Supreme Court Tackles the Element of Shareholder Reliance In Securities Fraud Class Action

The Supreme Court of the United States dealt a blow – at least for now – to plaintiff shareholders as part of its long-awaited June 21, 2021 decision in Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System.

The Plaintiffs, all Goldman shareholders, filed this securities fraud class-action suit against Goldman in Federal court back in 2011. They alleged that Goldman had misrepresented itself in violation of Section 10(b) of the Securities Exchange Act of 1934, leading to an inflated stock price. [1] The Plaintiffs asserted that Goldman’s misrepresented itself by stating “[o]ur clients’ interests always come first” and touting their “extensive procedures and controls that are designed to identify and address conflicts of interest.” [2]

The Plaintiffs alleged that these statements were false or misleading to shareholders, since Goldman was engaged in conflicted transactions at the time the statements were made. [2] Once the public was made aware of these conflicts following a government enforcement action, Goldman’s price dropped, which the Plaintiffs allege caused them to lose a combined $13 billion. [3]

The issues presented in this case revolve around the Plaintiffs gaining class certification, which would allow their case to move forward as a class-action lawsuit. In order to gain class certification, the plaintiffs invoked the Basic presumption, which lets the court presume class-wide reliance on the defendant’s alleged misrepresentations so long as specific prerequisites are met. [4] Goldman rebutted the Basic presumption by attempting to prove that the alleged misrepresentations had no impact on the price of their shares, particularly considering their generic nature. [4]

Thus, the Court was presented with two questions relating to the class certification stage of a securities fraud class-action lawsuit: first, whether the generic nature of a misrepresentation is relevant to the question of whether the misrepresentations had any price impact; and second, which party bears the burden of persuasion to prove a lack of price impact. [2]

Ultimately the Court held that the generic nature of a misrepresentation is indeed relevant to the question of price impact. [2] The Court also held that the defendant bears the burden of persuasion to prove a lack of price impact by a preponderance of the evidence. [2] As a result, the case was vacated and remanded to the Second Circuit for further consideration of whether the generic nature of Goldman’s alleged misrepresentations was properly considered by the Second Circuit. [2]

This decision strips, at least temporarily, the Plaintiffs of the class certification previously granted by the Second Circuit, creating yet another obstacle on their path to recovering damages. Importantly, the decision also provides valuable insight into how the 6-3 Conservative-leaning Supreme Court approaches shareholder class-action lawsuits. The Court’s opinion authored by Justice Amy Coney Barrett seems to signal support for businesses over shareholders in class-action lawsuits such as this one.

By the time this case reached the Supreme Court, both parties to this suit were widely in agreement that the generic nature of a misrepresentation is indeed relevant and important to answering the question of price impact. However, the Court was deliberate in its stance that, counter to Goldman’s assertion, the Defendant bears the burden of persuasion when attempting to rebut the Basic presumption at the class certification stage. [2]

Looking forward under this ruling, Plaintiff shareholders filing class action lawsuits may need to work a bit harder to prove the reliance necessary to grant them class certification, but defendants still bear the burden of persuasion when it comes to disproving the plaintiffs’ theory.

Sources: [1] https://www.natlawreview.com/article/scotus-finds-while-defendants-carry-burden-proof-overcoming-basic-s-presumption [2] https://www.supremecourt.gov/opinions/20pdf/20-222_2c83.pdf [3] https://www.reuters.com/business/finance/us-supreme-court-tosses-class-action-ruling-against-goldman-sachs-2021-06-21/ [4] https://www.arnoldporter.com/en/perspectives/publications/2020/12/scotus-to-clarify-presumption-of-class-reliance