Defendants Look for Broader Interpretation of Halliburton II June 7, 2016 Robert L. Hickok hickokr@pepperlaw.com Gay Parks Rainville rainvilleg@pepperlaw.com Reprinted with permission from the June 7, 2016 issue of The Legal Intelligencer. 2016 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved. This month marks the two-year anniversary of the U.S. Supreme Court s seminal securities class action decision, Halliburton v. Erica P. John Fund (Halliburton II), 134 S. Ct. 2398 (2014), which allows defendants to rebut at the class certification stage the fraud-on-the-market presumption of reliance permitted under Basic v. Levinson, 485 U.S. 224 (1988). According to Halliburton II, defendants may rebut the Basic presumption by showing that their alleged misrepresentations had no impact on the defendant company s stock price. Notably, the Court held that defendants may show lack of price impact with appropriate evidence that either the asserted misrepresentation (or its correction) did not affect the market price of the defendant s stock. Reiterating its decision in Basic, the THIS PUBLICATION MAY CONTAIN ATTORNEY ADVERTISING The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship. Please send address corrections to phinfo@pepperlaw.com. 2016 Pepper Hamilton LLP. All Rights Reserved.
Court explained that any showing that severs the link between the alleged misrepresentation and... the price received (or paid) by the plaintiff... will be sufficient to rebut the presumption of reliance. Despite the significance of Halliburton II, a majority of district courts have applied a narrow interpretation of its holding, rendering toothless defendants right to rebut the Basic presumption. Some defendants, including Halliburton Co. itself (on remand from Halliburton II), have sought interlocutory appeal of adverse district court rulings under Federal Rule of Civil Procedure 23(f). In April of this year, the first circuit court to interpret Halliburton II the U.S. Court of Appeals for the Eighth Circuit reversed a district court s class certification order in the securities action against Best Buy Co. The Eighth Circuit held that Best Buy sufficiently rebutted the Basic presumption with evidence that its stock price did not rise after the alleged misrepresentations at issue, showing the absence of a front-end price impact, and, therefore, the defendants did not need to also demonstrate a lack of back-end price impact (i.e., that there was no statistically significant stock price decline following the alleged corrective disclosure), as in IBEW Local 98 Pension Fund v. Best Buy, No. 14-3178, 2016 U.S. App. LEXIS 6616, at *20 (8th Cir. April 12, 2016). Soon we will learn whether the Best Buy decision is a harbinger of more defense-favorable appellate interpretations of Halliburton II. In the Fifth Circuit, the parties have fully briefed Halliburton s appeal of the district court s decision to grant class certification in Erica P. John Fund v. Halliburton, 309 F.R.D. 251 (N.D. Tx. 2015). In the Second Circuit, Goldman Sachs Group Inc. recently appealed the U.S. District Court for the Southern District of New York s class certification order in In re Goldman Sachs Group Securities Litigation, Master File No. 10 Civ. 3461, 2015 U.S. Dist. LEXIS 128856 (S.D.N.Y. Sept. 24, 2015). If either of these circuit courts issues an opinion that conflicts with that of the Eighth Circuit, the proper interpretation of Halliburton II may be ripe for Supreme Court review by 2017. Rebutting the Basic Presumption: Background To bring a securities fraud lawsuit under Section 10(b) of the Securities Exchange Act of 1934 and the U.S. Securities and Exchange Commission Rule 10b-5, an investor plaintiff must prove, among other things, that he or she individually relied on the alleged misrepresentation. If courts strictly applied this requirement in the class action context, then common questions would not predominate for purposes of satisfying Federal Rule of
Civil Procedure Rule 23(b)(3). Instead, each investor would have to testify that he or she was aware of the alleged misrepresentation and made an investment decision based on that representation. In Basic, the Supreme Court addressed this issue by holding that prospective investor classes could use a proxy for individual reliance by establishing a rebuttable presumption of class-wide reliance via the fraud-on-the-market theory. Under this theory, as long as a company s stock trades in an efficient market, all public information about that stock is viewed as being incorporated in the stock s price including the alleged misrepresentation. Thus, a court may presume that all members of the putative class indirectly relied on the alleged misrepresentation through reliance on the stock s market price, so long as plaintiffs can prove an efficient market. In Halliburton II, Halliburton asked the Court to allow defendants to rebut the Basic presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not impact the market price of its stock. The Court agreed with Halliburton that if a plaintiff establishes the Basic presumption, then the defendant should at least be allowed to defeat the presumption at the class certification stage through evidence that the misrepresentation did not in fact affect the stock price. The Eighth Circuit s Decision in Best Buy Best Buy, a typical stock-drop case, involved allegations of securities fraud arising from an earnings release the company issued before the stock market opened on Sept. 14, 2010. In that release, Best Buy announced that it was increasing its 2011 earnings per share guidance by 10 cents to $3.55-$3.70. When the market opened at 9:30 a.m., Best Buy s stock price rose to $37.25, 7.5 percent higher than its closing price the day before. At 10 a.m., the company held a conference call with analysts during which its chief financial officer stated: (1) Looking at the results for the first half of fiscal 2011, while there are many moving pieces that we manage, like always, we are pleased that our earnings are essentially in line with our original expectations for the year and (2) Overall, we are pleased that we are on track to deliver and exceed our annual EPS guidance. By the market s close that day, Best Buy s stock had dropped slightly to $36.73. On Dec. 14, 2010, Best Buy announced that it had reduced its 2011 earnings per share guidance to $3.20-$3.40. That same day, the company s stock price closed at $35.52, 14.8 percent lower than the previous day s price. The plaintiffs filed suit against Best Buy two months later.
At the motion to dismiss phase of the Best Buy case, the U.S. District Court for the District of Minnesota dismissed plaintiffs claims to the extent they were based on the Sept. 14, 2010, press release statement regarding the company s increased 2011 earnings guidance on grounds that the statement was protected by the Private Securities Litigation Reform Act s safe harbor for forward-looking statements. But the court refused to dismiss the plaintiffs claims to the extent they were based on the company s analyst call statements since those statements were not forward-looking. During the class certification stage, Best Buy sought to rebut the Basic presumption with its expert s event study that showed, with intraday stock price data, that the analyst call statements on Sept. 14, 2010, had no discernible impact on Best Buy s stock price. The plaintiffs expert conceded that the conference call statements did not immediately increase the stock price because the economic substance was disclosed in the press release, and thus by the time the 2Q11 conference call started, the economic substance of the alleged misrepresentations was largely reflected in Best Buy s stock price. In support of the plaintiffs price maintenance theory (i.e., that materially false statements or omissions maintained an already inflated stock price), the plaintiffs expert went on to opine that the price decline on Dec. 14 demonstrated that the conference call statements fraudulently maintained the [Best Buy] stock price until the corrective disclosure on Dec. 14. Adopting the reasoning of the plaintiffs expert, the district court granted class certification. As the court explained: Even though the stock price may have been inflated prior to the earnings phone conference... the alleged misrepresentations could have further inflated the price, prolonged the inflation of the price, or slowed the rate of fall. Therefore, according to the district court, price impact can be shown by a decrease in price following a revelation of the fraud, and defendants have not offered evidence to show that Best Buy s stock price did not decrease when the truth was revealed. In a 2-1 opinion, an Eighth Circuit panel reversed the district court s decision, holding that the opinion of the plaintiffs own expert that the economic substance of the analyst conference call statements was virtually the same as the non-fraudulent press release and, therefore, had no additional price impact served as overwhelming evidence of no front-end price impact [which] rebutted the Basic presumption. The court rejected the plaintiffs argument that the drop in Best Buy s stock price after the alleged corrective disclosure was evidence that the alleged misstatements maintained an inflated stock price, pointing out that such theory provided no evidence that refuted defendants overwhelm-
ing evidence of no price impact. The dissenting member of the panel, however, criticized the majority for disregarding the plaintiffs price-maintenance theory. The plaintiffs petitioned for a rehearing en banc as well as a rehearing by the same panel, arguing that the panel s decision (1) improperly interpreted Halliburton II as not requiring defendants to show a lack of back-end price impact, and (2) disregarded the plaintiffs price maintenance theory recognized by the Seventh and Eleventh circuits in Schleicher v. Wendt, 618 F.3d 679, 685 (7th Cir. 2010), and FindWhat Investor Group v. FindWhat. com, 658 F.3d 1282, 1315 (11th Cir. 2011). On June 1, the Eighth Circuit denied both of the plaintiffs petitions, solidifying the Best Buy opinion s current significance as the only circuit court guidance for interpreting Halliburton II. Issues Before the Fifth and Second Circuits In the meantime, Halliburton has presented the following issue, among others, in its appeal currently before the Fifth Circuit: Should class certification have been denied where Halliburton showed that (1) the alleged misrepresentations [regarding the company s exposure to asbestos liabilities] did not move the market price when made throughout the July 22, 1999, through Dec. 7, 2001, class period and that (2) the stock-price decline on Dec. 7, 2001, could not show the misrepresentations price impact because that day s disclosure of a jury verdict [in an asbestos lawsuit against a Halliburton subsidiary] was not corrective, i.e., it did not reveal the truth obscured by any alleged misrepresentation? To decide this issue, the Fifth Circuit must necessarily grapple with the question of whether a district court may assume the corrective nature of an alleged corrective disclosure and refuse to examine the defendant s evidence to the contrary, even in cases where, as in Halliburton II, the defendant has shown the absence of a front-end price impact. Similarly, in the Goldman Sachs securities litigation, the Second Circuit will decide the following question (among others) regarding the appropriate standard of rebuttal proof under Halliburton II: Did the district court err in creating a virtually insurmountable legal standard, that to rebut Basic s fraud-on-the-market presumption under Halliburton II, defendants must demonstrate a complete absence of price impact with conclusive evidence?
As did the Eighth Circuit in Best Buy, the Second Circuit will review the district court s (1) refusal to consider Goldman Sachs evidence of no front-end price impact and (2) conclusion that the plaintiffs mere assertion of a price-maintenance theory (without any supporting evidence) overrode the company s lack-of-price-impact evidence in any event. Securities litigants should pay close attention to these appeals as their outcomes will determine whether the Best Buy decision actually turned the tide for defendants seeking to rebut the Basic presumption under Halliburton II. Berwyn Boston Detroit Harrisburg Los Angeles New York Orange County Philadelphia Pittsburgh Princeton Silicon Valley Washington Wilmington pepper.law