Proof of Materiality Not Required for Certiciation of Securities Class Action

In a highly anticipated ruling, the Supreme Court held in Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds (, the Supreme Court held that securities plaintiffs are not required to prove materiality in order to obtain certification of a class seeking to recover under the securities laws.  The plaintiffs in Amgen sought to certify under Rule 23(b)(3) which requires that common questions of fact or law predominate over individual questions.  To do so, plaintiffs invoked the fraud-on-the-market theory to avoid the need to establish reliance on an individual basis.  Courts have long held that in order to obatin certification under this theory, plaintiffs have to establish its prerequisites, such as that the security trades on an efficient market.  Amgen contended that, in order for the theory to apply, the misrepresentation or omission at issue also had to be material -- otherwise the market for the security at issue by definition would be unaffected.  The Supreme Court, however, disagreed.  The Court held that other elements of the theory had to proved at the certification stage because, if those other elements failed, the class would fail but individual plaintiffs could bring individual actions.  The Court reasoned that materiality is different.  Materiality is also a substantive element of a securities claim -- therefore, if materiality fails, all the class' claims fail.  Because all of the class' claims rise or fall together, materiality is appropriately determined at trial. The implication for securities defendants is that they are unable to get a pre-trial opportunity to defeat a securities claim b contesting materiality.  While defendants maintain the opportunity to attack materiality on summary judgment, materiality tends to be a fact question not easily susceptible to summary judgment.  A favorable ruling would have given defendants with strong, but disputed, materiality arguments an opportunity to get a ruling on the merits before trial (and the massive attendent risks that go with it).

The decision also has broader implications for class certification because it gives courts a framework for evaluating how deep into the merits they can go at the certification stage.  Clearly now courts will not address merits issues under which the class will rise or fall together.

Must Plaintiffs Prove Materiality Before Trial Under the Fraud on the Market Theory?

It is well established that, in order to bring a securities case as a class action, it will almost always be necessary to proceed under the so-call “Fraud-on-the-Market” theory established by the Supreme Court in Basic v. Levinson. Under that theory, the class action mechanism works to adjudicate all affected stockholders’ claims together because the theory posits that any material false public statement inherently affects the market price of the securities at issue – therefore, in order to prove a claim that a stockholder was injured by a false statement, he need not prove that he ever heard, was aware of or relied upon the allegedly false statement. He need only prove he bought the affected security (the price of which was inflated based upon the false statement). In order to invoke the “Fraud on the Market” theory, a representative class plaintiff must establish that defendant made a public statement, that the statement was material and that the securities in question traded on an efficient market. On November 5, 2012, the Supreme Court heard argument in Amgen v. Connecticut Retirement Plans and Trust Funds. The question presented is whether the class representative must prove materiality at the class certification stage. Class plaintiffs must establish efficiency of the market to proceed as a class. However, the federal Circuits are split whether materiality must be proven as well. Because materiality is an element of securities fraud under Rule 10b-5, it must be proven at trial. Accordingly, some Circuits say that requiring proof at class certification is redundant, and, in any event, materiality is necessarily common to all class members and should be no impediment to class certification. Other Circuits have held that materiality is an element of the “Fraud on the Market” theory and thus should be treated like efficiency.

A victory by Amgen requiring materiality to be proved at class certification would be a major win for defendants. At class certification, materiality would be determined by a judge – not the jury. And, it would not be decided under the demanding the demanding summary judgment standard that is unkind to materiality based defenses. Moreover, defendants would not have to wait until trial (and an impending potentially disastrous judgment) to test a materiality defense. In short, if Amgen prevails, look for a much sharper focus by defendants on materiality in securities actions.

While reading into the Justices’ comments from oral argument is always challenging, it sounded like the decision will be split, with perhaps the Chief Justice casting the deciding vote.