Matrixx v. Siracusano: Law and Business Professors (and the SEC) Speak

Matrixx v. Siracusano represents perhaps the most significant business case in the Supreme Court this term. 

The case involves the materiality of reports filed by persons using over the counter drugs that suffer some type of adverse reaction.  The adverse health effect may or may not be related to the drug (the occurrence may be coincidental).  The point at which the reports would be important to reasonable investors is not, therefore, always clear. 

Petitioners asserted that the reports should only be treated as material if statistically significant.  Effectively, they were arguing for a bright line test of materiality, something considered and rejected in Basic v. Levinson, 485 U.S. 224 (1988).  To avoid a direct conflict with the case, the Petitioners asserted that statistical significance merely “defines the information a reasonable investor would consider relevant. . . .” Pet. Br. 43. 

In a brief filed by 36 law and business faculty, many of whom have written on the antifraud provisions under the federal securities laws, and three of whom were cited in Basic v. Levinson, 485 U.S. 224 (1988), they took the position that statistical significance was an overinclusive standard that effectively excluded information important to reasonable investors.  As the brief noted:

• Petitioners do not and cannot establish that investors will only find reports important upon a showing of a statistical significance. Moreover, the approach is inconsistent with assumptions underlying this Court’s use of a “total mix” analysis. Statistical significance assumes away, at least in the first instance, any contextual examination of the available information and presupposes that the market singularly relies on the presence or absence of a mathematically validated association between the drug and the adverse events at issue. The approach treats investors – whether analysts, institutional owners, or market professionals – as “nitwits unable to appreciate” the importance of any other information that could affect investment decisions.

As for the impact of the decision, the brief had this to say:

• To impose a requirement that reports must be statistically significant overlooks the central question in determining materiality: whether it is substantially likely that a reasonable investor would consider the omitted or misstated facts to have significantly altered the total mix of available information. The information need not have produced a different outcome but only have assumed “actual significance” in the deliberative process. The analysis is, as Northway rightfully recognized, a subtle one that requires a “delicate assessment of the inferences” in the context of all factors that could render the information important to a reasonable investor. This cannot be done through resort to a single test or factor.

• Section 10(b) is part of a statutory scheme that has as a “fundamental purpose” the reliance on full disclosure. See Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 171 (1994). Disclosure in turn helps “stimulate and stabilize the markets” and “inspire investor confidence in the integrity of the markets.” Elizabeth Nowicki, 10(b) or Not 10(b)? Yanking the Security Blanket for Attorneys in Securities Litigation, 3 COLUM. BUS. L. REV. 637, 690 (2004). Basic rejected a rigid and underinclusive test for materiality aware that, without accurate and complete disclosure, investors would “ ‘be less likely to invest, thereby reducing the liquidity of the securities markets to the detriment of investors and issuers alike.’ ” 485 U.S. at 235 n.12 (quoting In re Carnation Co., Exchange Act Release No. 22214 (1985)). A test of statistical significance raises the same concerns.

 Oral argument will be January 11.  The SEC (with the Solicitor General) also filed an amicus brief in this case.