In a case heard the same day as Comcast, the Supreme Court engaged in sometimes heated discussions about whether materiality under the fraud-on-the-market doctrine in securities class actions must be proven at certification. The oral argument comes one year after the Court unanimously held that plaintiffs do not have to prove loss causation to assert the fraud-on-the-market presumption for certification, and class action attorneys hope the Court will also rule in the class’s favor here.
“The business community hopes to put up another stop sign foreclosing a class action by requiring plaintiffs to show the materiality of the statements at the certification stage before discovery even commences,” said securities class action attorney Scott Silver of Coral Springs, Fla. “I believe the Supreme Court will find in favor of the plaintiff.”
A pension fund that filed a class action against drugmaker Amgen, Inc., for artificially inflating stock prices by misrepresenting the safety of two drugs sought to invoke the fraud-on-the-market doctrine. That doctrine presumes common reliance if a defendant made material misstatements that caused the plaintiff to buy stock at a higher price. The trial court certified the class, and the Ninth Circuit affirmed, holding that plaintiffs are not required to prove materiality at certification because it’s clear that materiality is a common question—if the statements were material, every plaintiff has proven reliance, while if they are found to be immaterial, every plaintiff’s claim fails. The Court granted certiorari to decide whether materiality must be proven before the class can be certified. (Amgen, Inc. v. Conn. Ret. Plans & Trust Funds, No. 11-1085 (U.S. oral arg. Nov. 5, 2012).)
From the beginning of Amgen’s oral argument, Chief Justice John Roberts and Justices Elena Kagan, Ruth Bader Ginsburg, Sonia Sotomayor, and Stephen Breyer questioned Amgen’s counsel extensively about why materiality isn’t automatically a common question that meets the predominance requirement.
“I am really nonplussed by your answer that if the judge says it’s immaterial, that doesn’t end it for everybody. Certainly it ends it for the class . . . so if it’s immaterial, the case ends. And if it is material, then it is material to everybody in the class,” said Ginsburg. Invoking Wal-Mart’s holding that it is a question of coherence, Kagan agreed. “It’s a question of whether the class wins or loses together. And here, for materiality, the class wins or loses together,” she said.
Justices Scalia and Kennedy expressed doubts about allowing a presumption that materiality is common, saying the same could be said for other elements of the fraud-on-the-market doctrine, such as the existence of an efficient market, which plaintiffs must prove for certification. The plaintiff attorney countered that efficiency is a gatekeeping function that determines whether the investors were similarly situated so that indirect reliance under fraud-on-the-market can be determined with a common answer.
Securities attorney Daniel Woska of Edmond, Okla., says that while it’s “difficult to hazard a guess based on the issues presented and questions asked by the Court,” the logical answer is that materiality does not have to be proven at certification.
“The defense is seeking to erect an almost insurmountable barrier of proof to such claims even when there are clear and compelling material misstatements in connection with the sale of the security in an efficient market,” said Woska. “If class certification is made more difficult by requiring proof of the actual materiality, then the issuer of the security containing the material misstatement may be able to avoid class certification, thereby relegating all individuals to bringing separate suits.”