What must a plaintiff do to invoke the fraud-on-the-market theory (pursuant to which reliance by investors on a misrepresentation is presumed if the company's shares were traded on an efficient market) in support of class certification? According to the U.S. Court of Appeals for the Ninth Circuit, nothing more than show (a) the security was traded on an efficient market, and (b) the alleged misrepresentations were public.
In Connecticut Retirement Plans and Trust Funds v. Amgen, Inc., 2011 WL 5341285 (9th Cir. Nov. 8, 2011), the court addressed whether a plaintiff also must prove that the alleged misrepresentations were material. Three circuit courts (Second, Fifth, and, to a lesser extent, Third) previously have held that this is a required part of the fraud-on-the-market analysis when evaluating whether a class should be certified. The Ninth Circuit joined a recent decision from the Seventh Circuit, however, in rejecting that position. The court held that materiality is a merits question that does not affect whether class certification is appropriate.
Holding: Affirming grant of class certification.
Quote of note: "If the misrepresentations turn out to be material, then the fraud-on-the-market presumption makes the reliance issue common to the class, and class treatment is appropriate. If the misrepresentations turn out to be immaterial, then every plaintiff's claim fails on the merits (materiality being a standalone merits element), and there would be no need for a trial on each plaintiff's individual reliance. Either way, the plaintiffs' claims stand or fall together - the critical question in the Rule 23 inquiry."
The Apollo Group, a large private education provider, has been a magnet for securities litigation. In the most recent securities class action brought against Apollo, investors allege that from May 2007 to October 2010 the company made false and misleading statements about its financial condition, business focus, ethics, compensation and recruitment practices, and compliance with federal student loan regulations. In a recent decision - In re Apollo Group, Inc. Sec. Litig., 2011 WL 5101787 (D. Ariz. Oct. 27, 2011) - the court dismissed the claims. The decision has a few interesting holdings:
(1) Internet Postings - The complaint cited certain anonymous internet postings. The court noted that "the only appreciable difference between anonymous internet postings and confidential witness statements is that anonymous internet postings are less reliable." As a result, "with regard to anonymous internet postings, it is Plaintiffs' burden to plead reliability and knowledge that are indicative of scienter to at least the same extent as it must when pleading scienter with regard to confidential witness statements."
(2) Suspicious Stock Trading - There were nine individual defendants in the case. The plaintiffs alleged that four of those defendants sold Apollo stock during the class period (21%, 15%, 34%, and 26% of their holdings respectively). The court found that these stock sales did not support a strong inference of scienter because (a) they were not "large sales amounts," and (b) there were no "corroborative sales" by the other individual defendants.
(3) SEC Investigation - There is a district court split regarding whether the announcement of an SEC investigation is sufficient to establish loss causation (presuming that the announcement does not otherwise disclose any information about the alleged fraud). In Apollo's case, the relevant press release stated that the SEC was conducting an informal investigation into the company's revenue recognition practices. The court found that this disclosure had a sufficient nexus to the alleged fraud, because it could have signaled to a "reasonable investor that there were improprieties in Apollo's revenue recognition policies."
Holding: Motion to dismiss granted based on failure to adequately plead scienter.