On The Case

What are the stakes in the Goldman Sachs shareholder class action case at SCOTUS?

(Reuters) - The U.S. Supreme Court agreed Friday to hear what the investment bank Goldman Sachs has called “the most important securities case to come before the court” since the justices left intact the essential framework of shareholder class actions in 2014’s Halliburton v. Erica P. John Fund. The justices will review a split 2020 decision by the 2nd U.S. Circuit Court of Appeals, which upheld the certification of a class of Goldman Sachs shareholders to proceed with claims that the bank lied to shareholders when it touted its business principles and procedures for averting conflicts with investors.

Goldman’s counsel at Paul, Weiss, Rifkind, Wharton & Garrison pitched the case to the Supreme Court as an opportunity to correct a misreading of its Halliburton precedent before plaintiffs lawyers run wild with a theory of shareholder class actions that the Supreme Court has never even recognized. In Halliburton, Goldman argued, the Supreme Court held that defendants can defeat class certification by showing that their alleged misrepresentations did not impact their share price. According to Goldman, there’s no way that investors relied on its anodyne statements of business principles. By refusing to consider the nature of the alleged misrepresentations in the Goldman case, the 2nd Circuit majority defied Halliburton and gave shareholder lawyers a glide path to class certification, Goldman argued.

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Shareholders’ counsel from Goldstein & Russell retorted in a brief opposing Supreme Court review that the 2nd Circuit was following the Supreme Court’s own precedent in 2013’s Amgen v. Connecticut Retirement Plans. “In Amgen, this court could not have been clearer that plaintiffs are ‘not required to prove the materiality of (a defendant's) alleged misrepresentations and omissions at the class-certification stage,’” the opposition brief said, quoting the Supreme Court’s Amgen ruling. Shareholders downplayed the significance of the question Goldman presented, arguing that defendants in securities class actions can contest the materiality of alleged misstatements when they first move for shareholder cases to be dismissed. And if the statements are truly immaterial, shareholders said, then defendants ought to be able to muster evidence that the revelation of their falsity did not impact share price.

At least four justices agreed with Goldman that the Supreme Court has to look again at the interplay between its Halliburton and Amgen precedent – which, as the 7th Circuit held in July in In re: Allstate Securities Litigation requires trial judges to “split some very fine hairs.” (Notably, Justice Amy Coney Barrett was on the 7th Circuit’s Allstate panel before she was elevated to the Supreme Court, although she did not write the opinion.) The Allstate decision -- which Goldman and shareholders both cited throughout their briefs – was refreshingly frank about how hard it has been for lower courts to reconcile Amgen’s prohibition on considering the materiality of alleged misstatements with Halliburton’s leeway for defendants to contest the price impact of alleged misrepresentations.

The case, in other words, should bring some clarity to a murky aspect of securities class action litigation. The question is whether that clarity will help shareholders or defendants.

The Goldman case, as you probably recall, stems from the bank’s sale of complex collateralized debt obligations it assembled with the assistance of the hedge fund Paulson & Co. Goldman did not disclose to investors that Paulson was involved in structuring the CDOs – not that Paulson had essentially bet on the CDOs to fail. Goldman ended up reaching a $550 million settlement with the Securities and Exchange Commission in 2010 over the CDOs, which included the infamous Abacus security. The bank’s shareholders, led by the Arkansas Teachers Retirement System, alleged that revelations about the CDOs exposed the falsity of Goldman Sachs’ statements about avoiding conflicts of interest and putting its clients’ interests first. Goldman’s exposure in the shareholder class action, according to the bank’s filings at the Supreme Court, is as much as $13 billion.

Shareholders’ theory in the Goldman case is a bit of twist on the classic model of securities fraud class actions, in which a defendant’s share price rises in response to a corporate announcement and then falls when the announcement turns out to be false. Goldman’s shareholders instead asserted that the bank’s share price was maintained at an artificially high level because investors trusted Goldman’s long-running assurances about its ethical conduct. When news of Paulson’s influence on the CDOs emerged, shareholders alleged, the fall in Goldman’s share price revealed the impact of the bank’s alleged misrepresentations.

Price-maintenance class actions like the Goldman case are increasingly common. That’s why Goldman contends the stakes are so high at the Supreme Court. According to the bank -- and the business lobby, which has stood by Goldman’s side during two trips to the 2nd Circuit and in certiorari briefing at the Supreme Court – price-maintenance theories allow shareholders to claim fraud without showing that a specific corporate announcement drove the share price up. And, according to Goldman and its amici, by allowing shareholders to proceed as a class based on the alleged falsity of generic statements of business principles, the 2nd Circuit has exposed companies to price-maintenance securities class actions whenever their share price falls in response to negative news.

“This theory,” said Columbia law professor John Coffee in an email to my colleague Nate Raymond, “spares the plaintiffs from having to prove a specific impact on the stock price.” The Supreme Court has never examined a shareholder class action asserting that the defendant’s share price was artificially propped up by misrepresentations, Coffee said, so the justices’ eventual decision could thwart this burgeoning form of securities litigation.

Or not. Shareholders, after all, argued in their brief opposing certiorari that Goldman had plenty of chances to show that the statement at the heart of the case didn’t matter to shareholders. It argued as much in its motion to dismiss the suit, which failed. And it had an opportunity, as required by the Supreme Court’s Halliburton decision, to rebut shareholders’ evidence of price impact in contesting class certification, shareholders said. The bank’s evidence, including expert studies on why its share price dropped after Abacus revelations, simply failed to persuade the 2nd Circuit that its alleged misrepresentations didn’t affect the share price, according to shareholders.

Shareholder counsel Thomas Goldstein told me by email that the Supreme Court, after all, has already heard defendants argue back in the Amgen case that they should be permitted to challenge materiality to defeat class certification. The court rejected those arguments then, Goldstein said, and should do so again in the Goldman case.

“Goldman’s concern that it needs to be able to disprove materiality early in the case is a red herring, because a defendant can make that motion at any time in a motion to dismiss, including pre-certification,” Goldstein said. “Goldman tried that here, and the district court correctly found that its statements were material.” Goldstein also said that it is “bizarre” for the bank to insist that its shareholders “would have disbelieved its own denials that it had massive, undisclosed conflicts of interest in betting against its own customers.”

Goldman Supreme Court counsel Kannon Shanmugam of Paul Weiss and longtime counsel Robert Giuffra of Sullivan & Cromwell declined to comment.