Second Circuit Applies Lenient Standards for Certifying Classes in Securities Litigation

On Nov. 6, a three-judge panel of the U.S. Court of Appeals for the Second Circuit issued an opinion in Waggoner v. Barclays, No. 16-1912, 2017 U.S. App. LEXIS 22115 (2d Cir. Nov. 6, 2017), that—if allowed to stand—will make it significantly easier for plaintiffs to obtain class certification in actions alleging violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Section 78j(b), and Securities and Exchange Commission Rule 10b-5 (10(b) actions) against large, publicly traded companies. In Waggoner, the court affirmed the district court's class certification order, holding, inter alia, that “direct evidence of price impact is not always necessary to demonstrate market efficiency, as required to invoke [the fraud-on-the-market presumption of reliance permitted under Basic v. Levinson, 485 U.S. 224 (1988)];” and “defendants seeking to rebut the Basic presumption must do so by a preponderance of the evidence.” The court also agreed with the district court that the plaintiffs' damages methodology—which the defendants had challenged—“posed no obstacle to certification.” And while the court rejected the district court's application of the presumption of reliance adopted by the Supreme Court in Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972), where, unlike the plaintiffs' claims in Waggoner, the claims of fraud were based primarily on omissions, the court determined that such error was harmless.

On Nov. 20, the defendants—London-based financial services company Barclays PLC, its American subsidiary Barclays Inc. (collectively Barclays), and three of their senior officers—filed a petition for partial panel rehearing and rehearing en banc. (A copy of the defendants' petition is available here.) The defendants argue in their petition that the court's holding “that whenever the securities of large, publicly traded companies are at issue, plaintiffs may invoke the Basic presumption of reliance without any direct empirical evidence of 'market efficiency'” conflicts with both the Supreme Court's decision in Halliburton v. Erica P. John Fund, 134 S. Ct. 2398 (2014) (Halliburton II), and the Second Circuit's opinion in Teamsters Local 445 Freight Division Pension Fund v. Bombardier, 546 F.3d 196 (2d Cir. 2008). The defendants' petition also points out that no other court of appeals has reached this “unprecedented conclusion.” In addition, the defendants contend that the panel's holding “that defendants bear the burden of persuasion (not just production), under Federal Rule of Evidence 301, to rebut the Basic presumption” conflicts with the Eighth Circuit's decision in IBEW Local 98 Pension Fund v. Best Buy, 818 F.3d 775 (8th Cir. 2016), creating a circuit split.

Under the governing law, only if the panel agrees with the defendants that it committed legal error and should reverse itself, will it grant defendants' petition for panel rehearing, see Fed. R. App. P. 40(a)(2) (“The petition must state with particularity each point of law or fact that the petitioner believes the court has overlooked or misapprehended …”) And only in extraordinary cases will the court grant a motion for en banc rehearing. As the applicable rule states, such a rehearing “is not favored and ordinarily will not be ordered unless: en banc consideration is necessary to secure or maintain uniformity of the court's decisions; or the proceeding involves a question of exceptional importance.”