(Reuters) - It’s been nearly four years (!) since the U.S. Supreme Court issued its decision in Halliburton v. Erica P. John Fund (134 S.Ct. 2398), reconfirming that shareholders in securities fraud class actions are entitled to rely on the presumption that the market responds to material misrepresentations by large, widely-traded companies. Halliburton was a big disappointment for class action opponents who had hoped the Supreme Court would do away with its longstanding fraud-on-the-market precedent. But the decision did provide a bit of solace for defendants, holding that they have a right to rebut the presumption that the market reacted to corporate executives’ supposedly misleading statements.
The Supreme Court didn’t spell out the mechanics of rebutting the presumption of market reliance in the 2014 Halliburton decision, leaving that to the lower courts to figure out. They’ve failed, according to a new Supreme Court petition from Barclays.
The bank wants the justices to grant review of a decision from the 2nd U.S. Circuit Court of Appeals (875 F.3d 79), affirming certification of a shareholder class suing Barclays, in order to clarify standards for defendants attempting to rebut the presumption.
Specifically, Barclays’ lawyers at Sullivan & Cromwell and Williams & Connolly argue that the 2nd Circuit’s decision in its case, which involved allegations that the bank deceived investors about its dark pool trading platform, sowed confusion in two different ways: The 2nd Circuit, according to Barclays, split with 8th Circuit precedent in 2016’s IBEW Local 98 Pension Fund v. Best Buy (818 F.3d 775) to hold that defendants bear the burden of countering the presumption of market efficiency by a preponderance of the evidence; and the appeals court contributed to post-Halliburton uncertainty across the lower courts about how shareholders can prove the market’s reaction to alleged misrepresentations.
Barclays also contends the 2nd Circuit was just plain wrong in its interpretation of the federal rules of evidence and the Supreme Court’s directive in Halliburton – and its mistakes will force securities defendants into unwarranted settlements.
“Absent guidance from this court, courts and litigants will continue to be uncertain as to what a defendant must show to rebut the presumption and what a plaintiff must show to invoke the presumption in the first place,” the petition said. “(The ruling) lowers the bar for plaintiffs to establish the … presumption in class actions involving large, publicly traded companies, while at the same time raising the bar for defendants to rebut the presumption — particularly in the 2nd Circuit, where thousands of companies are located or listed on the New York Stock Exchange, NASDAQ, and other public markets.”
Does Barclays have a shot at Supreme Court review? The bank, you may recall, is not the first recent securities class action defendant to raise a Supreme Court ruckus about the 2nd Circuit’s post-Halliburton standard for class certification. Last fall, the Brazilian oil company Petrobras protested the 2nd Circuit’s decision to uphold certification of a shareholder class even though investors didn’t offer empirical evidence, via an event study, of a market response to alleged misrepresentations. Like Barclays, Petrobras argued in its petition for Supreme Court review that the 2nd Circuit had all but obliterated defendants’ ability to rebut the presumption of fraud-on-the-market reliance, making class certification a foregone conclusion. It contended, like Barclays, that the 2nd Circuit was not only wrong but was also contributing to nationwide confusion about the empirical standard for market reaction.
Petrobras got amicus support from some influential law profs, but the Supreme Court denied its petition for review earlier this year. That doesn’t bode well for Barclays, whose case Petrobras cited to the Supreme Court as further evidence of the 2nd Circuit’s laxity.
Perhaps in response to the justices’ rejection of the Petrobras case, Barclays’ petition plays up the 2nd Circuit’s purported split with the 8th Circuit’s Best Buy ruling. Best Buy, as I wrote at the time, was the first defendant to use the Supreme Court’s Halliburton ruling to defeat class certification by rebutting the presumption of market efficiency. The 8th Circuit’s ruling rested on investors’ failure to establish a link between Best Buy’s share price and alleged misstatements by corporate execs.
But the appeals court also addressed evidentiary burdens. It was up to Best Buy, the 8th Circuit said, to provide initial rebuttal evidence breaking the link between market price and alleged misrepresentations. After the defendant broke the chain, the appeals court said, the burden shifted to shareholders to show why they were entitled to rely on the presumption of market efficiency.
The 2nd Circuit in Barclays looked more searchingly at the first step in the evidentiary burden analysis. Unlike the 8th Circuit, which shifted the burden to shareholders with the mere production of defense evidence rebutting the fraud-on-the-market presumption, the 2nd Circuit held that Barclays had to show by a preponderance of evidence that the bank’s alleged misstatements didn’t affect its share price.
The 2nd Circuit acknowledged the 8th Circuit’s ruling in Best Buy that shareholders bear the burden of proof of market reliance but said it was dicta because the holding didn’t determine the outcome of the case.
Barclays’ Supreme Court petition argues that the 2nd Circuit was too quick to shrug off its disagreement with the 8th Circuit. “The 8th Circuit’s decision in Best Buy established a legal rule that will plainly govern future decisions in that circuit,” the petition said. “The 8th Circuit expressly invoked Rule 301 (of the Federal Rules of Civil Procedure) and articulated the defendant’s burden as only involving a burden of production … The conflict between the 8th Circuit’s rule and the 2nd Circuit’s rule is square, and that conflict warrants this court’s review.”
The evidentiary burden in rebutting the presumption of market reliance may seem like a pretty technical question for the Supreme Court, but the justices have had a strong taste for securities class actions in the past several years, especially when defendants want their attention. The lead lawyer for Barclays’ shareholders, Jeremy Lieberman of Pomerantz, told me in an email that he was not available to comment on the bank’s petition. I have a feeling, though, that investors will tell the court there’s less to the circuit split than Barclays contends.