By Britt K. Latham and M. Jason Hale
(Britt K. Latham is a Member of Bass, Berry & Sims PLC, focusing his practice on complex business, securities and class action litigation and the representation of clients in connection with internal and governmental investigations. M. Jason Hale is an attorney at Bass, Berry & Sims PLC, focusing his practice on general commercial litigation with an emphasis in business disputes, corporate and securities matters, and financial products and broker-dealer litigation).
On June 11 the Supreme Court granted certiorari in a case from the 9th Circuit to address a circuit-split involving class certification of securities fraud cases. In addition to likely having a significant impact on a plaintiff’s burden in certifying a class, this case may also be an opportunity for the Supreme Court to reconsider the “fraud-on-the-market” presumption of reliance outlined in Basic v. Levinson, 485 U.S. 224.
In Connecticut Retirement Plans and Trust Funds v. Amgen Inc., 660 F.3d 1170 (9th Cir. 2011) (“Amgen”), the 9th Circuit upheld class certification in a securities fraud suit alleging that a biotech company had misstated and failed to disclose material safety information about two products.
The ruling in Amgen was noteworthy in two respects: first, the Court held that the plaintiffs were not required to prove that the misstated information was material in order to obtain class certification under Basic’s “fraud-on-the-market” presumption because “materiality” is an element of the merits of a securities fraud claim to be considered at summary judgment or trial.
Second, Amgen held that a defendant was precluded from introducing evidence at the class certification stage to rebut the “fraud-on-the-market” presumption by showing that the alleged misstatements were in fact immaterial. Other circuit courts, including the 1st, 2nd, and 5th Circuits, have disagreed with the 9th Circuit’s approach to these issues, and the Supreme Court has granted certiorari in Amgen to resolve the split on these two questions.
The Supreme Court’s review of Amgen is significant for several reasons. First, the Supreme Court will decide whether or not a plaintiff has the burden to affirmatively demonstrate — and not merely allege — that the alleged misstatements or omissions were “material” at the class certification stage as a condition of invoking the Basic presumption of reliance. If the Supreme Court rules that plaintiffs bear this affirmative burden, certification of securities fraud class actions will become substantially more difficult for plaintiffs as an initial matter, as they will now be charged with showing some level of proof of materiality.
Second, the Supreme Court will decide whether a defendant can rebut the Basic presumption of reliance at class certification by introducing evidence that the misstatements or omissions were not “material.” The Supreme Court appears to have paved the way for defendants to introduce “merits” arguments at the class certification stage in recent decisions. See, e.g.,Wal-Mart v. Dukes, 131 S. Ct. 2541 (2011).
If the Supreme Court reverses the 9th Circuit on this issue and permits defendants to introduce “merits” arguments, including expert testimony and economic analysis, at class certification to rebut plaintiffs’ claim of “materiality,” it will provide an additional line of attack to defeat the Basic presumption and, therefore, class certification. Such a holding would be crucially important for defendants, since so few securities class actions ever make it to trial and class certification so often serves as the demarcation line for either victory or a significant settlement with plaintiffs.
Perhaps the most substantial impact of Amgen, however, is that the Supreme Court may use Amgen to reconsider Basic and its “fraud-on-the-market” presumption of reliance in its entirety. Since Basic was announced nearly 25 years ago, courts have wrestled with Basic’s “fraud-on-the-market” presumption and learned that the concept of market efficiency is more complex in practice than the Basic court had hoped. Indeed, foreshadowing some of the challenges district courts have faced over the years, Justice Byron White’s dissent in Basic warned that the economic theory underpinning the “fraud-on-the-market” theory was experimental, and that “[c]onfusion and contradiction in court rulings are inevitable when traditional legal analysis is replaced with economic theorization by the federal courts.” Basic v. Levinson, 485 U.S. 224, 252 (1988) (J. White, dissenting).
Arguably, Justice White’s warnings have proven true, especially in the face of market turmoil during the global credit crisis. In light of the difficulties in applying Basic over the years, the Supreme Court may well use Amgen to reconsider (and even replace) Basic’s “fraud-on-the-market” presumption with an alternative.
Whatever the Supreme Court decides, Amgen is likely to have a profound impact on securities fraud class actions, including the frequency of filings, the ability of defendants to prevail at the class certification stage, and average settlement amounts.