The landscape of securities litigation is constantly evolving and changing. If you practice in this dynamic field, you know that the need to stay current and develop new strategies and tactics has never been more important. I recently received this outline from Simpson Thacher’s Jonathan Youngwood, Co-Chair of PLI’s Securities Litigation & Enforcement Institute 2011, that breaks down three major securities cases that will impact practice in this area. The Institute takes places today in NYC and on October 17th in San Francisco and via live webcast.
Here is an excerpt from the outline:
I. The Supreme Court Limits the Scope of Liability for Secondary Actors Under Section 10(b) and Rule 10b-5 in Janus Capital Group, Inc. v. First Derivative Traders
1. In a 5-4 decision issued on June 13, 2011, the Supreme Court ruled that Janus Capital Management LLC (“JCM”), the investment adviser and administrator for Janus Investment Fund, could not be held liable under Section 10(b) and Rule 10b-5 for helping to create allegedly “false statements in mutual fund prospectuses filed by Janus Investment Fund.” Janus Capital Group, Inc. v. First Der. Traders, 2011 WL 2297762, at *1 (U.S. June 13, 2011) (Thomas, J.) (”Janus”).
a) “Although JCM may have been significantly involved in preparing the prospectuses,” the Court found that JCM “did not itself ‘make’ the statements at issue for Rule 10b-5 purposes.” Id. at *2.
2. The majority decision held that “the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.” Id. at *5.
a) The majority also stated that “in the ordinary case,” attribution is a requirement for secondary actor liability. Id.
1. In 2003, First Derivative Traders brought a class action suit against JCM and Janus Capital Group Inc. (“JCG”), the parent company of Janus Investment Fund, alleging that Janus Investment Fund’s prospectuses contained misleading statements regarding the funds’ policies with respect to market timing practices.
a) The complaint alleged that JCG and JCM “caused mutual fund prospectuses to be issued for Janus mutual funds and made them available to the investing public, which created the misleading impression that [JCG and JCM] would implement measures to curb market timing in the Janus [mutual funds].” Id. at *3.
b) The suit was brought on behalf of certain shareholders of JCG.
II. The Supreme Court Holds that Plaintiffs Do Not Have to Prove Loss Causation to Trigger the Fraud-on-the-Market Presumption at the Class Certification Stage in Erica P. John Fund, Inc. v. Halliburton, Co.
1. On June 6, 2011, the Supreme Court unanimously held that securities fraud plaintiffs “need not” “prove loss causation in order to obtain class certification.” Erica P. John Fund, Inc. v. Halliburton Co., 2011 WL 2175208, at *3 (June 6, 2011) (Roberts, C.J.) (“Halliburton”).
1. In 2002, the plaintiffs filed a putative securities fraud class action against Halliburton Co. and one of its executives alleging that “Halliburton made various misrepresentations designed to inflate its stock price” and “later made a number of corrective disclosures that caused its stock price to drop.” Id.
2. After defeating a motion to dismiss, the plaintiffs moved for class certification.
3. In 2008, the district court declined to certify the class because the plaintiffs failed to meet the Fifth Circuit’s “extremely high burden on plaintiffs seeking class certification in a securities fraud case.” Archdiocese of Milwaukee Supporting Fund, Inc. v. Halliburton Co., 2008 WL 4791492, at *20 (N.D. Tex. Nov. 4, 2008).
a) To “trigger the fraud-on-the-market presumption of class reliance,” plaintiffs in the Fifth Circuit had to establish loss causation “at the class certification stage by a preponderance of all admissible evidence.” Id. at *2 (quoting Oscar Private Equity Invs. v. Allegiance Telecom, Inc., 487 F.3d 261, 269 (5th Cir. 2007)).
b) The district court defined loss causation as the “causal connection between the material misrepresentation and the [economic] loss” suffered by investors. Id. at *1.
c) Because the lead plaintiff “‘failed to establish loss causation with respect to any’ of its claims,” the district court “concluded that it could not certify the class in this case.” Halliburton, 2011 WL 2175208, at *4.
d) The district court stated that “absent ‘this stringent loss causation requirement,’ it would have granted the [lead plaintiff’s] certification request.” Id. at *3.
4. In 2010, the Fifth Circuit affirmed the district court’s decision. Archdiocese of Milwaukee Supporting Fund, Inc. v. Halliburton Co., 597 F.3d 330, 336 (5th Cir. 2010) (“Halliburton II”).
5. No other circuit required plaintiffs to prove loss causation at the class certification stage.
a) Compare Halliburton II with In re Salomon Analyst Metromedia Litig., 544 F.3d 474, 483 (2d. Cir. 2008) (stating that “plaintiffs do not bear the burden of showing an impact on price” at the class certification stage);
b) Schleicher v. Wendt, 618 F.3d 679, 687 (7th Cir. 2010) (holding that “[i]t gets the cart before the horse to insist that [a loss causation determination] be made before any class can be certified”);
c) In re DVI, Inc. Sec. Litig., 2011 WL 1125926, at *7 (3d Cir. Mar. 29, 2011) (finding that plaintiffs need not “establish loss causation as a prerequisite to invoking the presumption of reliance in the first instance”) (decided after certiorari was granted).
6. In January 2011, the Supreme Court granted certiorari “to resolve [this] conflict among the Circuits as to whether securities fraud plaintiffs must prove loss causation in order to obtain class certification.” Halliburton, 2011 WL 2175208, at *4.
III. The Supreme Court Rejects the Bright-Line Statistical Significance Standard for the Disclosure of Adverse Event Reports in Matrixx Initiatives, Inc. v. Siracusano
1. In a unanimous opinion delivered by Justice Sonia Sotomayor on March 22, 2011, the Supreme Court declined to adopt a bright-line rule requiring pharmaceutical companies to disclose only statistically significant adverse event reports. See Matrixx Initiatives, Inc. v. Siracusano, 2011 WL 977060 (U.S. Mar. 22, 2011).
a) Reaffirming the “total mix” of information standard for materiality set forth in Basic Inc. v. Levinson, 485 U.S. 224 (1988), the Court held that “the materiality of adverse event reports is a ‘fact-specific’ inquiry that requires consideration of the source, content, and context of the reports.” Matrixx, 2011 WL 977060 at *10 (internal citation omitted).
2. The Court stated that “[a]pplication of Basic’s ‘total mix’ standard does not mean that pharmaceutical manufacturers must disclose all reports of adverse events.” Id. at *11.
a) Rather, the question turns on whether “reasonable investors would have viewed reports of adverse events as material even though the reports did not provide statistically significant evidence of a causal link.” Id.
1. In April 2004, investors sued Matrixx, claiming that the company had failed to disclose a possible link between Zicam, an over-the-counter cold remedy, and the loss of the sense of smell (a condition known as anosmia).
a) The plaintiffs alleged that Matrixx had received multiple reports from physicians and academics that some consumers experienced anosmia following Zicam use.
2. The District of Arizona dismissed the complaint, finding that the alleged omission was not material because the plaintiffs had “failed to present evidence of a statistically significant correlation between the use of Zicam and anosmia… .” Siracusano v. Matrixx Initiatives, Inc., 2005 WL 3970117, at *7 (D. Ariz. Dec. 15, 2005) (Murguia, J.) (emphasis added).
3. The Ninth Circuit found that the district court had “erred in relying on the statistical significance standard to conclude that [the plaintiffs] failed adequately to allege materiality.” Siracusano v. Matrixx Initiatives, Inc., 585 F.3d 1167, 1178 (9th Cir. 2009).
a) Citing Basic, the Ninth Circuit held that the question of materiality cannot be resolved by bright-line rules but instead requires “delicate assessments of the inferences a reasonable shareholder would draw from a given set of facts[.]” Id. (internal quotations omitted).
4. On June 14, 2010, the Court granted certiorari to address whether a plaintiff can state a claim under Section 10(b) and Rule 10b-5 “based on a pharmaceutical company’s nondisclosure of adverse event reports even though the reports are not alleged to be statistically significant.” Order Granting Petition for Certiorari.
Click here for the complete outline from the Securities Litigation & Enforcement Institute Course Handbook.
Tags: Erica P. John Fund v. Halliburton Co., Janus Capital Group Inc. v. First Derivative Traders, Jonathan Youngwood, Matrixx Initiatives Inc. v. Siracusano, Securities Litigation, Securities Litigation & Enforcement Institute, Supreme Court