On June 21, 2021, the United States Supreme Court issued its decision in Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System, providing advice to lower courts regarding class certification in securities fraud class actions. Overall, the opinion favors defendants and potentially signals a backlash against the wave of securities fraud class actions based on vague and generic misrepresentation. Importantly, the Court ordered that all relevant evidence be taken into account when making a collective certification decision, sending a message that lower courts must grapple with and cannot ignore relevant evidence at the stage. collective certification simply because they overlap with substantive evidence. The Court also noted that the generic nature of a misrepresentation is often important evidence of the lack of impact on prices, which lower courts should take into account when deciding whether to grant or deny a claim. in collective certification.

While the Supreme Court’s ruling was not as sweeping as defendants hoped, it signals the Supreme Court’s concern that companies are too often held accountable for securities fraud because of legal developments or unfavorable trade, even when the company has never made any statements on the issues in question.

Background

The underlying facts of this case relate to Goldman’s now well-publicized involvement in the Abacus CDO transaction and subsequent settlement with the SEC in the aftermath of the 2008 financial crisis. In the consolidated complaint, which was filed in 2011, the plaintiff shareholders alleged that Goldman violated securities laws by making repeated inaccurate statements in its SEC documents and other public statements in connection with the Abacus CDO transaction, beginning in late 2006 / early 2007. misrepresentations were generic statements regarding Goldman’s conflict of interest policies and business practices, including statements such as: “We have extensive procedures and controls that are designed to identify and resolve conflicts of interest. interest ”; “The interests of our clients always come first”; and “Integrity and honesty are at the heart of our business. According to the plaintiffs, these alleged misrepresentations allowed Goldman to maintain an inflated stock price until 2010, when the SEC filed a lawsuit against Goldman for securities fraud. Goldman later revealed that he agreed to pay $ 550 million as part of a settlement with the SEC and admitted that he should have disclosed certain conflicts of interest in 2007 when underwriting the CDO Abacus which cost its customers $ 1 billion. The plaintiffs argued that once the SEC enforcement action and related news reports revealed that Goldman had in fact engaged in conflicting deals, the stock price plummeted and shareholders of Goldman suffered losses.

The Southern District of New York City rejected Goldman’s motion to dismiss, and the plaintiffs sought certification of the group. The plaintiffs argued that Goldman’s generic statements about its business practices and conflict of interest procedures artificially maintained an inflated share price. Goldman argued that the alleged inaccuracies were too generic to impact the share price. After extensive expert testimony on the matter, the district court certified the group. The Second Circuit overturned the class certification order, finding that Goldman had the burden of proving the absence of price impact by a preponderance of evidence, but that the district court erred in imposing to Goldman a higher burden of proof. On remand, the district court re-certified the group, finding that Goldman’s expert testimony failed to establish by a preponderance of evidence that the alleged misrepresentations had no impact on the claims. price. The Second Circuit upheld in a split decision, holding that the district court’s pricing impact determination was not an abuse of discretion.

The Supreme Court’s decision

On appeal, the Supreme Court was asked to resolve two questions: First, is the generic nature of Goldman’s alleged misrepresentation relevant to the price impact investigation? and second, whether Goldman has the burden of persuasion to prove the lack of impact on prices.

On the first question, Goldman argued that the Second Circuit erred in holding that the generic nature of the alleged misrepresentations was irrelevant to the issue of the impact on prices. Goldman’s initial position was that the generic claims could not have an impact on the share price, while the complainants argued that the generic nature of the alleged misrepresentations had no bearing on the impact investigation. the prices. The parties subsequently agreed that the generic nature of the statements was relevant to the impact on prices and should be considered at the class certification stage. The Court agreed, holding that district courts should take into account all the relevant evidence to assess the impact on prices and stating that courts may take into account the generic nature of false statements when certifying the group “independently. that the evidence is also relevant to a substantive issue such as materiality. The Court further explained that the generic nature of an alleged misrepresentation “will often be important evidence of a lack of price impact, particularly in cases proceeding under the maintenance of inflation theory” where it is less likely that a specific negative disclosure actually corrected a prior generic misrepresentation. Ultimately, the Court remanded on this issue and asked the Second Circuit to “consider all record evidence relevant to the impact on prices ”because the Court concluded that the Second Circuit decision left“ sufficient doubt ”that it had correctly taken into account the generic nature of the statements.

On the second issue, Goldman argued that the Second Circuit erred in placing the burden of persuasion on Goldman, as a defendant, to prove the lack of impact on prices. According to Goldman, the presumption of fraud in the market, articulated in the seminal judgment of the Court Basic vs. Levinson decision, only shifts the burden of production to the defendant, but the defendant can rebut the presumption by producing any competent evidence of the lack of impact on prices, while the plaintiff has the burden of persuasion to prove the impact on prices. The Court rejected Goldman’s argument, concluding that a defendant “bears the burden of persuasion to prove the lack of impact on prices” and agreeing with the Second Circuit that the defendant bears this burden by a preponderance of the proof. However, the court noted that, because parties in most securities fraud class actions typically submit competing expert evidence on the impact on pricing, its decision on burden sharing was “little.” likely to make a big difference in the field ”.

Key points to remember

Overall, the Court’s ruling favors the defendants in holding that all relevant evidence, including substantive evidence, must be taken into account when assessing the impact on prices at the stage of sale. collective certification, which gives a lower court more leeway to deny collective certification on the basis of it.

In addition, in cases based on generic misrepresentation, the decision of the Court should make it easier for defendants to rebut the claims. Basic presumption, given that the Court expressly recognized that the general nature of an anomaly “will often be important evidence of the lack of impact on prices”. It is important to note that the Court noted that this is particularly true in cases based on the “maintenance of inflation” theory, where the impact on prices is the amount of price inflation maintained by a. alleged false statement. The Court pointed out that in this type of case there is less reason to infer an initial price inflation on the basis of a final price decrease. In doing so, the Court appeared to reject the idea that negative disclosures or allegations of wrongdoing necessarily “correct” an earlier generic statement by the defendant company. Although defendants still bear the onus of refuting the impact on prices, this should make it more difficult for plaintiffs to succeed in cases relying on the theory of maintaining inflation, unless they can. show a link between the initial price and the final price drop.

Finally, on the issue of the burden, the Court clarified that its decision is unlikely to have much practical effect, noting that the defendant’s persuasive burden would become decisive “only in the rare cases” where the evidence by the parts of the price impact is perfectly balanced. In most cases, however, “the task of the district court is simply to assess all the evidence of the impact on prices – direct and indirect – and to determine whether it is more likely than not that the bogus. alleged statements have had an impact on prices ”.