Eleventh Circuit Affirms Securities Fraud Class Certification, Remands for Evidence to Rebut Presumption of Market Efficiency

by Carlton Fields
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In Local 703 v. Regions Financial Corp., No. 12:14168 (Aug. 6, 2014), the Eleventh Circuit reviewed the certification of a securities fraud class action brought by investors against Regions for allegedly misrepresenting its asset value and financial stability during the financial crisis, purportedly resulting in artificially high stock prices. 

The district court found that all class certification requirements had been met, and that the investors had introduced sufficient evidence of market efficiency to justify the invocation of what is known as the Basic presumption, created by the Supreme Court in Basic Inc. v. Levinson, 485 U.S. 224, 245, 108 S. Ct. 978, 990 (1988).  Under Basic, plaintiffs can benefit from a rebuttable presumption of class wide reliance based on the theory that an efficient market necessarily reflects all publicly available information, including misrepresentations.  For the presumption to apply, a plaintiff must first demonstrate the existence of certain factors including market efficiency.

On appeal, Regions argued that it had been denied the opportunity to rebut the Basic presumption with evidence that its stock price did not change in the wake of any of the alleged misrepresentations. 

Relying on the Supreme Court’s recent decision in Halliburton Co. v. Erica P. John Fund, Inc. (Halliburton II), ___ U.S. ___, 134 S. Ct. 2398 (2014), the Eleventh Circuit explained that defendants are permitted to “introduce price impact evidence both to undermine the plaintiff’s case for market efficiency and to rebut the Basic presumption once it has been established.”  Because Regions did not have that opportunity below, the Eleventh Circuit remanded for the district court to reconsider whether Regions had rebutted the Basic presumption. The appellate court also emphasized the narrow scope of the remand and the fact that “Halliburton II by no means holds that in every case in which such evidence is presented, the presumption will always be defeated.” The Eleventh Circuit indicated that Regions may not be able to rebut the presumption because its misrepresentations were largely “confirmatory misrepresentations” that would reinforce stock prices rather than alter them, but left it to the district court to decide that issue. 

Despite the lack of a comprehensive framework for determining market efficiency for particular stocks, the Eleventh Circuit rejected Regions’ call to follow other circuits in adopting the mandatory analytical framework set forth in Cammer v. Bloom, 711 F. Supp. 1264 (D. N.J. 1989) (the “Cammer factors”).  Instead, the Eleventh Circuit emphasized the importance of flexibility and discretion in determining market efficiency on a case-by-case basis.

The Eleventh Circuit further noted that although it provided significant flexibility and discretion to the district court in assessing market efficiency, it had in fact “defined some features of an efficient market,” namely “high-volume trading activity facilitated by people who analyze information about the stock or who make trades based upon that information.” The Court conceded the viability of the Cammer factors as a guide, but refused to adopt them as a mandatory standard, concluding that “as the law stands, District Courts have a good idea of what they should be looking for in determining market efficiency, as well as the flexibility to do that analysis in the most sensible way given the circumstances.”

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Carlton Fields
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