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. 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. 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.

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