ABA Files Amicus Brief Supporting Goldman in Supreme Court
SECURITIES LAW
Goldman Sachs Group Inc. (Goldman) v. Arkansas Teacher Retirement System
Date: Feb. 1, 2020
Issue: Whether a defendant in a securities class action may rebut the Basic presumption of classwide reliance by alleging the generic nature of the alleged misstatements did not have a price impact on the security.
Case Summary: The ABA, American Property Casualty Insurance Association, Bank Policy Institute, SIFMA, and U.S. Chamber of Commerce (Amici) filed a brief in the Supreme Court supporting Goldman’s challenge of a securities class certification.
To plead a federal securities fraud claim, a plaintiff must claim reliance. In Basic Inc. v. Levinson (1998), the Supreme Court ruled investors may satisfy the reliance requirement by invoking a presumption that a stock’s price—which is traded in an efficient market—reflects all public material information. Under a “price-maintenance theory,” misstatements can be actionable if a plaintiff shows (1) price inflation, (2) the misstatements “maintained” that inflation, and (3) a disclosure caused a reduction in a defendant’s share price. However, a defendant may rebut the Basic presumption with evidence that the alleged misrepresentations did not impact the company’s stock price.
Plaintiffs acquired shares of Goldman stock between 2007 and 2010. In July 2011, Plaintiffs brought a securities fraud action against Goldman, alleging the company’s statements about its procedures and controls designed to address potential conflicts of interest were false and misleading. For example, Goldman asserted “our clients always come first,” “we increasingly have to address potential conflicts of interest,” and “we have extensive procedures and controls that are designed to address conflicts of interest.” Plaintiffs alleged that Goldman had undisclosed conflicts of interest with its clients in four CDO transactions between 2006 and 2007.
Opposing class certification, Goldman tried to rebut the Basic presumption in two ways. First, Goldman presented evidence that no price increase occurred on the day of the alleged misstatements about Goldman’s efforts to avoid conflicts. Second, to show the alleged corrective disclosures did not have a price impact, Goldman presented evidence that its stock did not fall in response to 34 other press reports about Goldman’s alleged conflicts of interest in the CDO transactions.
The district court certified a class in September 2015. In January 2018, the Second Circuit vacated the district court’s certification order and remanded the case to the district court. On remand, the district court concluded that Goldman did not rebut the Basic presumption and again certified a class. The district court found that plaintiffs’ expert adequately supported the price-maintenance theory.
On appeal, the Second Circuit ruled the district court correctly applied the “price-maintenance theory” of securities fraud. The Second Circuit rejected Goldman’s argument that price inflation occurring before the price-maintaining misstatements must be “fraud-induced.” The Second Circuit ruled that a price-maintenance claim is viable if the market “originally arrived at the misconception” on its own. The Second Circuit also ruled it could not consider the general and aspirational nature of the challenged statements in assessing whether Goldman rebutted the Basic presumption. In its certiorari petition, Goldman claimed the Second Circuit’s decision “effectively strips defendants of any ability to rebut the Basic presumption in class actions.” Amici filed a brief urging the Court to grant Goldman’s petition. The Court granted Goldman’s petition on Dec. 11, 2020.
In support of Goldman’s merits brief, Amici filed a brief urging the Supreme Court to reverse the Second Circuit for three reasons. First, Amici argued the challenged statements in this case are general, aspirational, and the kind commonly made in the marketplace. Companies make such statements for a variety of reasons, including to motivate employees and affirm organizational culture. The statements communicate an organization’s goals and principles to key stakeholders, including customers, employees, and investors.
Second, Amici argued courts should consider the nature of the allege misrepresentations when evaluating whether the defendants rebutted the Basic presumption. Amici emphasized the Supreme Court in Halliburton Co. v. Erica P. John Fund, Inc. (2014) (Halliburton II) held defendants can rebut the presumption of classwide reliance by showing a lack of price impact. But Amici emphasized the Basic presumption is rarely rebutted in inflation-maintenance cases.
Finally, Amici argued the Second Circuit’s decision will create unwarranted class litigation in inflation-maintenance cases. “This case provides a blueprint for enterprising Plaintiffs (and their lawyers) to use everyday occurrences as grist for inflation-maintenance claims,” according to Amici. Further, Amici explained that after economically significant news, plaintiffs will review years of companies’ public filings to select statements vague and generic enough to conceivably cover the cause for the stock decline. Amici declared its membership “will be exposed to runaway class litigation as the inflation-maintenance theory becomes ever more widespread.”
Bottom Line: Oral argument is scheduled for March 29, 2021.
Download the amicus brief to read the full text.
