Nearly three decades after the U.S. Supreme Court embraced the “fraud on the market” presumption of reliance in securities fraud class actions (Basic v. Levinson, 485 U.S. 224 (1988)), significant recalibrations have been made. In two recent decisions, In re Petrobras Sec. Litig., 862 F.3d 250 (2d Cir. 2017) and Waggoner v. Barclays PLC, No. 16-1912-cv, 2017 U.S. App. LEXIS 22115 (2d Cir. Nov. 6, 2017), en banc petition pending, the Second Circuit held:
• In cases involving large cap, actively traded and well followed stocks (such as most listed on the NYSE and NASDAQ), plaintiffs need not present an “event study” to demonstrate that the stock traded in an “efficient” market. Petrobras, 862 F.3d at 278.
• When considering the efficiency of smaller cap stocks, district courts should “holistically” consider indirect factors of efficiency (e.g., trading volume, analysts and bid/ask spreads) along with event studies, rather than elevate event studies to a sine qua non status. Id. at 277.
• Plaintiffs need not show price movements when the alleged misrepresentations were first made, but rather may proceed on a “price maintenance theory,” i.e., that the misstatements “merely maintained inflation already extant in a company’s stock price.” Barclays, 2017 U.S. App LEXIS 22115, at *48, quoting In re Vivendi, S.A. Sec. Litig., 838 F.3d 223, 256 (2d Cir. 2016).
• Courts indeed should be wary of excessive reliance on event studies, given that such studies were intended for analysis of massive amounts of data involving multiple stocks, not individual firms with few “events.” Petrobras, 862 F.3d at 278.
• While Halliburton II afforded defendants an opportunity to rebut the reliance presumption by demonstrating that the alleged fraud had no impact on the price of the stock, defendants must do so by a “preponderance of the evidence.” 2017 U.S. App. LEXIS 22115, at **41-42.
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