- Law firms
(Reuters) - Why are defense lawyers so jazzed about the U.S. Supreme Court’s ruling on Monday in Goldman Sachs Group Inc v. Arkansas Teachers Retirement System?
The court’s primary holding, after all, shouldn’t have been much of a surprise. In a majority opinion by Justice Amy Coney Barrett, the Supreme Court ruled that before certifying shareholder classes, trial judges should consider a wide range of evidence, including the nature of a defendant’s alleged misrepresentations, to decide whether corporate misstatements distorted a company’s share price.
But there wasn’t really much dispute on that point by the time the case reached oral argument last March: Both Goldman Sachs and the shareholders who sued the bank back in 2010 for allegedly misrepresenting its business principles agreed that judges can use their common sense to weigh evidence at the class certification stage.
The Supreme Court majority, moreover, rejected a Goldman theory that might have radically changed the balance of power in securities class actions. Goldman had asked the court to find that defendants can block class certification by offering any evidence that alleged misstatements didn’t impact the company’s share price. Despite a partial dissent from Justice Neil Gorsuch that was joined by Justices Clarence Thomas and Samuel Alito, the majority left intact the essential framework of shareholder class actions, confirming that defendants bear the burden of persuasion when they attempt to show their alleged misstatements had no price impact.
Shareholder lawyers and advocates, including the Arkansas pension fund’s counsel at Robbins Geller Rudman & Dowd, hailed that part of the Supreme Court’s ruling. The Consumer Federation of America, American Association for Justice and Public Justice, for instance, said in a statement that the justices had “rejected Goldman’s cynical attempt to evade accountability by shifting the burden of proof onto investors.”
And though the court vacated the certification of the Goldman shareholder class, ruling that it wasn’t clear whether the 2nd U.S. Circuit Court of Appeals had properly considered the generic nature of Goldman’s alleged misstatements, investors’ Supreme Court counsel Thomas Goldstein of Goldstein & Russell seemed confident at oral argument that the class would be re-certified on remand.
So I ask again: Why do defense lawyers consider the ruling a boon for their side?
Because, according to Peter Morrison of Skadden, Arps, Slate, Meagher & Flom and Jessica Pulliam of Baker Botts, the ruling provides long-awaited clarification that lower courts can consider merits evidence before certifying the shareholder class. Judges have been reluctant to consider such evidence, Morrison and Pulliam said, because of the Supreme Court’s admonition in 2013’s Amgen Inc v. Connecticut Retirement Plans that plaintiffs need not prove materiality to be certified as a class. Amgen has blunted the impact of the Supreme Court’s ruling in 2014’s Halliburton Co v. Erica P. John Fund Inc, which held that defendants can defeat class certification if their alleged misstatements didn’t impact share price.
But the Goldman ruling, said Morrison and Pulliam, forecloses shareholder arguments that trial courts can’t consider merits evidence at the class certification stage. (The decision actually says in a footnote that lower courts “may not use the overlap” between price impact and materiality “to refuse to consider the evidence.)
“This ruling takes off the table the idea that the court has to shut its eyes to certain evidence,” said Morrison. “It clears the path for unvarnished analysis.”
The language of the Goldman opinion leaves no doubt that lower courts are entitled to be skeptical about the price impact of alleged misrepresentations regarding a company’s business principles. In the Goldman case, shareholders claimed that the bank’s share price was artificially propped up by its assurances that it puts customers first and avoids conflicts of interest. The class action asserts a so-called inflation-maintenance theory, arguing that Goldman shareholders lost billions when a government investigation of certain complex Goldman-sponsored, mortgage-backed securities revealed the falsity of its assurances.
The Supreme Court said the nature of alleged misstatements may be particularly important in inflation-maintenance cases. “That final inference – that the back-end price drop equals front-end inflation – starts to break down when there is a mismatch between the contents of the misrepresentation and the corrective disclosure,” Barrett wrote. “Under those circumstances, it is less likely that the specific disclosure actually corrected the generic misrepresentation, which means that there is less reason to infer front-end price inflation – that is, price impact – from the back-end price drop.”
Pulliam predicted that as corporations fall under increased pressure to issue generic statements about their environmental, social and corporate governance principles, the Goldman ruling will help defendants avert class actions accusing them of deceiving investors about their ESG practices. It’s now common for companies to face so-called event-driven shareholder fraud class actions whenever a corporate crisis leads to a drop in their share price. The Goldman ruling, Pulliam said, may dissuade plaintiffs from suing or enable defendants to defeat class certification.
At least one defendant has already cited the Goldman ruling in its appeal of class certification in a shareholder case. Blackberry Ltd’s lawyers from Morrison & Foerster told the 2nd Circuit that the decision highlights the trial judge’s failure to consider whether the disclosures cited by shareholders actually disclosed anything. Shareholders responded that the judge evaluated all of the evidence, just as Goldman requires.
Before defendants get too excited, shareholder lawyer Joel Fleming of Block & Leviton offered an alternative view of the Supreme Court’s ruling. The justices, Fleming said by email, didn’t change the law. The court didn’t even say that generic statements cannot impact share price. The justices, Fleming said, merely said that such statements may not be responsible for falsely inflating a company's stock price – a truism so evident that Goldman investors didn’t contest it.
"Defendants are, undoubtedly, going to spend the next five years citing two sentences from the court’s opinion," Fleming said. "Ultimately, I don’t see the court’s statement as anything more than an acknowledgement that judges are allowed to use common sense in considering the price impact question."
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