By Rodney F. Tonkovic, J.D.
An amicus brief filed by the attorney generals of sixteen states asks the Supreme Court to affirm the Second Circuit's holding in Goldman Sachs. The amici urge the Court to reject the petitioner's argument and uphold the Basic framework for evaluating price impact at the class certification stage.
The Goldman petition. At issue is whether a defendant in a securities class action may rebut the presumption of classwide reliance recognized in Basic Inc. v. Levinson by pointing to the generic nature of the alleged misstatements in showing that the statements had no impact on the price of the security, even though that evidence is also relevant to the substantive element of materiality. The petition in Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System asks the Court to reverse a decision by a divided Second Circuit panel rejecting Goldman Sach's position, concluding that a contrary rule would permit a defendant to smuggle materiality into a Rule 23 price-impact inquiry at the class-certification stage. The Court granted certiorari on December 11, 2020.
AG argument. The amici states, New Mexico, Delaware, Hawaii, Illinois, Maine, Michigan, Minnesota, Nebraska, New Jersey, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, Virginia, and Washington, as represented by their attorneys general, argue that the Second Circuit's judgment should be affirmed. According to the amici, the presumption set forth in Basic and refined in Amgen and the Halliburton cases is "grounded in factual evidence of how markets operate and how a statement affected a security's price." Goldman, the amici argue, is inviting the Court to replace this fact-based inquiry with judges' and litigants' "common sense" impressions.
The amici posit that class actions are a valuable enforcement tool, have a critical deterrent effect, and are critical to state funds' ability to recover when defrauded. Despite extensive research showing that securities class actions benefit investors and do not facilitate nuisance settlements, the petitioners claim that courts routinely allow immaterial claims to proceed to class certification, the amici say. If the Court adopted Goldman's suggested approach, defendants would have a chance to reargue legal theories that should have been raised earlier or should await resolution at a later stage. This re-writing of the Basic presumption, the brief says, would insulate corporations that commit securities fraud by reducing the ability to certify a class resulting in investors that lack sufficient resources being prevented from joining with others to seek relief.
The Court's current evidence-based framework for class certification works and should be adhered to, the amici contend. To allow the rebuttal of reliance by simply pointing to the generic nature of a statement would effectively overrule Halliburton II. "A defendant's legal argument that a statement is "generic," is not the kind of evidence Halliburton II permits," the brief says. This is also not an accurate reflection of how the markets work, the amici add, noting that reasonable investors can and do attach significance to very general statements (a point also made in the United States' amicus brief supporting neither party).
Finally, the amici take issue with Goldman's argument that once a defendant produces evidence of a lack of price impact, the burden of persuasion shifts to the plaintiff. This cannot be reconciled with Basic's statement that a defendant must prove a lack of price impact, not merely introduce evidence on the issue. Halliburton II reaffirmed the burden of persuasion and the obligation to rebut the presumption through evidence persuasively showing a lack of price impact.
Other amici support affirming. The AGs' brief is one of several filed on March 3, 2021 arguing that the judgment below be affirmed. The briefs make similar arguments concerning the fact that generic statements can have a price impact and that defendants seeking to rebut the Basic presumption should continue to bear the burden of persuasion.
In contrast, in early February 2021 a raft of amicus briefs were filed taking the opposite position and arguing that the Second Circuit's decision should be reversed or at least vacated and remanded. As noted above, the Department of Justice supported neither party but concluded that the case should be remanded for further consideration. The DOJ saw no reason to revisit Basic but wants to clarify whether the appellate court held—incorrectly in the DOJ's eyes—that the generic nature of the alleged misstatements is legally irrelevant to a court's determination of price impact. Certain of the other briefs filed at the same time made similar arguments and also took the view, based on Rule 301 of the Rules of Evidence, that the burden of persuasion remains with the original party.