Supreme Court To Address Fraud-On-The-Market Theory

A key development this week was the Supreme Court’s decision to hear the Amgen Inc. v. Connecticut Retirement Plans and Trust Funds case on appeal from the Ninth Circuit. Pursuant to the fraud-on-the-market theory, reliance by investors on a misstatement is presumed if the company’s shares were traded on an efficient market that would have incorporated the information into the stock price. The fraud-on-the-market presumption is routinely invoked in securities class actions to justify the grant of class certification because it removes the potential need for individual evaluations of reliance.

At issue in the Amgen case is a circuit split over whether a plaintiff must prove that the misstatement was material to invoke the fraud-on-the-market theory in support of class certification. Three circuit courts (Second, Fifth and, to a lesser extent, the 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 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.

The Amgen case picks up threads from two other recent Supreme Court decisions. In Matrixx, the Court addressed the issue of materiality, but only in the context of what must be plead to survive a motion to dismiss. Meanwhile, in Halliburton, the Court found that a plaintiff does not have to prove loss causation to invoke the fraud-on-the-market presumption, but left open the question of whether the plaintiff must demonstrate that the misstatement had a stock “price impact” (which is often used as a proxy for determining whether the misstatement was material). As a practical matter, if the Court were to find that lower courts should be evaluating whether the misstatement was material in determining whether to grant class certification, it obviously would reinvigorate class certification as a meaningful hurdle in prosecuting securities class actions.

Scotusblog has all of the relevant links, including to the amicus briefs filed in conjunction with the cert petition. The case will be heard next term.