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.” Courts continue to interpret the scope of that ruling.
A recent decision from the Southern District of Florida, for example, explores the extent that a defendant’s rebuttal can be based on something other than an event study (i.e., an empirical analysis of the impact of certain information on a stock’s price). In Aranaz v. Catalyst Pharmaceutical Partners, Inc., 2014 WL 4814352 (S.D. Fla. Sept. 29, 2014), the defendants were alleged to have falsely claimed that there was no effective and available treatment for Lambert-Eaton Myasthenic Syndrome (LEMS). At class certification, the defendants argued (among other things)that the fraud-on-the-market presumption was inapplicable because the truth about the existence of such a LEMS treatment “was already known to the public and the alleged misrepresentation therefore could not have impacted the price of Catalyst common stock.”
The court found that this “truth-on-the-market defense,” however, “is merely an argument that the alleged misrepresentation was immaterial in light of other information on the market.” Because the Supreme Court, in its earlier Amgen decision, had held that materiality cannot be used to indirectly rebut the fraud-on-the-market presumption at class certification, the court concluded that it could not consider “evidence that the truth was known to the public” in reaching its decision.
Held: Class certification granted.
Quote of note: “Here, Defendants’ burden is particularly onerous; not only is there a clear and drastic spike following the alleged misrepresentation and an equally dramatic decline following the revelation of the truth, but all agree that the publications containing the misrepresentation and its revelation respectively caused those price swings. Under these circumstances, proving an absence of price impact seems exceedingly difficult, especially at the class certification stage in which it must be assumed that the alleged misrepresentation was material.”
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.”
As the securities litigation bar awaits the fate of the fraud-on-the-market theory, an interesting federal district court decision highlights a fact pattern that did not allow for any possible presumption of classwide reliance. In Goodman v. Genworth Financial Wealth Mangement, 2014 WWL 1452048 (E.D.N.Y. April 15, 2014), a group of investors alleged that Genworth made misrepresentations related to the management of their securities portfolios. The court, as part of its class certification analysis, examined whether the investors could demonstrate a common method of proving reliance and concluded that they could not meet that burden.
First, the plaintiffs conceded the inapplicability of the fraud-on-the-market presumption of reliance because they could “identify no efficient market or market price for the particular securities in which the putative class invested.”
Second, under Affiliated Ute, there is a presumption of reliance for securities fraud claims “involving primarily a failure to disclose” by one with a duty to disclose. If the withheld facts are material, then individual reliance need not be proven. Because the plaintiffs pointed to various written statements from Genworth about how the portfolios were managed, however, the court concluded that that any “omissions” were only “significant because they contradicted the affirmative misrepresentations.” Under these circumstances, the claims could not be described as “primarily” concerning omissions.
Finally, the plaintiffs argued (based on a line of Second Circuit decisions in non-securities fraud cases) that they could prove classwide reliance based on circumstantial evidence. In particular, the plaintiffs cited the conclusion of their expert – a former SEC chairman – that the investors would have relied on the alleged misrepresentations. The court declined to decide whether circumstantial evidence is an acceptable method of common proof in securities fraud cases. Even if it were, however, the court found that the expert opinion merely established that the alleged misrepresentations were material, not that it was reasonable to conclude that every investor actually relied upon them.
Holding: Class certification denied.