On 6 November 2017, the Second Circuit Court of Appeals (which hears appeals from district courts in Connecticut, New York and Vermont) affirmed a class certification order in Waggoner v. Barclays PLC, a case concerning claims under the Securities Exchange Act of 1934 (the "Exchange Act") relating to the operation of alternative trading systems (so-called "dark pools"). The plaintiffs—three individuals who purchased American Depository Shares in Barclays PLC—had asserted claims against Barclays PLC, its U.S. subsidiary Barclays Capital Inc., and three senior officers of the companies for allegedly misleading the market by saying that Barclays monitored its alternative trading system (known as "LX") to protect clients from high-frequency traders.
The decision is significant for two reasons. First, it expands upon the Second Circuit's decision in In re Petrobras Securities to clarify that direct evidence of price impact is not always required to demonstrate market efficiency and thereby invoke the Basic Inc. v. Levinson ("Basic") presumption of reliance. Basic had established that plaintiffs may satisfy the reliance element of a claim under Rule 10b-5 without showing that they were actually aware of alleged misrepresentations if they met certain requirements, including demonstrating that the "stock at issue traded in an efficient market."
Second, the decision may be helpful to defendants in clarifying the limited applicability of the Affiliated Ute Citizens of Utah v. United States ("Affiliated Ute") presumption where alleged omissions also relate to specific alleged misstatements. In Affiliated Ute, the Supreme Court explained that, in a case primarily involving a failure to disclose, positive proof of reliance is not required.
The district court granting class certification found that the predominance requirement for class certification— the requirement that questions of law or fact common to class members predominate over any questions affecting only individual members—was satisfied by the presumptions of reliance contained in both Basic and Affiliated Ute. The Second Circuit, however, found that the Affiliated Ute presumption of reliance does not apply where a plaintiff points to specific statements that are rendered misleading by material omissions, or even where the allegedly misleading nature of such statements is "exacerbated" by the omission. Rather, the Affiliated Ute presumption of reliance is appropriate only where "reliance as a practical matter is impossible to prove." Because the plaintiffs had alleged numerous affirmative misstatements regarding Barclays' LX system, and the omissions that were alleged directly related to specific alleged misstatements, the Affiliated Ute presumption did not apply.
The court affirmed class certification based on the Basic presumption of reliance, rejecting defendants' argument that plaintiffs had not sufficiently demonstrated market efficiency because they had not shown that the price of Barclays' securities reacted to new information. This holding expands on the court's recent decision in In re Petrobras Securities ("Petrobras") (which we discussed in our last newsletter and for which a petition for Supreme Court review has been filed), which noted that the burden of establishing market efficiency could be met through a combination of direct and indirect evidence, including direct evidence of price impact. Here, the court clarified that direct evidence of price impact is not required when other evidence of market efficiency is present.
Separately, the court rejected the defendants' argument that the district court erred by imposing a burden of persuasion on the defendants to rebut the Basic presumption, rather than a mere burden of production (of evidence) that could permit a trier of fact to rule in the defendants' favor. The Second Circuit reasoned that it would be inconsistent with Halliburton Co. v. Erica P. John Fund, Inc. ("Halliburton II") to allow the defendants to rebut the Basic presumption by producing only limited evidence of market inefficiency. (In Halliburton II, the Supreme Court held that the defendants could rebut the Basic presumption by establishing that either (i) the alleged misrepresentation did not affect the market price, or (ii) the plaintiff would have bought or sold the security regardless.) Instead, the Second Circuit held that a defendant seeking to rebut the Basic presumption by demonstrating a lack of price impact must make that showing by a preponderance of the evidence.
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