Price Impact: The Battle of Experts and Burden of Proof after Halliburton II

A Fraud-on-the-Market Refresher
Before reviewing the specific questions addressed by the Halliburton district court, it is important to recall the doctrine that underlies this issue: the fraud-on-the-market presumption. One required element of a securities fraud claim under section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 is that a plaintiff must show that she relied on the statement by the company that she claims was incorrect or misleading when she made her decision to buy or sell the company’s stock. If that same plaintiff wishes to represent a class of investors, she must show that the reliance determination can be made on a class-wide basis.

Enter the Supreme Court’s holding in Basic v. Levinson, 485 U.S. 224 (1988), that reliance could be presumed as long as the company’s stock traded in an efficient market. In an efficient market, the Court reasoned, all material and public information is incorporated into the stock price. Thus, when an investor decides to buy or sell, he does so in reliance on the integrity of the stock price and the information incorporated therein. In this way, reliance can be determined on a class-wide basis rather than by requiring each individual plaintiff to prove how he or she specifically relied on the misstatements when making investment decisions. Without the fraud-on-the-market presumption, securities fraud claims could not be brought as class actions because the reliance inquiry would always require an individualized determination.

Halliburton argued before the Supreme Court that Basic should overturned. But only three justices—Chief Justice Roberts and Justices Scalia and Thomas—voted to overrule the 26-year-old precedent. The practical impact of Halliburton II lay instead in its second holding regarding whether the fraud-on-the-market presumption can be rebutted at the class certification stage. Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014).

Rebutting the Presumption before a Class Is Certified
The fraud-on-the-market doctrine is only a presumption. If certain requirements are met, class-wide reliance can be presumed. That presumption is, however, rebuttable. In Basic, the Court acknowledged that if the link between the statement and the stock price is severed, the presumption is no longer valid. But in the securities class action context, there is always a second question: should an issue be addressed during the class certification phase or on the merits? Rebutting the presumption is a much more powerful tool for defendants if they can raise it at the class certification stage rather than having to wait until summary judgment. This was the question in Halliburton II.

The Supreme Court held that securities class action defendants could rebut the fraud-on-the-market presumption of reliance in opposition to class certification. If defendants could sever the link by showing that the statement did not impact the stock price, the presumption would not apply, reliance would be individualized, and a class could not be certified. On this point, the Court was clear. What the Court did not explain was who had the burden: the plaintiff to prove the price was impacted or the defendant to disprove price impact? Without addressing this issue, the Court remanded the case to the district court.

District Court Considers Dueling Experts and Places the Burden of Proof on Defendants
On remand, the district court considered experts from both parties on the question of whether the alleged misstatements impacted the price of Halliburton’s stock. Halliburton’s expert, Lucy Allen, conducted event studies on the 35 dates on which there were either alleged misstatements or corrective disclosures. She found no price impact as to any of the alleged misstatements. The plaintiff fund relied on two experts—Jane Nettesheim and Chad Coffman—who concluded that six alleged misstatements impacted the stock price. The court conducted a detailed analysis of the experts’ reports and testimony, including their respective positions as to the correct control group and the application of the “multiple comparison adjustment.” Following this review, the court concluded that only one of the six misstatements alleged by the fund impacted price, and so it certified a class as to that statement only. While the court closely considered each expert’s opinion, the court’s decision ultimately depended on who had the burden.

Before addressing the merits of the experts’ opinions, Judge Lynn had to determine who had the burden of proving or disproving price impact. After acknowledging that the Supreme Court had not expressly decided the issue, Judge Lynn looked to the concurrence of Justices Ginsburg, Sotomayor, and Breyer. The concurrence indicated that the Supreme Court’s holding in Halliburton II would not have a dramatic impact on securities fraud plaintiffs because “it is incumbent upon the defendant to show the absence of price impact.” Relying on this language, and on a concern that placing the burden on plaintiffs would make it too easy for defendants to defeat class certification, the district court held that both the burden of production and the burden of persuasion resided with Halliburton. This placed Judge Lynn’s decision in line with three decisions from two other districts on the same issue. See Aranaz v. Catalyst Pharm. Partners, Inc., 302 F.R.D. 657, 673 (S.D. Fla. 2014); McIntire v. China MediaExpress Holdings, Inc., 38 F. Supp. 3d 415, 434 (S.D.N.Y. 2014); Wallace v. Intralinks, 302 F.R.D. 310, 317 (S.D.N.Y. 2014).

Are We Headed to Halliburton III?
While the holding in Halliburton II regarding price impact was initially heralded as a win for securities class action defendants, placing the burden on the defendants to disprove price impact significantly limits that advantage. While defendants will have the opportunity to present expert testimony at the class certification phase, the benefit of the doubt will go to plaintiffs. Where a court is considering dueling expert opinions on highly technical matters—event studies, control groups, and multiple comparison adjustments—that benefit is considerable. While the district courts have so far been consistent in their holdings, there is not yet any binding authority on the subject. Soon enough the issue will make its way up to the court of appeals and, eventually, the Supreme Court may have to decide whether it is interested in issuing a third Halliburton decision.

Keywords: litigation, securities, Halliburton, price impact, burden of proof