Goldman Sachs Group, Inc. v. Arkanas Teacher Retirement System: Goldman Fights for Defendants in Securities Class Actions

The U.S. Supreme Court on March 29, 2020, revisited the critical issue of whether a securities class action defendant can prevent the certification of a class by rebutting the basic presumption of reliance. Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System, No. 20-222. In the hearing held, the justices noted that each side seemed to converge since the court first agreed to hear the case.

A fraud claim is not suitable for class treatment as each plaintiff has to prove their reliance on the defendant’s misstatement. The “fraud-on-the-market” theory allows presumption of reliance when a stock trades on an efficient market as publicly available information is incorporated into the stock price and therefore, everyone who buys or sells the shares relies on the market price. In another decision, the Court ruled that a defendant must be given an opportunity to rebut the basic presumption at the stage of class certification, which would prevent certification. The presumption can be rebutted by showing that the statements at issue did not affect the stock price. However, the judgment did not provide enough guidance on how a defendant could prove that the statements did not actually affect the stock price. The impact was seen on the two thousand odd class actions which were filed after this decision as the defendants only succeeded in five cases in refuting price impact. And clearly, the lower courts have been more than reluctant to deny class certifications on this basis, thereby, ruling in favor of the plaintiffs.

In the present case, the Goldman Sachs Group, Inc. (Goldman) appealed the class certification on claims that the impugned statements were far too generic to have an impact on its stock price in any manner. In its pleading, Goldman put forth two important points about the impact on public companies of the existing uneven playing field. Firstly, courts have set the bar for rebutting the basic presumption unreasonably high, and therefore it makes it impossible for a defendant to defeat class certification on this basis. The second point put forth by Goldman was that the “inflation maintenance” theory adopted by the plaintiff, which is usually used by plaintiff in class certification case, makes it far more harder for the defendant to defeat the certification. The “inflation maintenance” theory states that an alleged misstatement can have actionable impact on the price by maintaining a previously inflated stock price instead of increasing the stock price. The theory does not require the plaintiff to even identify the statements which are alleged to have the price impact. Further, it allows a plaintiff to show a price impact by proving that the price of the stock decreased after the alleged “corrective disclosure”. This would not require the plaintiff to put forth any proof that the statement ever caused the stock price to avoid an earlier drop. It is pertinent to note that the theory has never been endorsed by the Supreme Court. Goldman in its pleading claimed that the alleged misrepresentations were “general and aspirational”. It further argued that it is now necessary for the Court to find balance and prevent meritless suits alleging securities fraud from being certified as class actions.

As per the facts of the present case, in 2010, the share price of Goldman declined sharply after disclosure of significant government enforcement activity, viz. a filed SEC action and DOJ investigation into whether Goldman was right in disclosing certain conflict of interests in several collateralized debt obligation (COD) transactions. Thereby, the shareholders sued the company and alleged that the “corrective” disclosure revealed the false representations that Goldman had made in the earlier SEC filings regarding its potential conflicts of interest. The shareholders also pursued an “inflation maintenance” theory. At the stage of class certification, Goldman produced expert testimony that the misrepresentations alleged by the plaintiff were too generic to have affected the company’s stock price. It also stated that on 36 prior occasions, where similar conflict of interests were revealed, no significant effect on the stock price was noted. It tried to establish that the decline in the stock price was due to disclosure of the SEC and DOJ enforcement activity and not the mere statements made by the company. Further, the experts also supported the contention that decline in Goldman’s stock price were consistent with the decline in stock price of other companies facing SEC enforcement actions. The lower courts declined to accept Goldman’s expert evidence as it believed that the evidence went to the materiality of the statements and thus, could not be considered at class certification. On interlocutory appeal, the Second Circuit reversed the order and instructed the lower court to accept the expert evidence. Thereby, the lower court held an evidentiary hearing but again certified the class. Thereafter, a divided panel of the Second Circuit affirmed the decision of the lower court. Upon appeal to the Supreme Court, certiorari was granted on December 11, 2020, on two legal issues, firstly, whether a defendant can submit evidence proving the alleged statement to be generic to prove lack of price impact, even though such evidence is also relevant to the substantive element of materiality. The second issue asks whether a defendant who is seeking to rebut the presumption bears only the burden of production.
The present case has given the Supreme Court an exceptional opportunity to put forth a much-needed clarification and guidance to the lower courts. With this case, it is highly anticipated that the Court would provide important guidance to the position of defendant in a securities class actions. As the present scenario is entirely leaning towards the plaintiff in a class action, such guidance and clarification would provide a sigh of relief to the defendants.



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