Can Defendants in a Securities Fraud Case Still Attempt to Defeat Class Certification by Presenting Evidence to Rebut a Presumption of Reliance?

April 18, 2013

The Supreme Court’s recent decision in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, 568 U.S. ___, 133 S. Ct. 1184 (Feb. 27, 2013), likely limits – but we believe does not overrule – a March 2011 Third Circuit opinion that permits defendants in securities fraud cases to oppose class certification by offering evidence to rebut the presumption of reliance the plaintiff is seeking under a fraud-on-the-market theory.

In Amgen, the Supreme Court resolved a split in the circuits on whether the plaintiff in a securities fraud case must prove, at the class certification stage, that the alleged public misrepresentations were material in order to qualify for the fraud-on-the-market presumption of reliance that generally permits a class to be certified.  The Court’s answer (by a vote of 6-3): He does not.  Materiality is a merits issue that is not necessary to a determination of whether common issues will predominate.

In the same opinion, the Court also upheld the Ninth Circuit’s determination that the trial court did not err in refusing to consider the defendant’s evidence rebutting the presumption of reliance.  A successful rebuttal of the reliance presumption would enable the defendant to argue that individual issues of reliance would predominate and preclude class certification.

This second ruling likely limits the Third Circuit’s decision in In re DVI, Inc. Securities Litig., 639 F.3d 623 (3d Cir. 2011), where the Third Circuit concluded that trial courts should permit defendants in securities fraud cases to present evidence at the class certification stage to rebut the presumption of reliance that the plaintiff is seeking as a basis for class certification.  639 F.3d at 638.

In Amgen, the Supreme Court explained that, while materiality is “an essential predicate of the fraud-on-the-market theory” – because immaterial information would not affect the market price of a stock – it is also an essential element of a securities fraud plaintiff’s claim under Rule 10b-5.  Slip op. at 9.  A plaintiff’s inability to prove materiality does not simply mean he will not be entitled to a presumption of reliance; it means he will lose his case on the merits. Id. at 10-11.  Because materiality is determined by an objective standard, it will often be a common question in a securities fraud case.  Whether a plaintiff can prove it – or a defendant can disprove it in an attempt to rebut a claimed presumption of reliance – does not affect whether common issues will predominate.  Id.

The Supreme Court ruled that the trial court “was not required to consider” the evidence Amgen offered to rebut the presumption of reliance because “Amgen’s rebuttal evidence aimed to prove that the misrepresentations and omissions alleged in Connecticut Retirement’s complaint were immaterial.”  Slip op. at 25, 26.  “[J]ust as a plaintiff class’s inability to prove materiality creates no risk that individual questions will predominate, so even a definitive rebuttal on the issue of materiality would not undermine the predominance of questions common to the class.”  Id. at 25.

There are, however, ways other than disproving materiality that a defendant can use to rebut the presumption of reliance.  As the Third Circuit noted in DVI, the Supreme Court’s seminal fraud-on-the-market case, Basic Inc. v. Levinson, 485 U.S. 224, 248-49 (1988), provides a non-exhaustive list of ways that a defendant can rebut the presumption, including by showing:

(1) the market did not respond to the alleged misrepresentations; (2) the misrepresentations were immaterial; (3) a plaintiff did not actually rely on the misrepresentations; or (4) a plaintiff would have sold the securities without relying on the integrity of the market.

639 F.3d at 637.  At least the third and fourth of these examples of rebuttal might involve evidence that would vary among individual members of the proposed class and, unlike the rebuttal evidence offered in Amgen, might need to be addressed to determine whether common questions will predominate.

Any post-Amgen effort in the Third Circuit to rebut the presumption of reliance at the class certification stage will have to contend with the dual hurdles that (1) the Supreme Court’s Amgen opinion does not expressly say that other types of rebuttal evidence may need to be addressed at class certification and (2) some of the Third Circuit’s discussion of rebuttal in DVI focused on materiality, which Amgen now eliminates as a consideration at class certification.  But if the proposed rebuttal evidence does not aim at materiality and would affect the predominance inquiry, then what the Third Circuit said in DVI may still be good law: “[R]ebuttal of the presumption of reliance falls within the ambit of issues that, if relevant, should be addressed by district courts at the class certification stage.” 639 F.3d at 638 (emphasis added).  Defendants will simply need to persuade the district court that their rebuttal evidence is relevant to the class certification determination.