The Two Faces of Materiality
34 Pages Posted: 6 Jan 2013 Last revised: 28 May 2013
Date Written: January 5, 2013
To make out a claim for securities fraud under federal law, a plaintiff must plead and prove the misrepresentation of a material fact. The Supreme Court has repeatedly defined a material fact as one that would be important to a reasonable investor in deciding how to act in that it would change the total mix of information – although it need not necessarily change the ultimate decision of the investor as to how to vote or whether to trade. On the other hand, the courts have also defined a material fact as one that would affect market price – which clearly implies that it must have changed the decisions of some investors. Although these two definitions of materiality appear to conflict, they can be reconciled as alternative expressions of the same standard, the former referring to individual investors and the latter referring to investors in the aggregate. Indeed, the Supreme Court has held a fact cannot be material if it cannot matter to the ultimate outcome, suggesting that a fact cannot be material if it does not affect the behavior of a number of investors sufficient to move the market. Moreover, it is appropriate to consider price impact in connection with the decision to certify a securities fraud action as a class action since a class action involves the claims of investors in the aggregate and since price impact need not be dispositive as to the merits of the individual claim of the lead plaintiff who may be able to recover under the individual investor standard.
Keywords: securities fraud, Rule 10b-5, class action, Rule 23, certification, materiality, fraud on the market, essential link, total mix, price impact, presumption, reliance, loss causation, transaction causation
JEL Classification: G10, G20, G30, K22, K41
Suggested Citation: Suggested Citation