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November 5, 2012
Supreme Court Hears Argument on Proving Materiality in FOTM Class Action
The Supreme Court heard oral argument today in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, in which the parties debate whether in a securities fraud class action courts must require proof of materiality before certifying a class based on the fraud-on-the-market (FOTM) theory and the related question of whether defendants must be allowed to present evidence rebutting the applicability of the FOTM theory at the class certification stage.
Seth Waxman, arguing on behalf of the petitioners/defendants, argued that each of the four predicates to the FOTM theory is common: market efficiency, public nature of statement, transactions in the stock during the period of market distortion, and materiality. Therefore, they should be treated similarly; each must be established at the class certification stage and again at trial. He drew a distinction between a judicial determination of materiality at the class certification stage and at a subsequent summary judgment stage, which elicited some questioning and requests for clarification from the Justices. He then addressed the purpose of Fed. R. Civ. Pro. 23, which he asserted was for the court to determine whether all of the preconditions for “forcing everyone into a class action” are present before certification.
David C. Frederick, arguing on behalf of respondent/plaintiff, started his argument with Basic and asserted that the Court indicated that materiality did not have to be proved at the class certification stage. With respect to Rule 23(b)(3), because materiality always generates a common answer for all class members, it is the quintessential common issue that does not cause the class to be noncohesive for purposes of deciding predominance. He emphasized that in a FOTM case, the only theory of reliance that is being advanced is indirect reliance on the integrity of the market; efficiency and publicity serve gate-keeping functions at the class certification stage, while materiality does not. This led to questioning about the distinctions he was making. Mr. Frederick also argued that Congress already addressed the concerns about securities fraud class actions in the PSLRA.
Melissa Arbus Sherry argued on behalf of the United States, as amicus curiae supporting the respondent. She focused on Rule 23 and the predominance requirement and also argued that materiality was different from efficiency and publicity, which again drew questioning from the Justices. She also argued Congressional intent.
It is difficult to “read” the Justices’ reactions to the counsel’s arguments from the written transcript. Nevertheless, nearly all the Justices questioned why materiality should be treated differently from the other predicates to FOTM. In addition, at least two Justices appeared to be thinking about policy implications. Justice Scalia suggested that perhaps the FOTM theory should be overruled as based on bad theory, and Justice Kennedy noted that post-Basic economic scholarship has shown that the efficient market theory is “really an overgeneralization.”
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