The Commission filed its amicus curiae brief in Matrixx Initiatives, Inc. v. Siracusano, No. 09-1156 (S.Ct.), one of two securities cases the Supreme Court will hear this term. Matrixx centers on the proper test of materiality at the pleading stage. The other case is Janus Capital Group v. First Derivative Traders, No. 09-525 (S.Ct) which concerns the question of primary liability. Both cases are discussed here.

Matrixx is a class action that claimed the company made false and misleading statements concerning one of its key products, an over-the-counter cold remedy called Zicam. The company issued statements regarding the success of the product in 2003. At one point, Matrixx revised its earning guidance upward based on the performance of the nasal spray.

The company had, however, received information that Zicam could cause a loss of smell. It came from several medical researchers as well as individuals. Several product liability suits were filed. Matrixx continued to maintain that Zicam was safe and that none of the clinical trials supported a claim that the nasal spray caused a loss of smell. The company denied press reports to the contrary.

The district court dismissed the complaint concluding that adverse information relating to the safety of the product was not material unless the reports contain reliable statistical information that the drug is unsafe. The Ninth Circuit reversed, concluding that the materiality standard adopted by the court was contrary to the Supreme Court’s decision in Basic Inc. v. Levinson, 485 U.S. 224 (1988).

The Solicitor General and the SEC filed a brief in support of Respondents. There, the Commission argues that the rule sought by Petitioners based on statistically significant association is contrary to Basic. In that case, the Court rejected a bright line test for materiality in favor of a nuanced approach which assesses the inferences a reasonable shareholder would draw from a given set of facts. This is, of necessity, a contextual inquiry. Viewed in this context, it is clear that a reasonable investor may be concerned about information which raises questions regarding the safety of a company’s products. This is true even where it does not establish a statistically significant association. While the test advanced by Petitioners provides some indication about the validity of a correlation between a product and a harm, it does not refute an inference of causation, the Commission noted.

Citing Basic, the SEC told the High Court that the materiality requirement in a securities fraud action filters out essentially useless information. Data that a company’s products cause harm may be important to an investor “even if it does not establish that the causal link more likely than not exists.” This is because a reasonable investor is concerned with the impact the information can have on the share price. Reports such as those involved here might cause consumers not to purchase the product or draw regulatory attention which can impact the drug’s commercial success and litigation risk.

Finally, Basic provides the correct test of materiality, particularly at the pleading stage. The test avoids a bright line in favor of an approach which takes into consideration various factors that a reasonable investor might consider. This contrasts sharply with the statistical test advanced by Petitioners. Applying this approach to the allegations in the complaint here demonstrates that it adequately pleads materiality.