|June 19, 2012|
Previously published on June 15, 2012
On Monday, June 11, 2012, the Supreme Court granted a writ of certiorari in Connecticut Retirement Plans and Trust Funds v. Amgen Inc., 660 F.3d 1170 (9th Cir. 2011) to clarify the standards for certifying a class in a securities fraud suit under the fraud-on-the-market theory. The Court’s decision to revisit class certification in securities fraud suits only a year after deciding Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. &under;&under; (2011), a case presenting similar issues as Amgen but which the Court resolved on narrow grounds, suggests that a broader ruling on the standards governing certification in securities fraud suits is forthcoming.
The Ninth Circuit in Amgen affirmed a district court’s certification of a securities fraud class invoking the fraud-on-the-market presumption, which, where applicable, allows plaintiffs to prove reliance through class-wide evidence. The Ninth Circuit held that to benefit from this presumption in the certification context plaintiffs need only prove (1) that the security in question traded in an efficient market and (2) that the alleged misrepresentations were public. Under the Ninth Circuit’s ruling, plaintiffs must plausibly allege, but need not prove, the materiality of the statements. The court’s holding that materiality need not be proven at the class certification stage placed the Ninth Circuit in line with the Third and Seventh Circuits and set it against three other circuit courts concluding otherwise: the First, Second and Fifth Circuits. The Amgen court went further in holding that the defendant cannot, at the certification stage, rebut the fraud-on-the-market presumption by attempting to show that the alleged misrepresentations were not material.
In granting a writ of certiorari to review in Amgen, the Supreme Court certified two issues for appeal:
(1) Whether, in a misrepresentation case under SEC Rule 10b-5, the district court must require proof of materiality before certifying a plaintiff class based on the fraud-on-the-market theory.
(2) Whether, in such a case, the district court must allow the defendant to present evidence rebutting the applicability of the fraud-on-the-market theory, before certifying a plaintiff class based on that theory.
These issues substantially overlap with those presented in Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. &under;&under; (2011), a case the Court decided just one year ago. The Halliburton Court concluded that plaintiffs do not need to prove “loss causation” to benefit from the fraud-on-the-market presumption of reliance. In an efficient market, the elements of reliance, loss causation, and materiality all relate to whether a false statement artificially inflated the market price for the issuer’s stock. Moreover, “price impact” is a factor most courts consider in determining whether a security is trading efficiently, a threshold issue that all circuits require plaintiffs to prove. Issues related to “price impact” and rebuttal of the fraud-on-the-market presumption were raised by the parties and amici in Halliburton, but the court expressly declined to address those issues. It is likely that the Supreme Court’s eventual decision in Amgen will address some of the issues that were left unresolved by Halliburton, including the relevance of “price impact” evidence on the availability of the fraud-on-the-market presumption.
Halliburton also expressly left unresolved whether the fraud-on-the-market theory is rebuttable at the class certification stage, though the opinion could have easily reached this issue. The Amgen appeal will likely mend the circuit split on whether a defendant can defeat class certification by rebutting the fraud-on-the market presumption.