The Supreme Court’s very recent decision in the Amgen case addressed whether a “merits” issue—the materiality of the alleged misstatement or omission—is such a predicate to the fraud-on-the-market presumption established in Basic Inc. v. Levinson that it must be proved (or at least subject to rebuttal) as part of class certification.  The Court said no by a 6-3 majority, surprising many.  I have written a reader’s guide to Amgen and the future of the presumption of reliance.  It explains the surprise (the pro-plaintiff outcome in contrast to the general trend in the class action case law) as a consequence of the ripening view that Congress spoke to the relative balance between plaintiffs and defendants in the Private Securities Litigation Reform Act of 1995, thereby “freezing” the scope of the law as of that moment. While that has to this point been a defendant-oriented argument to counter judicial expansiveness (made explicitly in the Stoneridge case), in Amgen it becomes a two-way street, preserving as well as restraining.

My paper also explores the skirmishing over the assumptions (and proof) of market efficiency and its relationship to materiality, reliance, causation and damages.  Even though there are ample muddles in the law, none is so troubling as to call Basic into question, as Justice Alito’s concurrence suggests, especially if one believes in the relevance of not only what Congress did but also did not do in 1995.  The paper draws from private correspondence between Justices Blackmun and Brennan when the Basic opinion was being drafted, which Adam Pritchard has unearthed, that sheds interesting light on the presumption and its contemporary meaning.

In his dissent, Justice Thomas traces the history of the fraud-on-the-market theory prior to Basic by reference to two “signposts,” one of which was the seminal Ninth Circuit case of Blackie v. Barrack. That was a fruitless effort in terms of reading it to say that materiality was crucial to class certification—it holds no such thing—but is also ironic.  Famously, Blackie justified the fraud-on-the-market presumption entirely in pragmatic terms.  While it expresses an intuition about organized markets and the importance of price integrity, the main idea is simple: without class certification there will be no practicable mechanism to address the harm from securities fraud.   Candidly admitting that its approach risked over-inclusion in the plaintiff class, Blackie reminded its readers that the securities statutes were to “be liberally construed to effectuate its remedial purposes, and that that purpose may be served only by allowing an over-inclusive recovery to a defrauded class if the unavailability of the class device renders the alternative a grossly under-inclusive recovery.”

Basic starts out saying much the same thing, stressing that presumptions exist mainly to do justice, but then wanders into the efficient markets discussion as if it offers a better way of understanding reliance in modern financial markets.  It doesn’t, generating the uncertainty about class certification that eventually led to Amgen.

Today the Supreme Court is no long enamored with the “liberally construed” rhetoric, which naturally invites those dissatisfied with how things have turned out to question the premises on which the fraud-on-the-market presumption rests.  The majority in Amgen responds to the defense-side request to allow them an early shot at materiality within the class certification decision by invoking old-school civil procedure.  How much this was also animated by sense that the relative balance between plaintiffs and defendants struck at the time Congress entered the debate twenty years ago should be respected will determine much about the future of private securities class actions.

A link to the full paper is available here.  Comments are welcomed.