A Basic Question: Is Materiality The Better Standard For Class Certification In Securities Fraud Lawsuits?

First published in Bloomberg Law Reports, February 13, 2012

The growing disagreement among federal courts over the timing for proving materiality in securities-fraud class actions highlights how unworkable the fraud-on-the-market (FOTM) inquiry currently is. In Basic Inc. v. Levinson,¹ the U.S. Supreme Court held that a purported class of shareholders may take advantage of the FOTM presumption of reliance if it can make certain showings at the class-certification stage. In the intervening 20-plus years, Courts of Appeals have become divided on whether this showing includes proof at the class certification stage that the misstatement at issue is "material." In other words, are plaintiffs merely required to prove that a security is traded on an efficient market, which assumes any material misstatement impacts the price, or must plaintiffs also prove that the statement at issue was, in fact, material, thus impacting the price of the stock?