Fraud-on-the-Market Theory: Significant Issues and Updates for 2014 and Beyond LIVE Webcast

Speaker Firms and Organization:
Winston & Strawn LLP
John E. Schreiber
Partner
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Presented By:
August 07, 2014
1
Partner Firms:
Jones Day
Michael J. McConnell
Partner
NERA Economic Consulting
Jordan Milev, Ph.D.
Vice President
BakerHostetler
Deborah H. Renner
Partner
Akin Gump Strauss Hauer & Feld LLP
Michelle Reed
Partner

August 07, 2014
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Partner Firms:
August 07, 2014
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Winston & Strawn LLP is an international law firm with more than 850
attorneys among 18 offices in Beijing, Brussels, Charlotte, Chicago, Geneva,
Hong Kong, Houston, London, Los Angeles, Moscow, New York, Newark,
Paris, San Francisco, Shanghai, Silicon Valley, Taipei, and Washington,
D.C. For more than 160 years, Winston has served as a trusted adviser and
advocate for clients across virtually every industry. In that time, through
careful growth and thoughtful fiscal management, they have built a law
practice with tremendous breadth and a global reach. Winston is proud of
the many accolades they have received over the years—a tribute to their
lawyers’ creativity, flexibility, depth of experience, and commitment. The
most meaningful accolade, though, is the continued trust and confidence of
their clients.
Visit winston.com if you would like more information about their legal
services, experience, or the industries they serve.
NERA Economic Consulting (www.nera.com) is a global firm of experts
dedicated to applying economic, finance, and quantitative principles to
complex business and legal challenges. For half a century, NERA’s
economists have been creating strategies, studies, reports, expert
testimony, and policy recommendations for government authorities and the
world’s leading law firms and corporations. With its main office in New York
City, NERA serves clients from more than 25 offices across North America,
Europe, and Asia Pacific.

Partner Firms:
August 07, 2014
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BakerHostetler is among the nation's 100 largest law firms, with more than
900 attorneys in 14 offices nationwide. Our Class Action Defense team has
decades of experience advising leading organizations in high-stakes,
statewide, and nationwide class action litigation—from removal under the
Class Action Fairness Act, to motions to dismiss, class certification
proceedings, discovery, trial, settlement, and appeal. While class action
defense is a procedural specialty, our team has specific subject matter
expertise in a broad range of class actions, ranging from consumer
fraud, banking, insurance securities and antitrust class actions, to false
advertising, data privacy and ERISA class actions. BakerHostetler is at the
cutting edge of the class action defense bar. Not only do we boast a highly
informative class action defense blog, but our lawyers continue to represent
clients on the most important class action issues of the day. We pride
ourselves on working with our clients to find solutions to complex litigation
issues and regulatory investigations. For more information, please visit our
website athttp://www.bakerlaw.com or contact Deborah Renner
at drenner@bakerlaw.com.
Akin Gump Strauss Hauer & Feld LLP is a leading global law firm providing
innovative legal services and business solutions to individuals and
institutions. Amongst the world’s largest law firms, with more than 850
lawyers and professionals in 20 offices, the firm offers a level of client
service that not only meets but anticipates clients’ needs and exceeds their
expectations. From reputational defense of headline-makers to down- and
midstream energy investments, from precedential class action dismissals to
protection of terrorism’s victims, the firm serves clients in over 85 practices
that range from the traditional, such as litigation and corporate, to the
contemporary, such as climate change and national security. Akin Gump’s
lawyers, many of them with years of experience in the boardroom, on the
bench and in the halls of government, collaborate across borders and
practice areas to provide comprehensive counsel.

Partner Firm:
August 07, 2014
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Jones Day is a global law firm with 41 offices in major centers of business
and finance throughout the world. Its unique governance system fosters an
unparalleled level of integration and contributes to its perennial ranking as
among the best in the world in client service. Jones Day provides significant
legal representation for almost half of the Fortune 500, Fortune Global 500,
and FT Global 500. The Atlanta Office of Jones Day proudly traces its roots
back to 1890. As part of a full-service office that has steadily grown to its
present size of about 130 lawyers, Jones Day's Atlanta attorneys advise
clients on the full range of issues relevant to leading corporations doing
business in the southeastern United States and worldwide.

Brief Speaker Bios:
August 07, 2014
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John E. Schreiber
John Schreiber, a litigation partner in Winston & Strawn’s New York and Los Angeles offices, was recently identified by Law360 as a
“Rising Star” in the area of securities litigation. In addition to the defense of federal securities class actions, his practice areas focus on
M&A-related litigation, corporate governance matters, class and derivative actions and insurance litigation. He has first-chair trial
experience and has represented firm clients in a variety of industries, including commercial and investment banking, private equity,
insurance, renewable energy, biotech, health care, pharmaceuticals, infrastructure and sports and entertainment.
Jordan Milev, Ph.D.
Dr. Jordan Milev is a Vice President in NERA's Securities and Finance Practice. He has testified in both federal and state cases and
consulted in a number of matters involving SEC and DOJ investigations, securities class action litigations, private-party disputes, and
international arbitrations. He has opined on the materiality of disclosures and conducted event study analyses of price impact in
numerous matters. He has analyzed market efficiency, including economic evidence regarding the applicability of the fraud-on-the-
market presumption, in many complex securities class actions involving issuers in the US and cross-border litigations relating to
issuers in Canada, China, Germany, India, Switzerland, and The Netherlands.

Brief Speaker Bios:
August 07, 2014
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Deborah H. Renner
Deborah Renner chairs BakerHostetler's class action practice in New York. Deborah focuses her practice on complex commercial
litigation, including the defense of consumer fraud, data breach, ERISA, and securities class actions. She defends companies in
nationwide, multidistrict and state class actions. Deborah has defeated class certification in courts around the country and has won
the dismissal of class claims at the outset of numerous actions. She frequently advises companies on class action defense and
regulatory inquiries. Among Deborah’s areas of knowledge and experience, she is certified in information privacy. Deborah frequently
speaks and writes on class action defense issues and strategies, and has taught class action law at Fordham University School of
Law.
Michelle Reed
Michelle Reed is a partner in the litigation department of Akin Gump Strauss Hauer & Feld LLP, where she represents public
companies, officers and directors in securities class actions, derivative lawsuits, M&A litigation, and adversary proceedings in federal
and state court. Ms. Reed has successfully defeated class certification in proposed securities class actions and regularly defends
allegations of accounting and financial fraud, insider trading, investment fund / advisor fraud, and FCPA violations. Ms. Reed also
represents companies and company insiders in internal investigations and in enforcement actions by the SEC, FINRA, and the CFTC.
Ms. Reed has been recognized as a “Rising Star” in securities litigation by Texas Monthly and she currently serves as co-chair of the
Derivative Suits Subcommittee of the American Bar Association’s Class Actions and Derivative Suits Committee.

Brief Speaker Bios:
August 07, 2014
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► For more information about the speakers, you can visit: http://theknowledgegroup.org/event_name/fraud-on-the-market-theory-significant-issues-and-updates-for-2014-and-beyond-live-webcast/
Mike McConnell has extensive complex litigation experience regarding many types of business disputes, with special emphasis on
securities litigation and corporate governance matters. The matters litigated include securities fraud class actions, investigations and
inquiries by the Securities and Exchange Commission, derivative cases, proxy fraud litigation, and other matters that are often
ancillary to shareholder litigation, including shareholder inspection actions, disputes under shareholder voting agreements, internal
corporate investigations, and other special committee matters.

In a two hour live webcast, a panel of thought leaders and practitioners assembled by The
Knowledge Group will discuss the significant and latest issues related to the Fraud-on-the-
Market (FOTM) Theory.
Key issues include that will be covered in this course are
• Fraud-on-the-Market Theory: an overview
• Relevant cases and court decisions
• Latest regulatory updates
• Guidance on how to use FOTM effectively
August 07, 2014
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Featured Speakers:
August 07, 2014
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SEGMENT 5:
Partner
Jones Day
SEGMENT 1:
John E. Schreiber
Partner
SEGMENT 2:
Jordan Milev, Ph.D.
Vice President
SEGMENT 3:
Deborah H. Renner
Partner
BakerHostetler
SEGMENT 4:
Michelle Reed
Partner

Introduction
John Schreiber, a litigation partner in Winston & Strawn’s New York and Los Angeles offices, was recently identified
by Law360 as a “Rising Star” in the area of securities litigation. In addition to the defense of federal securities class actions,
his practice areas focus on M&A-related litigation, corporate governance matters, class and derivative actions and insurance
litigation. He has first-chair trial experience and has represented firm clients in a variety of industries, including commercial
and investment banking, private equity, insurance, renewable energy, biotech, health care, pharmaceuticals, infrastructure
and sports and entertainment.
August 07, 2014
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SEGMENT 1:
John E. Schreiber
Partner

Anatomy of a Federal Securities Fraud Class Action
• Implied private right of action under Section 10(b) of the Securities Exchange Act of 1934 and SEC rule
10b-5 thereunder
• Elements
1. Misstatement or omission of material fact
2. Scienter
3. Connection to purchase or sale of security
4. Reliance
5. Loss causation
August 07, 2014
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SEGMENT 1:
John E. Schreiber
Partner

Fraud-on-the-Market Presumption
• Adopted in Basic v. Levinson, 485 U.S. 224 (1988)
• Premise:
o “[T]he market price of shares traded on well-developed markets reflects all publicly available
information and, hence, any material misrepresentations”
o The typical “investor who buys or sells stock at the price set by the market does so in reliance on the
integrity of that price” – i.e., the belief that it reflects all public material information.
August 07, 2014
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SEGMENT 1:
John E. Schreiber
Partner

Fraud-on-the-Market Presumption
• Reliance presumed if:
o Alleged misrepresentation is made publicly;
o Alleged misrepresentation is material; and
o Security trades in an “efficient market”
August 07, 2014
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SEGMENT 1:
John E. Schreiber
Partner

Fraud-on-the-Market Presumption: “Efficient Market”
• The five Cammer* Factors:
1. The average weekly trading volume of the securities at issue;
2. The number of securities analysts reporting or following the securities;
3. The extent to which market makers traded in the securities;
4. The extent to which the issuer was/is eligible to file an SEC Registration Form S-3; and
5. The demonstration of a cause and effect relationship between the unexpected, material
disclosures and changes in the securities’ price.
* Cammer v. Bloom, 711 F. Supp. 1264 (D.N.J. 1989).
August 07, 2014
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John E. Schreiber
Partner

Fraud-on-the-Market Presumption: “Efficient Market”
• NYSE/NASDAQ always “efficient”?
o No
o E.g., George v. China Automotive Systems, Inc., 2013 WL 3357170 (S.D.N.Y. July 3, 2013)
August 07, 2014
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John E. Schreiber
Partner

Introduction
Dr. Jordan Milev is a Vice President in NERA's Securities and Finance Practice. He has testified in both federal and state
cases and consulted in a number of matters involving SEC and DOJ investigations, securities class action litigations,
private-party disputes, and international arbitrations. He has opined on the materiality of disclosures and conducted event
study analyses of price impact in numerous matters. He has analyzed market efficiency, including economic evidence
regarding the applicability of the fraud-on-the-market presumption, in many complex securities class actions involving
issuers in the US and cross-border litigations relating to issuers in Canada, China, Germany, India, Switzerland, and The
Netherlands.
August 07, 2014
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SEGMENT 2:
Jordan Milev, Ph.D.
Senior Consultant

Weak form: Prices fully reflect the
information implicit in the sequence of
past prices.
The Efficient Markets Hypothesis
Semi-strong form: Prices reflect all
relevant information that is publicly
available
Strong form: Prices reflect information
that is known to any participant
(public and private)
10-K
Data From Filings
Past Price Information
Insider Information

Efficient Markets: The Legal Criteria
Average Weekly Turnover
Number of Securities Analysts
Number of Market Makers
Eligibility to File Form S-3
Price Response to News
Cammer v. Bloom (1989)
Krogman v. Sterritt (2001)
Market Capitalization
Bid-Ask Spread
Size of Float
Liquidity Information
Factor Speaks As To:
In re IPO Securities Litigation (2006)
Shares Purchased in IPO or Quiet Period

Economic Tests of Market Efficiency
Tests of the Random
Walk Hypothesis
Tests of Price
Reaction to News

August 07, 2014
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Tests of Price Reaction to News
• What constitutes news?
o New, unexpected, firm-specific information
o New, unexpected, non-firm-specific information that has valuation implications
• Improper methodology: examine news on a few days with large price drops
o See Polymedica, Freddie Mac
• General outline of the proper test methodology
o Categorize days during period of interest into days with news and days with no news
o Summarize the two samples: days with news sample vs. days with no news sample
o Use statistical tests to examine whether there is a difference between the two samples

Test of Random Walk: Serial Correlation Test
• Can we explain current return using lagged return(s)?
Rt+1
Efficient Market
Rt
Rt+1
Inefficient Market
Rt

Test of Random Walk: Systematic Under/Overreaction
• Identify all large price moves
o Examine average reaction following the large moves
o If yes, this shows possible over/underreaction and suggests possible violation of market efficiency.
Date
Price
Date
Price
Efficient Market Inefficient Market

August 07, 2014
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SEGMENT 2:
Jordan Milev, Ph.D.
Vice President
Market Efficiency – a Matter of Degree
• “Basic’s presumption of reliance thus does not rest on a ‘binary’ view of market efficiency. Indeed, in making the
presumption rebuttable, Basic recognized that market efficiency is a matter of degree and accordingly made it a matter
of proof.”
• Economic analysis of market efficiency involves results in identifying the legal criteria that factors that are generally
consistent or inconsistent with market efficiency.
• Do courts seem to weigh the various market efficiency factors?

August 07, 2014
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Uncovering Price Impact via an Event Study
• The event study method for analyzing statistical significance
o Identifies the firm-specific component of the price move (a.k.a. adjusted price move), distinguishing it from the effect
that the overall market and industry typically have on the security’s daily price move.
o Compares the adjusted price move to the typical price move for this security.
o Answers the question: assuming the information that day was not material, what is the likelihood (probability) that we
would expect to see a price move of such magnitude?
o In financial economics a probability of 5% or less indicates statistical significance.
• Additional considerations
o Increasing (or declining) average expected price move over certain periods (e.g., financial crisis, drug trials)
o Evaluating price movements on multiple days with misrepresentations: multiple comparisons
o Identifying appropriate estimation period
o Implied volatility expansion may indicate market expectation for potential future large price move

Introduction
Deborah Renner chairs BakerHostetler's class action practice in New York. Deborah focuses her practice on complex
commercial litigation, including the defense of consumer fraud, data breach, ERISA, and securities class actions. She
defends companies in nationwide, multidistrict and state class actions. Deborah has defeated class certification in courts
around the country and has won the dismissal of class claims at the outset of numerous actions. She frequently advises
companies on class action defense and regulatory inquiries. Among Deborah’s areas of knowledge and experience, she is
certified in information privacy. Deborah frequently speaks and writes on class action defense issues and strategies, and
has taught class action law at Fordham University School of Law.
August 07, 2014
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SEGMENT 3:
Deborah H. Renner
Partner
BakerHostetler

The Backdrop to Halliburton II
• Four Supreme Court cases provide the backdrop to the Halliburton II decision:
– Wal-Mart Stores, Inc. v. Dukes, 141 S. Ct. 2541 (2011);
– Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (2011) (“Halliburton I”);
– Amgen v. Connecticut Retirement Plans and Trust Funds, 133 S. Ct. 1184 (2013); and
– Comcast v. Behrend, 133 S. Ct. 1426 (2013).
August 07, 2014
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SEGMENT 3:
Deborah H. Renner
Partner
BakerHostetler

Wal-Mart on Commonality and Rigorous Analysis at Class Certification
• Wal-Mart re-defines commonality under Rule 23(a)(2): “claims must depend on a common
contention. . .that common contention, moreover, must be of such a nature that it is capable of
classwide resolution—which means that determination of its truth or falsity will resolve an issue that
is central to the validity of each one of the claims in one stroke.”
• Wal-Mart underscores that a trial court must conduct a “rigorous analysis” of the class certification
criteria and consider the merits of the case as necessary.
August 07, 2014
31
SEGMENT 3:
Deborah H. Renner
Partner
BakerHostetler

Halliburton I on Loss Causation, Predominance
and the Fraud-on-the Market Presumption
• The issue in Halliburton I was whether a plaintiff could invoke the presumption of reliance at the
class certification stage without showing “loss causation,” i.e., a causal connection between the
defendant’s alleged misrepresentation and plaintiff’s economic loss.
• However, the Supreme Court explained that satisfaction of the predominance requirement and the
issue of reliance concern “transaction causation,” i.e., the reasons the investor decided to buy or sell
a stock.
August 07, 2014
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SEGMENT 3:
Deborah H. Renner
Partner
BakerHostetler

Halliburton I on Loss Causation, Predominance
and the Fraud-on-the Market Presumption
• Justice Roberts, writing for a unanimous Supreme Court, held that loss causation had nothing to do
with reliance on an alleged misrepresentation, and need not be shown at class certification.
• Halliburton had argued that the real issue was price impact, itself backing off of the loss causation
argument, and foreshadowing Halliburton II’s arguments and holding: “Halliburton’s theory is that if a
misrepresentation does not affect market price, an investor cannot be said to have relied on the
misrepresentation merely because he purchased stock at that price. If the price is unaffected by the
fraud, the price does not reflect the fraud….”
• The Court did not reach this argument, as it was not presented below.
August 07, 2014
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SEGMENT 3:
Deborah H. Renner
Partner
BakerHostetler

Amgen and Comcast and the Debate on Predominance
• Two 2013 Supreme Court decisions shed light on standards for assessing the Rule 23(b)(3)
predominance requirement and the extent to which a court can consider the merits of a case at
class certification:
• Amgen v. Connecticut Retirement Plans and Trust Funds, 133 S. Ct. 1184 (2013); and
• Comcast v. Behrend, 133 S. Ct. 1426 (2013).
August 07, 2014
34
SEGMENT 3:
Deborah H. Renner
Partner
BakerHostetler

Amgen on Materiality and Predominance
• Harkening back to Wal-Mart, Justice Ginsburg, writing for the Court, held that “the 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.’”
• Justice Ginsburg reasoned that:
 Because “materiality can be proved through [objective] evidence common to the class . . .
materiality is a ‘common question’ for the purposes of Rule 23(b)(3).”
 “Failure of proof on the element of materiality would end the case for one and for all; no claim
would remain in which individual reliance issues could potentially predominate.”
August 07, 2014
35
SEGMENT 3:
Deborah H. Renner
Partner
BakerHostetler

Amgen on Rigorous Analysis at Class Certification
• “Rule 23 grants courts no license to engage in free-ranging merits inquiries at the certification stage.
Merits questions may be considered to the extent … that they are relevant to determining whether
the Rule 23 prerequisites … are satisfied.”
August 07, 2014
36
SEGMENT 3:
Deborah H. Renner
Partner
BakerHostetler

The Dissent and Concurrence in Amgen
• In dissent, Justice Scalia wrote that the Basic rule should govern not “only the question of
substantive liability, but also the question [of] whether certification is proper.”
• Justice Scalia also opined that the Court’s decision was contrary to the “rigorous analysis” required
for class certification decisions under Wal-Mart.
• The real issue, Justice Alito reasoned in a concurring opinion, is the Basic presumption of reliance.
August 07, 2014
37
SEGMENT 3:
Deborah H. Renner
Partner
BakerHostetler

The Comcast Decision on Predominance
and Rigorous Analysis at Class Certification
• Justice Scalia wrote the decision for the majority, relying on Wal-Mart. The Court reiterated that a
district court must determine that Rule 23 is satisfied “even when that requires inquiry into the merits
of the claim.”
• “By refusing to entertain arguments against respondents’ damages model that bore on the propriety
of class certification, simply because those arguments would also be pertinent to the merits
determination, the Court of Appeals ran afoul of our precedents requiring precisely that inquiry. And
it is clear that…respondents cannot show Rule 23(b)(3) predominance: Questions of individual
damages calculations will inevitably overwhelm questions common to the class.”
August 07, 2014
38
SEGMENT 3:
Deborah H. Renner
Partner
BakerHostetler

August 07, 2014
39
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Introduction
Michelle Reed is a partner in the litigation department of Akin Gump Strauss Hauer & Feld LLP, where she represents public
companies, officers and directors in securities class actions, derivative lawsuits, M&A litigation, and adversary proceedings
in federal and state court. Ms. Reed has successfully defeated class certification in proposed securities class actions and
regularly defends allegations of accounting and financial fraud, insider trading, investment fund / advisor fraud, and FCPA
violations. Ms. Reed also represents companies and company insiders in internal investigations and in enforcement actions
by the SEC, FINRA, and the CFTC.
Ms. Reed has been recognized as a “Rising Star” in securities litigation by Texas Monthly and she currently serves as co-
chair of the Derivative Suits Subcommittee of the American Bar Association’s Class Actions and Derivative Suits Committee.
August 07, 2014
42
SEGMENT 4:
Michelle Reed
Partner

Halliburton: Procedural Background
 Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317, 573 U.S. __ (June 23, 2014)
 Lead plaintiff Erica P. John Fund, a nonprofit supporting the Catholic Archdiocese of Milwaukee
 Plaintiff previously appealed to the Supreme Court on the issue of loss causation
 The Supreme Court ruled that plaintiff need not prove loss causation at class certification and
remanded Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. __ (2011)
August 07, 2014
43
SEGMENT 4:
Michelle Reed
Partner

Halliburton: Procedural Background
 On remand, district court granted class certification and the Fifth Circuit affirmed
● Plaintiff properly invoked the “fraud on the market” presumption
● The decision in Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds (No. 11-1085) (Feb.
27, 2013) precluded defendants from presenting evidence of no price impact to rebut the
presumption
August 07, 2014
44
SEGMENT 4:
Michelle Reed
Partner

Halliburton: Questions Presented
 Halliburton appealed, presenting two questions:
● Whether this Court should overrule or substantially modify the holding of Basic Inc. v. Levinson, 485
U.S. 224 (1988), to the extent that it recognizes a presumption of classwide reliance derived from the
fraud-on-the-market theory
● Whether, in a case where the plaintiff invokes the presumption of reliance to seek class certification,
the defendant may rebut the presumption and prevent class certification by introducing evidence that
the alleged misrepresentations did not distort the market price of its stock
August 07, 2014
45
SEGMENT 4:
Michelle Reed
Partner

Halliburton: The Holding
 Majority Opinion by Chief Justice Roberts, joined by Justices Kennedy, Ginsburg, Breyer, Sotomayor,
and Kagan
 Declined to overrule the fraud-on-the-market presumption of reliance established in Basic Inc. v.
Levinson, 485 U.S. 224 (1988)
 Interpreted it to allow for certification-stage rebuttal
August 07, 2014
46
SEGMENT 4:
Michelle Reed
Partner

Halliburton: Upholds Fraud-on-the-Market Presumption
 No special circumstances existed to overturn the presumption
● Many of defendant’s arguments for overturning the presumption were considered and rejected by the
Basic court
● Rejects Halliburton’s arguments that the presumption should be overturned because (1) capital
markets are not fundamentally efficient and (2) investors do not always rely on market price
August 07, 2014
47
SEGMENT 4:
Michelle Reed
Partner

Halliburton: Upholds Fraud-on-the-Market Presumption
 Burden of proving the predicates for the presumption on plaintiffs
● Publicity
● Materiality
● Market efficiency
● Market timing.
 Consistent with prior decisions because plaintiff still required to prove prerequisites to invoke
presumption
 Policy concerns about excessive settlements should be addressed to Congress
August 07, 2014
48
SEGMENT 4:
Michelle Reed
Partner

Halliburton: Allows Rebuttal Evidence on Price Impact
 Defendants are permitted to rebut the presumption at the class-certification stage through evidence of
the lack of price impact
● “Any showing that severs the link between the alleged 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.” Basic, 485 U.S. at 248.
● Market efficiency serves as an “indirect proxy” for price impact
August 07, 2014
49
SEGMENT 4:
Michelle Reed
Partner

Halliburton: Distinguishing Amgen
 Distinguished Amgen, which held that evidence of price impact to establish materiality was not
appropriately considered at the class-certification stage
● Evidence already necessary to establish the publicity and market-efficiency prerequisites
● Evidence points straight to Rule 23’s predominance requirement
● Materiality a common question on the merits, not necessary at class certification
August 07, 2014
50
SEGMENT 4:
Michelle Reed
Partner

Introduction
Mike McConnell has extensive complex litigation experience regarding many types of business disputes, with special
emphasis on securities litigation and corporate governance matters. The matters litigated include securities fraud class
actions, investigations and inquiries by the Securities and Exchange Commission, derivative cases, proxy fraud litigation,
and other matters that are often ancillary to shareholder litigation, including shareholder inspection actions, disputes under
shareholder voting agreements, internal corporate investigations, and other special committee matters.
Mike's recent representations include defending WL Ross & Co. and certain current and former officers and directors of
International Textile Group (ITG) in class and derivative shareholder litigation arising from the merger of ITG and Safety
Components International; defending Attachmate Corporation in connection with shareholder litigation filed in Delaware and
Massachusetts challenging its acquisition of Novell Corporation; defending officers and directors of Georgia Gulf
Corporation in shareholder litigation filed in Georgia challenging the board's rejection of a merger proposal by a third-party
bidder; defending former officers and directors of Security Bank of Bibb County in an action filed by the FDIC; and defending
members of a Special Committee of BlueLinx Holdings in connection with shareholder litigation filed in Delaware, Georgia,
and New York challenging a tender offer proposed by private equity investor.
August 07, 2014
51
SEGMENT 5:
Partner
Jones Day

The Ginsburg Concurrence
• Justices Breyer and Sotomayor joined Justice Ginsburg.
• Justice Ginsburg acknowledged that the holding by the majority will likely increase the amount of
discovery prior to class certification.
• She suggests this is a reasonable trade-off, however, given the majority opinion places the burden of
showing “the absence of price impact” on defendants.
• In light of this hurdle, these concurring justices agreed that the holding in Halliburton II “should impose
no heavy toll on securities-fraud plaintiffs with tenable claims.”
August 07, 2014
52
SEGMENT 5:
Partner
Jones Day

The Thomas Concurrence
• Justices Scalia and Alito joined Justice Thomas.
• Although these three justices concurred in the judgment, the seventeen-page opinion forcefully
attacks the majority’s reasoning and laments a missed opportunity to overrule Basic.
August 07, 2014
53
SEGMENT 5:
Partner
Jones Day

• Justice Thomas first provided a primer on the “reliance” element.
• Plaintiff must show transaction causation (i.e., the investor actually relied upon the affirmative
misrepresentation in a “relevant transaction”).
• Without this element, Rule 10b-5 is reduced to a “scheme of investor’s insurance.”
• Because the traditional means to prove reliance was incongruous with meeting the
predominance requirement under Rule 23, the Basic court relied on a “nascent economic theory”
to create a judge-made legal presumption that made it possible for class representatives to
“indirectly” establish “reliance.”
August 07, 2014
54
SEGMENT 5:
Partner
Jones Day

• Justice Thomas next attacked the two theoretical premises relied upon by the Basic court and
embraced by the Halliburton II majority.
• Premise One: In a well-developed market, public statements are reflected in the market price of the
security.
• Justice Thomas observed that the efficacy of this premise had lost its “luster” amongst
economists since Basic.
• Studies confirm that the market treats public statements differently depending on how and where
the information is communicated (e.g., financial data on the front page of the Wall Street Journal
may be impounded into the stock price faster than when it is only communicated through a
routine SEC filing)
• Other empirical studies show “scores” of “efficiency-defying anomalies.”
August 07, 2014
55
SEGMENT 5:
Partner
Jones Day

• Premise Two: Investors rely on the “integrity of the price.”
• Justice Thomas explained that many investors, however, trade for the opposite reason—they
believe the market has over-priced or under-priced the stock.
• Other investors trade for reasons completely unrelated to the price of the stock such as changing
liquidity needs, tax reasons or portfolio balancing.
• He responded to the majority’s assertion that “value” investors “rely on the fact that a stock’s
market price will eventually reflect material information” by noting that this argument conflicts
with a key assumption underlying the fraud-on-the-market hypothesis—i.e., the market quickly
impounds public information into the price of the stock:
– An investor “simply does not ‘rely on the integrity of the market price’ if he does not believe
that the market price accurately reflects public information at the time he transacts.”
August 07, 2014
56
SEGMENT 5:
Partner
Jones Day

• He next explained that Basic exempts Rule 10b-5 from Rule 23’s proof requirement, an exemption
that runs counter to Comcast and Wall Mart, which mandate that all class representatives meet the
proof requirement.
• Similarly, he noted that the majority’s reliance on stare decisis is misplaced and certainly does not
compel the Court to “save Basic’s muddled logic and armchair economics.”
• The Court has not afforded “special force” to stare decisis outside the context of statutory
interpretation.
• “[W]hen we err in areas of judge-made law, we ought to presume that Congress expects us to
correct our own mistakes—not the other way around.”
August 07, 2014
57
SEGMENT 5:
Partner
Jones Day

August 07, 2014
58
John E. Schreiber
Partner
Jordan Milev, Ph.D.
Vice President
Deborah H. Renner
Partner
BakerHostetler
Michelle Reed
Partner
Partner
Jones Day
All Speakers Segment

Impact of Halliburton II
• More challenges to class certification
o Historically, class certification denied in securities fraud actions in approximately only 2% of cases
• Impact on settlement Timing
August 07, 2014
59
John E. Schreiber
Partner

Impact of Halliburton II
• What will it take for defendants to show lack of “price impact”?
o Expected news
o Confounding factors
o Cases involving multiple alleged misrepresentations
August 07, 2014
60
John E. Schreiber
Partner

August 07, 2014
61
Price Movement ≠ Price Impact
• “[T]hat a defendant’s misrepresentation actually affected the stock price—so-called ‘price impact’
—Halliburton II at 16
• Note that Halliburton II describes the issue as whether the fraud “affects” or “distorts” the price, not whether the price
moves or changes.
• Could there be price impact but no price movement?
• Could there be price movement but no price impact?
Jordan Milev, Ph.D.
Vice President

August 07, 2014
62
Price Impact Analysis and Implications for Loss Causation
• Could there be price impact but no loss causation?
o Yes: e.g., a material misrepresentation may subsequently become immaterial
• Analysis of price impact of omissions?
o Simple event study of the misrepresentation date may not be sufficient
o The information may hot have been important prior to certain point
Jordan Milev, Ph.D.
Vice President

August 07, 2014
63
Parsing: Refining Price Movement via Additional Tools
• Content Analysis
o Method of analyzing text to assess the relative importance of information: systematic; objective; replicable
o Recently recommended by First Circuit
• Non-simultaneous Industry Effects (a.k.a. Contagion Analysis)
o Other companies in the industry may have experienced similar issues, with similar price impact over the same period,
but they did not happen to announce the issues on the same day
o Contagion analysis may assist in parsing out the effect of such industry-wide issues
• Valuation-Based Parsing Analysis
o Bottom-up vs. top-down approach
o Important to consider permanency of impact
• Correlation Analysis
o Can be used to study the value-relevancy of information at different points in time
Jordan Milev, Ph.D.
Vice President

Take-Aways
• Halliburton II diminishes the significance of Amgen on materiality and brings securities class actions
in line with others as to the “rigorous analysis” required for class certification.
• But the issue of how to look at the predominance requirement remains.
• And the question of the level of evidence required at the class certification remains.
• These issues go beyond the securities context.
August 07, 2014
64
Deborah H. Renner
Partner
BakerHostetler

Halliburton: Implications for Loss Causation
 Court’s discussion of the efficient capital markets hypothesis may impact future loss-causation
arguments
 Plaintiffs will key-in on dicta
● “market efficiency is a matter of degree”
● information need only be incorporated “within a reasonable period”
 Plaintiffs may see this as a tacit endorsement of “leakage” theory
 Defendants have strong defense in arguing that such theories violate the efficient capital markets
hypothesis on which the Basic and Halliburton II decisions are based
August 07, 2014
65
Michelle Reed
Partner

Halliburton: Implications for Loss Causation
 Plaintiffs will use the Court’s citation to Schleicher v. Wendt, 618 F.3d 679, 685 (7th Cir. 2010), as an
endorsement of “maintenance” theory
● i.e., alleged misrepresentations falsely confirmed market expectations, keeping the price steady
when it should have declined
 Defendants will still have strong loss-causation defenses
● Halliburton decision squarely focused on reliance element, not loss causation
● Loss causation holdings in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 342 (2005) and
Halliburton I require more
August 07, 2014
66
Michelle Reed
Partner

Omissions and Constructive Reliance
• Although plaintiffs traditionally rely upon the fraud-on-the-market presumption to satisfy the
predominance requirements under Rule 23, it is not the only tool available to them to establish
reliance.
• Under Affiliated Ute, if there is an omission of a material fact by a person or entity with a duty to
disclose, the investor to whom the duty was owed need not provide specific proof of reliance.
August 07, 2014
67
Partner
Jones Day

• This presumption of reliance is always available in “pure” omission cases.
• To rely on Affiliated Ute, a plaintiff must establish the existence of a duty to disclose.
• Affirmative obligation through statute or regulation
• Duty to correct
• Duty to update
• If a court holds a plaintiff has pled an “omissions case” within the scope of Affiliated Ute, then reliance
is presumed provided the statement is material.
• Notably, Amgen prohibits consideration of materiality at the class stage.
• Defendants can attempt to rebut the presumption by showing plaintiffs did not in fact rely on the
omission.
August 07, 2014
68
Partner
Jones Day

• The primary battle is whether Affiliated Ute applies in “mixed” cases where plaintiffs rely upon
misrepresentations and omissions.
• Rule 10b-5(b) prohibits the making of affirmative representations that are rendered misleading by the
omission of a material fact.
• In these “half-truth” situations, courts have generally read Affiliated Ute narrowly and required class
plaintiffs to rely upon the fraud-on-the-market presumption to establish reliance in the class context.
• Some courts, however, have held Affiliated Ute applies even in a mixed case provided it is “primarily”
an omissions case.
• The determination of whether an action primarily relies upon misstatements or omissions can be
highly subjective and semantic.
• If price impact is in doubt, plaintiffs may redouble their efforts to characterize their Rule 10b-5 claims
as primarily alleging “omissions.”
August 07, 2014
69
Partner
Jones Day

• Many courts have rejected reliance on Affiliated Ute in “mixed” cases because if expanded to include
all “half-truth” type claims, the exception would effectively dispense with the reliance element in most
Rule 10b-5 cases.
• Some courts, however, have been less restrictive in their application of Affiliated Ute.
• Fogarazzo v. Lehman Brothers, Inc., 263 F.R.D. 90, 106 (S.D.N.Y. 2009) (applying the Affiliated
Ute presumption to a claim premised on both representations and omissions and stating that the
“alleged failure to disclose made the analyst reports themselves misleading”).
• In re Jiffy Lube Sec. Litig., 772 F. Supp. 258, 267 (D. Md. 1991) (Affiliated Ute applied in case
against auditors where allegations included both misstatements and omissions).
August 07, 2014
70
Partner
Jones Day

► You may ask a question at anytime throughout the presentation today. Simply click on the question mark icon located on the floating tool bar on the bottom right side of your screen. Type
your question in the box that appears and click send.
► Questions will be answered in the order they are received.
Q&A:
August 07, 2014
71
SEGMENT 5:
Partner
Jones Day
SEGMENT 1:
John E. Schreiber
Partner
SEGMENT 2:
Jordan Milev, Ph.D.
Vice President
SEGMENT 3:
Deborah H. Renner
Partner
BakerHostetler
SEGMENT 4:
Michelle Reed
Partner

August 07, 2014
72
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