In June 2014, the Supreme Court issued its decision in Halliburton Co. v. Erica P. John Fund Inc. (“Halliburton II”), a putative class action in which Halliburton investors alleged that the company made misrepresentations designed to inflate its stock price, in violation of section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. 134 S. Ct. 2398 (2014). Of particular importance were two major holdings. First, the Court extended its holding in Basic Inc. v. Levinson, 485 U.S. 224 (1988) to allow putative securities fraud class members to prove the causation/reliance element of a securities fraud claim at the class certification stage “by invoking a presumption that the price of stock traded in an efficient market reflects all public, material information—including material misrepresentations.” Id. at 2414. Second, the Court held that securities class action defendants must be given the opportunity to rebut this presumption of reliance at the class certification stage by showing that their alleged misstatements didn’t actually impact the price of their stock. Id.
A year later, the ramifications of the Halliburton II decision are still developing. To date, no class action defendant in any published decision has successfully defeated class certification by rebutting the presumption of reliance under the Halliburton II framework. In fact, the cases that have interpreted Halliburton II over the past year have largely confirmed Justice Thomas’ comment in the Halliburton II dissent that “in practice, the so-called ‘rebuttable presumption’ is largely irrebuttable.” Id. at 2424.
For instance, last September the United States District Court for the Southern District of Florida rejected defendants’ attempts to rebut the presumption of reliance in a securities fraud putative class action. Aranaz v. Catalyst Pharm. Partners Inc., 302 F.R.D. 657, 673 (S.D. Fla. 2014). In Aranaz, the plaintiffs claimed that a pharmaceutical company had issued a press release containing material misrepresentations that affected the company’s stock price. Id. at 662. In an effort to rebut the plaintiffs’ presumption of reliance and defeat class certification, the defendants offered evidence, including expert testimony, to show that the alleged misrepresentations had no price impact. Id. at 669-72. The court held that the defendants had not successfully rebutted the presumption, noting that under the Halliburton II framework, once a plaintiff establishes the presumption of reliance, “the defendant is burdened with the daunting task of proving that the publicly known statement had no price impact.” Id. To this point, the court explained that “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.” Id. at 673.
While lower courts have declined to accept class action defendants’ attempts to rebut the presumption of reliance at the class certification stage, no federal appellate court has weighed in yet. Going forward, two pending decisions may provide more insight into the full effect of the Halliburton II decision.
First is the Halliburton II decision on remand. After the Supreme Court’s ruling, the case was remanded to the United States District Court for the Northern District of Texas for further proceedings. In December, the court held a hearing in which the parties each presented their economic evaluations of Halliburton’s stock price. Still trying to defeat class certification but this time with the Supreme Court’s affirmation that the presumption of reliance can be rebutted at the class certification stage, Halliburton is arguing that the alleged misinformation did not significantly impact the price of its stock. The court has not issued a decision to date.
Additionally, IBEW Local 98 Pension Fund v. Best Buy Co. is currently pending before the Eighth Circuit and will likely result in the first federal appellate court decision to weigh in on the impact of Halliburton II. In Best Buy, the plaintiffs brought a securities fraud class action alleging that Best Buy made material misrepresentations about the company’s fiscal well-being, which in turn affected the company’s stock price. See IBEW Local 98 Pension Fund v. Best Buy Co., 2014 U.S. Dist. LEXIS 127258, *1 (D. Minn. Sept. 11, 2014). On August 6, 2014, the United States District Court for the District of Minnesota granted the plaintiffs’ motion for class certification. Id. On August 19, 2014, the defendants filed an appeal with the Eighth Circuit seeking review of the trial court’s class certification order. Id. This appeal is currently pending before the Eighth Circuit. Specifically, the Eighth Circuit is expected to address the defendants’ argument that the trial court wrongly applied Halliburton II by certifying the class action despite proffered evidence that alleged misrepresentations had no impact on Best Buy’s stock price.
Some have argued that trial courts interpreting the Halliburton II decision thus far have failed to understand the true benefits the decision was intended to provide for defendants at the class certification stage. The outcomes of the Halliburton II remand decision and the Best Buy case will likely give defendants a better understanding of whether the presumption of reliance, though theoretically rebuttable, is actually rebuttable in practice. Further, if a class action defendant is able to rebut the presumption and defeat class certification in either of these cases, the types of evidence required to actually rebut a presumption of reliance at the class certification stage will become clearer. This information will likely impact class action defendants’ tactical decision of whether to even assert a rebuttal argument at the class certification stage, an argument which could reduce settlement leverage or be used by plaintiffs to argue loss causation.
Co-authored by Sammantha Tillotston.