Court Opinion

ID: 9963653
Source: CourtListenerOpinion
Date Created: 2024-04-26 00:00:54.125292+00
Date Added: 2024-06-11T08:24:55.404375
License: Public Domain

Case: 23-20424      Document: 43-1      Page: 1     Date Filed: 04/25/2024

        United States Court of Appeals
             for the Fifth Circuit                                  United States Court of Appeals
                                                                             Fifth Circuit
                            ____________
                                                                           FILED
                                                                       April 25, 2024
                             No. 23-20424
                            ____________                              Lyle W. Cayce
                                                                           Clerk
Georgia Firefighters’ Pension Fund,

                                                         Plaintiff—Appellee,

Norfolk City Council as Administering Authority of
the Norfolk Pension Fund; Iron Workers Local 580
Joint Funds; Building Trades United Pension Trust
Fund,

                                                        Movants—Appellees,
                                  versus

Anadarko Petroleum Corporation; Robert G. Gwin;
Robert P. Daniels; Ernest A. Leyendecker, III; R. A.
Walker,

                                      Defendants—Appellants.
              ______________________________

              Appeal from the United States District Court
                  for the Southern District of Texas
                        USDC No. 4:20-CV-576
              ______________________________

Before King, Ho, and Engelhardt, Circuit Judges.
James C. Ho, Circuit Judge:
      Our adversarial system of justice requires that we give both sides full
and fair opportunity to present their strongest possible arguments to the
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                                 No. 23-20424

court. See, e.g., Penson v. Ohio, 488 U.S. 75, 84 (1988); Lefebure v. D’Aquilla,
15 F.4th 670, 674–75 (5th Cir. 2021). It is through that clash of ideas that we
ensure that justice is done pursuant to the laws that govern the dispute in
question.
       That clash of ideas was missing here. A class of stock purchasers
allege that Anadarko Petroleum Corporation fraudulently misrepresented
the potential value of its Shenandoah oil field project in the Gulf of Mexico,
in violation of federal securities law.         During the class certification
proceedings below, Plaintiffs presented new evidence for the first time in a
reply brief. As a result, Anadarko did not have fair opportunity to address
that new evidence at an earlier stage in the briefing. So the district court
should have permitted Anadarko to file a sur-reply responding to that new
evidence contained in Plaintiffs’ reply.
       Accordingly, we vacate the district court’s order certifying the class
and remand for further proceedings.
                                       I.
       Plaintiffs sue on behalf of the class of stock purchasers who acquired
Anadarko common stock between February 20, 2015, and May 2, 2017. They
allege that Anadarko, along with the individual Defendants, fraudulently
misrepresented the value of the Shenandoah oil field.
       Specifically, Plaintiffs contend that a decline in Anadarko’s stock
price on May 3, 2017, resulted from Anadarko’s May 2 after-hours disclosure
that the Shen-6 sidetrack well was dry, that Anadarko was taking a $902
million write-off for the Shenandoah project, and that Anadarko was
suspending further appraisal.
       In securities fraud class actions, plaintiffs may show reliance on a
defendant’s misrepresentations—and therefore satisfy Federal Rule of Civil

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Procedure 23(b)(3)’s predominance requirement—by invoking the Basic
presumption, a rebuttable presumption that allows courts to presume “an
investor’s reliance on any public material misrepresentations” if certain
requirements are met. Basic Inc. v. Levinson, 485 U.S. 224, 247 (1988).
Plaintiffs must prove “(1) that the alleged misrepresentation was publicly
known; (2) that it was material; (3) that the stock traded in an efficient
market; and (4) that the plaintiff traded the stock between the time the
misrepresentation was made and when the truth was revealed.” Goldman
Sachs Grp., Inc. v. Ark. Tchr. Ret. Sys., 594 U.S. 113, 118 (2021). The
defendant may rebut the presumption by demonstrating that the “alleged
misrepresentation did not actually affect the market price of the stock.” Id.
at 119 (internal quotation omitted).
       Here, Plaintiffs invoked the Basic presumption in their motion to
certify the class, and submitted an expert report to demonstrate market
efficiency. In response, Anadarko contended that its May 3 stock price
decline was caused, not by its Shenandoah disclosure, but by an entirely
separate and distinct event—news linking Anadarko to a fatal Colorado home
explosion, and announcing related regulatory requirements estimated to cost
Anadarko $140 million.
       Plaintiffs’ reply brief included a rebuttal report from their expert,
Bjorn Steinholt. Most importantly for this appeal, Steinholt’s report pointed
to (1) evidence that Anadarko’s stock price fell 4.1% in after-market trading
on May 2 after the Shenandoah disclosure at 4:16 p.m. but before a news
article about the Colorado announcement was published at 4:51 p.m., and (2)
a new event study that controlled for the Colorado news but still found a

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                                       No. 23-20424

statistically significant price decline associated with Anadarko’s Shenandoah
disclosure.1
        Anadarko moved for leave to file a sur-reply. It argued that Plaintiffs’
reply brief contained new evidence to which Anadarko was entitled to
respond. The district court denied leave, stating that Anadarko “chose not
to provide an event study.” The court concluded that Plaintiffs’ reply
“squarely responded to arguments in [Anadarko’s] response” and “didn’t
introduce new arguments or evidence.”
        Anadarko subsequently moved to exclude Steinholt’s rebuttal report
under Daubert. The district court denied this motion as well, and proceeded
to certify the class.
        The class certification order cited evidence from Steinholt’s rebuttal
report, stating that “the Anadarko stock price dropped 4.1 percent during
after-hours trading between the time Anadarko made its Shen disclosures and
the time the [Colorado] news broke,” and that the “event study concluded
that the price drop on May 3rd remained statistically significant even when
controlling for the [Colorado] news.” The district court denied Anadarko’s
motion for reconsideration.
        Anadarko appealed, arguing that the district court abused its
discretion by relying on new evidence in Plaintiffs’ reply without allowing
Defendants an opportunity to respond. Anadarko also argued that the
district court failed to conduct a proper Daubert analysis, and that
Defendants sufficiently rebutted the Basic presumption.

        _____________________
        1
          An event study “is a statistical regression analysis that examines the effect of an
event . . . on a dependent variable, such as a corporation’s stock price.” Ludlow v. BP,
P.L.C., 800 F.3d 674, 683 (5th Cir. 2015) (internal quotation omitted).

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                                        II.
        We agree with Anadarko that the district court should have allowed a
sur-reply.
       Ordinarily, sur-replies are “heavily disfavored,” and the decision to
allow a sur-reply lies within the district court’s discretion. Butler v. S. Porter,
999 F.3d 287, 297 (5th Cir. 2021) (internal quotation omitted).
       But when a party raises new arguments or evidence for the first time
in a reply, the district court must either give the other party an opportunity
to respond or decline to rely on the new arguments and evidence. See
Residents of Gordon Plaza, Inc. v. Cantrell, 25 F.4th 288, 296 (5th Cir. 2022)
(“[A] district court abuses its discretion when it considers new arguments
raised for the first time in a reply brief without providing the non-movant an
adequate opportunity to respond prior to a ruling.”) (internal quotation
omitted); RedHawk Holdings Corp. v. Schreiber, 836 F. App’x 232, 235 (5th
Cir. 2020) (“[A] district court may consider arguments and evidence raised
for the first time in a reply brief without abusing its discretion so long as it
gives the non-movant an adequate opportunity to respond prior to a ruling.”)
(internal quotations omitted).
       Plaintiffs’ reply brief presented new evidence. As Steinholt himself
noted, “the primary focus” of his original report was market efficiency—not
price impact. Steinholt did not discuss or introduce evidence of the May 2
after-hours trading until his rebuttal report.          The district court itself
described Steinholt’s event study as “new.”               As Plaintiffs’ counsel
acknowledged at oral argument, this material was not in the record prior to
the reply brief. Yet the district court “considered” the rebuttal report
“where pertinent,” and referred both to the after-hours trading and to the
new event study in its predominance analysis. The after-hours trading and
the event study constituted key new evidence directly related to the central

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class certification dispute: whether Anadarko’s stock price decline was
caused by the Colorado news or the Shenandoah disclosure.
       The district court therefore abused its discretion by denying Anadarko
leave to file a sur-reply.
                                       III.
       Anadarko also challenges the admissibility of Steinholt’s rebuttal
report under Daubert, arguing that the district court failed to conduct a
sufficiently rigorous Daubert analysis and that the rebuttal report is
unreliable.
       Class actions may only be certified “based on adequate admissible
evidence to justify class certification.” Prantil v. Arkema Inc., 986 F.3d 570,
575 (5th Cir. 2021) (internal quotation omitted). Daubert therefore applies
with the same rigor at the class certification stage as at trial. See id.
       Anadarko argues that the district court failed to conduct a rigorous
Daubert analysis, because it considered Anadarko’s Daubert challenge as
“little more than an attempt to re-urge Defendants’ recently denied motion
for leave to file a surreply,” and noted that “[t]he new event study certainly
won’t be immune from criticism.”
       Specifically, Anadarko argues that Steinholt’s after-hours trading
evidence is unreliable, because Steinholt failed to establish that the after-
hours market was efficient, failed to conduct an event study specifically for
after-hours trading to determine whether the stock movement was
statistically significant, and erroneously identified the time the Colorado
news became public as 4:51 p.m., not 4:03 p.m. Anadarko additionally argues
that the event study is unreliable because it added Colorado comparators but
removed the industry index.

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       We agree with Anadarko that the district court failed to perform a full
Daubert analysis. The record indicates that the district court conducted a
Daubert inquiry to some extent—the class certification order noted
Steinholt’s credentials, stated that the rebuttal report was reliable, and
concluded that the rebuttal report would be “considered where pertinent.”
But it is not clear that the district court “appl[ied] Daubert’s reliability
standard with full force.” Prantil, 986 F.3d at 576. Instead, the district court
appears to have denied Anadarko’s Daubert motion at least in part on the
basis that “[i]t has already been determined that class certification will rise
or fall with what is fairly briefed in the papers under the Local Rules of the
Southern District”—not Anadarko’s sur-reply arguments that the district
court stated were “re-urge[d]” in Anadarko’s Daubert motion.
       The district court’s denial of Anadarko’s motion for reconsideration
of class certification also seems to indicate that the district court may not
have fully considered Anadarko’s Daubert arguments.             It stated that
“[m]any” of Anadarko’s arguments in its motion for reconsideration
“derive from information presented in the Daubert briefing, with express
determination that such would not be properly considered.”
       On remand, the district court should fully consider Anadarko’s
Daubert challenge.
                                     ***
       We vacate the class certification order entered by the district court,
and remand for proceedings consistent with this opinion.

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