Eighth Circuit Breathes Life Into Halliburton’s Price Impact Defense

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.

Plaintiffs’ claims against Best Buy arose out of three statements made on September 14, 2010.  The first was a statement in an 8:00 a.m. earnings release that the company was increasing its full year earnings per share guidance by ten cents to $3.55-$3.70.  Best Buy’s stock, which closed the prior day at $34.65, then opened at 9:30 a.m. trading up at $37.25.  The next two statements were in a 10:00 AM conference call with securities analysts.  During that call, Best Buy’s CEO and CFO stated (1) that the company’s earnings were “essentially in line with our original expectations for the year” and (2) that Best Buy was “on track to deliver and exceed our annual EPS guidance.”  Best Buy’s common stock closed on September 14 at $36.73.  Plaintiffs alleged that these statements were untrue and that the truth was disclosed on December 14, 2010, when Best Buy announced a decline in its fiscal third quarter sales and a reduction in its 2011 fiscal year EPS guidance to $3.20-$3.40.  Best Buy’s common stock – which had risen to $41.70 on December 13 – closed on December 14 at $35.52.

The district court did not allow plaintiffs’ claims to proceed as to all three statements.  In particular, the court dismissed their claims as to the EPS guidance in the earnings release because it was forward-looking and accompanied by meaningful cautionary language.  The court allowed the claims to proceed as to the two statements made during the analyst call.

Plaintiffs moved for class certification, invoking the rebuttable fraud-on-the-market presumption of reliance.  To support their application of the presumption, Plaintiffs submitted an expert report containing an event study reflecting that Best Buy’s stock increased in reaction to the three allegedly misleading statements.  The study did not, however, differentiate the price impact caused by each statement.  In response, Best Buy submitted its expert’s event study opining that while the company’s stock price increased after the non-actionable September 14 press release, the conference call statements had “no discernible impact on Best Buy’s stock price,” as the stock price after the conference call was identical to the price before the call.  In response, Plaintiffs’ expert submitted a revised opinion that reflected that he agreed that the conference call statements did not create an immediate stock price increase because the “economic substance” of the misrepresentation was disclosed in the press release.  However, he opined that even though the press release did not contain any actionable misstatement, investors gave “great weight” to the release, and the false statements from the conference call maintained the inflated stock price until the December 14, 2010 corrective disclosures.

The district court granted the motion, holding that even though the conference call statements did not lead to an immediate rise in Best Buy’s stock price, the statements could have further inflated the price, prolonged the inflation of the price, or slowed the rate of the price’s decline.  It held that price impact could be shown by a decrease in price following a revelation of the fraud and that Best Buy failed to rebut the Basic presumption of reliance because it did not offer evidence “to show that Best Buy’s stock price did not decrease when the truth was revealed.”

In a 2-1 decision, the Eighth Circuit reversed.  Writing for the majority, Judge Loken held that Best Buy presented compelling evidence of a lack of a price impact that was capable of rebutting the Basic presumption.  In particular, the court focused on the opinion from plaintiffs’ own expert that the economic substance of the conference call statements was “virtually the same” as that of the non-actionable press release and that there was an absence of price impact from the conference call statements.  The expert testimony that investors gave “great weight” to the non-actionable press release, combined with the absence of future price impact from the conference call and “common sense,” constituted “overwhelming evidence” that investors did not rely on the alleged misstatements and were sufficient to rebut the Basic presumption.

The Eighth Circuit rejected plaintiffs’ theory that the conference call statements created a gradual increase in the stock price between September 14 and December 14, 2010, finding it contrary to the very hypothesis of efficient capital markets upon which the Basic presumption rests.  Similarly, the district court’s reliance on the price drop as evidence of price impact ignored that the allegedly “inflated price” was, according to the plaintiffs’ own expert, established by the non-actionable earnings release, not the subsequent statements on the analyst call.

Judge Murphy dissented, finding that the majority’s decision failed to address Plaintiffs’ reliance on the “price maintenance theory,” through which they contended that the conference call statements fraudulently maintained the company’s stock price and counteracted expected stock price declines.  In order to rebut the Basic presumption of reliance under this theory, Best Buy would have had to produce evidence showing that the alleged misrepresentations did not counteract a price decline that would have otherwise occurred.  Because the company failed to produce this evidence, it did not rebut the presumption of reliance.  Judge Murphy disagreed with the premise of the majority’s opinion that Best Buy’s conference call statements were “virtually the same” as those made in the press release, given that the district court concluded that the press release was a non-actionable forward looking statement while the conference call statements were actionable statements of then-current fact.

Since the Supreme Court’s decision in Halliburton II, securities fraud defendants have struggled to determine the amount, and type, of price impact evidence necessary to rebut the Basic presumption.  The Eighth Circuit’s decision provides some helpful guidance, particularly in its rejection of the district court’s holding that actionable price impact could be shown through a price drop upon disclosure of the alleged truth.  But the unusual circumstances in Best Buy – with a price jump in the two-hour window between a non-actionable statement and an actionable one – will certainly lead plaintiffs to argue that the decision’s effect should be limited to cases with similar fact patterns, which are likely to be few and far between.  Further – as discussed in Judge Murphy’s dissent – the Eighth Circuit’s decision leaves open the question of whether, and how, securities fraud plaintiffs can use allegations that misrepresentations maintained a fraudulently inflated price to invoke the Basic presumption, despite the absence of an immediate price impact.

Orrick will continue to monitor decisions analyzing and applying Halliburton II.