Matrixx Initiatives, Inc. v. Siracusano: Rejection of the Statistically Significant Standard Reopened the Door to Securities Fraud Strike Suits

Benjamin A. Leisawitz

In response to the proliferation of securities fraud strike suits in the 1990s, Congress and the courts sought to impose heightened standards to dispose of frivolous claims at the pleadings stage. To properly plead materiality under Section 10(b) of the 1934 Act and SEC Rule 10b-5, for example, a growing number of circuit courts adopted the ‘statistically significant’ standard. In sharp contrast, the United States Supreme Court rejected this standard in Matrixx Initiatives, Inc. v. Siracusano.

Now, to survive the pleadings stage, plaintiff-investors seeking to assert securities fraud claims based on a pharmaceutical company’s failure to disclose adverse event reports are not required to allege that the omitted reports provide statistically significant evidence that the reported events are caused by-rather than randomly associated with-use of the drugs and are sufficiently serious and frequent to affect future earnings. As a result of this low threshold for materiality articulated by the Court, this Comment contends that pharmaceutical companies are forced to choose between two equally devastating alternatives: (1) conduct business as usual and risk being the target of securities fraud strike suits; or (2) disclose all adverse event reports and bury investors in an avalanche of trivial information.

In addition to highlighting the deficiencies in the Matrixx Court’s analysis, this Comment examines the consequences created and explains that these consequences will be felt well beyond the four walls of the courtroom.

Moving forward, this Comment suggests, the most efficient remedy is for the SEC and the FDA to cooperatively flex their inherent legislative muscles and proactively promulgate a uniform standard for materiality as it pertains to adverse event reports by developing an industry-specific calculation for determining statistical significance. Such a standard would effectuate protections to both investors and pharmaceutical companies, and at the same time, prevent over-disclosure that results in increased operating costs, artificially depressed stock prices, and uninformed decisionmaking.