The U.S. Supreme Court has issued a decision in the Amgen case holding that proof of materiality is not a prerequisite to certification of a securities fraud class action. It is a 6-3 decision authored by Justice Ginsburg, with dissents from Justice Thomas (main) and Justice Scalia.
Under the fraud-on-the-market presumption, reliance by investors on a misrepresentation is presumed if the misrepresentation is material and the company's shares were traded on an efficient market that would have incorporated the information into the stock price. At issue in Amgen was whether a class action plaintiff, to take advantage of this presumption for purposes of class certification, is required to prove that the misrepresentation was material. As foreshadowed by the oral argument, the key issue for the Court was whether the fact that materiality is both a predicate for the use of the fraud-on-the-market presumption and a substantive element of the securities fraud claim means that it should be treated differently than the other fraud-on-the-market predicates (market efficiency, misrepresentation was public, transaction took place between time when misrepresentation was made and truth was revealed).
The majority opinion held that proof of materiality is not needed to ensure, as required by FRCP 23(b), that the questions of law or fact common to the class will predominate over any questions affecting only individual members. First, materiality is determined using an objective test and is therefore a common question as to every class member. Second, if the plaintiff were unable to establish materiality at summary judgment or trial, that failure would end the case for every class member leaving no individual reliance questions. This result is in contrast to the other fraud-on-the-market predicates - e.g., market efficiency - where a failure to prove that the market was efficient would still leave an individual plaintiff capable of establishing reliance by other means and proceeding with his case. The Court also rejected the notion that policy considerations militated in favor of requiring precertification proof of materiality. Notably, the Court found that Congress had previously "rejected calls to undo the fraud-on-the-market presumption of classwide reliance" and had not decreed "that securities-fraud plaintiffs prove each element of their claim before obtaining class certification."
The main dissent presented a starkly different view of the importance of addressing materiality at the class certification stage. According to the dissent, "nothing in logic or precedent justifies ignoring at certification whether reliance is susceptible to Rule 23(b)(3) classwide proof simply because one predicate of reliance - materiality - will be resolved, if at all, much later in the litigation on an independent merits element." Indeed, a recent Court decision (Wal-Mart) "expressly held that a court at certification may inquire into questions that also have later relevance on the merits." The judicial history of the fraud-on-the-market presumption also shows that materiality "has been the driving force behind the theory from the outset" and "further supports the need to prove materiality at the time the fraud-on-the-market theory is invoked."
Holding: Judgment of Ninth Circuit upholding grant of class certification affirmed.
Notes on the Decision:
(1) The decision does not "revisit" the fraud-on-the-market presumption. That said, it would appear that at least four justices have some concerns about its continuing validity. The dissent notes that the Court is not well-equipped to apply economic concepts and there is some disagreement about how market efficiency works. In a separate concurrence, Justice Alito references that part of the dissent and suggests reconsideration could be appropriate because the presumption "may rest on a faulty economic premise."
(2) The majority's eagerness to establish there can be no individual questions of reliance if a class action plaintiff fails to prove materiality leads to some interesting language. Notably, the Court states that "there can be no actionable reliance, individually or collectively, on immaterial information." The Court also concludes that an individual's reliance on immaterial information would be "objectively unreasonable." In the context of the entire opinion, it is not clear whether the Court is suggesting that (a) any class member's claim will fail in the absence of materiality (therefore rendering the question of reliance moot), or (b) materiality is a necessary predicate for a finding of reliance under any circumstances. There is no doubt that there is close relationship between the concepts of materiality and reliance, but for an individual investor the reliance question is typically whether he actually saw the misrepresentation and acted upon it (i.e., transaction causation), with materiality as a separate inquiry.
Pursuant to 28 U.S.C. Sec. 1658(b), a private securities fraud action "may be brought not later than the earlier of (1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation." While there are a number of cases that have explored what triggers the 2-year period (the statue of limitations), fewer courts have examined what triggers the 5-year period (the statute of repose).
In Intesa Sanpaolo, S.p.A. v. Credit Agricole Corporate and Investment Bank, 2013 WL 525000 (S.D.N.Y. Feb. 13, 2013), the plaintiff argued that its securities fraud claim was not time-barred under the 5-year deadline "because a 'violation' for 1658(b) purposes is the transaction that forms the basis of the Sec. 10(b) claim at issue (rather than the alleged misrepresentation)." Alternatively, the plaintiff argued that even if the misrepresentation triggered the time period, its claim was still timely because the defendants had concealed the truth until less than five years before the complaint was filed. The court rejected both arguments.
First, the court found that the majority of courts have held that the "violation" is the misrepresentation, not the securities transaction, and there was no dispute that the last alleged misrepresentation took place more than five years before the plaintiff brought its suit. Second, the court rejected the "continuing omission" theory proposed by the plaintiff. The court noted that "applying the concept of a continuing omission to the five-year deadline would essentially render that element of 1658(b) a nullity with respect to any securities fraud case that does not involve a corrective disclosure."
Holding: Federal claims time-barred.
Quote of note: "For example, if it is assumed that an individual purchased a company's stock in February 2007 in reliance upon an offering memorandum that contained a material omission that was never subsequently acknowledged or corrected, under the continuing omission theory urged by Inesta, not only would a claim based on that omission be timely even today, six years after the omission, despite 1658(b)'s five-year deadline, but the five-year deadline would not have even begun running on the claim."
Merck & Co., a New Jersey-based pharmaceutical manufacturer, has announced the preliminary settlement of the securities class action pending against the company in the D. of New Jersey. The case is actually two cases - against Merck and Schering-Plough Corp. - based on the companies' failure to disclose the bad results of a clinical trial of the anti-cholesterol drug Vytorin (which the companies jointly sold). Merck and Schering-Plough merged in 2009. The cases were scheduled to go to trial next month.
The settlement is for $688 million, with the company paying $215 million to resolve the securities class action against the Merck defendants and $473 million to resolve the securities class action against the Schering-Plough defendants. (Note that this case is different than the Vioxx-related securities class action against Merck that led to a 2010 U.S. Supreme Court decision. The Vioxx-related case is still pending and class certification was granted last month.)
The Vivendi securities litigation continues to lead to interesting decisions. To recap, in 2010 the company lost a trial verdict in a securities class action with potential damages of $9.3 billion. As to who could collect those damages, however, the court found that it was unclear because "certain means of rebutting the presumption of reliance [under the fraud on the market theory] require an individualized inquiry into the buying and selling decisions of particular class members."
The class action verdict and reliance ruling also had an effect on related cases brought by investors who were not part of the class. In particular, Vivendi was precluded from contesting the elements of a Section 10(b) claim, other than the element of reliance. In one of these individual cases - GAMCO Investors, Inc. v. Vivendi, S.A., 2013 WL 132583 (S.D.N.Y. Jan. 10, 2013) - the court addressed a motion for summary judgment by GAMCO. In opposition to the motion, Vivendi argued that it had raised material questions of fact with respect to GAMCO's reliance. The court agreed.
(1) Reasonableness - The court found that Vivendi had "presented evidence establishing that [GAMCO] employees privately corresponded and/or met with Vivendi management during the relevant time period." If GAMCO learned corrective non-public information from these meetings, it could not "claim that it reasonably relied on the market price of Vivendi securities" in making its purchases.
(2) Reliance on Stock Price - GAMCO was a value-based investor that measured Vivendi's worth by calculating the "amount that an informed industrialist would pay for a company's assets in a private-market transaction." Vivendi presented evidence that the impact of the company's liquidity crisis (i.e., the fraudulently omitted information) on this calculation would have been "minor." The court found that this evidence was sufficient "to raise a material question of fact as to whether GAMCO would have transacted in Vivendi securities even if it had known its true liquidity condition."
Holding: GAMCO's motion for summary judgment denied.
Quote of note: "It is somewhat ironic that GAMCO, a value-based investor, is relying on the fraud on the market presumption, which is grounded on the reliability of the market price that value-based investors spend their lives second-guessing."
NERA Economic Consulting and Cornerstone Research (in conjunction with the Stanford Securities Class Action Clearinghouse) have released their 2012 annual reports on securities class action filings. As usual, the different methodologies employed by the two organizations have led to different numbers.
The findings for 2012 include:
(1) NERA finds that there were 207 filings (compared with 225 filings in 2011), while Cornerstone finds that there were 152 filings (compared with 188 filings in 2011). NERA normally has a higher filings number due to its counting methodology (see footnote 2 of the NERA report). A key difference in 2012 is how Cornerstone and NERA counted M&A suits, with NERA reporting 53 M&A filings and Cornerstone reporting 13 M&A filings.
(2) The difference in the M&A filings count leads NERA and Cornerstone to markedly different conclusions about what happened last year. NERA finds that filings generally are holding steady, with the key difference being a decline in credit crisis filings (from 13 filings to 4 filings). In contrast, Cornerstone concludes that there has been a sharp decline in filing activity, led by the drop in M&A filings (from 43 filings to 13 filings), and that this decline has resulted in the second-lowest filing level in the past sixteen years.
(3) NERA and Cornerstone agree that filings in the Ninth Circuit were down nearly 50% as compared to 2011. Cornerstone attributes the change "largely" to a decline in M&A and Chinese reverse merger filings.
(4) NERA finds a sharp drop in the number of settlements. Only 93 securities class actions were settled in 2012 -- a record low since 1996 and a 25% reduction as compared to 2011. Settlement values, however, were near their average level from recent years.
Quote of note (Professor Grundfest): "Is there a shoe waiting to drop? The SEC claims that the Dodd-Frank bounty program has helped it build a large inventory of high-quality leads as to fraud at publicly traded corporations. But will the Commission be able to transform these leads into quality enforcement actions? And, will private-party plaintiffs be successful in prosecuting “piggyback” claims that copy the Commission’s complaints? The current quiet patch in private securities fraud litigation could certainly be unsettled if the Dodd-Frank bounty program generates a new wave of private claims."