[Editor’s note: The following post from Arnold & Porter’s recent Client Advisory on the implications of the recent Supreme Court decision in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds. The authors include: Michael D. Trager, Veronica E. Rendon, and Scott B. Schreiber.]
In a February 27, 2013 ruling in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, the Supreme Court addressed the question of whether a plaintiff invoking the fraud-on-the market presumption to satisfy the reliance element of a securities fraud claim must prove, as a prerequisite to class certification, the materiality of the alleged misrepresentations. In a six-to-three decision, the Court held that proof of materiality is not necessary at the class certification stage because the applicable provision of Federal Rule of Civil Procedure 23(b)(3) “requires a showing that questions common to the class predominate, not that those questions will be answered, on the merits, in favor of the class.” The Court explained that materiality is an objective issue, the resolution of which necessarily applies in common to all members of a class. Because materiality is an issue for which the class “is entirely cohesive” and will “prevail or fail in unison,” the Court concluded that proof of materiality is not a prerequisite to class certification.
Fraud on the Market
In Basic Inc. v. Levinson, 485 U.S. 224 (1988), the Supreme Court first endorsed the “fraud-on-the-market” theory, which allows certain securities-fraud plaintiffs to invoke a rebuttable presumption of reliance on public, material misrepresentations. The premise of the fraud-on-the-market theory is that, in an efficient market, the price of a security reflects all publicly available information about a company; therefore, a court may presume that a purchaser of the security has indirectly relied on that information at the class certification stage, although reliance could be challenged later in the proceedings. The rebuttable presumption reflects the Court’s recognition of the evidentiary difficulties posed by requiring direct proof of reliance, which is an essential element of a securities fraud claim under Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder.
The fraud-on-the-market presumption is of vital importance to plaintiffs seeking to certify a class action under Rule 23(b)(3). As the Court explained in Amgen, without the presumption, questions of individual reliance would ordinarily predominate over questions common to the class, precluding class certification.
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