In other words, Halliburton II expressly provides that defendants may introduce affirmative evidence that no “price impact” exists, not only to rebut the Basic presumption but also to prevent the action from proceeding as a class action. For that reason, Halliburton II presents an intriguing concept for defendants. But how, specifically, have defendants been able to use a “price impact” rebuttal to defeat class certification? Over the past six years, the answer to that question has proven somewhat elusive, with only a handful of courts dismissing class action certifications on the theory. However, a few helpful themes have emerged over the years that provide guidance on this point.
Expert Evidence of Lack of Front-End Price Impact Is Required
“Defendants must do more than merely produce evidence that might result in a favorable outcome; they must demonstrate that the misrepresentations did not affect the stock’s price. . . .” In re Signet Jewelers Ltd. Sec. Litig., No. 16 Civ. 6728 (CM) (RWL), 2019 U.S. Dist. LEXIS 114695, at *38 (S.D.N.Y. July 10, 2019) (internal quotations omitted) (granting class certification where expert’s report did not provide evidence of a lack of price impact). A definitive showing that no price impact occurred requires expert analysis as to the lack of so-called “front-end” price impact (impact at the time of a misrepresentation).
For example, in In re Finisar Corp. Securities Litigation, No. 5:11-cv-01252, 2017 U.S. Dist. LEXIS 201150 (N.D. Cal. Dec. 5, 2017), reconsideration denied, 2019 U.S. Dist. LEXIS 88205, at *21 (N.D. Cal. May 24, 2019), the court denied class certification because it found that the defendants proved the lack of front-end price impact through their expert’s event study and regression analysis, which, after adjusting for macroeconomic factors, showed no statistically significant increase in the company’s stock price on the trading day of the alleged misrepresentations, thus rebutting any presumption of reliance and preventing the plaintiffs from meeting the predominance requirement of Rule 23. The Finisar court upheld the defendants’ expert analysis despite aggressive challenges to the methodology by the plaintiffs.
Similarly, in In re Moody’s Securities Litigation, 274 F.R.D. 480 (S.D.N.Y. 2011), the court denied class certification where the defendants’ expert conducted an event study that controlled for market and industry-wide variables and showed that there is “no day on which Plaintiffs allege Moody’s made a misstatement that is associated with a statistically significant and positive abnormal return” because the study severed the necessary link “between the misrepresentation and the price by showing that the allegedly false information that the market was absorbing was not causing the stock price to artificially inflate.” Id.; see also IBEW Local 98 Pension Fund v. Best Buy Co., 818 F.3d 775, 782–83 (8th Cir. 2016) (reversing district court’s grant of class certification because the expert evidence of “no ‘front-end’ price impact” from the alleged misrepresentations “rebutted the Basic presumption” of reliance); Ohio Pub. Emps. Ret. Sys. v. Fed. Home Loan Mortg. Corp., No. 4:08CV01602018, U.S. Dist. LEXIS 137229, at *49–50 (N.D. Ohio Aug. 14, 2018) (denying class certification after finding that defendant’s expert report “demonstrates that the alleged misstatements in the case at bar did not impact Freddie Mac’s stock price, rebutting the presumption of reliance”); see also, e.g., Rooney v. EZCORP, Inc., 330 F.R.D. 439, 449 (W.D. Tex. 2019) (holding defendants failed to meet their burden where only evidence of price impact at the time of correction was presented, and “Halliburton II only allows defendants to rebut the Basic presumption by showing a lack of price impact following a misrepresentation, and not following a corrective disclosure”).
Expert Evidence of Back-End Price Impact Analyses May Also Be Important
While it seems clear that front-end analyses are required for a successful Halliburton II challenge, there is inconsistency about the need for a “back-end” price impact analysis at the time of correction. Some courts have required that defendants also prove the absence of a “back-end” price impact in order to defeat class certification under Haliburton II, while others have found such analyses unpersuasive. Compare, e.g., Cosby v. KPMG, LLP, No. 3:16-CV-121-TAV-DCP, 2020 U.S. Dist. LEXIS 113424, at *75–76 (E.D. Tenn. June 29, 2020) (granting class certification because defendant cannot “simply show that a price did not rise after a misrepresentation” as price impact can be demonstrated both at the time of the misrepresentation or the corrective disclosure; defendant did not provide evidence for both time periods), with Rooney, 330 F.R.D. at 449 (back-end analysis insufficient on its own to defeat class certification and stating that “the Court concludes Halliburton II only allows defendants to rebut the Basic presumption by showing a [front-end] lack of price impact following a misrepresentation, and not following a corrective disclosure [on the back-end]”). Regardless of whether it is required, to the extent such an analysis can be provided, it may be persuasive to the courts in conjunction with other evidence—making it worth the effort.
Expert evidence demonstrating a lack of negative price movement when the information “correcting” the alleged misstatements came to light reinforces the absence of any price impact and can serve to further undercut any presumption of reliance. See, e.g., Ark. Teachers Ret. Sys. v. Goldman Sachs Grp., Inc., 879 F.3d 474 (2d Cir. 2018) (district court erred by failing to consider, at the class certification stage, defendants’ evidence that market had previously learned of the information contained in a later “corrective” disclosure without any accompanying, statistically significant price decline); Erica P. John Fund, Inc. v. Halliburton Co., 309 F.R.D. 251, 273 (N.D. Tex. 2015) (defendant can also rebut the presumption of reliance by showing that the “information alleged by the [plaintiff] to be corrective was both already disclosed and caused no statistically significant price reaction”).
Plaintiffs’ Price Maintenance Theories May Complicate the Analysis but Are Not Necessarily Dispositive
A number of courts have held that the absence of a statistically significant price increase after an alleged misrepresentation is not dispositive if a plaintiff is relying on a “price maintenance” theory (positing that the stock price was artificially inflated prior to the alleged class period), because then the alleged misrepresentation merely perpetuated the already inflated price. See, e.g., Glickenhaus & Co. v. Household Int’l, Inc., 787 F.3d 408, 418–19 (7th Cir. 2015). Allegations of a price maintenance theory at the class certification stage can, in some instances, prevent a successful Halliburton II challenge. Id.
But not in every instance. As a threshold matter, it is important to note that plaintiffs cannot switch to a price maintenance theory at the class certification stage simply to overcome the price impact defense. Price maintenance must be specifically alleged in the complaint, and plaintiffs cannot emerge with a price maintenance theory in response to defendants’ class certification opposition where that theory is inconsistent with the plaintiffs’ pleadings or prior motion practice or both. The Finisar court confronted this exact situation in its 2019 ruling denying reconsideration and maintaining its decision denying class certification due to a lack of price impact. It held, inter alia, that where the plaintiffs’ prior pleadings did not allege that the stock price was artificially inflated prior to the start of the alleged class period, the plaintiffs could not rely on that theory to obtain class certification. See In re Finisar Corp. Sec. Litig., No. 5:11-cv-01252, 2019 U.S. Dist. LEXIS 88205, at *19–20 (N.D. Cal. May 24, 2019); see also Best Buy, 818 F.3d at 782–83 (price maintenance theory inapplicable where statements prior to class period not alleged to be false or misleading).
Second, price maintenance theories are not logically applicable in all cases, and defendants should be on the lookout to rebut the rote recitation of such a theory. If the following factual predicates are not applicable, then price maintenance should not be able to save plaintiffs from a well-supported Halliburton II challenge:
- Offsetting market/macroeconomic forces exist to explain the lack of upward price movement.
- Offsetting company-specific confounding information exists to explain the lack of upward price movement.
- The stock price was demonstrably inflated prior to the misrepresentations at issue (which could be due to other preexisting misrepresentations or other market factors unrelated to defendant conduct).
- The company’s alleged “misstatement” was a failure to disclose bad news to investors (as opposed to an affirmative misstatement of “good news”) such that the company’s failure to disclose simply maintains the status quo and would not be expected to increase stock prices.
If plaintiffs allege the presence of one of the foregoing factors, a successful challenge to class certification will require the defendants to establish that these factual predicates do not exist through the development of fact and expert evidence. Specifically, the existence of the first two categories should be considered by defendants’ expert or experts, and the lack thereof should be included in any findings presented to the court.
The ability to distinguish price maintenance cases on the facts will be a key component to any defendant’s successful Halliburton II challenge. See, e.g., In re Finisar Corp. Sec. Litig., No. 5:11-cv-01252, 2017 U.S. Dist. LEXIS 201150 (N.D. Cal. 2017) (denying class certification where there was “no evidence in the present case of any information in the market that may have offset or confounded the effects of [defendant’s] alleged misrepresentations” that would explain a lack of price movement).
Conclusion
To invoke the Basic presumption of reliance, a securities class action plaintiff must allege that the stock trades in an efficient market, in which material information is immediately absorbed and reflected in the stock price. If a defendant can establish, through an expert regression analysis, that the alleged misrepresentation did not cause a statistically significant increase in the stock price at the time of the alleged misrepresentation (a lack of front-end price impact) and did not cause a statistically significant decrease in the stock price at the time of the alleged corrective disclosure (a lack of back-end price impact), Haliburton II provides a mechanism for the defendants to defeat class certification. While plaintiffs have in some instances overcome Haliburton II by asserting a “price maintenance” theory to explain the lack of stock movement, that theory does not fit the facts of every case, and plaintiffs cannot rely on this theory at class certification if they have not alleged it in their complaint.