Tuesday, November 23, 2010

Securities Industry Urges Supreme Court to Apply FRCP Rule 9(b) Standard to Materiality Element of Rule 10b-5

As the US Supreme Court considers the materiality element of Rule 10b-5 for the first time since 1988, the securities industry asks the Court to rule that materiality,like all other elements of a securities fraud, is subject to the heightened pleading standard of Federal Rule of Civil Procedure 9(b) and must pled with particularity. In a joint amicus brief filed with the Court in a private securities fraud action, SIFMA and the Chamber of Commerce contend that the Ninth Circuit incorrectly applied the “notice pleading” standard embodied by Federal Rule of Civil Procedure 8. Also, the brief said that the Ninth Circuit wrongly rejected the district court’s use of a “statistical significance” standard to evaluate whether the investors had sufficiently pled materiality. The Court has set oral argument for January 10, 2011. Matrixx Initiatives, Inc, v. Siracusano, Dkt. No. 09-1156.

While conceding that no federal circuit court of appeals has specifically addressed whether Rule 9(b) applies to the pleading of materiality, amici pointed out that a number of courts have held in general terms that Rule 9(b) applies to all elements of a federal securities fraud claim. Moreover, federal circuit courts of appeal have found that Rule 9(b) applies to analogous elements of a Section 10(b) claim, including loss causation and reliance. For example, the Fourth Circuit has observed that a strong case can be made that because loss causation is among the circumstances constituting fraud for which Rule 9(b) requires particularity, loss causation should be pleaded with particularity, see Teachers’ Ret. Sys. of La. v. Hunter, 477 F.3d 162, 185-86 (4th Cir. 2007). The same “strong case” exists for materiality, contended SIFMA and the Chamber.

The proper choice of pleading standards is important, emphasized amici, since Rule 9(b)’s heightened pleading standard serves to weed out meritless fraud claims. As to the crucial element of materiality, they noted, the complaint should include details
from which a judge could infer that the alleged misstatement or omission involved a fact that a reasonable investor would have considered important. And the securities fraud complaint should be dismissed if it does not do so. In this case, the Ninth Circuit never conducted the required Rule 9(b) particularity analysis.