Goldman Sachs wants a reversal after the Second Circuit gave class status to investors without making them show that the bank’s misstatement actually led to any stock inflation.
WASHINGTON (CN) — Sued by investors over its inflated stock price, Goldman Sachs urged the Supreme Court on Monday to raise the class-certification bar for an increasingly popular theory of fraud.
“The court of appeals upheld the certification of a securities class action based on exceptionally generic and aspirational statements in the face of overwhelming and unrebutted evidence that the statements had no impact on the stock price,” argued Kannon Shanmugam with the firm Paul Weiss.
Back when he petitioned the court to hear the case, Shanmugam distinguished the suit led by the Arkansas Teacher Retirement System from a traditional securities class action where investors allege that a company’s misstatement inflated its stock price.
Here, it’s alleged Goldman Sachs shares were already inflated at the time of a misstatement. But for the misstatement, the pension alleges, the price would have decreased. Shanmugam says the Supreme Court has never recognized this “inflation-maintenance theory,” and that the Second Circuit shifted the burden of persuasion on price impact when it upheld class certification last year. Advancing this plaintiff-friendly style of securities litigation, he warned, portends “devastating practical consequences for public companies.”
Given that the vast majority of securities class actions settle once class certification is granted, Shanmugam Sachs said that the “cheap ticket to class certification is a boon for plaintiffs (and their lawyers).”
Justice Neil Gorsuch grilled the pension’s attorney Monday over what to do when a company comes forward with direct evidence, as Goldman Sachs did in this case, that a given misstatement did not affect price.
It may be that the pension has evidence to rebut that, he said, but shifting the burden of proof onto the defendant might otherwise allow the plaintiff “to do nothing and just rest on the presumption that there’s a price impact in the face of direct evidence that there wasn’t.”
Thomas Goldstein, an attorney for the $20 billion pension fund, maintained that the Second Circuit decided the case correctly. “All that’s necessary is to issue an opinion and clarify any ambiguity that you perceive,” said Goldstein, who is with the firm Goldstein & Russell in Bethesda, Maryland.
Goldstein’s clients brought the case after the Securities and Exchange Commission sued Goldman Sachs for securities fraud in 2010, saying the company had misled investors regarding an investment deal that lost value during the Great Recession.
The bank ultimately paid a $550 million fine — the largest penalty ever paid by a Wall Street firm at the time, admitting that it had failed to disclose to investors that the portfolio in question had been put together at the urging of Paulson & Co. Inc., a company that would make money if the value later dropped.
On the day the SEC took action against Goldman Sachs, the company’s stock fell to $160.70, down from $184.27 the day before.
Supreme Court case law stipulates that plaintiffs can file security fraud suits if they relied on public statements by a company when buying or selling securities that were later proven false. It is up to the defendants then to prove that the disputed statements did not affect the stock’s price.
Though the government has not come out for either party, Assistant U.S. Solicitor General Sopan Joshi argued at Monday’s hearing to urge that the high court clarify what the law is for parties as to how the generic nature of a statement might be used in securities fraud cases.
“Price impact requires comparing the actual price to what the price would have been had there been no deceit. And so the nature of the deceitful statement is relevant, though not by itself dispositive,” Joshi said.
All that is left for the justices to resolve, he added, is “whether the generic nature of a misstatement must be introduced solely through expert evidence.”
“In our view, there’s no sound reason to impose that kind of artificial limits,” he said. “The more generic a statement is, the less likely it is to have had a price impact. There’s nothing wrong with the courts taking that likelihood into account as part of its calculus about which one of two competing narratives to credit.”
Goldstein noted in his brief for the retirement fund that Goldman Sachs made false statements about its business practices, including that it was “dedicated to complying fully with the letter and spirit of the laws,” and that this caused harm to the investors he represents.
“We’re just embracing the Second Circuit’s decision in this case,” he said Monday.
Shanmugam urged meanwhile that judges are allowed to use “common sense” when considering the nature of the allegedly false statements prior to class certification.
“Generic statements such as these are pervasive in the market,” Shanmugam said.
The argument was not a clear one, however, for Justice Sonia Sotomayor. “What I think you’re arguing is that a judge may rely on common sense and intuition in determining whether a statement is generic,” she said.
Justice Amy Coney Barrett also questioned Shanmugam, implying that the bank’s argument that judges should use common sense to determine questions generically would be difficult to do with experts.
“It seems to me very unlikely that any defendant in a class action like this is not going to bring in experts on the question of how the generality of this statement might have affected the price, whether inflating it or causing it to spike. The only dispute then is just the method of proof,” she said.
And the lawyer faced additional pushback from Justice Samuel Alito.
“Do you think there can never be a statement that is so bland, that there can never be reliance [on it]?”
“When you have a statement like this, it is unlikely to affect the market price, and the fact that a statement is unlikely to affect the market price, as the government explains at some length in its brief, tends to show that the statement did not affect the market price, in actuality,” Shanmugam said.