By Mark S. Nelson, J.D.
The Supreme Court in June 2021 remanded Arkansas Teacher Retirement System’s securities fraud case against Goldman Sachs Group, Inc. so that the Second Circuit could reconsider the generic nature of alleged misstatements made by Goldman Sachs about its ability to police conflicts of interest that were the basis for the suit. Said the Supreme Court: "On remand, the Second Circuit must take into account all record evidence relevant to price impact, regardless whether that evidence overlaps with materiality or any other merits issue" (emphasis in original). Both parties have submitted supplemental briefing ordered by the Second Circuit in light of the Supreme Court’s opinion, although the appellate court has not yet granted additional oral argument in the case (Arkansas Teacher Retirement System v. Goldman Sachs (Plaintiff Supplemental Brief; Defendant Supplemental Brief), August 10, 2021).
The Supreme Court had confirmed that a defendant bears the burden of persuasion by a preponderance of the evidence regarding price impact in securities cases (the justices further explained that "[t]he defendant’s burden of persuasion will have bite only when the court finds the evidence in equipoise—a situation that should rarely arise"). Moreover, the Supreme Court said that courts may consider more evidence of materiality, as it relates to price impact, at the class certification stage, Amgen’s more general admonition to the contrary, including the genericness of alleged misstatements, the latter point being something the parties had agreed on by the time the Supreme Court heard the case. The parties, and the Supreme Court, also had agreed that common sense should apply in assessing whether a generic statement had price impact.
The Second Circuit had previously taken a second look at the case and a majority of the panel upheld the district court’s class certification. One judge dissented, arguing that the majority should have considered more of the evidence regarding materiality in deciding the issue of price impact.
Goldman Sachs says evidence on its side. According to Goldman Sachs, the Supreme Court’s opinion merely confirmed its prior arguments about why generic statements by Goldman Sachs could not have produced the stock price inflation alleged by the plaintiffs. As a result, Goldman Sachs urged reversal of the district court’s certification of a class.
Citing the notion that specific statements are more likely than generic statements to affect price, Goldman Sachs argued that the generic statements alleged to have been made by Goldman Sachs about the propriety of its business practices were "at the most generic end of the spectrum." Goldman Sachs also argued that the several generic statements identified by the plaintiffs did not match the three alleged corrective statements, each of which dealt with either a government investigation or further disclosures by Goldman Sachs about one of two collateralized debt obligations (CDOs). Specifically, Goldman Sachs noted that the generic statements did not mention the subject matter of the corrective disclosures.
Moreover, Goldman Sachs argued that there was no evidence of price impact. For one, Goldman Sachs said the plaintiffs’ expert never assessed how Goldman Sachs’s stock price became inflated or how well the generic statements matched the corrective disclosures. One of Goldman Sachs’s experts had opined that a study of prior disclosures of alleged conflicts indicated such disclosure had no price impact and, thus, no price impact could have occurred in this case. Another Goldman Sachs expert opined that the actual cause of Goldman Sachs’s stock price drop was the revelation of multiple government investigations.
Plaintiffs tackle logic of Supreme Court opinion. While Goldman Sachs largely argued that the evidence supported its view that generic statements about its conflict management practices could not have resulted in the alleged price inflation, the plaintiffs, while also countering that evidence, also addressed the logic of the Supreme Court’s explanation of genericness. The plaintiffs made two observations: (1) the dissenting judge in the second Second Circuit opinion suggested that a generic statement along with other evidence could show lack of price impact; and (2) the district court had rebuffed much of Goldman Sachs’s experts’ testimony as "uninformative and unreliable." According to the plaintiffs, that meant Goldman Sachs could win now only if genericness alone can meet Goldman Sachs’s burden of persuasion.
The plaintiffs further explained that a better question to ask is what would have happened if Goldman Sachs had told the truth about its conflict management practices. The plaintiffs said Goldman Sachs would have to show that the market would not have reacted to the truth. However, the plaintiffs added that, citing the Second Circuit, common sense suggests that Goldman Sachs’s shareholders would not have been "indifferent" to the firm’s alleged failure to prevent conflicts. Rather, Goldman Sachs’s statements about conflict management "were specific reassurances" regarding its ability to manage conflicts.
Lastly, the plaintiffs argued that the evidence cited by Goldman Sachs could not support a finding of lack of price impact. In the case of one defense expert, the plaintiffs said that expert’s reports lacked detail. In the case of another expert relied on by Goldman Sachs, the plaintiffs said that expert failed to address two of the three alleged corrective disclosures.
The case is No. 18-3667 (Plaintiff Supplemental Brief and Defendant Supplemental Brief).