In so holding, the Seventh Circuit issued guidance for remand. As to the scope of the evidence, the Court noted that Basic itself provides that “[a]ny showing that 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.” Basic, Inc. v. Levinson, 485 U.S. 224, 248 (1988). This “point deserves emphasis,” the Seventh Circuit stated, “because of its implications for managing discovery.” Decision at 21. “Given the significant and growing overlap between the evidence at stake at the certification and merits stages, district courts may well choose not to bifurcate discovery at all in putative fraud-on-the-market securities class actions.” Id.
As to managing the Basic presumption, the Seventh Circuit joined the Second Circuit’s decision in Waggoner v. Barclays PLC, 875 F.3d 79 (2d Cir. 2017) in recognizing “that the fraud-on-the-market presumption endorsed in Basic created a burden-shifting framework” such that “‘[once plaintiffs have made a prima facie showing] the burden of persuasion, not production, to rebut the Basic presumption shifts to defendants.’” Decision at 22 (quoting Waggoner, 875 F.3d at 103). On remand, the district court must assess whether Allstate has met its burden of persuasion by a preponderance of evidence.
The Allstate panel also affirmed the viability of the “inflation maintenance” theory which “requires plaintiffs ‘to prove . . . that the defendants’ false statements caused the stock price to remain higher than it would have been had the statements been truthful,’ even if the price itself does not change by a single cent.” Decision at 26 (distinguishing the legal concepts of price reaction and price impact). This decision is consistent with the Eleventh Circuit’s decision in FindWhat Investor Grp. v. FindWhat.com, 658 F.3d 1282, 1310 (11th Cir. 2011).
Finally, the Allstate panel held that the addition of a new class representative after the statute of limitations expired did not violate China Agritech, Inc. v. Resh, 138 S. Ct. 1800 (2018) because “[t]he practical implications of Allstate’s position would be arbitrary and unfair, and would undermine the purposes of American Pipe tolling and the larger purposes of Rule 23.” Decision at 31. In so holding, the Seventh Circuit explained that “[i]n China Agritech, the Supreme Court dealt with an entirely different statute of limitations issue for class actions: whether American Pipe tolling applies to successive attempts to file entirely new class actions, effectively stacking class actions in the hope that a court somewhere can be convinced to certify a class in another case, filed perhaps many years after the statute of limitations has expired.” Id. In the underlying case, however, “[p]laintiffs here sought only to rearrange the seating chart within a single, ongoing action.” Id. at 34. This was permissible because “[t]he whole point of American Pipe tolling is that such parties are entitled to watch and wait while the initial class representative pursues the case.” Id. at 33-34.
Practitioners should note that the Seventh Circuit’s affirmance of the price maintenance theory is consistent with the Eleventh Circuit’s FindWhat decision and the Second Circuit’s Waggoner decision, but may diverge from the Eighth Circuit’s decision in IBEW Local 98 Pension Fund v. Best Buy Co., 818 F.3d 775, 782 (8th Cir. 2016).
