On November 6, 2017, the United States Court of Appeals for the Second Circuit affirmed a class certification order in a case concerning claims under the Securities Exchange Act of 1934 (the “Exchange Act”) relating to the operation of alternative trading systems (so-called “dark pools”). Waggoner v. Barclays PLC, No. 16-1912-cv, -- 3d. -- (2d Cir. Nov. 6, 2017). Plaintiffs—three individuals who purchased American Depository Shares in Barclays PLC—asserted claims against Barclays PLC, its U.S. subsidiary Barclays Capital Inc., and three senior officers of the companies, based on allegedly misleading statements indicating that Barclays monitored its alternative trading system (known as Liquidity Cross or “LX”) to protect clients from high-frequency traders. In affirming class certification based on the presumption of reliance in Basic Inc. v. Levinson, 485 U.S. 224 (1988), the Second Circuit held that direct evidence of price impact is not always required in order to demonstrate market efficiency.

The district court had granted class certification, finding that the predominance requirement for certification was satisfied under the presumptions of reliance contained in both Basic and Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972). In Affiliated Ute, the Supreme Court explained that, in a case involving primarily a failure to disclose, positive proof of reliance is not required. The district court found that the Affiliated Ute presumption applied because “a case could be made that it is the material omissions, not the affirmative statements, that are the heart of this case,” and further that it was “far more likely that investors would have found the omitted conduct,” as opposed to the misstatements, material. Slip op. at 27. The Second Circuit disagreed, noting that the Affiliated Ute presumption of reliance does not apply where plaintiff points to specific statements that are rendered misleading by material omissions or even where the allegedly misleading nature of such statements is “exacerbated” by the omission. Instead, the Second Circuit reiterated that the Affiliated Ute presumption of reliance is appropriate only where “reliance as a practical matter is impossible to prove.” Id. at 41. Because plaintiffs alleged numerous affirmative misstatements regarding Barclays’ LX system, and the omissions that were alleged directly related to specific alleged misstatements, the Affiliated Ute presumption did not apply. Id. at 43-44.

The Court, however, affirmed the class certification based on the Basic “fraud-on-the-market” presumption of reliance, rejecting defendants’ argument that plaintiffs had not sufficiently demonstrated market efficiency because they had not shown that the price of Barclays’ securities reacted to new information.[1] This holding expanded on the Court’s recent decision in In re Petrobras Securities, 862 F.3d 250 (2d Cir. 2017), petition for cert. filed (U.S. Nov. 1, 2017) (No. 17-664), which noted that the burden of establishing market efficiency could be met through a combination of direct and indirect evidence, including, but not limited to, the so-called Cammer factors set forth in Cammer v. Bloom, 711 F. Supp. 1264 (D.N.J. 1989). See Second Circuit Partially Vacates Class Certification, Holding That Whether Securities Transactions Are “Domestic” Raises Predominance Issues; Clarifying Ascertainability Test Under Rule 23; And Reiterating Holistic Analysis For Market Efficiency, Shearman & Sterling LLP Need to Know Litig. Newsletter (July 11, 2017), http://www.lit-sl.shearman.com/second-circuit-partially-vacates-class-certificat. Although plaintiffs established four of the five Cammer factors,[2] and the three so-called Krogman factors,[3] Barclays challenged whether the efficiency of the Barclays ADS market had been sufficiently demonstrated in this case because plaintiffs had not established (and the district court had not found) direct evidence of price impact (the fifth Cammer factor). Whereas in Petrobras the Second Circuit declined to decide whether plaintiffs could satisfy the Basic presumption without any direct evidence of price impact, in this case it found that direct evidence was not required based on the presence of the other Cammer and the Krogman factors. The Court noted, however, that direct evidence of price impact may be required in other cases if other Cammer factors are not established, and moreover that “securities of large publicly traded companies [may not] always trade in an efficient market,” thus requiring direct evidence of price impact. See slip op. at 54 n.29.

The Court separately rejected defendants’ argument that the district court erred by imposing a burden of persuasion on defendants to rebut the Basic presumption, rather than a mere burden of producing evidence that could permit a trier of fact to rule in defendants’ favor. In Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (“Halliburton II”), the Supreme Court held that defendants could rebut the Basic presumption by establishing that either (i) the alleged misrepresentation did not affect the market price, or (ii) the plaintiff would have bought or sold the security regardless. The Second Circuit reasoned that it would be inconsistent with Halliburton II to allow defendants to rebut the Basic presumption by producing only limited evidence of market inefficiency. Instead, the Court held that a defendant seeking to rebut the Basic presumption by demonstrating a lack of price impact must make that showing by a preponderance of the evidence.

Although the Waggoner decision is binding only within the Second Circuit, it is significant in that it builds on the Second Circuit’s decision in Petrobras (in which a petition for Supreme Court review has been filed) to clarify that direct evidence of price impact is not always required to satisfy the Basic presumption of reliance. It may also be helpful to defendants in clarifying the limited applicability of the Affiliated Ute presumption where alleged omissions also relate to specific alleged misstatements.

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