Today, the Supreme Court agreed to hear an appeal involving certification of securities fraud class actions. The case, Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085, --- S. Ct. ----, 2012 WL 692881 (June 11, 2012), presents two questions: (1) whether, in a misrepresentation case under Section 10(b) of the Securities Exchange Act of 1934 and 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; and (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 the decision below that is on appeal, the Ninth Circuit answered "no" to both questions. But other circuits have answered "yes" in other cases. The circuit-split means that, at present, defendants are being treated differently in different parts of the country.
A clear answer from the Supreme Court to these questions could have a significant effect on securities litigation. A decision that endorses the Ninth Circuit's approach could make securities litigation more costly for defendants, particularly in circuits where plaintiffs are presently required to prove materiality at class certification. Conversely, a decision rejecting the Ninth Circuit's approach could provide defendants an early opportunity to challenge the viability of class action claims.
The Amgen case presents the Court with its first opportunity in almost a quarter of a century to revisit the fraud-on-the-market presumption of reliance that a four-justice majority articulated in Basic v. Levinson, 485 U.S. 224 (1988). The Basic court held that reliance (one of the six elements in a Section 10(b) action) can be presumed in cases involving securities that trade in efficient markets.
Basic forged the presumption of reliance out of practical considerations. The Court found that a securities fraud case could not proceed as a class action if investors were required to prove direct individual reliance on a misrepresentation. Basic stated that an investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price. Because most publicly available information is reflected in the market price, an investor's reliance on any public material misrepresentations can be presumed for purposes of a 10b-5 action.