Previously published June 11, 2012.
Keywords: violation, securities and exchange act, class certification, class-wide reliance, securities fraud
Securities and Exchange Act—Certification of Class Actions
To obtain class certification in an action alleging a misrepresentation in violation of Section 10(b) of the Securities and Exchange Act, 15 U.S.C. § 78j(b), a plaintiff must show that reliance on the alleged misrepresentation is common to the class. In Basic Inc. v. Levinson, 485 U.S. 224 (1988), the Supreme Court held that a putative class-action plaintiff may obtain a rebuttable presumption of class-wide reliance by invoking the "fraud-on-the-market" theory. Today the Supreme Court granted certiorari in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085, to determine whether a plaintiff who relies on the fraud-on-the-market theory must prove at the class certification stage that the alleged misrepresentation was material, and whether a defendant may defeat class certification by showing that the immateriality of the alleged misrepresentation rebuts the presumption of class-wide reliance.
The Supreme Court's decision in this case will affect the standards for class certification of securities fraud claims. It will thus be of interest to all public companies that may be the target of securities class actions.
Respondent, the plaintiff below, alleged that petitioner Amgen made certain misrepresentations, which allegedly inflated the price of its stock. After ruling that the plaintiff could invoke the fraud-on-the-market theory, the district court held that at the class certification stage the plaintiff need only allege—and does not have to prove—that the purported misrepresentations were material. The district court also refused to consider Amgen's evidence rebutting the applicability of the fraud-on-the-market theory at the class certification stage, holding that rebuttal of the presumption was an issue for trial. Finding that common questions predominated, the district court certified the action as a class action under Rule 23(b).
The Ninth Circuit affirmed, holding that because materiality is an element of a securities fraud claim, it is a "merits" issue that should be addressed only at trial or on a summary judgment motion. The court stated that at the class certification stage a plaintiff "need only allege materiality with sufficient plausibility to withstand a 12(b)(6) motion." 660 F.3d 1170, 1177. The court also held that evidence proffered by a defendant to rebut the presumption of class-wide reliance could not be considered at the class certification stage because such evidence is essentially a method of refuting an alleged misrepresentation's materiality. In so holding, the Ninth Circuit joined the Seventh Circuit and rejected the contrary positions of the Second, Third, and Fifth Circuits, which hold that a plaintiff must demonstrate that an alleged misrepresentation is material before a class may be certified or that a defendant opposing class certification may rebut the presumption of reliance by showing the alleged misrepresentation's immateriality.
Absent extensions, which are likely, amicus briefs in support of the petitioners will be due on August 2, 2012, and amicus briefs in support of the respondent will be due on September 4, 2012.
Mayer Brown LLP filed an amicus brief in support of petitioners at the certiorari stage.
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