In today’s decision in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, the Supreme Court held, by a 6 to 3 margin, that securities class plaintiffs need not first demonstrate materiality in order to obtain certification of their claims. While this is an important victory for securities plaintiffs, the holding was not the most significant aspect of today’s opinions. That distinction belongs instead to the questions raised by four justices as to whether the presumption of reliance first enunciated by a four justice plurality in Basic Inc. v. Levinson (1988) should be reexamined.
The Basic plurality permitted plaintiffs “to invoke a rebuttable presumption of reliance on material misrepresentations aired to the general public.” Amgen majority opinion at 4. That “fraud on the market” theory was based upon “the premise that certain well developed markets are efficient processors of public information,” and that the publicly traded price of the stock will therefore reflect “all publicly available information.” Id. This premise in turn was rooted in then current economic theory. Since the 1988 decision in Basic, however, economic theory has begun to question the actual efficiency of the relevant stock markets in whole or in part.
In this context, it is noteworthy that the majority opinion, the concurring opinion of Justice Alito, and the dissenting opinion of Justice Thomas, joined by Justices Scalia and Kennedy, all referred to this change in economic thinking, and its possible implications for the presumption of reliance.
In Justice Ginsburg’s majority opinion, footnote 6 on page 14 noted that “this case is a poor vehicle for exploring whatever implications the research Amgen cites [relating to market efficiency] may have for the fraud-on-the-market presumption recognized in Basic.” In addition, all of the justices agreed that the continuing validity of that presumption was not before the court in Amgen.
Although that question was not before the court, four justices nevertheless expressly noted that serious questions were raised regarding the continuing validity of the fraud on the market presumption. In his one-paragraph concurring opinion, Justice Alito specifically observed that “reconsideration of the Basic presumption may be appropriate” because “more recent evidence suggests that the presumption may rest on a faulty economic premise.” In his dissenting opinion, Justice Scalia referred to the Basic presumption of reliance as having no foundation “in the United States Code or in the common law of fraud or deception; it was invented by the court in Basic Inc.v. Levinson.” He went on to note that the consequences of adopting this approach were “arguably regrettable.” Scalia Opinion at 1,4.
Finally, Justice Thomas, joined by both Justice Scalia and Justice Kennedy, wrote that “The Basic decision itself is questionable,” and that Justice White and Justice O’Connor in dissent raised valid questions in that case regarding the competence of the court “to embrace novel constructions of a statute based on contemporary microeconomic theory.” Thomas Opinion at 4, n. 4.
The fact that four justices of the court went out of their way to raise these questions regarding the continuing viability of the fraud on the market presumption should cause major tremors in the plaintiffs’ securities bar. Their victory in Amgen relieving them from the burden of proving materiality at the class certification phase may thus prove to be only a pyrrhic one, since without the presumption of reliance, virtually every securities class action would be denied certification on the grounds that questions of individual reliance on an allegedly material misrepresentation predominated over any common questions of law or fact.
Securities class action defendants will undoubtedly be searching for an appropriate case in which to invite the court to overrule the plurality opinion in Basic Inc. v. Levinson, and abandon the fraud on the market presumption of reliance on material misrepresentations. In short, stay tuned!