Meredith Kotler, Mary Eaton, and Doru Gavril are partners at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields memorandum
The Seventh Circuit Court of Appeals has just issued a decision of special interest to defendants in securities class actions under Section 10(b) of the Exchange Act. The Court vacated the district court’s certification of a class in a lawsuit against Allstate, holding that the district court failed to consider defendants’ evidence that the misrepresentations alleged by plaintiffs had no impact on Allstate’s stock price. Such evidence, the Court explained, could rebut the presumption of reliance on the market price, as the Supreme Court made clear in Halliburton II.
This new ruling has multiple implications for the defense of securities class actions. First, district courts cannot fail to consider defendants’ evidence at class certification stage, merely because the same evidence may also be relevant to merits issues. Second, where applicable, defendants should consider offering expert analysis at the class certification stage severing the “transaction causation” link between the alleged misrepresentation and the market price. Third, defendants must be careful about the probative value of the evidence they offer: as discussed below, the Court expressed skepticism that “no price movement” is the same thing as “no price impact.” We discuss below why we believe plaintiffs—not defendants—should bear the burden of distinguishing between these two concepts.
