In the Matrixx Initiatives v. Siracusano case, the U.S. Supreme Court has held that the plaintiffs were not required, in a case alleging that Matrixx failed to disclose reports of a possible link between its leading drug product and the loss of smell, to plead that these reports were statistically significant. The unanimous decision authored by Justice Sotomayor rejects the use of statistical significance as a "bright-line rule" for the assessment of materiality in this type of case.
The core of the defendants' argument was that in the absence of statistical significance, adverse event reports suggesting that a drug has caused a loss of smell do not "reflect a scientifically reliable basis for inferring a potential causal link" that would be material to a reasonable investor. The Court declined to hold, however, that "statistical significance is the only reliable indication of causation." For example, the FDA relies on a wide range of evidence of causation and "sometimes acts on the basis of evidence that suggests, but does not prove, causation." If "medical professionals and regulators act on the basis of evidence that is not statistically significant, it stands to reason that in certain cases reasonable investors would as well."
Having rejected the proposed bright line rule, the Court found that the complaint adequately alleged "Matrixx received information that plausibly indicated a reliable causal link" between the drug and the loss of smell. The information included the adverse event reports and studies suggesting a causal link. In turn, investors would have viewed this information as material because it suggested there was "a significant risk to the commercial viability of Matrixx's leading product," especially because the risk associated with the drug (possible loss of smell) substantially outweighed the benefit of using the drug (alleviate cold symptoms). The omitted material information rendered Matrixx's statement that its "revenues were going to rise 50 and then 80 percent" misleading.
Holding: Reversal of dismissal affirmed (the court also found that the plaintiffs had adequately plead scienter).
Notes on the Decision:
(1) The decision is quite narrow. Perhaps most importantly, the Court did not offer any redefinition of the Basic materiality standard (so the forests are safe). Nor did the Court make any broad pronouncements on the appropriateness of evaluating materiality at the motion to dismiss stage of a case.
(2) In line with its Tellabs decision on the issue of pleading scienter, the Court emphasized a holistic approach to evaluating the plaintiffs' materiality allegations (e.g., "Viewing the allegations of the complaint as a whole . . .").
And now for something a bit technical (but still important). The federal securities laws have statutes of repose (suit barred after a fixed number of years from the time the defendant acts in some way) and statutes of limitations (establishing a time limit for a suit based on the date when the claim accrued). Does the existence of a class action toll the statute of repose for a federal securities claim?
Under what is known as American Pipe tolling, "the commencement of a class action suspends the applicable statute of limitations as to all asserted members of the class who would have been parties had the suit been permitted to continue as a class action." American Pipe & Construction Co. v. Utah, 414 U.S. 538, 554 (1974). The Supreme Court found that its rule was “consistent both with the procedures of [Federal Rule of Civil Procedure] 23 and with the proper function of limitations statutes.” Id. at 555. In a later case, however, the Supreme Court also found that federal statutes of repose are not subject to equitable tolling. Lampf, Pleva, Lipkind, Prupis & Pettigrow v. Gilbertson, 501 U.S. 350, 364 (1991). In attempting to reconcile these two cases, the majority of lower courts have concluded that American Pipe tolling applies to statutes of repose for federal securities claims because it is based on FRCP 23 and, therefore, is a type of legal (as opposed to equitable) tolling.
In Footbridge Ltd. Trust v. Countrywide Financial Corp., 2011 WL 907121 (S.D.N.Y. March 16, 2011), however, the court strongly disagreed with this analysis. The court addressed claims subject to the '33 Act's one-and-three-year limitations and repose provision that were brought more than three years after the relevant acts. The plaintiffs argued that the repose period was tolled by certain class actions asserting similar claims. The court concluded that "nowhere in American Pipe does the Court read the text of [FRCP] 23 as having embedded within it language that creates a class action tolling rule." In the court's view, American Pipe tolling is best understood as a judicially-created rule based on equitable considerations and, as a result, cannot extend a statute of repose. The court granted defendants' motion for summary judgment.
Whether other courts will agree with the Footbridge decision remains to be seen. The potential impact of the ruling, however, is significant, especially in light of how long it can take a securities class action to get through the class certification stage (although securities fraud claims have a longer, five-year statute of repose). Could it lead to more individual suits?
Two interesting decisions from this past Monday.
(1) Just when it looked like the U.S. Supreme Court would never again reject a securities litigation cert petition, it turned down the Apollo Group case. The Ninth Circuit's decision exacerbated a circuit split and presented an important loss causation issue. So why didn't the Court grant cert? Perhaps securities litigation fatigue has set in.
Quote of note (Jones Day memo): "The five circuits that have addressed the timing of the loss are divided. The Second and Third Circuits have held that a securities-fraud plaintiff must demonstrate that the market immediately reacted to the corrective disclosure. Conversely, the Fifth, Sixth, and Ninth Circuits have held that the price decline may occur weeks or even months after the initial corrective disclosure. By denying certiorari in Apollo Group, the Supreme Court left this split unresolved."
(2) Yet another cautionary tale about the use of confidential witnesses in securities class actions was issued by a court in the N.D. of Illinois. In City of Livonia Employees' Retirement System v. Boeing Co., Civil Action No. 09 C 7143 (N.D. Ill. March 7, 2011), the court granted Boeing's motions to dismiss for failure to state a claim and fraud on the court. In their second amended complaint, the plaintiffs had added allegations providing details about a confidential witness and the basis for this witness' supposed knowledge of Boeing's misconduct. The court expressly relied on these new allegations in finding that the plaintiffs had adequately plead scienter. After discovery began, however, it turned out that the confidential witness denied being the source of the allegations in the complaint, denied having worked for Boeing, and claimed to have never met plaintiffs' counsel until his deposition. The court was not amused.
Quote of note: "If these facts were disclosed while the dismissal motions were pending, the court would not have concluded that the confidential source allegations were reliable, much less cogent and compelling. The second amended complaint would have been dismissed, possibly with prejudice, as insufficient under the PSLRA. It matters not whether, as plaintiffs argue, [the confidential witness] told their investigators the truth, but he is lying now for ulterior motives. The reality is that the informational basis for [the confidential witness allegations] is at best unreliable and at worst fraudulent, whether it is [the confidential witness] or plaintiffs' investigators who are lying."
Section 929Y of the Dodd-Frank Act directs the SEC to solicit public comments and thereafter conduct a study to determine the extent to which private rights of action under the antifraud provisions of the federal securities laws should be extended to cover transnational securities fraud. In other words, to what extent is the Supreme Court's National Australia Bank decision a problem and what, if anything, should Congress do about it?
The SEC solicited comments back in October and the results are now available on the SEC's website. They make for interesting reading. The commentators include current litigants in cases with extraterritoriality issues, forty-two law professors, the U.S. Chamber of Commerce, the governments of Australia and France, and an individual foreign investor who states that he has "been duped of huge sum of my life long savings by so called private bankers who are affiliates outside USA of US banks."
Quote of note (Comments by Forty-Two Law Professors): "We differ in our views of private rights of action: some of us have significant doubts about the efficacy of securities class actions, while others believe shareholder litigation rights should be strengthened. Nevertheless, as a group we believe reform efforts should be applied consistently and logically to both domestic and affected foreign issuers, and we therefore support extending the test set forth in Section 929P of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to private plaintiffs."