Alerts and Updates
U.S. Supreme Court Lowers the Bar for Class Certification in Private Securities Fraud Actions
March 6, 2013
It can be anticipated that this decision will lead to increased Rule 10b-5 class actions, particularly in the Second Circuit, which had required materiality to be established as a prerequisite to class certification.
On February 27, 2013, the U.S. Supreme Court issued its opinion in Amgen, Inc. v. Connecticut Retirement Plan and Trust Funds, 568 U.S. ___ (2013), resolving a conflict among the Courts of Appeals "over whether district courts must require plaintiffs to prove, and must allow defendants to present evidence rebutting, the element of materiality before certifying a class action under § 10(b) and Rule 10b-5." Id. (slip op., at p. 8). Prior to the February 27 decision, the Courts of Appeals had been split, with the Second Circuit requiring materiality to be proven at the class certification stage and the Seventh and Eleventh Circuits not requiring such proof for class certification. In the Amgen case, the Central District of California and the Ninth Circuit both held that materiality was not a required showing in order for a class to be certified.
Under federal rules, to obtain class certification, the plaintiff must first show that: (1) the alleged class is "so numerous that joinder of all members is impracticable"; (2) "there are questions of law or fact common to the class"; (3) the plaintiff's claims are “typical of the claims . . . of the class"; and (4) the plaintiff will "fairly and adequately protect the interest of the class." Fed. R. Civ. P. 23(a). To obtain certification of a class action for money damages, a plaintiff must satisfy all the requirements of Rule 23(a) and must additionally establish that "the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available for fairly and efficiently adjudicating the controversy." Fed. R. Civ. P. 26(b)(3).
In Amgen, plaintiff Connecticut Retirement alleged that Amgen violated § 10(b) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission Rule 10b-5 through certain misrepresentations and misleading omissions regarding the safety, efficacy and marketing of two of its flagship drugs. Connecticut Retirement alleged that these misrepresentations and omissions artificially inflated the price of Amgen’s stock at the time that Connecticut Retirement and others similarly situated bought the stock, which caused it to sustain economic losses when the stock prices later fell.
To recover money damages in a § 10(b) and Rule 10b-5 action, a plaintiff must prove "(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. ___ (2011) (slip op., at 9) (internal quotation marks omitted). Materiality is not only an element of the Rule 10b-5 cause of action, but also is an essential predicate of the fraud-on-the market theory that the Supreme Court endorsed in Basic Inc. v. Levinson, 485 U. S. 224 (1988).1 Thus, Amgen contended that Rule 23(b)(3) required that Connecticut Retirement prove the materiality of Amgen's alleged misrepresentations and omissions, and that the courts below erred by certifying Connecticut Retirement proposed class without such proof.
The Supreme Court rejected Amgen's argument and held that, for purposes of Rule 23(b)(3), "because '[t]he question of materiality . . . is an objective one, involving the significance of an omitted or misrepresented fact to a reasonable investor,' materiality can be proved through evidence common to the class." Amgen, 568 U.S. at ___ (slip op., at p. 11), quoting TSC Industries Inc. v. Northway, Inc., 426 U.S. 438, 445 (1976). The Court also noted that "there is no risk whatever that a failure of proof on the common question of materiality will result in individual questions predominating." Id. In other words, "Connecticut Retirement's failure to present sufficient evidence of materiality to defeat a summary-judgment motion or to prevail at trial would not cause individual reliance questions to overwhelm the questions common to the class. Instead, the failure of proof on the element of materiality would end the case for one and for all." Id.
An apparent implication of the Supreme Court's Amgen decision is that putative lead plaintiffs have a lower threshold to meet in order to obtain class certification. It can be anticipated that this decision will lead to increased Rule 10b-5 class actions, particularly in the Second Circuit, which had required materiality to be established as a prerequisite to class certification. Issuers should be prepared for increased class action lawsuits being brought against them.
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- In Basic, the Court recognized that requiring proof of direct reliance "would place an unnecessarily unrealistic evidentiary burden on [a] plaintiff who has traded on an impersonal market." 485 U.S. at 245. Therefore, the Court permitted certain plaintiffs to invoke a rebuttable presumption of reliance on material misrepresentation disseminated to the general public. Id. at 241–249.
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