On May 16, 2016, the United States Supreme Court handed down two decisions that may, in practice, limit the ability to access federal district courts. In Spokeo, Inc. v. Robins, No. 13-1339, 578 U.S. ___ (2016), the Supreme Court rejected the Ninth Circuit’s conclusion that statutory violations are per se sufficient to confer Article III standing, and, in Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning, No. 14-1132, 578 U.S. ___ (2016), the Court concluded that jurisdiction under Section 27 of the Securities and Exchange Act (Exchange Act) is limited to suits brought under the Exchange Act and state law claims that turn on the plaintiff’s ability to prove the violation of a federal duty.
The first Circuit Court of Appeals decision applying the Supreme Court’s landmark 2014 decision in Halliburton Co. v. Erica P. John Fund Inc., 134 S. Ct. 2398 (2014) (“Halliburton II”), favored the defendants, finding as a matter of law that Best Buy Co. and its executives successfully rebutted the presumption of reliance set forth in Basic v. Levinson, 485 U.S. 224 (1988) at the class certification stage through evidence of a lack of price impact from their alleged misstatements. See IBEW Local 98 Pension Fund et al. v. Best Buy Co., Inc. et al., Case No. 14-3178 (8th Cir. Apr. 12, 2016). By reversing the district court and holding that a class could not be certified, the Eighth Circuit showed that Halliburton II provides defendants with a meaningful opportunity to challenge the fraud on the market presumption. The plaintiffs’ bar, however, will be eager to highlight Best Buy’s unique pattern in trying to limit the impact of the decision beyond this case. Whether other federal courts follow the Eighth Circuit’s lead and deny class certification motions based on Halliburton II in greater numbers, and outside the Best Buy fact pattern, remains to be seen.
On March 28, 2016, the Supreme Court denied a petition for certiorari review brought by Laurie Bebo, the former CEO of Assisted Living Concepts Inc., who challenged the constitutionality of proceedings conducted in an SEC administrative tribunal. Although the Court denied review, there are many more cases like it winding their way through the federal system, and in the likely event a split develops among the circuits, the Supreme Court may be inclined to address the issue, especially given the amount of attention the issue has received. Indeed, Bebo’s petition itself attracted the notice of celebrity entrepreneur Mark Cuban, who filed an amicus brief in her case arguing that the SEC’s administrative tribunal is a “farce” and unconstitutional.
On March 22, 2016, the Supreme Court issued a decision permitting class plaintiffs to rely on “representative” or “sample” evidence to satisfy the prerequisites to class certification and certain elements of their claims. See Tyson Foods, Inc. v. Bouaphakeo, No. 14-1146, 2016 WL 1092414 (Mar. 22, 2016). This is one of the relatively few recent class action decisions by the Court that could be construed as something other than a victory for class defendants. As Justice Thomas stated in dissent, the decision arguably is inconsistent with the Court’s pro-defendant decisions in Wal-Mart and Comcast. We have previously discussed the Supreme Court’s recent class action jurisprudence, including the Wal-Mart and Comcast decisions.
In what is now the third interlocutory appeal in the course of class certification proceedings spanning more than a decade, the case of Erica P. John Fund, Inc. v. Halliburton Co. will head back to the United States Court of Appeals for the Fifth Circuit, with perhaps another trip to the Supreme Court to follow. The Fifth Circuit’s eventual decision on this latest interlocutory appeal could clarify—at least in the Fifth Circuit—just how far a defendant in a securities class-action can go in presenting indirect evidence of (a lack of) price impact to defeat class certification.
In a lengthy ruling containing a detailed analysis of dueling economic expert reports, a federal court in Texas held on July 25, 2015 that defendant Halliburton Company demonstrated a lack of price impact at the class-certification stage on nearly all of the plaintiffs’ claims, thus rebutting the presumption of reliance. This action has twice been to the Supreme Court, most recently in Halliburton, Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (“Halliburton II”), which held that the fraud-on-the-market presumption of reliance may be rebutted by showing a lack of price impact from the alleged misrepresentation. The district court’s recent decision is significant because it is one of the first to consider the issue of price impact post-Halliburton II, and because the decision suggests that lower courts may be willing to wade deep into the complications of event studies and economic analysis in order to determine price impact at the class-certification stage.
On November 3, 2014, the U.S. Supreme Court held oral argument in Omnicare v. Laborers District Council Construction Industry Pension Fund. As discussed in earlier posts, from March 18, 2014 and July 22, 2014, the Supreme Court in Omnicare has been asked to resolve a circuit split regarding the scope of liability under Section 11 of the Securities Act: does an issuer violate Section 11 if it makes a statement of opinion that is objectively false, or must the issuer also have known that the statement was false when made?
In recent years, the DOJ and SEC have significantly increased their Foreign Corrupt Practices Act (FCPA) enforcement efforts, and in the process, have successfully advocated the theory that state-owned or state-controlled entities should qualify as instrumentalities of a foreign government under the FCPA. The FCPA defines a foreign official as “any officer or employee of a foreign government or any department, agency or instrumentality thereof.” In August 2014, the government’s broad definition of who constitutes a “foreign official” came into question for the first time when two individuals (Joel Esquenazi and Carlos Rodriguez) filed a petition for writ of certiorari with the Supreme Court to challenge their convictions under the FCPA and argued for the high court to limit the FCPA’s definition of the term. However, on October 6, 2014, the Supreme Court declined to consider the potential landmark case effectively upholding the government’s broad view of the term “foreign official.” READ MORE
On July 16, 2014, a three-judge Second Circuit panel affirmed the dismissal of a securities class action against Deutsche Bank AG and several underwriters. The case was brought on behalf of investors who purchased approximately $5.5 billion in preferred Deutsche Bank shares in 2007, and who alleged that defendants misled them about the bank’s exposure to mortgage-backed securities and other risks in a registration statement filed in October of 2006. Plaintiffs alleged that the registration statement omitted details about Deutsche Bank’s business, including that the company failed to properly record provisions for RMBS, commercial real estate loans and exposure to monoline insurers.
Today the Supreme Court rejected calls from lawyers, economists and corporate associations to overrule the “fraud-on-the-market” theory that makes it possible to litigate federal securities fraud claims as class actions, instead handing defendants a modest procedural victory. In Halliburton Co. v. Erica P. John Fund, Inc., the Court declined to overrule a decision that for more than twenty-five years has been used by securities plaintiffs to certify thousands of federal class actions, but also recognized that defendants can rebut class certification by showing that allegedly misleading statements did not affect the price of a company’s securities. Halliburton kills what had been a growing movement to eliminate federal securities fraud class actions for all intents and purposes.
Plaintiff-respondent Erica P. John Fund, Inc. (the “Fund”) purchased stock in Halliburton and lost money when Halliburton’s stock price dropped upon the release of certain negative news regarding the company. The Fund filed suit against Halliburton and its CEO David Lesar (collectively, “Halliburton”), alleging that Halliburton had made knowing or severely reckless misrepresentations concerning those topics, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. READ MORE