Wednesday, February 27, 2013
The U.S. Supreme Court announced two decisions today involving federal securities law issues.
In Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, the Court held that proof of materiality is not a prerequisite to certification of securities fraud class actions. While I will have more to say about this opinion later, it is a significant victory for the plaintiffs' securities bar. (Download Amgen opinion)
According to the court, the "pivotal inquiry ... is whether proof of materiality is needed to ensure that the questions of law or fact common to the class will 'predominate over any questions affecting only individual members' as the litigation progresses." The Court answered its question "no" for two reasons: First, because materiality is judged according to an objective standard, it can be proved through evidence common to the class. Second, a failure of proof on the common question of materiality would not result in individual questions predominating. Instead, it would end the case, for materiality is an essential element of a securities fraud claim. The Court rejected defendants' calls to require proof of materiality on policy grounds, noting that Congress had determined not to undo the "fraud-on-the-market" theory that allowed for federal securities fraud class actions. Justice Ginsburg wrote the opinion; three Justices (Scalia, Thomas and Kennedy) dissented.
The SEC, however, suffered a defeat in Gabelli v. SEC, in which the Court unanimously held that the five year statute of limitations applicable to government actions seeking civil penalties begins to run when the fraud occurs and not when it is discovered. The Court found this was the natural reading of the statutory language. In addition, there were sound policy reasons not to read into the statute a discovery rule exception. In particular, such an extension "would leave defendants exposed to Government enforcement actions not only for five years after their misdeeds, but for an additional uncertain period into the future." (