In an amicus brief filed with the US Supreme Court in the Amgen case, six former SEC Commissioners urged the Court to reverse the Ninth Circuit and hold that the logic and purposes of the fraud-on-the-market doctrine and of the Rule 23 class action device require that, in order to obtain class certification, plaintiffs in a private securities fraud action seeking money damages must establish by a preponderance of the evidence that the alleged misrepresentations were material in the sense that they affected the price of the stock at issue. The Ninth Circuit panel ruled that plaintiffs need not prove materiality to use the fraud-on-the-market presumption of reliance at the class certification stage. Amgen, Inc. v.
Plans and Trust Funds, Dkt. No. 11-1085. Connecticut
The brief asserts that the Ninth Circuit’s expansive interpretation of the fraud-on-the-market doctrine untethers the class certification determination from even the most cursory consideration of materiality and is contrary to the Court’s recent admonitions that the Section 10(b) implied private right of action should be narrowly interpreted. The former SEC Commissioners are Aulana Peters, Paul Atkins, Joseph Grundfest, Philip Lochner, Charles Cox and Stephen Friedman. Former SEC General Counsel Brian Cartwright was also on the brief.
According to the former Commissioners, the Ninth Circuit’s decision strikes at the heart of the Court’s holding in Basic Inc. v. Levinson, 485 U.S. 224 (1988), which recognized that in order to benefit from a presumption of class-wide reliance, a private securities fraud plaintiff seeking money damages must show at the class certification stage that the essential predicates to the fraud-on-the-market theory are satisfied. The crux of the fraud-on-the-market theory is that, in an efficient market, all public material information is reflected in the price of a security. An investor who purchases a security relying on the integrity of the market price thus relies on any material misrepresentations that have been made to the market, posited the brief, not because the investor is actually aware of any of these misrepresentations, but because the effect of the material misrepresentation is incorporated into the stock price, and not for any other reason.
Amici thus argued that materiality in the form of information that is incorporated into securities prices is a condition precedent to the theory that makes class certification of private Section 10(b) money damages claims possible. In Basic, the Court recognized that whenever the link between an alleged misrepresentation and the market price of a security is severed, the presumption of reliance is inapplicable and class certification is improper. But, in the view of amici, The Ninth Circuit panel failed to follow these important principles when it held that a Section 10(b) plaintiff need not demonstrate materiality in any form whatsoever in order to obtain class certification in an action for money damages.
The brief further contended that the Ninth Circuit’s misunderstanding of Basic and the role of materiality in the Rule 23 inquiry has significant implications. Because securities class actions are nearly always settled if a class is certified, noted the former SEC officials, the materiality and price impact of an alleged misstatement will never be tested unless the question is examined as part of the Rule 23 inquiry. Plaintiffs’
allegations of reliance therefore will never be tested either. The brief said that the Ninth Circuit’s decision unleashes the in terrorem power of class certification to compel settlement of even questionable claims without any meaningful inquiry into materiality or price impact and, therefore, into an important aspect of the propriety of presuming reliance. Basic, however, establishes that these are critical issues that must be tested at the class certification stage.
The former Commissioners assured that the rule proposed by amici would not impair the ability of the SEC to enforce the federal securities laws. The SEC in civil enforcement actions is not required to establish reliance or causation. The SEC therefore need not depend on the fraud-on-the-market theory, and need not prove materiality by way of price impact. In this federal enforcement context, a statement may be shown to be material if there is a substantial likelihood that a reasonable investor would view it as having significantly altered the total mix of available information, even if it has no price impact.
Finally, amici invited the Court to take the opportunity to define the burden of proof a plaintiff bears to establish the prerequisites for class certification in a Section 10(b) suit. The former Commissioners urged the Court to require plaintiffs to prove materiality through price impact and all other prerequisites of Rule 23 certification by a preponderance of the evidence, adding that the Second, Third, and Fifth Circuits have expressly held that Rule 23 prerequisites must be proved by a preponderance of evidence.
In the instant case, the Ninth Circuit held that the plaintiff must merely plausibly allege, but need not prove, materiality at the class certification stage. Although the panel acknowledged that the plaintiff must prove the other elements of Rule 23, the Ninth Circuit did not describe the evidentiary standard that applies to Rule 23. Nor has the Ninth Circuit done so elsewhere.
The Supreme Court has not yet explicitly established the standard of proof for Rule 23 requirements, noted amici, though in Wal-Mart it made clear that a plaintiff must meet more than “a mere pleading standard.” Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2551 (2011). In the view of amici, the Court left no doubt in Wal-Mart that a plaintiff seeking class certification must affirmatively demonstrate compliance with Rule 23 and must be prepared to prove that there are in fact sufficiently numerous parties, common questions of law or fact, etc. The Court also reaffirmed that certification is proper only if the trial court is satisfied, after a rigorous analysis, that the prerequisites of Rule 23(a) have been satisfied.
The former SEC officials urged the Supreme Court to embrace the reasoning of the Second, Third, and Fifth Circuits and, consistent with the rigorous analysis it required in the Wal-Mart opinion, adopt the preponderance of the evidence standard for Rule 23 class certification.