The Supreme Court recently heard oral argument in a case that may have a significant impact on how district courts resolve class certification fights in securities fraud cases. The issue in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds is whether a class can be certified if the alleged misrepresentations constituting the fraud are not “material” under the federal securities laws. In the decision below, the Ninth Circuit said yes, refusing to consider evidence that securities analysts had already reported the truth of the matters that the defendant allegedly misrepresented—rendering the alleged misrepresentation immaterial. That decision deepened a circuit split that pits the Seventh and Ninth Circuits against the Second, Third, and Fifth Circuits. The core of the dispute in Amgen is whether the price of obtaining a presumption of reliance—essential to class treatment in a securities fraud case—should include having to prove materiality at the class certification stage.
At the oral argument on November 5 (transcript (pdf); audio (mp3)), the Supreme Court appeared to be sharply divided. Questions from Justices Ginsburg, Sotomayor, and Kagan suggested that they believe that materiality should be irrelevant to the class certification decision. In their view, materiality is different from other prerequisites to the presumption of reliance because it is an element of a securities fraud claim. These Justices appeared concerned that a failure to prove materiality therefore would lead not just to denial of class certification but also to judgment for the defendant, and their questions suggested that they were not comfortable with having this core issue of liability on the merits resolved as part of the class certification inquiry. By contrast, questions from Justices Scalia and Kennedy suggested that those Justices view materiality to be no different than any other prerequisite to the presumption of reliance. Their position appears to be that, because the presumption of reliance makes class certification highly likely, and class certification in securities cases imposes enormous pressure on defendants to settle, it is not asking too much to require plaintiffs to prove materiality, alongside the other prerequisites for presumed reliance, at the class certification stage. Where the rest of the Court stands is harder to discern.
How the Court decides Amgen should shed light on a fundamental jurisprudential question that lies behind many class certification rulings in securities fraud cases. Are class actions in such cases presumptively proper, purely as a matter of “fairness” and “public policy”? Or are they subject to the same “rigorous analysis” that, according to the Supreme Court, applies to all class actions? Fidelity to Rule 23 and the fact that class certification is ordinarily the last opportunity to consider the shortcomings of a securities fraud claim should lead the Supreme Court to take the prerequisites to presumed reliance seriously and require trial courts to deny class certification when they are not met. A decision in Amgen is expected by June of 2013.