Class actions are about fairness and efficiency. While some corporate defendants act as if class actions are beasts from the Book of Revelation, class actions simply involve a person representing the interests of a larger group of people having common issues in order to promote fairness and efficiency. According to the plain text of Federal Rule 23, a class action is proper when “the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.”
Given that securities fraud cases involve large numbers of investors buying stock on modern securities markets, where stock prices reflect publicly-available information, class actions are a fair and efficient way to try these cases. Supporting class-action treatment for securities fraud cases, the Supreme Court held in 1988 in Basic Inc. v. Levinson that “proof of individualized reliance from each member of the proposed plaintiff class” is not required because it “effectively would have prevented [plaintiffs] from proceeding with a class action, since individual issues then would have overwhelmed the common ones.” So, by showing that a stock traded on an efficient market and that defendants’ false statements were publicly known, plaintiffs get the “fraud-on-the-market” presumption for class-action treatment.
Many corporate defendants, who develop arguments to undercut the fraud-on-the-market presumption supporting class actions, appear to not want large numbers of defrauded investors to be able to fairly and efficiently recover damages.
Just last year, in Erica P. John Fund v. Halliburton, corporate defendants argued before the Supreme Court for a new requirement for securities fraud class actions—that plaintiffs should have to prove before trial that the defendants’ alleged fraud caused the plaintiffs’ losses. Unanimously rejecting the defendants’ argument, the Supreme Court explained that the proposed new requirement would “contravene Basic’s fundamental premise—that an investor presumptively relies on a misrepresentation so long as it was reflected in the market price at the time of his transactions.” In addition, the text of Rule 23 governing class actions doesn’t mention, let alone require, such proof of “loss causation.”
Having failed to convince a single Justice that proving loss causation is required for class-action treatment, corporate defendants try again this year in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, arguing for another new requirement for securities fraud class actions—that plaintiffs must prove before trial the “materiality” of the defendants’ false statements. The Supreme Court’s most recent decision on securities fraud class actions in Erica P. John Fund, however, never mentions proof of materiality as a condition for class-action treatment. Rule 23 doesn’t either. And the issue of materiality—whether information would be important to a reasonable investor—doesn’t affect Basic’s core premise that investors presumptively rely on defendants’ misrepresentations reflected in stock prices on efficient markets.
Rather than be faithful to the texts of Rule 23, Basic, and Erica P. John Fund, the Amgen defendants peddle old-time scare tactics by invoking the phantom of the “in terrorem power of class certification to force settlements.” They invite the Supreme Court to ignore those authoritative texts and conjure up a harsh new proof-of-materiality requirement to produce what defendants deem a socially desirable result—the death of securities fraud class actions. Yet given that “the judge’s principal function is to give those texts their fair meaning” and “the dutiful judge is never invited to pursue the purposes and consequences that he prefers,” [Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts at 3, 17 (West, June 2012) (emphasis in original)], defendants’ nontextual policymaking argument to achieve their ideological “vision” should be soundly thrashed by the Supreme Court during the Amgen oral argument in October 2012.