U.S. Supreme Court Denies Class Certification in Goldman Sachs Securities Case
On June 21, 2021, The U.S. Supreme Court in a landmark judgment ruled in favor to the Goldman Sachs Group, Inc. and overruled the decision of the Second Circuit Court of Appeals, whereby a class action lawsuit was allowed, alleging that the bank was concealing conflict of interest while creating risky subprime securities in the pre-2008 financial crisis time. Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System, No. 16-250, 2021 WL 2519035 (June 21, 2021)
The suit was filed by the Arkansas Teacher Retirement System and other pensions that purchased Goldman Sachs’ shares between February 2007 and June 2010. The class actions suit accused the bank and three former executives of violating the anti-fraud provision (Section 10(b)) of the Securities Exchange Act of 1934 (amended as 15 U.S.C. § 78j(b)) and also a related SEC regulation, Rule 10b-5 (amended as 17 C.F.R. §§ 240.10b-5). The plaintiffs alleged that the bank published fraudulent and untrue statements which artificially kept its share price in the high range. In the suit, plaintiffs stated that they bought the shares of the company while relying upon the bank’s statements about its ethical principles and internal regulations against conflict of interest, and its pledge saying that its “clients’ interests always come first.” In its reply, Goldman argued that the “aspirational” statements published by it were too vague and general for them to have any impact on the bank’s stock price. The issue of conflict of interest arose from bank’s sale of collateralized debt obligations including Abacus 2007 AC-1, which was facilitated with the help from hedge fund manager John Paulson. Further, in the year 2010, the bank had a $550 million settlement with the U.S. Securities and Exchange Commission to resolve charges that it duped Abacus investors by hiding Paulson’s role. The resolved charges also included how Mr. Paulson made a $1 billion profit by betting that the sale of collateralized debt obligations would fail. Last year, the Second Circuit upheld a federal judge’s decision and allowed the plaintiff to sue as a group and rejected bank’s arguments that generic statements can never impact a stock price. Its ruling was based on a 1988 Supreme Court decision, in which it held that investors claiming that they were defrauded by false statements in securities filings, do not necessarily have to show that they relied on the statements. Basic Incorporated, et al. v. Max L. Levinson, et al., 485 U.S. 224. Instead, the court could rely on a presumption that all important publicly available information regarding a company affects its stock price.
However, the ruling of the Second Circuit Court was overruled by the Supreme Court as it had failed to assess whether the impugned statements made by the bank were too generic to have affected the stock price of the bank. The Supreme Court gave the bank another chance to avoid the class action whereby the plaintiffs claimed to have lost more than $13 billion caused by bank’s action. Further, the Supreme Court clarified the working of the basic presumption. It stated that the plaintiffs must provide some evidence that the impugned statements affected the stock price. However, the defendants bear the burden of persuading the court that there had been no such effect. Justice Barrett added that “The defendant’s burden of persuasion will have bite only when the court finds the evidence in equipoise — a situation that should rarely arise.” Therefore, the Supreme Court allowed the bank to persuade the appeals court that it should not be held liable for the alleged loss of $13 billion.
The issue of class certification in securities cases is not a recent development and has been a bone of content in various matters. The decision of Supreme Court in the Goldman matter might lead more district courts to find in favor of the defendants on price impact at the class certification stage. The Supreme Court clarified that the generic nature of an alleged misrepresentation can be “important” evidence that there is no price impact, that all evidence relevant to price impact should be considered (even if it arguably overlaps with materiality), and that the allocation of the burden of proof to defendants should “rarely” affect the outcome except in cases where the evidence is in “perfect equipoise.” Goldman Sachs Grp., 2021 WL 2519035, at *2, 5, 7.