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No. 09-1156 IN THE Supreme Court of the United States __________ MATRIXX INITIATIVES, INC., ET AL., Petitioners, v. JAMES SIRACUSANO AND NECA-IBEW PENSION FUND, Respondents. __________ On Writ of Certiorari to the United States Court of Appeals for the Ninth Circuit __________ BRIEF FOR RESPONDENTS __________ DARREN J. ROBBINS DAVID C. FREDERICK ERIC ALAN ISAACSON Counsel of Record JOSEPH D. DALEY SCOTT H. ANGSTREICH SCOTT H. SAHAM GREGORY G. RAPAWY LUCAS F. OLTS EMILY T.P. ROSEN ROBBINS GELLER RUDMAN KELLOGG, HUBER, HANSEN, & DOWD LLP TODD, EVANS & FIGEL, 655 West Broadway P.L.L.C. Suite 1900 1615 M Street, N.W. San Diego, California 92101 Suite 400 (619) 231-1058 Washington, D.C. 20036 (202) 326-7900 SAMUEL H. RUDMAN ([email protected]) DAVID A. ROSENFELD ROBBINS GELLER RUDMAN & DOWD LLP 58 South Service Road Suite 200 Melville, New York 11747 (631) 367-7100 November 5, 2010 QUESTION PRESENTED Respondents are investors in petitioner Matrixx Initiatives, Inc. who claim that petitioners violated § 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 by misrepresenting and by failing to disclose informa- tion about the safety of their drug products, includ- ing several independent reports by doctors linking intranasal applications of Matrixx’s Zicam products to persistent anosmia (loss of the sense of smell). Contrary to petitioners’ question presented, which asserts that this case concerns “a pharmaceutical company’s nondisclosure of adverse event reports even though the reports are not alleged to be statisti- cally significant,” this case does not involve “adverse event reports” required by the Food and Drug Administration. Zicam was not subject to the federal reporting requirements at the relevant time. See infra pp. 8-9, 55; Br. in Opp. 17-18. Accordingly, the question presented is: Whether a securities-fraud complaint adequately can plead materiality and scienter by alleging that defendants received multiple, credible reports from medical specialists that its cold medicine appeared to cause serious, persistent anosmia, omitted disclosure of product-liability litigation concerning that defect, obtained scientific studies linking the drug’s key in- gredient zinc to anosmia but conducted no follow-up studies, and stated that clinical trials established that its drug did not cause anosmia when in fact it had no basis for any such claim. ii TABLE OF CONTENTS Page QUESTION PRESENTED .......................................... i TABLE OF AUTHORITIES ...................................... iv INTRODUCTION ....................................................... 1 STATEMENT .............................................................. 3 A. Statutory And Doctrinal Background ............. 3 B. Nature Of The Action ....................................... 5 1. Intranasal application of zinc and anosmia ....................................................... 5 2. Matrixx’s intranasal zinc products ............ 8 3. Information communicated to Matrixx about Zicam and anosmia before February 2004 ............................................. 9 4. Statements by Matrixx to its inves- tors from October 2003 to February 2004 ........................................................... 13 5. Subsequent developments ........................ 15 C. District Court Proceedings ............................ 18 D. The Ninth Circuit’s Decision ......................... 19 SUMMARY OF ARGUMENT .................................. 21 ARGUMENT ................................................................. I. THE COMPLAINT ADEQUATELY PLEADS MATERIALITY AND SCIEN- TER ................................................................. 25 A. Materiality Is A Fact-Intensive De- termination Based On The Totality Of The Circumstances .............................. 25 iii B. The Complaint Plausibly Alleges That Matrixx Misstated And Omit- ted Material Facts .................................... 28 C. The Complaint’s Allegations Support A Strong Inference That Matrixx Acted With Scienter .................................. 34 II. THIS COURT SHOULD REJECT MATRIXX’S PROPOSED BRIGHT-LINE RULE .............................................................. 38 A. Statistical Significance Is Not The Same As Practical Importance ................. 38 B. Adopting Statistical Significance As A Bright-Line Rule For Materiality Would Depart From Well-Settled Precedent .................................................. 41 C. A Reasonable Investor Would Not Consider A Finding Of Statistical Significance A Prerequisite To Eval- uating Otherwise Useful Information...... 47 D. Adverse Events Reports Do Not Require Special Treatment In The Materiality Analysis ................................. 55 CONCLUSION .......................................................... 58 iv TABLE OF AUTHORITIES Page CASES Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009) ... 21, 27, 33, 45 Baker v. Dalkon Shield Claimants Trust, 156 F.3d 248 (1st Cir. 1998) ................................ 50 Basic Inc. v. Levinson, 485 U.S. 224 (1988) ..... 1, 3, 19, 21, 22, 24, 25, 27, 41, 42, 43, 44, 47, 58 Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) ...................................... 19, 21, 27, 31, 33, 45 Burlington N. & Santa Fe Ry. Co. v. White, 548 U.S. 53 (2006) ..........................................27, 55 Carter-Wallace, Inc. Sec. Litig., In re: 150 F.3d 153 (2d Cir. 1998) ............................44, 57 220 F.3d 36 (2d Cir. 2000) ................................... 18 Castaneda v. Partida, 430 U.S. 482 (1977) .............. 45 Craik v. Minnesota State Univ. Bd., 731 F.2d 465 (8th Cir. 1984) .......................................... 45-46 Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993)52 Dirks v. SEC, 463 U.S. 646 (1983) ........................... 43 Ferebee v. Chevron Chem. Co., 736 F.2d 1529 (D.C. Cir. 1984) .................................................... 50 Flamm v. Eberstadt, 814 F.2d 1169 (7th Cir. 1987) ..................................................................... 43 Hazelwood Sch. Dist. v. United States, 433 U.S. 299 (1977) .................................................... 45 v Heller v. Shaw Indus., Inc., 167 F.3d 146 (3d Cir. 1999) ....................................................... 50 Kadas v. MCI Systemhouse Corp., 255 F.3d 359 (7th Cir. 2001) ............................................... 51 MacDissi v. Valmont Indus., Inc., 856 F.2d 1054 (8th Cir. 1988) ............................................. 52 Maryland Ins. Co. v. Ruden’s Administrator, 10 U.S. (6 Cranch) 338 (1810) ............................. 26 McLanahan v. Universal Ins. Co., 26 U.S. (1 Pet.) 170 (1828) ...........................................21, 26 New-York Firemen Ins. Co. v. Walden, 12 Johns. 513 (N.Y. Sup. Ct. 1815) .......................... 26 Oran v. Stafford, 226 F.3d 275 (3d Cir. 2000) ......... 44 Patterson v. McLean Credit Union, 491 U.S. 164 (1989) ............................................................ 27 Pitre v. Western Elec. Co., 843 F.2d 1262 (10th Cir. 1988) ............................................................. 45 Pommer v. Medtest Corp., 961 F.2d 620 (7th Cir. 1992) ............................................................. 46 SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968) ..................................................47, 48 Stoneridge Inv. Partners, LLC v. Scientific- Atlanta, Inc., 552 U.S. 148 (2008) ......................... 4 Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) ...... 4, 20, 22, 34, 35, 38, 44, 54 TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976) ........................... 1, 19, 21, 25, 26, 27, 42 Turner v. Iowa Fire Equip. Co., 229 F.3d 1202 (8th Cir. 2000) ................................................. 49-50 United States v. Gaudin, 515 U.S. 506 (1995) ....26, 27 vi Utah Lighthouse Ministry v. Foundation for Apologetic Info. & Research, 527 F.3d 1045 (10th Cir. 2008) .................................................... 35 Westberry v. Gislaved Gummi AB, 178 F.3d 257 (4th Cir. 1999) ............................................... 50 STATUTES, REGULATIONS, AND RULES Dietary Supplement and Nonprescription Drug Consumer Protection Act, Pub. L. No. 109- 462, 120 Stat. 3469 (2006) ..................................... 9 21 U.S.C. § 379aa ................................................ 55 21 U.S.C. § 379aa(a) .............................................. 9 21 U.S.C. § 379aa(b) .............................................. 9 Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 737 .....4, 5, 19, 22, 34, 44 15 U.S.C. § 78u-4(b)(1) ........................................ 27 15 U.S.C. § 78u-4(b)(2) ............................... 4, 27, 34 Securities Act of 1933, 15 U.S.C. § 77a et seq. .......... 3 Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. ........................................................... 3 § 10(b), 15 U.S.C. § 78j(b) .................................. 3, 4 15 U.S.C. § 1114(1)(a) ............................................... 35 15 U.S.C. § 1125(a)(1)(A) .......................................... 35 15 U.S.C. § 1125(a)(1)(B) .......................................... 35 15 U.S.C. § 1125(c)(3)(C) .......................................... 35 21 U.S.C. § 355 ............................................................ 8 vii 17 C.F.R. § 240.10b-5 (Rule 10b-5) .................. 4, 25, 38 21 C.F.R.: Pt. 310 .................................................................... 9 Pt. 312 ...................................................................