Fifth Circuit Holds That Securities Fraud Defendants May Not Rebut the Fraud-on-the-Market Presumption at the Class Certification Stage Through Evidence of No Price Impact

by Sheppard Mullin Richter & Hampton LLP
Contact

In Erica P. John Fund, Inc. v. Halliburton Co., No. 12-10544, 2013 WL 1809760 (5th Cir. Apr. 30, 2013), the United States Court of Appeals for the Fifth Circuit held that a defendant in a securities fraud class action is not entitled to rebut the fraud-on-the-market presumption of reliance at the class certification stage by showing the alleged misstatement caused no market price impact. The Fifth Circuit adopted the same analysis the United States Supreme Court used in Amgen Inc. v. Connecticut Ret. Plans and Trust Funds, 133 S. Ct. 1184 (2013) [blog article here]. There, the Court held that class certification procedures afford securities fraud defendants no right to rebut the presumption through evidence showing the alleged misstatements were not material. The Fifth Circuit’s opinion now extends Amgen by further narrowing the range of rebuttal evidence a district court may consider at the class certification stage.

Plaintiff alleged that Halliburton Co. (“Halliburton”) and its CEO made a series of public misstatements concerning the company’s liabilities and revenues and the cost savings expected from a recent merger. These misstatements purportedly inflated Halliburton’s stock price. According to plaintiff, when Halliburton eventually revealed the truth, the stock price fell, injuring plaintiff and other investors who purchased at the allegedly inflated prices. Plaintiff, on behalf of a putative class, asserted claims against Halliburton and its CEO for violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities & Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder.

Plaintiff moved for class certification under Rule 23 of the Federal Rules of Civil Procedure, seeking to satisfy Rule 23(b)(3)’s requirement that common questions predominate by invoking the fraud-on-the-market presumption of reliance. That presumption, when it applies, allows for common proof of reliance on the theory that investors rely upon the integrity of a stock’s trading price and, when the stock trades in an efficient market, such price reflects all public information, including any alleged material misstatements. See Basic, Inc. v. Levinson, 485 U.S. 224, 241-42 (1988). Plaintiff failed, however, to prove loss causation, a fraud-on-the-market prerequisite in the Fifth Circuit at the time (see Oscar Private Equity Investments v. Allegiance Telecom, Inc., 487 F.3d 261 (5th Cir. 2007)), and the district court denied its motion. The appeal of that order reached the Supreme Court, which reversed after concluding loss causation is not among the presumption’s prerequisites. See Erica P. John Fund, Inc. v. Halliburton, 131 S. Ct. 2179, 2184 (2011). On remand, Halliburton further opposed class certification by arguing the alleged misstatements did not in fact affect the market price of the stock. The district court, however, declined to consider the evidence, finding it did not bear on the Rule 23(b)(3) predominance question, and certified the class. Halliburton appealed.

The Fifth Circuit affirmed. It first reviewed Supreme Court precedent. Citing Basic, the Court acknowledged that a defendant is entitled to rebut the fraud-on-the-market presumption by using any showing that “severs the link” between the misrepresentations and the price paid for the security. It also noted, however, that Basic did not decide the extent to which a defendant is entitled to rebut the presumption at the class certification stage. The Fifth Circuit next described Amgen as making clear that at least one prerequisite to proving the fraud-on-the-market presumption on the merits — materiality — is not necessary to justify certification. Amgen instead held that, because materiality is itself a separate Rule 10b-5 element, a failure to prove materiality on the merits causes all claims to fail, leaving no individual issues to adjudicate, much less predominate.

Turning to price impact issue before it, the Fifth Circuit agreed with Halliburton that the absence of price impact removes the basis for presuming the market price of a security in fact transmitted the alleged fraudulent statements. It also agreed that unlike materiality, price impact is neither a Rule 10b-5 element nor a distinct fraud-on-the-market predicate, but rather is probative of the presumption as a whole, and generally rebuts it as a showing that “severs the link” between the fraud and price paid. Nevertheless, the Fifth Circuit deemed the “pivotal inquiry” to be whether a determination of price impact is needed to ensure that common questions predominate under Rule 23(b)(3). It identified the Supreme Court’s Amgen opinion as supplying the proper analytical framework to answer that question.

The Fifth Circuit applied Amgen’s two-part approach. The first question under Amgen asks whether the rebuttal evidence at issue is common to the class. Since price impact evidence measures the alleged misstatement’s effect on the security’s share price, it undoubtedly is common. This answer suggests a district court should not address the evidence at the class certification stage.

The second Amgen question asks whether a failure to show price impact on the merits will cause individual reliance questions to predominate. In other words, does the absence of price impact proof, like the materiality issue in Amgen, “cause all plaintiffs’ claims to fall together?” As price impact is, unlike materiality, not a substantive element of a Rule 10b-5 fraud claim, Halliburton argued that even absent price impact, individual plaintiffs could still pursue viable individual Rule 10b-5 claims.

The Fifth Circuit disagreed. “Although the 10b-5 fraud action does not expressly require proof of price impact as an element of the claim, a plaintiff must nevertheless prevail on this fact in order to establish another element on which the plaintiff does bear the burden of proof: loss causation.” The Court explained that if Halliburton succeeded in showing no price impact (i.e., that stock prices did not increase in response to the alleged misstatements), Halliburton would also necessarily show the alleged corrective disclosures could not have caused any decrease in price. But such decrease — loss causation — is a substantive Rule 10b-5 element, and, without it, all individual plaintiffs’ claims would fail. For this reason the Fifth Circuit concluded that evidence of no price impact posed no risk that individualized questions would predominate and, therefore, did not bear on the district court’s predominance inquiry.

In light of the Supreme Court’s decisions in Halliburton and Amgen, it comes as no surprise that the Fifth Circuit would hold that evidence of no price impact may not be used to rebut the fraud-on-the-market presumption at the class certification stage. That evidence may still be used at summary judgment or trial to undermine several elements of the plaintiffs’ claim, including reliance (through rebuttal of the fraud-on-the-market presumption), materiality and damages.

Written by:

Sheppard Mullin Richter & Hampton LLP
Contact
more
less

Sheppard Mullin Richter & Hampton LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!