The U.S. Court of Appeals for the Eighth Circuit recently recognized a significant defense against class certification for defendants in federal securities fraud cases. In IBEW Local 98 Pension Fund v. Best Buy Co.,1 the Eighth Circuit held that the defendants rebutted the fraud-on-the-market presumption of class-wide reliance, and in doing so, the Eighth Circuit became the first federal appellate court to issue such a ruling after the Supreme Court's decision in Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (Halliburton II). The Eighth Circuit's ruling, which reversed the district court's decision to certify the securities fraud class, may provide defendants with a meaningful opportunity to challenge class certification by demonstrating that their alleged misrepresentations had no impact on the price of the stock at issue. Notably, in early June 2016, the Eighth Circuit declined to reconsider its prior reversal of class certification.
The Best Buy case involved allegations that the company made fraudulent statements when it released guidance in connection with its earnings. Best Buy made the alleged misstatements on September 14, 2010, both in a press release before the stock market opened and in a conference call with analysts later that day. Before the plaintiffs moved for class certification, however, the district court ruled that the company's statements in its press release were protected by the federal safe harbor securities laws regarding "forward looking" statements. Nevertheless, the district court refused to dismiss the plaintiffs' claims related to the alleged misstatements made by the company's CFO during the conference call with stock analysts.
The plaintiffs moved for class certification based upon the well-established fraud-on-the-market presumption of reliance, which was derived from the U.S. Supreme Court's decision in Basic, Inc. v. Levinson, 485 U.S. 224 (1988), and reaffirmed in Halliburton II. However, in Halliburton II, the U.S. Supreme Court also held that defendants have the right to rebut the presumption of reliance by, inter alia, providing evidence to demonstrate that the stock price was not actually affected by the alleged misrepresentations. In Best Buy, the defendants' expert established that the stock price increased only because of the press release before the stock market opened, and that the stock price before the conference call with the analysts was essentially the same as the price at that day's closing. Nevertheless, the district court certified the class after holding that the "price impact can be shown by a decrease in price following a revelation of the fraud" and that the defendants failed to offer "evidence to show that Best Buy's stock price did not decrease when the truth [of the stock's performance] was revealed."2 The district court then granted the defendants' request for an interlocutory appeal.
In a 2-1 decision, the Eighth Circuit reversed the district court's class certification and held that the district court "misapplied the price impact analysis mandated by Halliburton II."3 While both the district and appellate courts found that the plaintiffs adequately demonstrated a "prima facie case" to apply the fraud-on-the-market presumption of reliance, the Eighth Circuit found that the defendants presented "strong evidence" to establish that the alleged misrepresentations during the conference call with analysts did not impact Best Buy's stock price.4 Specifically, the defendants' expert demonstrated that Best Buy's stock price increased immediately after the company issued its press release and before the conference call at issue. Additionally, the defendants' expert established that there was no change in Best Buy's stock price after the conference call. As such, the appellate court found that the increase in the stock price occurred "after the press release but before the call."5
Lastly, the majority of the Eighth Circuit soundly rejected the plaintiffs' theory that the conference call statements "effected a gradual increase in stock price."6 Specifically, the appellate court held that such an argument runs contrary to the very premise of the fraud-on-the-market presumption from the Basic case: that the market will rapidly incorporate public information into a stock's price. The Eighth Circuit further noted that even the plaintiffs' own expert acknowledged that investors gave "great weight" to the press release statements.7
Notably, the Eighth Circuit did not require the Best Buy defendants to also show that the stock price's later decline—at the time of the purported "corrective disclosure"—was the result of the stock price's earlier inflation. Thus, the Best Buy decision demonstrates that, when defendants set forth a meaningful rebuttal of the fraud-on-the-market theory consistent with Halliburton II, district courts in the Eighth Circuit cannot certify a class based solely upon speculation as to whether the defendants’ purported misrepresentations "might have" prevented a stock price from declining or otherwise caused the artificial inflation of a stock price.
The Best Buy decision potentially creates a split in authority between the federal circuits. Specifically, as the dissenting opinion noted in Best Buy, the Seventh Circuit and the Eleventh Circuit have already upheld securities fraud claims in which the plaintiffs alleged that a company's stock price remained artificially inflated as a result of the defendants' supposedly false statements.8 Nevertheless, in light of Halliburton II and the Eighth Circuit's recent decision in Best Buy, the viability of plaintiffs' "price maintenance" theory appears to be in dispute, at least in the context of class certification.