Wednesday, June 23, 2021
Well, the Supreme Court’s decision in Goldman Sachs v. Arkansas Teacher Retirement System is out and I suppose that makes me legally obligated to blog about it.
The result itself was … overdetermined. As I posted after oral argument:
[Goldman] 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. …
[T]he 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. …Which meant, the disagreement between the parties boiled down to whether  the Second Circuit had erred by rejecting the notion that genericness is relevant if not dispositive…
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.
So, now we have the decision, and:
On the first question—whether the generic nature of a misrepresentation is relevant to price impact—the parties’ dispute has largely evaporated. Plaintiffs now concede that the generic nature of an alleged misrepresentation often will be important evidence of price impact ... The parties further agree that courts may consider expert testimony and use their common sense in assessing whether a generic misrepresentation had a price impact. And they likewise agree that courts may assess the generic nature of a misrepresentation at class certification even though it also may be relevant to materiality....
We share the parties’ view.
Anyhoo, 8 members of the Court decided to remand to the Second Circuit, while Justice Sotomayor wrote separately to argue that she thought the Second Circuit got it right the first time. Goldman also had an argument that the burden of persuasion should have shifted back to the plaintiffs under Rule 301; it lost on that 6-3, so the law is pretty much where it’s always been.
Or is it?
Let’s take a step back and recall that the Supreme Court has been granting cert to decide what is basically the same exact issue for literally 10 years now. The first time was Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804 (2011) (Halliburton I). In that case, the Fifth Circuit had modified the presumption announced in Basic Inc. v. Levinson, 485 U. S. 224 (1988) – that material, false, public statements impact the prices of securities that trade efficiently – by placing the burden on plaintiffs to prove such an impact. They could do this, the Fifth Circuit held, either by showing that stock prices had gone up in response to the initial false statement, or by establishing loss causation, which the Fifth Circuit defined to mean that stock prices had gone down in response to a corrective disclosure.
This was significant, as I explained in an earlier blog post, because it is unusual for plaintiffs to be able to show upward price movement upon an initial lie; it is far more common that frauds keep prices level when they otherwise would have fallen. And there is always a price drop at the end of the class period, because otherwise, no plaintiff would bring a claim. Which means the fight is never about whether there was a disclosure and a price drop, but about whether the disclosure was the right kind of disclosure, and the Fifth Circuit was requiring a very tight linkage between the disclosure and the earlier lie. Ultimately, the evidence that the Fifth Circuit was demanding would not have shed light on the price impact inquiry at all.
The Supreme Court (umm, sort of) understood all of this. It rejected the Fifth Circuit’s attempt to shift the burdens first established in Basic. It also rejected the defendants’ fallback position that even if the initial burden should not have been placed on plaintiffs, the defendants should have had a chance to rebut the presumption by disproving loss causation. Why? Because “[t]he fact that a subsequent loss may have been caused by factors other than the revelation of a misrepresentation has nothing to do with whether an investor relied on the misrepresentation in the first place, either directly or presumptively through the fraud-on-the-market theory.”
And finally, it rejected the defendants’ further fallback position that while the Fifth Circuit had said “loss causation,” what it really meant was “price impact,” because, ahem, “We do not accept Halliburton’s wishful interpretation of the Court of Appeals’ opinion. As we have explained, loss causation is a familiar and distinct concept in securities law; it is not price impact…. Whatever Halliburton thinks the Court of Appeals meant to say, what it said was loss causation… We take the Court of Appeals at its word. Based on those words, the decision below cannot stand.”
That was step one.
Step two was Amgen Inc. v. Connecticut Retirement Plans, 568 U.S. 455 (2013). There, the defendants argued that at class certification, plaintiffs should have the burden of proving materiality – or that defendants should be able to prove lack of materiality – as a means of establishing that the lie had not impacted prices. The Supreme Court said no.
Step three was Halliburton Co. v. Erica P. John Fund, Inc., 573 U. S. 258 (Halliburton II). This time, the Court held that defendants do have the right to try to prove lack of price impact at class certification.
And now we have Goldman. The Court rejected Goldman’s attempt to shift the burden to plaintiffs, again, writing, “the best reading of our precedents—as the Courts of Appeals to have considered the issue have recognized—is that the defendant bears the burden of persuasion to prove a lack of price impact.”
But it also accepted that the “generic” nature of a statement – a concept, incidentally, that is never actually defined – is relevant to the price impact inquiry. And then it had this curious explanation for why:
The generic nature of a misrepresentation often will be important evidence of a lack of price impact, particularly incases proceeding under the inflation-maintenance theory. Under that theory, price impact is the amount of price inflation maintained by an alleged misrepresentation—in other words, the amount that the stock’s price would have fallen “without the false statement.” Glickenhaus & Co. v. Household Int’l, Inc., 787 F. 3d 408, 415 (CA7 2020). Plaintiffs typically try to prove the amount of inflation indirectly: They point to a negative disclosure about a company and an associated drop in its stock price; allege that the disclosure corrected an earlier misrepresentation; and then claim that the price drop is equal to the amount of inflation maintained by the earlier misrepresentation. See, e.g., id., at 413–417; In re Vivendi, S. A. Securities Litig., 838 F. 3d 223, 233–237, 253–259 (CA2 2016).
But 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. That may occur when the earlier misrepresentation is generic (e.g., “we have faith in our business model”) and the later corrective disclosure is specific (e.g., “our fourth quarter earnings did not meet expectations”). 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.
See what the Court did there? Why is it talking about plaintiffs’ burdens? Why is it citing two cases – Vivendi and Glickenhaus – that explained how to prove loss causation at trial? What relevance does the Court think this has for class certification and price impact?
I don’t know, but it almost suggests we could be right back where we started with the Fifth Circuit’s original rule. And whatever it means, I am 100% certain it will cause additional, confused sparring in the lower courts.
Because at the end of the day, it’s very hard to get away from “what goes up must come down” as a heuristic. Defendants routinely argue “look here that purported disclosure really didn’t disclose anything,” and from there claim that they have “disproved” price impact. But that’s non sequitur. If the purported end-of-class-period disclosure was not, in fact, a disclosure at all, that doesn’t actually answer the question whether the initial statements affected prices. I blogged about how much this whole thing confused the Halliburton district court when it tried to implement the Supreme Court’s instructions in Halliburton II; I can only assume we’re about to see more of the same.