Arkansas Teachers Retirement System v. Goldman Sachs
Date: Aug. 10, 2023
Issue: Whether the district court misconstrued the Supreme Court’s decision in Goldman Sachs Group v. Arkansas Teacher Retirement System, in certifying the class action.
Case Summary: In a unanimous (3-0) decision, a Second Circuit panel decertified an investor class action against Goldman Sachs, concluding it rebutted the presumption of reliance with evidence the generic alleged misstatements had not impacted the company’s stock price.
To prevail on a claim under Section 10(b) of the Exchange Act, a plaintiff must prove, among other things, a material misrepresentation or omission by the defendant and the plaintiff’s reliance on that misrepresentation or omission. As to reliance, plaintiffs may invoke the “Basic presumption”—a rebuttable presumption that an investor presumptively relies on a misrepresentation if it was reflected in the market price at the time of his transaction.
This dispute spans more than a decade, has been presented to the Second Circuit four times, and reached the Supreme Court. In 2010, the Security and Exchange Committee brought an enforcement action against Goldman. In response, Shareholder plaintiffs filed a putative securities-fraud class action in 2010, alleging Goldman maintained an artificially inflated stock price by making statements about conflicts management—“we have extensive procedures and controls that are designed to identify and address conflicts of interest”—and publishing aspirational business principles—“integrity and honesty are at the heart of our business.” Goldman Sachs’ stock price did not go up when the challenged statements were made. It did drop following the alleged corrective disclosures.
At class certification, the shareholders invoked the Basic presumption. Goldman presented expert evidence showing: dozens of pre-corrective disclosure statements criticizing the company’s conflicts practices did not cause the stock price to drop; and news of the regulatory actions caused the stock drops, rather than the corrective disclosures. Goldman also argued the statements were so generic they could not impact its stock price. The district court certified the class, which the Second Circuit affirmed.
In 2021, the Supreme Court ruled, in an 8-1 decision written by Justice Amy Barrett, that courts should consider the genericness of challenged statements at the class certification stage. The Court reasoned where plaintiffs are proceeding on an “inflation maintenance” theory—meaning they are using a stock drop that occurred when a statement is allegedly corrected, rather than an increase when the statement was made to show the statement’s price impact—the court should consider whether the statement and the correction sufficiently “match.” The Court also reasoned the severity of the mismatch between the two may cast doubt on whether the price movement results from the challenged statement.
After the Supreme Court’s decision, the Second Circuit remanded the case to the district court, which certified the proposed class again. Applying the Supreme Court’s Goldman decision, the court concluded Goldman’s alleged misstatements were “not so generic as to diminish their power to maintain pre-existing price inflation.” Afterward, the Second Circuit granted Goldman’s Rule 23(f) petition for interlocutory review. ABA and a group of trades (Amici) urged the Second Circuit to reverse the district court’s certification order because it: misconstrued the Supreme Court’s opinion; understated the generality of Goldman’s alleged misstatements; and did not properly consider whether narrow disclosures made years later “mismatched” the generic and aspirational front-end statements at issue.
The Second Circuit reversed the district court’s class certification order and remanded with instructions to decertify the class. The Second Circuit ruled the district court misapplied inflation maintenance theory and failed to rebut the Basic presumption by a preponderance of the evidence. The Second Circuit concluded there was “an insufficient link between the corrective disclosures and the alleged misrepresentations.” The Second Circuit first explained the district court erred in construing Goldman’s generic statements of business principles along with the challenged statements about conflicts controls. It reasoned those statements were made “in separate reports at separate times” with no evidence the statements “piggybacked” off each other.
As to Goldman’s statements about conflicts management, the Second Circuit ruled the district court misapplied its precedent on the inflation-maintenance theory recognized in In re Vivendi Securities Litigation (2016). According to that theory, a plaintiff can show a defendant’s misstatement affected the defendant’s stock price if it caused the price to remain at an inflated level—i.e., by preventing an inflated stock price from dropping.
The Second Circuit explained such an inference is possible where the corrective event has “directly rendered false” a company’s earlier misstatement. However, the Second Circuit noted if the corrective disclosures do not identify the alleged misrepresentations as false, then the inference “is on shakier ground.” In its view, the Supreme Court’s Goldman decision “requires courts pay special attention to mismatches in specificity between a misstatement and corrective disclosure.”
The Second Circuit observed “not one of the corrective disclosures here expressly identifies either the business principles statements or conflicts disclosure.” It explained there was a “considerable gap in specificity” between the alleged misstatements and corrective disclosures. Rather than asking what would have happened had defendants spoken truthfully “at an equally generic level,” the Second Circuit explained the district court erred by substituting the details and severity of the purported “corrective disclosures” in place of the generic alleged misstatements.
Bottom Line: For securities class actions surviving a motion to dismiss, the class certification motion is typically the next opportunity for defendants to defeat the class claims. The Second Circuit’s decision makes clear courts must carefully consider a defendant’s price impact defense.