On June 21, 2021, the United States Supreme Court issued its decision in Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System, which provides important guidance for defendants seeking to rebut the presumption of reliance that underlies securities class action litigation. In particular, the decision confirmed that courts may consider all competent evidence tending to show a lack of price impact, including the generic nature of alleged misstatements, when evaluating class certification.
Background of the Presumption of Reliance
Typically, plaintiffs alleging fraud must establish reliance directly—i.e., by demonstrating the plaintiff was aware of a false or misleading statement and engaged in a transaction based on that misrepresentation. That requirement poses complexities for prospective securities plaintiffs seeking to certify classes of shareholders, however, because it is difficult to demonstrate that each member of the prospective class actually traded in reliance on the alleged misstatement or omission.1 The Supreme Court's 1988 decision in Basic v. Levinson addressed that issue by holding that investors could satisfy the reliance requirement by invoking a rebuttable presumption that the price of stock traded in an efficient market reflects all public material information.2 Using this "fraud on the market" presumption, class members are presumed to have relied on alleged misstatements if they plead that (1) the alleged misrepresentations were public; (2) the misrepresentations were material; (3) the stock traded in an efficient market; and (4) the plaintiffs traded between when the misrepresentations were made and when the truth was revealed.3
In 2014, the Supreme Court provided further guidance regarding the Basic presumption in Halliburton Co. v. Erica P. John Fund, Inc. (Halliburton II). Specifically, Halliburton II clarified that because the Basic presumption was just a presumption, defendants to securities class actions are entitled to the opportunity to rebut the presumption of class-wide reliance at class certification by introducing evidence that an alleged misrepresentation did not, in fact, affect the stock price.4 If defendants are able to "sever the link" between the misrepresentation and the price plaintiffs paid for shares of the stock, plaintiffs may not invoke the presumption of reliance and, therefore, cannot certify a class. Although Halliburton II confirmed defendants' ability to rebut the fraud on the market presumption at class certification, in practice class certification has rarely been denied on the basis that the Basic presumption had been rebutted.
The Goldman Sachs Decision
The Supreme Court's recent Goldman Sachs decision builds on Basic and Halliburton II. In the underlying complaint, the plaintiffs alleged that Goldman Sachs violated the securities laws by making generic statements concerning its conflict-of-interest policies and business practices, such as "our clients' interests always come first" and "[i]ntegrity and honesty are at the heart of our business." The plaintiffs alleged that those statements were false, misleading, and omitted material information because Goldman had engaged in several purportedly conflicted transactions without disclosing conflicts related to its creation and sale of collateralized debt obligations (CDOs) and synthetic CDOs. The plaintiffs alleged that the market learned the truth when regulators filed later enforcement actions and news reports disclosed Goldman's purportedly conflicted transactions. The plaintiffs invoked Basic's presumption to show that the class members had traded in reliance on those misrepresentations. Goldman, in turn, argued that the Basic presumption was rebutted because the supposed "corrective disclosures" had not affected the price of the stock whatsoever, meaning that the plaintiffs could not establish any actual impact on the price of the stock.5 After an initial remand, the U.S. Court of Appeals for the Second Circuit upheld the district court's grant of class certification. A key factor was that court's belief that focusing on the generic nature of the alleged misstatements would overlap too significantly with the materiality inquiry, which is typically reserved for the merits stage. The Second Circuit also held that the defendants bore the ultimate burden of persuasion to disprove price impact.
In reviewing the Second Circuit's decision, the Supreme Court decided (by an 8-1 vote) that a remand was required for the court of appeals to consider the generic statements and (by a 6-3 vote) that Goldman retained the burden of persuasion to disprove price impact. Although the Supreme Court issued three separate opinions, all nine justices agreed with the core principle that the generic nature of alleged misstatements is relevant evidence of price impact. As Justice Barrett wrote on behalf of the Court, when "assessing price impact at class certification, courts should be open to all probative evidence on that question—qualitative as well as quantitative—aided by a good dose of common sense."6 The Court also explained that lower courts cannot avoid a consideration of price impact merely because evidence that is relevant to disproving price impact will often also tend to be relevant to the question of materiality. Instead, district courts must determine that the pre-requisites for class certification are met before certifying a class, "even when that requires inquiry into the merits."7 And because the majority believed that the Second Circuit's decision left "doubt" as to whether it had actually considered the generic nature of the statements at issue, the Court ordered a remand for further proceedings.8 Justice Sotomayor, for her part, agreed with the Court's adoption of this rule, but would have affirmed the Second Circuit because she believed the lower court's opinion did not contradict the rule.
In addition, the six-justice majority opinion agreed that when Basic's presumption is properly invoked, the ultimate burden lies on defendants to disprove price impact. The majority emphasized, however, that its ruling should not affect the vast majority of certification decisions. Rather, because most important certification decisions will feature competing expert testimony on both sides (as well as other evidence), a district court's task is simply to weigh that evidence and determine which side showed that its factual theory was more likely than not to be true. The majority encouraged district courts not to weigh the initial burden too heavily when making that inquiry, but instead to recognize that the initial allocation of the burden of persuasion should come into play only when the evidence is perfectly "in equipoise" (i.e., in equilibrium). Justice Gorsuch (joined by Justices Thomas and Alito) dissented from the Court's holding on this point, and would have concluded that the ultimate burden of persuasion flipped back to the plaintiffs once the defendants introduced sufficient evidence to contest price impact (as is normally the case under Federal Rule of Evidence 301).
Implications
Goldman Sachs may have important implications for opposing class certification in securities cases. Lower courts have often been reluctant to deny class certification due to a lack of price impact following Halliburton II—even when expert testimony casts significant doubt on the connection between the alleged misstatements and a stock's price. By reiterating that lower courts should consider "all relevant evidence," including "common sense," when evaluating price impact, the Court again confirmed that plaintiffs are not automatically entitled to class certification once Basic's presumption has been invoked. Moreover, the decision instructs that lower courts should consider relevant evidence of price impact, even when that evidence overlaps with merits issues such as materiality.
Finally, an interesting question left open by the decision is the validity of the "price" or "inflation" maintenance theory. Under that theory, misrepresentations do not need to cause artificially inflated stock prices in order to be actionable. Instead, the misrepresentations may be actionable where they cause a stock price to remain inflated by preventing preexisting inflation in the price from dissipating. Although the opinion did not rule out the theory, it also did not officially endorse it. Defendants may approvingly cite to the majority's skeptical treatment of that theory where "there is a mismatch between the contents of the misrepresentation and the corrective disclosure."
[1] Amgen Inc. v. Conn. Ret. Plans & Trust Funds, 568 U.S. 455, 462-63 (2013).
[2] 485 U.S. 224, 250 (1988).
[3] See Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804, 811 (2011) (Halliburton I); Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258, 268 (2014) (Halliburton II).
[4] 573 U.S. 258 (2014).
[5] Halliburton II, 573 U.S. at 278 (“[I]n the absence of price impact, Basic’s fraud-on-the-market theory and presumption of reliance collapse.”).
[6] Citations omitted.
[7] Quoting Comcast Corp. v. Behrend, 569 U. S. 27, 35 (2013).
[8] The opinion below stated, for example, that “[t]he inflation-maintenance theory does not discriminate between general and specific misstatements.” 955 F. 3d 254, 268 (2d. Cir 2020).
