Oral argument took place in the Amgen case in the U.S. Supreme Court this morning. The case involves the issue of whether, to obtain class certification, a plaintiff must prove that an alleged misstatement was material and therefore can support a fraud-on-the-market presumption (reliance by investors on the misstatement is presumed if the misstatement is material and the company’s shares were traded on an efficient market that would have incorporated the information into the stock price).
The argument focused heavily on whether it was appropriate to decide the issue of materiality at the class certification stage given that it is both a predicate for the use of the fraud-on-the-market presumption and a substantive element of the securities fraud claim.
A few highlights:
(1) The parties agreed that materiality was a “common issue” for all the class members, but not on whether that fact should preclude it being examined at the class certification stage of the case. Petitioner (Amgen) had some difficulty persuading the Court that a distinction could be drawn between determining materiality at the class certification stage for purposes of the fraud-on-the-market presumption and determining materiality on the merits. A few justices pressed whether it was Petitioner’s position, as Justice Kagan put it, “that a judge who has just ruled that a statement is immaterial is going to keep the case in his court litigated by an individual plaintiff, even though he’s just ruled that the statement is immaterial?” Petitioner insisted that this was possible, because the judge would not be able to resolve disputed facts at the summary judgment stage of a case brought by an individual plaintiff. Justice Breyer questioned whether this established too much, because why not “try out everything [at class certification], because we could always think of a few examples where, despite the fact that, you know, it’s only a common issue 99 percent of the time, we can dream up a situtation where it’s not a common issue.”
(2) More broadly, Petitioner argued that the purpose of FRCP 23 “is for a court to determine whether all of the preconditions for forcing everyone into a class action are present before you certify.” Because materiality is “an essential predicate of the fraud-on-the-market theory” and that theory is necessary to certify a securities fraud class, it follows that the court must determine the existence of materiality at class certification.
(3) In turn, Respondent (investors) was asked numerous questions about why the Court should draw a distinction between market efficiency (another predicate for the fraud-on-the-market presumption that can be rebutted at the class certification stage) and materiality. Justice Scalia noted that market efficiency also is a common issue that, if decided by the judge at class certification, might preclude individual investors from bringing a suit because they could not say “that’s why I got cheated, because the market reflected this false statement and I paid more money for the stock than I should have.” Respondent – with some assistance from Justice Breyer – argued that the difference was that market efficiency is merely a “gate-keeping function to determine whether or not the answer for indirect reliance on the market is a common question,” while materiality is a traditional element of a fraud.
(4) For its part, the government argued in support of Respondent, stating that “materiality in a fraud-on-the-market case serves two purposes . . . . And what Petitioners would have this Court do is isolate the two inquiries when they’re really the same question.” Justice Scalia’s response: “If you have the same question, then maybe we shouldn’t have this fraud-on-the-market theory . . . . So maybe we should overrule Basic [the Supreme Court case endorsing the fraud-on-the-market presumption] because it was certainly based upon a theory that simply collapses once you remove the materiality element.”