In first appellate analysis of Halliburton, 8th Circuit boosts securities defendants

April 13, 2016

(Reuters) – At 8 a.m. on Sept. 14, 2010, the electronics retailer Best Buy issued an optimistic press release boosting its projected earnings per share by ten cents. The company’s opening stock price that day reflected the good news. Best Buy was up by nearly $3 per share, a 7.5 percent rise over the previous day’s close.

At 10 a.m., two hours after the press release, Best Buy’s CEO and CFO held a conference call for analysts. They reiterated that the company was on track to deliver those optimistic results. The share price by the end of the day was $36.73, down from its $37.25 opening but still more than $2 per share above the close on the previous day.

The bad news for Best Buy shareholders came in December 2010. On the 13th, the share price was all the way up at $41.70. The next day, the company announced that its third-quarter sales had slumped and its earnings per share would be even lower than it had been predicting before the nudge upward in September.

Investors responded immediately to the new guidance. In heavy trading, Best Buy’s share price fell nearly 15 percent by the close of trading, ending the day at $35.52.

After several years of litigation, U.S. District Judge Donovan Frank of St. Paul, Minnesota, certified a class of Best Buy shareholders. Investors could not bring fraud claims based on the Sept. 14 press release, the judge said, because it was a forward-looking statement covered by the safe-harbor provision in securities laws. But he ruled statements during the analyst call about the company’s present performance were not protected by the safe-harbor provision. Judge Donovan found that lead counsel from Robbins Geller Rudman & Dowd had established the price impact of the alleged misrepresentations by showing the sharp drop in Best Buy’s stock price when the supposed fraud was revealed in December.

On Tuesday, a divided three-judge panel at the 8th U.S. Circuit Court of Appeals reversed that class certification decision. The court’s opinion is the first federal circuit court analysis of the U.S. Supreme Court’s 2014 ruling in Halliburton v. Erica P. John Fund – and it’s quite a boon for defendants in securities class actions. Best Buy’s lead counsel, Joseph McLaughlin of Simpson Thacher & Bartlett, called the decision “a blueprint” for securities defendants hoping to capitalize on the Supreme Court’s decision.

That ruling, known as Halliburton II, left intact the fraud-on-the-market presumption of investor reliance that is the foundation of securities class actions. But the justices also said defendants can defeat class certification by rebutting the presumption that the company’s share price reflected allegedly fraudulent corporate representations. In other words, if defendants could show the supposed misstatements had no impact on the share price, they could block class certification.

In practice, that has been nearly impossible in the two years since Halliburton II. According to Best Buy lawyer McLaughlin, no securities fraud defendant has completely defeated class certification by rebutting the presumption of reliance (though some have had limited success in knocking out pieces of cases against them). Gibson Dunn & Crutcher‘s 2015 year-end securities litigation roundup recounted far more defense failures than successes in attempting to show fraud didn’t impact share price; the trend, according to McLaughlin, has been for trial court judges to certify classes as long as shareholders offered any plausible evidence of price impact from alleged misstatements.

The 8th Circuit, however, said the facts have to match the theory. And in this case, according to the panel majority, Judges James Loken and Steven Colloton, the shareholders’ own evidence showed no link between the Best Buy executives’ supposedly misleading conference call statements and the company’s share price. The plaintiffs’ expert conceded that Best Buy’s share price rose on the morning of Sept. 14 because of the company’s pre-opening press release, not because of statements by the CEO and CFO in the followup call with analysts.

“The Best Buy executives’ conference call statements added nothing to what was already public,” Judge Loken wrote in the majority opinion. “The confirming statements in the conference call two hours (after the press release) had no additional price impact.”

Plaintiffs’ lawyers from Robbins Geller tried to argue a couple of different theories for the price impact of the conference call statements. They said the statements contributed to a continued, gradual rise in Best Buy’s price over the last quarter of 2010, leading up to the disappointing earnings report in December. They also said the alleged misrepresentations led the market to maintain an inflated price for Best Buy shares. The proof of the fraud, according to shareholders, was the market response when Best Buy revealed its earnings shortfall in December in what plaintiffs called a corrective disclosure.

Even after Halliburton II, according to Best Buy lawyer McLaughin, trial judges have generally found that when shareholders could show stock prices fell in response to a corrective disclosure, the presumption of reliance held and they could be certified as a class. In contrast, the 8th Circuit majority focused on the front end of the supposed fraud, when misstatements had no discernible impact on the share price. That evidence was enough to rebut the presumption of classwide reliance, the decision said.

Significantly, the 8th Circuit said Best Buy bore the burden of proving the allegedly fraudulent statements had no price impact, a question that has been a matter of debate in the securities bar after Halliburton II. But the appeals court also said that once Best Buy broke the link between the supposed misstatements and the price of company shares, it was up to investors to show why they were entitled to the presumption of classwide reliance.

McLaughlin said the majority’s analysis of which side bears the burden of proof at different phases of the class certification inquiry should inform trial courts considering Halliburton II rebuttal arguments. “The decision corrects a misstep many district courts have taken,” he said. “It holds class certification must be denied unless plaintiffs can meet the burden of showing actual price impact.”

In a dissent, Judge Diana Murphy said the class certification should have been affirmed under investors’ price maintenance theory, which posited that the executives’ allegedly false statements propped up Best Buy’s inflated share price. “The reason a misrepresentation in a price maintenance suit is presumed to be reflected in the market price of the stock is because the stock’s price was fraudulently prevented from declining,” she wrote. “Best Buy could have rebutted the presumption of reliance by producing evidence showing that the alleged misrepresentations had not counteracted a price decline that would otherwise have occurred. Best Buy produced no such evidence, and the presumption was not rebutted.”

I emailed shareholder lawyer Susan Alexander of Robbins Geller, who argued for Best Buy investors at the 8th Circuit, but didn’t hear back.

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