Waggoner v. Barclays PLC
875 F.3d 79 (2017)
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Rule of Law:
A plaintiff seeking to establish market efficiency to invoke the Basic presumption of reliance in a securities fraud class action is not required to present direct evidence of price impact (the fifth Cammer factor), provided that indirect indicia of market efficiency are overwhelmingly strong. Defendants seeking to rebut the Basic presumption must do so by a preponderance of the evidence.
Facts:
- Following its involvement in the LIBOR manipulation scandal, Barclays PLC undertook significant measures to reform its corporate culture and restore its integrity.
- Barclays operated a private stock trading venue, or 'dark pool,' known as Barclays Liquidity Cross (LX), which was marketed to institutional investors as a safe environment protected from predatory high-frequency traders (HFTs).
- Between August 2011 and June 2014, Barclays and its officers made numerous public statements touting LX's transparency and its 'Liquidity Profiling' tool, which they claimed protected clients from aggressive HFT activity.
- In reality, Barclays allegedly favored HFTs, exempted a significant portion of trades in LX from its protective 'Liquidity Profiling,' and provided undisclosed advantages to predatory traders.
- On June 25, 2014, the New York Attorney General filed a lawsuit against Barclays, alleging the company's representations about LX were false and misleading.
- In the two trading days following the announcement of the Attorney General's lawsuit, the price of Barclays' American Depository Shares (ADS) fell by a combined total of over 8.8%.
- Joseph Waggoner, Mohit Sahni, and Barbara Strougo purchased Barclays' ADS during the period when the company was making its allegedly false statements about LX.
Procedural Posture:
- Joseph Waggoner and other plaintiffs filed a putative class action suit against Barclays PLC in the U.S. District Court for the Southern District of New York.
- The defendants filed a motion to dismiss the complaint.
- The district court denied the defendants' motion to dismiss in part, finding the alleged misstatements about LX could be qualitatively material to investors.
- The plaintiffs moved for class certification.
- The district court granted the plaintiffs' motion for class certification, concluding that reliance could be presumed.
- The U.S. Court of Appeals for the Second Circuit granted Barclays, the appellant, leave to appeal the class certification order, with the plaintiffs as appellees.
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Issue:
Is direct evidence of a cause-and-effect relationship between unexpected corporate disclosures and an immediate stock price response always required to prove market efficiency for the purpose of invoking the Basic presumption of reliance at the class certification stage?
Opinions:
Majority - Droney, J.
No. Direct evidence of price impact is not always necessary to demonstrate market efficiency for invoking the Basic presumption of reliance. A court may find a market to be efficient based on a holistic analysis of the evidence, and strong indirect evidence—such as high trading volume, significant analyst coverage, and the other Cammer and Krogman factors—can be sufficient to establish efficiency, particularly for the securities of a large, widely-followed company. The court first held that the Affiliated Ute presumption for omissions was inapplicable because the plaintiffs' claims were primarily based on affirmative misstatements, where the omissions were simply the inverse of the alleged falsehoods. However, the court affirmed that the Basic presumption was properly invoked. It reasoned that the Cammer factors are tools, not a rigid checklist, and that the seven undisputed indirect factors in this case so strongly indicated an efficient market for Barclays' ADS that a finding on the direct evidence factor (Cammer 5) was unnecessary. Furthermore, the court held that defendants bear the burden of persuasion—proof by a preponderance of the evidence—to rebut the Basic presumption by showing a lack of price impact, a burden Barclays failed to meet. The defendants' argument that the price drop was caused by fear of fines rather than the revelation of the fraud was insufficient, as the two were inextricably linked to Barclays' lack of integrity.
Analysis:
This decision clarifies the standard for proving market efficiency in the Second Circuit, establishing that an event study showing direct price impact is not a mandatory prerequisite for invoking the Basic presumption. It provides plaintiffs with greater flexibility at the class certification stage, especially in cases involving large, heavily traded securities where indirect evidence of efficiency is robust. The ruling also solidifies the high bar for defendants attempting to rebut the presumption, requiring them not merely to produce some evidence of no price impact, but to affirmatively prove the absence of such impact by a preponderance of the evidence. This lowers a potential barrier for plaintiffs and reinforces the strength of the fraud-on-the-market theory in securities class actions.
