What must a plaintiff do to invoke the fraud-on-the-market theory (pursuant to which reliance by investors on a misrepresentation is presumed if the company’s shares were traded on an efficient market) in support of class certification? According to the U.S. Court of Appeals for the Ninth Circuit, nothing more than show (a) the security was traded on an efficient market, and (b) the alleged misrepresentations were public.
In Connecticut Retirement Plans and Trust Funds v. Amgen, Inc., 2011 WL 5341285 (9th Cir. Nov. 8, 2011), the court addressed whether a plaintiff also must prove that the alleged misrepresentations were material. Three circuit courts (Second, Fifth, and, to a lesser extent, Third) previously have held that this is a required part of the fraud-on-the-market analysis when evaluating whether a class should be certified. The Ninth Circuit joined a recent decision from the Seventh Circuit, however, in rejecting that position. The court held that materiality is a merits question that does not affect whether class certification is appropriate.
Holding: Affirming grant of class certification.
Quote of note: “If the misrepresentations turn out to be material, then the fraud-on-the-market presumption makes the reliance issue common to the class, and class treatment is appropriate. If the misrepresentations turn out to be immaterial, then every plaintiff’s claim fails on the merits (materiality being a standalone merits element), and there would be no need for a trial on each plaintiff’s individual reliance. Either way, the plaintiffs’ claims stand or fall together – the critical question in the Rule 23 inquiry.”