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From Securities Regulation Daily, April 04, 2018

SIFMA, Chamber of Commerce seek to resolve ‘confusion’ about fraud-on-the-market presumption

By John M. Jascob, J.D., LL.M.

The U.S. Chamber of Commerce and the Securities Industry and Financial Markets Association (SIFMA) have asked the Supreme Court to grant certiorari and review a Second Circuit decision concerning the proof necessary to invoke the fraud-on-the-market presumption of reliance under Basic Inc. v. Levinson. In their joint amicus brief, the chamber and SIFMA argued that the Second Circuit’s decision has created split of authority among the circuit courts and exacerbated confusion in the lower courts concerning the Basic presumption in securities class actions (Barclays PLC v. Waggoner, March 30, 2018).

In a putative class action filed against Barclays PLC, investors alleged that Barclays allowed predatory high-frequency traders to operate within an alternative trading system or "dark pool" operated by Barclays. The investors claimed that the price of Barclays' American Depositary Shares (ADS) was inflated until the New York attorney general brought an action against Barclays alleging that the bank misrepresented the protections afforded to customers who used the dark pool. The Second Circuit ultimately affirmed the district court's grant of class certification, holding that Barclays failed to rebut the Basic presumption of reliance on the price of the shares in an efficient market and that it was not erroneous to require that this be shown by a preponderance of the evidence. Barclays then filed a petition for writ of certiorari on February 28, 2018.

Burden for rebutting the Basic presumption. In the view of the amici, the Second Circuit mistakenly placed on defendants not only a burden of production to come forward with evidence rebutting the Basicpresumption, but also the burden of persuasion to defeat the presumption by a preponderance of the evidence. The amici noted that plaintiffs bear the burden of proving every element when seeking class certification under Federal Rule of Civil Procedure 23. The Second Circuit ruling, however improperly relieved the plaintiffs of their burden of persuasion under the Supreme Court’s decision in Halliburton Co. v. Erica P. John Fund, Inc. (U.S. 2014), once the defendants had produced evidence to rebut the presumption.

Even though Barclays produced evidence that the alleged misstatements did not cause any statistically significant price increase, the Second Circuit erred by holding that this evidence was insufficient because Barclays continued to bear the burden of persuasion, the amici argue. The Second Circuit’s decision also conflicts with IBEW Local 98 Pension Fund v. Best Buy Co. (8th Cir.2016), where the Eighth Circuit applied Federal Rule of Evidence 301 to the Basic presumption of reliance and required the defendant only to "come forward with evidence showing a lack of price impact." The Second Circuit’s error is particularly important, the amici contend, in light of that circuit’s critical role in capital markets and securities law.

Direct evidence of market efficiency. The amici contend that the Second Circuit also erred in holding that plaintiffs can benefit from the Basic presumption of reliance without direct evidence that the relevant securities were traded in an efficient market. In the view of the amici, the Second Circuit’s ruling would eviscerate the reliance element in securities class actions because if "indirect evidence" were sufficient to find market efficiency, and hence establish reliance, most large companies would be potentially liable for any statement regardless whether investors actually relied on it. Borrowing from the Supreme Court’s language in Dura Pharmaceuticals, Inc. v. Broudo (U.S. 2005), this would in effect be "turning the securities laws into an insurance policy." The amici also fear that the ruling, if allowed to stand, will embolden investors to "bring even more questionable claims that are disconnected from real culpability and allow them to extort settlements using the threat of massive class-wide damages."

The case is No. 17-1209.

Attorneys: Jeffrey Thomas Scott (Sullivan & Cromwell LLP) for Barclays PLC. Jeremy Alan Lieberman (Pomerantz LLP) for Joseph Waggoner.

Companies: Barclays PLC

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