Materiality: Revisiting Pleading Standards at the Class Certification Stage in

Securities Fraud Litigation

Sonia Bhasin
I. Introduction
In recent years, private securities fraud claims have been the focus of increasing
judicial scrutiny. The Supreme Court under Chief Justice John Roberts has generated
more securities fraud precedent in the past two years than the Supreme Court had
generated in the previous two decades.1 In particular, the class certification stage has
proven to be a heavily contested issue in the world of securities fraud litigation. Despite
its importance, the class certification stage does not have a set place on the litigation
timeline.2 There appears to be flexibility in the rules for when judges can address class
certification.3 However, the importance of that stage is two-fold and has implications
beyond just the plaintiffs and defendants who serve as the parties to the litigation.
Almost all securities fraud class actions are either dismissed or result in sizeable
settlement agreements due to the risk that an order of damages may be so large as to put a
company out of business.

1 Robert F. Carangelo, et al., The 10b-5 Guide: A Survey of 2010-2011 Securities Fraud.
2 Barbara J. Rothstein & Thomas E. Willging, Managing Class Action Litigation: A Pocket Guide for
Judges (Federal Judicial Center 2009).

3 Id.

According to a study by NERA Economic Consulting, over the past

17 years since the Private Securities Litigation Reform Act became law,
the annual rate of settlements has always surpassed that of dismissals.
The study also showed that the median settlement rate in 2012 was the highest
since the passage of the PSLRA.4 As the above chart of median settlement values shows,
settlement values have been increasing over the past few years.

4 See Dr. Renzo Comoli, Dr. Ron Miller, Svetlana Starykh, & Sukaina Klein, 2012 Trends in Securities
Class Actions: Settlements Plummet; Dismissals Down Even More, NERA Economic Consulting
(December 11, 2012).

Therefore, relaxed pleading standards at the class certification stage could lead to
an increasing number of frivolous claims being brought by plaintiffs, and therefore
companies being forced to settle those frivolous claims.5 Alternatively, elevated
standards would burden plaintiffs, who would be required to assemble a case prior to
discovery, add to ever-increasing litigation costs, and could discourage investors from
pursuing securities fraud claims. It would also prevent plaintiffs from serving as a
deterrent to businesses engaging in actual securities fraud. Indeed, the average time it

5 See, e.g., Regents of the Univ. of Cal. v. Credit Suisse First Boston (USA), Inc., 482 F.3d 372, 379 (5th
Cir. 2007) (reviewing a district courts certification order in which plaintiffs alleged damages totaling $40
billion) and See Robert G. Bone & David S. Evans, Class Certification and the Substantive Merits, 51
DUKE L.J. 1251, 1302 (2002) ([L]ack of attention to the merits make[s] the class action an attractive
vehicle for frivolous suits.).

takes to get one of these securities fraud cases through the system has increased.6
Motions to dismiss can take years, which makes settlement even more attractive to
defendants, at the benefit of the plaintiff classes.7
This Note will focus on the recent case that faced the Supreme Court, Amgen, Inc. v.
Connecticut Retirement Plans and Trust Funds, concerning the materiality requirement at
the class certification stage in securities fraud litigation, giving the Supreme Court
another opportunity to shape the world of securities fraud litigation. Part II will give
some legal background leading up to the Amgen case, with a focus on Securities and
Exchange Commission Rule 10b-5 and the Basic, Inc. v. Levinson decision, which
revolutionized class action securities litigation. Part III will give an overview of the
Amgen case and the recent Supreme Court ruling that was handed down. Part IV will
look at the potential impact this decision will have on lower courts, where most securities
fraud cases begin and end, by taking a circuit-by-circuit look at rulings handed down in
the 5 years preceding Amgen. It will ultimately conclude that the Amgen case, although
given much attention in securities law circles about its potential implications, will likely
have little impact on actual litigation at the District Court level.

II.

Legal Background

6 See Dr. Renzo Comolli, et al., 2012 Trends in Securities Class Action Litigation, at 3
7 Id.

Under Securities and Exchange Commission Rule 10b-58 securities fraud claims,
a plaintiff must make a showing of both materiality and reliance. First, the plaintiff must
show that a defendants misrepresentation concerned a material fact. Secondly, the
plaintiff must show that they relied on the misrepresented material fact in deciding
whether to buy or sell a particular companys stock.9 To prove materiality, a plaintiff
must establish that there is a substantial likelihood that a reasonable shareholder would
consider the misrepresented fact an important factor in their decision to trade in the
stock.10 After proving materiality, a plaintiff must also prove the element of reliance: that
the investor actually relied upon the material fact before deciding to engage in the
transaction they were ultimately harmed as a result of.11 Since millions of trades are
made on a daily basis and many investors can be affected during any period of time from
a misrepresented material fact they relied on in trading a companys stock, securities
fraud plaintiffs seek to bring class actions. However, when attempting to bring class
actions, securities fraud plaintiff classes faced a barrier under Federal Rule of Civil
Procedure 23(b)(3), which required the plaintiff class to establish reliance on a class-wide
basis.12 Plaintiffs need to show that questions of law or fact common to all class
members predominate over individual questions before being certified as a class.13 This
8 17 C.F.R. 240.10b5 (2012).
9 Dura Pharm., Inc. v. Broudo, 554 U.S. 336, 341 (2005).
10 Basic, Inc. v. Levinson, 485 U.S. 224, 23132 (1988).
11 See id. at 243.
12 See id. at 224.
13 See FED. R. CIV. P. 23(b)(3) (stating that a class action may be maintained if the court finds that the
questions of law or fact common to class members predominate over any questions affecting only
individual members).

is a problem for plaintiffs trading in an open, public market because individual investors
may not be aware of statements or misstatements made by a company.14 They rely on the
market to perform the valuation process for them, and assume that the price of a stock
reflects all publicly available information, which disrupts the direct link between the
company and the investor.15 A showing of common, individualized reliance would be an
unrealistic evidentiary burden for a plaintiff class, and nearly impossible to overcome.16
Confronted with this huge roadblock facing potential securities fraud plaintiffs
classes, the Supreme Court revolutionized the field of securities fraud litigation 25 years
ago when it handed down its landmark decision in Basic v. Levinson. The decision
adopted a practical solution to solve the reliance problem for plaintiffs seeking class
treatment, known as the fraud on the market theory.17 This theory stipulates that in an
efficient market, the price of a security reflects all material public information available
about that security.18 It gives rise to a rebuttable presumption that investors indirectly
rely on any material misrepresentations absorbed into the market price at the time they
decide to buy or sell company stock.19 Because this holds true for any buyer or seller of a

14 Merritt B. Fox, After Dura: Causation in Fraud-on-the-Market Actions, 31 J. CORP. L. 829, 840
(2006).

15 Basic, Inc. v. Levinson, 485 U.S. at 244.

16 Merritt B. Fox, After Dura: Causation in Fraud-on-the-Market Actions, 31 J. CORP. L. 839-840
(2006).

17 Basic, 485 U.S. at 245-46.

18 See id. at 244.
19 Id. at 247.

particular companys stock during the putative class period, plaintiffs may establish
reliance on a class-wide basis.
III.

Amgen and its Impact on Class Certification Standards

Defendant-Petitioner is Amgen, Inc. and several of its officers. Amgen is a

publicly traded biotechnology company, and is well-known for two of its flagship
pharmaceutical products: Epogen and Aranesp.20
Plaintiff-Respondent Connecticut Retirement Plans and Trust Funds represents a
class of purchasers who bought Amgens publicly traded securities between April 22,
2004 and May 10, 2007.21 Connecticut Retirement claims that Amgen began making
certain omissions and misstatements regarding Epogen and Aranesp on April 22, 2004.22
These misrepresentations artificially inflated the price of Amgens stock until May 10,
2007, when corrective disclosures were made and Amgens stock price fell.23 These led
to financial losses for those who purchased the stock at the artificially inflated price,
including Connecticut Retirement.24 On October 1, 2007, Connecticut Retirement
brought a securities fraud action against Amgen in the Central District of California,
alleging violations of 10b and Rule 10b-5. Connecticut Retirement moved to certify its
class action on behalf of all purchasers of Amgen stock between the date the first
misrepresentations were made and the date the final corrective disclosures were made.25
20 Petition for Writ of Certiorari at i, Amgen, No. 11-1085 (U.S. Mar. 1, 2012).
21 Id.
22 Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, 568 U.S. 6 (2013).
23 Id.
24 Id.
25 Id. at 7.
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The District Court granted the motion, and the Ninth Circuit Court of Appeals
affirmed.26
Connecticut Retirement invoked the fraud-on-the-market presumption to establish
common reliance among the class. They provided evidence that Amgens stock traded in
an efficient market and that Amgens alleged misstatements were public. Connecticut
Retirement argued that because the misrepresentations were reflected in the market
price, common reliance should be presumed for any investors who sold or purchased
Amgen stock during the class period.
Amgen made two principal arguments on appeal. First, Amgen claimed that the
fraud-on-the-market presumption also requires a showing that the misrepresentations
were material, because immaterial statements do not affect the stock price in an efficient
market, and thus argued that the District Court erroneously certified the class because
they did not first require Connecticut Retirement to prove the materiality of Amgens
alleged misrepresentations.27 Second, Amgen demanded the opportunity to rebut the
presumption by showing that the truth behind each of Amgens alleged misstatements had
already entered the market and thus could not have affected the stock price, and claimed
that the District Court was required to consider rebuttal evidence offered by Amgen in
opposition to Connecticut Retirements motion.28 The Court of appeals rejected both of
Amgens arguments. They held that, with respect to the first argument, proof of
materiality is not a necessary requirement to ensure compliance with Rule 23(b)(3)s
26 Id.
27 Id.
28 Id.

requirement that common questions predominate.29 With respect to the second argument,
the Court of Appeals concluded, the district court correctly refused to consider the
rebuttal evidence offered by Amgen at the class certification stage.30
The Ninth Circuits decision led to a circuit split, a conflict among the various
Courts of Appeals, over whether district courts must require plaintiffs to prove, and must
allow defendants to present evidence rebutting, the element of materiality before
certifying a class action under 10(b) and Rule 10b-5.31
In the 9th and 7th Circuits, plaintiffs must plausibly allegebut need not prove at
this juncturethat the claimed misrepresentations were material. Defendants were also
not allowed to rebut the plaintiffs materiality showing.32 In the 1st, 2nd and 5th Circuits,
plaintiffs were required to prove materiality at the class certification stage to utilize the
Basic presumption, and also allowed Defendants an opportunity to rebut that showing.33
The 3rd Circuit did not require evidence of materiality to invoke the fraud-on-the-market
presumption, but at least provided Defendants an opportunity to rebut the presumption
once established.34

29 Id. at 8.
30 Id.
31 Id.
32 Schleicher v. Wendt, 618 F.3d 679, 685 (7th Cir. 2010).
33 .In re Salomon Analyst Metromedia Litig., 544 F.3d 474, 481 (2d Cir. 2008) & Oscar Private Equity
Invs. v. Allegiance Telecom, Inc., 487 F.3d 261, 264 (5th Cir. 2007) & In re PolyMedica Corp. Sec. Litig.,
432 F.3d 1, 8 n.11 (1st Cir. 2005).

34 In re DVI, Inc. Sec. Litig., 639 F.3d 623, 631 (3d Cir. 2011).

The Supreme Court presented a 6-3 ruling on February 27th, 2013. The Court held
that while materiality is essential to the fraud-on-the-market theory, proof of materiality
is not a prerequisite to certification of a securities fraud class action seeking money
damages for alleged violations of Rule 10b-5.35 The Supreme Court also upheld the
Ninth Circuits determination that the trial court did not err in refusing to consider the
defendants evidence rebutting the presumption of reliance.36
The Supreme Court reasoned that materiality was judged according to an
objective standard that could be proven through evidence common to the class.37
Therefore, a failure to prove materiality would not just defeat an attempt to certify a
class, it would also defeat all of the individual claims, because it is an essential element to
a claim under Rule 10b-5.38 Materiality is a merits issue that is not necessary to ensure
that common questions of law or fact will predominate over questions which affect only
individual members.
IV.

District Court Impact

From the amount the Amgen case has been discussed in the securities fraud

community, it would appear that the Supreme Courts decision that materiality is not an
essential element of class certification would have major implications for the future of
securities fraud class actions. However, from a fairly thorough inspection of District
Court decisions in select jurisdictions and in every circuit, it seems that any effect will
35 Amgen, 568 U.S. 10 (2013).
36 Id.
37 Id. at 10.
38 Id.

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likely be minimal, at best. Looking at District Court decisions in each circuit in the past
five years leading up to the Amgen decision, it appears that District Courts tend to follow
the precedent established by the Courts of Appeals in their circuit. The vast majority of
class action securities fraud cases are brought in the 2nd and 9th circuits. In an analysis of
forum shopping in securities class actions, it was found that 85 percent of the securities
fraud class actions in a particular sample were filed in the defendant corporations home
circuit.39 This would make sense because the 2nd and 9th Circuits correspond to New York
and California, respectively. However, the analysis further found that differences in
pleading standards among circuits did not have a statistically significant impact on choice
of venue. In addition, the Amgen decision was not unique to the 9th Circuit alone. It was
in line with the 9th and 7th Circuits, as well as the emerging doctrines in the 1st and 4th
Circuits.
The Amgen decision arguably only has an impact on the 2nd and 5th Circuits, which
required proof of materiality at the class certification stage. After analyzing various
district court decisions in the 5th Circuit, it appeared that class certifications were denied
in that Circuit only for failure to prove loss causation at the class certification stage,
which has since been overruled by the Supreme Court in the important Erica P. John
Fund, Inc. v. Halliburton Co. decision in 2011. It is presumed that a requirement
regarding materiality survived with the Halliburton decision, but with the limited case
law in the 5th Circuit since that decision, we cannot be certain because the doctrine in this
circuit was so closely tied in with loss causation. Therefore, the Amgen decision might
not even have any effect on the 5th Circuit.
39 Cox, James D., Randall S. Thomas, and Lynn Bai. Do Differences in Pleading Standards Cause Forum
Shopping in Securities Class Actions: Doctrinal and Empirical Analyses. Wis. L. Rev. (2009): 421.

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After an analysis of District Court cases in the 2nd Circuit, it appeared that in the
past five years, most District Court cases required proof of materiality at the class
certification stage. Out of a multitude of cases reviewed, only one class certification was
denied for failure to prove materiality. Two others were denied for failure to prove
predominance and efficiency of the market. Out of 16 cases available for analysis, 11
cases appeared to have settled and 1 was dismissed. The requirement of showing proof
of materiality did not appear to lead to more dismissals, and cases tended to settle most of
the time. One post-Amgen cases stated that proof of materiality was no longer required
at the class certification stage, which was in line with the Supreme Courts decision.
After reviewing 100 District Court cases in 11 different Circuits, only one class
certification was actually denied for failure to prove materiality, which was the issue of
the Amgen case. In sum, cases tended to both settle the same amount of time and class
certifications tended to be denied at the same rate between the District Courts in the 2nd
and 9th Circuit, despite the different standards regarding materiality. Instead, the decision
may have opened increased scrutiny to the Basic v. Levinson fraud-on-the-market
theory, which was questioned by 4 justices in the Amgen opinion. Perhaps the increased
judicial scrutiny of securities cases by the Roberts Court is only setting us up for the
inevitable re-visitation of Basic. Time will only tell

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