Friday, August 27, 2021

Goldman generic-statements case heads back to district court

By Anne Sherry, J.D.

After multiple trips back and forth between the district court, appeals court, and Supreme Court, the Second Circuit once again determined that a fraud class action against Goldman Sachs under the inflation-maintenance theory should return to the district court. The litigants had refined their arguments but still disagreed on issues of fact best decided by the district court, and the Supreme Court’s explanation of the legal standards would aid the district court in its review of the record evidence. On remand, the district court should consider all record evidence relevant to the impact (or lack thereof) of Goldman’s statements on its stock price (Arkansas Teacher Retirement System v. Goldman Sachs Group, Inc., August 26, 2021, per curiam).

The case concerns statements that Goldman made about its conflicts-of-interest policies and practices in SEC filings between 2006 and 2010. According to the plaintiffs, the statements about Goldman’s intent to comply with the law and its maintenance of procedures and controls to address conflicts were misleading because Goldman had pursued conflicted transactions during the relevant period. The lawsuit alleges that the statements maintained an already inflated stock price (the "inflation maintenance" theory) and that subsequent corrective disclosures caused a price drop. But Goldman countered that the statements were generic and aspirational and tried to rebut the Basic presumption of reliance by showing that the statements did not impact its stock price.

The district court certified the class, but the Second Circuit vacated and remanded after concluding that the district court had not properly applied the preponderance-of-the-evidence standard under Halliburton II (U.S. 2014). On remand, the district court again certified the class, and a divided Second Circuit panel affirmed. In doing so, the appellate panel held that Goldman’s attempt to exclude general statements from the inflation-maintenance theory as a matter of law too closely resembled the materiality inquiry, which is inappropriate at the class certification stage. But the Supreme Court kicked the case back to the appeals court, directing the Second Circuit to consider all record evidence relevant to price impact, whether or not it overlapped with materiality or any other merits issue.

Remand to remand. On remand, the Second Circuit considered that it could not reverse the district court’s findings of fact unless clearly erroneous. However, the arguments in the case had shifted: in its petition for certiorari, Goldman had abandoned its argument that the inflation-maintenance theory should not apply to generic statements as a matter of law, instead arguing that the generic nature of the statements is relevant to price impact regardless of any overlap with materiality, and the plaintiffs agreed. Therefore, by the time the Supreme Court ruled, the parties only disagreed about whether the Second Circuit had properly considered the generic nature of Goldman’s alleged misrepresentations.

The district court’s decision granting class certification did not discuss the generic nature of the statements in evaluating the evidence relevant to price impact, nor did it discuss the expert reports dealing with the generic nature of the statements. The parties’ supplemental briefs before the appeals court on remand confirm that their arguments implicate questions of fact better evaluated by the district court in the first instance.

The Supreme Court’s clarification of the legal standard also confirmed to the Second Circuit that it should remand the matter to the district court. The Court’s opinion supplemented the Second Circuit’s legal conclusions with new ideas, such as that expert testimony as well as common sense should guide the court in evaluating the evidence, and the Court agreed with the parties that a more general statement will have less of a price impact than a more specific statement on the same question. The Court also specified that the inference required for the inflation-maintenance theory begins to break down when there is a mismatch between the misrepresentation and the corrective disclosure (such as a generic misrepresentation followed by a specific correction). Finally, the Court agreed that Goldman bears the burden of persuasion but explained that the district court’s task is to assess all evidence of price impact and determine whether it is more likely than not that the statements had a price impact. Only if the evidence is "in equipoise" will the defendant’s burden of persuasion come into play.

Accordingly, the Second Circuit vacated the district court’s order and remanded for further proceedings. The district court is directed to consider all record evidence relevant to price impact and apply the legal standard as clarified by the Supreme Court.

The case is No. 18-3667.