Confirmatory Information

In its Halliburton II decision, the Supreme Court held that a securities fraud defendant can overcome the fraud-on-the-market presumption of reliance at the class certification stage of a case “through evidence that the misrepresentation did not in fact affect the stock price.”  Some defendants have argued that this means that if the company’s stock price did not increase when the alleged misrepresentations were made, the fraud-on-the-market presumption is not applicable.

Two recent decisions have questioned this line of reasoning.  In Local 703, I.B. of T. Grocery and Food Employees Welfare Fund v. Regions Financial Corp., 2014 WL 3844070 (11th Cir. Aug. 6, 2014), the court remanded the case so that the district court could consider evidence that the company’s “stock price did not change in the wake of any of the alleged misrepresentations.”  The court noted, however, that this evidence might not be sufficient to overcome the fraud-on-the-market presumption because the misrepresentations could have been “confirmatory information” that the market had already incorporated into the stock price.

Similarly, in McIntire v. China Mediaexpress Holdings, Inc., 2014 WL 4049896 (S.D.N.Y. Aug. 15, 2014), the court granted class certification as to certain claims because a “material misstatement can impact a stock’s value either by improperly causing the value to increase or by improperly maintaining the existing stock price.”  The court was “not persuaded” that the auditor defendant had demonstrated no stock price impact as the result of its allegedly false audit opinion because (a) only days before the audit opinion was issued the company’s “stock price increased based on its release of unaudited financial statements,” and (b) “it is reasonable to infer that this increase included the market’s expectation that [the] audit opinion would later confirm the accuracy of [the company’s] financial statements.”

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