Today, the U.S. Supreme Court issued its long-awaited decision in Goldman Sachs Group, Inc. v. Arkansas Teachers Retirement System, which reaffirmed (and for all intents and purposes left intact) the “fraud on the market” presumption—a presumption crucial to investor’s ability to prove reliance on a class-wide basis. The Court did vacate and remand the case to the Second Circuit for further proceedings. In the end, the decision proved a modest reaffirmation of current case law, with little controversy. As Tulane law professor Ann M. Lipton predicted following oral argument in March, while the appeal came “in like a lion,” it went “out like a lamb.”
[For a more detailed discussion of the history of the case and appeal, please see U.S. Supreme Court to Revisit “Fraud On The Market” Presumption | Berman Tabacco].
Justice Amy Coney Barrett delivered the opinion of the Court, which was joined in full by 4 justices (a mixture of liberal and conservative), and in part by 4 others. The Court reached two rulings: first, it affirmed the fraud on the market presumption of reliance and concluded that a defendant may rebut that presumption by pointing to the generic nature of alleged misstatements and showing that the statements had no impact on the price of the security, even where that evidence is also relevant to materiality; and second, the Court held that a defendant seeking to rebut the presumption has both the burden of production and the ultimate burden of persuasion.
Generic Statements and Fraud On The Market Presumption
The first issue addressed by the Court proved far less controversial than the second, given the parties’ evolving positions. In the end, the “parties’ dispute … largely evaporated,” and both parties—and the Court—agreed that the generic nature of any alleged misrepresentation can be important evidence of price impact that courts should consider at class certification.
(By way of brief background, plaintiffs alleged that Goldman’s statements about adhering to high ethical standards when managing conflicts of interests were false and misleading when made, which caused the price for Goldman’s stock to be artificial inflated. Before the district court, defendants argued that the statements were too generic to be actionable and that they had no price impact on Goldman’s stock price. On appeal, Goldman modified its position to argue that the generic nature of the statements was important evidence relevant to the price impact/class certification inquiry.)
In addressing this issue, the Court reiterated the fundamental importance of the fraud on the market presumption to establish reliance under the federal securities laws. The Court also restated a plaintiff’s burden to invoke the presumption, by proving: (a) that the alleged misrepresentation was publicly known; (b) that it was material; (c) that the stock traded in an efficient market; and (d) that the plaintiff traded the stock between the time the misrepresentation was made and when the truth was revealed. The Court reiterated that at the class certification stage, a plaintiff must prove each of these prerequisites, except for materiality, because under the Court’s Amgen decision, “materiality should be left to the merits stage because it does not bear on Rule 23’s predominance requirement.”
Then, the Court reaffirmed a defendant’s ability to rebut the presumption through “[a]ny showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decisions to trade at a fair market price.” (quoting Basic v. Levinson, 485 U.S. 224, 248 (1988)). The Court stressed that “[i]n 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.” Further, the Court noted that lower courts “may assess the generic nature of a misrepresentation at class certification even though it may be relevant to materiality, with which Amgen reserves for the merits.”
The Court explained why the generic nature of misstatements are relevant at the class certification phase, prior to a determination on the merits. Specially, the Court recognized that “typically [plaintiffs] try to prove the amount of inflation indirectly: They point to a negative disclosure about a company and an associated drop in its stock price; allege that the disclosure corrected an earlier misrepresentation; and then claim that the price drop is equal to the amount of inflation maintained by the earlier misrepresentation.” The Court then went on:
But that final inference—that the back-end price drop equals front-end inflation—starts to breakdown when there is a mismatch between the contents of the misrepresentation and the corrective disclosure. That may occur when the earlier misrepresentation is generic (e.g., “we have faith in our business model”) and the later corrective disclosure is specific (e.g., “our fourth quarter earnings did not meet expectations”). Under those circumstances, it is less likely that the specific disclosure actually corrected the generic misrepresentation, which means that there is less reason to infer front-end price inflation—that is price impact—from the back-end price drop.
In the end, the Court vacated the lower court ruling and remanded the case back to the Second Circuit, because a majority of justices “doubt[ed]” whether the lower court properly considered the generic nature of the Goldman’s alleged misrepresentations.
Burden Of Production/Persuasion
The second question before the Court concerned whether a defendant seeking to rebut the presumption has only a burden of production or also the ultimate burden of persuasion. Here, the Court held that the defendant had both. The Court cited prior Supreme Court decisions requiring defendants to sever the link between the alleged misrepresentations and price impact, and found such language supported placing the burden of persuasion on defendants. Further, the majority noted that placing the burden of persuasion on plaintiffs would “effectively negate Halliburton II’s holding that plaintiffs need not directly prove price impact in order to invoke the Basic presumption.”
Concurring/Dissent
While all Justices concurred in some aspects of the majority opinion, there were two side opinions, concurring in part and dissenting in part.
Justice Sotomayor wrote separately to state that while she fully concurred with the majority’s reasoning on the law, she would simply affirm (as opposed to vacate and remand) because the Second Circuit “properly considered the generic nature of Goldman’s alleged misrepresentations.”
Justice Gorsuch (joined by Justices Thomas and Alito) dissented solely on the second issue, asserting that defendants should only bear the burden of production, and not the burden of persuasion, when it comes to showing a lack of price impact.
Impact Of Decision
Goldman is not a game-changer. As predicted following oral argument, the decision largely affirms the current state of the law. It firmly recognizes a plaintiff’s rights to invoke the fraud on the market presumption, and correctly placed the burden of persuasion for rebuttal of that presumption on the defendants.
Going forward, the battle lines at class certification for securities fraud cases will continue to focus on the line between arguments concerning price impact (which are allowable under Halliburton II and Goldman) and materiality (which is solely a merits issue, per Amgen). The Court’s decision provided little to no guidance to lower courts on where or how to draw this line. Thus, we expect that class certification will continue to involve extended proceedings and expert battles. In the end, however, we do not expect this decision will have a material impact on class certification rates for securities class actions.