Securities Class Certification Under Inflation-Maintenance Theory: Rebutting Price Impact

Rule 10b-5 securities class actions filed after an adverse company event are on the rise. Plaintiffs routinely proceed, as they did in the J&J case, under an "inflation-maintenance" or a “price-maintenance” theory: the company made misrepresentations (or withheld/delayed disclosures) to keep share prices from falling. 

To get a securities fraud class certified, plaintiffs must show that "reliance" on the alleged misrepresentations can be proved on a class-wide basis. Basic Inc. v. Levinson, 485 U.S. 224 (1988), created a rebuttable presumption of class-wide reliance if plaintiffs bought their shares in an "efficient" market at market price after the alleged misstatements were publicly made but before the truth was revealed. If defendants can show that the alleged misrepresentations had no price impact on the stock, the Basic presumption of class-wide reliance is rebutted, and the class will not be certified. 

What evidence defendants need, whether they have to show zero price impact, and what evidence courts may consider in deciding price impact at the certification stage, particularly in inflation-maintenance cases, are crucial, complex, and developing issues. The Supreme Court's decision in Goldman Sachs Group Inc. v. Arkansas Teacher Retirement Sys., 594 U.S. 113 (2021), broke new ground by holding that courts may consider the generic nature of the alleged misrepresentations. This led the Second Circuit to conclude, on remand, that defendants adequately showed the misrepresentations had no price impact, and it went on to de-certify the class.

The second appellate court to apply Goldman, in J&J, focused on whether the subsequent corrective disclosures did or did not actually correct anything and how courts should decide that as well as whether the defendants' evidence met the preponderance of the evidence standard necessary to rebut the Basic presumption. Defendants have contended, however, that the Third Circuit misapplied Goldman and opened the door to "easy" certification.

Listen as the expert panel of class action lawyers discusses rebuttal of price impact in inflation-maintenance / price-maintenance theory class actions.