On December 8, 2021, Judge Paul A. Crotty of the United States District Court for Southern District of New York granted a motion for class certification in a securities fraud class action against a global financial institution (the “Company”) under the Securities Exchange Act of 1934. In re Goldman Sachs Group, Inc. Sec. Litig.
, No. 10-3461 (PAC) (Dec. 8, 2021). This is the third time the District Court has granted plaintiffs’ motion for class certification in this case, following several decisions by the Second Circuit and the Supreme Court.
Most recently, the District Court’s second class certification order was the subject of Supreme Court review. In June 2021, in a decision covered here
, the Supreme Court vacated and remanded the Second Circuit’s decision upholding the district court’s certification of a class because there was “sufficient doubt” as to whether the Second Circuit had considered the generic nature of the Company’s misrepresentations. Specifically, the Supreme Court held that, in the context of class certification in a case involving claims under Section 10(b) of the Exchange Act: (i) the generic nature of a misrepresentation is important evidence of price impact that courts should consider at the class certification stage, regardless of whether that evidence overlaps with materiality and any other merits issue, and (ii) defendants bear the burden of persuasion to prove a lack of price impact by a preponderance of the evidence in order to rebut the presumption of reliance established under the Supreme Court’s decision in Basic Inc. v. Levinson
. In a decision covered here
, the Second Circuit noted that the District Court’s class certification decision did not discuss either the generic nature of the alleged misrepresentations in its evaluation of the evidence relevant to price impact, or the parties’ expert and rebuttal reports that focused on the generic nature of the alleged statements. The Second Circuit therefore remanded the case to the District Court, holding that the parties’ arguments “raise fact-intensive issues better evaluated by the district court in the first instance.”
On December 8, 2021, following remand from the Second Circuit, the District Court held that, even under the “clarified guidance” from the Supreme Court, defendants failed to rebut the Basic
presumption of classwide reliance by a preponderance of the evidence. The District Court found that the evidence indicated that the alleged misstatements had some impact on the price of defendant’s stock during the class period. Plaintiffs claimed that the Company’s statements concerning certain policies and business practices—including that the Company had robust institutional systems to manage and mitigate conflicts of interests—worked to maintain an inflated share price. Both parties presented evidence concerning price impact through briefing, supplemental briefing, expert reports, and an evidentiary hearing. The District Court concluded that plaintiffs’ expert report “at the very least, establishe[d] a link between the news of the Company’s conflicts and the subsequent stock price declines” and did not find defendants’ experts’ analyses persuasive in undermining that link. The District Court recognized that the Supreme Court clarified that courts “may not end their inquiry there” but “must also evaluate whether the subsequent inference required for class certification under the inflation-maintenance theory . . . is fatally undermined by the generic nature of those misstatements, a ‘mismatch’ in genericness between misstatement and corrective disclosure, or other common-sense factors.” The District Court concluded, however, that a “review of all evidence probative of price impact reveals that the alleged misstatements had some impact on the price of [the Company]’s stock” during the class period, and accordingly, defendants failed to establish a lack of price impact by a preponderance of the evidence.
In coming to this conclusion, the District Court addressed a number of arguments concerning the generic nature of the Company’s misrepresentations. First, the District Court rejected the argument that the “generic” statements at issue could not exert any price impact as a matter of law—noting that the Supreme Court did not address this question directly and that Justice Sotomayor stated in her concurrence that the genericness-as-a-matter-of-law test was “materiality by another name.”
Second, the District Court found that the alleged misstatements were not so generic as to diminish their power to maintain pre-existing price inflation, and that while some may “present as platitudes when read in isolation, others are significantly more substantive.” As examples of what the District Court found “more substantive,” the Court included statements such as: “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” and “[w]e have extensive procedures and controls that are designed to identify and address conflicts of interest.” The District Court stated that even what it conceded were more generic statements—such as that “[i]ntegrity and honesty are at the heart of our business”—“may reinforce misconceptions about [the Company]’s business practices” when read in conjunction with one another and more specific statements. The District Court also found that plaintiffs’ expert’s report linking the three alleged corrective disclosures to statistically significant drops in the Company’s share price was strong evidence that the statements did maintain price inflation.
Third, the District Court found that the Company had presented no evidence purporting to demonstrate that if the Company had replaced the alleged misstatements with the alleged truth about its conflicts, its stock price would have held fast. Although the District Court credited the defense expert’s testimony that “some of the alleged misstatements here were unlikely, in a vacuum, to consciously influence investor behavior,” the Court also found persuasive plaintiffs’ expert’s critique that “truthful, contrary substitutes for the alleged misstatements would have impacted investors’ subsequent decision-making.” The Court stated that “the proper measure of inflation maintenance by a company that chooses to speak ‘is not what might have happened had a company remained silent, but what would have happened if it had spoken truthfully.’” (quoting In re Vivendi, S.A. Sec. Litig.
, 838 F.3d 223, 257 (2d Cir. 2016)).
Fourth, the District Court rejected what it characterized as the Company’s argument that the issuing of generic statements of the kind made by many other companies means that investors do not rely on those statements. The Court stated that what it called “this ‘strength-in-numbers’ argument” misconstrues the inflation-maintenance theory, which the Court found does not hinge on “whether such statements were consciously relied upon, in the moment, by investors evaluating [defendant]” but rather on “whether the statements maintained an already-inflated stock price” by “reinforc[ing]” a misconception.
Finally, the District Court addressed the alleged “mismatch” between the purported generic misstatements and subsequent corrective disclosures. The Supreme Court stated that, under the inflation-maintenance theory, the inference of price impact “starts to break down when there is a mismatch between the contents of the misrepresentation and the corrective disclosure” because, “[u]nder those circumstances, it is less likely that the specific disclosure actually corrected the generic misrepresentation.” The District Court interpreted this as a “sliding scale” that should be used to orient a trial court’s review of this particular evidentiary issue. Under this approach, the District Court found the alleged misstatements “are not so exceedingly more generic than the corrective disclosures that they vanquish the otherwise strong inference of price impact embedded in the evidentiary record.” The District Court concluded that the “comfortable, though certainly not boundless, gap in genericness between the alleged misstatements and subsequent corrective disclosures fails to satisfy the Company’s burden to demonstrate a complete lack of price impact attributable to the alleged misstatements.”
As we noted at the time, the Supreme Court’s decision this past June may help give defendants a better chance of rebutting the classwide reliance presumption by providing evidence that there was no price impact given the generic nature of the alleged misstatements, but it did not provide lower courts with a bright-line rule. The District Court’s application of the Supreme Court’s guidance shows that in the absence such a rule, it may not be difficult for courts to find that a combination of a stock price decline and generic alleged misstatements is sufficient.