On June 21, the U.S. Supreme Court issued its long-awaited decision in Goldman Sachs Group, Inc. et al. v. Arkansas Teacher Retirement System et al.1 The Court held that in ruling on class certification in a securities action, a court may properly consider all relevant evidence, including the generic nature of alleged misrepresentations, even though such evidence may overlap with the merits. The Court further ruled that on a certification motion, defendants bear the burden of persuasion to prove a lack of price impact by a preponderance of the evidence. The Court remanded the case to the Second Circuit Court of Appeals to consider "all record evidence relevant to price impact," including the generic nature of The Goldman Sachs Group's alleged misrepresentations, "regardless whether that evidence overlaps with materiality or any other merits issue."
Litigation Background
The case has a long history, having been before the Second Circuit Court of Appeals twice on class certification issues, and now will return a third time.
Several pension funds sued Goldman and three of its former executives alleging that Goldman had made misrepresentations about its ability to manage conflicts of interest, in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Goldman's generic, allegedly false representations included such anodyne statements as: "We have extensive procedures and controls that are designed to identify and address conflicts of interest," "Our clients' interests always come first" and "Integrity and honesty are at the heart of our business." Relying on the inflation-maintenance theory of securities fraud and the Basic presumption of reliance,2 plaintiffs argued that these statements artificially inflated Goldman's stock price and that when certain of Goldman's alleged conflicts of interest came to light, its stock price dropped, causing shareholders to lose money.
In 2015, the district court initially certified the class, determining that Goldman had failed to meet its burden of proving lack of price impact. On Goldman's first appeal, the Second Circuit Court of Appeals vacated the class certification decision, finding that the district court had incorrectly held Goldman to a higher burden of proof and failed to consider some of Goldman's price impact evidence. On remand, the district court certified the class again, and this time the court of appeals affirmed, as discussed in our April 2020 alert. As we reported in our December 2020 alert, the Supreme Court granted certiorari to review the court of appeals' decision.
The Court's Decision
The appeal to the Supreme Court raised two issues stemming from the court of appeals' decision: (1) whether the generic nature of Goldman's alleged misrepresentations is relevant to the price impact inquiry at the class certification stage, and (2) whether Goldman bears the burden of persuasion to prove lack of price impact. Interestingly, on the first question, the parties had reached agreement by the time of oral argument. The Court came to the same view, holding that the generic nature of a defendant's statements is relevant evidence for a court to consider at class certification. As for the second question, the Court agreed with the decision below that defendants bear the burden of persuasion in the price impact inquiry.
To address the first issue, Justice Barrett, writing for the full court, reasoned that at the class certification stage, "courts should be open to all probative evidence" regarding price impact, as guided by common sense, even if that evidence also bears on a merits question. This conclusion stems from the court's obligation to ascertain that Rule 23 is satisfied. The Court further observed that the generic nature of alleged misrepresentations is particularly relevant when plaintiffs rely on the inflation-maintenance theory. For instance, when an earlier misrepresentation is generic and a later corrective disclosure is specific, the specific disclosure likely does not correct the earlier statement and the price drop is less likely to be tied to the amount of front-end inflation. The parties agreed with the Court on this analysis, and only disputed whether the Second Circuit Court of Appeals properly considered the generic nature of Goldman's statements. The Court remanded to the court below for further consideration of all evidence relating to price impact regardless of whether it also involves a merits issue.3
On the second question, the Court reaffirmed that defendants bear the burden of persuasion by a preponderance of the evidence to establish that there was no price impact. In other words, the defendants must "sever the link" between a false statement and the price the plaintiff paid. To hold otherwise, the Court reasoned, would make the Basic presumption meaningless — if defendants could produce any evidence to overcome the presumption and then the burden would shift back to plaintiff, plaintiff would have "the burden of directly proving price impact in almost every case." The Court pointed out that, practically, placing the burden on defendants would not be outcome determinative in most cases as both plaintiffs and defendants submit expert evidence on price impact for the court to weigh. The defendant's burden would make an impact only in the rare case in which this submitted price impact data is completely balanced.4
Takeaways
Corporate defendants can and will turn to defenses that relate to merits issues at the class certification stage, even when a motion to dismiss has previously been denied.- As businesses are increasingly pressured to issue statements about their environmental, social and corporate governance values, the Goldman ruling may give defendants an additional way to dispute price impact to the extent such statements may on occasion also be seen as "generic."
- Plaintiffs will likely cite to the portion of the decision confirming that defendants bear the burden of persuasion to prove price impact.
Footnotes
1. No. 20-222, 2021 WL 2519035 (U.S. June 21, 2021).
2. See Basic v. Levinson, 485 U.S. 224 (1988). The inflation-maintenance theory posits that misstatements can affect the market price - or have a "price impact" - by artificially maintaining an already inflated stock price. See In re Vivendi, S.A. Sec. Litig., 838 F.3rd 223, 257 (2d Cir. 2016).
3. Justice Sotomayor dissented as to the remand, believing that the court of appeals had properly considered the generic nature of the statements in its earlier decision.
4. Justice Gorsuch, joined by Justices Thomas and Alito, dissented as to placing the burden of persuasion on defendants, arguing instead that Federal Rule of Evidence 301 applies to the Basic presumption and thus that the burden should fall on plaintiffs.
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THE GOLDMAN SACHS GROUP, INC. 
