On April 12, 2016, in IBEW Local 98 Pension Fund v. Best Buy Co., Inc., the US Court of Appeals for the Eighth Circuit reversed the lower court's certification of the plaintiffs' proposed securities fraud class action. The divided panel relied on the Supreme Court's ruling in Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (Halliburton II) in holding that the defendant rebutted the fraud-on-the market presumption of reliance by showing that alleged misrepresentation had no impact on share price (No. 14-3178, (8th Cir., Apr. 12, 2016)).

At 8:00 a.m. on September 14, 2010, before the markets opened, Best Buy issued a press release increasing its earnings per share guidance (EPS) for the 2011 fiscal year by 10 cents, to $3.55 - $3.70. EPS is a common metric investors use in assessing the value of public companies. Reflecting the optimistic news, the company's share price for that day opened 7.5% higher than the previous day's closing price. At 10:00 a.m. the same morning, Best Buy's executives held a conference call where they reiterated the statements made in the press release, saying that the company is "on track to deliver and exceed" its EPS guidance, and that the earnings were "essentially in line" with the company's original expectations for the year. Three months later, on December 14, 2010, Best Buy announced a decline in its quarterly sales and reduced its EPS guidance for the fiscal year to $3.20 - $3.40. By the close of trading that day, the Best Buy share price declined by 15%, returning almost to the levels it had been at before the optimistic September announcement.

The plaintiffs, who bought Best Buy's shares in this period, brought a purported securities fraud class action against Best Buy in the US District Court for the District of Minnesota. They alleged that Best Buy violated SEC Rule 10b-5 when it issued fraudulent or recklessly misleading statements in the September 2010 press release and the conference call. According to the plaintiffs, these misrepresentations artificially inflated and maintained Best Buy's price until Best Buy corrected the misstatements in December 2010.

The district court dismissed the claims relating to the press release, finding that the EPS guidance statement in Best Buy's press release was forward-looking and accompanied by appropriate cautionary language. The court allowed the claims concerning the conference call to go forward because it found them to be actionable as statements of present condition. The plaintiffs then filed a motion for class certification based on the conference call related allegations.

Plaintiffs in securities fraud actions must prove six elements, including reliance on the misrepresentation or omission. To obtain class certification, the plaintiffs must show that questions of law or fact common to class members predominate over any questions affecting only individual members (FRCP 23(b)(3)).

The Supreme Court has long held that securities fraud plaintiffs may satisfy the reliance element by invoking a rebuttable presumption of reliance based on the fraud-on-the-market theory. That theory states that any investor who buys or sells a stock on a well-developed, efficient market does so in reliance on the integrity of the price set by the market, which reflects all publicly available information. (Basic, Inc. v. Levinson (485 U.S. 224, 241-47 (1988)).

In 2014, in Halliburton II, another landmark decision, the Supreme Court held that securities fraud defendants may rebut the presumption of reliance at the class certification stage by showing that the alleged misrepresentation had no impact on the share price. If a defendant rebuts the presumption, the lawsuit cannot proceed as a class action because individual questions of reliance will predominate over common questions of law and fact.

Here, relying on their expert's opinion, the plaintiffs asserted fraud-on-the-market reliance because, although the economic substance of the statements Best Buy made in the press release was already reflected in the stock price by the time the conference call started, the conference call statements maintained the inflated share price until the December 14 corrective disclosure.

The defendant attempted to rebut this presumption by arguing that the alleged misrepresentations did not in fact impact the price of Best Buy's shares. The district court considered this evidence in light of Halliburton II but ultimately certified the class finding that the defendant had failed to rebut the presumption.

The Eighth Circuit reversed. The circuit court held that the defendant had successfully rebutted the fraud-on-the-market presumption because:

Judge Murphy dissented, arguing that the majority misapplied the presumption of reliance standard that Halliburton II set out because it ignored the plaintiffs' "price maintenance" theory that several circuits recognize. The plaintiffs alleged that the information Best Buy disclosed on the conference call fraudulently maintained the inflated share price and counteracted expected declines. The dissenting judge concluded that Best Buy produced no evidence that would rebut this allegation and that it therefore failed to rebut the fraud-on-the-market presumption of reliance.

Practitioners in the Eighth Circuit should be aware that the circuit court's decision has opened the door for securities fraud defendants seeking to defeat class certification based on price impact.

Practical Law has many resources to help practitioners navigate the issues they may encounter in securities fraud class actions: