The Best Buy decision out of the Eighth Circuit Court of Appeals, issued on April 12, 2016, is the first appellate court opinion interpreting and applying the rebuttable presumption of reliance standard at the class certification stage following the Supreme Court’s decision in Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (Halliburton II). And it is a definite win for defendants seeking to defeat rule 10b-5 class actions. In a 2-to-1 decision, with Judge Murphy dissenting, the court reversed the trial court’s decision certifying a class of purchasers of Best Buy stock between September and December of 2010. The trial court held that Defendants had failed to rebut the Basic v. Levinson presumption by “establishing that the challenged statements did not impact Best Buy’s publicly-traded stock price.” On appeal, the Eighth Circuit concluded that the trial court misapplied the price-impact analysis mandated by Halliburton II.
Before the court on appeal was the district court’s finding of predominance under rule 23 and the question of whether the defendants had adequately rebutted the fraud-on-the-market presumption of reliance such that certification of the class was improper. The court noted that, as the Supreme Court held in Halliburton II, if a defendant rebuts the presumption, the class should not be certified because individual questions of reliance will predominate over common questions of law and fact. Therefore, establishment of the presumption “is critical to a Rule 10b-5 plaintiff’s burden to establish that a class action should be certified.”
In support of their motion for class certification, the plaintiffs submitted an expert report and event study concluding that the company’s stock price increased in reaction to three allegedly misleading statements (one in a press release and two on an earnings call two hours later), without distinguishing the effects that occurred for each. Not surprisingly, the defendants rebutted the plaintiffs’ report with their own expert’s event study and report, which found that the rise in Best Buy’s stock price occurred after the first statement (in the press release, which contained appropriate safe-harbor cautionary language about forward-looking statements, and therefore, was not actionable) but before the guidance call in which the additional alleged misstatements were made. Because the price of the stock was virtually identical right before and after the call, the defendants’ expert concluded that the statements on the call had no discernable impact on the stock price. In response, the plaintiffs’ expert issued a revised report acknowledging that the statements on the call did not “immediately increase the stock price,” but claiming that they “fraudulently maintained” the price until the corrective disclosure was made in December, when another press release was issued reporting a decline in the preceding quarter’s sales (contrary to the statements made in September about earnings being on track and in line with expectations).
The court stated that, while it was clear the plaintiffs had made a prima facie showing of the presumption of reliance for purposes of class certification, per Halliburton II, an additional question must be answered at the class certification stage. That is, whether the defendants had rebutted the presumption with evidence showing an absence of price impact, which “severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at a fair market price.” The district court found that the defendants did not adequately rebut the presumption. Instead, it found the plaintiff’s expert’s revised opinion persuasive, agreeing with him that the defendant’s alleged misstatements on the call could have “further inflated the price, prolonged the inflation of the price, or slowed the rate of fall.” The Eighth Circuit disagreed, stating that the district court ignored the defendants’ “strong evidence” showing a lack of price impact—i.e., ‘the opinion of Plaintiffs’ own expert.’” (emphasis in original). Most notably, the plaintiffs’ expert’s event study showed that the statements in the press release had an immediate impact on the stock price, whereas “the confirming statements in the conference call two hours later had no additional price impact.” Additionally, the court rejected the plaintiffs’ contention that the conference call statements effected a gradual increase in the stock price, finding such theory directly contrary to the efficient market hypothesis on which the Basic presumption is founded. The problem for the plaintiffs, in essence, was that any price inflation was admittedly (by the plaintiffs’ own expert) attributable to the first statements made in the press release, which were not actionable, and not to the statements made in the conference call. Accordingly, any “correction” to the stock price following the December press release was logically linked to the non-fraudulent statements from the first press release and not to the earnings call. Thus the court reversed certification and remanded for further proceedings.
The dissent strenuously disagreed with the majority opinion, arguing that the majority misapplied the presumption of reliance standard at the certification stage. The dissent made three key points in taking issue with the majority opinion: (1) that the defendants could have rebutted the presumption (to the plaintiffs’ price maintenance theory) by showing that “the alleged misrepresentations had not counteracted a price decline that would otherwise have occurred, but they failed to do so; (2) that the majority focused on the “gradual increase” theory over the price maintenance theory, which was ignored, causing the Eighth Circuit to diverge from other circuit courts that have recognized the theory; and (3) that the court’s finding that the statements in the press release and earnings call were nearly identical was factually inaccurate and an improper finding as to materiality (of the statements on the call), which is not permitted at the class certification stage.
The impact of the Best Buy decision on pending and new securities class actions remains to be determined. Undoubtedly, the defendants will rely on the court’s reasoning rejecting the gradual price increase theory as well as its implicit rejection of the more accepted (in other circuits) price maintenance theory and seek to defeat class certification following the template of the Best Buy expert where applicable and possible. On the other side, the plaintiffs will seek to distinguish the opinion and encourage courts in other circuits to disregard it as a poorly reasoned anomaly. Regardless, in the post-Halliburton II class certification era, the score stands at defendants one, plaintiffs zero. Stay tuned.
Laura J. O'Rourke is a partner with Baker McKenzie in Dallas, Texas.