The very existence of most modern securities class actions rests on a presumption of reliance adopted by the Supreme Court decades ago in Basic Inc. v. Levinson, 485 U.S. 224 (1988). That presumption itself relies on fundamental assumptions about how efficient securities markets are supposed to operate. But the pandemic-era phenomenon of so-called “meme stocks”—and a pair of recent class certification decisions involving such stocks—has tested the limits of courts’ traditional application of Basic. Those courts diverged in their analysis of how a stock’s “meme” status affected the traditional market efficiency assessment. This article summarizes those decisions and the outlook on meme stock cases going forward.
Like any class action, a putative securities class action brought under section 10(b) of the Exchange Act must satisfy Federal Rule of Civil Procedure 23, including its requirement that “questions of law or fact common to class members predominate over any questions affecting only individual members.” Fed. R. Civ. P. 23(b)(3). That requirement—known as the “predominance” requirement—ordinarily would doom certification of putative securities fraud class actions on the reliance element. Specifically, “[i]nvestors can recover damages in a private securities fraud action only if they prove that they relied on the defendant’s misrepresentation in deciding to buy or sell a company’s stock.” Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258, 263 (2014). But “[i]f every plaintiff had to prove direct reliance on the defendant’s misrepresentation, individual issues then would . . . overwhelm[ ] the common ones, making certification under Rule 23(b)(3) inappropriate.” Id. at 268 (internal quotation marks omitted and alterations in original).
That roadblock to class certification explains why securities plaintiffs advanced—and the Supreme Court adopted in Basic—a “rebuttable presumption of reliance, rather than [making plaintiffs] prov[e] direct reliance.” Id. That Basic presumption itself rests on two factual assumptions about how the stock market and its participants operate:
Combining these assumptions, so the theory goes, “[b]ecause most publicly available information is reflected in market price, an investor’s reliance on any public material misrepresentations, therefore, may be presumed for purposes of a Rule 10b-5 action.” Id.
Nearly four decades after Basic, applying its rebuttable presumption of reliance in stock drop cases has become somewhat formulaic. Courts have developed and applied factors—known as the Cammer and Krogman factors—involving things like the average trading volume and the existence of analyst coverage to assess whether the market for a stock qualifies as “efficient” and is thus amenable to the Basic presumption. Waggoner v. Barclays PLC, 875 F.3d 79, 89 (2d Cir. 2017). And when a stock is traded on a major exchange like the New York Stock Exchange or the NASDAQ and otherwise exhibits no anomalous qualities, courts often treat market efficiency as effectively a foregone conclusion. E.g., Strougo v. Barclays PLC, 312 F.R.D. 307, 318 nn.68–69 (S.D.N.Y. 2016) (collecting cases).
That brings us to the rise of the so-called “meme stock.” In late 2020, amidst the COVID-19 pandemic, the popularity of online investing groups skyrocketed, most prominently through Reddit.com and its subreddit titled “r/wallstreetbets.” Groups of these social-media-inspired, typically nonprofessional investors would set their sights on stocks that were heavily shorted by institutional investors—i.e., stocks that those hedge funds and other institutional investors were betting would decrease in price. The meme stock contingent would buy and hold those stocks in order to put pressure on the institutional investors to cover their shorts—what is known as a “short squeeze”—and thus drive the stock price up even further as trading volume increased. The short squeezes were characterized by virtual battle cries like “Hold the line,” “To the moon,” and “YOLO” (meaning “you only live once”). See “What Are Meme Stocks, and Are They Real Investments?,” Investopedia (May 14, 2024). The most prolific of these meme stock campaigns involved the stock of GameStop, which investors caused to experience a more than 700 percent price increase in less than a week’s time in January 2021. See Shupe v. Rocket Cos., Inc., 2024 WL 4349171, at *14 (E.D. Mich. Sept. 30, 2024) (summarizing the meme stock concept generally and the GameStop saga specifically).
Why does the meme stock phenomenon matter for the Basic presumption? Because meme stocks raise fundamental questions about Basic’s assumptions for how securities markets operate. If, as Basic assumes, securities in an efficient market reflect all publicly available information and investors trade based on the integrity of that market price, the meme stock paradigm pits those assumptions against investors whose trading patterns arguably are totally untethered from the market price or what it reflects and instead reflect a coordinated desire to manipulate the stock price as a means of retaliating against institutional investors.
Seizing on these unique attributes of a meme stock, certain defendants in recent putative securities fraud class actions have opposed class certification on the basis that the relevant stock’s meme-stock status renders Basic’s presumption of reliance inapplicable and, thus, Rule 23(b)(3)’s predominance requirement unsatisfied. While the issue is still in its nascent stages, courts have issued two recent decisions on the interplay between meme stocks and the Basic presumption. We summarize those decisions—and a potential emerging split in authority—below.
In Bratya SPRL v. Bed Bath & Beyond Corp., the district court concluded that while the Cammer and Krogman factors remained relevant for assessing market efficiency in the meme stock context, they were nonetheless considerably less compelling in that case. 2024 WL 4332616, at *12–14 (D.D.C. Sept. 27, 2024). Although the plaintiff had “technically satisfie[d]” most of the factors, the court recognized that the factors can take on a different meaning when viewed through the lens of meme stock volatility. Id. at *11.
For instance, the first Cammer factor considers whether the stock had a large weekly trading volume, on the theory that significant investor interest in a company presumably reflects investors executing trades on the basis of newly disseminated corporate information. But instead of interpreting Bed Bath & Beyond’s weekly trading volume (exceeding 1,300 percent of total shares outstanding during the class period) as supporting the Basic presumption of market efficiency given that it far surpassed the 2 percent threshold courts typically deem sufficient, the Bratya court concluded that it was more likely indicative of market manipulation. Id. at *14 (“It is far more plausible that the high trading volume was not incorporating the market’s view of the stock, but the opposite: pumping up the stock’s price without any regard to value-relevant information.”).
Similarly, a high level of analyst coverage for the stock (the second Cammer factor) in theory supports the presumption of market efficiency because it suggests that corporate information is being widely distributed. But the Bratya court looked beyond the number of analysts covering the stock to what those analysts actually said: that the dramatic price increases “were not attributable to any significant fundamental catalyst,” and there were “no corporate developments that may have seemingly moved shares.” Id. at *13.
All told, the court credited the defense expert’s position that most of the Cammer and Krogman factors are “static” indicators, which can “provide some evidence of baseline efficiency.” Id. at *13–14. Those factors are of limited use, however, in evaluating whether a particular market experienced a temporary period of inefficiency. Id. And there was good reason to believe the market for Bed Bath & Beyond stock underwent such a period. The court concluded that severe short-selling constraints during the class period likely impeded market efficiency “since traders [could not] easily incorporate their negative view of [the] stock into its price.” Id. at *15–16. The court determined that this additional evidence, while “not definitive,” further “weigh[ed] against” the plaintiff’s marginal showing of market efficiency under most of the Cammer factors. Id. at *16.
Against this backdrop, the court finally considered the “sine qua non” of efficiency—the one Cammer factor that is a “direct,” rather than “indirect,” indicator of market efficiency: “evidence of a cause-and-effect relationship between unexpected news and market price,” which typically takes the form of an “event study” that examines a stock’s historical response to the release of value-relevant information. Id. According to the court, this direct evidence is perhaps “more critical” in the meme stock context, where the other Cammer and Krogman factors may carry diminished force. Id.
The court ultimately found that the plaintiff’s event study (a study designed to test that cause-and-effect relationship) fell short because, among other things, it focused on an earlier period when Bed Bath & Beyond stock “was not showing the same high trading volume and price volatility.” Id. at *18. Accordingly, the plaintiff’s event study did not resolve the court’s “concerns that the short squeeze dynamics prevalent during the Class Period may have rendered BBBY’s market temporarily inefficient.” Id.
In denying class certification, the court emphasized that the Cammer and Krogman factors still apply to short squeezes. Id. at 21. But the court held that, on the record before it, the plaintiff had not “muster[ed] enough evidence to trigger Basic.” Id. The plaintiff merely “default[ed] to the standard Cammer factors,” without meaningfully engaging the meme stock issue or the defendant’s arguments that “undercut[ ] their relevance at every turn” in that case. Id.
Three days later, the court in Shupe v. Rocket Companies, Inc., rejected the defendant’s argument that the meme stock status of Rocket Companies “preclude[d] Plaintiffs from demonstrating market efficiency.” 2024 WL 4349172, at *19 (E.D. Mich. Sept. 30, 2024).
The facts in Shupe were different. Unlike in Bratya, where Bed Bath & Beyond’s stock was gripped by a meme-stock-infused short squeeze during the entire weeklong class period, the stock of Rocket Companies experienced a two-day meme-stock “trading frenzy” during a longer, two‑month class period. Id. at *19; compare id. at *12 (Rocket’s weekly trading volume was “over 110% of shares outstanding”), with Bratya, 2024 WL 4332616, at *13 (Bed Bath & Beyond’s weekly trading volume was “1,346.6 percent of total shares outstanding”).
In evaluating the plaintiffs’ proof of market efficiency, the court first engaged in a routine analysis of the Cammer and Krogman factors, several of which the defendant did not dispute. Shupe, 2024 WL 4349172, at *11–17. Addressing the Cammer factor providing the “‘best’ and most ‘direct’ evidence of market efficiency,” the court noted that the plaintiffs’ expert had concluded, based on an event study, that “100% of Rocket’s earnings announcements had a statistically significant price impact” during the class period. Id. at *15.
As for the defendant’s argument that Rocket’s meme stock status “outweigh[ed] all other” considerations, id. at *19, the court ultimately was “not convinced that Rocket’s two-day meme stock status . . . render[ed] the market for Rocket stock inefficient, let alone throughout the entire two-month Class Period.” Id. at *24. The court determined that “even if Rocket’s meme-stock status suggested market inefficiency, it would not outweigh” the other factors pointing the other way. Id. (emphasis in original).
The court largely side-stepped the defendant’s argument that Rocket’s two-day trading frenzy “created short-selling frictions” throughout the class period that suggested market inefficiency. Id. at *21–22. In contrast to the more fact-intensive analysis employed by the Bratya court, the court in Shupe reasoned more broadly that considerations specific to a meme stock were “inapposite” to its market-efficiency analysis. Id. at *19, *22–23. First, the court likened meme stock investors to the “value investors” that the Supreme Court in Halliburton recognized do not undermine market efficiency. Id. at *22–23 (quoting Halliburton, 573 U.S. at 273). Second, the court relied on the Supreme Court’s observation in Halliburton that “‘[d]ebates about the precise degree to which stock prices accurately reflect public information are largely beside the point,’ since stock price inaccuracies ‘do not detract from the fact that false statements affect it, and cause loss.’” Id. (quoting Halliburton, 573 U.S. at 272) (emphasis in original).
In the end, while the court held that the plaintiffs had invoked the Basic presumption, the court went on to deny class certification because the defendant had successfully rebutted it with proof of lack of price impact. Id. at *24.
Read together, these cases signal that defendants may not be able to simply wave the meme stock talisman in class certification battles and that plaintiffs may not be able to rest comfortably on rote evidence under the Cammer and Krogman factors. It remains to be seen whether a true split of authority is emerging, or whether these divergent decisions were mostly driven by the particular evidence and arguments before each court.
Although the Shupe court invoked broadly applicable legal principles, their salience in the context of meme stocks is likely to be the subject of further debate. For example, that a stock price may be inaccurate, to be sure, does not preclude the presumption of market efficiency. Shupe, 2024 WL 4349172, at *23. Basic just requires that the market react to publicly available information. Bratya, 2024 WL 4332616, at *9. And that requirement can be met even if the market reacts irrationally, such that the stock price does not reflect the stock’s fundamental value. Id. But, as the Bratya court and others have noted, evidence of “fundamental value” efficiency cannot always be neatly disentangled from “information” efficiency. Id. at *10. They often “go hand-in-hand,” id., because an inaccurate stock price can indicate that value-relevant information is not impounded in the price.
In addition, both cases focused principally on the first factual assumption underlying Basic—that stock prices reflect all publicly available information. The Bratya court did not go further and consider the second assumption—whether, during a meme stock event, most investors do in fact buy or sell the stock in reliance on the integrity of the market price. The Shupe court’s discussion of “value investors” does implicate Basic’s second factual assumption. But are meme stock traders truly akin to “value investors”—those investors “who make their own estimation of the value of a publicly-traded company’s securities and attempt to buy such securities when the market price is lower than its own valuation”? GAMCO Invs., Inc. v. Vivendi Universal, S.A., 838 F.3d 214, 216 (2d Cir. 2016). Traditional meme stock investors do not trade based on the belief that a stock is inherently undervalued or overvalued; rather, they trade with nihilistic indifference to the stock’s intrinsic value. Moreover, if they are akin to value investors, does it remain true in a meme stock event that “most investors” are nonetheless trading in reliance on the integrity of the market price, as the Supreme Court’s discussion in Halliburton assumed? 573 U.S. at 273 (emphasis in original).
These issues are expected to remain a focus of continued consideration by courts and litigants.
