CLIENT PUBLICATION
LITIGATION | October 5, 2016
Second Circuit Accepts Controversial “Inflation-
Maintenance” Theory of Securities Fraud Liability
In so-called “price maintenance” securities fraud cases, plaintiffs argue that a
misrepresentation that does not cause a stock’s price to rise can nevertheless be actionable
under Section 10(b) of the Securities Exchange of 1934 (“Exchange Act”) on the theory that
the misrepresentation prevented a stock’s artificially-inflated price from falling. The Seventh
and Eleventh Circuits have accepted price maintenance as a cognizable theory of liability
under the Exchange Act.1 However, in IBEW Local 98 Pension Fund v. Best Buy Co., the
Eighth Circuit, at least in the view of Judge Murphy in dissent, effectively rejected price
maintenance as a cognizable theory under the Exchange Act when it held that a defendant
had rebutted the fraud-on-the-market presumption of reliance by showing a lack of price
impact pursuant to the US Supreme Court’s decision in Halliburton II.2 On the same day that
Best Buy was decided, the US Court of Appeals for the Second Circuit, in In re Pfizer Inc.
Securities Litigation, discussed the theory, but noted that the Second Circuit had not and was
not in Pfizer endorsing the theory.3
In In re Vivendi, S.A. Securities Litigation, No. 15-180 (2d Cir. Sept. 27, 2016), the Second Circuit agreed with
the Seventh and Eleventh Circuits and endorsed price maintenance as a cognizable theory of securities fraud
liability. The Vivendi Court accordingly rejected the argument that an alleged misstatement must be associated
with an increase in artificial inflation to have an actionable “price impact.” Rather, the Court held, an alleged
misstatement can affect the market price of a stock by maintaining already-existing inflation. Thus, a securities
fraud defendant cannot avoid liability for an alleged misstatement merely because the misstatement is not
associated with an increase in the stock’s price, regardless whether the preexisting inflation was the result of
the defendant’s fraud. However, because Vivendi did not address the propriety of class certification and did not
discuss Best Buy, it remains to be seen whether the Second Circuit will view the Vivendi decision as effectively
foreclosing an argument that lack of price impact can defeat class certification in the face of evidence that the
prior inflation was “maintained” by the alleged misrepresentation or omission.
1 See Glickenhaus & Co. v. Household Int’l, Inc., 787 F.3d 408, 419 (7th Cir. 2015); FindWhat Inv’r Grp. v. FindWhat.com, 658 F.3d 1282, 1314 (11th
Cir. 2011).
2 See 818 F.3d 775, 784 (8th Cir. 2016) (Murphy, J., dissenting); Halliburton Co. v. E rica P. John Fund, Inc., 134 S. Ct. 2398, 2410 (2014) (“Halliburton
II”) (holding that defendants have the right to rebut the fraud-on-the-market presumption of reliance by providing evidence sho wing the alleged
misrepresentations did not actually affect the stock price); see also Eighth Circuit Holds Presumptio n Of Reliance Rebutted Under Halliburton II And
Reverses Class Certification In Securities Action
3 See 819 F.3d 642 (2d Cir. 2016); see also Second Circuit Stresses Control, Not Attribution, In Applying Janus’s “Ultimate Authority” Test, And Also
Allows Expert Testimony In Support Of An “Inflation-Maintenance” Theory Of Liability
