March 26, 2019

Second Circuit Makes Class Certification in Securities Cases Easier

Sandra D. Grannum, Kevin DeMaio, and Edward J. Scarillo – December 6, 2017

On November 6, 2017, the Second Circuit clarified that plaintiffs do not need to provide an “event study” to demonstrate market efficiency at the class certification stage in putative class actions. Rather, courts will certify a putative class if plaintiffs can demonstrate sufficient indirect evidence of market efficiency. Waggoner v. Barclays PLC, No. 16-1912-cv (2d. Cir. Nov 6, 2017).

In Waggoner, plaintiffs filed a putative class action alleging that defendants violated section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. §78j(b) and the Securities and Exchange Commission’s Rule 10(b)-5 by making misrepresentations and omissions about the risk in a subset of Barclays’ alternate trading systems known as “dark pools.”

Section 10(b) requires a plaintiff to demonstrate that it relied on a misrepresentation or omission made by the defendant. For class certification purposes, plaintiffs may satisfy the FRCP section 23(b)(3) requirement of predominant questions of law or fact common to class members by either 1) demonstrating awareness of a company’s statement or 2) invoking the presumption of reliance established by the Supreme Court in Basic, Inc. v. Levinson, 485 U.S. 224 (1988). Basic presumes that the price of any stock is affected by public material information, including public material misrepresentations. Therefore, a public misrepresentation distorts the market value of a stock traded in an efficient market, and consequently any purchase taking place after such a misrepresentation is presumed to have relied on such misrepresentation. That presumption was modified in 2013 with Halliburton Co. v. Erica P. John Fund, Inc., when the Supreme Court permitted defendants to rebut the presumption of reliance by proving at the class certification stage, as well as at the merits stage, that any alleged misrepresentation had no price impact and, consequently, did not affect the stock’s price.

The Waggoner plaintiffs sought to take advantage of the Basic presumption. The Basic requirement at issue in Waggoner was whether the stock in question traded in an “efficient market,” which is a market where stock prices will be impacted by an entity’s publicly announced material statements. The Waggoner court examined whether indirect evidence of price impact was sufficient at the class certification stage. The Waggoner court noted that plaintiffs have often submitted “event studies” to demonstrate direct evidence of a cause-and-effect relationship between corporate events, such as public statements, and an immediate response in the stock price. However, here the Second Circuit declined to adopt a particular test for market efficiency. Instead, the court determined that plaintiffs “need not always present direct evidence of price impact through event studies.”

The court also addressed what burden defendants must carry to rebut the Basic presumption. The Waggoner defendants argued that they rebutted the Basic presumption, and that the district court erred by shifting to them the burden of persuasion, rather than merely the burden of production. The Second Circuit disagreed, holding that in order to rebut the Basic presumption and defeat class certification, defendants must disprove reliance by a preponderance of the evidence—rather than merely meeting a burden of production. This, coupled with the court’s analysis of what is required to demonstrate market efficiency, may allow plaintiffs before the Second Circuit to more easily attain class certification in actions involving allegations of securities fraud under section 10(b).

Sandra D. Grannum is a partner and Kevin DeMaio and Edward Scarillo are associates with Drinker, Biddle & Reath in Florham Park, New York.  


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Sandra D. Grannum, Kevin DeMaio, and Edward J. Scarillo – December 6, 2017