On April 12, 2016, the Eighth Circuit reversed certification of a class of Best Buy shareholders on the grounds that defendants had established that the alleged misstatements at issue did not impact Best Buy’s stock price. The opinion marks the first time a circuit court has applied the U.S. Supreme Court’s 2014 holding in Halliburton v. Erica P. John Fund that a defendant in a Section 10(b) case is entitled to present evidence regarding price impact at the certification stage to defeat the fraud-on-the-market presumption that, following Basic v. Levinson, may permit plaintiffs to satisfy Rule 23.
The Eighth Circuit panel, in an opinion by Circuit Judge Loken, agreed with the district court that because “plaintiffs presented a prima facie case that the Basic presumption applie[d] to their claims, defendants had the burden to come forward with evidence showing a lack of price impact.” The circuit held, however, that defendants met that burden, as they were able to show an absence of “‘front-end’ price impact.”
Plaintiffs brought claims regarding statements made by Best Buy concerning increased earnings per share (EPS) guidance in an 8 a.m. press release and related statements regarding EPS performance on a subsequent 10 a.m. conference call. The district court held that the statements in the press release were forward-looking and protected by the PSLRA’s Safe Harbor provision but found the statements in the analyst call, including the statement “we are on track to deliver and exceed our annual EPS guidance,” were not forward-looking. Claims based on the press release were therefore dismissed in August 2013. The district court denied defendants’ request to certify the interlocutory dismissal order for immediate appeal and plaintiffs then successfully moved for class certification based on Basic’s fraud-on-the-market presumption to prove the reliance element of their Rule 10b-5 claim.
At the certification stage, plaintiffs’ expert did not differentiate between the effects of the press release and the conference call with analysts. Instead, he opined that the alleged misrepresentations on the call had the same “economic substance” as the non-actionable statements made earlier the same day in the press release. In addition, plaintiffs’ event study showed that the non-actionable statements about EPS guidance in the press release had an immediate impact on the share price, whereas the statements made on the call did not. In reversing the district court’s order certifying a class, the circuit panel found that the “overwhelming evidence . . . rebutted the Basic presumption” and observed that the district court “ignored . . . that defendants . . . present[ed] strong evidence on this issue – the opinion of plaintiffs’ own expert.”
In so holding, the circuit majority rejected the plaintiffs’ argument that a price drop due to a corrective disclosure months later sufficiently established price impact, finding that the “allegedly ‘inflated price’ was established by the non-fraudulent press release,” not the subsequent statements. As a result, the plaintiffs “failed to satisfy the predominance requirement of Rule 23(b)(3), and the district court abused its discretion by certifying the class.”
Circuit Judge Murphy, dissenting, observed that plaintiffs relied on a “price maintenance” theory—i.e., that Best Buy “disclosed ‘confirmatory information’ [in the conference call] which fraudulently maintained its stock at a constant price and counteracted expected price declines.” Judge Murphy opined that Best Buy was required to rebut the Basic presumption of reliance “by producing evidence showing that the alleged misrepresentations had not counteracted a price decline that would otherwise have occurred,” which it did not do.