Amgen v. Conn. Retirement Plans

The securities class action industry was launched a quarter-century ago when the Supreme Court recognized the so-called “fraud-on-the-market” presumption of reliance in most putative securities class actions.  The result has been that—despite Congressional efforts at securities litigation reform—most securities class actions that survive the pleadings stage are likely to achieve class certification, forcing defendants to settle.  In the meantime, as explained in prior blog posts, the best economic thinking has shifted, calling the empirical assumptions underlying the fraud-on-the-market presumption into question.

In Halliburton Co. v. Erica P. John Fund, Inc. (pdf), decided today, the Supreme Court declined to abandon that presumption, instead largely maintaining the status quo.  The Court did clarify one key aspect of how class certification works in the securities context, holding that defendants are now entitled to attempt to rebut the presumption by introducing evidence at the class certification stage that there was no “price impact”—i.e., that misrepresentation alleged in a particular lawsuit did not affect the stock’s price.  This adjustment will make it possible for defendants to challenge class certification in a number of securities class actions, but is unlikely to alter the landscape of securities litigation significantly—a result that is troubling from a policy perspective because (for reasons we have previously stated) securities class actions generally benefit the lawyers who bring and defend them rather than the investors.

We provide more details about the decision below. Continue Reading Supreme Court Refuses To Overturn Fraud-On-The-Market Presumption, But Adjusts Presumption To Allow Evidence of Absence Of “Price Impact” At Class Certification Stage

In Section 10(b) securities-fraud cases based on affirmative misrepresentations, a class action cannot be certified unless investor reliance is presumed under the fraud-on-the-market theory of Basic, Inc. v. Levinson, 485 U.S. 224 (1988). In Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (2011), the Supreme Court ruled that a plaintiff does not need to establish loss causation at the class-certification stage in order to invoke the fraud-on-the-market presumption. On remand from that ruling, Halliburton argued that it should be permitted to rebut that presumption and defeat the request for class certification with evidence that the alleged misrepresentations had no impact on Halliburton’s stock price. Based largely on the Supreme Court’s intervening decision in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, 133 S. Ct. 1184 (2013), the Fifth Circuit rejected Halliburton’s argument, holding that price impact is not properly considered at the class-certification stage. Erica P. John Fund, Inc. v. Halliburton Co. (pdf), — F.3d —-, 2013 WL 1809760 (5th Cir. Apr. 30, 2013).

The Fifth Circuit acknowledged that when the Supreme Court adopted the fraud-on-the-market presumption of reliance in Basic, it made the presumption rebuttable. The Fifth Circuit likewise recognized that establishing that a misrepresentation had no price impact would rebut the presumption of reliance by severing the link between the alleged misrepresentation and the price paid by the plaintiffs. The Fifth Circuit further noted that, even though Halliburton offered its price-impact evidence only for rebuttal purposes, such evidence also could be probative on the market-efficiency, public-statement, and materiality elements of the fraud-on-the-market presumption.

Despite this settled law, the Fifth Circuit understood Amgen to make questions about price impact off limits at the class-certification stage. The Supreme Court held in Amgen that immateriality is not a proper ground for refusing to presume reliance at the class-certification stage because it turns on objective evidence common to the class and is an element of securities fraud. As a result, the Court reasoned, a lack of materiality would lead to judgment for the defendant rather than individual inquiries that would defeat class certification.

The Fifth Circuit concluded that price impact should be treated like materiality. Proof of price impact is common class-wide evidence, in the court’s view. And, even though price impact itself is not an element of a securities-fraud claim, the court ruled that proof that there was no price impact would mean that a plaintiff could not establish loss causation—which is an element of securities fraud. Thus, a victory for Halliburton on price impact, the court explained, “will not result in the possibility of individual claims continuing.” As the Fifth Circuit understood Amgen, those conclusions meant that “Halliburton’s price impact evidence does not bear on the question of common issue predominance, and is thus appropriately considered only on the merits after the class has been certified.”

The Fifth Circuit’s ruling represents an unfortunate misreading of the Supreme Court’s troubling Amgen decision. Under these decisions, the limited fraud-on-the-market inquiry at the class-certification stage is a slender reed on which to presume reliance for class certification purposes and thereby allow sprawling and coercive securities-fraud class actions. From my perspective, this is all the more reason to reconsider whether the economic and other premises of the fraud-on-the-market presumption of reliance are faulty, as four Justices suggested in Amgen.

With all of the attention on last week’s Amgen decision, another interesting decision addressing the fraud-on-the-market presumption of reliance in securities fraud actions may have escaped notice. In GAMCO Investors, Inc. v. Vivendi, S.A. (S.D.N.Y. Feb. 28, 2013), Judge Scheindlin found that the defendant had rebutted the presumption of reliance as to a group of related investment advisers and mutual funds by showing that the plaintiffs’ investment decisions did not rely on the prices of the defendant’s securities as an accurate assessment of the value of those securities. As one of the few decisions to address this issue following a bench trial, GAMCO provides a valuable example of how the presumption of reliance can be rebutted. The decision also illustrates why individualized questions as to reliance should make class certification impossible in some fraud-on-the-market class actions. Continue Reading Securities Fraud Defendant Rebuts Fraud-on-the-Market Presumption of Reliance

Today, in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085, the Supreme Court held that proof of materiality is not a prerequisite for class certification in a securities fraud class action under Section 10(b), even though materiality is a predicate of the fraud-on-the-market presumption of reliance.  The opinion for the majority of the Court was authored by Justice Ginsburg.  Justices Scalia, Thomas, and Kennedy dissented.  Justice Alito wrote a concurring opinion indicating that, in an appropriate case, he (like the three dissenting justices) would be open to reconsidering the fraud-on-the-market presumption.  For more, see our report on the decision.  (See also our report and article on the argument.)

Today, Marcia Coyle of the National Law Journal and Daniel Fisher of Forbes each published previews of the just-commenced Supreme Court term that mention the three cases scheduled for argument that involve issues near and dear to the hearts of class-action practitioners: Standard Fire Insurance Co. v. Knowles, Comcast Corp. v. Behrend, and Amgen v. Conn. Retirement Plans.

Although the National Law Journal article is behind a paywall, my blog co-editor Archis Parasharami is quoted—which alone is enough to make a subscription worthwhile. And the Forbes piece quotes my colleague Dan Himmelfarb.  Happy reading!