CASE 43-3
MATRIXX INITIATIVES, INC. v. SIRACUSANO
Supreme Court of the United States, 2011
563 U.S. ___, 131 S.CT. 1309, 179 L.ED.2D 398
http://scholar.google.com/scholar_case?q=131+S.+Ct.
+1309&hl=en&as_sdt=2,34&case=15831619199744263593&scilh=0
Sotomayor, J.
[Matrixx develops, manufactures, and markets over-the-counter pharmaceutical products. Its
core brand of products is called Zicam. All of the products sold under the Zicam name are used
to treat the common cold and associated symptoms. At the time of the events in question, one of
Matrixx’s products was Zicam Cold Remedy, which came in several forms including nasal spray
and gel. The active ingredient in Zicam Cold Remedy was zinc gluconate. Respondents allege
that Zicam Cold Remedy accounted for approximately 70 percent of Matrixx’s sales.
Respondents initiated this securities fraud class action against Matrixx on behalf of
On January 30, 2004, Dow Jones Newswires reported that the Food and Drug
Administration (FDA) was “looking into complaints that an over-the-counter common-cold
medicine manufactured by a unit of Matrixx Initiatives, Inc. (MTXX) may be causing some users
to lose their sense of smell” in light of at least three product liability lawsuits. Matrixx’s stock
fell from $13.55 to $11.97 per share after the report. In response, on February 2, Matrixx issued a
press release:
All Zicam products are manufactured and marketed according to FDA guidelines for homeopathic
medicine. Our primary concern is the health and safety of our customers and the distribution of factual
The day after Matrixx issued this press release, its stock price rebounded to $13.40 per
share.
On February 19, 2004, Matrixx filed a Form 8-K with the SEC stating that it had
“convened a two-day meeting of physicians and scientists to review current information on smell
disorders” and that “[i]n the opinion of the panel, there is insufficient scientific evidence at this
time to determine if zinc gluconate, when used as recommended, affects a person’s ability to
smell.”
Respondents claimed that Matrixx violated § 10(b) of the Securities Exchange Act and
SEC Rule 10b-5 by making untrue statements of fact and failing to disclose material facts
necessary to make the statements not misleading in an effort to maintain artificially high prices
Section 10(b) of the Securities Exchange Act makes it unlawful for any person to “use or
employ, in connection with the purchase or sale of any security . . . any manipulative or
deceptive device or contrivance in contravention of such rules and regulations as the
Commission may prescribe as necessary or appropriate in the public interest or for the protection
of investors.” [Citation.] SEC Rule 10b-5 implements this provision by making it unlawful to,
among other things, “make any untrue statement of a material fact or to omit to state a material
fact necessary in order to make the statements made, in the light of the circumstances under
which they were made, not misleading.” [Citation.] We have implied a private cause of action
from the text and purpose of § 10(b). [Citation.]
* * *
To prevail on a § 10(b) claim, a plaintiff must show that the defendant made a statement
that was “misleading as to a material fact.” Basic [ Inc. v. Levinson , citation.] In Basic, we held
that this materiality requirement is satisfied when there is “‘a substantial likelihood that the
disclosure of the omitted fact would have been viewed by the reasonable investor as having
significantly altered the “total mix” of information made available.’” [Citation.] * * *
* * * We observed that “[a]ny approach that designates a single fact or occurrence as
always determinative of an inherently fact-specific finding such as materiality, must necessarily
be overinclusive or underinclusive.” * * *
*
As in Basic, Matrixx’s categorical rule would “artificially exclud[e]” information that
“would otherwise be considered significant to the trading decision of a reasonable investor.”
[Citation.] Matrixx’s argument rests on the premise that statistical significance is the only
reliable indication of causation. This premise is flawed: As the SEC points out, “medical
researchers . . . consider multiple factors in assessing causation.” [Citation.] Statistically
significant data are not always available. * * *
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 * * * It suffices to note that *
* * “medical professionals and researchers do not limit the data they consider to the results of
* * *
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. * * * As a result, assessing the materiality of adverse event reports is a
“fact-specific” inquiry, [citation], that requires consideration of the source, content, and context
of the reports. This is not to say that statistical significance (or the lack thereof) is irrelevant—
only that it is not dispositive of every case.
Application of Basic’s “total mix” standard does not mean that pharmaceutical
manufacturers must disclose all reports of adverse events. * * * The fact that a user of a drug has
suffered an adverse event, standing alone, does not mean that the drug caused that event.
[Citation.] The question remains whether a reasonable investor would have viewed the
nondisclosed information “‘as having significantly altered the “total mix” of information made
available.’” For the reasons just stated, 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. [Citation.] Something more is needed, but that something more is not
investor might consider material, companies can control what they have to disclose under these
provisions by controlling what they say to the market.
Applying Basic’s “total mix” standard in this case, we conclude that respondents have
adequately pleaded materiality. * * *
* * *
We believe that these allegations suffice to “raise a reasonable expectation that discovery
will reveal evidence” satisfying the materiality requirement, [citation], and to “allo[w] the court
to draw the reasonable inference that the defendant is liable for the misconduct alleged,”
[citation]. The information provided to Matrixx by medical experts revealed a plausible causal
relationship between Zicam Cold Remedy and anosmia. Consumers likely would have viewed
the risk associated with Zicam (possible loss of smell) as substantially outweighing the benefit of
It is substantially likely that a reasonable investor would have viewed this information
“‘as having significantly altered the “total mix” of information made available.’” Basic,
[citation]. Matrixx told the market that revenues were going to rise 50 and then 80 percent.
Assuming the complaint’s allegations to be true, however, Matrixx had information indicating a
significant risk to its leading revenue-generating product. Matrixx also stated that reports
indicating that Zicam caused anosmia were “‘completely unfounded and misleading’” and that
“‘the safety and efficacy of zinc gluconate for the treatment of symptoms related to the common
cold have been well established.’” [Citation.] Importantly, however, Matrixx had evidence of a
biological link between Zicam’s key ingredient and anosmia, and it had not conducted any
studies of its own to disprove that link. In fact, as Matrixx later revealed, the scientific evidence
at that time was “‘insufficient … to determine if zinc gluconate, when used as recommended,
affects a person’s ability to smell.’” [Citation.]
intent to deceive, manipulate, or defraud.’” [Citation.] We have not decided whether recklessness
suffices to fulfill the scienter requirement. [Citation.] Because Matrixx does not challenge the
Court of Appeals’ holding that the scienter requirement may be satisfied by a showing of
“deliberate recklessness,” [citation], we assume, without deciding, that the standard applied by
the Court of Appeals is sufficient to establish scienter.
* * *
These allegations, “taken collectively,” give rise to a “cogent and compelling” inference
that Matrixx elected not to disclose the reports of adverse events not because it believed they
were meaningless but because it understood their likely effect on the market. [Citation.] “[A]
reasonable person” would deem the inference that Matrixx acted with deliberate recklessness (or
Insider Trading — Rule 10b-5 applies to sales or purchases by an “insider” who
possesses material information that is unavailable to the general public. An
insider who fails to disclose such information before trading on it will be liable
unless he waits for the information to become public. Under new SEC Rule
10b5-1, a purchase or sale of an issuer’s security is based on material nonpublic
information about that security or issuer if the person making the purchase or
sale was aware of the information when the person entered into the transaction.
Insiders, under Rule 10b-5, include directors, o)cers, employees, and agents of
the security issuer as well as those with whom the issuer has entrusted
information solely for corporate purposes, such as underwriters, accountants,
lawyers, and consultants. In some instances, the rule also precludes people who
receive material, nonpublic information from insiders — tippees — from trading
on that information.
New SEC Rule 10b5-2 adopts the misappropriation theory of liability: A violation
includes the purchase or sale of a security on the basis of material nonpublic
information in breach of trust or confidence that is owed to the issuer, the
shareholders of that issuer or any other person who is the source of the material
The Stop Trading on Congressional Knowledge Act of 2012 prohibits the
purchase or sale of securities of any issuer by a person in possession of material
nonpublic information regarding pending or prospective legislative action
relating to the issuer of the securities if the information was obtained (1) by
employee or (2) knowingly from a federal employee.
Under new SEC Regulation FD, regulated issuers who disclose material nonpublic
information to specified persons (primarily securities market professionals such
as analysts and mutual fund managers) must make public disclosure of that
information. If the selective disclosure was intentional or reckless, the issuer
must make public disclosure simultaneously; for a non-intentional disclosure, the
issuer must make public disclosure promptly, usually within 24 hours. . In 2013,
the SEC issued a report (1) con-rming that Regulation FD applies to social media
and other emerging means of communication used by public companies the
same way it applies to company websites and (2) clarifying that issuers can use
social media outlets like Facebook and Twitter to announce key information in
compliance with Regulation FD so long as investors have been alerted about
which social media will be used to disseminate such information. With a few
exceptions, Regulation FD does not apply to disclosures made in connection with
securities offering registered under the 1933 Act. The SEC can enforce this rule
by bringing an administrative action seeking a cease-and-desist order or a civil
action seeking an injunction and/or civil money penalties.