U.S. Supreme Court Grants Certiorari Petition In Amgen: Must Plaintiffs In Securities Class Actions Prove Materiality To Invoke The 'Fraud-On-The-Market' Presumption?

Author:Mr Steven Paradise and Ethan I. Jacobs
Profession:Vinson & Elkins LLP

The threat of class-wide judgments in private securities class actions often leads defendants to pay significant amounts to settle claims without testing their merits for fear of incurring even greater damages after a trial. Thus, decisions on motions for class certification are critical in determining whether and how much defendants have to pay to dispose of a case. On June 11, 2012, the U.S. Supreme Court granted certiorari in Amgen, Inc. v. Connecticut Retirement Plans & Trust Funds, a recent Ninth Circuit decision that held that a plaintiff is not required to establish that a misrepresentation on which it claims to have relied was "material" to invoke the fraud-on-the-market presumption of reliance in support of its class certification petition.

Most securities class actions are brought under Rule 23(b)(3), which allows a class to be certified only if the court finds that "questions of law or fact common to class members predominate over any questions affecting only individual members . . . ." Fed. R. Civ. P. 23(b)(3). Because reliance on an alleged misrepresentation is an element of a securities fraud claim, a plaintiff seeking class certification must establish that reliance is common to the class.

Under ordinary circumstances, no plaintiff could show reliance by all the individual prospective class members. But in Basic Inc. v. Levinson, 485 U.S. 224 (1988), the Supreme Court approved the fraud-on-the-market doctrine — a rebuttable presumption of reliance on statements once they become public. According to this doctrine, when a security is traded in an efficient market, all public information is reflected in the market price of the security and it can then be assumed that an investor who buys or sells stock at the market price relies upon all public statements. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 159 (2008) (citing Basic, 485 U.S. at 247).

In Amgen, the lead plaintiff alleged that Amgen and several of its officers made misstatements and omissions regarding the safety of Amgen's anemia treatment products. After plaintiff moved for class certification, the district court held that plaintiff's allegation that Amgen's supposed falsehoods were material was sufficient to invoke the fraud-on-the-market presumption and that proof of materiality is not required until summary judgment or trial. The district court also denied Amgen's attempt to rebut materiality by offering evidence showing that the market was...

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