In the same December 11, 2020 Order in which it rejected the bid by the Texas Attorney General to overturn the results of the 2020 Presidential election, the U.S. Supreme Court also agreed to take up a case involving the effort of Goldman Sachs to overturn the certification of a class in the long-running securities lawsuit. The case relates to the bank’s alleged conflicts of interest in structuring collateralized debt obligation securities before the global financial crisis. The case will require the Court to address important questions pertaining to the ability of securities lawsuit defendants opposing class certification to attempt to rebut the presumption of reliance and the extent to which the defendants in opposing class certification can rely on matter that is also relevant to merits-related issues such as materiality.
In April 2010, plaintiff shareholders first filed this securities class action lawsuit in the Southern District of New York against Goldman Sachs and certain of its directors and officers. The lawsuit pertains to the infamous “built to fail” Abacus CDO transaction and other ill-fated CDO deals. As discussed here, in June 2012, Southern District of New York Paul Crotty denied the defendants’ dismissal motion and the case proceeded to the class certification stage, which has proven to be protracted and procedurally complicated. The case has already been to the Second Circuit on class certification issues on two separate occasions.
In the Second Circuit’s most recent opinion in April 2020, a divided three-judge panel affirmed the district court’s certification of a class in the case, concluding among other things that the defendants, in opposing class certification by attempting to argue that the alleged misrepresentations on which the plaintiffs sought to rely did not affect the company’s share price, had failed to show that the statements did not have an impact on the company’s share price.
At the center of the Second Circuit’s ruling that Goldman seeks to challenge is the presumption of classwide reliance on the alleged misrepresentations – first recognized by the U.S. Supreme Court in 1988 in Basic, Inc. v. Levinson — that plaintiffs must invoke for a private securities lawsuit to proceed as a class action. In its 2014 decision in Halliburton v. Erica P. John Fund, Inc. (Halliburton II), the Court clarified that defendants must have the opportunity to attempt to rebut the Basic presumption by showing that the alleged misrepresentations had no impact on the price of the defendant company’s securities.
In seeking to rebut the presumption, the defendants had pointed to the generic and aspirational nature of the alleged misstatements on which plaintiffs relied in arguing that the statements had no impact on the price of the company’s securities. The Second Circuit rejected this argument, reasoning that a contrary rule would permit a defendant to “smuggle materiality” – a merits issue – into the price-impact inquiry at the class-certification stage.
Significantly, Judge Richard Sullivan dissented from the appellate court’s opinion, observing that “rigid compartmentalization” of the materiality and price-impact inquiries is not “possible,” and noting further that under Halliburton II defendants were entitled to seek to rebut the presumption of reliance with any relevant evidence regardless of whether the evidence is relevant at the merits stage. Judge Sullivan noted that under the ruling of the appellate panel’s, the presumption of reliance is “truly irrebuttable.”
In August 2020, Goldman filed a petition to the U.S. Supreme Court for a writ of certiorari seeking to have the Court address the class certification issues. In its cert petition, Goldman Sachs sought to have the court address two questions: First, whether a defendant may rebut the Basic presumption by pointing to the generic nature of the alleged misrepresentations, even though the evidence is also relevant to the substantive element of materiality; and, second, whether a defendant seeking to rebut the Basic presumption has only a burden of production or also the ultimate burden of persuasion.
In seeking to persuade the Supreme Court to take up the case, Goldman argued that the Second Circuit’s rulings in the case “will guarantee plaintiffs the ability to obtain certification in virtually any securities class action lawsuit premised on the increasingly popular and plaintiff-friendly ‘inflation maintenance’ theory.” Under the “inflation maintenance” theory (or “price maintenance” theory, as it is sometimes called), a plaintiff contends that an alleged misstatement affected the defendant company’s stock price not by artificially inflating it but by preventing the stock price from decreasing. Goldman argued that the Second Circuit’s ruling on the class certification issues “effectively strips defendants of any ability to rebut the Basic presumption in class actions premised on the inflation-maintenance theory in the Second Circuit,” the “most important circuit for securities litigation.”
In their opposition to the cert petition, the plaintiffs contended that the defendants were attempting to argue that they should be able to oppose class certification by arguing that the alleged misrepresentations were “immaterial,” despite U.S. Supreme Court precedent holding that “materiality should be left to the merits stage, because it does not bear on the predominance requirement” of Fed. R. Civ. Proc. 23.
In its cert petition, Goldman called this dispute “the most important securities case to come before the Court” since Halliburton II. Class certification is indeed an “important battleground,” as the Skadden law firm noted in its December 11, 2020 memo about the Supreme Court’s agreement to take up the case, because the certification of a class “creates an in terrorem effect that often causes defendants to settle disproportionately to the merits.” These types of concerns explain the active support of Goldman’s petition by several amici curiae, including a number of business, trade, and securities industry groups.
One aspect of this particularly important aspect of this dispute is the plaintiffs’ reliance on a “inflation maintenance” theory in order to establish their entitlement to rely on presumption of reliance. Plaintiffs increasingly depend on the inflation maintenance theory in seeking to establish their ability to rely on the Basic presumption. Goldman argued in its cert petition that the ease with which inflation-maintenance plaintiffs will be able to obtain class certification under the Second Circuit’s standard “will further incentivize” the “troubling practice” of “event-driven securities litigation.” The decision below, Goldman argues, “ensures the proliferation of those suits [i.e., event-driven lawsuits] by virtually guaranteeing class certification in any securities action premised on the inflation-maintenance theory.”
Even without respect to the class certification issues involved, it is significant that the Court has agreed to take up this case at all, as it is any time the Court agrees to take up a securities case. The Court’s consideration of securities law issues carries with it the opportunity for the Court to work some significant change on the way securities suits are litigated in the lower courts (as happened, for example, with the Court’s 2010 decision in the Morrison case). Of relevance here is the fact that the plaintiffs in this case are relying on an “inflation maintenance” theory in support of the entitlement to rely on the Basic presumption. While several intermediate appellate courts have recognized the inflation maintenance theory, the U.S Supreme Court has never recognized or even weighed in on the theory. The Court’s consideration of the issues presented in this case could provide an opportunity for the Court to consider a variety of concerns, including, for example, the inflation maintenance theory.
The Court’s agreement to take up this case also presents some intriguing possibilities simply because the presumption of reliance is such an important part of the case. The centrality of the Basic presumption to the issues involved in this dispute means that the Court could provide some further perspective on the presumption, potentially impacting many securities class action lawsuits.