From Ronald Mann
on March 31, 2021
at 7:45 a.m.
Kannon Shanmugam argues for the Goldman Sachs Group (Art Lien)
Monday’s argument in the Goldman Sachs Group v Arkansas Teacher Retirement System case did not do much to clarify what, if anything, the judges will decide in this chaotic and seemingly endless piece of securities dispute.
As I explain in more detail in my preview, the case contains two technical questions about standards of evidence and the burden of proof in securities lawsuits. The key procedural problem is deciding when a class-based decision in securities fraud disputes is appropriate. In general, a class-based decision is appropriate only when common issues “outweigh”, and we know from the 1988 Supreme Court decision in Basic Inc. v Levinson that the courts will consider them to “outweigh.” if the case of misrepresentation on stock trading calls into question a public and well-functioning market. Crucially, Basic tells us that defendants can rebut this presumption if they can show that the misrepresentation “did not distort prices.” The defendants care so much about the problem because once a class action lawsuit is upheld it is almost inevitable that they will be forced to settle down.
Goldman Sachs is asking the court to explain exactly what a defendant can do to rebut this presumption. A group of shareholders, led by the Arkansas Teacher Retirement System, allege that Goldman Sachs made a number of false statements that artificially supported stock prices. Goldman Sachs argues that the statements were so boring (“generic”) that they could not have influenced the price of the shares in any discernible way. “Our customers’ interests always come first.” “Integrity and honesty are at the core of our business.” “We have extensive procedures and controls in place to identify and address conflicts of interest.” The first question to ask the court is to what extent the generosity of these statements helps Goldman Sachs determine that the statements did not affect stock prices. The second question is which party bears the ultimate burden of conviction if Goldman Sachs’ evidence is sufficient to disprove the presumption.
It is difficult to give a concise assessment of the meandering and scattered argument that the judges heard Tuesday. With apologies for what will appear inappropriately, I can say at most that three general issues dominated the discussion, the first and most substantive of which concerned the relationship between the materiality of the statements and the likelihood that they would affect price. On the one hand, we know from a previous decision (Amgen vs. Connecticut Retirement Plans) that the plaintiff does not need to demonstrate materiality in the class certification phase. On the other hand, evidence that investors would not consider generic statements to be material strongly suggests that the statements would not affect price. In the lower court’s view, passages in this case suggest that since plaintiffs are not required to prove materiality at this point, the defendants are not entitled to assert themselves by refuting materiality, even if evidence is presented to prove that the Statements the standard price. Several judges strongly opposed this idea.
For example, Judge Clarence Thomas admitted that “Amgen … believes the plaintiff is not required to demonstrate materiality at the classification stage,” but questioned whether that rule “should prevent the defendant from determining materiality.” to refute “. Justice Amy Coney Barrett followed the same line of reasoning, stating, “If a statement is insignificant, it’s far less likely that it will actually have an impact on price, isn’t it?” Justice Samuel Alito was even clearer. When Tom Goldstein (representative of plaintiffs who had invested in Goldman Sachs securities) warned that the discussion of materiality should dominate the class certification phase, Alito immediately asked if he was arguing that, “When considering whether the If the basic presumption has been rebutted, this may not take into account evidence that would also relate to the question of materiality. “When Goldstein admitted that this was going too far, Alito asked if Goldstein would accept Thomas and Barrett’s view:” Should we say the opposite? That there is no reason to ignore evidence that would refute the basic presumption just because it also addresses the issue of materiality? “
Justice Brett Kavanaugh spent much of his time testing certain formulations of an answer to this problem. For example, in exchange with Kannon Shanmugam (Goldman Sachs representative), Kavanaugh appeared to agree with Shanmugam that “the generic nature of the alleged misrepresentation is strong evidence of the lack of price impact. They also use “critical” or “important”. What is your preferred adjective? “His later questions suggested that he had opted for the adjective” important “when he asked both Sopan Joshi (federal government representative) and Goldstein if they would agree that” the generic nature of an alleged misrepresentation is important evidence of a lack of price impact. ”His more elaborate comments suggest that, like Alito, Thomas, and Barrett, he thinks the answer is clear:
I think we’re here, in part because of the confusion in some of the lower courts about how to read amgen and [a 2014 decision in Halliburton v. Erica P. John Fund] together. On the one hand, do not consider the materiality. On the other hand, do not consider any indications of a lack of price impact. And the problem, as you know, is that the two requests overlap a lot. Can we say that the fact that the evidence of the lack of price impact from generic claims overlaps materiality does not matter?
A second issue was frustration at the narrow and changing basis of disagreement between the parties, which some judges believed suggests that the case is barely worth settling. The problem is that both sides have severely constrained their positions in the course of litigation. Goldman Sachs originally argued that generic statements were categorically incapable of having a price impact, but only argued that their genericity is evidence that there is no price impact. Conversely, the plaintiffs have claimed below that the generality of the statements is completely irrelevant. Now plaintiffs agree that genericity is relevant, but argue that defendants can only rely on expert testimony and not on evidence or inferences from the testimony themselves. For Barrett, among others, the difference between the two parties seemed “quite narrow” be. “So the only argument between you is whether the judge can only rely on common sense or expert testimony,” she said. “Am I right?” Similarly, Chief Justice John Roberts asked if there was “daylight to the substantive issue between the two of you regarding the general statements”. Judge Stephen Breyer suggested that at this point in the dispute “everyone agrees” that the correct answer to the first question is that the courts “should take the testimony for what it is worth.” Listen to the experts and don’t check your common sense at the door. That’s what judges do. Why do we hear this problem? “
Judges Sonia Sotomayor and Elena Kagan did not seem convinced that the US Circuit Court of Appeals had even taken the extreme position that Goldman Sachs ascribes to it (this generosity is completely irrelevant). Sotomayor, for example, pointed out to Shanmugam that he “argued below that, for legal reasons, generic statements cannot have an impact on price”. For them, “read in context,” responded to the two statements in Circuit 2 that the Goldman Sachs challenges merely responded to Goldman Sachs’ previous position in the litigation. Sotomayor repeatedly emphasized statements from an earlier statement by the 2nd Circuit which, in her view, spelled out the correct rule more clearly than the statement reviewed this week: “Wouldn’t it be the most efficient answer to state the law and the best way to read the Circuit 2 opinion is the way it was said the first time and just let this problem end … and move on with the case? “As Kagan put the same point:” It is difficult to find the correct statement of the law in the second opinion. You have to go back to the first opinion to find the correct statement of the law. Why shouldn’t we just evacuate and say, “Here is what the law really is. We want you to make sure you do this under this reasonable standard. “
A third issue is concerns about the “inflation maintenance” theory of securities fraud on which this case (and many others) is based. According to this theory, plaintiffs do not have to prove that the allegedly false statements drove up the price; All you need to do is demonstrate that an adverse event caused the price to drop and point out previous false statements that helped the securities maintain an inflated price. Roberts and Thomas were deeply skeptical of this theory. Thomas, for example, was doubtful that “the basic assumption [should] apply even if the cause of the allegedly excessive price has never been identified. “Both also urged Joshi how to defend the idea that a generic statement like” We’re a nice company “could be treated as a” fraudulent statement “.
So many tangents were attacked by the various judges during the dispute (many of them were not even mentioned in this already lengthy article) that it is not at all obvious which line of analysis the court will ultimately adopt. A decision is expected by the summer.
[Disclosure: Goldstein & Russell, P.C., whose attorneys contribute to SCOTUSblog in various capacities, is counsel for the Arkansas Teacher Retirement System in this case. The author of this article is not affiliated with the firm.]