Plaintiffs Need Only “Plausibly Allege” Materiality at the Class Certification Stage
In the Ninth Circuit, a plaintiff invoking the fraud-on-the-market presumption at the class certification stage does not need to prove materiality; he must only plausibly allege that the misstatements were material.In so holding, the Ninth Circuit joins the Third and Seventh circuits, but adds to the growing divide among the circuits. The First, Second, and Fifth circuits require proof of materiality before a plaintiff may assert the fraud-on-the-market presumption.
In Connecticut Retirement Plans and Trust Funds v. Amgen Inc., No. 0956965, 2011 U.S. App. LEXIS 22540 (9th Cir. Nov. 8, 2011), the court held that “a plaintiff need not prove materiality at the class certification stage to invoke the [fraud-on-the-market] presumption,” emphasizing that “materiality” is a merits issue to be addressed at trial. Id. at *18.
In Amgen, the plaintiff class alleged that the company had misrepresented key safety information relating to two Amgen products used to treat anemia. The complaint alleged that Amgen: (1) downplayed the FDA’s safety concerns about its products in advance of an FDA meeting with a group of oncologists; (2) concealed details about a clinical trial that was canceled over concerns that Amgen’s product exacerbated tumor growth in a small number of patients; (3) exaggerated the on-label safety of its products; and (4) misrepresented its marketing practices, claiming that it promoted its products solely for on-label uses when it actually promoted off-label usage, violating federal law.Id. at *4–5.
In order to obtain class certification in a 10b-5 securities fraud case, the plaintiff, as required by Fed. R. Civ. P. 23(b)(3), must show that the element of reliance is common to the class. The U.S. Supreme Court first approved the fraud-on-the-market doctrine in Basic Inc. v. Levinson, 485 U.S. 224 (1988) and created the presumption of reliance. The doctrine is based on an efficient capital markets hypothesis—that is, the price of a stock traded in an efficient market reflects all publicly available information about the company and its business. Id. at 246–47. Any investor who purchased the stock in an efficient market is presumed to have relied on the integrity of that price, which reflects all publically available information. The presumption can be invoked even if the investor never saw the misstatements.See id. at 247.
In order to successfully invoke the fraud-on-the-market doctrine, the plaintiff must show that the stock was traded in an efficient market and that the alleged misstatements were public. Amgen argued that the plaintiff did not carry its burden because it failed to prove the alleged misstatements were material, noting that if those misrepresentations were immaterial, the statements would not affect the stock price in an efficient market. Therefore, Amgen argued, “each individual plaintiff would be left to prove reliance at trial individually—making a class proceeding unwieldy.” Amgen, 2011 U.S. App. LEXIS 22540, at *11.
The Amgen court, however, stated that, “because materiality is an element of the merits of their securities fraud claim, the plaintiffs cannot both fail to prove materiality yet still have a viable claim for which they would need to prove reliance individually.” Id. at *11.
“By contrast, the elements of the fraud-on-the-market presumption—whether the securities market was efficient and whether the defendant’s purported falsehoods were public—are not elements of the merits of a securities fraud claim. . . . Thus, if the plaintiffs failed to prove those elements, they could not use the fraud-on-the-market presumption, but their claims would not be dead on arrival; they could seek to prove reliance individually. That scenario, however, would be inappropriate for a class proceeding. Id. at *12–13.
As the Amgen court pointed out, the current split in authority over the issue of proving materiality at the class certification stage arises out of a misinterpretation of footnote 27 in Basic. According to the Seventh Circuit, “All note 27 [in Basic] does . . . is state that the court of appeals deemed materiality essential; the Justices did not adopt it as a precondition to class certification.” Schleicher v. Wendt, 618 F.3d 679, 687 (7th Cir. 2010). And, as the Amgen court noted, this reading of Basic has support in the Supreme Court’s most recent discussion of the fraud-on-the-market presumption in Erica P. John Fund v. Halliburton, 131 S. Ct. 2179, 2185 (2011), which requires the plaintiff to show that the stock was traded in an efficient market and that the information was public, but does not mention that materiality is a prerequisite.
David Brown is a third year student as New York Law School. He is Executive Editor of Law Review. He has interned at the US Attorney’s Office for the Eastern District of New York and for the Honorable Joel H. Slomsky, US District Court, Eastern District of Pennsylvania.
Abbey Spanier, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.