On March 17, 2017, Judge Michael Watson of the United States District Court for the Southern District of Ohio certified a securities class action brought against Big Lots, Inc. (“Big Lots”) and various current and former officers for alleged misrepresentations in SEC filings in violation of the antifraud provisions of the Securities Exchange Act of 1934 (the “Exchange Act”). Willis v. Big Lots, Inc., No. 2:12-cv-00604 (S.D. Ohio Mar. 17, 2017). Plaintiffs alleged misleading statements concerning the company’s performance and ability to meet various sales targets. In holding that the requirements for class certification were satisfied, the court held notably that (i) being a value investor—including using investment advisors that made their own assessments of Big Lots’ intrinsic value—is insufficient, particularly at the class certification stage, to show that the lead plaintiffs were not typical representatives of the class; and (ii) where the stock price did not rise as the result of alleged misrepresentations, defendants still bore the burden of establishing a lack of price impact under the price maintenance theory.
In holding plaintiffs’ claims were “typical,” the Court rejected the argument that plaintiffs were subject to unique defenses because their investment advisors relied on their own research to determine the intrinsic value of Big Lots’ stock, rather than on market prices. Defendants argued this meant plaintiffs were not entitled to a presumption of reliance under Basic Inc. v. Levinson, 485 U.S. 224 (1988). In rejecting the argument, the Court relied on language in the Supreme Court’s decision in Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (“Halliburton II”), to explain (i) there is implicit reliance by value investors that the market price eventually will reflect material information, and (ii) value investors rely on market prices to generate their estimates of how undervalued or overvalued a stock might be.
The Court also held on the issue of “predominance” that defendants could not rebut the presumption of reliance by showing that Big Lots’ stock price did not rise following the alleged misrepresentations. In Halliburton II, the Supreme Court held that a defendant could rebut a presumption of reliance and defeat predominance by showing a lack of “price impact.” Some courts have held this requires an alleged misrepresentation to cause a company’s stock price to increase; others have held that the stock price does not necessarily need to increase because sometimes the misrepresentation “maintains” the stock price. Judge Watson held that price impact could be shown either by an increase following a misrepresentation or a decrease following a corrective disclosure, and that defendants bear the burden of showing that the alleged misrepresentations did not maintain Big Lots’ stock price. Defendants had urged Judge Watson to follow an earlier decision by the Eighth Circuit, which held that plaintiffs had the burden to support the price maintenance theory, but he declined. See Eighth Circuit Holds Presumption of Reliance Rebutted Under Halliburton II and Reverses Class Certification in Securities Action, Shearman & Sterling LLP Client Publication (Apr. 14, 2016).
This decision is a reminder of the challenges in rebutting the Basic presumption of reliance at the class certification stage, and provides an indication that the Eight Circuit’s view of the price maintenance theory may not spread more widely.