“Without the ability to rebut class-wide reliance at the certification stage, most securities class-action defendants will have little choice but to settle.”
—Cory Andrews, WLF Vice President of Litigation

Click here for WLF’s brief

(Washington, DC)—On Friday evening, the U.S. Supreme Court agreed to review a decision of the U.S. Court of Appeals for the Second Circuit in a securities class action with far-reaching implications. The grant of certiorari was a victory for Washington Legal Foundation, which filed an amicus brief in the case urging review. WLF’s brief was prepared with the pro bono assistance of Lyle Roberts and Daniel Sachs at Shearman & Sterling LLP.

Under the Supreme Court’s decision in Basic Inc. v. Levinson, a defendant can rebut the presumption of class-wide reliance in a securities class action by showing that an alleged misrepresentation did not actually affect the stock’s market price. The Supreme Court has also made clear, in Halliburton Co. v. Erica P. John Fund, that a defendant is entitled to rebut the Basic presumption at the class-certification stage.

The Second Circuit violated those precedents in this case. Holding that such an inquiry would necessarily reach the merits of materiality, the appeals court barred the defendant from being able to rebut price impact by pointing to the generic nature of the alleged misstatements (e.g., Goldman Sachs’s aspirational mission statement). As WLF contended in its amicus brief, that decision, if left to stand, would undermine Congress’s intent to limit the proliferation of meritless securities class actions.

Under the Second Circuit’s rule, WLF argued, a plaintiff need only claim that a misstatement affected the stock’s price—not by artificially inflating it when the misstatement was made, but simply by preventing the stock price from decreasing from a previously inflated level. That “inflation-maintenance” approach to class-wide reliance, if allowed to stand, would render class certification in a securities class action a near certainty.Cyan