In Terrorem Impact of Securities Class Actions May Increase After Amgen

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On June 11, 2012, the Supreme Court agreed to answer two critical class certification questions in a securities fraud case that could increase the in terrorem settlement value of these actions dramatically. The case, Amgen Inc., et al. v. Connecticut Retirement Plans, Docket No. 11-1085, is before the Court on appeal from the Ninth Circuit. The questions presented bear directly on the standards plaintiffs must satisfy to obtain class certification. The lower the standards, the easier it is for plaintiffs to obtain class certification, and it is certification of a class that raises the damages stakes for defendants to levels that typically exceed even the tallest towers of insurance coverage.

Summary of the Issues

The two questions Amgen raises pertain to a technical prerequisite to class certification, i.e., securities fraud plaintiffs must establish that questions of law or fact affecting all class members will not “predominate” over questions that impact individuals only. In all securities cases asserting §10(b) violations of Section 10(b), the “reliance” element of the cause of action presents a predominance obstacle to class certification—if each class member must individually prove its actual reliance on alleged misstatements, no class will be certified.

Plaintiffs could not overcome this obstacle to class certification until the courts adopted the “fraud-on-the-market” presumption of reliance, which is founded on the “Efficient Market Hypothesis” (EMH) developed by an economist in the 1960s. The EMH holds that the price of a stock traded in an “efficient market” rapidly and fully reflects all publicly available material information about the issuer, including any material false statement of fact or misleading omission. Thus, if a company’s stock trades in an efficient market, investors who heard, read and knew nothing about a company can nevertheless be presumed to have relied on representations made about the company when they invested.

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