Saturday, February 6, 2016

Halliburton Fallout Continues

For those of you who just can’t get enough of Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (“Halliburton II”), developments, there have recently been a couple of doozies.

[More under the cut]

First up, the Second Circuit just granted Goldman's 23(f) petition in In re Goldman Sachs Group, Inc. Securities Litigation, 2015 U.S. Dist. LEXIS 128856 (S.D.N.Y. Sept. 24, 2015). 

As I previously posted, two circuits have granted 23(f) petitions to review how defendants may rebut the presumption of price impact under the standards of Halliburton II.  With its recent grant, the Second Circuit becomes the third circuit to enter the fray.   

Goldman is an odd duck of a case. The central allegation is that Goldman made various representations regarding its policies for protecting against conflicts of interest.  These statements were revealed to be false - causing Goldman's stock price to drop - when various governmental entities began investigating Goldman's conduct in connection with sales of mortgage-backed CDOs.  The district court denied Goldman Sachs’s argument that the claims should be dismissed as puffery, see Richman v. Goldman Sachs Group, Inc., 868 F. Supp. 2d 261 (S.D.N.Y. 2012), then denied Goldman’s motion for reconsideration after the Second Circuit rejected similar claims based on statements by Standard & Poor’s, UBS, and Barclays, see In re Goldman Sachs Group, Inc. Sec. Litig., 2014 U.S. Dist. LEXIS 85683 (S.D.N.Y. June 23, 2014), and then denied Goldman’s motion for interlocutory appeal of the denial of reconsideration, see In re Goldman Sachs Group Secs. Litig., 2014 U.S. Dist. LEXIS 143127 (S.D.N.Y. Oct. 6, 2014). 

The district court really didn't think the statements were puffery, is what I'm saying.

After the district court certified the class, Goldman finally managed to get its puffery argument before the Second Circuit in the form of a Rule 23(f) petition that devotes nearly half of its space to the contention that because the statements were immaterial, they could not have impacted stock prices.  One might have thought that an argument about the materiality of misstatements at the class certification stage was foreclosed by the Supreme Court’s decision in Amgen Inc. v. Conn. Ret. Plans & Tr. Funds, 133 S. Ct. 1184 (2013), but it seems that the Second Circuit may believe there’s still some ambiguity on the issue.

Either that, or the Second Circuit granted the petition to focus on Goldman’s alternative argument, which is actually a bit different than the theories being considered by CA5 and CA8.  In those cases, the defendants claim that there can be no price impact without evidence of either price movement when the false statement was made, or price movement when the truth was disclosed, and that if – in the defendants’ view – the truth was never disclosed (because the alleged corrective disclosures were not sufficiently tethered to the false statements), there is no evidence of price impact. As I previously pointed out, however, if the burden is on defendants to show lack of price impact when the false statements were made, the argument that the truth was never disclosed doesn’t really prove their point.

In Goldman, however, Goldman’s argument is that the “truth” was disclosed – multiple times – prior to the corrective disclosure on which the plaintiffs’ case hinges, and there was no market reaction. Thus, the market reaction exhibited at the end of the class period was solely due to the threat of government regulatory action, and not due to the revelation of any information concealed by Goldman. 

The district court rejected this argument, viewing it as a riff on “truth on the market,” a forbidden materiality determination.  Which it is, sort of:  Goldman isn't precisely arguing that because information had been disclosed, it must necessarily have been incorporated into stock prices – instead, it is simply arguing that there was a demonstrable lack of price movement – but that may be a distinction without a difference.  This is especially so given the types of truth on the market inquiries that courts have refused to undertake in the past, such as in cases like Amgen itself, where the dispute was about how widely/clearly the truth had been disclosed.

But whatever label applies, Goldman's logic is plain:  if markets did not react to various revelations of the truth regarding Goldman's unchecked conflicts of interest, it is likely that the market did not react to the earlier false statements on the same subject.  But this is not “direct evidence” that the initial false statements failed to impact market prices, as Halliburton II discusses; it is indirect evidence, focusing on time points later than the original statements, and to some extent it depends on the inference that the market found information on the subject to be – you guessed it – immaterial.  And we're once again back in the territory forbidden by Amgen

So what the Goldman dispute really highlights is the instability of Halliburton II, which permits inquiries into price impact but not materiality or loss causation, both of which (by other names) are critical parts of the price impact analysis.  As I recently discussed in an essay for the Duke Journal of Constitutional Law and Public Policy, the artificially-truncated inquiry mandated by Halliburton II only invites mischief, which the Goldman decision – and the earlier Halliburton district court decision – illustrate.

The second interesting development comes in the form of Judge Scheindlin’s grant of class certification in Strougo v. Barclays PLC, 2016 U.S. Dist. LEXIS 12332 (S.D.N.Y. Feb. 2, 2016).   Echoing her opinion in last summer's Carpenters Pension Trust Fund of St. Louis v. Barclays PLC, 310 F.R.D. 69 (S.D.N.Y. 2015), Scheindlin held that plaintiffs need not submit event studies to win class certification in fraud on the market cases, if they have other types of evidence demonstrating market efficiency (such as high trading volume and analyst following).  Scheindlin based her decision in part on the academic criticism of the use of event studies in securities litigation, and in part on Halliburton II’s holding that “efficiency” for fraud on the market purposes is a relatively “modest” presumption that does not require instantaneous correlations between public information and market movement.  Though several of us 10(b)-watchers had previously speculated that district courts might loosen their definitions of efficiency in the wake of Halliburton II, Scheindlin’s opinion is the strongest evidence I’ve seen of that actually occurring.  Indeed, it’s hard to read Scheindlin’s opinion as anything less than a call to arms against prevailing standards in securities litigation.

Ann Lipton | Permalink


Thanks for this analysis, Ann. It's very helpful in a number of respects. In fact, I recently taught puffery in Securities Regulation, and these district court cases may make an interesting project for my students in that connection. Great stuff.

Posted by: joanheminway | Feb 6, 2016 5:47:04 AM

Glad you liked it! I also just taught puffery in Sec Reg - it makes for entertaining classes, that's for sure.

Posted by: Ann Lipton | Feb 6, 2016 7:15:14 AM

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