Supreme Court to Resolve Split Among Circuit Courts Over the Fraud-on-the-Market Presumption at Class Certification

June 14, 2012

As anticipated in our Dec. 5, 2011, legal alert covering the Ninth Circuit’s ruling in Connecticut Retirement Plans and Trust Funds v. Amgen Inc., 660 F.3d 1170 (9th Cir. 2011), the U.S. Supreme Court has granted certiorari to review that opinion. The Supreme Court’s June 11, 2012 order means that in its next term the Court will, for the first time in many years, revisit and/or clarify its holding in Basic Inc. v. Levinson, 485 U.S. 224 (1988), the opinion that first articulated the “fraud-on-the-market” presumption as a means to satisfy the element of reliance in connection with claims under Section 10(b) of the Securities Exchange Act of 1934. The specific issue posed by Amgen is a split among the circuits over the issue of whether and under what circumstances a district court must require proof of materiality before certifying a plaintiff class based on the fraud-on-the-market theory.

Factual and Procedural Background

In Amgen, the plaintiffs brought a securities fraud action against Amgen, Inc., a bio-technology company alleging that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by failing to disclose safety information about Amgen products used to treat anemia.

The Ninth Circuit affirmed the district court’s class certification order and, in the process, rejected Amgen’s argument that the plaintiffs could invoke the fraud-on-the-market presumption only if they could prove that Amgen’s allegedly false statements were material. The Ninth Circuit’s holding is in line with the Seventh Circuit’s approach: to invoke the fraud-on-the-market presumption at the class certification stage, plaintiffs need only show that the security in question was traded in an efficient market and that the alleged misrepresentations were public.

By contrast, the First, Second and Fifth Circuits require plaintiffs to prove by a preponderance of evidence that the alleged misrepresentations were material in order to invoke the fraud-on-the-market presumption at class certification, although defendants are entitled to present evidence rebutting any such presumption.

Yet another approach was adopted by the Third Circuit, which has held that plaintiffs need not demonstrate materiality at the
class certification stage, but that defendants may offer evidence to rebut any presumption.


The Supreme Court’s decision will have a significant effect on securities class action litigation. Given the prospect of class-wide damages, class certification creates an enormous pressure on defendants to settle certified claims, including non-meritorious claims. By postponing the issue of materiality until after certification, many defendants may feel compelled to settle without ever reaching the merits of the materiality issue. In recent years, the Supreme Court has been sensitive to the pressure that certification puts on defendants.

The Supreme Court will hear argument on the Amgen case during its 2012 term which begins in October (Justice Breyer, whose financial disclosure documents reflect ownership of Amgen stock, recused himself from consideration of Amgen’s petition and seems unlikely to participate in the Court’s deliberation of the matter). Because this order arises in a matter over which there is a genuine split among the circuits, drawing any substantive conclusions from the grant itself is difficult. We note, however, that the Court has during the 2011 term to date reversed 16 of the 20 cases originating in the Ninth Circuit.

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This article was originally published by Bingham McCutchen LLP.