Friday, November 2, 2012
On Nov. 5, 2012, the U.S. Supreme Court will hear oral argument in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds (No. 11-1085), a case that raises important questions about the “fraud on the market” theory (FOTM) established in Basic Inc. v. Levinson, 485 U.S. 224 (1988), and class certification under Fed. R. Civ. Pro. 23. Currently, there is a split in the Circuits over the necessity of establishing materiality at the class certification stage of a federal securities class action.
The lead plaintiff, Connecticut Retirement Plans and Trust Funds, brought a typical Rule 10b-5 class action alleging material misstatements about the safety, efficacy and marketing of two of Amgen’s products and invoked FOTM in order to show that reliance can be established on a class-wide basis. The district court granted plaintiff’s motion for class certification, and the appellate court affirmed, in an opinion reported at 660 F.3d 1170 (9th Cir. 2011). The defendants did not contest that Amgen stock traded in an efficient market and that the statements at issue were publicly disseminated. They argued, however, that at the class certification stage, plaintiff must also establish the materiality of the statements and defendants must have an opportunity to establish “truth-on-the-market” to rebut FOTM. The Ninth Circuit rejected defendants’ arguments. The court held that in order to invoke FOTM in aid of class certification, the plaintiff need only (1) show that the securities were traded in an efficient market; (2) show that the alleged misrepresentations were public; and (3) plausibly allege that the alleged misrepresentations were material. Similarly, the court rejected defendants’ argument that they must be afforded an opportunity to rebut FOTM at the class certification stage by introducing evidence to establish a “truth-on-the-market” defense.
The questions presented in the petition for certiorari are stated as follows:
1. Whether, in a misrepresentation case under SEC Rule 10b-5, the district court must require proof of materiality before certifying a plaintiff class based on the fraud-on-the-market theory.
2. Whether, in such a case, the district court must allow the defendant to present evidence rebutting the applicability of the fraud-on-the-market theory before certifying a plaintiff class based on that theory.
In asserting that the answer to both questions is “yes,” defendants make a number of arguments. First, materiality, in addition to being an element of a securities fraud claim, is a predicate to FOTM and is therefore necessary to establish reliance on a class-wide basis. Second, because reliance is an essential predicate of FOTM, Fed R. Civ. Pro. 23 requires that it be proved before class certification. Third, if materiality is not determined at the class certification stage, it frequently will not be considered at all, because class certification creates enormous pressure to settle even frivolous claims. To defer judicial inquiry would be unfair to defendants, who should not have to face the pressures of class litigation in order to establish that a class action was not warranted. Finally, defendants refer to modern economic research to demonstrate that proof that a market is generally efficient does not make it appropriate to apply FOTM in every case involving a security in that market.
Connecticut Retirement Plans and Trust Funds assert a number of arguments to the contrary. First, proof of materiality is not required to certify a class under Rule 23, because materiality is a common question not susceptible to different answers for individual class members. Second, FOTM does not require proof of materiality for class certification. Third, requiring proof of materiality for class certification will have adverse effects on courts’ ability to administer securities fraud class actions. Fourth, rebuttal evidence regarding materiality is not appropriate at the class certification stage because it would not demonstrate a lack of predominance under Rule 23(b)(3); Amgen’s “truth-on-the-market” defense is irrelevant at the class certification stage. Finally, plaintiff argues that defendants are making “naked public policy arguments” to alter the rules for certification of federal securities class actions, contrary to Congressional intent expressed in the PSLRA and SLUSA.
The Solicitor General filed an amicus brief in support of the plaintiff and urged the Court to affirm the Ninth Circuit’s opinion. The Solicitor General stated that the United States has a “substantial interest” in the court’s resolution of the questions presented, because “meritorious private securities-fraud actions, including class actions, are an essential supplement to criminal prosecutions and SEC enforcement actions.” The Solicitor General will also participate in the oral argument.
As an indication of the case’s importance, a number of amicus briefs have been filed. Amicus briefs in support of defendants include the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association (SIFMA) and the Washington Legal Foundation. Amicus briefs in support of the plaintiff include CalPERS, AARP, and National Association of Shareholder and Consumer Attorneys. Needless to say, there are amicus briefs filed by law professors on both sides. In the interests of full disclosure, I am a signatory on an amicus brief filed by law professors in support of lead plaintiff Connecticut Retirement Plan.