April 15, 2016
The Eighth Circuit reversed class certification in a highly anticipated ruling in IBEW Local 98 Pension Fund v. Best Buy Co. on Tuesday, April 12, 2016. The Best Buy decision is the first for a federal court of appeals since the United States Supreme Court’s decision in Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (Halliburton II). In Halliburton II, the Court preserved the fraud-on-the-market presumption of reliance–a presumption necessary for plaintiffs to maintain common proof of reliance in a Rule 10b-5 case–but made room for defendants to rebut that presumption at the class certification stage by proving the alleged misrepresentation had no impact on the stock price. In the nearly two years since Halliburton II, defendants have had limited success defeating class certification by rebutting the presumption (at least a dozen classes have been certified after defendants’ failed efforts to rebut the presumption) . . . until this week.
In a split opinion, the majority of the panel in the Eighth Circuit reversed the district court’s class certification, holding that the lower court "misapplied the price impact analysis mandated by Halliburton II." IBEW Local 98 Pension Fund v. Best Buy Co., No. 14-3178, 2016 WL 1425807, at *1 (8th Cir. Apr. 12, 2016). Plaintiffs alleged in their amended complaint three misstatements, all made on September 14, 2010: a statement in a press release issued at around 8:00 a.m. EST, before the market opened, and two statements made in a subsequent conference call at around 10:00 a.m., after the market opened. Id. at *1. The district court dismissed the claim based on the pre-market, press-release statement, finding it qualified for the PSLRA safe harbor as a forward-looking statement. Id. at *2 (citing 15 U.S.C. § 78u-5). Plaintiffs then moved to certify a class with respect to the two post-market opening conference-call statements, see id.
Both the district and appellate courts found that plaintiffs adequately demonstrated a "prima facie case" to invoke the fraud-on-the-market presumption of reliance. Id. at *4, *6. And both the district and appellate courts agreed that defendants then "had the burden to come forward with evidence showing a lack of price impact." Id. at *6 (citing Fed. R. Evid. 301). But unlike the district court, the appellate court found that defendants presented "strong evidence" demonstrating a lack of price impact. Id. (emphasis added). Best Buy introduced expert testimony and analysis demonstrating that the Company’s stock price increased immediately following the press release–which contained statements protected by the PSLRA safe harbor; and that price movement occurred prior to the conference call. Id. at *3. Moreover, the defense expert provided evidence that there was no movement at all in the Company’s stock price following the conference call. Id. In other words, the price increase occurred "after the [nonactionable] press release but before the [actionable] call [statements]." Id. at *3 (emphasis in original). In response, plaintiffs’ expert agreed that investors gave "great weight" to the nonactionable press-release statements, id. at *3, but nonetheless maintained that the eventual price decline demonstrated that "the conference call statements fraudulently maintained the [Best Buy] stock price" until the truth was revealed during the December 14, 2010 conference call, id.
The district court found Best Buy’s evidence insufficient to overcome the fraud-on-the-market presumption. IBEW Local 98 Pension Fund v. Best Buy Co., No. 11-cv-429-DWF, 2014 WL 4746195, at *6, *9 (D. Minn. Aug. 6, 2014). "The fact that non-actionable statements made in the press release may have caused initial upward movement in Best Buy’s stock price does not necessarily mean that misrepresentations made during the earnings conference call that occurred shortly thereafter did not also impact the stock price," the district court wrote. Id. at *6. It reasoned that "[e]ven though the stock price may have been inflated prior to the earnings phone conference, the alleged misrepresentations could have further inflated the price, prolonged the inflation of the price, or slowed the rate of fall." Id. Thus, in the district court’s view, "[t]his impact on the stock price can support a securities fraud claim." Id.
A majority of the Eighth Circuit panel found that the district court had abused its discretion in not according sufficient weight to the Company’s price impact evidence. Best Buy Co., 2016 WL 1425807, at *7. The majority noted that plaintiffs’ own expert agreed that the contents of the nonactionable press-release statements and the actionable conference-call statements were "virtually the same" and "would have been expected to be interpreted similarly by investors." Id. at *6. Thus, to say that the conference-call statements somehow impacted Best Buy’s stock price would betray "common sense," the majority wrote, because "Best Buy executives’ conference call statements added nothing to what was already public." Id. Even more unpersuasive was plaintiffs’ inconsistent theory that the conference-call statements "effected a gradual increase in stock price," which is contrary to the very premise of the Basic presumption–that the market quickly incorporates publicly available information into the stock’s price. Id. "The substance of the conference call statements two hours later was ‘virtually the same’ and had no immediate impact on that price, impact the Basic presumption would otherwise presume." Id.
While the decision is undoubtedly a solid win in the defense bar column, there remains ample room for debate and development over what evidence adequately rebuts the presumption. The dissenting opinion, for example, found the "price maintenance" theory, upon which the district court relied, adequate to avail plaintiffs of the presumption. The dissent chided the majority for "not join[ing] the circuit courts that have recognized price maintenance theories to be cognizable under the Securities Exchange Act." Id. at *8. Indeed, the price maintenance theory has prevailed in several post-Halliburton II class certification battles that have played out in various districts. And in several cases, district courts have found most evidence or arguments offered by defense experts on price impact insufficient to overcome the presumption. Moreover, the Best Buy panel chose not to address several issues raised in the briefings which remain open questions, and this may not be the last word from the Eighth Circuit, as plaintiffs intend to file a motion for rehearing en banc. See IBEW Local 98 Pension Fund v. Best Buy Co., No. 14-3178, Appellees’ Unopposed Motion for 14-Day Extension to File Petition for Panel and En Banc Rehearing (8th Cir. filed Apr. 13, 2016).
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