A decade of litigation in the Goldman Sachs securities fraud class action has ultimately revealed an unremarkable truth, confirmed by a unanimous U.S. Supreme Court – in a case brought under Rule 10b-5 premised on an inflation-maintenance theory, a publicly traded company’s generic, garden-variety statements can be shown, at the all-important class certification stage, not to have maintained an inflated stock price. Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement Sys., No. 20-222 (June 21, 2021) (Part II-A). Whether Goldman Sachs’ generic statements in fact caused the price of its stock to be artificially maintained is a $13 billion question that will be addressed by the Second Circuit Court of Appeals on remand from the Supreme Court’s decision.
The more nuanced question that divided the Court was who bears the burden of proving or disproving “price impact” for class certification. Writing for the Court, Justice Barrett reasoned in Part II-B of the opinion that defendant Goldman Sachs must prove the absence of price impact. Chief Justice Roberts joined with Justices Breyer, Kagan, Sotomayor, Kavanaugh, and Barrett in Part II-B, with Justices Gorsuch, Thomas, and Alito dissenting from Part II-B, reasoning that a securities fraud plaintiff maintains the burden of proving its case.
The Goldman Sachs case was the subject of a previous Ulmer Client Alert, which, at the time the Court granted certiorari, previewed the importance of the rebuttable presumption, called the Basic presumption, that a publicly traded company’s statements are reflected in the price of its stock. If the presumption applies, then a court will presume by operation of law that investors relied on the statements in purchasing the stock. The alternative, which is individualized proof that each investor relied on a company’s statements, would decimate class action securities litigation.
The Supreme Court previously ruled in Halliburton Co. v. Erica P. John Fund, Inc. (Halliburton II), 573 U.S. 258, 134 S.Ct. 2398, 189 L.Ed.2d 339 (2014), that the Basic presumption is rebutted if, at the class certification stage, there is no “price impact,” i.e., the allegedly false or misleading statements did not impact the stock’s price. However, the Supreme Court also ruled in an earlier case that the “materiality” of a statement, meaning whether it is too generic or vague to matter, is an objective test that must be adjudicated on a common and class wide basis on the merits and not at the earlier class certification stage. See Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, 568 U.S. 455, 133 S.Ct. 1184, 185 L.Ed.2d 308 (2013). The distinction between the concepts of price impact, which is addressed at class certification, and materiality, which must await the merits, is critical because almost all securities fraud class action cases are settled if they are certified due to the leverage of aggregate liability.
With this backdrop, the question initially presented in Goldman Sachs was whether a company’s generic superlatives are relevant to price impact under the Basic presumption or whether instead they go to materiality. The Supreme Court ruled unanimously in Goldman Sachs that a company’s allegedly misleading statements can be considered both as to price impact (at class certification under Halliburton II) and materiality (on the merits under Amgen). The Court’s unanimous ruling explained that the notion (in an inflation-maintenance case) that a “back-end price drop equals front-end inflation (price impact) starts to break down when there is a mismatch between the contents of the misrepresentation and the corrective disclosure.” The Court remanded the case to the Second Circuit Court of Appeals to “take into account all record evidence relevant to price impact, regardless whether that evidence overlaps with materiality or any other merits issue.” (Justice Sotomayor dissented from Part II-A-2 of the opinion, reasoning that the Second Circuit properly rejected Goldman Sachs’ argument below that its generic statements are, as a matter of law, incapable of causing a price impact).
The Justices drew sharper lines on the question of which party bears what burden on price impact at the class certification stage. More specifically, if a securities fraud plaintiff initially establishes the Basic presumption, then does the defendant bear only the burden of production to rebut the presumption, which in turn would shift the burden of persuasion back to the plaintiff to affirmatively prove price impact? Or does the defendant bear the burden of persuasion to disprove price impact, thereby severing the link between the alleged misstatements and the stock price?
The Court ruled in Part II-B of the opinion that a securities fraud defendant bears the burden of persuasion on price impact at class certification, interjecting a common sense point that “the allocation of the burden is unlikely to make much difference on the ground.” The Court observed that parties always submit competing expert evidence on the issue of price impact, the district court assesses the evidence to determine whether it is more likely than not that the alleged misrepresentations had a price impact, and thus the burden comes into play only in the rare instance when the evidence is in equipoise.
Justice Gorsuch penned a dissenting opinion as to Part II-B, joined by Justices Thomas and Alito. The dissenters observed that while the Basic presumption is critical to “proceeding with a securities fraud action on a classwide basis,” the Basic presumption is still just a presumption. Consequently, if the defendant meets its burden of production to rebut the presumption, then the plaintiff should be required to affirmatively prove price impact. The dissent pointed out that it is unusual, as the majority ruled, that a defendant would be charged with the burden of persuasion as to any aspect of a plaintiff’s case. And, in contrast to the majority’s observation that allocation of the burden matters only in close cases, Justice Gorsuch commented “[t]hat close cases may not be common ones is no justification for indifference about how the law resolves them.”
As it turns out, the opinion in the Goldman Sachs case is not groundbreaking, and in most cases the allocation of the burden of persuasion will not affect the outcome. Nonetheless, the Court’s clear directive to consider all of the evidence going to price impact is important in the context of Rule 10b-5 litigation, especially given that inflation-maintenance cases are particularly susceptible to 20/20 hindsight (i.e., the stock price drops and the company’s prior statements are scrutinized to find ones that supposedly maintained a higher “inflated” price). More generally, the Court’s opinion builds on the important Civil Rule 23 principle that courts must consider all of the facts that bear on class certification at the class certification stage, notwithstanding that those same facts overlap the merits.
Finally, dedicated SCOTUS commentators undoubtedly will note the interesting alignment of the justices in a straightforward, middle-of-the-road decision by the Court in a closely watched business case.