Tightening the Noose on Class Certification Requirements (I): Another Whack at the Fraud-on-the-Market Presumption in Securities Fraud Class Actions

Abstract

In Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds, the Court will determine whether a class plaintiff, in order to rely on the so-called “fraud-on-the-market” presumption, must prove the materiality of the alleged misstatements as part of the class certification process. The Connecticut Retirement Plans and Trust Funds sued Amgen Inc. and corporate officers in a securities fraud class action for losses stemming from alleged misleading statements. 

The issue in Amgen focuses on whether a plaintiff seeking certification of a securities fraud class action who invokes a rebuttable fraud-on-the-market presumption must provide evidence that alleged misstatements were material to the impact on a company’s stock price. In addition, the Court will consider whether a trial court also must give the defendant the opportunity, during the class certification process, to present rebuttal evidence that the alleged misstatements were not material to affect a stock’s price. The core dispute in the Amgen appeal centers on whether a plaintiff, in seeking to invoke classwide reliance afforded by the “fraud-on-the market” presumption, has to demonstrate as a pre-condition to class certification that the alleged misstatements are material to a finding of a Rule 10b-5 violation. 

The Amgen appeal follows one year after the Court’s decision in Erica P. John Fund, Inc. v. Halliburton, 131 S. Ct. 2179 (2011), in which a corporate defendant (Halliburton) similarly asked the Supreme Court to tighten class certification requirements in securities fraud cases that invoke the “fraud-on-the-market” presumption.  Similar to this Amgen appeal, The Erica P. John Fund, Inc. brought a securities fraud class action on behalf of its shareholders against Halliburton Co. alleging Halliburton committed securities violations by deliberately falsifying information and misleading the public. In that appeal, Halliburton contended that a plaintiff must prove “loss causation” as a predicate to application of the Basic fraud-on-the-market presumption.

In a unanimous opinion authored by Chief Justice Roberts, the Court rejected Halliburton’s suggestion to tighten a plaintiff’s pleading burden of proof at class certification, which would have required securities plaintiffs to provide additional proof in order to invoke and rely on the “fraud on the market presumption” in lieu of actual reliance. The Court answered the simple question whether a plaintiff in a Rule 10b-5 securities class action must prove loss causation to obtain class certification with an unqualified “No.” 

In the broadest sense, this year’s Amgen appeal, similar to last year’s Halliburton appeal, is significant because the Court again will determine whether to uphold liberal standards for certification of securities class actions or will tighten those Basic requirements for invoking and applying the fraud-on-the-market presumption of reliance. The fight embodies a dispute concerning what plaintiffs have to demonstrate at the class certification stage to permit a court to allow a securities class action to proceed.

And, similar to the Halliburton appeal, this Amgen appeal decision has broad implications for stock market investors seeking recovery for investment fraud. Connecticut Retirement and its friend-of-the-court Public Citizen have cast the appeal as a consumer protection case, asking the Court not to turn investors away from the courthouse door at the class certification stage. The United States government, as a friend-of-the-court amicus, has joined the plaintiffs in asking the Court to uphold the Basic holdings.

The Court will have to determine whether federal courts may require plaintiffs to prove the materiality of alleged misstatements at the class certification stage. The plaintiffs have suggested that this requirement embodies illegitimate “heightened pleading” at the class certification stage and imposes an improper assessment of the merits of the case, before trial. The plaintiffs further suggest that this is an unfair burden to impose on plaintiffs at an early stage of litigation, when the appropriate stage of proceedings for determining this “merits” question is either on a motion for summary judgment, or at trial.

The defendant, on the other hand, views the role of the court at class certification as evaluating whether it makes common sense to proceed with a proposed class action that could not actually be tried because the alleged misstatements actually were not material to have affected market pricing. The defendant sees no point in permitting class certification to proceed when at some later time it is subsequently proven that the alleged misstatements were not material and therefore could not have affected market pricing. 

If the alleged misstatements cannot be proven to have been material, as part of the class certification process, then the defendants suggest that a proposed class action that cannot satisfy the Rule 23 requirements ought to be dismissed at the certification stage. The defendants cite to the large economic costs entailed in prosecuting class actions, and the settlement pressure on defendants to settle cases if a court certifies a class ― even in the instance of meritless claims.

In recent years, the Supreme Court has evinced a trend towards supporting heightened pleading requirements for ordinary and class action complaints. In addition, several prominent lower federal courts, including the Second and Third Circuits, also have issued landmark decisions clarifying and strengthening the evidentiary burdens of production and persuasion at class certification. On the other hand, the Court just last year in Halliburton refused to read a proof of “loss causation” requirement into class certification proceedings in order to apply the presumption of reliance.

As with the Halliburton appeal, it is of some note that the Court has changed personnel since the Basic decision in 1988. Only four Justices joined the Court’s Basic opinion then: Justice Blackmun, Brennan, Marshall, and Stevens. Hence, none of the Court’s Basic supporters remain on the Court. Justices Rehnquist, Scalia, and Kennedy did not participate in the Basic decision, and Justices White and O’Connor dissented in relevant parts. Hence, the Court now has been almost completely reconstituted since the Basic decision which first articulated the fraud-on-the–market presumption. 

It will be interesting to see how the Court analyzes the fundamental issue in Amgen in the context of the very similar issue raised by Halliburton, which case must be fresh in the Justices’ minds. On the one hand, upholding the Ninth’s Circuit decision and preserving a liberal interpretation of the Basic decision and presumption would seem consistent with the Court’s analysis in Halliburton. On the other hand, the Court will have to distinguish the concept of materiality from that of loss causation to explain why the Ninth Circuit’s decision requires reversal. Such a decision would then place an additional burden of plaintiffs seeking certification of security fraud class actions.