In its Halliburton II decision, the Supreme Court held that a securities fraud defendant can overcome the fraud-on-the-market presumption of reliance at the class certification stage of a case “through evidence that the misrepresentation did not in fact affect the stock price.”  Courts continue to interpret the scope of that ruling.

A recent decision from the Southern District of Florida, for example, explores the extent that a defendant’s rebuttal can be based on something other than an event study (i.e., an empirical analysis of the impact of certain information on a stock’s price).  In Aranaz v. Catalyst Pharmaceutical Partners, Inc., 2014 WL 4814352 (S.D. Fla. Sept. 29, 2014), the defendants were alleged to have falsely claimed that there was no effective and available treatment for Lambert-Eaton Myasthenic Syndrome (LEMS).  At class certification, the defendants argued (among other things)that the fraud-on-the-market presumption was inapplicable because the truth about the existence of such a LEMS treatment “was already known to the public and the alleged misrepresentation therefore could not have impacted the price of Catalyst common stock.”

The court found that this “truth-on-the-market defense,” however, “is merely an argument that the alleged misrepresentation was immaterial in light of other information on the market.”  Because the Supreme Court, in its earlier Amgen decision, had held that materiality cannot be used to indirectly rebut the fraud-on-the-market presumption at class certification, the court concluded that it could not consider “evidence that the truth was known to the public” in reaching its decision.

Held: Class certification granted.

Quote of note: “Here, Defendants’ burden is particularly onerous; not only is there a clear and drastic spike following the alleged misrepresentation and an equally dramatic decline following the revelation of the truth, but all agree that the publications containing the misrepresentation and its revelation respectively caused those price  swings. Under these circumstances, proving an absence of price impact seems exceedingly difficult, especially at the class certification stage in which it must be assumed that the alleged misrepresentation was material.”