Saturday, April 3, 2021

In like a lion, out like a lamb

When Goldman Sachs petitioned the Supreme Court to grant certiorari from the Second Circuit’s affirmance of a class certification grant, it described the case as having “enormous legal and practical importance,” and later reiterated that it would be “hard to overstate the legal and practical importance of this case.”

By the time we got to oral argument, though … not so much.

I blogged about Goldman Sachs v. Arkansas Teacher Retirement System when it was before the Second Circuit (see here and here), but I only minimally discussed the Supreme Court iteration, in part because I couldn’t figure out what the legal issue was, other than that Goldman thought Amgen Inc. v. Connecticut Ret. Plans & Tr. Funds, 568 U.S. 455 (2013) was wrongly decided.

Well, that was my mistake, because it’s clear now that in fact, Goldman does not think that Amgen was wrongly decided, and the legal issue is that it doesn’t like the fact that it lost in the Second Circuit Court of Appeals. 

That was evident in the briefing, in which it invited the Supreme Court to review the expert evidence submitted to the district court and reweigh it in its favor. (Seriously. Check out the Reply Brief at 8-9, 19-21)

Goldman does have a whole separate argument about Federal Rule of Evidence 301 and who has the burden of production/persuasion when it comes to the issue of reliance at class certification.  This idea was first proposed, as far as I can tell, in an article by Wendy Couture, but was rejected by the Second Circuit in Waggoner v. Barclays PLC, 875 F.3d 79 (2d Cir. 2017).  I won’t weigh in on that piece except to say that most Justices – with Alito and Gorsuch as exceptions – did not seem interested, but then, it’s hard to say with remote arguments because there isn’t room for the kind of back and forth you get with in-person presentations.  So it’s possible the Rule 301 argument here is a wild card, but I don’t know anything about it and will therefore skip it.

So, all that aside, what’s going on here?

The plaintiffs alleged that Goldman falsely claimed to adhere to high ethical standards when managing its conflicts of interest, and that these statements were revealed to be false when various governmental entities filed enforcement actions.  Goldman argued that its statements were immaterial as a matter of law, and when it lost on that argument, it argued at class certification that these statements were too generic to have had any impact on the price of its securities.  The district court found that Goldman had not rebutted the presumption of price impact and certified the class.  Goldman appealed to the Second Circuit, where it argued that the “generic” nature of the statements defeated class certification as a matter of law in any case where the plaintiffs argued that the false statements maintained stock prices rather than initially inflating them.  The Second Circuit, by a 2-1 vote, rejected that claim as inconsistent with Amgen.

Before the Supreme Court, Goldman’s argument underwent a makeover. As you can see from the transcript, it abandoned any claim that, at the class certification stage, courts should determine whether statements are too generic to impact price as a matter of law, whether in the price maintenance context or anywhere else.  Instead, it argued that “genericness” is a relevant fact to be considered at class certification in service of the price impact inquiry, along with any other evidence on the subject.  Goldman’s claim was not that courts should revisit the question of materiality at class cert – which tests what a hypothetical reasonable investor would have thought about the statements – but that in weighing whether the statements actually had an effect on prices, it is legitimate for courts to consider the generic nature of the statements at issue.  And it further argued that the Second Circuit erred by rejecting the notion that genericness can ever be considered as relevant to the price impact inquiry.

In other words, Goldman drew a distinction between materiality, which concerns whether there is a “substantial likelihood” that a “reasonable investor” would have traded on the information, and price impact, which concerns whether there actually was an effect on stock prices.  See Petitioners’ Brief at 32All relevant facts, said Goldman, should be part of the impact inquiry, and genericness is a relevant fact even if it is also relevant to materiality.

At this point, the plaintiffs agreed with Goldman that genericness is a relevant fact to be considered by courts as part of the price impact inquiry, subject to appropriate expert evaluation.  And, the plaintiffs pointed out, Goldman actually submitted evidence in this case to the district court that the genericness of the statements meant that there was no price impact – there was a whole expert report on the subject.  But the district court certified the class despite that report.  See Resp. Brief at 11-12.

Which meant, the disagreement between the parties boiled down to whether (1) the Second Circuit had erred by rejecting the notion that genericness is relevant if not dispositive and (2) whether the Supreme Court should itself reweigh the evidence and determine that Goldman’s carried the day.

Let’s assume (2) is off the table.  Come on.

The question then is whether the Second Circuit, considering Goldman’s appeal from the district court’s class cert decision, improperly refused to allow the generic nature of the statements to play any role in the price impact inquiry. 

And that depends on how you read the Second Circuit’s opinion.

On the one hand, the Second Circuit held: “Whether alleged misstatements are too general to demonstrate price impact has nothing to do with the issue of whether common questions predominate over individual ones.” Ark. Teachers Ret. Sys. v. Goldman Sachs, 955 F.3d 254 (2d Cir. 2020).

Sounds pretty definitive, right?  The Second Circuit seems here to be clearly rejecting the notion that genericness should even be part of the evidence.

On the other hand, the Second Circuit made those statements in response to arguments by Goldman that genericness should be determinative of the price impact inquiry.

Which is why the Solicitor General admitted that the Second Circuit could be read either way – maybe it meant that genericness is categorically irrelevant, but maybe it meant only to reject Goldman’s argument at the time that genericness was dispositive.  See Brief of U.S. at 26; see also Transcript at 45-46.

So the parties are functionally reduced to fighting over what the Second Circuit meant, and whether the Supreme Court should vacate the Second Circuit’s opinion for a do-over, or whether the Supreme Court should affirm but clarify that it understands the Second Circuit to not have categorically barred the introduction of evidence of genericness at the class certification stage.

Let’s just say that on this question, I’m with Justice Breyer: “this seems like an area that the more that I read about it, the less that we write, the better….”

Ann Lipton | Permalink


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