U.S. Supreme Court Rules That Securities Class Action Plaintiffs Need Not Prove Materiality To Invoke The 'Fraud-On-The-Market' Presumption For Class Certification

The Supreme Court of the United States decided a long-anticipated and important securities-law case today, holding that plaintiffs in a federal securities-fraud class action need not prove materiality of a misrepresentation to obtain class certification. In Amgen Inc. v. Connecticut Retirement Plans and Trust Funds,1 a divided Court affirmed a Ninth Circuit decision and resolved a circuit split on this issue critical in many securities-fraud class actions. This decision will make it more challenging for defendants to defeat class action lawsuits in those Circuits that had previously required a showing of materiality to obtain class certification, and thus may lead to more securities lawsuit filings. At the same time, however, language in the opinion may be read to signal that lower courts should apply closer scrutiny to materiality on motions for summary judgment, and thus defendants may have greater success defeating claims before trial.

The Amgen Decision

As observed in V&E's recent elert on the initial grant of certiori in Amgen, materiality is relevant at the class-certification stage because it is a component of the "fraud-on-the-market" theory of reliance. In a securities-fraud case, requiring proof of reliance would likely preclude class certification because it would require raising questions as to whether each plaintiff relied on the alleged misrepresentation, and therefore could not be resolved on a class-wide basis. To resolve this issue, the Supreme Court held in Basic Inc. v. Levinson2 that a prospective class of plaintiffs could invoke a rebuttable presumption of reliance by resorting to the "fraud on the market theory," which provides that "[a]n investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price."3 In the intervening quarter-century since Basic was decided, Courts of Appeals have divided over whether plaintiffs must prove at the class certification stage that the misstatement at issue is "material." The First, Second, and Fifth Circuits have held that a materiality showing is required at the class certification stage,4 while the Third, Seventh, and Ninth Circuits have held that it is not.5

In Amgen, the Court sided with the Third, Seventh, and Ninth Circuits in rejecting a materiality requirement at the class-certification stage. In doing so, the Court acknowledged that materiality is an element of the fraud-on-the-market presumption. But the Court reasoned that it did not...