Corporate Governance

Matrixx v. Siracusana: Revisiting the Materiality Standard (Part 1)

By J Robert Brown Jr.

It seems these days that the US Supreme Court has rarely found a Rule 10b-5 case that it doesn't want to hear. 

The Court just accepted cert in Matrixx v. Siracusana, a case involving the standard for materiality under Rule 10b-5.  This makes the seventh case involving Rule 10b-5 since 2001.  In addition to Matrixx, the cases taken by the Supreme Court include:  

• Merck (130 S. Ct. 1784 2010), a case intended to clarify the reach of the statute of limitations under the antifraud provision; Stoneridge (552 U.S. 148 2008), which sought but never did draw the boundaries between primary and secondary liability; Tellabs (551 U.S. 308 2007), an examination of the language in the PSLRA applicable to securities fraud suits; Dura  (544 U.S. 336 2005), on loss causation; Zandford (535 US 813 2002), dealing with the "in connection with" requirement; and Wharf (532 US 588 2001), addressing whether Rule 10b-5 applies to oral contracts.

We left out Dabit (547 US 71 2006), which involved the preemptive effect of SLUSA.  

Compare that with the 1990s.   There were three, maybe four cases in the Rule 10b-5 area that mattered to plaintiffs. 

• There was O'Hagan (521 US 642 1997), addressing the misappropriation theory of insider trading; Central Bank (511 US 164 1994), eliminating secondary liability under Rule 10b-5;  and Lampf (501 US 350 1991), the statute of limitations under the antifraud provisions.  In addition to these three, the list arguably ought to include Va. Bankshares (501 US 1083 1991), a case involving materiality.  While arising under the proxy rules, its analysis of materiality also applies in the Rule 10b-5 context.   

In our list, we are not counting Plaut (514 US 211 1995), which involved the retroactive effect of Section 27A of the Exchange Act and Musick (508 US 286 1993) which dealt with the right of contribution in actions under Rule 10b-5.   

In short, the new millennium has seen something like twice the number of cases affecting Rule 10b-5 as in the prior decade.  Moreover, while a number of the decisions have been favorable to plaintiffs (Merck and Tellabs, for example), some have been quite damaging (Stoneridge).   Moreover, in Stoneridge, the five Justice majority expressed a certain degree of hostility towards the concept of an implied right of action under the Rule and suggested that it would adopt a restrictive approach in its interpretation.  See 552 US at 165 ("Concerns with the judicial creation of a private cause of action caution against its expansion. The decision to extend the cause of action is for Congress, not for us."). 

It is in this context that we examine the recent decision by the Supreme Court to hear Matrixx v. Siracusana.  It represents the first time that the Court will revisit the standard for materiality under Rule 10b-5 since Basic v. Levinson back in 1988. 

For the cert petition and the reply, we have posted them on the DU Corporate Governance web site. 

Full post as published by The Race to the Bottom on June 22, 2010 (boomark / email).