SECOND CIRCUIT DECERTIFIES CLASS IN GOLDMAN, ENDING 13-YEAR SAGA

After thirteen years, several trips to the Second Circuit and one to the U.S. Supreme Court, last year the Second Circuit delivered the death blow to the securities fraud 10b-5 class action Arkansas Teacher Retirement System v. Goldman Sachs Group, Inc., 77 F. 4th 74 (2d Cir. 2023), when it held that the Southern District of New York had erroneously certified a class of shareholders claiming over $13 billion in losses because Defendants had successfully demonstrated that the misrepresentations did not impact the stock price and that, in turn, they rebutted the legal presumption of reliance.  After this decision, Plaintiffs agreed to a voluntarily dismissal, thus ending the litigation.  But while the Goldman saga may have come to an end, its impact on future securities fraud class actions is likely just beginning.  

The case, dating back to 2010, stems from allegedly material misrepresentations and omissions made by Goldman Sachs and other defendants to investors about Goldman’s approach to managing conflicts of interest and its business principles, e.g. “[w]e are dedicated to complying with the letter and spirit of the laws, rules and ethical principles that govern us” and “[w]e have extensive procedures and controls that are designed to identify and address conflicts of interest…”, which Plaintiffs allege maintained Goldman’s already-inflated stock.  Plaintiffs further allege that revelations of previously undisclosed conflicts of interest revealed that these statements were false, causing the stock to drop.  Id. at 81-82.  One notable example includes a corrective disclosure involving an SEC enforcement action regarding a synthetic collateralized debt obligation, or CDO, which a Goldman Sachs hedge fund client was active in, and who, unbeknownst to investors, was taking a position in a CDO transaction contrary to what Goldman was marketing to investors.[1] In this instance, Plaintiffs argued that this corrective disclosure, and others which disclosed a DOJ and additional SEC investigation, revealed to the market that Defendants’ statements regarding business principles and conflicts management practices were false. Id. at 84.

The Second Circuit held that there was a mismatch between the generic false and misleading statements about business principles and conflicts management which allegedly inflated the stock and the corrective disclosures regarding actions taken by the SEC and DOJ.  Citing to the Supreme Court decision Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System, 141 S. Ct. 1951, 1961 (2021), the Second Circuit noted that such “a gap in genericness between misrepresentations and corrective disclosure reduces the likelihood that investors would understand the ‘specific disclosure [to have] actually corrected the generic misrepresentation’, and, in such a scenario, the back-end-front-end inference starts to break down.” (internal citation omitted).  Goldman, 77 F. 4th at 99.  Here, the corrective disclosures did not specifically reference the misstatements, Id. at 99, and the Second Circuit held “there is an insufficient link between the corrective disclosures and the alleged misrepresentations,” that the misrepresentations did not impact the stock price, and that Defendants rebutted the presumption of reliance.  Id. at 105.

Notably, the Second Circuit disagreed with the district court’s finding that while “the challenged ‘statements were [not] consciously relied upon, in the moment, by investors evaluating Goldman,’” if Goldman had disclosed the details and extent of its misconduct in the misstatements, then this would have impacted the price of the stock.  Id. at 100.  The Second Circuit held that, where a gap between the corrective disclosure and misstatement exists, “courts should ask…whether a truthful–but equally generic–substitute for the alleged misrepresentations would have impacted the stock price.”  Id. at 102.  

This latest Goldman decision is now the controlling Second Circuit interpretation.  The Supreme Court’s Goldman opinion presents a significant new development in the law regarding a Defendant’s ability to challenge the Basic presumption of reliance.   It can be expected to spawn significant new rulings among the appellate courts nationwide.  

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