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In Halliburton v. Erica P. John Fund, 134 S. Ct. 2398 (2014), the Supreme Court held that “defendants must be afforded an opportunity before class certification to defeat the [fraud-on-the-market] presumption through evidence that an alleged misrepresentation did not actually affect the market price of the stock.”[1]

On April 12, 2016, in the first circuit court opinion to apply Halliburton in considering defendants’ price impact evidence, the Eighth Circuit reversed a district court decision granting class certification in a securities fraud action against Best Buy.[2] IBEW Local 98 Pension Fund v. Best Buy Co., 2016 WL 1425807 (8th Cir. 2016) (Loken, J.). The Eighth Circuit held that defendants had successfully rebutted the fraud-on-the-market presumption by presenting “overwhelming evidence” that the alleged misstatements had no impact on Best Buy’s share price. The Eighth Circuit further held that the district court had “misapplied the price impact analysis mandated by” Halliburton and “abused its discretion” in certifying the class.

Background

At 8 a.m. on September 14, 2010, Best Buy issued a press release announcing that it was increasing its full-year earnings per share (“EPS”) guidance by ten cents to $3.55-$3.70. When the market opened an hour and a half later, Best Buy’s shares were trading at $37.25, a 7.5% increase over the prior day’s close-of-market share price.

At 10 a.m. that same day, Best Buy’s CEO and CFO held a conference call with analysts, during which Best Buy’s CFO stated that (1) the company’s earnings were “essentially in line” with management’s “original expectations for the year”; and (2) the company was “on track to deliver and exceed” its EPS guidance.

Between September 14, 2010 and December 13, 2010, Best Buy’s share price rose (but not in a straight line) to $41.70. On December 14, 2010, Best Buy issued a press release announcing that it had reduced its EPS guidance to $3.20-$3.40 in light of a decline in third quarter sales. That day, Best Buy’s shares closed at $35.52, a decline of 14.8%.

Plaintiffs subsequently brought the instant securities fraud action alleging that Best Buy and three of its executives had made misstatements in the September 14, 2010 press release and during the analyst conference call that same day. On August 5, 2013, the district court found the statements in the press release to be inactionable forward-looking statements protected under the Private Securities Litigation Reform Act’s Safe Harbor provision. The court permitted plaintiffs to proceed with their claims based on the statements made during the conference call.

District Court Grants Plaintiffs’ Motion for Class Certification Despite Evidence That the Conference Call Statements Did Not Affect Best Buy’s Stock Price 

Plaintiffs then moved for class certification, invoking the fraud-on-the-market presumption of reliance established in Basic v. Levinson, 485 U.S. 224 (1988). Plaintiffs presented an expert event study concluding that Best Buy’s “stock price increased in reaction to the three allegedly misleading statements on September 14.” Plaintiffs’ expert did not separate out the effects of the 8 a.m. press release and the 10 a.m. conference call.

Defendants submitted price impact rebuttal evidence through an expert event study showing that the price increase on September 14, 2010 “occurred after the press release but before the call.” Defendants’ expert opined that “the ‘on track’ and ‘in line’ conference call statements ‘had no discernible impact on Best Buy’s stock price.’”

Plaintiffs’ expert then submitted a reply report agreeing that “the conference call statements did not immediately increase [Best Buy’s] stock price because ‘the economic substance’ was disclosed in the press release, and thus ‘by the time the . . . conference call started, the economic substance of the alleged misrepresentations was largely reflected in Best Buy’s stock price.’” In the reply report, plaintiffs’ expert contended for the first time that the December 14, 2010 price decline somehow demonstrated that the “in line” and “on track” statements artificially propped up Best Buy's stock price on September 14 and throughout a three-month class period.

On August 6, 2014, the district court granted plaintiffs’ motion for class certification. The court concluded that defendants had not presented adequate evidence to rebut the fraud-on-the-market presumption. IBEW Local 98 Pension Fund v. Best Buy Co., 2014 WL 4746195 (D. Minn. 2014). The court reasoned that “[e]ven though [Best Buy’s] stock price may have been inflated prior to the earnings phone conference, . . . the alleged misrepresentations could have further inflated the price, prolonged the inflation of the price, or slowed the rate of fall.” The court determined that “price impact can be shown by a decrease in price following a revelation of the fraud,” and found that defendants had “not offered evidence to show that Best Buy’s stock price did not decrease when the truth was revealed.” Defendants appealed.

Eighth Circuit Reverses, Finding the District Court Misapplied the Price Impact Analysis Mandated by Halliburton 

At the outset of its discussion, the Eighth Circuit agreed with the district court’s holding that “when plaintiffs presented a prima facie case that the Basic presumption applie[d] to their claims, defendants had the burden to come forward with evidence showing a lack of price impact.” However, the Eighth Circuit held that the district court erred by “ignor[ing]” defendants’ “strong evidence on this issue – the opinion of plaintiffs’ own expert.”

The Eighth Circuit underscored that plaintiffs’ “event study showed that the forward-looking EPS guidance in the press release had an immediate impact on the [Best Buy] market price, whereas the confirming statements in the conference call two hours later had no additional price impact.” The Eighth Circuit held that “this was direct evidence that investors did not rely on the executives’ confirming statements” in the conference call. The court explained that the lack of price impact was “consistent with common sense” because “[e]arnings projections are statements of what a company is ‘on track’ to do” and “thus, the Best Buy executives’ conference call statements added nothing to what was already public.”

The Eighth Circuit rejected plaintiffs’ assertion that “the conference call statements effected a gradual increase in stock price between September and December.” The court held that plaintiffs’ argument was “contrary to the efficient market hypothesis on which the Basic presumption of reliance is based.” The Eighth Circuit similarly rejected plaintiffs’ contention that Best Buy’s “price drop after the December 14 ‘corrective disclosure’ was evidence of the requisite price impact–maintaining an inflated stock price.” The court held that plaintiffs’ price maintenance “theory provided no evidence that refuted defendants’ overwhelming evidence of no price impact.”

The Eighth Circuit concluded that “defendants [had] rebutted the Basic presumption by submitting direct evidence (the opinions of both parties’ experts) that severed any link between the alleged conference call misrepresentations and the stock price at which plaintiffs purchased.” Finding that plaintiffs had “presented no contrary evidence of price impact,” the Eighth Circuit held that “the district court [had] abused its discretion by certifying the class.” The Eighth Circuit reversed the district court’s decision and remanded the action for proceedings “not inconsistent with [its] opinion.”

In a dissenting opinion, Judge Murphy contended that the majority failed to address plaintiffs’ “theory that the conference call statements prevented [Best Buy’s] stock price from declining[.]”