Securities Regulation Daily High Court to hear petition on rebuttal of Basic presumption
Monday, December 14, 2020

High Court to hear petition on rebuttal of Basic presumption

By Rodney F. Tonkovic, J.D.

The Court will consider what petitioner Goldman Sachs says is "the most important securities case" since Halliburton II.

The Supreme Court will hear a petition arguing that defendants should be permitted to rebut the Basic presumption of reliance by pointing to evidence that may also be relevant to the question of materiality. Pointing to the "generic" and "aspirational nature of the alleged misstatements, the petition argues that a court should not reject price-impact evidence simply because it may also have implications for merits issues. (Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System, December 11, 2020).

The petition asks the court to reverse a decision upholding class certification in a suit alleging that Goldman Sachs Group, Inc. falsely represented its ability to remain conflict-free despite participating in a conflicted collateralized debt obligation (CDO). At issue is whether a defendant in a securities class action may rebut the presumption of classwide reliance recognized in Basic Inc. v. Levinson 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. The petitioners assert that this case is "the most important securities case to come before the Court" since Halliburton II, and it is possible, at least plausible, that this case may be a vehicle for allowing more of the merits of a securities class action to be addressed at the class certification stage. Several amici have filed in support of the petitioners, including SIFMA and a group of former SEC officials and law professors.

Class certified. The complaint alleged that Goldman Sachs misrepresented its commitment to putting the interests of its clients first while it knew that it was riddled with undisclosed conflicts of interest. The shareholders focused in particular upon a 2007 CDO transaction in subprime mortgages in which Goldman had allowed a hedge fund to actively select risky mortgages as part of the portfolio while the hedge fund bet against that same portfolio via short sales. The district court certified the class, concluding that the Basic presumption applied because there was no real dispute that the market for Goldman's stock was efficient and because the plaintiffs’ demonstrated an obvious link between the release of information revealing the misstatements to the market and the subsequent drop in stock price.

The Second Circuit affirms. On appeal, however, the Second Circuit reversed, deciding that the district court had not properly applied the preponderance-of-the-evidence standard under the Supreme Court’s 2014 opinion in Halliburton Co. v. Erica P. John Fund, Inc. (Halliburton II ). On remand, the district court again certified the class, and this time a divided panel of the Second Circuit affirmed. The court rejected Goldman Sachs's effort to rebut the Basic presumption by pointing to the generic and aspirational nature of the alleged misstatements in an attempt to show that the statements had no impact on the price of the security, stating that a contrary rule would permit a defendant to smuggle materiality into a Rule 23 price-impact inquiry at the class-certification stage. A request for rehearing or rehearing en banc was denied.

"Most important" case since Halliburton II. The petition argues that the Second Circuit's decision guarantees certification in almost any class action premised, as here, on the "inflation maintenance" theory. Under that theory, which has never been recognized by the Court, plaintiffs seeking class certification need only identify a drop in a company's stock price and then assert that the alleged misconduct not only artificially inflated the price, but also kept it from decreasing. The circuit decision conflicts with Halliburton II by preventing a defendant from relying on the nature of the alleged misstatements to show the absence of an impact on the price of a security when seeking to rebut the Basic presumption at the class-certification stage. According to the petitioners, the Second Circuit's characterization of an inquiry into the nature of the alleged misstatements as merely a "means for smuggling materiality into Rule 23" directly conflicts with Halliburton II’s mandate that evidence of price impact should not be "artificially limit[ed]" simply because that proof may also be highly relevant at the merits stage.

In their brief in opposition, the respondents maintain that there is no circuit conflict and that the Second Circuit's decision was correct. No court, the respondents say, has ever accepted what Goldman argues: that a defendant can defeat class certification by showing that its challenged statements are immaterial, so long as it labels that argument a "price impact," rather than a "materiality," defense. The logic of Halliburton II precludes defendants from attempting to disprove price impact by arguing that the statements were immaterial. Goldman would lose under its own argument because its statements were material, despite its assertions to the contrary, the brief says in conclusion.

In its reply brief, Goldman accuses the respondents of recasting the petition's main argument in terms of Amgen, that is, as a request for resolution at the class certification stage of the merits issue of materiality. The brief insists, however, that the Second Circuit's decision conflicts with Halliburton II by barring a defendant from pointing to the generic nature of the statements on which a plaintiff's claim is based as part of showing no price impact, even though that evidence may also be relevant to materiality. To this point, the brief cites the dissent by Judge Sullivan in the Second Circuit case and a Seventh Circuit opinion (for which then-Judge Barrett was on the panel) explaining that a court may not refuse to consider price-impact evidence simply because it may also have implications for merits issues.

Lack of standing. In other news of interest, the Court issued an opinion blocking a bid by a judicial aspirant challenging how Delaware selects its judges. On December 10, 2020, the Court held in Carney v. Adams, that the would-be judge failed to show that he was "able and ready" to apply for a judicial vacancy and thus lacked standing to bring a constitutional challenge against Delaware's party-membership requirements for its judiciary. Without reaching the merits of the case, an 8-0 Court overturned a Third Circuit holding that Delaware’s political-party restrictions for certain judicial appointments violate the U.S. Constitution. Calling this a "highly fact-specific case" that "begins and ends with standing," Justice Breyer wrote that the lawyer challenging the restrictions did not suffer an injury in fact in part because he lacked a concrete intention to apply for judicial vacancies.

Read the Docket. These cases, and others before the Court may be referenced in the latest version of the Supreme Court Docket. Issued opinions, granted petitions, pending petitions, and denied petitions are listed separately, along with a summary of the questions presented and the current status of each appeal.

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