WASHINGTON — In a pair of securities fraud decisions issued Wednesday, the Supreme Court ruled for investors seeking to band together in a class-action lawsuit and imposed a strict time limit on some suits filed by the Securities and Exchange Commission.
The class action case, Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085, was a kind of sequel to the court’s 2011 decision in Wal-Mart Stores v. Dukes, which threw out an enormous employment discrimination class action on the ground that the plaintiffs did not have enough in common to pursue their claims in a single lawsuit.
The question in the new case was whether plaintiffs in securities fraud cases should be required to prove that the defendant had made a material misstatement before a class action may be certified. Material information, the court has explained, is the sort of thing that reasonable investors would believe significantly alters the total mix of available information.
But the court has also said that materiality may be presumed when a company makes public statements in an efficient securities market, or a market that reflects all publicly available information about a company. That presumption is known as the “fraud on the market” theory.
The case decided Wednesday arose from statements made by Amgen, a drug company, about the safety of two drugs that stimulate red blood cell production, reducing the need for transfusions. The plaintiffs asserted that those statements were materially false and had inflated the company’s stock price.
Justice Ruth Bader Ginsburg, writing for the majority in the 6-to-3 decision, said the plaintiffs’ assertion was enough for purposes of class certification because the question at that stage was merely whether, in the words of the relevantrule of civil procedure, “questions of law or fact common to class members predominate over any questions affecting only individual members.”
Justice Ginsburg wrote that the question of materiality, whatever its eventual answer, was a common one.
“The class is entirely cohesive: it will prevail or fail in unison,” she wrote. “In no event will the individual circumstances of particular class members bear on the inquiry.”
Chief Justice John G. Roberts Jr. and Justices Stephen G. Breyer, Samuel A. Alito Jr., Sonia Sotomayor and Elena Kagan joined the majority opinion. In a concurrence, Justice Alito said that it may be time to reconsider the fraud-on-the-market theory in light of research suggesting that it may sometimes rest on a faulty premise.
Justice Clarence Thomas, joined by Justice Anthony M. Kennedy and in part by Justice Antonin Scalia, dissented. Justice Thomas agreed that the theory was questionable and added that materiality must be shown at the certification stage.
Justice Scalia, in a separate dissent, said that “certification of the class is often, if not usually, the prelude to a substantial settlement by the defendant because the costs and risks of litigating further are so high.” Allowing plaintiffs to obtain class certification without showing that the asserted misstatement was material, he said, is “unquestionably disastrous.”
In the second case decided Wednesday, Gabelli v. Securities and Exchange Commission, No. 11-1274, the court ruled unanimously that the commission must act promptly when it seeks civil penalties.
The case concerned Marc J. Gabelli and Bruce Alpert, who were executives affiliated with a mutual fund company, Gabelli Funds L.L.C. They successfully argued that the S.E.C. had waited too long to sue them for what the agency said were abuses related to rapid trading by a hedge fund.
The law in question, which applies to many kinds of government requests for civil penalties, says lawsuits “shall not be entertained unless commenced within five years from the date when the claim first accrued.” The agency sued more than five years after the disputed conduct.
“The question,” Chief Justice Roberts wrote for the court, “is whether the five-year clock begins to tick when the fraud is complete or when the fraud is discovered.”
In ordinary civil litigation, it is not unusual for courts to say that the clock starts running in fraud cases only when the plaintiff discovers or should have discovered the wrongdoing. That is because of the nature of fraud, Chief Justice Roberts explained.
“When the injury is self-concealing, private parties may be unaware that they have been harmed,” he wrote. “Most of us do not live in a state of constant investigation; absent any reason to think we have been injured, we do not typically spend our days looking for evidence that we were lied to or defrauded.”
But the government, the chief justice wrote, is different.
Investigation is a central mission of the commission, he said, and it has the tools to ferret out fraud. And allowing the government unlimited time would raise a host of practical problems, he added.
“It would leave defendants exposed to government enforcement action not only for five years after their misdeeds, but for an additional uncertain period into the future,” Chief Justice Roberts wrote. “Repose would hinge on speculation about what the government knew, when it knew it and when it should have known it.”