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Matrixx Initiatives Inc. v. Siracusano Amicus Brief

2010-11 preview of the U.S. Supreme Court

The Ninth Circuit’s approach to the scienter requirement in this securities fraud action is well grounded in this court’s precedent. The conclusion that the actions of petitioner Matrixx Initiatives Inc. (“Matrixx”), as alleged in the complaint, give rise to a strong inference of scienter follows naturally from this court’s decision in Tellabs Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007). Allegations that Matrixx was aware of anecdotal and scientific evidence raising questions about a Zicam-anosmia link are sufficiently particularized to satisfy the pleading standard for securities fraud, and the assertion that the company sought to hide or refute this evidence with deliberate recklessness is at least as compelling as any plausible nonculpable explanation.

An analysis of evident inferences presents the following picture: Matrixx was on notice about consumer complaints of Zicam users developing anosmia as early as 1999, and in 2002 Matrixx reached out to independent researchers to discuss the potential dangers. Matrixx’s own scientists could not disprove the existence of the Zicam-anosmia link, yet Matrixx refused to commission additional outside research. Then, in reacting to widespread media coverage of a Zicam-anosmia link, Matrixx issued intentionally misleading press releases that falsely implied to readers that two prior studies had tested for anosmia and returned negative results. Lastly, Matrixx’s discussion of potential product liability litigation risks in its Securities and Exchange Commission (“SEC”) Form 10-Q filings omitted the significant fact that an anosmia related lawsuit had already been filed against the company.

Contrary to the theory that petitioners and their amici attempt to advance, Tellabs does not require the inference of scienter to be irrefutable, or for the court to determine and rule on which inference is most cogent. Rather, a court must allow a case to proceed beyond a Rule 12(b)(6) motion if a reasonable person, when viewing the complaint in its entirety and taking all facts alleged as true, would deem the inference of scienter cogent and at least as compelling as any plausible opposing inferences that could be drawn from the facts alleged. The Ninth Circuit correctly applied this standard in reversing the district court’s judgment of dismissal in this case.



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