On April 12, 2016, the Eighth Circuit became the first court of appeals to interpret and apply Halliburton Co. v. Erica P. John Fund, Inc., 134 S.Ct. 2398 (2014) (“Halliburton II”), in which the Supreme Court held that direct and indirect evidence of a lack of price impact may be presented by Rule 10b-5 defendants at the class certification stage to rebut the “fraud-on-the-market” presumption established by Basic v. Levinson, 485 U.S. 224, 241–47 (1988).
In IBEW Local 98 Pension Fund, et al. v. Best Buy Co., Inc., et al., 818 F.3d 775 (8th Cir. 2016), the majority of a divided three-judge panel held that a district court had abused its discretion in certifying a class under Rule 23, where the defendants had provided “overwhelming evidence” that statements challenged by the plaintiffs had not affected the price of Best Buy’s common stock.
Legal Background: Basic and Halliburton II
Until 1988, when the Supreme Court decided Basic, Rule 23’s commonality requirement was a major impediment to certification in securities cases, because the reliance element of a Rule 10b-5 claim often implicated facts specific to individual investors. Basic transformed the landscape of securities litigation by allowing entire classes of investors to invoke a “fraud-on-the-market” presumption of reliance, eliminating the need for each investor to demonstrate actual reliance. The Basic presumption is based on the theory that because the price of any stock traded on an efficient market reflects all public information, anyone who purchases such a stock when its price has been inflated by a material misrepresentation can be presumed to have relied upon that misrepresentation. 485 U.S. at 246–47.
In Halliburton II, the Supreme Court was given an opportunity to overrule or modify Basic but declined to do so, emphasizing instead that the “fraud on the market” presumption is rebuttable, and holding that “defendants must be afforded an opportunity before class certification to defeat the presumption through evidence that an alleged misrepresentation did not actually affect the market price of the stock”—a chance to show, in other words, that there was no “price impact.” 134 S.Ct. at 2416-17.
Factual Background and the District Court’s Decision
In Best Buy, plaintiffs alleged that the company and three of its executives made false or misleading statements in a press release issued at 8:00 a.m. on September 14, 2010, and an analyst conference call held at 10:00 a.m. the same day. Specifically, plaintiffs initially challenged three statements: one from the 8:00 a.m. press release increasing Best Buy’s earnings-per-share (EPS) guidance for FY 2011, and two from the 10:00 a.m. conference call, that “we are on track to deliver and exceed our annual EPS guidance” and “our earnings are essentially in line with our original expectations for the year.” Best Buy, 818 F.3d at 777-78. The district court allowed the plaintiffs to proceed based on the latter two statements, but dismissed their claim as to the press release statement, holding that increasing the EPS guidance was a forward-looking statement protected by the Safe Harbor provision of the Reform Act. Id. at 778.
With the press release statement out of the case, plaintiffs moved for class certification, relying on Basic’s fraud-on-the-market presumption to satisfy the commonality requirement. The district court stayed the plaintiffs’ motion pending the outcome of Halliburton II, then granted the motion, certifying a class of all Best Buy purchasers between the 10:00 a.m. conference call on September 14 and the release of the “corrective” earnings report three months later. Id. at 777. In doing so, the district court held that defendants had failed to rebut the Basic presumption, because while they had shown that the price of the stock did not increase after the conference call, they failed to show that the conference call statements did not artificially maintain the stock’s price. Id. at 782.
The Eighth Circuit’s Opinion
On interlocutory appeal, the Eighth Circuit focused on whether the district court had properly evaluated the price impact evidence offered by the defendants to rebut the Basic presumption—and in particular, whether the district court was correct to conclude that plaintiffs could continue to rely on the presumption even though defendants had shown that there was no “front-end” price impact immediately following the conference call.
An expert offered by plaintiffs before the district court had opined that although the forward-looking EPS guidance in the 8:00 a.m. press release led to an immediate increase in the stock price, the challenged statements in the conference call two hours later had no additional price impact. This expert also concluded that the “economic substance” of the EPS guidance in the press release was “virtually the same” that of the alleged misstatements in the conference call, and that investors gave the EPS guidance “great weight.” A defense expert agreed. Id.
In the Eighth Circuit’s majority opinion, Judge Loken held that this expert testimony constituted “overwhelming evidence of no ‘front-end’ price impact.” Id. at 782. Although the price of Best Buy stock did decline following the December 14 “corrective” earnings report, which the plaintiffs cited as evidence to support their price maintenance theory, plaintiffs’ own expert’s opinion showed that “the allegedly ‘inflated price’ was established by the non-fraudulent press release,” thereby severing “[any] link between the alleged conference call misrepresentations and the stock price at which plaintiffs purchased.” Id. at 782-83. In the absence of any additional evidence of price impact, Judge Loken concluded, the plaintiffs had failed to satisfy Rule 23, and the district court had abused its discretion in certifying the class. Id. at 783.
Judge Murphy, writing in dissent, argued that the majority had “ignore[d]” plaintiffs’ price maintenance theory, which supported an unrebutted fraud-on-the-market presumption of reliance sufficient to support class certification. Where plaintiffs rely on such a theory, she wrote, the defendant must rebut the Basic presumption “by providing evidence showing that the alleged misrepresentations had not counteracted a price decline that would otherwise have occurred”—and yet the Best Buy defendants had offered no such evidence. Id. at 784.
Judge Murphy also noted that the Seventh and Eleventh Circuits have recognized claims based on an allegation that false statements averted the decline of an artificially-inflated stock price. Id. at *8 (citing FindWhat Inv’r Grp. v. FindWhat.com, 658 F.3d 1282, 1313-15 (11th Cir. 2011) and Schleicher v. Wendt, 618 F.3d 679, 683-84 (7th Cir. 2010)).
Although it is not clear that the Best Buy majority sought to foreclose price maintenance arguments as a general matter, the court’s rejection of plaintiffs’ theory does at least raise the possibility of a circuit split regarding their viability.