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Waggoner v. Barclays PLC

United States Court of Appeals, Second Circuit

November 6, 2017

Joseph Waggoner, Mohit Sahni, Barbara Strougo, individually and on behalf of all others similarly situated, Plaintiffs-Appellees,
v.
Barclays PLC, Robert Diamond, Antony Jenkins, Barclays Capital Inc., William White, Defendants-Appellants, Chris Lucas, Tushar Morzaria, Defendants.

          Argued: November 15, 2016

         Appeal from the United States District Court for the Southern District of New York. No. 14-cv-5797 ― Shira A. Scheindlin, Judge.

         Appeal from an order of the United States District Court for the Southern District of New York (Scheindlin, J.) granting the Plaintiffs-Appellees' motion for class certification in this action asserting violations of § 10(b) of the Securities Exchange Act of 1934. We affirm, concluding that: (1) although the district court erred in holding that the Affiliated Ute presumption of reliance applied because the claims are primarily based on misstatements, not omissions, the Basic presumption of reliance applied; (2) direct evidence of price impact is not always necessary to demonstrate market efficiency to invoke the Basic presumption, and was not required here; (3) defendants seeking to rebut the Basic presumption must do so by a preponderance of the evidence, which the Defendants-Appellants in this case failed to do; and, (4) the Plaintiffs-Appellees' damages methodology for calculating class wide damages is appropriate. We therefore AFFIRM the order of the district court.

          Jeremy Alan Lieberman, Pomerantz LLP, New York, NY (Tamar Weinrib, Pomerantz LLP, New York, NY; Patrick V. Dahlstrom, Pomerantz LLP, Chicago, IL, on the brief), for Plaintiffs-Appellees.

          Jeffrey T. Scott, Sullivan & Cromwell LLP, New York, NY (Matthew A. Schwartz and Andrew H. Reynard, Sullivan & Cromwell LLP, New York, NY; Brent J. McIntosh, Sullivan & Cromwell LLP, Washington, DC, on the brief), for Defendants-Appellants.

          Max W. Berger, Bernstein Litowitz Berger & Grossmann LLP, New York, NY (Salvatore J. Graziano, Bernstein Litowitz Berger & Grossmann LLP, New York, NY; Blair Nicholas, Bernstein Litowitz Berger & Grossmann LLP, San Diego, CA; Robert D. Klausner, Klausner, Kaufman, Jensen & Levinson, Plantation, FL, on the brief), for the National Conference on Public Employee Retirement Systems as amicus curiae in support of Plaintiffs- Appellees.

          Daniel P. Chiplock, Lieff Cabraser Heimann & Bernstein, LLP, New York, NY, for the National Association of Shareholder and Consumer Attorneys as amicus curiae in support of Plaintiffs-Appellees.

          Jeffrey W. Golan, Barrack, Rodos & Bacine, Philadelphia, PA (James J. Sabella, Grant & Eisenhofer P.A., New York, NY, of counsel; Daniel S. Sommers, Cohen Milstein Sellers & Toll PLLC, Washington, DC, of counsel; James A. Feldman, Washington, DC, on the brief), for Evidence Scholars as amicus curiae in support of Plaintiffs-Appellees.

          Robert V. Prongay, Glancy Prongay & Murray LLP, Los Angeles, CA, for Securities Law Professors as amicus curiae in support of Plaintiffs-Appellees.

          Charles E. Davidow, Paul, Weiss Rifkind, Wharton & Garrison LLP, Washington, DC (Marc Falcone & Robyn Tarnofsky, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY; Ira D. Hammerman and Kevin M. Carroll, Securities Industry and Financial Markets Association, Washington, DC, on the brief), for the Securities Industry and Financial Markets Association as amicus curiae in support of Defendants-Appellants.

          David S. Lesser (Fraser L. Hunter, Jr., Colin T. Reardon, John Paredes, on the brief), Wilmer Cutler Pickering Hale and Dorr LLP, New York, NY, for Paul S. Atkins, Elizabeth Cosenza, Daniel M. Gallagher, Joseph A. Grundfest, Paul G. Mahoney, Richard W. Painter, and Andrew N. Vollmer as amicus curiae in support of Defendants-Appellants.

          Michael H. Park, Consovoy McCarthy Park PLLC, New York, NY (J. Michael Connolly, Consovoy McCarthy Park PLLC, Arlington, VA; Kate Comerford Todd and Warren Postman, U.S. Chamber Litigation Center, Washington, DC, on the brief), for the Chamber of Commerce of the United States of America as amicus curiae in support of Defendants-Appellants.

          Before: Kearse, Lohier, and Droney, Circuit Judges.

          Droney, Circuit Judge.

         Barclays PLC, its American subsidiary Barclays Capital Inc. (collectively, "Barclays"), and three senior officers of those companies[1] appeal from an order of the United States District Court for the Southern District of New York (Scheindlin, J.) granting a motion for class certification filed by the Plaintiffs-Appellees ("Plaintiffs"), three individuals[2] who purchased Barclays' American Depository Shares ("Barclays' ADS")[3] during the class period. The Plaintiffs brought this suit alleging violations of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and the Securities and Exchange Commission's Rule 10b-5.[4]

         The Defendants-Appellants ("Defendants") contend that the district court erred in granting class certification by: (1) concluding that the Affiliated Ute presumption of reliance applied, see Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972); (2) determining, alternatively, that the Basic presumption, see Basic Inc. v. Levinson, 485 U.S. 224 (1988), applied without considering direct evidence of price impact when it found that Barclays' ADS traded in an efficient market; (3) requiring the Defendants to rebut the Basic presumption by a preponderance of the evidence (and concluding that the Defendants had failed to satisfy that standard); and (4) concluding that the Plaintiffs' proposed method for calculating classwide damages was appropriate.

         We agree with the Defendants that the district court erred in applying the Affiliated Ute presumption, but reject the remainder of their arguments and conclude that the district court did not err in granting the Plaintiffs' motion for class certification. Specifically, we hold that: (1) the Affiliated Ute presumption does not apply because the Plaintiffs' claims are primarily based on misstatements, not omissions; (2) direct evidence of price impact is not always necessary to demonstrate market efficiency, as required to invoke the Basic presumption of reliance, and was not required here; (3) defendants seeking to rebut the Basic presumption must do so by a preponderance of the evidence, which the Defendants in this case failed to do; and (4) the district court's conclusion regarding the Plaintiffs' classwide damages methodology was not erroneous. We therefore AFFIRM the order of the district court.

         BACKGROUND

         I. Barclays' Recent Involvement in the LIBOR Scandal and Its Investigations

         Barclays is a London-based international financial services provider involved in banking, credit cards, wealth management, and investment management services in more than fifty countries.[5]Barclays was the subject of a number of investigations and suits involving the misrepresentation of its borrowing data submitted for the calculation of the London Interbank Offered Rate ("LIBOR").[6]Barclays and other financial institutions manipulated LIBOR, an important set of benchmarks for international interest rates. In June 2012, Barclays was fined more than $450, 000, 000 as a result of its involvement. As a result of the LIBOR investigation, Barclays' corporate leadership undertook significant measures to change the company's culture and develop more integrity in its operations.[7]

         II. LX, Dark Pools, and High-Frequency Traders

         From the time it was involved in the LIBOR investigations to the present, Barclays, through its American subsidiary Barclays Capital Inc., has operated an alternate trading system-essentially a private venue for trading securities[8]-known as Barclays' Liquidity Cross, or, more simply, as Barclays' LX ("LX"). LX belongs to a particular subset of alternate trading systems known as "dark pools." Dark pools permit investors to trade securities in a largely anonymous manner. Neither "information regarding the orders placed into the pool for execution [n]or the identities of subscribers that are trading in the pool" are displayed at the time of the trade.[9]

         The anonymous nature of dark pools makes them popular with institutional investors, who seek to avoid victimization at the hands of high-frequency traders.[10] [11] High-frequency traders often engage in "front running" or "trading ahead" of the market, meaning that they detect patterns involving large incoming trades, and then execute their own trades before those incoming trades are completed.[12] Front running results in the incoming trades being more costly or less lucrative for the individuals or institutions making them.[13] Thus, many investors prefer to avoid high- frequency traders, and utilize dark pools to do so. Some literature nevertheless suggests that dark pools are also popular with high- frequency traders, who similarly prefer them because they are anonymous.[14]

         III. Barclays' Statements Regarding LX and Liquidity Profiling

         To address concerns that high-frequency traders may have been front running in LX, Barclays' officers made numerous statements asserting that LX was safe from such practices, and that Barclays was taking steps to protect traders in LX.

         For example, Barclays' Head of Equities Electronic Trading (and a Defendant in this action) William White told Traders Magazine that Barclays monitored activity in LX and would remove traders who engaged in conduct that disadvantaged LX clients. On a different occasion, White publicly stated that LX was "built on transparency" and had "safeguards to manage toxicity, and to help [its] institutional clients understand how to manage their interactions with high-frequency traders." J.A. 237. Other examples of purported misstatements made by Barclays include the following allegations:

• Touting LX as encompassing a "sophisticated surveillance framework that protects clients from predatory trading activity." J.A. 240.
• Representing that "LX underscores Barclays' belief that transparency is not only important, but that it benefits both our clients and the market overall." J.A. 246.
• Stating that Barclays' algorithm and scoring methodology enabled it "to restrict [high-frequency traders] interacting with our clients." J.A. 247.

         Barclays also created a service for its LX customers entitled "Liquidity Profiling." First marketed in 2011, Liquidity Profiling purportedly allowed Barclays' personnel to monitor high-frequency trading in LX more closely and permitted traders to avoid entities that engaged in such trading. For example, Barclays issued a press release stating that Liquidity Profiling enabled "Barclays to evaluate each client's trading in LX based on quantitative factors, thereby providing more accurate assessments of aggressive, neutral and passive trading strategies." J.A. 246. Based on a numerical ranking system that categorized traders, LX users could, according to Barclays, avoid trading with high-frequency traders. Barclays made numerous other alleged misstatements regarding Liquidity Profiling, such as:

• Claiming in a press release that by using Liquidity Profiling, clients could "choose which trading styles they interact with, instead of choosing by the more arbitrary designation of client type." J.A. 246.
• Explaining that "transparency" was the biggest theme of the year 2013, and that "Liquidity Profiling analyzes each interaction in the dark pool, allowing us to monitor the behavior of individual participants. This was a very significant step because it was important to provide . . . clients with transparency about the nature of counter parties in the dark pool and how the control framework works." J.A. 252.

         IV. The New York Attorney General's Lawsuit

         On June 25, 2014, the New York Attorney General commenced an action alleging that Barclays was violating provisions of the New York Martin Act[15] in operating its dark pool. The complaint alleged that many of Barclays' representations about protections LX afforded its customers from high-frequency traders were false and misleading. See People ex rel. Schneiderman v. Barclays Capital Inc., 1 N.Y.S.3d 910, 911 (N.Y. Sup. Ct. 2015).

         The next day, the price of Barclays' ADS fell 7.38%. On the following day, news reports estimated that Barclays could face a fine of more than £300, 000, 000 as a result of the Attorney General's action, and on June 30th its stock price dropped an additional 1.5%.

         V. The Plaintiffs' Action

         The Plaintiffs filed the instant putative class action shortly thereafter. They alleged in a subsequent second amended complaint that Barclays had violated § 10(b) and Rule 10b-5 by making false statements and omissions about LX and Liquidity Profiling.

         The Plaintiffs alleged that Barclays' statements about LX and Liquidity Profiling "were materially false and misleading by omission or otherwise because, " J.A. 227, contrary to its assertions, "Barclays did not in fact protect clients from aggressive high frequency trading activity, did not restrict predatory traders' access to other clients, " and did not "eliminate traders who continued to behave in a predatory manner, " J.A. 228.

         According to the complaint, Barclays "did not monitor client orders continuously, " or even apply Liquidity Profiling "to a significant portion of the trading" conducted in LX. J.A. 228. Instead, the Plaintiffs alleged that Barclays "favored high frequency traders" by giving them information about LX that was not available to other investors and applying "overrides" that allowed such traders to be given a Liquidity Profiling rating more favorable than the one they should have received. J.A. 228.

         The result of these fraudulent statements, the Plaintiffs asserted, was that the price of Barclays' ADS had been "maintained" at an inflated level that "reflected investor confidence in the integrity of the company" until the New York Attorney General's lawsuit. J.A. 224.

         VI. Procedural History

         The Defendants moved to dismiss the Plaintiffs' claims. They contended, among other arguments, that the alleged misstatements recited by the Plaintiffs were not material and therefore could not form the basis for a § 10(b) action. In particular, the Defendants pointed out that the revenue generated by LX was only 0.1% of Barclays' total revenue, which was, according to the Defendants, significantly below what would ordinarily be considered quantitatively material to investors. The Defendants also contended that the Plaintiffs had not adequately pleaded that the alleged misstatements were qualitatively material because they had not alleged that any Barclays investor had considered them in making investment decisions; the statements were directed only to LX clients, not investors.

         The district court denied the Defendants' motion to dismiss, in part. Strougo v. Barclays PLC, 105 F.Supp.3d 330, 353 (S.D.N.Y. 2015). The court explained that it was obligated to consider whether the purported misstatements were quantitatively or qualitatively material. Id. at 349-50. In its quantitative analysis, the court agreed with the Defendants that LX was a small part of Barclays' business operation and accounted for a small fraction of the company's revenue. Id. at 349. It nevertheless concluded that the misstatements could be qualitatively material. Id. After the LIBOR scandal, the court explained, "Barclays had staked its long-term performance on restoring its integrity." Id. (internal quotation marks omitted). Barclays' statements regarding LX and Liquidity Profiling could therefore "call into question the integrity of the company as a whole."[16] Id.

         a. The Plaintiffs' Motion for Class Certification

         The Plaintiffs then sought class certification for investors who purchased Barclays' ADS between August 2, 2011, and June 25, 2014.[17]

         In order to satisfy Federal Rule of Civil Procedure 23(b)(3)'s predominance requirement, the Plaintiffs argued that § 10(b)'s reliance element was satisfied by the members of the proposed class under the presumption of reliance recognized by the Supreme Court in Basic, 485 U.S. at 224.

         In support of their motion, the Plaintiffs submitted an expert report from Dr. Zachary Nye[18] that considered whether the market for Barclays' ADS was efficient, a necessary prerequisite for the Basic presumption to apply. Dr. Nye's report applied the five factors identified in Cammer v. Bloom, 711 F.Supp. 1264 (D.N.J. 1989), and the three factors identified in Krogman v. Sterritt, 202 F.R.D. 467 (N.D. Tex. 2001). See In re Petrobras Sec., 862 F.3d 250, 276 (2d Cir. 2017). Dr. Nye explained that all eight factors supported the conclusion that the market for Barclays' ADS was efficient. Dr. Nye first concluded that the seven factors that rely on "indirect" indicia of an efficient market-the first four Cammer factors and all three Krogman factors-supported his conclusion.

         With respect to the final factor-the fifth Cammer factor, or "Cammer 5, " which is considered the only "direct" measure of efficiency-Dr. Nye conducted an "event study" to determine whether the price of Barclays' ADS changed when new material information about the company was released. Based on the results of that event study, Dr. Nye concluded that the final factor also weighed in favor of concluding that the market for Barclays' ADS was efficient. Thus, relying on Dr. Nye's report, the Plaintiffs asserted that they were entitled to the Basic presumption.

         In the alternative, the Plaintiffs argued that reliance could be established under the presumption of reliance for omissions of material information, as recognized by the Supreme Court in Affiliated Ute, 406 U.S. at 128. That presumption, the Plaintiffs asserted, applied because Barclays had failed to disclose material information regarding LX, such as the fact that Liquidity Profiling did not apply to a significant portion of the trades conducted in LX and that Barclays provided advantages such as "overrides" to high- frequency traders.

         Dr. Nye also addressed the calculation of class damages. He opined that the damages class members had suffered as a result of Barclays' fraudulent conduct could be calculated on a classwide basis. According to Dr. Nye, the amount by which a stock's price was inflated by fraudulent statements or omissions could be calculated by measuring how much the price of the stock declined when those statements were revealed to be false or when previously undisclosed information was revealed. An event study could then isolate company-specific changes in stock price from changes resulting from outside factors such as fluctuations in the stock market generally or the particular industry. Once the decline caused by the corrective disclosure was isolated, the "daily level of price inflation" could be readily calculated for Barclays' ADS for the class period. J.A. 348. Then, each class member's actual trading in the security could be used to determine individual damages.[19]

b. The Defendants' Opposition to Class Certification

         In response, the Defendants argued that the Plaintiffs had not made the requisite showing to invoke the Basic presumption because they had failed to show that the market for Barclays' ADS was efficient.[20] The Defendants pointed to the report of their expert, Dr. Christopher M. James, [21] which claimed that the Plaintiffs had not shown direct evidence of efficiency under Cammer 5 because the event study conducted by Dr. Nye was flawed. The Defendants did not, however, challenge Dr. Nye's conclusion that the seven indirect factors demonstrated that the market for Barclays' ADS was efficient, nor did Dr. James conduct his own event study to demonstrate the inefficiency of the market for Barclays' ADS.

         The Defendants also argued that even if the district court were to conclude that the Plaintiffs were entitled to the Basic presumption of reliance, class certification should be denied because the Defendants rebutted that presumption. They asserted that the event study conducted by Dr. Nye indicated that the price of Barclays' ADS did not increase by a statistically significant amount on any of the days on which the purportedly fraudulent statements had been made. Thus, according to the Defendants, there was no connection between the misstatements and the price of Barclays' ADS.

         The Defendants further contended that the Affiliated Ute presumption was inapplicable to the complaint's allegations. That presumption, they argued, applied only to situations primarily involving omissions, and the complaint alleged affirmative misstatements, not omissions.

         Finally, the Defendants contended that the damages model proposed by Dr. Nye failed to satisfy Comcast Corp. v. Behrend, 569 U.S. 27 (2013). Dr. Nye's model, the Defendants argued, did not disaggregate confounding factors that could have caused the price drop in Barclays' ADS that occurred when the New York Attorney General announced his action, such as the likelihood of regulatory fines. Nor had the model sufficiently accounted for variations in the time each alleged misstatement became public. According to the Defendants, these deficiencies precluded class certification.

         c. The District Court's Class Certification Decision

         The district court granted the Plaintiffs' motion for class certification. Strougo v. Barclays PLC, 312 F.R.D. 307, 311 (S.D.N.Y. 2016). It concluded that the Affiliated Ute presumption applied. Id. at 319. The court explained that "a case could be made that it is the material omissions, not the affirmative statements, that are the heart of this case." Id. According to the court, it was "far more likely that investors would have found the omitted conduct, " as opposed to the misstatements, material. Id.

         In the alternative, the district court concluded that the Basic presumption of reliance for misrepresentations applied. Id. at 323. The Defendants, the court noted, had conceded that the Plaintiffs had "established four of the five Cammer factors and all three Krogman factors." Id. at 319-20. They disputed only the sufficiency of Dr. Nye's event study under Cammer 5. Id. at 320. Although Dr. Nye's event study had been presented to the district court (and was the subject of extensive court proceedings), the district court concluded that direct evidence of price impact under Cammer 5 was not necessary to its determination that the market for Barclays' ADS was efficient during the class period.[22] Id. The district court noted that although an event study may be particularly important where the indirect factors do not weigh heavily in favor of market efficiency, it was not necessary here where the application of the indirect factors, including that the "stock trades in high volumes on a large national market and is followed by a large number of analysts, " weighed so strongly in favor of a finding of market efficiency. Id. at 322-23. Therefore, the court declined to determine whether Cammer 5 was satisfied, but concluded based on the showing made by the Plaintiffs on all the indirect factors that Barclays' ADS traded in an efficient market during the class period. Id. at 323.

         The district court noted that, based on Dr. Nye's report, Barclays' ADS had an average weekly trading volume of 17.7% during the class period. Id. at 323 n.103. That volume far exceeded the 2% threshold for a "strong presumption" of efficiency based on the average weekly trading volume described in Cammer. Id. Additionally, the district court noted that analysts had published more than 700 reports regarding Barclays' ADS during the class period, and it explained that "the amount of reporting on Barclays['] [ADS] by security analysts during the Class Period indicates that company-specific news was widely disseminated to investors." Id. at 323 n.104. That consideration was directly relevant to a different "indirect" Cammer factor and, like the average weekly trading volume, supported the conclusion that the market for Barclays' ADS was efficient. Id. at 316.

         The court further determined that the Defendants had not rebutted the Basic presumption. Id. at 327. They had failed to demonstrate that the allegedly fraudulent statements did not impact the price of Barclays' ADS. Id. The "fact that other factors contributed to the price decline does not establish by a preponderance of the evidence that the drop in the price of Barclays['] ADS was not caused at least ...


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