Saturday, December 11, 2021
Whenever I want to complain about my boredom with blogging the latest developments in Arkansas Teachers’ Retirement System v. Goldman, I think to myself, at least I’m not as bored as Judge Crotty of the SDNY. And Judge Crotty made that clear this week in his opinion re-certifying the class (for a third time).
The history, as I’ve previously blogged, was that plaintiffs alleged Goldman violated Section 10(b) with anodyne statements about its ethics and ability to manage conflicts among its varied client base, and these were revealed to be false in a few financial-crisis-era scandals about conflict-ridden CDO sales. The plaintiffs’ theory was that Goldman had a reputation for managing its conflicts well, which was baked into the stock price, and these statements maintained its stock price at those inflated levels, until the truth was disclosed and the stock price dropped. Goldman’s main defense has been that the statements were too vague, generic, content-less, etc to matter to investors. It tried that argument on a motion to dismiss, and then a motion for reconsideration of the motion to dismiss, and then on a motion for interlocutory appeal of the denial of the motion for reconsideration, and then at class cert, and then on an appeal of the class cert decision to the Second Circuit – where it finally won a remand! – and then at the remanded class cert hearing, and then before the Second Circuit again on an appeal of the second class cert opinion, and then before the Supreme Court – where it won again! – and then on remand back to the Second Circuit – score! – and then back to Judge Crotty where … this week, it lost again.
Throughout all of this, Goldman’s argument morphed. At first, the argument was that its statements were so vague that they could not, as a matter of law, have impacted stock prices. When that failed before Judge Crotty, Goldman instead offered factual evidence via expert reports that these particular statements were so generic that shareholders ignored them. When Judge Crotty rejected the expert’s evidence as unpersuasive, Goldman went back to arguing before the Second Circuit that the statements were legally incapable of impacting stock prices. By the time the case was actually before the Supreme Court, the argument was that the Second Circuit had erroneously held that genericness cannot be part of the factual inquiry when examining price impact, and therefore the Circuit had failed to take into account the generic nature of the statements, in addition to other factual evidence, when it reviewed Judge Crotty’s class cert decision. The Supreme Court held that it was not clear whether the Second Circuit had so held – and if the Second Circuit had held that, it shouldn’t have have – and kicked it back down.
The Supreme Court’s decision was … maddening. As I blogged at the time, it seemed to shift the burden of proof to plaintiffs in cases involving “price maintenance” theories, and introduced loss causation into the class certification decision – even though in Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804 (2011), the Court had held that loss causation should not be considered at class certification.
Which is what Judge Crotty had to deal with when the same evidence was before him, again, and his exasperation was clear.
First, he emphasized that nothing in any of the appellate opinions had overruled his prior factual determinations about the strength of the expert evidence, and he reiterated those findings: namely, that Goldman’s price drops were associated with revelations of the truth about its conflicts, that market commentary at the time reiterated the importance of Goldman’s ability to manage its conflicts, and that the revelations that caused the price drops were far more specific and credible than earlier purported disclosures that had not caused any price drops. As he put it, “Since the updated direction from the Supreme Court and Second Circuit has no bearing on these factual findings, the Court here reiterates, and restates, its grounds only in brief.” Op. at 17.
Second, pace Vivendi, he held that to determine whether Goldman’s statements maintained the artificial inflation in its stock price, the proper comparator was not what would have happened if Goldman had remained silent, but what would have happened if it had told the truth. If it had told the truth about its inability to manage conflicts, investors would have devalued the stock.
Third, he even looked to what would have happened if Goldman had remained silent, and found the statements still maintained the stock price because “in a marketplace where, according to Defendants, dozens of Goldman competitors and other blue-chip corporations routinely make statements ‘indistinguishable’ from some of the alleged misstatements, it seems unlikely that Goldman's conspicuous failure to conform-…would be irrelevant to investors.” Op. at 24-25.
I’ve made that argument before; in my paper, Reviving Reliance, I said:
The articulated rationale for many puffery holdings—that the statements are too similar to those offered by other companies to carry much weight in the minds of investors—is not only unpersuasive, but is something of a self-fulfilling prophecy. Corporations frequently make disclosures similar to those of other companies, from representations that their financial statements comply with Generally Accepted Accounting Principles to declarations that a merger price is “fair” to shareholders, and yet none of these statements are declared to be puffery on grounds of ubiquity. Moreover, in a world where computer programs analyze corporate SEC filings so as to instantly trade on even minute data changes, if a corporation did not, for example, proclaim itself to exhibit “financial discipline” when all of its competitors did, investors would likely take the absence seriously. As
a result, when courts treat all such statements as equally meaningless, they provide no incentive for corporations to refrain from making them when they are no longer truthful.
Along these lines, as I pointed out in a previous post, Goldman was making statements about its integrity and conflicts management long before the class period – at a time when, by hypothesis, the statements were true. Can you even imagine how the market would have reacted if those statements suddenly disappeared?
Judge Crotty went further, though. Displaying extreme skepticism of the idea that corporations generally issue happy talk that has no effect on investors, he added: “This Court is hard-pressed to understand why statements such as those at issue here would have achieved such ubiquity in the first place were they incapable of influencing (including by maintaining) a company’s stock price.” Op. at 24.
And now I have to pause and note how radical Crotty’s holdings are, even if, ahem, they make perfect sense. That’s because the inquiry into materiality/puffery/genericness what-have-you in securities cases is usually divorced from any honest attempt to assess the role these statements actually play in the market; as I’ve repeatedly blogged, materiality inquiries often seem more like backdoor attempts to distinguish claims based on poor governance from claims based on fraud than empirical evaluations of evidence. (Which is also a point I’ve also made in both Reviving Reliance and my paper Fact or Fiction: Flawed Approaches to Evaluating Market Behavior in Securities Litigation.) Quoting, ahem, me, “what we call ‘harm’ and ‘damage’ for the purpose of private securities fraud lawsuits have become so artificial that it no longer seems as though we’re even trying to measure the actual real-world effects of fraud.”; see also Fact or Fiction (describing “the cavernous distance between judicial measures of harm and the underlying reality”). So it is genuinely striking to see a judge examine actual market behavior instead of pursuing some broader policy regarding what Section 10(b) ought to be about.
Which is why I fully expect Goldman’s next 23(f) appeal to argue that Crotty’s analysis contradicts the Supreme Court because he treated genericness as a point in favor of price impact instead of against it.
Anyway, the final striking aspect of Judge Crotty’s opinion is this: Even though technically, plaintiffs are meant to have a presumption of price impact, and defendants have the responsibility of rebutting that presumption, Crotty took the Supreme Court at its word and seemed to place an initial burden on plaintiffs to establish a connection between the final stock price drop and the earlier false statements in order to win that “presumption.” To wit, he began his analysis with the heading “Plaintiffs’ Persuasive Evidence of Price Impact,” explained that evidence, and concluded, “The Court credits Dr. Finnerty’s conclusions, and finds that Plaintiffs have presented compelling evidence that the alleged misstatements in fact impacted Goldman's stock price.” Op. at 16-17. Only after finding plaintiffs had established price impact did he turn to defendants’ evidence, concluding they had “failed to rebut the Basic presumption… Neither [of defendants’ experts] persuasively undermine these findings” Op. at 17.
See what he did there? He made the plaintiffs prove price inflation and only then turned to whether defendants’ had met their burden of rebuttal, all while paying lipservice to the idea that there was some kind of “presumption” in plaintiffs’ favor at work. And I can’t say he’s wrong, precisely, because that was in fact the Supreme Court’s suggestion.
More than anything else, though, what offends me aesthetically about this case and makes me want to scream “IT’S NOT FAIR!!” at the top of my lungs – before I remember that we live in a cold, cruel world and fairness is a fairytale – is how Goldman was permitted to change its argument before the Supreme Court in order to revive a claim that it had made before the district judge, lost, and then abandoned on appeal – and instead of dismissing the writ as improvidently granted, the Court rewarded Goldman for that bait-and-switch with yet another bite at the apple.
The other notable thing: The factual evidence, at least as Judge Crotty describes it, presents a pretty compelling case that yes Goldman’s statements mattered: Goldman did have a strong reputation, the truth did damage that reputation and make people worried for Goldman’s future, and the statements at the very least maintained that reputation because Goldman couldn’t suddenly have been silent on the topic without raising questions. And that’s evidence we probably would never have seen but for Crotty’s denial of the original motion to dismiss, when another judge likely would have granted it. Which you would think would make future courts hesitant to casually dismiss claims based on a seat-of-the-pants judgment that no reasonable investor would have taken certain statements seriously.
But it won’t.