With all eyes on the U.S. Supreme Court and the nomination of Judge Amy Coney Barrett, we look at the Court’s October 2020 term for cases impacting the Banking & Financial Services industries. One case to watch is Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement Syst., Case No. 18-3667 (2d Cir. Apr. 7, 2020), reh’g denied (June 15, 2020). A Petition for Certiorari is pending but industry experts expect the Court to accept the case for review to resolve a split among the Circuit Courts of Appeal. The case will address an important issue of class certification in securities cases.
In Goldman, the Second Circuit Court of Appeals certified a plaintiff class and declined to adopt Goldman’s narrow interpretation of the “inflation-maintenance theory.” The “inflation-maintenance doctrine” supposes that alleged misstatements affect a stock price not by artificially inflating it, but by maintaining pre-existing price inflation. The class in that case alleged Goldman’s general statements about business practice conflicts and its ability to resolve them maintained an inflated value of its shares to the detriment of shareholders before a series of government investigations and subsequent fines revealed Goldman’s flawed conflicts system. Goldman sought to narrow the inflation-maintenance theory’s scope by proposing that courts only have applied the theory in two “special circumstances,” neither of which applied to the alleged misstatements at issue in this case. The court rejected Goldman’s proposed revision of the inflation-maintenance doctrine and held that Goldman failed to prove its claim that the inflation-maintenance theory applies so narrowly.
The case arose from a collateralized debt obligation transaction (CDO) involving subprime mortgages Goldman underwrote in April 2007 that lost CDO investors $1 billion after Goldman allegedly allowed a hedge fund to select the mortgages in the CDO then short the security. Goldman on the other hand simultaneously sold the CDO to clients. Goldman’s shareholders brought an action claiming Goldman misrepresented the absence of business practice conflicts and thereby artificially inflated its stock price; the share price fell when the SEC brought enforcement action against Goldman and revealed the actual conflicts involved with the CDO transaction. Goldman argued that general statements about its firm’s conflicts should be legally insufficient as evidence of price impact and that not all class members relied on Goldman’s statements to the same extent. The court rejected Goldman’s argument, stating that inflation-maintenance theory “does not discriminate between general and specific misstatements.”
Goldman brought the case to the Supreme Court for review, asking the Court to consider: (1) Whether a defendant in a securities class action may rebut the presumption of class-wide reliance recognized in Basic Inc. v. Levinson by pointing to the generic nature of the alleged misstatements in showing that the statements had no impact on the price of the security, even though that evidence is also relevant to the substantive element of materiality; and (2) whether a defendant seeking to rebut the Basic presumption has only a burden of production or also the ultimate burden of persuasion. Financial industry advocacy groups, including the American Bankers Association, have come to Goldman’s defense advocating for the Court to accept the case.