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Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System

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Supreme Court of the United States
Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System
Term: 2020
Important Dates
Argument: March 29, 2021
Decided: June 21, 2021
Outcome
Vacated and remanded
Vote
8-1
Majority
Amy Coney Barrett • Chief Justice John Roberts • Stephen Breyer • Elena Kagan • Brett Kavanaugh
Concurring
Sonia Sotomayor;
Neil Gorsuch • Clarence Thomas • Samuel Alito
Dissenting
Sonia Sotomayor;
Neil Gorsuch • Clarence Thomas • Samuel Alito

Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System is a case argued before the Supreme Court of the United States on March 29, 2021, during the court's October 2020-2021 term.

In an 8-1 opinion, the court vacated the U.S. Court of Appeals for the 2nd Circuit's ruling and remanded the case for further proceedings, holding that (1) the generic nature of a misrepresentation often is important evidence of price impact that courts should consider at class certification, including in inflation-maintenance cases, and (2) defendants bear the burden of persuasion to prove a lack of price impact by a preponderance of the evidence at class certification. Justice Amy Coney Barrett delivered the majority opinion of the court. Justice Sonia Sotomayor filed an opinion concurring in part and dissenting from the judgment. Justice Neil Gorsuch filed an opinion concurring in part and dissenting in part, joined by Justices Clarence Thomas and Samuel Alito.[1] Click here for more information about the ruling.

HIGHLIGHTS
  • The case: Between 2006 and 2010, Goldman Sachs Group ("Goldman"), a multinational investment banking firm, made public statements about its business practices. A group of Goldman shareholders ("Shareholders") alleged in federal district court that the statements were false because Goldman made them with the knowledge that the company had several undisclosed conflicts of interest. Allegedly, Goldman was publicly marketing risky financial products as ordinary asset-backed securities while internally, the company was allowing a hedge fund client access to create the products. Then, both Goldman and the client bet against the products, meaning that they would profit off of the transaction performing poorly or failing. Meanwhile, the shareholders experienced financial losses on the transactions. In 2010, Goldman disclosed its conflicts of interest. In 2011, the Shareholders filed a class action complaint against Goldman. On remand from the U.S. Court of Appeals for the 2nd Circuit, the district court certified the class. Goldman requested that the certification be reversed. On appeal, the 2nd Circuit affirmed the district court's judgment.
  • The issues: The case concerned class action lawsuits pertaining to securities fraud and demonstrating the element of materiality in such cases.
  • The questions presented:
    "1. Whether a defendant in a securities class action may rebut the presumption of classwide reliance recognized in Basic Inc. v. Levinson, 485 U.S. 224 (1988), by pointing to the generic nature of the alleged misstatements in showing that the statements had no impact on the price of the security, even though that evidence is also relevant to the substantive element of materiality.
    "2. Whether a defendant seeking to rebut the Basic presumption has only a burden of production or also the ultimate burden of persuasion."[2]
  • The outcome: The U.S. Supreme Court vacated the U.S. Court of Appeals for the 2nd Circuit's ruling and remanded the case for further proceedings.


    • The case came on a writ of certiorari to the United States Court of Appeals for the 2nd Circuit. Click here to review the lower court's opinion.[3]

    Timeline

    The following timeline details key events in this case:

    Background

    Between 2006 and 2010, Goldman Sachs Group ("Goldman"), a multinational investment banking firm, made statements about its business practices. A group of individuals and institutions holding shares of Goldman's common stock ("Shareholders") alleged that the statements were false because Goldman made them with the knowledge that the company had several undisclosed conflicts of interest. The conflicts at issue were related to several collateralized debt obligation ("CDO") transactions involving subprime mortgages, including the Abacus 2007 AC-1 ("Abacus") transaction.[4] Publicly, Abacus was marketed as an ordinary asset-backed security through which investors could buy shares in bundles of mortgages, in hopes that the mortgages would succeed. Internally, Goldman allegedly allowed the hedge fund Paulson & Co. to select mortgages for inclusion in the CDO. Paulson bet against Abacus' financial success via short-selling mortgages it deemed to be risky, meaning that they were presumed to perform poorly or fail.[5] Paulson profited approximately $1 billion from these transactions. Later, Goldman stated that it failed to disclose Paulson's role in selecting the mortgages for the CDO and reached a $550 million settlement with the Securities and Exchange Commission (SEC).[6] Goldman allegedly engaged in similar conduct related to three other CDOs. At times, Goldman allegedly represented to its investors that it was aligned with them regarding the mortgages' success when it was short-selling against their investment positions.[3]

    In 2011, the Shareholders filed a class action complaint in the U.S. District Court for the Southern District of New York against Goldman, alleging that the firm violated the Securities Exchange Act of 1934. The Shareholders argued that by not disclosing its conflicts of interest, Goldman artificially maintained an inflated stock price and the later disclosures of conflict, as in the Abacus transaction, were corrective disclosures that caused the market to devalue Goldman shares.[3] Ultimately, the Shareholders argued, Goldman intentionally sold securities designed to fail to its own clients while Goldman and others of its clients profited through taking short positions on the same transactions. The Shareholders asserted they lost more than $13 billion as a result of Goldman's alleged fraud.[3]

    Goldman moved to dismiss the case under the Federal Rules of Civil Procedure, arguing that the alleged misstatements were not material as a matter of law, meaning that they were too general to be relied upon for determining Goldman's value and therefore could not have impacted the stock prices, and that any loss experienced by the shareholders was a result of something other than the corrective disclosures.[3] The Southern District of New York held that most of Goldman's statements were material and dismissed the complaint to the extent that it relied upon statements that were not material. Goldman requested reconsideration and the district court denied the motions. The shareholders then moved to be certified as a class for the class action complaint and the district court certified the class. On appeal, the U.S. Court of Appeals for the 2nd Circuit vacated the ruling and remanded the case back to district court for reconsideration.[3]

    On remand, the Southern District of New York certified the class. Goldman appealed to the 2nd Circuit. The 2nd Circuit affirmed the district court's ruling and remanded the case for further proceedings.[3]

    Goldman's public statements

    The following quotation of Goldman Sachs Group's public statements at issue in the case has been sourced from the 2nd Circuit opinion:[3]

    “ 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 ....


    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.[7]

    		”

    Questions presented

    The petitioner presented the following questions to the court:[2]

    Questions presented:
    “ 1. Whether a defendant in a securities class action may rebut the presumption of classwide reliance recognized in Basic Inc. v. Levinson, 485 U.S. 224 (1988), by pointing to the generic nature of the alleged misstatements in showing that the statements had no impact on the price of the security, even though that evidence is also relevant to the substantive element of materiality.
    2. Whether a defendant seeking to rebut the Basic presumption has only a burden of production or also the ultimate burden of persuasion.[7]     		”

    Oral argument

    Audio

    Audio of oral argument:[8]



    Transcript

    Transcript of oral argument:

    Outcome

    In an 8-1 opinion, the court vacated the U.S. Court of Appeals for the 2nd Circuit's ruling and remanded the case for further proceedings, holding that (1) the generic nature of a misrepresentation often is important evidence of price impact that courts should consider at class certification, including in inflation-maintenance cases, and (2) defendants bear the burden of persuasion to prove a lack of price impact by a preponderance of the evidence at class certification. Justice Amy Coney Barrett delivered the majority opinion of the court. Justice Sonia Sotomayor filed an opinion concurring in part and dissenting from the judgment. Justice Neil Gorsuch filed an opinion concurring in part and dissenting in part, joined by Justices Clarence Thomas and Samuel Alito.[1]

    Opinion

    In the court's majority opinion, Justice Amy Coney Barrett wrote:[1]

    “ This case involves a securities-fraud class action filed by several pension funds against The Goldman Sachs Group, Inc., and three of its former executives (collectively, Goldman). Plaintiffs allege that Goldman maintained an artificially inflated stock price by making generic statements about its ability to manage conflicts—for example, “We have extensive procedures and controls that are designed to identify and address conflicts of interest.” Plaintiffs say that Goldman’s generic statements were false or misleading in light of several undisclosed conflicts of interest, and that once the truth about Goldman’s conflicts came out, Goldman’s stock price dropped and shareholders suffered losses.


    Below, this securities-fraud class action proceeded in typical fashion. Plaintiffs sought to certify a class of Goldman shareholders by invoking the presumption endorsed by this Court in Basic Inc. v. Levinson, 485 U.S. 224 (1988). The Basic presumption is premised on the theory that investors rely on the market price of a company’s security, which in an efficient market incorporates all of the company’s public misrepresentations. For its part, Goldman sought to defeat class certification by rebutting the Basic presumption through evidence that its alleged misrepresentations actually had no impac on its stock price. After determining that Goldman had failed to carry its burden of proving a lack of price impact, the District Court certified the class, and the Second Circuit affirmed.

    In this Court, Goldman argues that the Second Circuit erred twice: first, by holding that the generic nature of its alleged misrepresentations is irrelevant to the price impact inquiry; and second, by assigning Goldman the burden of persuasion to prove a lack of price impact.

    On the first question, the parties now agree, as do we, that the generic nature of a misrepresentation often is important evidence of price impact that courts should consider at class certification. Because we conclude that the Second Circuit may not have properly considered the generic nature of Goldman’s alleged misrepresentations, we vacate and remand for the Court of Appeals to reassess the District Court’s price impact determination. On the second question, we agree with the Second Circuit that our precedents require defendants to bear the burden of persuasion to prove a lack of price impact by a preponderance of the evidence. We emphasize, though, that the burden of persuasion should rarely be outcome determinative.

    ... The Second Circuit correctly placed the burden of proving a lack of price impact on Goldman. But because it is unclear whether the Second Circuit properly considered the generic nature of Goldman’s alleged misrepresentations in reviewing the District Court’s price impact determination, we vacate the judgment of the Second Circuit and remand the case for further proceedings consistent with this opinion.[7]

    		”
    —Justice Amy Coney Barrett

    Concurring in part, dissenting in part

    Justice Sotomayor

    Justice Sonia Sotomayor filed an opinion concurring in part and dissenting from the judgment.[1]

    In her opinion, Justice Sotomayor wrote:[1]

    “ I agree with the Court’s answers to the questions presented, and I accordingly join Parts I, II–A–1, and II–B of the Court’s opinion. Under Basic Inc. v. Levinson, 485 U. S. 224 (1988), securities plaintiffs may demonstrate reliance by invoking the rebuttable presumption that investors rely on any misrepresentations reflected in a security’s market price. Id., at 241–247. The Basic presumption is particularly useful to class-action plaintiffs who, without the presumption, ordinarily could not demonstrate that questions common to the class predominate over individual ones. Ante, at 3–4. Defendants, for their part, may rebut the Basic presumption by demonstrating that the alleged misrepresentations did not in fact affect the security’s price. Ante, at 3. So-called “price impact” may be disproved with a variety of evidence, alone or in combination. As the Court holds today, one potentially relevant piece of evidence may be the “generic nature” of the misrepresentation. Ante, at 6–8.


    I do not, however, join the Court’s judgment to vacate and remand because I believe the Second Circuit “properly considered the generic nature of Goldman’s alleged misrepresentations.” Ante, at 8. On appeal, Goldman did not contend that the District Court improperly refused to consider the generic nature of the alleged misstatements as evidence of price impact (or lack thereof ). Instead, Goldman argued that “general statements, like those challenged here, are incapable of impacting a company’s stock price as a matter of law” because they are “‘too general to cause a reasonable investor to rely upon them.’” Brief for Appellants in No. 18–3667 (CA2), pp. 43, 46. Goldman reasoned that “the challenged statements are incapable of maintaining inflation in a stock price for the same reasons that those statements are immaterial as a matter of law (as well as fact).” Id., at 48. ...

    ... In short, the Second Circuit did not address whether the generic nature of a misstatement may be used as evidence to disprove price impact for a simple reason: Goldman identified no error in the District Court’s treatment of such evidence. Goldman did not press the argument in the Second Circuit that it now urges here, and the Second Circuit did not reject the proposition that this Court now adopts. Thus, the argument Goldman seeks to press on remand is unpreserved, and nothing in the Second Circuit’s opinion misstates the law. Because affirmance is appropriate under these circumstances, I respectfully dissent from Part II–A–2 of the Court’s opinion and from the judgment of the Court.[7]

    		”
    —Justice Sonia Sotomayor

    Justice Gorsuch

    Justice Neil Gorsuch filed an opinion concurring in part and dissenting in part, joined by Justices Clarence Thomas and Samuel Alito.[1]

    In his opinion, Justice Gorsuch wrote:

    “ I join all but Part II–B of the Court’s opinion. There, the Court holds that the defendant, rather than the plaintiff, "bear[s] the burden of persuasion on price impact.” Ante, at 9. Respectfully, I disagree.


    ... Before us, the only meaningful dispute concerns what burden a defendant bears when it comes to rebutting the Basic presumption. Does the defendant carry only a burden of production, or does the defendant sometimes carry a burden of persuasion? In my view, only a burden of production is involved.

    ... Perhaps recognizing the incongruity of its conclusion, the Court goes out of its way to downplay its significance. We’re told that “on the ground” today’s holding “is unlikely to make much difference” because “[i]n most securities-fraud class actions . . . the plaintiffs and defendants submit competing expert evidence on price impact.” Ante, at 12. And in cases like these, “[t]he district court’s task,” according to the Court, “is simply to assess all the evidence of price impact” and “determine whether it is more likely than not that the alleged misrepresentations had a price impact.” Ibid.

    This is a curious disavowal. Obviously, the Court thinks the issue important enough to spend the time and effort to rejigger the burden of persuasion. Now, though, it says none of this matters because most cases come down to a dispute over evidence of price impact irrespective of the presumption. The Court’s suggestion that the burden of persuasion will “rarely” make a “difference” misses the point too. The whole reason we allocate the burden of persuasion is to resolve close cases by providing a tie breaker where the burden does make a difference. That close cases may not be common ones is no justification for indifference about how the law resolves them.

    Respectfully, I dissent.[7]

    		”
    —Justice Neil Gorsuch


    Text of the opinion

    Read the full opinion here.

    See also

    External links

    Footnotes

    1. ↑ 1.0 1.1 1.2 1.3 1.4 1.5 U.S. Supreme Court, Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System, decided June 21, 2021
    2. ↑ 2.0 2.1 Supreme Court of the United States, "20-222 GOLDMAN SACHS GROUP, INC. V. ARKANSAS TEACHER RETIREMENT SYSTEM: Questions presented," accessed February 2, 2021
    3. ↑ 3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 United States Court of Appeals for the 2nd Circuit Ark. Teacher Ret. Sys. v. Goldman Sachs Grp., decided April 7, 2020
    4. ↑ Investopedia, "Collateralized Debt Obligation (CDO)," accessed February 5, 2021
    5. ↑ Investor.gov, "Short Sales," accessed February 5, 2021
    6. ↑ SEC.gov, "Goldman Sachs to Pay Record $550 Million to Settle SEC Charges Related to Subprime Mortgage CDO," July 15, 2010
    7. ↑ 7.0 7.1 7.2 7.3 7.4 Note: This text is quoted verbatim from the original source. Any inconsistencies are attributable to the original source.
    8. ↑ Supreme Court of the United States, "Oral Argument - Audio," accessed March 30, 2021
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