Supreme Court To Revisit Class Certification Factors For Securities Fraud Cases

On December 11, 2020, the United States Supreme Court granted certiorari in a shareholder securities class action against Goldman Sachs (“Goldman”) to resolve whether “materiality” and stock price-impact determinations may be made at the class certification stage. Arkansas Teacher Ret. Sys. v. Goldman Sachs Grp., Inc., 955 F.3d 254 (2d Cir. 2020), cert. granted sub nom. Goldman Sachs Grp. v. AR Teacher Ret., No. 20-222, 2020 WL 7296815 (U.S. Dec. 11, 2020).

The complaint, which was originally filed in 2011, alleged that Goldman’s stock price was artificially maintained at a high level due to Goldman privately allowing its clients to select mortgages that were packaged as collateralized debt obligations, thereby violating Section 10(b) of the Securities Exchange Act of 1934. Id. Plaintiffs relied on a “price-maintenance” theory, which is when an action alleges that a defendant’s stock price was artificially inflated. A benefit of the price-maintenance theory is that plaintiffs are spared from having to prove the alleged securities law violation had a specific impact on a Company’s stock price. 

A major issue in the case is whether Goldman rebutted the “fraud on the market” presumption of reliance set forth by the Supreme Court in Basic Inc. v. Levinson, 485 U.S. 224, 108 S. Ct. 978, 99 L. Ed. 2d 194 (1988). To establish the rebuttable presumption of reliance in a securities fraud action, the plaintiff must prove that (1) the defendants’ misstatements were publicly known, (2) their shares traded in efficient market, and (3) plaintiffs purchased shares at market price after misstatements were made but before truth was revealed. Id.

Goldman argued that the Supreme Court’s decision in Halliburton Co. v. Erica P. John Fund, Inc. (Halliburton II), 573 U.S. 258, 268, 134 S.Ct. 2398, 189 L.Ed.2d 339 (2014), allows courts to consider evidence of price impact on a Company’s stock at the class certification stage and that alleged general misstatements are incapable of maintaining stock price inflation for the same reason the statements are immaterial.  This argument was accepted in the Seventh Circuit’s recent decision in In re Allstate Corp. Sec. Litig., 966 F.3d 595 (7th Cir. 2020), which vacated a class certification order after the district court refused to consider whether the defendant’s public statements impacted its stock price. The Seventh Circuit in In re Allstate Corp. Sec. Litig. also remanded the case, instructing the lower court to consider evidence rebutting the “fraud on the market” presumption at the class certification stage. Id. On remand, the lower court found that defendants failed to rebut the presumption and ruled in favor of plaintiffs. In re Allstate Corp. Sec. Litig., No. 16 C 10510, 2019 WL 1512268 (N.D. Ill. Mar. 26, 2019), vacated and remanded, 966 F.3d 595 (7th Cir. 2020).

However, plaintiffs’ counsel argued the Supreme Court’s ruling in Amgen Inc. v. Connecticut Ret. Plans & Tr. Funds, 568 U.S. 455, 474, 133 S.Ct. 1184, 185 L.Ed.2d 308 (2013) does not require plaintiffs to prove that defendant’s misrepresentations were material at the class certification stage. Arkansas Teacher Ret. Sys. v. Goldman Sachs Grp., Inc., 955 F.3d 254 (2d Cir. 2020). The Second Circuit agreed with the plaintiffs and followed Amgen Inc. v. Connecticut Ret. Plans & Tr. Funds, holding that the “materiality” of allegedly misleading statements is not an appropriate consideration at the class certification stage and that defendants normally challenge the “materiality” element at the motion to dismiss or summary judgment stage of litigation. Arkansas Teacher Ret. Sys. v. Goldman Sachs Grp., Inc., 955 F.3d 254 (2d Cir. 2020).

The Supreme Court granted Goldman’s writ of certiorari based on the Second Circuit’s determination. The Supreme Court’s decision will resolve the circuit split as to whether “materiality” and price-impact determinations may be made at the class certification stage and may dramatically alter future securities litigation cases.