On February 27, 2013, the U.S. Supreme Court issued opinions in two significant securities law cases, Gabelli v. Securities and Exchange Commission, 568 U.S. ___ (2013) and Amgen Inc., v. Connecticut Retirement Plans and Trust Funds, 568 U.S. ___ (2013). In the Gabelli decision the Court addressed the ability of the government to bring civil enforcement actions seeking civil penalties where the alleged fraudulent conduct occurred outside the five-year statute of limitations period. In the Amgen decision the Court addressed the class certification pleading requirements in security holder class action suits.
In Gabelli, the SEC had brought an enforcement action against defendants Marc Gabelli (chief operating officer) and Bruce Alpert (former portfolio manager), alleging that during the period from 1999 through 2002 the defendants permitted an investor to engage in certain market timing activities without disclosure to other investors. Noting that the complaint was brought in 2008, more than five years after the alleged violation, the District Court dismissed the action as time barred under 28 U.S.C. §2462. The Second Circuit reversed, applying the “discovery rule,” which delays the running of the statute of limitations in cases sounding in fraud until the defrauded party discovered or reasonably could have discovered the violation.
The Supreme Court unanimously reversed the Second Circuit, declining to apply the discovery rule to government civil penalty enforcement actions, thereby establishing a “fixed date” by which the government must bring its cases in order to obtain a civil penalty. The Court did not address the issue of whether the fixed date also applies to injunctive relief. Gibson Dunn filed an amicus brief in support of Gabelli on behalf of the Securities Industry and Financial Markets Associations and the Chamber of Commerce of the United States of America.
In Amgen the Supreme Court affirmed a 9th Circuit decision allowing plaintiffs to proceed in a security holder class action without having to prove that alleged misrepresentations or omissions were “material” at the class certification stage. The securities fraud action here involved allegations of fraudulent statements relating to two of Amgen’s flagship drugs. Amgen had argued that the information regarding the two drugs was already in the marketplace, thereby rendering the alleged misleading statements immaterial.
The issue before the Court was whether plaintiffs must prove that the alleged statements were material in order to obtain class certification, on the theory that the materiality of the statements is necessary to invoke the fraud-on-the-market theory and thereby avoid the need for individualized proof of reliance. In Basic v. Levinson, 485 U.S. 224 (1988), the Court previously ruled that a plaintiff may use the fraud-on-the-market theory to create a rebuttable presumption that satisfies the class-wide reliance requirement.
In yesterday’s 6-3 opinion authored by Justice Ruth Bader Ginsburg, the Court clarified the requirements for certifying a 10b-5 action relying on the fraud-on-the-market theory. The Court held that a plaintiff need not prove that the alleged misrepresentations or omissions by the defendant had a material effect on the price of the security. Interestingly, several of the Justices indicated that they might be prepared to reconsider Basic in an appropriate case, although the Court declined to do so in Amgen because the defendant had not raised the issue.
For more information on these cases and their significance to future government enforcement actions and security holder class actions, please see our client alerts which can be found here and here.