Shaky Ground

In Halliburton II, the U.S. Supreme Court held that defendants can rebut the fraud-on-the-market presumption of reliance at the class certification stage with evidence of a lack of stock price impact.  In a typical case, where the plaintiff alleges that a misrepresentation artificially inflated the company’s stock price, the defendant can satisfy this requirement by providing evidence that there was no stock price increase as a result of the misrepresentation. 

At least two circuit courts (Seventh and Eleventh), however, have recognized an alternative “price maintenance theory” of artificial inflation.  Under the price maintenance theory, a misrepresentation can artificially inflate a stock’s price by improperly maintaining the existing price (e.g., by repeating prior falsehoods and preventing the stock’s price from falling to its true value).  But how does a defendant provide evidence to establish a lack of stock price impact under these circumstances?

Perhaps because of the inherent tension between Halliburton II and the price maintenance theory, two recent circuit court decisions appear to question the theory’s use in securities class actions.

In IBEW Local 98 Pension Fund v. Best Buy Co., Inc., 2016 WL 1425807 (8th Cir. April 12, 2016), the court held that the district court had improperly certified a class based on statements made in an earnings call.  According to experts for both sides, the statements were merely confirmatory and did not cause the company’s stock price to increase.  While the plaintiffs argued that a price increase was not necessary under their price maintenance theory, the court found that the “theory provided no evidence that refuted defendants’ overwhelming evidence of no price impact.”

In In re Pfizer Inc. Sec. Litig., 2016 WL 1426211 (2nd Cir. April 12, 2016), the court addressed the issue more indirectly.  The district court granted summary judgment for the defendants after excluding the plaintiffs’ loss causation and damages expert from testifying.  On appeal, the court found that the plaintiffs were relying on a price maintenance theory and that the expert’s testimony would be helpful to the jury in that context.  As to the theory itself, however, the court went out of its way to note that it was not  deciding whether it was “either legally or factually sustainable” and that it “might be that Plaintiffs’ inflation-maintenance theory is deficient under Rule 10b-5.”

As noted by the dissent in the Best Buy case, “[n]either the Supreme Court nor any circuit court has however discussed the type of showing needed to rebut [] a presumption of reliance in a price maintenance case.”  Until that issue is addressed, the price maintenance theory appears to be on shaky ground.