Could it be...Satan?

Interesting oral argument yesterday in the Zicam litigation brought by its shareholders relating to corporate disclosures. Satan, Scalia and anosmia...quite a lively discussion. The New York Times has more:

What do you think about Satan?” Justice Scalia asked a lawyer for the government, who was just starting his argument.

The case, Matrixx Initiatives v. Siracusano, No. 09-1156, was a class action against Matrixx Initiatives, an Arizona company accused of committing securities fraud by failing to tell investors of reports that its main product, a nasal spray and gel called Zicam, might have caused some users to lose their sense of smell. The condition is known as anosmia.

After a link between Zicam and anosmia was reported on “Good Morning America” in 2004, the company’s stock dropped 24 percent. In 2009, the Food and Drug Administration warned consumers not to use the products, which had been sold as over-the-counter homeopathic medicines, and Matrixx recalled them.

Satan came into the case by way of analogy. Matrixx contended that it should not have been required to disclose small numbers of unreliable reports of adverse effects, which were all it said were available in 2004.

“For years many consumers would not purchase products from Procter & Gamble because of a ridiculous rumor that the company was Satanic,” Matrixx said in a recent brief. “But no decision of this court bases securities-law disclosure obligations on how ignorant or paranoid people might react to unreliable or even false information.”

The Supreme Court has said that companies may be sued under the securities law for making statements that omit material information, and it has defined material information as the sort of thing that reasonable investors would believe significantly alters the “total mix” of available information.

Much of the argument revolved around whether reasonable investors would want to know about false and outlandish assertions like the one about Satanism so long as the assertions might affect the price of securities.

“A reasonable investor is going to worry about the fact that thousands of unreasonable investors are going to dump their Matrixx stock,” Chief Justice John G. Roberts said.

Justice Scalia disagreed. “It seems to me ridiculous to hold companies to irrational standards,” he said.

Though the justices were divided about how to handle reports of Satanism and the like, Matrixx did not appear to get much traction for its main argument — that a failure to disclose reports of adverse effects should give rise to securities fraud liability only if the reports were collectively statistically significant.

Full story here.