WASHINGTON (CN) — Unwinding certification of a class of investors in a securities fraud case against Goldman Sachs, the Supreme Court called Monday for another look at whether the banking giant's misrepresentations were too generic to actually inflate its stock price.
“The Second Circuit correctly placed the burden of proving a lack of price impact on Goldman,” Justice Amy Coney Barrett wrote for the court in a 12-page opinion. “But because it is unclear whether the Second Circuit properly considered the generic nature of Goldman’s alleged misrepresentations in reviewing the District Court’s price impact determination, we vacate the judgment of the Second Circuit and remand the case for further proceedings consistent with this opinion.”
The Arkansas Teacher Retirement System brought the case after Goldman Sachs paid a $550 million fine — the largest penalty ever paid by a Wall Street firm at the time — in connection to a 2010 suit by the Securities and Exchange Commission over subprime mortgage transactions in the lead-up to the Great Recession. As part of the settlement, Goldman admitted that in one specific deal known as the Abacus transaction, it had permitted a favored client, Paulson & Co. Inc., to participate in the asset selection process for a CDO (short for collateralized debt obligation) without telling other investors that the client held a short position, and thus had a motive to select particularly risky mortgages that it hoped would fail.
Thomas Goldstein represented the $20 billion pension fund before the high court in March oral arguments. There, he said that the share price of Goldman Sachs would have decreased but for the misstatements about the bank's operational guarantees, including that Goldman Sachs was “dedicated to complying fully with the letter and spirit of the laws."
Goldman meanwhile sought a reversal after the Second Circuit affirmed class certification for the retired Arkansas teachers. Represented by Paul Weiss attorney Kannon Shanmugam, the bank called it undisputed that Goldman Sachs' share price was already inflated at the time of its misstatement.
“We are pleased the Supreme Court has vacated the grant of class certification and we will continue to vigorously defend ourselves as the case returns to the lower courts,” Maeve DuVally, a spokeswoman for Goldman Sachs, said in a statement Monday.
Goldstein did not respond to a request for comment.
The lead opinion from Barrett directs the Second Circuit to account on remand for “all record evidence relevant to price impact.” Monday's ruling was not a slam dunk for Goldman, however, with Barrett writing that it is the bank, rather than the investors, that bears the burden of persuasion on price impact at class certification.
This “will have bite,” she said, “only when the court finds the evidence in equipoise — a situation that should rarely arise.”
“Although the defendant bears the burden of persuasion, the allocation of the burden is unlikely to make much difference on the ground,” Barrett explained. “In most securities-fraud class actions, as in this one, the plaintiffs and defendants submit competing expert evidence on price impact. The district court’s task is simply to assess all the evidence of price impact — direct and indirect — and determine whether it is more likely than not that the alleged misrepresentations had a price impact.”
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.
The high court’s conclusion was fragmented with Chief Justice John Roberts joining Barrett in full alongside Justices Stephen Breyer, Elena Kagan and Brett Kavanagh. Justices Clarence Thomas, Samuel Alito, Sonia Sotomayor and Neil Gorsuch joined only in part, with Justices Sotomayor and Gorsuch each filling partial dissents.
In Sotomayor’s opinion Monday, she clarified that she thought the Second Circuit had properly considered the generic nature of Goldman’s alleged misrepresentations.
The Second Circuit, she wrote, did not say that “the generic nature of an alleged misstatement” couldn’t serve as evidence of price impact when it refused to adopt Goldman’s proposition that such statements cannot have a price impact as a matter of law.
“The Court nevertheless reads a handful of sentences in the Second Circuit’s opinion to create ‘doubt’ over whether the Court of Appeals refused to consider ‘all record evidence relevant to price impact,’” that 4-page opinion stresses.
Justice Gorsuch dove meanwhile into the burden that Goldman Sachs must bears when it comes to rebutting the investors presumption of reliance on its generic claims.
“Everyone accepts that, if a defendant undermines one of the assumptions on which it rests, the presumption dissipates," Gorsuch wrote, joined by Thomas and Alito. "So, for example, if the defendant’s alleged misrepresentation did not actually affect the market price, there can be no ground for presuming anyone relied on that misrepresentation when purchasing the stock."
Addressing Gorsuch’s dissent in the lead opinion, Barrett invoked the the 1988 Supreme Court precedent Basic Inc. v. Levinson and, from 2014, Halliburton Co. v. Erica P. John Fund.
These cases require that “the defendant must ‘in fact’ ‘seve[r] the link’ between a misrepresentation and the price paid by the plaintiff — and a defendant’s mere production of some evidence relevant to price impact would rarely accomplish that feat," Barrett wrote. (Emphasis in original.)
“If, as they 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,” Barrett added.
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