Two Bites At The Apple

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.  There are at least two different points, however, when stock price impact might be relevant: (a) the date of the alleged misstatement, and (b) the date of the alleged corrective disclosure.  Is it enough for defendants to provide evidence of a lack of stock price impact as of the date of the alleged misstatement?

In In Re Finisar Corp. Sec. Litig., 2017 WL 6026244 (N.D. Cal. Dec. 5, 2017), the plaintiffs alleged that a December 2010 statement misled investors as to the nature of Finisar’s growth by denying that the company’s revenue increase was the result of an unsustainable inventory build-up by customers.  The complaint also stated that Finisar’s stock price increased after the statement was issued.

At class certification, the defendants presented an expert report demonstrating that any increase in Finisar’s stock price following the alleged misstatement was not statistically significant “when the price is adjusted for general market and industry trading.”  Among other objections, the plaintiffs asserted that the expert report was “flawed insofar as it fails to consider Finisar’s stock price change following the allegedly corrective disclosure” that occurred several months later.  The court acknowledged that for purposes of price impact analysis, many courts have focused on the corrective disclosure date, especially where there may have been offsetting disclosures about the company on the date of the alleged misstatement or the plaintiffs had alleged that the misstatement maintained the stock price at an artificially-inflated level.  (For more on the “price maintenance theory,” see here and here.)

In the instant case, however, the court found that neither of those rationales for focusing on the corrective disclosure date were applicable.  There was no evidence that other information about Finisar had offset any price inflation caused by the alleged misstatement and the plaintiffs were not proceeding on a price maintenance theory.  Under these circumstances, the court found no flaw in the expert analysis “simply because it focuses on the date of the alleged misstatement rather than the date of the alleged corrective disclosure.”

Holding: Class certification denied.

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