Second Circuit Clarifies Burden of Rebutting the Basic Presumption Under Halliburton II

In In re Goldman Sachs Group, Inc. Sec. Litig., the Second Circuit confirmed that, at the class-certification stage in a securities-fraud class action, the defendant bears the burden of persuasion to rebut the presumption of reliance under Basic v. Levinson by a preponderance of the evidence. The decision follows on the heels of a separate Second Circuit panel’s similar decision in Waggoner v. Barclays PLC and clarifies that a defendant need not provide “conclusive evidence” to rebut the presumption.

Goldman Sachs is one of several federal court decisions interpreting Halliburton Co. v. Erica P. John Fund, Inc. (Halliburton II), which declined to dispense with the Basic presumption of reliance – which is premised on the “fraud-on-the-market” theory – but held that the presumption can be rebutted by “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.” Since Halliburton II was handed down, courts have wrestled with the proof a defendant must offer to rebut the presumption.

In Waggoner v. Barclays PLC, issued in November 2017, the Second Circuit resolved the question by holding that a defendant bears the burden of persuasion to rebut the Basic presumption by a preponderance of the evidence. In Goldman Sachs, another Second Circuit panel confirmed the Waggoner panel’s conclusion, rejecting defendants’ argument that it only bears the burden of production, i.e., to offer some evidence to rebut the presumption.

The Goldman Sachs panel also clarified that the burden on a defendant is no greater than the preponderance standard, disapproving of the District Court’s statement that defendants failed to rebut the Basic presumption because they failed to “conclusively” prove “a complete absence of price impact.” The Court went on to hold that the District Court erred in rejecting certain price-impact evidence offered by the defendants on class certification, determining that while a defendant may not offer materiality evidence on class certification, price-impact evidence – although touching on materiality – goes directly to the heart of Basic by showing whether the alleged misrepresentation could have affected the market price of the defendant’s stock.

In sum, Goldman Sachs, along with Waggoner, offers clarity as to how Halliburton II should be applied. Given the plaintiff-friendly tack these cases have taken, securities fraud class action defendants will have to be creative in developing methods to rebut the Basic presumption.