Securities Regulation -- 2011



Matrixx Initiatives Inc. v. Siracusano   (U.S. Supreme Court)

Whether adverse drug effects that are not statistically significant are material enough for 10b-5 litigation

This suit by investors in Matrixx sued the company for failing to disclose that Zicam Cold Remedy might cause "anosmia," or loss of the sense of smell. Their suit was based on a small number of adverse event reports during the period between 1999 and 2004, and the trial court dismissed the case because the reports did not provide "reliable statistically significant information that a drug is unsafe," and that therefore the nondisclosure was not a material omission.

This ruling was reversed on appeal, and the Supreme Court agreed. It unanimously decided on March 22, 2011, that this case could go to trial. It found that the failure to disclose a few adverse events does involve "material" information, i.e., information that would be viewed by a reasonable investor as having significantly altered the total mix of information made available. The Court found that experts and the FDA rely on evidence that is not statistically significant to establish an inference of causation, and investors can also be expected to find such evidence significant. Evidence introduced at trial will be considered to determine whether it actually rises to the level of materiality required, but the allegations in the complaint are adequate to survive a motion to dismiss.

The Court also agreed that the plaintiffs' had pled sufficient evidence of "deliberate recklessness" to constitute "scienter," or a mental state embracing intent to deceive, manipulate, or defraud." It found that a statistically significant number of complaints about a product are not necessary, as long as some of the complaints "taken collectively," give rise to a "cogent and compelling" inference that the company intended to prevent significant information from affecting the stock's price.

This is an important case that will make it harder for manufacturers to defend themselves in securities litigation if they consider a statistically insignificant number of complaints not to be material information. Consequently, manufacturers will have to disclose adverse effects based on statistically insignficant information, confusing investors and consumers alike.