When the U.S. Supreme Court granted the petition for a writ of certiorari to take up class certification questions raised in the long-running Goldman Sachs securities class action lawsuit, some commentators thought the case might give the Court the opportunity to reconsider fundamental issues about the presumption of reliance under the “fraud on the market” theory in connection with class certification in securities suits. However, as the case has turned out, the Court’s consideration of the case has not produced any fundamental recasting of any key issues; instead, the Court on June 21, 2021 issued a narrow decision that the majority opinion itself acknowledged, with respect to the most significant substantive part of the Court’s opinion, will not be “outcome determinative” in many cases. The Court’s June 21, 2021 decision can be found here.
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 Second Circuit’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.”
The Cert Petition and Oral Argument
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 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.
During the course of merits briefing, it developed that the parties’ positions with respect to the first of the two issues on which the Court granted cert is narrower than it had initially appeared. As described in a March 29, 2021 post in Alison Frankel’s On the Case blog (here), during oral argument it appeared that there was very little disagreement between the parties with respect to the question of whether a court could consider the “generic” nature of the alleged misrepresentations, which in turn suggested that the Court’s ultimate opinion would be far less game-changing than observers had initially thought it might be. As it turned out, the opinion the court issued is in fact quite narrow.
The June 21, 2021 Opinion
In a majority opinion written by the newest Supreme Court Justice, Amy Barrett, the court vacated the Second Circuit’s opinion affirming the district court’s certification of a class, for further proceedings in light of the Supreme Court’s opinion.
With respect to the first issue before the Court – that is, the question whether the generic nature of a misrepresentation is relevant to price impact at the class certification state – the parties’ dispute, Justice Barrett noted, “has largely evaporated,” adding further that the plaintiffs “now conceded that the generic nature of an alleged misrepresentation often will be important evidence of price impact,” for the simple reason that a more general statement will affect a company’s share price less than a more specific statement. The parties “further agree,” Justice Barrett noted, that courts may consider “expert testimony and use their common sense in assessing whether a generic misrepresentation had a price impact.”
Justice Barrett said for the majority that “we share the parties’ view,” adding that the district court should be open to “all probative evidence,” adding that this is true “regardless whether the evidence is also relevant to a merits question like materiality.” The generic nature of a misrepresentation “often will be important evidence of a lack of price impact, particularly in cases proceeding under the inflation-maintenance theory.”
The only question left for the Court is whether or not the Second Circuit properly considered the generic nature of Goldman’s alleged misrepresentations. Because the Second Circuit’s opinions “leave us with sufficient doubt on this score,” the Court remanded the case to the appellate court for further consideration, taking into account “all record evidence relevant to price impact, regardless whether that evidence overlaps with materiality or any other merits issue.”
In the final section of the Court’s opinion, the Court rejected Goldman’s argument that the Second Circuit erred by requiring Goldman to bear the burden of persuasion on price impact at class certification. The Court considered its own precedent in Basic and Halliburton II in which the Court previously has said that a securities defendant can rebut the presumption of reliance by showing the absence of impact on the company’s share price from the alleged misrepresentation. In order to rebut the presumption, the defendant must “sever the link,” and the mere production of “some evidence” relevant to price impact would “rarely accomplish that feat.”
Although the court concluded that the defendants do bear the burden of persuasion, that allocation of the burden, the court said, “is unlikely to make much difference on the ground.” A court will consider the parties’ submissions on issue and then determine whether the alleged misrepresentation had a price impact. The defendant’s burden of persuasion “will have bite” only “when the court finds the evidence in equipoise – a situation that should rarely arise.”
Justice Barrett wrote her opinion for a majority of five justices (including herself) in the entirety of her opinion; the four other justices joining in all of her opinion were Chief Justice Roberts, and Justices Breyer, Kagan, and Kavanaugh. Justice Sotomayor also joined in all of Justice Barrett’s opinion, except she dissented from the majority’s decision to vacate the Second Circuit’s opinion, contending in dissent that she believed that Second Circuit had fully considered the issues. Justice Gorsuch, joined by Justices Thomas and Alito, dissented from the Court’s opinion with respect to the burden of persuasion on the price impact issue.
It is always interesting when the Supreme Court agrees to take up a securities case — you never know what the Court might do. In the end, the outcome of this case was far from the framework-altering possibilities that some had suggested for the case at the outset. Indeed, on the first of the two issues before the court, the parties ultimately were not even in disagreement except to the extent of whether or not further proceedings in the Second Circuit will called for; and on the second of the two issues, the burden of persuasion issue, Justice Barrett herself said that the Court’s decision is “unlikely to make much difference.”
That is not to say that the outcome is unimportant to the parties. To be sure, Goldman managed to get the Second Circuit’s opinion affirming the certification of a class vacated, a not insignificant development. However, I suspect (especially after reading Justice Sotomayor’s dissenting/concurring opinion) that on remand, the Second Circuit is unlikely to reach a different outcome, so Goldman may find itself in about the same place in the end after all.
One very interesting possibility that kind of came and went in this opinion was the intriguing possibility that the Court might address the “price maintenance theory” at the hear of the plaintiff’s claims, and often at the heart of securities class action lawsuit plaintiffs’ claims. Under this theory, the plaintiffs argue not that the defendants’ misrepresentation inflated the company’s share price; rather, the plaintiffs argue that the misrepresentations allowed the defendant company to maintain its share price. The Supreme Court has never considered whether or not this theory satisfies the requirements to state a securities claim. It obviously is a key component of the plaintiffs’ claims in this case; indeed, this aspect of the plaintiffs’ case was the object of commentary in the majority opinion.
However, in footnote 1 to her opinion, Justice Barrett noted only that “this Court has expressed no view on [the price maintenance theory’s] validity or its contours. We need not and do not do so in this case.” Looks to me like a marker has been laid down for another day and another case.
Another interesting thing about this case is the lineup of the Justices. The conservative trio of Gorsuch, Alito, and Thomas lined up on one side of the burden of persuasion issue, while the liberal group of Breyer, Kagan and Sotomayor lined up on the other side (Justice Sotomayor joining all of the majority opinion except the decision to vacate). Interestingly, joining the liberal group in the majority were the two newest Justices – Kavanaugh, and of course Barrett—and the Chief Justice. If nothing else, this lineup suggests that the more conservative Justices do not form a unified voting block with the most recent Trump appointees.
At a minimum, the voting lineup in this case is consistent with the theory set out by Adam Liptak in his June 18, 2021 New York Times article (here), that the supposed 6-3 conservative juggernaut that would transform the Supreme Court might turn out different that some are expecting. Among other things, Liptak noted that Justice Kavanaugh seems to be at the Court’s ideological center, voting with the majority this term more than any other Justice – as happened to be the situation again in this case. Maybe there is too little evidence yet to make any overarching generalizations, but it is still interesting to observe as the Court’ proceeds with its still relatively new lineup.