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Guest Post: Price Impact, the Speed of Information, and Securities Class Certification


Matthew L. Mustokoff
Margaret E. Mazzeo

Since the U.S. Supreme Court’s 2014 decision in Halliburton II, the lower courts have wrestled with questions on how to address the “price impact” of corrective disclosures. In the following guest post, Matthew L. Mustokoff and Margaret E. Mazzeo, partners at the Kessler Topaz Meltzer & Check LLP law firm, examine several critical unanswered questions concerning price impact. I would like to thank Matt and Margaret for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is the authors’ article.

 

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In outlining the contours of the “fraud-on-the-market” presumption of reliance, the Supreme Court in Basic v. Levinson held that the presumption is rebuttable through evidence that “severs the link” between the defendant’s misrepresentation and the loss suffered by the stockholder (i.e., the stock price decline).[1]  A quarter-century later in Halliburton II, the Court expounded that one way for a defendant to “sever the link” is by demonstrating a lack of price impact:  “[I]f a defendant could show that the alleged misrepresentation did not, for whatever reason, actually affect the market price, . . . then the presumption of reliance would not apply.”[2]

 

The Court in Basic and Halliburton II left unanswered a critical question regarding price impact: how long does it take new, value-relevant information to impact the stock price of a security trading in an efficient market?  The Court declined to lay down a bright-line rule with regard to the proper time period in which to assess price impact.  As the Court made clear in Basic, “by accepting this rebuttable presumption, we do not . . . adopt any particular theory of how quickly and completely publicly available information is reflected in market price.”[3]  The Court again turned down the opportunity to address the question of timing of price impact in Halliburton II, reiterating that “market efficiency is a matter of degree” and that “Basic’s presumption of reliance . . . does not rest on a ‘binary’ view of market efficiency’” that requires the stock price to immediately absorb material public information—or to absorb such information within a prescribed timeframe.[4]

 

In the wake of Halliburton II, the district and circuit courts have granted plaintiff-investors a degree of latitude when it comes to the amount of time it takes for information to be disseminated, analyzed, and synthesized before it is reflected in a company’s stock price.  In these cases, the courts have rejected arguments by defendants—both in the pleading (loss causation) and class certification contexts—that the analysis or commentary regarding previously released information cannot cause a price impact in an efficient market.  For example, in In re Chicago Bridge & Iron Co. N.V. Securities Litigation, the court rejected the defendants’ price impact challenge, explaining that “‘[w]hile it is generally true that in an efficient market, any information released to the public is presumed to be immediately digested and incorporated into the price of a security, it is plausible that complex economic data understandable only through expert analysis may not be readily digestible by the marketplace.’”[5]  The Chicago Bridge court recognized that the mere echoing of already-public information by an analyst cannot be corrective, but a “third-party’s analysis of a company’s already-public financial information can[] contribute new information to the marketplace.”[6]

 

The Ninth Circuit in In re BofI Holding, Inc. Securities Litigation similarly observed that “some information, although nominally available to the public, can still be ‘new’ if the market has not previously understood its significance.”[7]  As the Ninth Circuit further explained, the fact that an alleged disclosure “relie[s] on nominally public information does not, on its own, preclude [it] from qualifying as [a] corrective disclosure” as “the time and effort it took to compile this information make it plausible that the [disclosure] provided new information to the market, even though all of the underlying data was publicly available.”[8]  The court acknowledged that in some cases, “someone”—often a securities analyst—needs to put the pieces together before the market [can] appreciate [the] import” of particular data or other information about a company’s sales, businesses, or operations.[9]

 

In Billhofer v. Flamel Technologies, S.A., the court rejected the defendants’ attempt to rebut the Basic presumption by arguing that an analyst report discussing results from an adverse clinical drug trial was not corrective because the results had been previously available to the public.[10]  The court explained that “Basic does not require a perfectly efficient market or require a court to draw purely academic and unfounded conclusions regarding the spread of information.”[11]  Thus, the court ruled:  “The results of the CASPER trial were not ‘publicly available’ simply because they were posted in an obscure location on the internet. The CASPER trial results became publicly available when an analyst . . . issued a research report on the disappointing clinical results.”[12]

 

Below we examine two recent district court decisions from 2022 in which the courts rejected the price impact arguments raised by the defendants and provided important analysis of the issues posed by the dissemination of complex or confusing information as well as the time it can take new information to impact a stock’s market price.

 

Allegheny County Employees’ Retirement System v. Energy Transfer LP

In Allegheny County Employees’ Retirement System v. Energy Transfer LP, the plaintiff alleged that Energy Transfer and its senior officers made a series of false statements regarding Energy Transfer’s construction of three natural gas pipelines in Pennsylvania.[13]  In denying the defendants’ motion to dismiss at the pleadings stage, Judge Gerald McHugh of the Eastern District of Pennsylvania sustained the plaintiff’s allegations that a series of corrective disclosures resulted in a stock price decline and were sufficient to establish loss causation.[14]  When the plaintiff subsequently moved for class certification, the defendants again challenged the corrective disclosures, contending that they had “severed the link” between the misrepresentation and the loss by demonstrating that the disclosures had no impact on Energy Transfer’s stock price.[15]  The court explained that the “key disputes” regarding price impact focused “on how long a time period following an event the Court should consider in determining if there was a price impact, taking into account the significance of intervening news or events that might either confound the market, and what is reasonably necessary to comprehend the significance of a disclosure.”[16]

 

As a threshold matter, the defendants argued that “price impact under an efficient market presumption must take place almost instantaneously with the disclosure of new information to the market.”[17]  The court disagreed, stating: “The efficient price is not set by an invisible hand that instantly reflects new information in a security’s price, but through the dynamic, high-volume exchange of a security over an appropriate window of time.”[18]  As Judge McHugh explained:  “[T]he nature and timing of the disclosures here, the lack of transparency, the attempts by Energy Transfer to cast damaging information in a positive light, and the obvious confusion in the market at certain points require a more precise and nuanced analysis of when the market would have absorbed relevant information.”[19]

 

The first corrective disclosure alleged by the plaintiff was Energy Transfer’s announcement during an earnings call on Thursday, August 9, 2018, that the company would only be able to meet the stated construction deadlines for one of its new pipelines through the temporary use of old 12-inch pipelines that were already in place, instead of the 20-inch pipelines called for in the plans.[20]  Energy Transfer did not indicate how long the 12-inch pipeline would be used for or quantify the resulting reduction in throughput capacity.[21]  The following day—Friday, August 10—two analysts published reports that revised the anticipated earnings for the company based on the disclosed information.[22]  By the end of the day on Monday, August 13, Energy Transfer’s stock price had declined by 5.6% from its close on Wednesday, August 8 (i.e., the day before the corrective disclosure)—a statistically significant decline over this period of three trading days.[23]

 

In challenging this disclosure, the defendants argued that they had severed the link between the allegedly corrective information and the share price because the company’s share price did not decline in a statistically significant manner on the day of the disclosure (August 9) or the following day (August 10), and the decline on the following Monday (August 13) was “too distant to support a finding of price impact under efficient market conditions.”[24]  In response, the plaintiffs argued that the August 9 earnings call did not provide a clear enough disclosure to impact the market; rather, “it was the analysts’ interest and report of August 10 that clarified the disclosure sufficiently enough for the market to quantify its impact on price and, from there, cause the drop in price.”[25]  In other words, it took three trading days for the information regarding the status of the pipelines to impact the stock price.

 

The court found that the defendants failed to establish a lack of price impact and therefore did not rebut the presumption of reliance with respect to this corrective disclosure.  As Judge McHugh explained, “when Energy Transfer discussed the use of the 12-inch pipeline on their call with investors on August 9, 2018, the disclosure was artfully crafted and required additional clarifying information.”[26]  This additional clarifying information was provided in part through the August 10, 2018 analyst reports.[27]  After a “private discussion” with Energy Transfer, Wolfe Research published a report stating that the company’s disclosure “was confusing,” that “transparency and disclosure on this project are very low,” and that there would likely be a one-year delay until the pipeline reached full capacity due to the re-purposing of the old, smaller diameter pipes.[28]  Also on August 10, 2018, Wells Fargo published an analyst report that similarly noted that Energy Transfer’s statements regarding the piping that would be used for the project “confuse[d] the market,” and required follow-up from Wells Fargo analysts “to gain clarity.”[29]  Through further inquiry of Energy Transfer, the Wells Fargo report concluded that the pipeline’s capacity would be reduced by nearly 65% compared to what the company had told investors during the class period, the projected cost of the project would be nearly double what the company had represented, and full service of the pipeline would start two years later than previously expected.[30]

 

Judge McHugh concluded that “[g]iven the confusion described on the earnings call, and the need for journalists and analysts to follow up, a delay in the market absorbing the news does not on its own suffice to sever the link.”[31]  As the court continued, “it bears emphasis that the critical information was not announced by the company itself, but through analysts’ reports, a factor that courts have deemed relevant in looking to time periods beyond a day.”[32]  The court was unpersuaded by the defendants’ claims that the analysts did not change their overall outlook with respect to Energy Transfer, noting that the “conclusions and recommendations [the analysts] draw are distinct from the facts and figures they report,” further stating:

 

Investors, particularly sophisticated investors, will make their own judgments based on the information made available through the investigation and quantification work of the analysts. The information reported here, independent of the analysts’ conclusions, would have been objectively concerning to market participants because it quantified delays and identified an impact on profitability.[33]

 

The second corrective disclosure alleged by the plaintiff was related to a stop work order that was issued in the weeks following an explosion on one of the company’s pipelines.[34]  The plaintiff alleged that on Saturday, October 27, 2018, the Associated Press republished an article discussing some of the controversy surrounding one of Energy Transfer’s pipelines and then, on Monday, October 29, 2018, the Pennsylvania Department of Environmental Protection issued a stop work order for a separate Energy Transfer pipeline.[35]  There was a statistically significant decline in Energy Transfer’s share price between market close on Friday, October 26, 2018, and Monday, October 29, 2018.[36]  The defendants argued that because the article was originally published on October 21 and the stop work order was not published until October 30, neither of the pieces of allegedly corrective information could be linked to the share price decline on October 29.[37]

 

The court acknowledged that the article at issue was originally published by the Pittsburgh Post-Gazette on October 21, 2018, but explained that the “Associated Press’s October 27th republication of the article from the Pittsburgh Post-Gazette necessarily broadcast the controversy over the September explosion to a wider audience: the Gazette is a regional publication in Western Pennsylvania which as of October 2018 published print editions three days a week, while the Associated Press is a leading national wire service with broad distribution.”[38]  With respect to the Pennsylvania Department of Environmental Protection stop work order, the parties disputed when news of this order was publicized to the market and submitted competing evidence on this point.[39]

 

Ultimately, the court found that while “[n]either side’s analysis of the timing issue is particularly illuminating[,]” a “close consideration of the record leads [the court] to conclude that Defendants have not rebutted the presumption of market reliance.”[40]  Focusing first on the stop work order, the court noted that “a wire service that follows state news was in possession of the press release on October 29th and published the contents of the release on that same date as an item of news.”[41]  Turning to the news articles, the court stated:

 

In my view, the Associated Press reprint has significance in three respects.  First, the fact that the story was deemed worthy of reprint would give it greater significance.  Second, as noted above, it would bring the story to a wider, national audience.  Finally, it would heighten awareness that the project was one to watch closely, increasing the likelihood that concerned investors would more closely monitor project news and the DEP website.[42]

 

Therefore, the court concluded that the defendants had not severed the link with respect to this corrective disclosure:

 

On the record as it stands, the same day a stop work order was publicly issued and on the first trading day after a problematic story was widely distributed, Energy Transfer’s stock decreased by a substantial amount relative to the energy index.  As with the August 2018 disclosure, Defendants do not offer a competing explanation sufficient to sever the link between the disclosures and the alleged misrepresentations.[43]

 

The third corrective disclosure alleged by the plaintiff was a December 2018 announcement by the Chester County District Attorney of an investigation into Energy Transfer for its role in causing sinkholes in Pennsylvania.[44]  Several media outlets reported this announcement on Wednesday, December 19, 2018 and Thursday, December 20, 2018 through various sources, including Twitter, AM radio, news wires, trade news publications, and daily newspapers.[45]  By market close on Friday, December 21, Energy Transfer’s stock had declined from its closing price on Tuesday, December 18.[46]

 

In challenging this disclosure, the defendants argued that the news regarding the investigation was widely disseminated as of Wednesday, December 19, and thus the decline on Friday, December 21 was “too distant in time from the December 19th corrective disclosure to be the product of an efficient market.”[47]  The court sided with the plaintiffs, stating:

 

The factual nuances surrounding this disclosure are complex, and the issue is a close one, but on balance there is a substantial and unexplained drop on December 21st that corresponds to Energy Transfer’s internal expressions of concern over traffic about the story on social media. On that basis I conclude it has failed to rebut the presumption.[48]

 

As the court explained, on December 19, 2018, at 11:36 am, the Chester County District Attorney announced an investigation into Energy Transfer and news outlets disseminated the story beginning that morning.[49]  After market close on December 19, the Associated Press ran an article on the announcement.[50]  Trading in Energy Transfer’s stock on December 20 showed mixed results.[51]  Then, just before market close on December 20, Reuters published a story about the investigation.[52]  Energy Transfer’s stock declined precipitously on December 21.[53]  The plaintiffs’ expert asserted that the decline on December 21 was statistically significant and the defendants’ expert was “notably silent on the statistical significance of the price movement on December 21st, only restating her contention as to distance in time” from the initial dissemination of the allegedly corrective information.[54]  Thus, the court stated, “[t]he question then becomes whether the drop on December 21st is too remote in time from the initial announcement of the investigation, and whether wide dissemination of the news on the 19th and 20th would have blunted the impact of the disclosure.”[55]

 

In establishing the link between the announcement and the decline in Energy Transfer’s stock price, the plaintiff pointed to “a flurry of social media posts being tracked internally by Energy Transfer,” asserting that this “showed widespread interest in the news on December 21st.”[56]  Relying in part on this evidence, the court explained:

 

The Reuters story went online less than thirty minutes before the close of trading on December 20th.  Defendants are correct that the market reacts almost immediately to certain types of information, but immediate reaction is more likely to occur when a listed company itself releases information or the information is quantitative in nature such as earnings.  The decline on December 21st occurred contemporaneously with substantial online dissemination and discussion of the Hogan investigation.[57]

 

The court also emphasized that the defendants “offer no plausible alternative explanation for the declines that day in comparison to the sector as a whole.”[58]  The court concluded, therefore, that the defendants had failed to sever the link and rebut the presumption of reliance.[59]

 

In re Celgene Corporation Securities Litigation 

In In re Celgene Corporation Securities Litigation, the plaintiff alleged that Celgene and certain of its officers made materially false and misleading statements regarding the company’s progress toward filing a new drug application with the Food and Drug Administration (FDA) for ozanimod, a multiple sclerosis drug.[60]  Specifically, the plaintiff claimed that Celgene concealed from investors the belated discovery of a metabolite (i.e., a chemical compound formed through the metabolism of ozanimod) that required additional testing and jeopardized the company’s timeline for FDA submission and approval.  After the court granted the plaintiff’s motion for class certification, the defendants filed a motion to modify the certified class period, arguing that the court had failed to consider all of the relevant evidence concerning price impact.[61]

 

The plaintiff alleged two corrective disclosures regarding the failed ozanimod new drug application and subsequent stock price declines.  First, on February 28, 2018, Celgene disclosed that the FDA had refused to accept the ozanimod application for filing, but gave no reason for the FDA’s decision.[62]  Then, on April 29, 2018, Morgan Stanley published an analyst report concluding that the FDA required additional toxicology testing of the ozanimod metabolite—disclosed for the first time four days earlier—which could delay the refiling of its new drug application by up to three years.[63]

 

In its April 29 report, Morgan Stanley analyzed data from toxicology studies for ozanimod’s previously-known metabolites to conclude that the required toxicology studies for the newly discovered metabolite would cause a delay of one to three years in Celgene’s resubmission of the ozanimod new drug application.[64]  The data had been previously released on posters displayed at the 2013 and 2014 annual meetings of the American Association of Neurology, but it had not been disseminated outside of these conferences.[65]  The defendants argued that the alleged corrective information disclosed through the Morgan Stanley report was limited to the length of the delay of the resubmission to the FDA, and that because other analysts had already predicted a delay of up to three years, they had severed the link between misrepresentation and loss.[66]  Judge John M. Vazquez agreed that the defendants had “sever[ed] the link with respect to the length of the delay as the corrective disclosure,” but he rejected the defendants’ framing of the alleged corrective information as “too narrow.”[67]  The court noted the plaintiff’s allegation that “analysts attributed [the stock price] decline [on April 30, 2018] to the revelations that resulted from Morgan Stanley’s detailed specialized analysis and digestion of Celgene’s informationally-complex AAN disclosure” which included “new information as to why the additional studies were necessary” and “the types of studies needed.”[68]

 

Judge Vazquez rejected the defendants’ argument that this information was not actually new because Morgan Stanley had simply relied on previously-available information and, therefore, its report was “nothing more than analyst commentary based on previously available facts.”[69]  The court explained that he “cannot conclude that the posters were publicly available before the April 29 report.”[70]  As the court noted: “[I]t appears that Morgan Stanley took public information (FDA guidance and Receptos S-1) and (at most) ‘nominally’ public information (the 2013 and 2014 AAN posters) to piece together a more detailed and new conclusion in comparison to other analysts.  This amounts to a corrective disclosure.”[71]  The court continued:  “Further, because the April 29 report synthesized information to reach a new opinion, the market reaction to the underlying information addressed in the report is not the same as the market reaction to the April 29 report itself.”[72]  Thus, the court concluded that “it appears, more likely than not, that the April 29 report provided the market with new, corrective information about the Metabolite discovery” and thus found that the defendants had failed to “sever the link between the alleged misrepresentations and the stock price.”[73]

 

Conclusion 

As these recent decisions demonstrate, in the wake of Basic and Halliburton II, the courts have adopted a flexible approach to evaluating both the time it takes for new, value-relevant information to impact a company’s stock price and the ability of novel third-party analyses or commentaries regarding previously-disclosed information to serve as corrective disclosures.  These cases underscore that the disclosure of information can take time to impact the price of a security—even in an efficient market—especially when that information is obscure or complex, and that information may also need to be analyzed or digested by a securities analyst before the market can understand its import and the stock price can react accordingly.

 

__________________________

[1]        485 U.S. 224 (1988).

[2]           Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258, 269 (2014) (“Halliburton II”).

[3]           Basic, 485 U.S. at 248 n.28.

[4]           Halliburton II, at 272.

[5]           2020 WL 1329354, at *7 (S.D.N.Y. Mar. 23, 2020) (quoting Pub. Emps. Ret. Sys. Of Miss. v. Amedisys, Inc., 769 F.3d 313, 323 (5th Cir. 2014) (Wall Street Journal article analyzing public Medicare records constituted corrective disclosure because underlying information “had little to no probative value in its native state”).

[6]           Id.

[7]           977 F.3d 781, 794 (9th Cir. 2020).

[8]           Id. at 795.

[9]           Id. 

[10]         281 F.R.D. 150, 160 (S.D.N.Y. 2012).

[11]         Id. 

[12]         Id.

[13]         No. CV 20-200, 2022 WL 3597200 (E.D. Pa. Aug. 23, 2022).

[14]         Id.

[15]         Id. at *4.

[16]         Id.

[17]       Id. at *6.

[18]         Id.  Judge McHugh observed that the Third Circuit has “recognized a need for flexibility,” citing to In re Merck & Co. Sec. Litig., 432 F.3d 261, 269 (3d Cir. 2005), where the Third Circuit referred to “the period immediately following disclosure,” but added “this does not mean instantaneously of course,” as well as In re DVI, Inc. Sec. Litig., 639 F.3d 623, 635 (3d Cir. 2011), where the Third Circuit noted, “[t]hat some information took two days to affect the price does not undermine a finding of efficiency.” Id.  Judge McHugh further noted that a “recent case from this district concluded that a two-day window was relevant” citing to Pelletier v. Endo Int’l PLC, 338 F.R.D. 446, 486 (E.D. Pa. 2021), which held that “[w]hile most public information should be absorbed into an efficient market quickly, the related price impact may occur more slowly where clarifying or contextualizing information is disclosed later.”

[19]         Id. at *6.

[20]         Id. at *11.

[21]         Id.

[22]         Id.

[23]         Id.

[24]         Id.

[25]         Id.

[26]         Id. at *12 (emphasis added).

[27]         Id. at *12-13.

[28]         Id. at *12.

[29]         Id. at *13.

[30]         Id.

[31]       Id.

[32]         Id.

[33]         Id. at *14.  The court further found that “the justifications advanced by Plaintiffs’ expert in his deposition for applying a multi-day window are sensible given all the surrounding circumstances” and observed that “[u]nder Amgen, the issue of when information ‘credibly entered the market’ is a matter for trial.’”  Id. (quoting Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, 568 U.S. 455 at 481-82 (2013)).

[34]         Id.

[35]         Id.

[36]         Id.

[37]         Id. at *15-16.

[38]         Id. at *15.

[39]         Id.

[40]         Id. at *16.

[41]         Id.

[42]         Id. at *17.

[43]         Id.

[44]         Id.

[45]         Id.

[46]         Id.

[47]         Id.

[48]         Id.

[49]         Id.

[50]         Id.

[51]         Id.

[52]         Id.

[53]         Id. at *18.

[54]         Id.

[55]         Id.

[56]         Id.

[57]         Id. at *19.

[58]         Id.

[59]         Id.

[60]         No. 18-cv-4772 (D.N.J. Apr. 13, 2022) (ECF No. 198), Opinion & Order.

[61]         Id.

[62]         Id. at 3.

[63]         Id.

[64]         Id. at 8-9.

[65]         Id.

[66]         Id. at 9.

[67]         Id. at 9-10.

[68]         Id. at 9-10 (emphasis added).

[69]         Id. at 11.

[70]         Id.

[71]         Id. at 12.

[72]         Id.

[73]         Id. at 12-13.



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