On 12 April 2016, in IBEW Local 98 Pension Fund v. Best Buy Co., the federal appeals court based in St. Louis, Missouri held that the defendants had rebutted the presumption under Section 10(b) of the Exchange Act that the plaintiffs had relied on the defendants' alleged misrepresentations. This is the first decision by a federal appeals court applying the US Supreme Court's 2014 ruling in Halliburton Corporation v. Erica P. John Fund ("Halliburton II"), which said that defendants can overcome this presumption at the class certification stage by presenting evidence that the alleged misrepresentations did not affect the price of the defendant company's stock. In reaching this result, the court here rejected the plaintiffs' contention that, even if the company's stock price did not immediately react to the alleged misrepresentation, they could still maintain their claim for securities fraud because that misrepresentation artificially maintained the company's already inflated stock price.
In Halliburton II, which we discussed in an earlier edition of this newsletter, the Supreme Court affirmed the continued validity of the fraud-on-the-market presumption, which assumes that, based on an economic theory known as the "efficient market hypothesis," investors rely on material public representations when buying and selling stock because these public statements determine the stock's market price. Because investors are presumed to rely on public representations when buying the stock, they can therefore satisfy the statutory requirement that plaintiffs plead reliance when filing a securities class action under Section 10(b). But the Court in Halliburton II also ruled that defendants may rebut the presumption of reliance at the class certification stage by showing that the alleged misrepresentations did not in fact affect the company's stock price.
The court in Best Buy held that the defendants rebutted the presumption of reliance by providing evidence showing that an alleged misrepresentation did not actually affect the company's stock price immediately after that statement was made. In this case, the stock price jumped in response to a public statement that the defendants made a couple of hours before the alleged misrepresentation. The plaintiffs therefore argued that even if the alleged misrepresentation did not cause the stock price to increase, it could still be the basis for their securities fraud claim because the alleged misrepresentation maintained the stock's already inflated price. While the court as a whole did not accept this "price maintenance" theory, one of the three judges on the panel did, and wrote a dissenting opinion arguing that the plaintiffs' claims should have been allowed to proceed on the theory that the alleged misrepresentation "fraudulently maintained [the company's] stock at a constant price and counteracted expected price declines."
This case illustrates how—based on Halliburton II—defendants can defeat class certification by showing that the alleged misrepresentation did not affect the company's stock price. In addition, the court's rejection of the plaintiffs' "price maintenance" theory calls into question whether plaintiffs would be able to establish such a theory in other circumstances (as some courts in other jurisdictions have sometimes held).
For additional information about this case, please see our client note:
http://www.shearman.com/en/newsinsights/publications/2016/04/eighth-circuit-holds-presumption
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