Securities Regulation Daily Panel says court misapplied price impact analysis in Best Buy class action
Tuesday, April 12, 2016

Panel says court misapplied price impact analysis in Best Buy class action

By Kevin Kulling, J.D.

The Eighth Circuit has reversed and remanded a Minnesota District Court decision that certified a class action brought by Best Buy stock purchasers who alleged that the consumer electronic retailer made fraudulent statements about its future earnings in a press release and during a conference call with analysts. The appellate court, addressing an issue of first impression, concluded that the district court misapplied the price impact analysis mandated in the recent Supreme Court case of Halliburton v. Erica P. John Fund (IBEW Local 98 Pension Fund v. Best Buy Co., 14-3178, Loken, J.).

Underlying claims. The suit was brought by stock purchasers who claimed the company misled investors in a September 14, 2010 press release, issued before the stock market opened, announcing that Best Buy was increasing its full year earnings per share guidance. Stock purchasers also challenged statements made at 10 a.m. that same day, when Best Buy’s CEO and CFO held a conference call with analysts affirming that earnings were “in line” with original expectations for the year and that the company was pleased it was “on track” to deliver and exceed the annual earnings per share guidance.

Investors alleged that by December 14, 2010, the company reported a decline in its fiscal third quarter sales and announced that it had reduced guidance. Best Buy’s stock price, which had risen after the September 14 press release and conference call, closed down approximately 15 per cent after the earnings report.

The district court case had been stayed until the Supreme Court resolved in Halliburton whether defendants in class actions should be allowed to rebut the fraud-on-the-market presumption of reliance at the class certification stage. Following the Supreme Court ruling, the district court certified a class consisting of all purchasers of Best Buy stock between September 14 and December 14, 2010. The Eighth Circuit granted defendants permission to appeal the interlocutory ruling.

Actionable statements. The district court dismissed plaintiffs’ claims that were based on the earnings guidance statement in the press release because it was forward looking and accompanied by meaningful cautionary statements in SEC filings. However, the court denied a motion to dismiss the claim based on the conference call statements because they were not forward looking and were therefore actionable as a statement of present condition, according to the court.

Class certification. Defendants challenged the court’s certification of the class, contesting the court’s Rule 23 predominance ruling. Plaintiff’s motion for class certification relied on the “fraud on the market” presumption to prove the reliance element of the Rule 10b-5 claims.

In support, the purchasers presented an expert report that concluded the conference call statements did not immediately increase the stock price because the economic substance was disclosed in the press release. Defendants presented an expert report essentially concluding that the “on track” and “in line” conference call statements had no discernible impact on Best Buy’s stock price.

Halliburton impact.The appellate court took note of the U.S. Supreme Court ruling in its first consideration of Halliburton that distinguished between price impact (transaction causation) and loss causation. There, the Court concluded that loss causation had no logical connection to the facts necessary to establish the efficient market predicate to the fraud on the market theory. The court said that defendants must be afforded an opportunity before class certification to defeat the presumption through evidence that an alleged misrepresentation did not actually affect the market price of the stock.

Final outcome. After the decision in Halliburton, the district court granted the motion for class certification, recognizing that Halliburton permits Rule 10b-5 defendants to rebut the fraud on the market presumption at the class certification stage with evidence of no price impact but concluded that the defendants did not adequately rebut the presumption.

The appellate court said that the district court, however, ignored strong evidence presented by defendants on the issue consisting of the opinion of plaintiffs’ own expert.

The expert opined that the economic substance of the non-fraudulent press release statements and the alleged misrepresentation in the immediately following conference call was virtually the same and that the two would have been expected to be interpreted similarly by investors. The expert’s event study showed that the forward looking guidance in the press release had an immediate impact on the Best Buy market price, whereas the confirming statements in the conference call two hours later had no additional price impact.

This was direct evidence that investors did not rely on the executives confirming statements two hours later, the court said. Noting that the defendants’ expert agreed with the analysis, the court said it was also consistent with common sense. Earnings projections are statements of what a company is on track to do, thus the Best Buy executives’ conference call statements added nothing to what was already public, the court said. The allegedly inflated price was established by the non-fraudulent press release. The substance of the conference call statements was virtually the same and had no immediate impact on the price.

Here, the court said, defendants rebutted the presumption by submitting direct evidence that severed any link between the alleged conference call misrepresentations and the stock price at which plaintiffs purchased.

As plaintiffs presented no contrary evidence of price impact, they failed to satisfy the predominance requirement of Rule 23(b)(3), and the district court abused its discretion by certifying the class.

The case is No. 14-3178.

Attorneys: Susan Katina Alexander (Robbins Geller Rudman & Dowd LLP) and Steven F. Marino (Marino & Conroy Attorneys at Law) for IBEW Local 98 Pension Fund. Jeffrey Sullivan Gleason (Robins, Kaplan, Miller & Ciresi L.L.P.) and Daniel J. Stujenske (Simpson Thacher & Bartlett LLP) for Best Buy Co., Inc.

Companies: IBEW Local 98 Pension Fund; Best Buy Co., Inc.

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