Supreme Court Declines “Statistically Significant Risk” Standard for Determining Materiality in Securities Fraud


On March 22, 2011, the Supreme Court issued a unanimous opinion in Matrixx Initiatives v. Siracusano, that reaffirmed its long-standing test for determining materiality with respect to securities fraud claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and rejected a "bright-line" materiality rule based on whether or not there was a "statistically significant number" of adverse events.

The case arose out of Matrixx's failure to disclose that its leading product – Zicam Cold Remedy – had caused a loss of the sense of smell (known as anosmia) in less than two dozen users, a statistically insignificant number of adverse events. Investors brought suit after Matrixx's stock price dropped once the adverse events and suspected link between Zicam and anosmia were reported on television, and alleged that Matrixx and some of its executives had fraudulently failed to disclose the adverse event reports linking Zicam and anosmia in violation of Section 10(b) and Rule 10b-5.

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