Ark. Tchr. Ret. Sys. v. Goldman Sachs Grp., Inc. ( 2021 )

18-3667
Ark. Tchr. Ret. Sys. v. Goldman Sachs Grp., Inc.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
______________
August Term 2020
(Submitted: August 11, 2021 | Decided: August 26, 2021)
Docket No. 18-3667
ARKANSAS TEACHER RETIREMENT SYSTEM, WEST VIRGINIA
INVESTMENT MANAGEMENT BOARD, PLUMBERS AND PIPEFITTERS
PENSION GROUP,
Plaintiffs-Appellees,
v.
GOLDMAN SACHS GROUP, INC., LLOYD C. BLANKFEIN, DAVID A.
VINIAR, GARY D. COHN,
Defendants-Appellants. †
______________
Before:
WESLEY, CHIN, and SULLIVAN, Circuit Judges.
Plaintiffs-Appellees, shareholders of Goldman Sachs Group, Inc., brought
this class action lawsuit against Goldman Sachs and several of its former
executives (collectively, “Goldman”) alleging that Goldman committed securities
fraud by misrepresenting its conflicts-of-interest policies and practices. In 2015,
the district court certified a class of shareholders under Federal Rule of Civil
Procedure 23(b)(3). We vacated and remanded, holding that the district court
failed to apply the preponderance-of-the-evidence standard in deciding whether
† The Clerk of the Court is respectfully directed to amend the caption as set forth above.
Goldman rebutted the “Basic presumption,” which presumes that the shareholders
relied on Goldman’s public misrepresentations when they purchased its stock at
market price. In 2018, the district court again certified the class, and we affirmed,
rejecting Goldman’s arguments that the district court failed to apply the correct
legal standard or that it otherwise abused its discretion. The Supreme Court
vacated and remanded because it was uncertain that we properly considered the
generic nature of Goldman’s alleged misrepresentations in reviewing the district
court’s decision. Because it is unclear whether the district court considered the
generic nature of Goldman’s alleged misrepresentations in its evaluation of the
evidence relevant to price impact and in light of the Supreme Court’s clarifications
of the legal standard, we VACATE the class certification order of the district court
and REMAND for further proceedings consistent with this opinion.
_________________
ROBERT J. GIUFFRA, JR., Sullivan & Cromwell LLP, New York, NY
(Richard H. Klapper, David M.J. Rein, Benjamin R. Walker,
Julia A. Malkina, Jacob E. Cohen, Sullivan & Cromwell LLP,
New York, NY; Kannon K. Shanmugam, Paul, Weiss, Rifkind,
Wharton & Garrison LLP, Washington, DC, on the brief), for
Defendants-Appellants.
THOMAS C. GOLDSTEIN, Goldstein & Russell, P.C., Bethesda, MD
(Kevin K. Russell, Goldstein & Russell, P.C., Bethesda, MD;
Spencer A. Burkholz, Joseph D. Daley, Robbins Geller Rudman
& Dowd LLP, San Diego, CA; Thomas A. Dubbs, James W.
Johnson, Michael H. Rogers, Irina Vasilchenko, Labaton
Sucharow LLP, New York, NY, on the brief), for Plaintiffs-
Appellees.
________________
PER CURIAM:
Plaintiffs-Appellees (hereinafter, “Plaintiffs”), shareholders of Goldman
Sachs Group, Inc., brought this class action lawsuit against Goldman Sachs and
several of its former executives (collectively, “Goldman”) alleging that Goldman
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committed securities fraud by misrepresenting its conflict-of-interest policies and
practices. The facts and procedural history, which we reference here only as
necessary to explain our decision, are detailed in our previous opinions. See, e.g.,
Ark. Tchrs. Ret. Sys. v. Goldman Sachs Grp., Inc. (“ATRS I”), 879 F.3d 474, 478 (2d
Cir. 2018).
BACKGROUND
In 2018, 1 the United States District Court for the Southern District of New
York (Crotty, J.) granted Plaintiffs’ motion to certify a class of shareholders under
Federal Rule of Civil Procedure 23(b)(3). See In re Goldman Sachs Grp., Inc. Sec.
Litig., No. 10 CIV. 3461 (PAC), 2018 WL 3854757, at *6 (S.D.N.Y. Aug. 14, 2018),
aff’d sub nom. Ark. Tchr. Ret. Sys. v. Goldman Sachs Grp., Inc., (“ATRS II”), 955 F.3d
254 (2d Cir. 2020), vacated and remanded, 141 S. Ct. 1951 (2021). To recover damages,
Plaintiffs “must prove, among other things, a material misrepresentation or
omission by [Goldman] and [Plaintiffs’] reliance on that misrepresentation or
omission.” Goldman Sachs Grp., Inc. v. Ark. Tchr. Ret. Sys., 141 S. Ct. 1951, 1958
1The district court previously certified a class in 2015, see In re Goldman Sachs Grp., Inc.
Sec. Litig., No. 10 CIV. 3461 PAC, 2015 WL 5613150, at *8 (S.D.N.Y. Sept. 24, 2015), which
we vacated and remanded upon finding that it was unclear whether the district court had
applied the preponderance-of-the-evidence standard in determining whether Goldman
rebutted the Basic presumption, see ATRS I, 879 F.3d at 486.
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(2021). Plaintiffs invoked the Basic presumption, a rebuttable presumption that all
shareholders had relied on Goldman’s public misrepresentations when they
purchased its stock, premised on the theory that investors rely on all of a
company’s public misrepresentations when trading stock in an efficient market.
See Basic Inc. v. Levinson, 485 U.S. 224, 246 (1988). By allowing courts to infer
reliance on a classwide basis, the Basic presumption helps plaintiffs in securities
class actions to satisfy Rule 23(b)(3)’s requirement that “the questions of law or
fact common to class members predominate over any questions affecting only
individual members.” Fed. R. Civ. P. 23(b)(3).
As Goldman acknowledged, Plaintiffs met their burden of proving the
elements of the Basic presumption required for class certification: that Goldman’s
alleged “misstatements were publicly known, [its] shares traded in an efficient
market, and [Plaintiffs] purchased the shares at the market price after the
misstatements were made but before the truth was revealed.” 2 ATRS I, 879 F.3d
at 481, 484. However, the Basic presumption is not insuperable. A defendant may
2 The Basic presumption also requires the alleged misrepresentation to be “material.” See
Goldman, 141 S. Ct. at 1958. However, plaintiffs do not need to prove materiality before
class certification. See id. at 1959 (“[M]ateriality should be left to the merits stage because
it does not bear on Rule 23’s predominance requirement.”).
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rebut the Basic presumption by making “[a]ny showing that severs the link
between the alleged misrepresentation and either the price received (or paid) by
the plaintiff, or his decision to trade at a fair market price.” Basic, 485 U.S. at 248.
If a defendant can establish that the alleged misrepresentation “did not actually
affect the market price of the stock”––i.e., that it had no “price impact”––“then
Basic’s fundamental premise ‘completely collapses, rendering class certification
inappropriate.’” Goldman, 141 S. Ct. at 1959 (quoting Halliburton Co. v. Erica P. John
Fund, Inc., 573 U.S. 258, 283–84 (2014)).
Plaintiffs brought this action under the inflation-maintenance theory. They
allege that Goldman’s statements regarding its conflicts-of-interest policies and
practices in SEC filings and annual reports between 2006 and 2010, such as “[w]e
have extensive procedures and controls that are designed to identify and address
conflicts of interest,” J.A. 88, and “[w]e are dedicated to complying fully with the
letter and spirit of the laws,” J.A. 93, were misleading because Goldman had
pursued conflicted transactions during that period. Plaintiffs argue the statements
maintained an already-inflated stock price “by preventing preexisting inflation
from dissipating from the stock price,” and once the truth about Goldman’s
conflicts was revealed in government enforcement actions and news reports (the
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“corrective disclosures”), “the inflation in Goldman’s stock price dissipated,
causing the price to drop and shareholders to suffer losses.” Goldman, 141 S. Ct. at
1959–60 (citation omitted).
In the inflation-maintenance context, “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.’” Id. at 1961
(quoting Glickenhaus & Co. v. Household Int’l, Inc., 787 F.3d 408, 415 (7th Cir. 2015));
see also In re Vivendi, S.A. Sec. Litig., 838 F.3d 223, 258 (2d Cir. 2016) (“[T]he proper
question for purposes of our inquiry into price impact is not what might have
happened had a company remained silent, but what would have happened if it
had spoken truthfully.”). 3
Goldman submitted evidence to show that its alleged misrepresentations
had no price impact. It introduced expert testimony from Dr. Paul Gompers, who
3 Although Glickenhaus, the Seventh Circuit case quoted by the Supreme Court, facially
appears to conflict with our holding in Vivendi, Glickenhaus also explains that price
inflation is measured by what would have happened if the defendant had told the truth.
See Glickenhaus, 787 F.3d at 415 (“The best way to determine the impact of a false
statement is to observe what happens when the truth is finally disclosed and use that to
work backward, on the assumption that the lie’s positive effect on the share price is equal
to the additive inverse of the truth’s negative effect.”). The Supreme Court also stated
that it “need not and do[es] not” express its views on the “validity or . . . contours” of the
inflation-maintenance theory. Goldman, 141 S. Ct. at 1959 n.1. Vivendi’s articulation of
price impact in the inflation-maintenance context thus remains the law of this Circuit.
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argued that the lack of movement in Goldman’s stock price in response to news
articles regarding Goldman’s conflicts published on 36 dates prior to the corrective
disclosures showed that the alleged misrepresentations had no price impact, and
Dr. Stephen Choi, who suggested the price drops following the corrective
disclosures were due to news of enforcement activities rather than Goldman’s
conflicts. It also submitted a report from Dr. Laura Starks, who concluded that
Goldman’s statements would not have influenced investors because of their
generic nature. Plaintiffs’ expert Dr. John D. Finnerty challenged the
methodologies and findings of Goldman’s experts.
The district court concluded that Goldman failed to establish by a
preponderance of the evidence that its alleged misrepresentations had no price
impact. See In re Goldman, 2018 WL 3854757, at *6. It found Dr. Gompers’s
arguments unpersuasive, determining that “[t]he first corrective disclosure
included new material information that had not been described in any of the 36
more generic reports on conflicts.” Id. at *4. It also rejected Dr. Choi’s findings as
unreliable and credited Dr. Finnerty’s criticisms of Dr. Choi’s methodologies. See
id. at *5–6. The court granted Plaintiffs’ motion for class certification. See id. at *6.
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On a Rule 23(f) appeal, 4 we affirmed the district court’s order certifying the
class. See ATRS II, 955 F.3d at 275. Goldman principally contended that the district
court erred in applying the inflation-maintenance theory, arguing that “general
statements, like those challenged here, are incapable of impacting a company’s
stock price as a matter of law.” Goldman’s Br. at 46. It also argued that the court
misconstrued its evidence and misapplied the preponderance of the evidence
standard. We rejected Goldman’s request to narrow the inflation-maintenance
theory, holding that its proposal to exclude general statements as a matter of law
too closely resembled the materiality inquiry, which is inappropriate at the class
certification stage. See ATRS II, 955 F.3d at 267. We also concluded that the district
court did not clearly err in its evaluation of the evidence and that it correctly
applied the preponderance of the evidence standard. See id. at 271–74. 5
The Supreme Court vacated our judgment and remanded for further
4Rule 23(f) provides that “[a] court of appeals may permit an appeal from an order
granting or denying class-action certification under [Rule 23].” Fed. R. Civ. P. 23(f).
5Judge Sullivan dissented, explaining that he would reverse the district court’s finding
because in his view, “the generic quality of Goldman’s alleged misstatements, coupled
with the undisputed fact that Goldman’s stock price did not move on any of the 36 dates
on which the falsity of the alleged misstatements was revealed to the public, clearly
compels the conclusion that the stock drop following the corrective disclosures was
attributable to something other than the misstatements alleged in the complaint.” See
ATRS II, 955 F.3d at 278–79 (Sullivan, J., dissenting) (internal quotation marks and citation
omitted).
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proceedings consistent with its opinion. See Goldman, 141 S. Ct. at 1963. The Court
determined that “it is unclear whether [this Circuit] properly considered the
generic nature of Goldman’s alleged misrepresentations in reviewing the [d]istrict
[c]ourt’s price impact determination,” id., and instructed that on remand we “take
into account all record evidence relevant to price impact, regardless whether that
evidence overlaps with materiality or any other merits issue,” id. at 1961. The
parties subsequently submitted supplemental briefing summarizing all evidence
in the record relating to the price impact of the corrective disclosures, including
the generic nature of Goldman’s alleged misrepresentations.
DISCUSSION
The Supreme Court’s decision instructs us to reassess the district court’s
price impact determination, upon which the court’s class certification order rests.
“We review a district court’s grant of class certification for abuse of discretion,”
Levitt v. J.P. Morgan Sec., Inc., 710 F.3d 454, 464 (2d Cir. 2013), reviewing de novo
“the conclusions of law underlying that decision” and “for clear error the factual
findings underlying” its ruling, such as the court’s price impact determination, id.(quoting Teamsters Loc. 445 Freight Div. Pension Fund v. Bombardier Inc., 546 F.3d
196, 201 (2d Cir. 2008)). “Under the clear error standard, we may not reverse [a
finding] even though convinced that had [we] been sitting as the trier of fact, [we]
9
would have weighed the evidence differently. Rather, a finding is clearly
erroneous only if although there is evidence to support it, the reviewing court on
the entire evidence is left with the definite and firm conviction that a mistake has
been committed.” Atl. Specialty Ins. Co. v. Coastal Env't Grp. Inc., 945 F.3d 53, 63
(2d Cir. 2019) (alterations in original) (internal quotation marks and citations
omitted).
In its petition for certiorari, Goldman abandoned its argument before us that
the inflation-maintenance theory should not apply to generic statements as a
matter of law. See Petition for Writ of Certiorari, Goldman, 141 S. Ct. 1951 (No. 20-
222). Instead, it argued that the generic nature of the statements is relevant to the
price impact inquiry regardless of the overlap with materiality. See id. at 3.
Plaintiffs ultimately agreed the generic nature is relevant, and by the time of the
Supreme Court’s decision, the parties “disagree[d] only about whether [this
Circuit] properly considered the generic nature of Goldman’s alleged
misrepresentations.” Goldman, 141 S. Ct. at 1961. Because the Court was left with
“sufficient doubt on this score,” it remanded for us to take into account “all record
evidence relevant to price impact,” including the generic nature of Goldman’s
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statements. 6 Id.
It is “our general policy that the trial court should consider arguments—and
weigh relevant evidence—in the first instance.” Florez v. Cent. Intel. Agency, 829
F.3d 178, 189 (2d Cir. 2016). The district court’s decision granting class certification
did not discuss the generic nature of Goldman’s alleged misrepresentations in its
evaluation of the evidence relevant to price impact. Nor did it discuss Dr. Starks’s
expert report, which focused on the generic nature of Goldman’s statements, or
Dr. Finnerty’s rebuttal to Dr. Starks’s arguments. See generally In re Goldman, 2018
WL 3854757. The parties’ supplemental briefs confirm that their arguments before
us raise fact-intensive issues better evaluated by the district court in the first
instance.
The Supreme Court’s clarifications of the legal standard further support our
decision to vacate and remand to the district court. See, e.g., United States v.
Highsmith, 688 F.3d 74, 78 (2d Cir. 2012) (vacating and remanding to the district
court for resentencing consistent with the panel’s opinion and the Supreme
6 Plaintiffs suggest in their supplemental briefing that “Goldman has forfeited any
objection that the district court erred in failing to account for the nature of the
statements.” Pls.’ Suppl. Br. at 3 n.1. In adherence to the Supreme Court’s decision, we
need not address whether Goldman sufficiently preserved the argument.
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Court’s intervening decision). Although the Supreme Court did not disturb our
legal conclusions, it supplemented them with new ideas. For example, the Court
made explicit that expert testimony as well as “common sense” should inform
courts’ evaluation of the evidence and agreed with the parties that “a more-general
statement will affect a security’s price less than a more-specific statement on the
same question.” Goldman, 141 S. Ct. at 1960 (citation omitted). The Court also
specified that the inference required for the inflation-maintenance theory—“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,” which “may occur when the earlier misrepresentation is
generic . . . and the later corrective disclosure is specific.” Id. at 1961. Finally, on
the burden of persuasion, the Court agreed with our holding that Goldman bears
the burden but explained that “[t]he district court’s task is simply to assess all the
evidence of price impact—direct and indirect—and determine whether it is more
likely than not that the alleged misrepresentations had a price impact. The
defendant’s burden of persuasion will have bite only when the court finds the
evidence in equipoise.” Id. at 1963.
Because it is unclear whether the district court considered the generic nature
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of Goldman’s alleged misrepresentations, and in light of the Supreme Court’s
clarifications of the legal standard, we vacate the district court’s order and remand
for further proceedings consistent with this opinion and the opinion of the
Supreme Court. On remand, the district court should consider all record evidence
relevant to price impact and apply the legal standard as supplemented by the
Supreme Court. We express no views as to whether the evidence suffices to rebut
the Basic presumption or whether the district court might want to accept
additional briefing by the parties.
CONCLUSION
We VACATE the district court’s August 14, 2018 order granting Plaintiffs’
motion for class certification and REMAND for further proceedings consistent
with this opinion and the Supreme Court’s opinion. Any future appeals of the
district court’s decisions in this action shall be referred to this panel.
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