The Fraud-on-the-Market Doctrine: Recent Trends, Developments and Legal Challenges
Join a seasoned panel of thought leaders and professionals brought together by The Knowledge Group as they provide and present to the audience an overview of the recent trends, developments and legal challenges surrounding the Fraud-on-the-Market Doctrine. Speakers will highlight the implications and inferences of the developments to the securities class action landscape. Speakers will also go beyond the basics and provide practical tips and strategies to avoid common risks and pitfalls surrounding this significant topic.
Key topics include:
- An Introduction - Fraud-on-the-Market Doctrine
- The Basic Fraud on the Market Presumption
- The Basic Principles and Theory of Reliance
- Implications on Class Certification
- Elements of Securities Fraud Claims
- The Fairness in Class Action Litigation Act of 2017
- Recent Court Decisions
- Trends, Developments, and Updates in 2018
Michele E. Rose, Attorney
Murphy & McGonigle
- Elements of Securities fraud claims
- Fraud on the Market Doctrine: The Basics
- Rebuttable presumption that the market price paid for a security reflected the impact of any material public misrepresentation by the Defendant
- To invoke the fraud-on-the-market presumption, the plaintiff must allege that:
- The alleged misrepresentations were publicly known.
- The misrepresentations were material.
- The stock trades in an efficient market, meaning that its market price reacts quickly to new information.
- The plaintiff traded the stock between the time when the defendant made the misrepresentations and the market learned the truth.
- To rebut the presumption, the defendant must sever the link between the alleged misrepresentation and either:
- The price that the plaintiff received (or paid).
- The plaintiff's decision to trade at a fair market price. Halliburton II, 134 S. Ct at 2408, Semerenko 223 F. 3d at 178-79.
- Challenges may focus on any of the elements of the plaintiff's fraud-on-the-market claim, including the plaintiff's assertion that the misrepresentations were material
- Implications on Class Certification
- The fraud-on-the-market theory facilitates class certification by recognizing a rebuttable presumption for class-wide reliance on public, material misrepresentations when shares trade in an efficient market
- A defendant seeking to rebut the application of the fraud-on-the-market presumption may show that the plaintiff failed to prove the following, by a preponderance of the evidence, at class certification:
- The relevant transaction occurred after the misrepresentations were made but before the truth was revealed (Proof of trade timing)
- The alleged misrepresentations were publicly known
- The stock traded in an efficient market
- Proof of Market efficiency
- Proof of Price Impact
- Defense Perspective: Challenging Plaintiff’s proof of reliance
Clint A. Corrie, Shareholder
Quilling Selander Lownds Winslett Moser P.C.
- The two faces of materiality
- Materiality as element of class certification
- Materiality as element of 10-b-5 claim
- Materiality vs Reliance
- Arguments in Amgen Id by Amgen
- Response by Majority to reject materiality as required proof at class certification stage
- Dissent support for curtailing cases at inception where materiality cannot be proved
- Future grounds of attack on class certification
- market efficiency
- Reliance, Loss causation
Dr. Vinita M. Juneja, Managing Director and Chair, Global White Collar, Investigations & Enforcement Practice
NERA Economic Consulting
- What does market efficiency mean? Are there different types of efficiency?
- How does one determine or test for market efficiency?
- Court endorsed tests
- Other econometric tests
- Impact of recent decisions on the determination of efficiency
- Testing for price impact and testing for materiality: a step by step primer
- Controlling for market and industry factors
- Controlling for confounding news
- Other complexities
- Examples of price impact and materiality tests from various cases including Halliburton II: accounting for old news, efficient markets and multiple comparisons
- Some data on filings and settlements and other dispositions in fraud on the market class actions.
Emma Gilmore, Partner
- Application of fraud on the market principles in In re Petrobras Sec. Litig.
- One of the biggest securities fraud class action litigation in over a decade
- Billions of dollars in bribes and one third of Brazilian Congress under investigation; former Brazilian president arrested; many company executives arrested and entered plea deals, admitting to massive fraud
- District court opinion (SDNY, Judge Rakoff), 312 F.R.D. 354 (S.D.N.Y. Feb. 2, 2016)
- Certified both purchasers of ADRs and purchasers of bonds
- In determining whether a market is efficient (reliance presumed), court applied the Cammer and Krogman factors
- Biggest battle was Cammer factor 5: empirical evidence of market efficiency
- District court found Cammer factor 5 was met. Plaintiffs’ expert employed proportionality Z-test
- A statistically significant showing that statistically significant price returns are more likely to occur on event dates than on non-event dates is sufficient as direct evidence of market efficiency
- Plaintiffs’ expert also analyzed directionality of price movements, to which court assigned only limited weight
- Court of appeals opinion (Second Circuit), 862 F.3d 250 (2d Cir. July 7, 2017)
- Seminal opinion
- Defendants challenged the district court’s findings, arguing that the court erred in the relative weight it assigned to the parties’ competing evidence of market efficiency
- Confirmed the existence of Plaintiffs’ direct evidence of market efficiency
- Directionality evidence not required: defendants are attempting to relabel a sufficient condition as a necessary one. Event study not the only way to prove market efficiency
- Indirect evidence is particularly valuable in situations where direct evidence does not entirely resolve the question
- Not an onerous burden for the Plaintiffs
- Supreme court cert petition (filed on November 1, 2017)
- In Basic and Halliburton, this Court held that a plaintiff in a securities fraud action can invoke a rebuttable presumption of reliance on public misstatements, only if the plaintiff can show that new information had a “price impact” on the securities
- The lower courts are deeply divided on what factors to weigh, and how to weigh them, in determining whether a plaintiff may be presumed to have relied on alleged misrepresentations under Basic and Halliburton II
- Does the legal standard to invoke Basic’s presumption of reliance at minimum require empirical evidence that a security generally reacted in a directionally appropriate manner to new material information
- Application of fraud on the market principles in Barclays PLC. Sec. Litig.
- Supreme court cert petition (filed on November 1, 2017)
- Application of fraud on the market principles in In re Petrobras Sec. Litig.
- Defendants concealed information and made misleading statements over a three-year period regarding Barclays’ management of its “LX” dark pool, a private trading platform
- District court opinion (SDNY, Judge Scheindlin), 312 F.R.D. 307 (S.D.N.Y. Feb. 2, 2016)
- court rejected defendants’ argument that to show market efficiency, plaintiffs must provide empirical evidence/event studies showing that the market price of the company’s stock price reacted quickly to the disclosure of new material information about the company
- While plaintiffs did, in fact, proffer an event study, the court held that no one measure of market efficiency was determinative
- Plaintiffs can demonstrate market efficiency through indirect evidence of market efficiency
- Event studies are usually conducted across “a large swath of firms,” but “when the event study is used in a litigation to examine a single firm, the chances of finding statistically significant results decrease dramatically,” thus not providing an accurate assessment of market efficiency
- Plaintiffs sufficiently established market efficiency indirectly. Direct evidence from event studies was unnecessary
- Court of Appeals Opinion (Second Circuit) (875 F.3d 79, 2d Cir. 2017)
- Seminal opinion
- Direct evidence of price impact is not always necessary to demonstrate market efficiency
- “We have repeatedly—and recently [in Petrobras]—declined to adopt a particular test for market efficiency.”
- “Direct evidence of price impact under Cammer 5 is not always necessary to establish market efficiency and invoke the Basic presumption.”
- Rejected defendants’ contention that Federal Rule of Evidence 301 applies and made clear that the Basic presumption is a judicially created doctrine and thus the burden of persuasion properly shifts to defendants to rebut the Basic presumption by a preponderance of the evidence
- Defendants seeking to rebut the presumption of reliance must do so by a preponderance of the evidence rather than merely meeting a burden of production
- The Court placed the burden of showing there is no price impact upon defendants (i.e., that the misrepresentations at issue affected the price of the securities)
- Other Circuits
- Eight Circuit
- IBEW Local 98 Pension Fund v. Best Buy Co., 818 F.3d 775 (8th Cir. 2016)
- Court applied burden-shifting under FRE 301
- Best Buy met its burden of production by proffering evidence that no price movement occurred following the alleged misstatements
- Burden of persuasion shifted to plaintiffs, whose own expert supported Best Buy’s assertion that the statements at issue did not impact the stock’s price
- Eight Circuit
- Fifth Circuit
- Recent 23(f) petition filed on behalf of Cobalt Energy
- Defendants argues that the district court certified class despite evidence that no price movement accompanied the alleged misstatements and the information contained in the corrective disclosures was supposedly already known to the market
- District court reasoned that “Defendant's arguments about whether the disclosures were actually corrective has no bearing on the predominance inquiry for class certification” as this “is an issue that is common to all members of the class.”
- Petitioners argued that this reasoning ignores Halliburton II’s mandate that courts consider evidence rebutting price impact before a class is certified to ensure that the presumption of classwide reliance is warranted, and argued that “whether disclosures are actually corrective” is an “essential link” connecting a price decline with an alleged misstatement
- Interlocutory review was granted on August 4, 2017
- Sixth Circuit
- Recent 23(f) petition filed on behalf of Big Lots, Inc.
- Southern District of Ohio certified a class despite absence of price impact at the time the statements were made
- The district court rejected the Best Buy court’s burden-shifting analysis, relying on Justice Ginsburg’s concurrence in Halliburton II in concluding that the defendant bears the ultimate burden of proving a lack of price impact at the class certification stage
- Petitioners argued that the district court used the wrong evidentiary standard by failing to apply the burden-shifting regime of FRE 301.
- Amici argued that because the district court did not articulate any legal standard for allocating evidentiary burdens, the decision should be reversed for this reason alone
- Amici also argued that the district court failed to place any burden on the plaintiffs. The district court’s reasoning would allow securities plaintiffs to obtain class certification merely by invoking the “price maintenance” theory (i.e., pointing to a subsequent price drop) with no supporting evidence
- Interlocutory review was granted on August 23, 2017
- Recent 23(f) petition filed by Bancorpsouth, Inc.
- The Middle District of Tennessee certified the class. Defendants argued that the market showed no interest in the alleged misstatements
- 23(f) petition includes whether evidence of no front-end price impact is sufficient to rebut the Basic presumption, and whether the district court should have applied the burden shifting regime of FRE 301
- Petition denied Sept. 18, 2017
- If the Basic presumption pertains, a defendant may rebut it with “evidence that the asserted misrepresentation (or its correction) did not affect the market price of the defendant’s stock.” Halliburton,
- BancorpSouth maintains that it rebutted the Basic presumption because it demonstrated a lack of price impact at the time the alleged misrepresentations were made. But price impact may be demonstrated either at the time that the alleged misrepresentations were made, or at the time of their correction
- Under a deferential standard, the court also found that the district court did not abuse its broad discretion to apply the Affiliated Ute presumption despite it never been applied at the class-certification stage
Who Should Attend:
- Securities Law Attorneys
- Business Lawyers
- General Counsel
- In-House Counsel
- Top Level Management
Dr. Juneja is a Managing Director and Chair of NERA’s Global White Collar, Enforcement & Investigations Practice. She was formerly the Global Chair of NERA’s Securities and Finance Practice and has PhD and Masters degrees, both in economics, from Harvard University. Dr. Juneja has been retained as an expert in hundreds of matters, chiefly in the areas of securities economics, finance, and valuation. In addition to her work on many other kinds of financial disputes, she has been retained in over a thousand securities fraud class actions involving alleged fraud on the market. In shareholder suits, she has analyzed: damages, materiality, and causation in both securities fraud class actions and opt-out claims involving individual securities and funds; class certification, tracing, and market efficiency issues in securities class actions involving both equity and fixed income securities; affected trading volume in class actions; and settlement value of securities class actions. She has also worked on numerous white collar criminal matters, regulatory enforcement investigations and related litigation.
She has testified and submitted testimony in US federal state courts, in Canadian courts, in Israeli court, and in arbitrations in the US, Canada, and the UK. Her arbitration and mediation experience includes appearances before the AAA, the NASD, the NYSE, the ICC International Court of Arbitration, the LCIA, and JAMS. She has also been an arbitrator for FINRA.
Who’s Who Legal has recognized Dr. Juneja as a leading damages expert in its annual “Consulting Experts” guide, stating that her expert testimony and reports are “supported by meticulous analysis, as well as flawlessly and clearly presented; they are also subject of compelling testimony when presented at trial or in deposition.” She has lectured at the graduate and undergraduate level at Western University.
Dr. Juneja is a Managing Director and Chair of NERA’s Global White Collar, Enforcement & Investigations Practice. She was formerly …
Michele Rose is a senior securities defense litigator with over twenty-five years of experience. Ms. Rose specializes in the defense of securities class actions, shareholder derivative litigation, corporate investigations, SEC enforcement matters and exchange inquiries. Ms. Rose represents clients in state and federal court and before the Securities and Exchange Commission (SEC), Department of Justice (DOJ) and other regulatory bodies. She also conducts corporate internal investigations and counsels clients with respect to securities regulatory and corporate governance issues. Her clients include public companies and their boards (including audit committees and special committees), senior executives and managers, financial institutions, professional firms, auditors and lawyers. Ms. Rose has significant experience in all aspects of litigation, including pre¬trial investigations, counseling, discovery, motion practice, settlement negotiations, litigation strategy, and trial. She also has extensive negotiating experience, including negotiating complex D&O coverage issues, discovery disputes, and settlements.
Michele Rose is a senior securities defense litigator with over twenty-five years of experience. Ms. Rose specializes in the defense …
Emma Gilmore is a partner at the Firm and is regularly involved in high-profile class-action litigation.
Ms. Gilmore plays a leading role in the Firm’s class action case against Brazil’s largest oil company, Petrobras, arising from a multi-billion dollar kickback and bribery scheme. Ms. Gilmore played a leading role in Strougo v. Barclays PLC, a high-profile securities class action that alleges Barclays PLC misled institutional investor clients about the extent of the banking giant’s use of so-called “dark pool” trading systems.
Before joining Pomerantz, Ms. Gilmore was a litigation associate with the firms of Skadden, Arps and Sullivan & Cromwell. She worked on the WorldCom Securities Litigation.
Ms. Gilmore also served as a law clerk to the Honorable Thomas C. Platt, United States District Judge for the Eastern District of New York.
She graduated cum laude from Brooklyn Law School, where she served as a staff editor for the Brooklyn Law Review. She was the recipient of two CALI Excellence for the Future Awards. She graduated summa cum laude from Arizona State University, with a BA in French and a minor in Business.
Emma Gilmore is a partner at the Firm and is regularly involved in high-profile class-action litigation. Ms. Gilmore plays a …
Clint Corrie focuses his practice primarily in complex commercial litigation, with an emphasis on banking, securities litigation, and arbitrations before FINRA panels. He represents broker-dealers, investment advisers, wealth management advisers, hedge funds and private equity firms and their professionals in a wide range of securities matters including sales practices, customer complaints, suitability and supervisory claims, regulatory inquiries, investigations, and FINRA and SEC enforcement proceedings. He is experienced in a broad range of commercial litigation and arbitration claims having tried jury and non-jury trials in state and federal courts, and before national and international arbitral tribunals. Clint has extensive experience prosecuting and defending clients in trade secrets, covenants-not-to-compete, and related intellectual and employment-related litigation involving injunctions and extraordinary relief. He has extensive experience in professional liability matters and coverage involving financial institution bonds. He has represented national banks and credit unions in litigation between financial institutions, involving syndicated loans and participations.
Clint Corrie focuses his practice primarily in complex commercial litigation, with an emphasis on banking, securities litigation, and arbitrations before …
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Method of Presentation:
Basic knowledge on securities litigation
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Areas of Professional Practice
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About NERA Economic Consulting
NERA Economic Consulting (www.nera.com) is a global firm of experts dedicated to applying economic, finance, and quantitative principles to complex business and legal challenges. For over half a century, NERA’s economists have been creating strategies, studies, reports, expert testimony, and policy recommendations for government authorities and the world’s leading law firms and corporations. With its main office in New York, NERA serves clients from more than 25 offices across North America, Europe, and Asia Pacific.
About Murphy & McGonigle
Murphy & McGonigle, founded in 2010, was created based on an innovative law firm model that rigorously controls overhead while providing its attorneys and clients with state-of-the-art technology and litigation support to ensure both world-class service and maximum cost-efficiency. Murphy & McGonigle serves the litigation, enforcement defense, and regulatory counseling needs of clients across the full spectrum of the financial services industry – from national banks, broker-dealers, investment advisers, and hedge funds, to national and international securities markets and exchanges. Many of the firm’s partners formerly served in senior positions at the U.S. Department of Justice, SEC, FINRA, and CFTC and several served in senior executive positions in major financial institutions on Wall Street. Murphy & McGonigle operates out of offices in New York, Washington, D.C., and Richmond, Virginia.
About Pomerantz LLP
Founded over 80 years ago, Pomerantz LLP is the oldest securities litigation firm in the United States. The firm represents some of the largest pension funds, asset managers and institutional investors around the globe, monitoring assets of well over $3.5 trillion. To date, Pomerantz has recovered billions of dollars for defrauded investors and has won landmark decisions that have expanded and protected investor rights and initiated historic corporate governance reforms. The firm’s cases have set important precedents that are now the bedrock of securities litigation, including: the right to trial-by-jury in derivative actions; the duty of companies to disclose ongoing merger negotiations; and limits on investment company advisory fees.
About Quilling Selander Lownds Winslett Moser P.C.
Since 1993, Quilling, Selander, Lownds, Winslett and Moser, P.C. has built a highly successful practice providing state of the art and aggressive litigation and bankruptcy services to a broad range of clients that include some of the nation’s largest financial institutions, real estate, insurance companies, and construction companies as well as small to mid-size businesses in a wide range of disputes and business planning.