Case: 12-10544 Document: 00512225214 Page: 1 Date Filed: 04/30/2013
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
April 30, 2013
No. 12-10544 Lyle W. Cayce
Clerk
ERICA P. JOHN FUND, INCORPORATED, formerly known as Archdiocese of
Milwaukee Supporting Fund Inc., On Behalf of Itself and All Others Similarly
Situated,
Plaintiff-Appellee
v.
HALLIBURTON COMPANY,
Defendant-Appellant
LORI A. RUSSO, On Behalf of Herself and All Others Similarly Situated,
Plaintiff
v.
HALLIBURTON COMPANY; DAVID J. LESAR,
Defendants-Appellants
ERNEST HACK, On Behalf of Himself and All Others Similarly Situated,
Plaintiff
v.
HALLIBURTON COMPANY; DAVID J. LESAR,
Defendants-Appellants
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POLAR INVESTMENT CLUB, On Behalf of Itself and All Others Similarly
Situated,
Plaintiff
v.
HALLIBURTON COMPANY; DAVID J. LESAR,
Defendants-Appellants
Appeal from the United States District Court
for the Northern District of Texas
Before DAVIS, GRAVES, and HIGGINSON, Circuit Judges.
W. EUGENE DAVIS, Circuit Judge:
Plaintiffs-Appellees, a putative class of plaintiffs, seek to recover damages
from Defendants-Appellants for securities fraud under § 10(b) of the Securities
Exchange Act of 1934. The district court concluded that Defendants-Appellants
were not entitled to use evidence of no market price impact to rebut the fraud-
on-the-market presumption of reliance at class certification. We AFFIRM.
I.
This litigation arises out of alleged misrepresentations by the Halliburton
Company and its CEO, President, and Chairman of the Board, David Lesar
(collectively “Halliburton”). The Plaintiffs-Appellees, represented by the Erica
P. John Fund, Inc. (“the Fund”), are a putative class of shareholders who allege
that they suffered material losses as a result of these fraudulent
misrepresentations between June 3, 1999, and December 7, 2001. Over this
period of time, the Fund contends that Halliburton made misrepresentations
concerning three primary aspects of its operations: (1) it understated its
projected liability for asbestos claims, (2) it overstated its revenues by including
billings whose collections were unlikely, and (3) it exaggerated the cost savings
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and efficiencies Halliburton would derive from its 1998 merger with Dresser
Industries. Plaintiffs allege that these misrepresentations temporarily and
artificially inflated the price of Halliburton stock; when the truth was
subsequently revealed, the stock price fell, causing damages to those who
purchased the stock in the relevant timeframe.
In September 2007, the Fund moved to certify a class of all persons who
purchased Halliburton’s common stock during the class period. The district court
first determined that the Fund had satisfied the Fed. R. Civ. P. 23(a) threshold
class certification requirements of numerosity, commonality, typicality, and
adequacy of representation. Turning to Rule 23(b)(3)’s predominance
requirement, the district court conducted a limited inquiry into the plaintiffs’
cause of action to determine whether common questions of law and fact
predominated over questions affecting only individual plaintiffs. The court
observed that “the Fifth Circuit has placed an extremely high burden on
plaintiffs seeking class certification in a securities fraud case.” Specifically, the
court pointed to Fifth Circuit precedent requiring securities fraud plaintiffs to
make a showing of loss causation before obtaining certification. The district court
then found that plaintiffs had not established loss causation and declined to
certify the class. See Archdiocese of Milwaukee Supporting Fund, Inc. v.
Halliburton Co., No. 3:02-CV-1152-M, 2008 WL 4791492 (N.D. Tex. Nov. 14,
2008) (unpublished).
On appeal, a panel of this court affirmed the district court’s denial of class
certification based on its conclusion that the Fund had “failed to meet this
court’s requirements for proving loss causation at the class certification stage.”
See Archdiocese of Milwaukee Supporting Fund, Inc. v. Halliburton Co., 597 F.3d
330, 344 (5th Cir. 2010) (“AMS Fund”). The Fund filed a petition for a writ of
certiorari, which the Supreme Court granted. In Erica P. John Fund, Inc. v.
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Halliburton Co., 131 S. Ct. 2179, 2184 (2011) (“EPJ Fund”),1 a unanimous
Supreme Court reversed the judgment of the Fifth Circuit, finding that this
court “erred by requiring proof of loss causation for class certification.” The
Court then remanded the case back to this court, stating, “To the extent
Halliburton has preserved any further arguments against class certification,
they may be addressed in the first instance by the Court of Appeals on remand.”
Id. at 2187.
On remand from the Supreme Court, this court remanded the case to the
district court for further proceedings. Halliburton argued to the district court
that the class should still not be certified because Halliburton’s class certification
evidence revealed that its alleged fraud did not affect the market price of the
stock; that is, its alleged misrepresentation did not cause “price impact” or “price
distortion.” The district court declined to consider Halliburton’s evidence on the
issue, finding that price impact evidence did not bear on the critical inquiry of
whether common issues predominated under Rule 23(b)(3). Based on its finding
that common issues predominated and that the other Rule 23 class prerequisites
were satisfied, the district court certified the class. Halliburton now appeals.
II.
We review the district court’s class certification decision for abuse of
discretion. See Benavides v. Chicago Title Ins. Co., 636 F.3d 699, 701 (5th Cir.
2011). “Because, however, a court by definition abuses its discretion when it
applies an incorrect legal standard, we review such errors de novo.” Id. While the
district court has substantial discretion to grant or deny certification, it “must
conduct a rigorous analysis of the rule 23 prerequisites before certifying a class.”
Id.
1
Archdiocese of Milwaukee Supporting Fund, Inc. was eventually replaced by Erica P.
John Fund as the named class representative. Thus, judicial decisions under both names
concern the instant putative class.
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III.
A.
Halliburton’s primary argument on appeal is that the district court erred
by not permitting Halliburton to challenge class certification with evidence that
the alleged misrepresentations did not impact the price of the stock (i.e., there
was no price impact).
1.
The pivotal question in this case is whether a defendant should be
permitted to show the absence of price impact at the class certification stage of
the proceedings to establish that common issues among class members do not
predominate and that class certification is inappropriate.
A potential class of securities fraud plaintiffs, like any other group seeking
class certification, must satisfy the requirements of Fed. R. Civ. P. 23 in order
to be certified. Rule 23 provides that a class action may be maintained if the
conditions of 23(a) and (b) are met. To satisfy the criteria set forth in Rule 23(a),
a plaintiff must demonstrate numerosity, commonality, typicality, and adequacy
of representation. In this case, the plaintiff must also show that common
questions predominate, as provided in Rule 23(b). The parties agree that Rule
23(a)’s requirements have been met, so that the only element at issue is whether
common questions predominate. Thus, if “questions of law or fact common to
class members predominate over any questions affecting only individual
members,” then a class of purchasers of Halliburton common stock from June 3,
1999–December 7, 2001 should be certified. FED. R. CIV. P. 23(b)(3).
The private securities fraud action is based upon federal securities
statutes and their implementing regulations. Section 10(b) of the Securities
Exchange Act of 1934 forbids the use of any “deceptive device,” in “connection
with the purchase or sale of any security.” 15 U.S.C. § 78j(b) (2006). The
Securities and Exchange Commission’s corresponding Rule 10b-5 forbids, among
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other things, the making of any “untrue statement of a material fact” “in
connection with the purchase or sale of any security.” 17 CFR § 240.10b-5 (2004).
From these provisions, courts have derived a private securities fraud cause of
action; to succeed at trial or summary judgment, a plaintiff is required to
establish the 10b-5 action’s elements: (1) a material misrepresentation, (2)
scienter (deceptive intent), (3) a connection with the purchase or sale of a
security, (4) reliance, (5) economic loss, and (6) loss causation. Dura Pharms.,
Inc. v. Broudo, 544 U.S. 336, 341–42 (2005).
The burden of establishing all the requirements of class certification
likewise falls on the party seeking certification, here the Fund. See Wal-Mart
Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2551 (2011). Establishing common
question predominance as a prerequisite to class certification is different from
the burden of proving 10b-5 fraud on the merits, although the inquiries may
overlap. As the Supreme Court has stated, “[w]hether common questions of law
or fact predominate in a securities fraud action often turns on the element of
reliance.” EPJ Fund, 131 S. Ct. at 2184. Because common question
predominance in this context hinges on reliance, there has been considerable
debate concerning what evidence relating to reliance is required or allowed at
class certification. The Supreme Court has issued several decisions touching on
this issue, which we now turn to for guidance.
2.
The Court in Basic Inc. v. Levinson first considered the difficulty inherent
in establishing proof of class-wide reliance. 485 U.S. 224 (1988). As the Basic
Court stated, “Reliance provides the requisite causal connection between a
defendant’s misrepresentation and a plaintiff’s injury.” Id. at 243. “The
traditional (and most direct) way a plaintiff can demonstrate reliance is by
showing that he was aware of a company’s statement and engaged in a relevant
transaction—e.g., purchasing common stock—based on that specific
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misrepresentation.” EPJ Fund, 131 S. Ct. at 2185. However, if this were the only
way to prove reliance, it “would place an unnecessarily unrealistic evidentiary
burden on the [securities fraud] plaintiff who has traded on an impersonal
market.” Basic, 485 U.S. at 245. Without some legal accommodation, the element
of reliance would become a “barrier to class certification, since each of the
individual investors would have to prove reliance on the alleged
misrepresentation.” Dukes, 131 S. Ct. at 2552 n.6.
As a result, the Basic Court adopted a legal presumption previously
accepted by several circuits: the “fraud-on-the-market presumption” of reliance.
The Supreme Court explained that because the market price of a security in an
efficient market will immediately incorporate any material, public
representation, a purchaser who buys a security at the market price will be
presumed to have relied upon the representation:
In face-to-face transactions, the inquiry into an investor’s reliance
upon information is into the subjective pricing of that information
by that investor. With the presence of a market, the market is
interposed between seller and buyer and, ideally, transmits
information to the investor in the processed form of a market price.
Thus the market is performing a substantial part of the valuation
process performed by the investor in a face-to-face transaction. The
market is acting as the unpaid agent of the investor, informing him
that given all the information available to it, the value of the stock
is worth the market price.
Basic, 485 U.S. at 244 (quoting In re LTV Sec. Litig., 88 F.R.D. 134, 143 (N.D.
Tex. 1980)).
To invoke the fraud-on-the-market presumption, a plaintiff must establish
the prerequisites necessary for market price incorporation of information: (1)
misrepresentation publicity, (2) misrepresentation materiality, (3) market
efficiency, and (4) that the plaintiff traded the shares between the time the
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misrepresentations were made and the time the truth was revealed. Id. at 248
n.27.
Basic also established that the defendant is entitled to rebut the fraud-on-
the-market presumption by demonstrating certain facts that undermine its basic
assumptions. “Any showing that severs the link between the misrepresentation
and either the price received (or paid) by the plaintiff, or his decision to trade at
a fair market price, will be sufficient to rebut the presumption of reliance.” Id.
at 248. For example, there would be no reliance if a misrepresentation was
ignored because the truth was well-known to the market, or there would be no
reliance by those who purchased the security after the truth had already entered
the market and dissipated the effects of the fraud. Id. at 248–49. If the
defendant could make such a showing, the market price could not be said to have
incorporated—or relied upon—the misrepresentation, and “the basis for finding
that the fraud had been transmitted through market price would be gone.” Id.
Similarly, if a defendant could demonstrate that a plaintiff knew about the
misrepresentation but decided to purchase the stock anyway, the plaintiff would
not have relied upon the integrity of the market price. Id. at 249. Though
making clear that the fraud-on-the-market presumption could be rebutted, the
Court in Basic did not decide the extent to which the presumption could be
rebutted at class certification.
After Basic, the circuits eventually began to apply the fraud-on-the-market
presumption inconsistently. As a result, the Supreme Court stepped in to clarify
the law again in EPJ Fund v. Halliburton, 131 S. Ct. 2179 (2011), when the
Court considered another issue in its review of an earlier decision by this court
in the instant case. The specific question before the Supreme Court in EPJ Fund
was whether proof of loss causation was required to invoke the fraud-on-the-
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market presumption of reliance at the class certification stage. In AMS Fund,2
this court found that in order for plaintiffs to invoke the fraud-on-the-market
presumption of reliance and obtain class certification, they must establish proof
of loss causation; this requires proof that the stock price declined after the false
statement is corrected and the truth is revealed.3 Because the Fund had not
established loss causation, we affirmed the district court’s denial of class
certification. See AMS Fund, 597 F.3d at 339–43.
After granting certiorari, the Supreme Court acted swiftly to correct this
court’s error, rejecting our position that a putative class had to establish loss
causation as a predicate to invoking the fraud-on-the-market presumption of
reliance at class certification: “The Court of Appeals’ requirement is not justified
by Basic or its logic. . . . Loss causation addresses a matter different from
whether an investor relied on a misrepresentation, presumptively or otherwise,
when buying or selling a stock.” EPJ Fund, 131 S. Ct. at 2186. The Court held
that proof of loss causation, or a decline in stock value after revelation of the
truth, is a conceptually distinct inquiry and is not necessary to establish
reliance. Id. at 2185–86. The EPJ Fund Court declined, however, to address
Halliburton’s assertion that it was entitled to rebut the presumption at class
certification for other reasons. The Court stated: “[T]he Court of Appeals erred
by requiring EPJ to prove loss causation at the certification stage, . . . and [we]
do not, address any other question about [the fraud-on-the-market] presumption,
or how and when it may be rebutted.” Id. at 2187.
2
Recall that the case was originally brought before us as AMS Fund, but the plaintiff
class representative was redesignated as EPJ Fund before Supreme Court proceedings.
3
See AMS Fund, 597 F.3d at 335 (“‘[W]e require plaintiffs to establish loss causation
in order to trigger the fraud-on-the-market presumption.’” (quoting Oscar Private Equity
Investments v. Allegiance Telecom, Inc., 487 F.3d 261, 265 (5th Cir. 2007))).
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The Supreme Court had to intervene yet a third time as courts struggled
with the question of which issues a securities fraud plaintiff had to prove in
order to invoke the fraud-on-the-market presumption at class certification, and
the corollary question of whether the defendant could present rebuttal evidence
on the issues. See Amgen Inc. v. Conn. Ret. Plans and Trust Funds. 133 S. Ct.
1184 (2013). Although it was clear that plaintiffs must eventually establish the
materiality of a misrepresentation on the merits to invoke the fraud-on-the-
market presumption, the precise questions before the Amgen Court were
whether the putative class must establish materiality at class certification to
invoke the presumption; and relatedly, whether a defendant is entitled to rebut
the presumption at class certification with proof of immateriality. Id. at 1194.
The Amgen Court began by emphasizing that the central issue in resolving
this question was whether proof of materiality was required to satisfy Rule
23(b)(3)’s requirement of common question predominance. Id. at 1195. Thus, the
twin issues of what a plaintiff must prove and what a defendant may rebut at
class certification are resolved by the same inquiry: “[T]he pivotal inquiry is
whether proof of materiality is needed to ensure that the questions of law or fact
common to the class will ‘predominate over any questions affecting only
individual members’ as the litigation progresses.” Id. (quoting FED. R. CIV. P.
23(b)(3)). 4 Thus, the focus of the 23(b)(3) class certification
inquiry—predominance—is not whether the plaintiffs will fail or succeed, but
whether they will fail or succeed together. Id. at 1197. Although the other
prerequisites to invoke the fraud-on-the-market presumption—purchase timing,
4
At least this is true in cases in which the defendant’s proffered rebuttal evidence
concerns an issue which the court has already deemed to be not relevant to class certification.
While rebuttal evidence concerning an issue which is relevant at class certification—such as
market efficiency—would seemingly be relevant to the question of common question
predominance and therefore admissible at class certification, that question is not before us and
nor was it before the Amgen Court.
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publicity, and market efficiency—must be established at class certification, the
same is not true of materiality. Id. at 1198–99. The Court held, “While [a
putative class] certainly must prove materiality to prevail on the merits, we hold
that such proof is not a prerequisite to class certification.” Id. at 1191. The
Amgen Court thus made clear that what is required for a plaintiff to “invoke” the
fraud-on-the-market presumption on the merits is not necessarily what is
required for the plaintiff to benefit from the presumption at class certification.
The Court based its determination that materiality need not be
established at class certification on the answers to two crucial questions: (1)
whether the question of materiality was an objective inquiry that could “be
proved through evidence common to the class;” and (2) whether there was a risk
that a failure of proof on the question of materiality would “result in individual
questions predominating.” Id. at 1195–96. The Court determined that because
materiality is established by evidence common to all plaintiffs, and because a
failure to prove materiality will cause all plaintiffs’ individual claims to fail,
materiality evidence was not relevant at class certification. Id. at 1197. In
summary, the Court stated: “As to materiality, therefore, the class is entirely
cohesive: It will prevail or fail in unison. In no event will the individual
circumstances of particular class members bear on the inquiry.” Id. at 1191. It
is this characteristic of materiality which distinguishes it from the other fraud-
on-the-market presumption’s prerequisites. Id. at 1198–99. A plaintiff can fail
to establish publicity, market efficiency, or trade timing, and therefore lose the
class-wide presumption of reliance, but still establish individual reliance and
prove fraud. Id. Thus, only those issues which bear directly on the pivotal
inquiry of common question predominance and the propriety of class resolution
should be addressed at class certification. Id.
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3.
We thus know from the above Supreme Court cases that in order for a 10b-
5 plaintiff to invoke the fraud-on-the-market presumption of reliance on the
merits, a plaintiff must establish (1) trade timing, (2) market efficiency, (3)
publicity, and (4) materiality. See id. at 1192–93. However, the fraud-on-the-
market elements that should be addressed at class certification are limited to
those matters which bear on common question predominance and the propriety
of class resolution: trade timing, market efficiency, and publicity (but not
materiality).5 Id. at 1194–99.
Halliburton frames the question before us as whether price impact is an
issue which a defendant may address at class certification to rebut the fraud-on-
the-market presumption that the stock price was affected by a
misrepresentation. According to EPJ Fund, “‘Price impact’ simply refers to the
effect of a misrepresentation on a stock price.”6 131 S. Ct. at 2187. It is neither
an element of 10b-5 fraud nor an element of the fraud-on-the-market theory. In
fact, price impact evidence does not fit neatly into any one fraud issue, but is
probative of materiality, statement publicity, and market efficiency, all of which
are relevant in establishing the presumption of fraud-on-the-market reliance.7
5
To be clear, the Amgen Court actually found that trade timing related not to the Rule
23(b)(3) question of common question predominance, but to the 23(a) requirements of typicality
and adequacy of representation. See 133 S. Ct. at 1198.
6
Price impact, or an effect of a misrepresentation on a stock price, can be established
in two ways: either by showing (1) that the stock price increased following the allegedly false
positive statements or (2) that there was a corresponding decrease in price following the
revelation of the misleading nature of these statements. See Greenberg v. Crossroads Systems,
Inc., 364 F.3d 657, 662 (5th Cir. 2004).
7
For example, evidence that a stock’s price was unaffected by a misrepresentation is
convincing evidence that a misrepresentation was not material. See, e.g., In re Burlington Coat
Factory Sec. Litig., 114 F.3d 1410, 1425 (3d Cir. 1997) (“Because the market for BCF stock was
‘efficient’ and because the . . . disclosure had no effect on BCF’s price, it follows that the
information . . . was immaterial as a matter of law.”); Miller v. Thane Int’l, Inc., 372 F. Supp.
2d 1198, 1209 (C.D. Cal. 2005); see also In re Polymedica Corp. Sec. Litig., 432 F.3d 1, 13 (1st
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According to Amgen, however, only some of these matters may be considered at
class certification. 133 S. Ct. at 1197–99. For example, price impact evidence
relating to materiality may not be considered at class certification (because
materiality does not bear on Rule 23(b)(3) common question predominance), but
price impact evidence relating to market efficiency or statement publicity could
be considered. See id. We must therefore determine at what issue Halliburton’s
price impact evidence is directed.
In this case, Halliburton contends that its price impact evidence is not
intended to rebut materiality, market efficiency, or statement publicity—the
issues which the Supreme Court has specifically addressed. Rather, Halliburton
contends that its price impact evidence is intended only to generally rebut the
fraud-on-the-market presumption of reliance without necessarily attacking one
of the presumption’s individual elements. More specifically, Halliburton argues
that despite the proof offered in support of invoking the fraud-on-the-market
presumption of reliance, its evidence shows that the price did not actually
transfer the effects of the alleged fraud to a stock purchaser.
As the Basic Court stated, “Any showing that severs the link between the
alleged misrepresentation and either the price received (or paid) by the plaintiff
. . . will be sufficient to rebut the presumption of reliance.” 485 U.S. at 248. We
agree with Halliburton that in the absence of price impact, “the basis for finding
that fraud has been transmitted through market price would be gone.” See id.
Accordingly, Halliburton’s price impact evidence potentially demonstrates that
Cir. 2005). Furthermore, if a misrepresentation is concededly material, evidence that a stock’s
price was still unaffected could serve as evidence that the market is not efficient or that the
misrepresentation was not public, undermining the fraud-on-the-market presumption of
reliance. Or as Halliburton argues in this case, proof that a stock’s price was unaffected might
broadly serve as evidence that the market price did not in fact transfer the effect of the
misrepresentation to a purchaser, refuting the ultimate conclusion of the fraud-on-the-market
presumption of reliance. Finally, as we will discuss more fully infra, a plaintiff cannot
establish the element of loss causation without demonstrating a negative price impact
resulting from the defendant’s release of corrective information.
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despite the presence of the necessary conditions for market price incorporation
of fraudulent information (fraud-on-the-market reliance), no such incorporation
occurred in fact. Thus, Halliburton’s price impact evidence could be used at the
trial on the merits to refute the presumption of reliance.8 See id. at 248–49. The
Amgen Court did not discuss whether evidence offered for this purpose could be
considered at class certification, but it did set forth the proper analytical
framework so that we may resolve the question.
As the Amgen court made clear, the “pivotal inquiry” when determining
whether to consider a matter at class certification is whether resolution of the
matter “is needed to ensure that the questions of law or fact common to the class
will ‘predominate over any questions affecting only individual members’ as the
litigation progresses.” Amgen, 133 S. Ct. at 1195. Amgen held that materiality
and the rebuttal of materiality were not issues to be considered at class
certification because this proof depended on evidence common to all class
members; moreover, the failure of plaintiffs to prevail on the issue of materiality
would not cause individual issues to “overwhelm questions common to the class,
for the class members’ claims will have failed on their merits, thus bringing the
litigation to a close.” Id. at 1204.
Turning to the instant case, the first question we ask is whether price
impact evidence is common to the class. Because price impact is simply a
measure of the effect of a misrepresentation on a security’s price, it is
8
We accordingly reject the Appellants’ contention that EPJ Fund disclaimed the
relevance of price impact evidence to fraud-on-the-market reliance. In fact, the Supreme Court
in EPJ Fund made it clear that it was not evaluating the relevance of price impact to the
fraud-on-the-market theory. See EPJ Fund, 131 S. Ct. at 2187. Other circuits have similarly
found evidence of a lack of price impact relevant to rebutting the fraud-on-the-market
presumption. See In re Salomon Analyst Metromedia Litig., 544 F.3d 474, 484 (2d Cir. 2008)
(“[D]efendants are allowed to rebut the [fraud-on-the-market] presumption . . . by showing,
for example, the absence of a price impact.”); In re DVI, Inc. Sec. Litig., 639 F.3d 623, 638 (3d
Cir. 2011) (“In an otherwise efficient market, the failure of a corrective disclosure to affect the
market price may therefore serve as a rebuttal to the presumption of reliance . . . .”).
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undoubtedly an objective inquiry. See EPJ Fund, 131 S. Ct. at 2187. As the
record evidence in this case demonstrates, price impact is ordinarily established
by expert evaluation of a stock’s market price following a specific event and it
inherently applies to everyone in the class. The first Amgen consideration
therefore suggests that price impact fraud-on-the-market rebuttal evidence
should not be addressed at class certification.
The second inquiry suggested by Amgen is whether there is any risk that
a later failure of proof on the common question of price impact will result in
individual questions predominating. See Amgen, 133 S. Ct. at 1196. In Amgen,
the Court found that a failure to establish materiality could not result in the
continuation of any individual claims, because immateriality would be fatal to
all plaintiffs’ claims. Id. Because materiality is an element of every fraud claim,
immateriality absolutely destroys both class and individual causes of action. The
absence of materiality “end[s] the case for one and for all.” Id.
Turning to the instant case, we must determine whether the failure to
prove price impact will necessarily cause all plaintiffs’ claims to fall together. In
other words, if Halliburton successfully rebuts the fraud-on-the-market
presumption with evidence of no price impact, could individual plaintiffs still
proceed with their fraud claims? Halliburton contends that a failure on the part
of the plaintiffs to prove price impact will not cause all claims to fail, because
unlike materiality, price impact is not a required element of fraud. Thus,
Halliburton argues, a plaintiff class which fails to show price impact would only
lose the class-wide presumption of reliance, leaving individual plaintiffs with
viable fraud claims.
We disagree. Although the 10b-5 fraud action does not expressly require
proof of price impact as an element of the claim, a plaintiff must nevertheless
prevail on this fact in order to establish another element on which the plaintiff
does bear the burden of proof: loss causation. As the Court in EPJ Fund stated,
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“‘Price impact’ simply refers to the effect of a misrepresentation on a stock price.”
131 S. Ct. at 2187. Price impact can be shown either by an increase in price
following a fraudulent public statement or a decrease in price following a
revelation of the fraud. To successfully prove a lack of price impact, Halliburton
would thus be required to demonstrate both that the stock price did not increase
when the misrepresentation was announced, and that the price did not decrease
when the truth was revealed. If Halliburton were to successfully show that the
price did not drop when the truth was revealed, then no plaintiff could establish
loss causation. See id. at 2185.9 In other words, because a showing of negative
price impact is required to establish loss causation, plaintiffs who cannot
establish price impact cannot establish loss causation. Thus, if Halliburton were
to successfully rebut the fraud-on-the-market presumption by proving no price
impact, the claims of all individual plaintiffs would fail because they could not
establish an essential element of the fraud action. In the words of the Amgen
Court, “[T]he class members’ claims will have failed on their merits, thus
bringing the litigation to a close.” See Amgen, 133 S. Ct. at 1204. Thus, the
second Amgen consideration also leads to the conclusion that price impact fraud-
on-the-market rebuttal evidence should not be addressed at class certification.10
9
(“The court determined that . . . EPJ Fund needed to prove that the decline in
Halliburton’s stock was ‘because of the correction to a prior misleading statement’ and ‘that
the subsequent loss could not otherwise be explained by some additional factors revealed then
to the market.’ This is the loss causation requirement as we have described it.” (citations
omitted) (citing Dura Pharms., 544 U.S. at 342, and AMS Fund, 597 F.3d at 336)).
10
This conclusion is also buttressed by the Supreme Court’s specific conclusion in
Amgen that evidence of materiality is not an issue that should be considered at class
certification. The price impact evidence considered here is both similar to and offered for much
the same reason as the materiality evidence considered by the Supreme Court in Amgen. Many
if not most plaintiffs offer proof of price impact to demonstrate that a defendant’s
misrepresentation affected the stock price and was material. While Halliburton insists that
it is questioning reliance and not the materiality of its alleged misrepresentations, in fraud-on-
the-market cases such as this, the presumption of reliance actually depends upon the
misrepresentation’s materiality. As a result, there is a fuzzy line between price impact
evidence directed at materiality and price impact evidence broadly directed at reliance.
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Halliburton’s only other argument is its policy-based contention that not
considering evidence of price impact at class certification will enhance the “in
terrorem power of certification,” and allow plaintiffs to extort non-meritorious
settlements from corporate defendants. See Oscar, 487 F.3d at 267. The Supreme
Court rejected an identical argument in Amgen, pointing out that “Congress has
homed in on the precise policy concerns raised” by this argument, but has
selected different remedies. See Amgen, 133 S. Ct. at 1201.
The Amgen Court’s analysis leads to the conclusion that price impact
fraud-on-the-market rebuttal evidence should not be considered at class
certification.11 Proof of price impact is based upon common evidence, and later
proof of no price impact will not result in the possibility of individual claims
continuing. Accordingly, Halliburton’s price impact evidence does not bear on the
question of common question predominance, and is thus appropriately
considered only on the merits after the class has been certified.12
B.
The Fund also argues that because Halliburton waived the argument it
now presents by failing to initially raise it before the district court, the argument
Because Amgen determined that defendants are not permitted to use evidence of no price
impact to rebut materiality (and thereby rebut the fraud-on-the-market theory) at class
certification, it would be anomalous to permit Halliburton to nonetheless use evidence of no
price impact to “generally” rebut the fraud-on-the-market theory at class certification.
11
Because we hold that Halliburton’s price impact evidence in this context is not
appropriately considered at class certification, it is not necessary to consider Halliburton’s
argument that the district court erred by refusing to allow Halliburton to supplement the
record on remand with additional price impact rebuttal evidence. Nor is it necessary to
evaluate the extensive evidence of no price impact offered by Halliburton. See Joint Brief of
Appellants at 35–61.
12
As the above discussion demonstrates, we conclude that this court’s position in Oscar
and other cases requiring plaintiffs to prove price impact as a prerequisite to the fraud-on-the-
market presumption and class certification is inconsistent with the Supreme Court’s reasoning
in EPJ Fund and Amgen. See, e.g., Oscar, 487 F.3d at 264–65.
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has not been preserved and we may not consider it.13 This waiver issue is not
subject to our discretion, the Fund contends, because the Supreme Court
expressly limited our consideration of issues on appeal to those which
Halliburton had “preserved.”
When the Supreme Court remanded the instant case back to this court, it
instructed us to consider Halliburton’s arguments against class certification “[t]o
the extent Halliburton has preserved” them. See EPJ Fund, 131 S. Ct. at 2187.
As the Supreme Court has consistently noted, “an inferior court has no power or
authority to deviate from the mandate issued by an appellate court.” Briggs v.
Penn. R.R. Co., 334 U.S. 304, 306 (1948). We thus may consider Halliburton’s
fraud-on-the-market rebuttal argument only to the extent it has been preserved.
Ordinarily, “arguments not raised before the district court are waived and
cannot be raised for the first time on appeal.” Martco Ltd. P’ship v. Wellons, Inc.,
588 F.3d 864, 877 (5th Cir. 2009). The Fund insists that because Halliburton
never attempted to rebut fraud-on-the-market reliance before the district court,
the Supreme Court’s decree prevents this court from considering the argument
now. The Fund contends that Halliburton attempted to use its price impact
evidence to rebut the element of loss causation but did not challenge the element
of reliance; having lost on the loss causation issue before the EPJ Fund Court,
Halliburton should not now be able to challenge the Fund’s fraud-on-the-market
reliance.
However, the Fund’s argument ignores both the substance of Halliburton’s
pleadings and the state of the fraud-on-the-market theory as interpreted by this
13
The Fund argues that waiver is in fact the basis of the district court’s failure to
discuss the legal question of whether Halliburton is entitled to rebut the fraud-on-the-market
presumption of reliance at the class certification stage. Brief of Plaintiffs/Appellees at 27–28.
However, support for that conclusion is not found in the district court’s brief statement, “The
fraud-on-the-market theory applies to this case, so proof of each individual class member’s
reliance is not required.”
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circuit before EPJ Fund. Although Halliburton’s reliance-rebuttal argument has
technically been available since Basic, this court had since applied a significant
judicial gloss to Basic. In fact, our cases required defendants to use evidence of
no price impact to undermine the fraud-on-the-market theory in another
way—by rebutting loss causation.14 Halliburton did not direct its evidence of no
price impact at fraud-on-the-market reliance in an effort to comply with our case
law: under our pre-EPJ Fund framework, evidence directed at loss causation
was by definition directed at fraud-on-the-market reliance. The Supreme Court
has since corrected our fraud-on-the-market framework and established that loss
causation is not relevant to the fraud-on-the-market presumption of reliance.
EPJ Fund, 131 S. Ct. at 2185–86. However, we decline to penalize Halliburton
for framing its evidence in the manner we instructed. It is well-settled that when
the law changes in unanticipated ways during an appeal, parties are generally
given an opportunity to apply the new law and present arguments relevant to
the new standard. See Deffenbaugh-Williams v. Wal-Mart Stores, Inc., 188 F.3d
278, 282 (5th Cir. 1999).
IV.
For the reasons stated above, the judgment of the district court is
AFFIRMED.
14
This court has . . . tighten[ed] the requirements for plaintiffs seeking a
presumption of reliance. We now require more than proof of a material
misstatement; we require proof that the misstatement actually moved the
market. That is, ‘the plaintiff may recover under the fraud on the market theory
if he can prove that the defendant’s non-disclosure materially affected the
market price of the security.’ Essentially, we require plaintiffs to establish loss
causation in order to trigger the fraud-on-the-market presumption.
Oscar, 487 F.3d at 264–65 (5th Cir. 2007) (citations and brackets omitted); see also AMS Fund,
597 F.3d at 335.
19