U.S. Court of Appeals for the Second Circuit

Leading up to the Supreme Court's decision in Halliburton Co. v. Erica P. John Fund, the securities bar waited in great suspense to see whether the Court would overrule the "fraud-on-the-market" presumption of reliance established many years earlier in Basic v. Levinson. Under that presumption, shareholders pursuing federal securities law claims do not have to show reliance on each alleged misstatement if the shares at issue traded in an efficient market. In an efficient market, it is presumed that all material, publicly available information about a company is reflected in its stock price and therefore shareholders need only rely on the trading price when deciding to purchase.

Ultimately, the Court declined to overturn Basic, but held that defendants can rebut the presumption at class certification by showing the alleged misrepresentations had no impact on the stock's price. District courts have, however, struggled applying Halliburton. Significant questions linger regarding the process of rebutting the presumption such as what evidence is sufficient to rebut the presumption and, most importantly, what effect should Halliburton have on the plaintiffs' so-called "price maintenance" theory?

According to the price maintenance theory, a misrepresentation can "impact" the trading price, even if it does not change that price at all, either because it confirms market expectations or prevents the price from falling. It is frequently the case that plaintiffs seek to recover for statements that result in no price change or a downward movement in price. When a court is willing to entertain the price maintenance theory without requiring plaintiffs to come forward with empirical evidence justifying its application, it makes it hard for defendants to successfully rebut the presumption. The Court's silence in Halliburton on what specific type of evidence rebuts the presumption has created an uncertain path for district courts to navigate, and too often defendants are left trying to disprove price maintenance—a legal fiction for which plaintiffs offer no concrete proof. In reality, all defendants should have to do is come forward with any evidence that severs the link between the alleged misstatement and the stock price. Evidence that the statement literally had no impact on the trading price of the stock or had a negative impact should suffice.

It has taken some time for price impact cases to reach the circuit court level. The Eighth Circuit in IBEW Local 98 Pension Fund v. Best Buy was the first appellate court post-Halliburton to hold that the presumption had been successfully rebutted. Best Buy involved two statements made on the same day. The defendants offered evidence showing that the price went up after the first alleged misstatement (which was deemed nonactionable) but not after the second one. Plaintiffs' experts argued that the second statement "maintained" the inflation and evidence of this inflation could be found in the price decline that occurred after plaintiffs claimed the "truth" was finally revealed. The Eighth Circuit reversed certification and found that Best Buy rebutted the presumption through evidence that there was no price reaction to the second statement and the fact that the second statement said nothing new. In so ruling, the court of appeals rejected the notion that plaintiffs can overcome no "front-end" price impact simply by arguing that a later decline must mean some actionable inflation was being maintained.

The Second Circuit has also been asked to weigh in on these issues. In Arkansas Teacher Retirement System v. Goldman Sachs Group, the Second Circuit vacated certification because the district court required defendants to "conclusively" show a "complete absence of price impact" instead of applying the preponderance of the evidence standard. The district court also erred by refusing to consider defendants' evidence that the stock price did not drop on 34 dates when the very information plaintiffs contend was concealed from investors was publicly disclosed. Thus, in addition to facing the issue of no upward price movement from the alleged misstatements, the plaintiffs in Goldman Sachs also faced the problem that the alleged "truth" underlying their nondisclosure claims was revealed to the market on several days with no price impact prior to their alleged corrective disclosure days. This means that the later price decline on the corrective disclosure days must have been caused by something else. In an efficient market, the price should not react to the same information twice.

After remand, the district court recertified the class, and Goldman again appealed to the circuit court. Notable amici, including the U.S. Chamber of Commerce, former SEC officials, law professors and economists, and the Securities Industry and the Financial Markets Association added their voices protesting the "impossible standard" defendants are expected to meet where direct evidence of no price impact is disregarded in favor of the unproven assumption that price inflation was being maintained. This second appeal is now fully briefed, and oral argument was scheduled for late June. With this latest appeal, the Second Circuit will hopefully take on plaintiffs' typical practice of invoking price maintenance whenever defendants offer evidence of no front-end price impact.

Susan E. Hurd is a partner in Alston & Bird's securities litigation group. She has more than 25 years of experience representing companies and their executives in securities class actions, derivative cases and merger litigation across the country. Courtney Quirós is a senior associate at Alston & Bird. Her practice focuses on securities fraud class actions, shareholder suits and corporate investigations.