Pomerantz achieved another seminal post-Halliburton II victory for investors in Strougo v. Barclays PLC, when, on November 6, 2017, the Second Circuit affirmed the district court’s decision granting Plaintiffs’ motion for class certification.
The case, which involves claims pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, concerns defendants’ concealment of information and misleading statements regarding management of its “dark pool,” a private trading platform where the size and price of the orders are not revealed to other participants. Pomerantz is lead counsel for a class of investors who purchased Barclays’ American Depository Shares (“ADS”), and lost hundreds of millions of dollars when the truth about Barclays’ management of its dark pool came to light.
In certifying the class in February 2016 following a thorough analysis of the parties’ briefing, expert reports, and an in-depth evidentiary hearing, the district court concluded that under the Supreme Court’s Basic “fraud-on-the-market” doctrine, reliance by investors on defendants’ affirmative misleading statements could be presumed, because Barclays’ ADSs trade in an efficient market. Judge Scheindlin rejected defendants’ argument that to show market efficiency, plaintiffs must provide event studies showing that the market price of the company’s stock price reacted quickly to the disclosure of new material information about the company. While plaintiffs did in fact proffer an event study, the court held – consistent with a vast body of case law – that no one measure of market efficiency was determinative and that plaintiffs could demonstrate market efficiency through indirect evidence. In so holding, the court observed that event studies are usually conducted across “a large swath of firms,” but “when the event study is used in a litigation to examine a single firm, the chances of finding statistically significant results decrease dramatically,” thus not providing an accurate assessment of market efficiency. The district court found, after extensive analysis, that plaintiffs sufficiently established market efficiency indirectly, and thus direct evidence from event studies was unnecessary.
Leaving no ambiguity, the Second Circuit’s decision affirming that of the district court cited its own recent decision in Petrobras—another Pomerantz victory—and stated that, “We have repeatedly—and recently—declined to adopt a particular test for market efficiency.”
This decision is a significant win for plaintiffs as it conclusively holds that “direct evidence of price impact … is not always necessary to establish market efficiency and invoke the Basic presumption.” The Court further made clear that the burden on plaintiffs is not “onerous” and that there would be little point to considering factors looking at indirect evidence of market efficiency if they only came into play after a finding of direct efficiency through an event study.
The Second Circuit also put an end to effort by defendants to minimize their burden of rebuttal, making it abundantly clear that defendants seeking to rebut the presumption that investors rely on prices set on an efficient market must do so by a preponderance of the evidence. In so holding, the Second Circuit recognized that the presumption of reliance would be of little value if defendants could overcome it easily. Specifically, the Court—pointing to language in Halliburton II, the Supreme Court decision addressing the issue— stated that defendants could only rebut the presumption of reliance by making a showing that “sever[ed] the link” between the misrepresentation and the price a plaintiff paid and that any such evidence must be “direct, more salient evidence”—held that it would be inconsistent with Halliburton II to “allow defendants to rebut the Basic presumption by simply producing some evidence of market inefficiency, but not demonstrating its inefficiency to the district court.” The Court made clear that to rebut the Basic presumption, the burden of persuasion properly shifts to defendants, by a preponderance of the evidence. The Court placed the burden of showing there is no price impact squarely upon defendants and confirmed that plaintiffs have no burden to show price impact at the class certification stage.
Jeremy Lieberman, Co-Managing Partner of Pomerantz, commented: “We are very gratified by the Second Circuit’s decision. In reaching this and the Petrobras decision this past summer, the Second Circuit has unambiguously reaffirmed Halliburton II and Basic’s guidance that class certification for widely traded securities such as Barclays and Petrobras is a “common sense” proposition. For too long, Defendants have tried to obscure this guidance by attempting to require arcane event studies at the class certification stage, which had little to do with the merits of the case, or the damages suffered by investors. This decision debunks that effort, providing a far easier and more predictable path for securities class actions plaintiffs going forward.”