Evidence Rebutting Fraud-on-the-market Presumption of Reliance Must Be Considered for Class Certification: Eleventh Circuit | Practical Law

Evidence Rebutting Fraud-on-the-market Presumption of Reliance Must Be Considered for Class Certification: Eleventh Circuit | Practical Law

In Local 703, I.B. of T. Grocery & Food Employees Welfare Fund v. Regions Financial Corp., the US Court of Appeals for the Eleventh Circuit remanded a securities fraud class certification order to allow consideration of evidence of price impact in light of the Supreme Court's recent ruling in Halliburton Co. v. Erica P. John Fund, Inc. (Halliburton II).

Evidence Rebutting Fraud-on-the-market Presumption of Reliance Must Be Considered for Class Certification: Eleventh Circuit

by Practical Law Litigation
Published on 11 Aug 2014 • USA (National/Federal)
In Local 703, I.B. of T. Grocery & Food Employees Welfare Fund v. Regions Financial Corp., the US Court of Appeals for the Eleventh Circuit remanded a securities fraud class certification order to allow consideration of evidence of price impact in light of the Supreme Court's recent ruling in Halliburton Co. v. Erica P. John Fund, Inc. (Halliburton II).
On August 6, 2014, in Local 703, I.B. of T. Grocery & Food Employees Welfare Fund v. Regions Financial Corp., the US Court of Appeals for the Eleventh Circuit affirmed the application of the fraud-on-the-market theory of reliance, but remanded a securities fraud class certification order to allow consideration of evidence of price impact in light of the US Supreme Court's recent ruling in Halliburton Co. v. Erica P. John Fund, Inc., 134 S.Ct. 2398 (2014) (Halliburton II) (No. 12-14168, (Aug. 6, 2014)).
The plaintiffs in Local 703 brought a purported securities fraud class action against Regions Financial Corporation (Regions) in the US District Court for the Middle District of Florida, alleging that it manipulated how its real estate holdings were carried on its books to avoid disclosing significant losses that would affect the company's value. The court certified the class and Regions appealed arguing, inter alia, that:
  • The plaintiffs did not show that common questions about reliance (a key element of a securities fraud action) would predominate over individual ones.
  • Even if the plaintiffs did establish commonality on reliance, the district court failed to fully consider the evidence that Regions presented to rebut the presumption of class-wide reliance.
The Eleventh Circuit affirmed the district court's finding that the plaintiffs established commonality based on the rebuttable presumption of reliance under Basic v. Levinson, 485 U.S. 224 (1988). Under the Basic "fraud-on-the-market" theory, an investor who buys or sells a security on an efficient market at the market price, presumably relied on any material misrepresentation because the market price reflects all publicly available information, including the misrepresentation.
However, in Halliburton II, the Supreme Court held that defendants can introduce evidence that stock prices did not change in light of any alleged misrepresentations both to undermine a plaintiff's case for market efficiency and to rebut the Basic presumption once it has been established. The district court, relying on the law before Halliburton II, did not fully consider the price impact evidence that Regions presented. The Eleventh Circuit therefore remanded the case to the district court to consider this evidence, but cautioned that under Halliburton II, the Basic presumption is not automatically rebutted simply because contrary evidence is presented. The district court still has to evaluate whether the evidence is sufficient to defeat the presumption.