June 21, 2021
Decided June 21, 2021
Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System, No. 20-222
Today, the Supreme Court held 8-1 that the Second Circuit must clarify its reasoning in its certification of a securities class action against Goldman Sachs, and held 6-3 that the defendant bears the burden of persuasion when attempting to rebut the “fraud on the market” presumption.
Goldman Sachs was sued under the securities laws for making statements suggesting that it did not have any conflicts of interest in the management of its mortgage business. The plaintiffs sought to certify a class of investors in Goldman stock and invoked the “fraud on the market” presumption, recognized in Basic Inc. v. Levinson, 485 U.S. 224 (1988), to show that every class member relied on Goldman’s alleged misrepresentations in buying or selling at the market price. Goldman tried to rebut this presumption of reliance by pointing to the generic nature of its challenged statements (e.g., “Integrity and honesty are at the heart of our business”). As Goldman saw it, no investors could have truly relied on such statements in buying their shares because the statements were too generic to impact the stock’s price. The district court rejected that argument and certified the class.
The Second Circuit initially reversed the class-certification order and remanded, after which the district court recertified the class; the Second Circuit then affirmed that second certification order. The Second Circuit held that the generic nature of the statements was irrelevant at the class-certification stage, and instead should be litigated at trial.
Can a defendant in a securities class action rebut the presumption of classwide reliance recognized in Basic by arguing that the statements were too generic to have had any impact on the price of the security?
Does a defendant seeking to rebut the Basic presumption with evidence of a lack of price impact bear only the burden of production or also the ultimate burden of persuasion?
A court should consider the generic nature of the statements at the class certification stage, and the Second Circuit must clarify on remand whether it in fact did so here.
The defendant bears the ultimate burden of persuasion when attempting to rebut the Basic presumption.
“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.”
Justice Barrett, writing for the Court
What It Means:
The Court’s opinion is available here.
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|Monica K. Loseman
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