Third Circuit Drops Stock-Price Test for Securities Fraud Materiality
The Third Circuit has unanimously abandoned its Oran-Burlington rule, which treated a misstatement as immaterial if the company's stock price did not fall or quickly recovered after a corrective disclosure. The court instead adopted the Supreme Court's fact-specific 'total mix' standard for materiality under Section 10(b) and Rule 10b-5. The case involved Ocugen, a pharmaceutical company that restated 15 quarters of financial statements.
The Third Circuit case arose from Ocugen, a small drug developer focused on retinal gene therapies. In 2019, it licensed a core product to CanSinoBIO for certain markets, but allegedly misclassified the arrangement under accounting rules, forcing restatement of fifteen quarters.
Investors sued after the restatement. Although Ocugen shares fell 10.38% and rebounded within two days, the panel rejected using that price path alone to deem the alleged misstatements immaterial, adopting the Supreme Court’s total-mix approach.
The ruling may make it harder for companies in the Third Circuit to win early dismissal of securities fraud claims based only on stock-price movement. Investors, including institutional and retail shareholders, could find it easier to proceed past the pleading stage. Public companies and their officers may face greater litigation costs and uncertainty, which could influence disclosure practices and insurance needs. Courts may handle more fact-intensive materiality disputes.