Arkansas Teachers Retirement System v. Goldman Sachs Group, Inc.

16-250
Arkansas Teachers Ret. Sys., et al. v. Goldman Sachs Grp., Inc., et al.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
______________
August Term 2016
(Argued: March 15, 2017 Decided: January 12, 2018)
Docket No. 16-250
ARKANSAS TEACHERS RETIREMENT SYSTEM, WEST
VIRGINIA INVESTMENT MANAGEMENT BOARD,
PLUMBERS AND PIPEFITTERS PENSION GROUP, ILENE
RICHMAN, individually and on behalf of all others
similarly situated, PABLO ELIZONDO, HOWARD
SORKIN, individually and on behalf of all others similarly
situated, TIVKA BOCHNER, EHSAN AFSHANI, LOUIS
GOLD, THOMAS DRAFT, individually and on behalf of all
others similarly situated,
Plaintiffs-Appellees,
v.
GOLDMAN SACHS GROUP, INC., LLOYD C.
BLANKFEIN, DAVID A. VINIAR, GARY D. COHN,
Defendants-Appellants.*
______________
* The Clerk of the Court is respectfully directed to amend the
caption.
Before:
CABRANES, WESLEY, Circuit Judges, SESSIONS, District
Judge. *
Defendants-Appellants Goldman Sachs Group, Inc.,
Lloyd Blankfein, David A. Viniar, and Gary D. Cohn, appeal
from a September 24, 2015 order of the United States District
Court for the Southern District of New York (Crotty, J.),
certifying a class of plaintiffs who purchased shares of
common stock in Goldman Sachs Group, Inc., between 2007
and 2010. Plaintiffs alleged that defendants made material
misstatements about Goldman’s efforts to avoid conflicts of
interest, and that those misstatements caused the value of
their shares to decline. To establish the predominance of
class-wide issues under Federal Rule of Civil Procedure
23(b)(3), plaintiffs invoked the rebuttable presumption of
reliance established in Basic Inc. v. Levinson, 485 U.S. 224
(1988). In light of this Court’s recent pronouncement that
defendants seeking to rebut the Basic presumption must do
so by a preponderance of the evidence, see Waggoner v.
Barclays PLC, 875 F.3d 79 (2d Cir. 2017), and for the
additional reasons stated herein, we VACATE the District
Court’s order and REMAND for further proceedings
consistent with this opinion.
______________
*
Judge William K. Sessions III, of the United States District Court
for the District of Vermont, sitting by designation.
2
THOMAS C. GOLDSTEIN, Goldstein & Russell, P.C.,
Bethesda, MD (Susan K. Alexander, Andrew Love, Robbins
Geller Rudman & Dowd LLP, San Francisco, CA; Thomas A.
Dubbs, James W. Johnson, Michael H. Rogers, Labaton
Sucharow LLP, New York, NY, on the brief) for Plaintiffs-
Appellees.
ROBERT J. GIUFFRA, JR., (Richard H. Klapper, David
M.J. Rein, on the brief), Sullivan & Cromwell LLP, New York,
NY, for Defendants-Appellants.
Max W. Berger, Salvatore J. Graziano, Bernstein
Litowitz Berger & Grossman LLP, New York, NY; Blair
Nicholas, Bernstein Litowitz Berger & Grossmann LLP, San
Diego, CA; Robert D. Klausner, Klausner, Kaufman, Jensen
& Levinson, Plantation, FL, for Amicus Curiae National
Conference on Public Employee Retirement Systems in support of
Plaintiffs-Appellees.
Rachel S. Bloomekatz, Deepak Gupta, Gupta Wessler
PLLC, Washington, D.C.; Mark I. Gross, Jeremy A.
Lieberman, Pomerantz LLP, New York, NY; Robert D.
Klausner, Klausner, Kaufman, Jensen & Levinson,
Plantation, FL, for Amicus Curiae Louisiana Sheriffs’ Pension
and Relief Fund in support of Plaintiffs-Appellees.
Daniel P. Chiplock, Lieff Cabraser Heimann &
Bernstein, LLP, New York, NY, for Amicus Curiae National
Association of Shareholder and Consumer Attorneys in support of
Plaintiffs-Appellees.
Jeffrey W. Golan, Barrack, Rodos & Bacine,
Philadelphia, PA; James A. Feldman, Washington, D.C., for
Amici Curiae Evidence Scholars in support of Plaintiffs-Appellees.
3
Barbara A. Jones, AARP Foundation Litigation,
Pasadena, CA, for Amici Curiae AARP and AARP Foundation
in support of Plaintiffs-Appellees.
David Kessler, Kessler Topaz Meltzer & Check, LLP,
Radnor, PA; Ernest A. Young, Apex, NC, for Amici Curiae
Procedure Scholars in support of Plaintiffs-Appellees.
Robert V. Prongay, Glancy Prongay & Murray LLP,
Los Angeles, CA, for Amici Curiae Securities Law Professors in
support of Plaintiffs-Appellees.
George T. Conway III, Wachtell, Lipton, Rosen & Katz,
New York, NY, for Amici Curiae Former SEC Officials and Law
Professors in support of Defendants-Appellants.
Charles E. Davidow, Marc Falcone, Robyn Tarnofsky,
Paul, Weiss, Rifkind, Wharton & Garrison LLP, Washington,
D.C.; Ira D. Hammerman, Kevin M. Carroll, Securities
Industry & Financial Markets Association, Washington,
D.C., for Amicus Curiae Securities Industry & Financial Markets
Association in support of Defendants-Appellants.
Lewis J. Liman, Cleary Gottlieb Steen & Hamilton
LLP, New York, NY; Kate Comerford Todd, U.S. Chamber
Litigation Center, Inc., Washington, D.C., for Amicus Curiae
Chamber of Commerce of the United States of America in support
of Defendants-Appellants.
______________
WESLEY, Circuit Judge:
Investors in a securities fraud class action traditionally
have a problem proving that “questions of law or fact
4
common to class members predominate over . . . questions
affecting only individual members” under Federal Rule of
Civil Procedure 23(b)(3). The presumption established in
Basic Inc. v. Levinson, 485 U.S. 224 (1988), addressed that
problem by allowing courts to presume that the price of
stock traded in an efficient market reflects all public, material
information—including misrepresentations—and that
investors rely on the integrity of the market price when they
choose to buy or sell stock. Basic also established, however,
that defendants may rebut the presumption, and therefore
defeat class certification, by showing the misrepresentations
did not actually affect the price of the stock. The question
presented in this case is what defendants must do to meet
that burden.
In light of this Court’s recent pronouncement that
defendants bear the burden of persuasion to rebut the Basic
presumption by a preponderance of the evidence, see
Waggoner v. Barclays PLC, 875 F.3d 79 (2d Cir. 2017), and for
the additional reasons stated herein, we VACATE the
September 24, 2015 Order of the United States District Court
for the Southern District of New York (Crotty, J.) granting
plaintiff’s motion for class certification and REMAND for
further proceedings consistent with this opinion.
BACKGROUND
Plaintiffs-appellees acquired shares of common stock
in The Goldman Sachs Group, Inc. (“Goldman”) between
February 5, 2007 and June 10, 2010. In July 2011, they
commenced a securities fraud action in the District Court
against Goldman and several of its directors (collectively,
5
“defendants”), for violating section 10(b) of the Securities
Exchange Act and Rule 10b-5 promulgated thereunder. See
15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5.
I. Plaintiffs’ Allegations of Fraud
In their consolidated class action complaint, plaintiffs
alleged that defendants made material misstatements about
Goldman’s efforts to avoid conflicts of interest, causing the
value of their stock to decline. 1 Specifically, they alleged that
defendants made the following statements in Goldman’s
Form 10-K filings and Annual Report, as well as in
shareholder conference calls:
Our reputation is one of our most
important assets. As we have expanded
the scope of our business and our client
base, we increasingly have to address
potential conflicts of interest, including
situations where our services to a
particular client or our own proprietary
investments or other interests conflict, or
are perceived to conflict, with the interest
of another client . . . .
1
Plaintiffs also alleged defendants failed to disclose Goldman’s
receipt of “Wells Notices,” which are sent by the SEC in order to
inform a firm that the SEC intends to bring an enforcement action
against it. The District Court dismissed that cause of action and it
is not at issue in this appeal. See Richman v. Goldman Sachs Grp.,
Inc., 868 F. Supp. 2d 261, 269, 275 (S.D.N.Y. 2012).
6
We have extensive procedures and
controls that are designed to identify and
address conflicts of interest. . . .
Our clients’ interests always come first.
Our experience shows that if we serve our
clients well, our own success will
follow. . . .
We are dedicated to complying fully with
the letter and spirit of the laws, rules and
ethical principles that govern us. Our
continued success depends upon
unswerving adherence to this
standard. . . .
Most importantly, and the basic reason
for our success, is our extraordinary focus
on our clients. . . .
Integrity and honesty are at the heart of
our business. . . .
Joint App’x 81–87.
Plaintiffs claimed that these statements about
Goldman’s efforts to avoid conflicts of interest were false and
misleading because Goldman acted in direct conflict with the
interests of its clients in at least four collateralized debt
obligation (“CDO”) transactions involving subprime
mortgages between 2006 and 2007, most notably the Abacus
7
2007 AC-1 (“Abacus”) transaction involving hedge-fund
client Paulson & Co. Plaintiffs alleged that Goldman
permitted Paulson, its client, to play an active role in the
asset selection process for Abacus, without revealing to
institutional investors that Paulson held the sole short
position and thus chose particularly risky mortgages that it
hoped “would perform poorly or fail.” Plaintiffs claimed that
Goldman’s role in Abacus, which ultimately resulted in a
$550 million settlement with the SEC, “allow[ed] a favored
client to benefit at the expense of Goldman’s other clients,”
creating a conflict of interest at odds with the company’s
public statements.
The complaint asserted that Goldman created similar
conflicts of interest in three other CDO transactions
involving subprime mortgages: Hudson Mezzanine
Funding 2006-1 (“Hudson”), Anderson Mezzanine Funding
2007-1 (“Anderson”), and Timberwolf I (“Timberwolf”).
Goldman allegedly contributed equity to the portfolios in
those transactions and told investors it was “aligned” with
them, while simultaneously holding substantial short
positions opposite their investments.
Although plaintiffs invested in Goldman—but not any
of the CDOs described above—they claimed Goldman’s
conflicted roles in the transactions revealed that the
company did not have “extensive procedures and
controls . . . designed to identify and address conflicts of
interest” and that it was not “dedicated to complying fully
with the letter and spirit of the laws,” as its public statements
had suggested.
8
Plaintiffs alleged that news of government
enforcement actions against Goldman on three occasions in
mid-2010 revealed the falsity of defendants’ statements and
caused the company’s share prices to decline. On April 16,
2010, the SEC filed a securities fraud action against Goldman
and one of its employees regarding the Abacus transaction,
for failing to disclose to potential investors that Paulson
played a significant role in the asset selection process.
Following the announcement, the company’s stock price
declined 13% from $184.27 to $160.70 per share on April 16,
2010. On April 30, 2010, the company’s share price dropped
another 9% from $160.24 to $145.20 after the Wall Street
Journal reported that Goldman was under investigation by
the Department of Justice for its purported role in the CDOs.
And on June 10, 2010, the press reported that the SEC was
investigating Goldman’s conduct in the Hudson CDO,
which resulted in a further 2% decline in the price of
Goldman stock. 2
According to plaintiffs, these three “corrective
disclosures” 3 revealed to the market the falsity of
2
The Complaint identified a fourth corrective disclosure on April
26, 2010, but plaintiffs have abandoned any reliance on that
disclosure, which did not contain news of government
enforcement activities and caused no statistically significant
movement in the price of Goldman’s stock.
3
A “corrective disclosure” is an announcement or series of
announcements that reveals to the market the falsity of a prior
statement. See Lentell v. Merrill Lynch & Co., 396 F.3d 161, 175 n.4
(2d Cir. 2005).
9
defendants’ statements regarding Goldman’s efforts to avoid
conflicts of interest. Plaintiffs claimed that, on April 16, April
30, and June 10, 2010, the market learned for the first time
that Goldman had created “clear conflicts of interest with its
own clients” by “intentionally packag[ing] and
s[elling] . . . securities that were designed to fail, while at the
same time reaping billions for itself or its favored clients by
taking massive short positions” in the same transactions.
Plaintiffs alleged that defendants made the misstatements
with the intent to defraud Goldman’s shareholders, and that
they lost, in total, over $13 billion as a result of defendants’
fraud.
Defendants initially moved to dismiss the complaint
pursuant to Federal Rules of Civil Procedure 9(b) and
12(b)(6), arguing the alleged misstatements were too general
and vague to be actionable as a matter of law. The District
Court denied defendants’ motion, holding that plaintiffs
sufficiently pleaded all six elements of a securities fraud
action. 4 See Richman, 868 F. Supp. 2d at 271–72, 279. The
District Court subsequently denied defendants’ motions for
reconsideration and interlocutory appeal. In re Goldman Sachs
Grp., Inc. Sec. Litig., No. 10 Civ. 3461, 2014 WL 2815571, at *6
(S.D.N.Y. June 23, 2014); In re Goldman Sachs Grp., Inc. Sec.
4
Those elements are “(1) a material misrepresentation or omission
by the defendant; (2) scienter; (3) a connection between the
misrepresentation or omission and the purchase or sale of a
security; (4) reliance upon the misrepresentation or omission;
(5) economic loss; and (6) loss causation.” Stoneridge Inv. Partners,
LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157 (2008).
10
Litig., No. 10 Civ. 3461, 2014 WL 5002090, at *3 (S.D.N.Y. Oct.
7, 2014).
II. Plaintiffs’ Motion for Class Certification
Plaintiffs then moved to certify a class consisting of
“[a]ll persons or entities who, between February 5, 2007 and
June 10, 2010, purchased or otherwise acquired the common
stock of The Goldman Sachs Group, Inc. . . . and were
damaged thereby.” Plaintiffs argued (and defendants did
not dispute) that they satisfied the requirements for class
certification under Federal Rule of Civil Procedure 23(a): The
class was sufficiently numerous, there were common issues
of law or fact, the claims of the representative parties were
typical of the claims of the class, and the representative
parties would fairly and adequately protect the interests of
the class.
Plaintiffs also argued they satisfied Rule 23(b)(3)
because common issues of law or fact predominated over
issues affecting only individual members and a class action
was the superior method of adjudicating the controversy. See
FED. R. CIV. P. 23(b)(3). To establish the predominance of
class-wide issues with respect to the reliance element of their
securities fraud claim, plaintiffs argued they were entitled to
a presumption that all class members relied on defendants’
misstatements in choosing to buy Goldman stock. The
presumption derives from Basic, 485 U.S. 224, and is based
on the theory “that the market price of shares traded on well-
developed markets reflects all publicly available
information, and, hence, any material misrepresentations.”
Id. at 246. If plaintiffs in a securities fraud class action
11
establish certain prerequisites—namely, that defendants’
misstatements were publicly known, their 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—the court presumes the market price
reflected the misstatements and that all class members relied
on that price when they chose to buy or sell shares. See
Halliburton Co. v. Erica P. John Fund, Inc. (Halliburton II), 134
S. Ct. 2398, 2413 (2014).
Defendants opposed class certification by attempting
to rebut the Basic presumption. They presented evidence in
the form of declarations and sworn affidavits that Goldman
stock experienced no price increase on the dates the
statements were made, and no price decrease on 34 occasions
before 2010 when the press reported Goldman’s conflicts of
interest in the Abacus, Hudson, Anderson, and Timberwolf
transactions. 5 For example, as early as December 6, 2007, the
5
Both plaintiffs’ and defendants’ experts used “event studies” to
determine whether an event or news report caused a statistically
significant change in the price of Goldman’s stock. An event study
isolates the stock price movement attributable to a company (as
opposed to market-wide or industry-wide movements) and then
examines whether the price movement on a given date is outside
the range of typical random stock price fluctuations observed for
that stock. If the isolated stock price movement falls outside the
range of typical random stock price fluctuations, it is statistically
significant. If the stock price movement is indistinguishable from
random price fluctuations, it cannot be attributed to company-
specific information announced on the event date. See Mark L.
Mitchell & Jeffry M. Netter, The Role of Financial Economics in
12
Financial Times ran a story suggesting that “Goldman’s
Glory May [B]e Short-lived,” due to numerous accusations
that it “behave[ed] unethically and perhaps [broke] the law”
in taking massive short positions in the U.S. housing market.
The article questioned Goldman’s ability to “manage
conflicts,” noting that “Goldman ha[d] been more aggressive
than any other bank” in “advis[ing] a company on a
transaction, financ[ing] it and invest[ing] its own money.”
Approximately one week later, the Dow Jones Business
News reported that Goldman had been subpoenaed for its
role in various CDO transactions that presented a “massive
conflict of interest with major liabilities.” Defendants’ expert
presented evidence that Goldman’s stock experienced no
price decline in response to these or similar reports about
Goldman’s conflicts in the CDOs.
Because the market did not react to defendants’
misstatements on the dates they were made or on the dates
defendants claim the truth about Goldman’s conflicts was
revealed, defendants argued the misstatements did not affect
the price of Goldman stock and plaintiffs could not have
relied on them in choosing to buy shares at that price. 6
Securities Fraud Cases: Applications at the Securities & Exchange
Commission, 49 BUS. LAW. 545, 556–69 (1994).
6
Defendants challenged the materiality of the misstatements
again in their opposition to the motion for class certification.
Although materiality is “an essential predicate of the fraud-on-
the-market theory,” it is common to the class and does not bear
on the predominance requirement of Rule 23(b)(3). Amgen Inc. v.
Conn. Ret. Plans & Trust Funds, 568 U.S. 455, 466–67 (2013).
13
Without holding an evidentiary hearing or oral
argument, the District Court rejected defendants’ arguments
and certified the class. See In re Goldman Sachs Grp., Inc. Sec.
Litig., No. 10 Civ. 3461, 2015 WL 5613150 (S.D.N.Y. Sept. 24,
2015). It concluded plaintiffs met all four elements of Rule
23(a) and established predominance under Rule 23(b)(3) by
invoking the Basic presumption of reliance. Id. at *3, 7.
Although the court acknowledged that defendants may
rebut the Basic presumption by a “preponderance of the
evidence,” id. at *4 n.3, it held that defendants failed to do so
in this case because they “d[id] not provide conclusive
evidence that no link exists between the price decline [of
Goldman stock] and the misrepresentation[s].” Id. at *7.
The District Court rejected defendants’ evidence that
the price of Goldman stock did not increase on the dates the
misstatements were made, because it determined they could
have served to maintain an already inflated stock price. See
id. at *6. It also rejected defendants’ evidence concerning a
lack of price impact when the news reported Goldman’s
conflicts in the CDOs, because, in its view, defendants’
evidence was either “an inappropriate truth on the market
defense” or an argument for materiality that the court
“w[ould] not consider” at the class certification stage. Id. at
*6 (internal quotation marks omitted). Even if it were to
consider the evidence, the court held it did not rebut the Basic
presumption of reliance because it “failed to conclusively
Therefore, the District Court correctly held that plaintiffs need not
prove the materiality of defendants’ misstatements at the class
certification stage, and we do not consider it on appeal.
14
sever th[e] link” between defendants’ statements and the
market price of Goldman stock. Id. at *7. Accordingly, the
court held plaintiffs were entitled to the presumption of
reliance and certified the class. Id. We granted defendants’
petition for leave to appeal pursuant to Federal Rule of Civil
Procedure 23(f).
DISCUSSION
No one disputes that plaintiffs satisfy the four
requirements of Rule 23(a). The battle is joined over whether
plaintiffs can meet the predominance requirement of Rule
23(b)(3), with respect to the reliance element of their
securities fraud claim. 7
I. Rule 23(b)(3) and the Basic Presumption of
Reliance
Reliance in a 10b-5 action ensures “a proper
connection between a defendant’s misrepresentation and a
plaintiff’s injury.” Erica P. John Fund, Inc. v. Halliburton Co.
(Halliburton I), 563 U.S. 804, 810 (2011) (internal quotation
7
The burden of proving compliance with Rule 23 rests with the
party moving for class certification. See Levitt v. J.P. Morgan Sec.,
Inc., 710 F.3d 454, 465 (2d Cir. 2013). On appeal, we review the
District Court’s grant of class certification for an abuse of
discretion, and the legal conclusions underlying that decision de
novo. See Barclays, 875 F.3d at 92. When a case involves the
application of legal standards, we look at whether the District
Court’s application “falls within the range of permissible
decisions.” Id.
15
marks omitted). “The traditional (and most direct) way a
plaintiff can demonstrate reliance is by showing that he was
[personally] aware of a company’s statement” and
purchased shares based on it. Id. But requiring that kind of
proof in a securities fraud class action “place[s] an
unnecessarily unrealistic evidentiary burden on the Rule
10b-5 plaintiff who has traded on an impersonal market.”
Basic, 485 U.S. at 245. If every plaintiff had to prove she relied
on a misrepresentation in choosing to buy stock, it would
effectively prevent investors from proceeding as a class;
individual issues of reliance would overwhelm common
ones and make certification under Rule 23(b)(3)
inappropriate in every case.
The Supreme Court in Basic sought to alleviate that
concern by permitting securities fraud plaintiffs to satisfy
Rule 23(b)(3) by invoking a rebuttable presumption of
reliance. The presumption derives from the “fraud-on-the-
market” theory, which holds that “the market price of shares
traded on [a] well-developed market[] reflects all publicly
available information, and, hence, any material
misrepresentations.” Id. at 246. As the Court in Basic
explained:
The fraud on the market theory is based
on the hypothesis that, in an open and
developed securities market, the price of
a company’s stock is determined by the
available material information regarding
the company and its
business. . . . Misleading statements will
therefore defraud purchasers of stock
16
even if the purchasers do not directly rely
on the misstatements.
Id. at 241–42 (internal quotation marks omitted).
“If a market is generally efficient in incorporating
publicly available information into a security’s market
price,” the fraud-on-the-market theory assumes investors
rely on that price as an “unbiased assessment of the
security’s value in light of all public information,” including
any material misrepresentations. Amgen, 568 U.S. at 462.
Basic endorsed the fraud-on-the-market theory and
applied it to class action lawsuits for securities fraud. It held
that if plaintiff-investors prove that a company’s
misstatement was public, the company’s stock traded in an
efficient market, and the plaintiffs purchased the stock after
the misstatement was made but before the truth was
revealed, they are entitled to a presumption that the
misstatement affected the stock price and that they
purchased stock in reliance on the integrity of that price.
Basic, 485 U.S. at 247, 248 n.27. Under the Basic presumption,
individual class members need not prove they actually relied
upon (or even knew about) the misstatement giving rise to
their claim; “anyone who buys or sells the stock at the market
price may be considered to have relied on th[e]
misstatement[].” Halliburton II, 134 S. Ct. at 2405.
The Basic presumption does not eliminate the
predominance requirement of Rule 23(b)(3) or the reliance
element of a 10b-5 action for fraud. It simply provides an
alternative means of satisfying those requirements, enabling
class action litigation of securities fraud claims where none
17
previously could have survived. See id. at 2414. Accordingly,
defendants opposing class certification may rebut the
presumption of reliance “through evidence that the
misrepresentation did not in fact affect the stock price.” Id.
The “fundamental premise” underlying the fraud-on-
the-market theory is “that an investor presumptively relies
on a misrepresentation” that “was reflected in the market
price at the time of his transaction.” Halliburton I, 563 U.S. at
813. If defendants “sever[] the link” between the
misrepresentation and the market price—by showing, for
example, that the misrepresentation was not public, the
shares did not trade in an efficient market, or “the
misrepresentation in fact did not lead to a distortion of
price”—both the theory and the presumption collapse. Basic,
485 U.S. at 248. “[T]he basis for finding that the fraud had
been transmitted through market price would be gone,” and
plaintiffs are no longer entitled to the presumption. Id.
Instead, each plaintiff must prove she actually relied on
defendants’ misrepresentations when choosing to buy or sell
stock, which dooms the predominance of class-wide issues
under Rule 23(b)(3) and defeats class certification. See
Halliburton II, 134 S. Ct. at 2416.
II. Rebuttal of the Basic Presumption
The parties agree that plaintiffs established the
preliminary elements to invoke the Basic presumption of
reliance: defendants’ misrepresentations were public,
Goldman’s shares traded in an efficient market, and the
putative class members purchased Goldman stock at the
relevant time (after the misstatements were made but before
18
the truth was revealed). The parties also agree that
defendants in a securities fraud class action may submit
rebuttal evidence of a lack of price impact at the class
certification stage. The principal question on appeal is
whether defendants bear the burden of production or
persuasion to rebut the Basic presumption.
Relying on Rule 301 of the Federal Rules of Evidence
and language in Basic, defendants argue they need only
produce—i.e., offer—evidence of a lack of price impact to
rebut the presumption. Rule 301 states that “the party
against whom a presumption is directed has the burden of
producing evidence to rebut the presumption,” while the
“burden of persuasion . . . remains on the party who had it
originally.” FED. R. EVID. 301. Because it is plaintiffs’ burden
to prove the predominance of class-wide issues and the
reliance element of their securities fraud claim, defendants
argue plaintiffs also bear the ultimate burden to persuade the
court that the statements at issue affected the market price of
Goldman stock. According to defendants, that rule comports
with the language in Basic that “[a]ny showing that severs the
link between the alleged misrepresentation and . . . the price
received (or paid) by the plaintiff” is sufficient to rebut the
presumption of reliance. Basic, 485 U.S. at 248 (emphasis
added). Defendants contend the District Court imposed an
impermissibly high evidentiary burden by requiring them to
rebut the Basic presumption with conclusive proof of a lack
of price impact.
After the District Court granted plaintiffs’ motion for
class certification, another panel of this Circuit concluded
that defendants in a securities fraud class action bear the
19
burden of persuasion to rebut the Basic presumption, and
that they must do so by a preponderance of the evidence. See
Barclays, 875 F.3d at 99. The Court in Barclays examined “the
development of the presumption and the burden the
[Supreme] Court imposed on plaintiffs to invoke it at the
class certification stage.” Id. at 100. It determined that the
language in Basic that “[a]ny showing that severs the link”
between the misstatement and the market price places a
burden of persuasion, rather than a burden of production, on
defendants seeking to rebut the presumption, because it
“requires defendants to do more than merely produce
evidence that might result in a favorable outcome.” Id. at 101.
They must demonstrate that the misrepresentation did not in
fact affect the stock’s price. Id.; see also Halliburton II. 134 S.
Ct. at 2405 (“[A] defendant c[an] rebut th[e] presumption in
a number of ways, including by showing that the alleged
misrepresentation did not actually affect the stock’s price—
that is, that the misrepresentation had no ‘price impact.’”).
The Barclays court also rejected the argument that Rule
301 of the Federal Rules of Evidence requires defendants
only to produce “some” evidence to rebut the presumption.
Rule 301 contemplates that a federal statute can alter the
traditional rule that the burden of persuasion remains on the
party who had it originally. See FED. R. EVID. 301 (“unless a
federal statute or these rules provide otherwise . . . the
burden of persuasion . . . remains on the party who had it
originally”). Because the Basic presumption is a substantive
doctrine of federal law that derives from the securities fraud
statutes, Barclays determined it altered the default rule and
20
imposed a burden of persuasion on defendants seeking to
rebut it. See Barclays, 875 F.3d at 102–03.
That conclusion is consistent with the purpose of the
presumption. As the Barclays court observed, the Basic
presumption is essential in putative class actions involving
securities fraud plaintiffs “who ha[ve] traded on an
impersonal market.” Id. at 101 (internal quotation marks
omitted). It would be “of little value” if defendants could
overcome it “by simply producing some evidence” of a lack
of price impact. Id. at 100–01 (emphasis added). Accordingly,
the panel concluded that Basic and its progeny require
defendants seeking to rebut the Basic presumption to
“demonstrate a lack of price impact by a preponderance of
the evidence at the class certification stage rather than merely
meet a burden of production.” Id. at 101.
Barclays makes clear that defendants seeking to rebut
the Basic presumption of reliance must do so by a
preponderance of the evidence. See id. Although the District
Court acknowledged that standard in a footnote its decision,
see In re Goldman Sachs Grp., Inc. Sec. Litig., No. 10 Civ. 3461,
2015 WL 5613150, at *4 n.3, it went on to find that defendants
failed to rebut the Basic presumption because they did not
“conclusively” prove a “complete absence of price impact,”
id. at *7. Because the District Court concluded its findings
with these words, it is unclear to us whether the court
required more of defendants than a preponderance of the
evidence. We therefore vacate the District Court’s order and
remand for it to reconsider defendants’ evidence in light of
the Barclays standard.
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III. Defendants’ Price Impact Evidence
Because we are remanding to the District Court to
reconsider defendants’ evidence under the Barclays
standard, one final issue regarding defendants’ rebuttal
evidence needs mention. In their opposition to class
certification, defendants’ expert presented evidence of 34
dates before 2010 in which various news sources reported
Goldman’s conflicts of interest in the Abacus, Hudson,
Anderson, and Timberwolf transactions, without any
accompanying decline in the price of Goldman stock. The
District Court construed this evidence as “an inappropriate
truth on the market defense” or as evidence of the
statements’ lack of materiality, neither of which the court
thought it could consider at the class certification stage. Id. at
*6 (internal quotation marks omitted). We agree with
defendants that this was error.
The “truth on the market” defense attacks the timing
of the plaintiffs’ purchase of shares, not price impact. The
theory is, essentially, that the market was already aware of
the truth regarding defendants’ misrepresentations at the
time the class members purchased their shares, meaning the
market price had already adjusted to the revelation of
defendants’ misstatements, and class members could not
have relied on those misstatements in choosing to buy stock.
See Amgen, 568 U.S. at 482; see also Basic, 485 U.S. at 248–49.
Contrary to the District Court’s characterization of
their evidence, defendants did not present a “truth on the
market” defense. Defendants did not argue, for example,
that Goldman’s conflicts of interest were already known to
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the market at the time plaintiffs purchased their shares of
Goldman common stock. Indeed, it was undisputed that
plaintiffs purchased their shares after the misstatements
were made but before the truth was revealed. Rather,
defendants presented evidence that the market learned the
truth about Goldman’s conflicts of interests in the Abacus,
Hudson, Anderson, and Timberwolf transactions on 34
occasions from 2007 to 2009, without any accompanying
decline in the price of Goldman stock. Defendants used that
evidence to show that their statements about Goldman’s
efforts to avoid conflicts of interest “did not actually affect
the stock’s market price.” Halliburton II, 134 S. Ct. at 2416.
Although price impact touches on materiality, which
is not an appropriate consideration at the class certification
stage, it “differs from materiality in a crucial respect.” Id.
Price impact “refers to the effect of a misrepresentation on a
stock price.” Halliburton I, 563 U.S. at 814. Whether a
misrepresentation was reflected in the market price at the
time of the transaction—whether it had price impact—"is
Basic’s fundamental premise. It . . . has everything to do with
the issue of predominance at the class certification stage.”
Halliburton II, 134 S. Ct. at 2416 (internal quotation marks and
citation omitted). If a defendant shows that an “alleged
misrepresentation did not, for whatever reason, actually
affect the market price” of defendant’s stock, “there is no
grounding for any contention that the investor indirectly
relied on that misrepresentation through his reliance on the
integrity of the market price”; the fraud-on-the-market
theory underlying the presumption would “completely
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collapse[].” Id. at 2408, 2414 (internal quotation marks and
brackets omitted).
Accordingly, the District Court erred in declining to
consider defendants’ evidence at this stage of the litigation.
We espouse no views as to whether the evidence is sufficient
to rebut the Basic presumption; we hold only that the District
Court should consider it on remand, in determining whether
defendants established by a preponderance of the evidence
that the misrepresentations did not in fact affect the market
price of Goldman stock. We encourage the court to hold any
evidentiary hearing or oral argument it deems appropriate
under the circumstances.
CONCLUSION
Defendants seeking to rebut the Basic presumption of
reliance must do so by a preponderance of the evidence. See
Barclays, 875 F.3d at 99. Because it is unclear whether the
District Court applied the correct standard in this case, we
VACATE the order of the District Court and REMAND for
further proceedings consistent with this opinion.
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