Supreme Court Rejects “Statistical Significance” as Threshold for Required Securities Disclosure
Insight April 06, 2011
In Matrixx Initiatives et al. v. Siracusano et al, the unanimous Court held that a pharmaceutical company may be liable for securities fraud by failing to disclose a statistically insignificant number of adverse reactions to a cold medication.
The Supreme Court issued a decision on March 22, 2011 that may help securities class action plaintiffs survive motions to dismiss securities fraud cases. In Matrixx Initiatives et al. v. Siracusano et al, the unanimous Court held that a pharmaceutical company may be liable for securities fraud by failing to disclose a statistically insignificant number of adverse reactions to a cold medication.
In April 2004, investors brought suit against Matrixx, a pharmaceutical company, claiming that the company had failed to disclose information that the nasally-administered versions of its over-the-counter cold remedy named Zicam caused loss of smell in its users (anosmia.) The complaint alleged Matrixx knew of dozens of complaints from both doctors and consumers in addition to consumer product lawsuits. A district court found for Matrixx and dismissed the complaint after concluding the undisclosed information was not material because there was no "statistically significant correlation between the use of Zicam and anosmia."
The Ninth Circuit reversed this ruling finding the allegations adequate. This created a split with the First, Second, and Third Circuits which had previously held that adverse reports relating to the safety of a product are not material unless such reports provide reliable "statistically significant" evidence that a drug is unsafe.
In affirming the Ninth Circuit's ruling, the Supreme Court refused to adopt a bright-line rule concerning what constitutes a "material misstatement" under federal securities law, concluding that such a rule would artificially exclude information that would "otherwise be considered significant to the trading decision of a reasonable investor." Noting that medical experts as well as government regulators and courts frequently act on the basis of causation evidence other than statistically significant data, the Court observed that "it stands to reason that in certain cases reasonable investors would as well."
Instead, the Court reaffirmed the Basic total mix test, holding that the "materiality of adverse event reports is a 'fact-specific' inquiry . . . that requires consideration of the source, content, and context of the reports." It concluded that the allegations in plaintiff's complaint sufficiently alleged materiality under this standard.
While clearly rejecting the proposition that the absence of statistically significant adverse events will insulate issuers from securities fraud claims based on a failure to disclose such events, the materiality standard put forth by the Court for distinguishing routine adverse event reports from those requiring disclosure provides only limited guidance to issuers who wish to satisfy disclosure obligations.
The Court's analysis may be significant for two further reasons. First, it suggests that pharmaceutical issuers may be at risk for liability if they delay or decline to acknowledge adverse events or research regarding their products, regardless of whether they believe such events or research to be relevant and valid. Second, companies may be viewed as acting with the market for their securities in mind when they attempt to protect the market position of their products.
For more information, please contact a member of Rimon Law Group at http://www.rimonlaw.com.