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. 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.