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Monday, April 4, 2011

Duty to Disclose to Shareholders: Matrixx Initiatives v. Siracusano

Michael V. Seitzinger
Legislative Attorney

On January 10, 2011, the U.S. Supreme Court heard oral arguments in the case Matrixx Initiatives v. Siracusano. The question presented is whether a plaintiff can state a claim under section 10(b) of the Securities Exchange Act and Securities and Exchange Commission (SEC) Rule 10b-5 based upon a pharmaceutical company’s nondisclosure of adverse event reports, despite the lack of an allegation that the reports are statistically significant.

The case was first brought in U.S. District Court for the District of Arizona. The district court found that there were not statistically significant data as to the accuracy of reports that the company’s cold medication caused cases of the loss of smell and granted the defendants’ motion to dismiss.

The shareholders appealed the district court’s decision to the U.S. Court of Appeals for the Ninth Circuit. That court, analyzing issues of required materiality and scienter under the Private Securities Litigation Reform Act (PSLRA), held that the shareholders had sufficiently complied with the requirements and reversed the district court’s decision.

Because disclosure is the heart of the federal securities laws, Congress will likely be interested in how the Supreme Court rules. Although it is not possible to predict with any certainty what the Court will hold, the skepticism expressed by several justices about the dependence of materiality upon statistical significance, along with past Supreme Court disapproval of a bright-line rule to determine materiality, may weigh in favor of the shareholders.

Date of Report: March 15, 2011
Number of Pages: 6
Order Number: R41710
Price: $19.95

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