Attorney: Tamar A. Weinrib
Pomerantz Monitor November/December 2017
Several years ago, in a case known as Halliburton II, the Supreme Court reaffirmed the so-called “fraud on the market” theory, which allows investors in securities fraud class actions to establish reliance on a class-wide basis. If the company’s stock traded on an efficient market that reacted quickly to the release of material information by the company, investors are entitled to a “presumption” that they all relied on the defendants’ misstatements, because they would have affected the price at which they bought their stock.
However, Halliburton II also notably allowed defendants the right to try to rebut this presumption of reliance at the class certification stage, by showing that the market for the company’s shares was not, in fact, efficient. Since then, a mountain of ink has been spilled over the question of who has to prove what, and how, on class certification motions that turn on market efficiency.
In November, Pomerantz achieved another seminal post-Halliburton II victory in the Second Circuit for investors in Strougo v. Barclays PLC, where the Second Circuit affirmed the district court’s decision granting plaintiffs’ motion for class certification. The case concerns defendants’ misrepresentations and concealment of risks involving its management of its LX “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 pools came to light.
The district court 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.” 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 efforts 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 mis- representation and the price a plaintiff paid and that any such evidence must be “direct, more salient evidence” and 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.
The Barclays and Petrobras decisions will likely form the bedrock of securities class certification jurisprudence for decades to come. In successfully litigating both appeals, Pomerantz is continuing its more than eighty years of trailblazing advocacy for securities fraud victims.”