US Supreme Court Rules on Materiality in 10(b)(5) Context

The Law at Issue

To demonstrate a claim in a securities fraud case under section 10(b)(5) of the Securities Exchange Act of 1934, a plaintiff must  demonstrate (1) deceptive practices (2) in connection with the purchase or sale of securities, (3) materiality, (4) scienter, (5) loss causation, (6) damages, (7) reliance, and (8) standing.

Case Background

In Matrixx Initiatives, Inc. v Siracusano, the Plaintiffs alleged that the Defendants’ committed fraud when they failed to disclose reports that their pharmaceutical product (Zicam) had been linked to the loss of smell. Matrixx, the manufacturer of Zicam had been made aware of a number of reports that patients using their product had suffered from asomnia (the loss of smell). Multiple lawsuits had been filed against Matrixx based on consumers’ loss of smell, when Matrixx was issuing positive forward looking statements.

Highlights of the Opinion

The Defendants claimed that the Plaintiffs had failed to meet the materiality requirement because the reports of asomnia were not material because Matrixx had not received a statistically significant number of reports regarding the loss of smell. The Supreme Court, in an opinion written by Justice Sotomayor found that materiality had been sufficiently alleged to survive a motion to dismiss. The Court refused to reduce the materiality requirement to a bright line rule: “Although in many cases reasonable investors would not consider reports of adverse events to be material information, respondents have alleged facts plausibly suggesting that reasonable investors would have viewed these particular reports as material.” The Court further elaborated on this point stating, “Matrixx’s categorical rule would artificially exclude information that would otherwise be considered significant to the trading decision of a reasonable investor.”

The opinion can be read in its entirety here.