In Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System, the US Supreme Court clarified that courts should consider all record evidence relevant to class certification, regardless of whether that evidence also overlaps with the merits. Specifically, in securities class actions, the Court explained that the generic nature of the alleged misstatements should be one of many factors considered in the price impact analysis at the class certification stage, as corporate statements may be too generic to be relied upon by investors class-wide. Additionally, the Court held 6-3 that defendants have the burden of persuasion to rebut the fraud-on-the-market presumption of class-wide reliance.
As the majority opinion acknowledges, the Court’s decision is narrow and will not be “outcome determinative” in many cases. This is because, while the Court concluded that the defendant bears the burden of persuasion to defeat the fraud-on-the-market presumption and sever the link between the alleged misstatements and the stock price, the Court explained that “the allocation of the burden is unlikely to make much difference on the ground” and “will have bite” only “when the court finds the evidence in equipoise—a situation that should rarely arise.”
The opinion does, however, make clear that lower courts should consider all relevant evidence at the class certification stage of a securities class action, including the generic nature of the statements at issue. It also provides that evidence that rebuts the fraud-on-the-market presumption of reliance—including evidence that the challenged statements were generic and did not impact the company’s stock price—can be used by the defendant in a securities class action to defeat class certification. It remains unclear whether the generic nature of a statement alone is enough to defeat class certification or how these principles will apply in cases where there is a mix of generic and specific misstatements.
More than a decade ago, Arkansas Teacher Retirement System (Plaintiffs) brought a securities fraud action, on behalf of a putative class of Goldman Sachs investors, against Goldman Sachs and several of its directors (together, Defendants). Plaintiffs alleged that Defendants violated Section 10(b) of the Securities Exchange Act of 1934 by making material misstatements about Goldman Sachs’s efforts to avoid conflicts of interest. These alleged misstatements included generic statements such as, “[o]ur clients’ interests always come first,” “[i]ntegrity and honesty are at the heart of our business,” and “[w]e have extensive procedures and controls that are designed to identify and address conflicts of interest.” Plaintiffs alleged that news of government enforcement actions against Goldman Sachs purportedly revealed the falsity of Defendants’ statements and caused Goldman’s share price to decline.
To establish a claim for securities fraud, among other things, a plaintiff must prove that it relied on the defendant’s alleged misstatements. While reliance is ordinarily an individualized inquiry, in securities class actions, the plaintiff may invoke the fraud-on-the-market presumption of reliance established by the Supreme Court in Basic Inc. v. Levinson, 485 U.S. 224 (1988). Under Basic, all public market investors are presumed to rely on the market price of a company’s stock, which, in an efficient market, reflects all of the company’s public statements and all other public information. The Basic presumption allows the plaintiff to prove reliance through evidence common to the class, but the defendant may rebut the presumption with evidence showing that the alleged misstatements did not impact the company’s stock price.
In the district court, Defendants sought to defeat class certification by arguing that the alleged misstatements were so generic that they had no impact on the share price, i.e., the statements did not cause the stock to be maintained at an allegedly inflated price. The district court rejected Defendants’ argument and certified the class. The US Court of Appeals for the Second Circuit held that the generic nature of the statements was irrelevant at the class certification stage of the case, and instead was an issue for trial. Defendants argued to the US Supreme Court that the Second Circuit erred in two respects: (1) by concluding that the generic nature of alleged misrepresentations is irrelevant to the price impact analysis; and (2) by placing the burden of persuasion on Defendants to prove a lack of price impact.
Justice Barrett, writing the opinion of the Court (joined in full by Chief Justice Roberts as well as Justices Breyer, Kagan, and Kavanaugh), began by explaining that if a misrepresentation had no price impact, then Basic’s fundamental premise “completely collapses, rendering class certification inappropriate.” The Court then noted that Plaintiffs had conceded that the generic nature of an alleged misrepresentation often will be important evidence of price impact. Accordingly, the Court held 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.”
While there was agreement on these basic principles, the parties disagreed about whether the Second Circuit properly considered the generic nature of the alleged misstatements in its class certification analysis and decision. The Court held that because “the Second Circuit’s opinions leave us with sufficient doubt on this score, we remand for further consideration.” The Court further stated, “On remand, the Second Circuit must take into account all record evidence relevant to price impact, regardless whether that evidence overlaps with materiality or any other merits issue.”
The Court’s decision also reaffirmed that the defendant in a securities class action has the burden of persuasion to rebut the fraud-on-the-market presumption of reliance by establishing that the purported misstatements “in fact” did not impact the company’s stock price. To accomplish this, the defendant must “sever the link” between a misrepresentation and the stock price, and the defendant’s “mere production of some evidence” is insufficient. Writing for the Court, Justice Barrett explained, “If, as [Defendants] urge, the defendant could defeat Basic’s presumption by introducing any competent evidence of a lack of price impact—including, for example, the generic nature of the alleged misrepresentations—then the plaintiff would end up with the burden of directly proving price impact in almost every case.”
Justice Sotomayor did not join the Court’s decision to vacate and remand because, although she agreed with much of the majority’s ruling, she found that the Second Circuit properly considered the generic nature of Goldman’s alleged misrepresentations.
Justice Gorsuch, joined by Justices Thomas and Alito, dissented from the Court’s holding that the defendant bears the burden of persuasion to rebut the fraud-on-the-market presumption of reliance. In the dissenting opinion, Justice Gorsuch stated that in rebutting the Basic presumption, the defendant should only bear the burden of production: the duty to present evidence to the court. Justice Gorsuch noted that reliance is an element of the plaintiff’s claim, and under Federal Rule of Evidence 301 and related principles of law, evidentiary presumptions do not shift the ultimate burden of persuasion.
In the context of securities fraud class actions, the dissenting opinion reasoned that reliance is an element of the plaintiff’s claim, and therefore, the “plaintiff at all times bears the ultimate burden of persuasion” as to that element of the claim. Accordingly, the dissenting opinion stated that if a securities class action defendant produced evidence that, if believed, would support a finding that the plaintiff did not actually rely on its alleged misrepresentation, the presumption of reliance should drop from the case. In these circumstances, “the trier of fact must decide the question of reliance vel non, cognizant of the fact the plaintiff bears the burden of proving reliance like any other essential elements of its claim.”
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Brian A. Herman