Eighth Circuit Becomes First Appellate Court to Apply Halliburton II Price Impact Analysis
The Eighth Circuit has become the first federal circuit court to apply the Supreme Court’s Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (Halliburton II) decision. Relying on Halliburton II, the Eighth Circuit reversed the district court’s certification of a class of Best Buy shareholders in a Rule 10b-5 case. In a 2-1 opinion, the court held that the defendants had rebutted the fraud-on-the-market presumption of reliance and, as a result, class certification was improper under Civil Rule 23(b)(3) because individual questions of reliance predominated over common questions of law and fact. The case is IBEW Local 98 Pension Fund v. Best Buy Co., No. 14-3178, 2016 WL 1425807 (8th Cir. Apr. 12, 2016).
Like many Rule 10b-5 cases, Best Buy involved statements reflecting earnings per share (EPS) guidance that later proved to be too optimistic. The plaintiffs alleged the company and its executives made two sets of misleading statements regarding EPS on the same day, the first in a press release issued before the stock market opened and the second in a conference call with analysts after the market opened. Notably, the district court found that the earlier statements in the press release were nonactionable forward-looking statements, but the later statements in the conference call were potentially actionable. On appeal, the Eighth Circuit did not review the district court’s ruling on whether each set of statements was actionable.
At issue on appeal was whether the plaintiffs could rely on the fraud-on-the-market presumption of reliance, which would obviate the need for each plaintiff to prove individual reliance on defendants’ alleged misrepresentations and, consequently, allow the district court to certify the proposed class. In Halliburton II, the Supreme Court clarified that a defendant can rebut the presumption at the class certification stage with evidence showing the absence of price impact (also known as transaction causation) – i.e., evidence establishing that the alleged misrepresentation did not affect the stock’s market price. The Court further clarified that if a defendant successfully rebuts the presumption of reliance, the class cannot be certified because individual questions of reliance will predominate over common questions of law and fact.
Reversing the district court, the Eighth Circuit concluded that the defendants had successfully rebutted the presumption of reliance. In large part, the court relied on expert reports concluding that only the earlier allegedly misleading statements – the nonactionable forward-looking statements in the press release – caused the stock’s price to increase. According to the Eighth Circuit, the later statements, which the district court concluded were potentially actionable, merely confirmed the earlier statements and thus had no additional price impact.
The impact of the Eighth Circuit’s ruling on future securities class certification decisions remains to be seen. It may be a rare case where, as in Best Buy, price impact can be linked entirely to nonactionable statements that occurred on the same day as potentially actionable statements. The extent to which courts apply Best Buy beyond these facts will be an item to watch in the coming months.
The Best Buy plaintiffs have indicated they intend to move for an en banc rehearing.