Supreme Court Grants Certiorari in Long Running Securities Class Certification Dispute

Kramer Levin Naftalis & Frankel LLP

On Dec. 11, 2020, the Supreme Court granted certiorari in Arkansas Teacher Retirement System, et al. v. Goldman Sachs Group, Inc.,[1] to review a decision by the Second Circuit Court of Appeals upholding certification of an investor class alleging that Goldman violated securities laws by concealing conflicts of interest. This long running case presents important and recurring issues in securities class action litigation as to (i) whether the presumption of classwide reliance recognized in Basic v. Levinson[2] can be rebutted by pointing to the generic nature of alleged misstatements, and (ii) the burden of proof in rebutting the Basic presumption.

The underlying action dates back to 2011. Plaintiffs alleged that Goldman’s general public statements that it had extensive procedures designed to identify and address conflicts of interest and that it was dedicated to complying with the law were misleading, in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Relying on the inflation-maintenance theory of securities fraud, plaintiffs alleged that Goldman’s public statements concerning conflicts of interest artificially maintained an inflated stock price and that the eventual revelations in an SEC enforcement action served as corrective disclosures which caused the price of Goldman shares to fall.

The district court initially certified the shareholder class in 2015. On Goldman’s first appeal, the Court of Appeals vacated the class certification decision, holding that the district court had failed to apply the correct evidentiary standard in determining whether Goldman had (i) successfully rebutted the presumption of reliance under Basic v. Levinson and (ii) shown that the decline in Goldman’s share price was due to something other than its alleged misstatements. On remand, the District Court reconsidered Goldman’s evidence but ultimately recertified the class. Goldman once again appealed the certification decision and argued two grounds for reversal: the district court (1) misapplied the inflation-maintenance theory and (2) abused its discretion by rejecting Goldman’s Basic rebuttal evidence.

As we reported in our April 2020 alert, a split appellate panel upheld the class certification decision. The panel unanimously declined Goldman’s invitation to narrow the inflation-maintenance theory to misstatements that artificially maintain a fraud-induced inflation of the share price or to misstatements that are unduly optimistic concerning specific and material financial or operational information. However, the panel split 2-1 on the District Court’s finding that Goldman had failed to rebut the Basic presumption. In his dissent, Judge Richard C. Sullivan concluded that Goldman had successfully rebutted the Basic presumption by offering “persuasive and uncontradicted evidence” that Goldman’s share price was unaffected by the news reports that disclosed Goldman’s conflicts of interest prior to the corrective disclosures. Goldman sought an en banc review of the panel’s ruling, but the full court denied that request in June.

In August, Goldman filed a petition for certiorari with the Supreme Court, seeking review of the Court of Appeals’ decision. The petition presented two questions for the Court’s consideration: (1) whether a defendant in a securities class action may rebut the Basic presumption by pointing to the generic nature of the alleged misstatements, even though that evidence is relevant to the substantive question of materiality, and (2) whether a defendant seeking to rebut the Basic presumption has only a burden of production or also the ultimate burden of persuasion. Various groups, including law professors and former SEC officials, filed amicus curiae briefs in support of Goldman’s petition for certiorari, arguing that the Court of Appeals’ decision contravenes Supreme Court precedent, will encourage unwarranted securities class litigation, and will make companies overly cautious about the types of general statements they issue. In their opposition brief, plaintiffs contended that merits assessments of materiality are inappropriate at the class certification stage, and that there is no circuit conflict, and therefore no need for Supreme Court review of the questions presented.

The Supreme Court’s decision to grant certiorari signals its willingness to clarify the scope and application of the Basic presumption of classwide reliance. Both the plaintiffs’ and defendants’ bar are likely to watch this case closely, as the Court’s decision could alter the landscape of securities class actions.


[1] No. 20-222, 2020 WL 7296815 (U.S. Dec. 11, 2020).

[2] See Basic v. Levinson, 485 U.S. 224 (1988).

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