Corporate Governance

Matrixx v. Siracusana: Revisiting the Materiality Standard (Part 8)

By J Robert Brown Jr.

Will a finding of materiality in this case result in an increase in the number of lawsuits?  The Petitioners noted in their cert petition:

• The effects of the Ninth Circuit's rejection of the statistical significance standard are profoundly unsettling. The court's decision dramatically expands the number of investor suits against pharmaceutical companies that state a claim and substantially increases the pressure on companies to settle meritless claims.

Some empirical evidence will be available to test this hypothesis.  It is unlikely that it will support the Petitioners.   

The 9th Circuit's decision came down in October 2009.  Thus, the decision is eight months old.  Data on securities class action fraud suits shows that the number filed in 2009 declined from the prior two years and, with one exception of a single year, was the lowest number since 1997 when comprehensive data was collected.  The data does show that the number of suits filed in the 9th Circuit increased by 9 in 2009 from the year before.  

Analysis of data from 2009 also shows that the category of suits that includes pharmaceutical companies (consumer non-cyclical which included agriculture, beverages, biotechnology, commercial services, cosmetics/personal care, food, healthcare products, healthcare services, household products/wares, and
pharmaceuticals") accounted for only 3.9% of all suits filed, less than the category for industrial (4.6%), financial (11.5%), or consumer-cyclical companies (6.3%)(the latter including "airlines, apparel, auto manufacturers, auto parts and equipment, distribution/wholesale, entertainment, food service, home builders, home furnishings, housewares, leisure time, lodging, office furnishings, retail, and storage/warehousing.").    See Cornerstone Report, at 12.  

The data from 2009 is not, however, particularly useful.  The case was only two months old when the year ended.  Moreover, data for 2010 so far indicates that the number of suits will decline even further.
As 2010 reaches its halfway mark, Cornerstone will, if the past is any indication, provide a six month report on all securities class action lawsuits.  The data will presumably provide some hint as to whether, in fact, the finding of materiality by the 9th Circuit in Matrixx spurred additional suits.  It was in fact something Petitioners hinted would occur.  See Petitioners Brief, at 10 ("In effect, the Ninth Circuit's rule gives any class action plaintiff who can secure jurisdiction within the Ninth Circuit's wide geographic region a ready weapon to blunt the protection against unmeritorious suits offered by the First, Second, and Third Circuits.").

Why might a finding of materiality not spur additional lawsuits?  First, the finding of materiality in this case does not turn only on the small number of adverse reports.  Second, the other elements of Rule 10b-5 still must be present.  There must be a drop in share prices to meet the loss causation requirement and there must be scienter.  Scienter must meet the "strong inference" standard set out in the PSLRA.

For the cert petition and the reply, we have posted them on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on June 28, 2010 (boomark / email).