SCOTUS and securities class actions: a love story
Weil, Gotshal & Manges has asked a great question in a new post at the Harvard Law School Forum on Corporate Governance: Why is the U.S. Supreme Court suddenly so passionate about federal securities litigation? According to Weil’s survey, the justices have generated more securities fraud precedent in the last two years than in the previous two decades: Merck v. Reynolds and the infamous Morrison v. National Australia Bank in 2010; Matrixx Initiatives v. Siricusano, Erica P. John Fund v. Halliburton, Janus v. First Derivative Traders and (tangentially) Wal-Mart v. Dukes in 2011. The court has looked at when shareholders are on notice of fraud, how broadly U.S. securities law extends to foreign defendants, who can be sued for misstatements and when companies have a duty to inform shareholders of potential problems — in other words, a huge range of issues reflecting deep interest in shareholder rights (or lack thereof).
The Weil post says we’ll have to leave it to future historians of the Roberts Court to figure out exactly why these justices seem to be fascinated by securities class actions. In the meantime, though, we can study the briefs in the next big securities case up for Supreme Court consideration. On Thursday, Connecticut’s pension fund filed its 67-page brief in the case that will hereafter be known in SCOTUS jurisprudence as Amgen v. Connecticut Retirement Plans. Oral arguments will take place on Nov. 5 in the case, which presents the question of whether plaintiffs must provide evidence of materiality to win certification of a securities fraud class; or whether, under the Supreme Court’s 1988 fraud-on-the-market ruling in Basic v. Levinson, the class must only demonstrate an efficient market and allegedly public misstatements. Amgen also considers whether defendants have a right to rebut the fraud-on-the-market theory at the class certification stage.
It’s notable that the Connecticut fund opted to bring in David Frederick of Kellogg, Huber, Hansen, Todd, Evans & Figel to argue its case at the Supreme Court. I had asked in a post in June whether the fund would stick with its lawyers at Labaton Sucharow or — like Amgen, which brought in Seth Waxman of Wilmer Cutler Pickering Hale and Dorr — go with an appellate specialist. Frederick was a smart choice. Justice Elena Kagan recently signaled the high court’s preference for arguments by members of the specialized Supreme Court bar, and no one has more recent success before the justices on behalf of shareholders than Frederick, who lost in Janus but won in Merck and Matrixx.
In Amgen’s brief, filed by Waxman on Aug. 8, the company argued that if a defendant’s alleged misstatements weren’t material, by definition, they didn’t affect its stock price. And if the market wasn’t defrauded, Amgen argued, Basic‘s fraud-on-the-market presumption that shareholders relied on misstatements doesn’t apply. So, according to Amgen, unless plaintiffs can show the materiality of the alleged misstatements before the class is certified, they can’t show that they relied on those statements and thus can’t be certified as a class. Trial courts must consider materiality at the class certification stage, Amgen said, or else shareholder classes will be erroneously certified, giving plaintiffs unwarranted leverage in the litigation.
“Defendants will thus be forced to settle many class claims without plaintiffs ever having proved one of the predicates to the theory that allows for a class action in the first place,” argued Amgen, which lost on this question in the 9th Circuit Court of Appeals ruling in the case. “Moreover, such a regime would waste judicial resources, forcing district courts to expend the substantial resources required to conduct class litigation before determining whether class litigation is even properly available.” (The Chamber of Commerce and other business trade associations, conservative legal groups and a number of influential securities law professors have filed amicus briefs supporting Amgen.)
In its new brief, the Connecticut fund countered that materiality is a merits question that applies equally to all shareholders. The fund said that Amgen is urging a cramped reading of Basic, which stands for the principle that shareholders can be certified as a class without having to show that each of them relied on alleged misstatements. “If the securities at issue were traded in an efficient market (which Amgen concedes in this case), then reliance converges with the objective, common questions of materiality and falsity,” the fund argued. “Materiality can have only one class-wide answer because it relates to the misstatement’s importance to a reasonable investor.”
The fund said that far from promoting efficiency, as Amgen argued, considering materiality at the class certifications stage would defeat the entire purpose of class actions. “Lack of materiality should end the case on the merits, but refusing class certification on that basis would merely splinter a single class action into countless individual cases, because denial of class certification on materiality grounds does not have issue-preclusive effect on the materiality issue on the merits,” the fund’s brief said. It asserted that Amgen is asking the court, in effect, to undo Congress’s “considered policy judgments” in striking a balance “between allowing class actions that hold companies and individuals accountable for their false statements and eliminating actions that might be abusive.” (Amici for the fund haven’t yet filed briefs.)
The issue of materiality at the class certification stage seems arcane, but as the competing merits briefs point out, the ramifications for securities class actions are huge. Shareholders dodged a bullet on a similar issue in last year’s Halliburton ruling, in which the justices chose to restrict their finding to a consideration of the 5th Circuit’s definition of loss causation. But when the court agreed to hear Amgen, it showed it’s not yet done with securities fraud class certification. Can shareholders dodge again?
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