Adjudicating Securities Fraud

How to Challenge Class Certification

In search of ‘market efficiency’

by Kevin McLafferty

Mr. McLafferty is an analyst with NewOak, a financial advisory and consulting firm providing clients with strategic insight, transparency and risk management. Reprinted with permission. Visit

The Supreme Court’s Halliburton II[1] decision has set the tone for class certification in securities fraud litigation.

In Halliburton II, the plaintiffs claimed that Halliburton made misstatements about revenue, leading to investor losses. The plaintiffs brought suit for securities fraud against Halliburton and attempted to certify the class through a fraud-on-the-market theory. This theory presumes that, in an efficient market, a security’s price (e.g., as listed on an exchange) reflects any material public representation affecting that security.

Chief Justice John Roberts states that securities fraud classes may prove the causation element of fraud at the class certification stage by invoking a presumption that the instrument was traded in an efficient market, and that it reflects all public, material information—including material misrepresentations. Additionally, the court ruled that the defendants in these matters may rebut presumption of reliance on these statements by providing evidence of price impact.

The element of material misrepresentation was originally set forth in Basic v. Levinson[2]. This involved a corporate merger where Basic made statements denying the merger, inducing the other company’s investors to sell stock shares. The court ruled that misstatements about merger negotiations can be material statements of fact. Additionally, a fraud-on-the-market theory is acceptable for class certification, as it would be too difficult for every plaintiff in a class to show reliance on these misstatements.

Proving market efficiency

In proving market efficiency—a second factor that the Halliburton II court looked to—one must refer to the five factors put forth in Cammer v. Bloom[3], a securities fraud case which held that the presumption of reliance on information was able to satisfy a fraud-on-the-market theory. The five factors that Cammer put forth to determine market efficiency were: 1) the stock’s average weekly trading volume; 2) the number of securities analysts that followed/reported on the stock; 3) the presence of market makers; 4) the company’s eligibility to file a Form S-3 registration statement; and 5) a cause-and-effect relationship between corporate events or releases and immediate change to stock price.

The ability to challenge presumption at the class certification stage, however, has yet to succeed in securities litigation since the Halliburton II ruling. The issue remains that no judge has ruled against class certification to this point, finding that the connection between an alleged fraud and price impact, the fraud-on-the-market theory, has been established. This has enabled classes to grow in size, and therefore in damages or settlement figures. Further, it puts a greater emphasis on the valuation and analysis on those damages or settlements.

In a recent case, Gusinksy v. Barclays[4], class certification was challenged in August of 2015. This case involves Barclays’ alleged market manipulation concerning Libor rates. Judge Shira Schiendlin ruled for class certification, reasoning that the plaintiffs had shown sufficient evidence to support that Barclays’ stocks traded in an efficient market (e.g, and therefore could rely on the fraud-on-the-market theory). Judge Schiendlin cited Halliburton II in this order to grant class certification.

The defense in Gusinsky argued that the plaintiffs did not pass the factors for market efficiency set forth in Cammer. The defense saw failure in the fifth Cammer factor where a cause and effect relationship between corporate communications and immediate stock reaction exists. The defense also challenged the plaintiff expert, Dr. John D. Finnerty, and his report, claiming that is was not an event study. Judge Schiendlin noted, however, that Dr. Finnerty analyzed a sufficient scope of data to prove market efficiency, and, therefore, a cause and effect relationship. Judge Schiendlin reasoned that after Halliburton II there is no requirement that the plaintiffs conduct an event study to prove market impact. Rather, the only place for an expert’s event study would be from the defense in rebutting price impact or market efficiency. The defense did not conduct their own study, so Dr. Finnerty—by demonstrating a cause and effect relationship between misstatements and market price moves—exhibited what was necessary.

Manipulating the foreign exchange market

Chief Justice John Roberts states that securities fraud classes may prove the causation element of fraud at the class certification stage by invoking a presumption that the instrument was traded in an efficient market

Another case where the plaintiff settlement class is being challenged is In re Foreign Exchange[5]. This is a case involving banks allegedly manipulating the foreign exchange market. A settlement involving nine of the 12 banks has been proposed for approximately $2 billion. The three non-settling banks (Credit Suisse, Deutsche Bank, and Morgan Stanley) are contesting class certification. The non-settling banks have stated that the class the plaintiffs seek to certify is large in scope and will be challenged. It remains to be seen the effectiveness of any challenge on certification for this case, but a status conference tentatively scheduled for December 3, 2015 should shed some light onto the argument.

In an even more recent securities class action, Strougo v. Barclays[6], the defendants are accused of high frequency trading in a dark pool. The plaintiffs have sought to certify the class of investors who were affected by this dark pool, and oral arguments took place on November 5, 2015.

At these arguments, the plaintiff’s counsel (Pomerantz LLP) stated that market efficiency had been established through the analysis and subsequent report of their expert, Dr. Zachary Nye. Dr. Nye analyzed 38 total trading days, nine of which showed statistically significant reactions to price related Barclays’ communications. Given the courts’ previous holdings, it is likely that when the court rules on this case the plaintiffs will have satisfied the market efficiency factor, as well as the fifth Cammer factor, that being the cause and effect relationship.

The defense (Sullivan & Cromwell, and the same as in Gusinsky) argued that market efficiency was not evident in Dr. Nye’s analysis. They also stated that there was no evidence of a cause-and-effect relationship from Barclays communications that impacted prices. An emphasis on the fifth Cammer factor was made once again, and Judge Schiendlin stated that “if the fifth Cammer factor was all that mattered we wouldn’t have factors one through four.” While the court acknowledged that the fifth factor was the most important factor, it seemed reluctant to ignore the other four factors. No decision has been made on class certification in Strougo to date.

Although it might be possible to rebut class certification after Halliburton II, it seems more likely that it will be granted in securities fraud cases, like Gusinsky, if the opposing arguments remain focused on a lack of market efficiency and/or the quality and scope of the plaintiff expert’s analysis. It remains to be seen what the best argument in rebutting class certification is, but it is likely centered on evidence providing lack of price impact.

The implications of class certification continually being awarded bodes well for plaintiff classes looking for higher damages or settlement amounts. This stresses the importance of a proper analysis of damages or settlements as well as strong expert analysis.





[1] Halliburton Co. v. Erica P. John Fund, Inc., 134 S.Ct. 2398 (2014)
[2] Basic v. Levinson, 485 U.S. 224 (1988)
[3] Cammer v. Bloom, 711 F.Supp. 1264 (D.N.J. 1989)
[4] Gusinsky v. Barclays PLC, 944 F.Supp.2d 279 (S.D.N.Y. 2013)
[5] In re Foreign Exchange Rates Antitrust Litigation, 74 F.Supp.3d 581 (S.D.N.Y. 2013)
[6] Strougo v. Barclays PLC, __F.Supp.3d__ (S.D.N.Y. 2015)