9th Circuit Holds Materiality Is a Merits Issue

The 9th Circuit has joined with the 3rd and 7th Circuits in holding that plaintiffs invoking the fraud-on-the-market presumption in aid of class certification must show that the security in question was traded in an efficient market and that the alleged misrepresentations were public. Plaintiffs must also plausibly allege, but not prove at the certification stage, that the alleged misrepresentations were material. Proof of materiality and rebuttal of the fraud-on-the-market presumption, the panel concluded, are matters for trial or summary judgment.

The panel found that the district court did not abuse its discretion in certifying a class in an action brought against a biotechnology company. Investors alleged that the company had made several materially false public statements and had failed to disclose information about the safety of two of its products. According to the complaint, the alleged misstatements and omissions inflated the price of the company's stock, and the investors suffered losses when corrective disclosures caused the price to fall. The district court certified the class, finding that it satisfied the requirements of Rule 23(a) and that common questions of law and fact predominated. The district court also held that reliance was common to the class because it could invoke the fraud-on-the-market presumption. In this case, the presumption was successfully invoked because the company conceded that its stock traded in an efficient market and also did not contest that the alleged misstatements were public. The court held further that the investors could merely allege, and did not need to prove at this stage, that the alleged falsehoods were material and that rebuttal of the presumption was an issue for trial.

The panel held that proof of materiality is not necessary to invoke the fraud-on-the-market presumption at the class certification stage. It is not necessary to prove materiality, the panel determined, to ensure that reliance is a common element among all prospective class members' claims. The panel explained that materiality is an element of the merits of a securities fraud claim, while the elements of the fraud-on-the-market presumption are not. Moreover, those circuits that require materiality to be proved at the certification stage do so based on a misreading of a footnote in Basic Inc. v. Levinson. The Supreme Court did not adopt proof of materiality as a precondition to certification in either Basic or in more recent cases involving the presumption, stated the panel.

Finally, the panel held that the district court was not in error in denying the company an opportunity to rebut the presumption. The company's argument was based on the truth-on-the-market defense, but the panel explained that the defense is used to rebut an alleged misrepresentation's materiality, which goes to the merits of the claim. In this case, the company did not contest that the misrepresentations were public and that its stock traded on an efficient market, and this was sufficient to invoke the fraud-on-the-market presumption of reliance.

□ Connecticut Retirement Plans and Trust Funds v. Amgen, Inc. (9thCir) is reported at ¶96,580.