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Supreme Court Rules “Statistically Insignificant Information” Can Still Be “Material Information”

Boulder Lawyers - LaszloLawThe Supreme Court Ruled 9-0 in favor of the investors in Matrixx Initiatives v. Siracusano (March 22, 2011).

We all may remember well the countless television and radio advertisements for Zicam cold remedy.  But when reports began to surface that some users of the Zicam cold remedy (now a discontinued product) had lost their sense of smell, the manufacturer, Matrixx Initiatives, Inc., saw shares of its stock lose value. In an effort to stem the tide of negative publicity, Matrixx issued statements defending its popular cold medicine by first dismissing the incidence of the loss of sense of smell as exceedingly rare and then taking the additional bold step of proclaiming that there was no scientific basis for linking Zicam to the complained of side effect.

Investors brought class action against Matrixx Initiatives and three of its executives, alleging that they violated federal securities laws by failing to disclose material information about Zicam.  The investors had learned that Matrixx had, on a handful of occasions, been contacted by the medical community regarding the link between the use of Zicam and the loss of smell.  Further, Matrixx made statements about product sales and growth without disclosing that the company had been sued upon claims of loss of smell resulting from the use of Zicam.

The Supreme Court was faced with the question of whether a plaintiff can state a claim for securities fraud under § 10(b) of the Securities Exchange Act of 1934, and Securities and Exchange Commission (SEC) Rule 10b-5, based on a Matrixx’s failure to disclose reports of adverse events associated with its product Zicam if the reports do not disclose a statistically significant number of adverse events.

The Supreme Court held that information regarding a side effect of a drug, even if the side effect is extremely rare, was ‘material information’ upon which a ‘reasonable investor’ may have acted.  The decision now clears the way for the investor class-action lawsuit to move forward against Matrixx, holding that the company had an obligation to reveal details of the observed side effects to investors even though the Company claimed the information did not rise to the level of statistically significant data.

A lack of statistically significant data does not mean that medical experts have no reliable basis for inferring a causal link between a drug and adverse events … We note that courts frequently permit expert testimony on causation based on evidence other than statistical significance.

Given that medical professionals and regulators act on the basis of evidence of causation that is not statistically significant, it stands to reason that in certain cases reasonable investors would as well.

What is important to recognize here is that Martixx made affirmative statements denying the association between Zicam and loss of smell and omitted certain facts and information relating to those side effects.  Simply, Matrixx was not required to provide the information it had.  However, once Matrixx made satements and representations regarding Zicam, those statements needed to be complete and accurate.

…it bears emphasis that § 10(b) and Rule 10b-5(b) do not create an affirmative duty to disclose any and all material information. Disclosure is required under these provisions only when necessary “to make … statements made, in the light of the circumstances under which they were made, not misleading.

The Court reasoned that there is no bright line rule requiring statistically significant information embracing, rather, a “total mix” standard of whether a reasonable investor would have viewed the non-disclosed information as significantly altering the total mix of information available to the investing public.

The question remains whether a reasonable investor would have viewed the nondisclosed information ‘as having significantly altered the “total mix” of information made available.’

… the mere existence of reports of adverse events-which says nothing in and of itself about whether the drug is causing the adverse events-will not satisfy this standard. Something more is needed, but that something more is not limited to statistical significance and can come from “the source, content, and context of the reports…

The Court’s analysis in Matrixx is important to consider when deciding what information your company should make public.  As is so often the case, the mouth piece of the company may not be aware of certain facts or information which may cause their statements to be “misleading.”  Good corporate policy regarding dissemination of information to the public and a clear understanding of that policy is critical.

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