Opinion analysis

Supreme Court Monday Decide in Goldman Sachs Group v. Arkansas Teacher Retirement System Will not be remembered as one of the court’s pioneering securities cases. In fact, it may not even change the results of previous cases. But it does provide another chapter for the courts to continue their efforts to tighten the lower courts’ criteria for evaluating securities fraud class actions.

The case involved a process by which investors who believed they were victims of securities fraud attempted to aggregate these claims for category-based rulings. The focus of the process is whether common legal and factual issues are “dominant.” A common issue is whether the complaining investor can jointly prove that they are dependent on the defendant’s alleged false statement.The Supreme Court gave the answer: its 1988 ruling Basic Inc. v. Levinson An assumption was adopted that the plaintiff relied on statements that affected the price of securities at the time of its transactions. Because these statements affect prices for all investors, they allow for joint judgments on dependencies. The question in this case is how to proceed when the defendant tries to refute the presumption.

The majority opinion of Justice Amy Connie Barrett resolved three different issues.First, she reasoned (for unanimous courts) and analyzed basic It is presumed that the lower court should consider whether the statement in question is too general and unspecific so as not to distort the price of the relevant securities. Secondly (for most of the eight justices-except for Justice Sonia Sotomayor), Barrett concluded that there is a possibility that the U.S. Court of Appeals for the Second Circuit failed to do this in this case It is sufficient to prove that it is reasonable to send the case back for retrial. Third (for most of the six judges), she believes that in order to refute the presumption of trust, the defendant has the responsibility to prove that the statement in question did not actually affect the price of the security. Justice Neil Gorsuch disagrees on the last point, and Justices Clarence Thomas and Samuel Alito also joined this view.

Although the proper treatment of evidence that the general statement does not affect the price is the focus of the briefing and argumentation, Barrett’s analysis is very concise: four paragraphs almost occupy two pages. The reason for succinctness is easy to understand: no matter what disputes the parties may have in the lower courts, they agree in the Supreme Court that the general nature of the alleged misrepresentation may be related to the question of whether the misrepresentation affects the price. Safety. According to the agreement, it is clear from the arguments that the judge is unlikely to order the district court to ignore the evidence.Against this background, Barrett explained briskly (quoting her opinion added during the Seventh Circuit Court of Appeals) that in this case, the court “should be open to all supporting evidence on the issue— — Qualitative and quantitative — with the help of a lot of common sense.” In short, for judges (no one disagrees with this), “the court cannot conclude that [class adjudication is proper] Not consider All Evidence related to price impact. “

Barrett emphasized that in so-called inflation maintenance cases, evidence of the “general nature of false statements” will be “particularly” important. Under these circumstances, the plaintiffs did not find any false statements that raised the stock price; they were more precisely “a negative disclosure of a company and the related share price decline; claiming that the disclosure corrected the previous false statement; and then claiming that the price drop was equal to The amount of inflation maintained by the previous misrepresentation.” In this case, Barrett wrote, “The inference…the back-end price drop is equal to the front-end inflation…when…the early misrepresentation is universal (E.g,’We are confident in our business model’) and subsequent corrective disclosures are specific (E.g,’Our fourth quarter earnings did not meet expectations’). For her, “specific disclosures are unlikely to really correct general misrepresentations, which means that there is no reason to infer front-end price increases from back-end price declines—that is, price effects. “

After explaining why the lower courts should consider information about generality during the category certification stage, Barrett then provided a paragraph to annul the Court of Appeal’s ruling, which supports the certification of a category of investors who claim that Goldman Sachs has exaggerated its shares. Pricing by making false statements that cover up conflicts of interest. She simply stated that the opinion of the Second Circuit “let us have enough doubts about whether the court correctly considered the general nature of Goldman Sachs’ so-called false statements”, and she returned the case to the Second Circuit for re-examination. This decision (sotomayor objected) is a bit trickier than Barrett’s suggestion, because the Second Circuit clearly stated the correct standard in its 2018 opinion when it first considered the case. , Although the discussions in its 2020 opinions (the opinions under review) in Monday’s decision) are ambiguous at best. Sotomayor believes that the clear statement in the 2018 opinion is sufficient to prove that it is certainly reasonable, but no other judge agrees with her on this point.

Barrett then turned to the narrow question of determining which party has the “burden of persuasion” on the issue of price effects.Everyone agrees basic The presumption transfers the “burden of production” to the defendant-if the defendant cannot provide any evidence to weaken the presumptive effect of the questioned statement on the price, the defendant loses. The question to be answered is, after the defendant provides some evidence, who has the ultimate responsibility to convince the court that these statements did or did not affect the stock price.

Barrett concluded that basic (And explanation of the 2014 decision basic call Halliburton v. Erica P. John Fund) The defendant has been assigned not only the burden of proof to refute the presumption, but also the ultimate “persuasive burden to prove the lack of price impact” to answer this question.Barrett pointed out that the statements in both cases stated that the defendant could only[ing]”, that is, the false statement “does not” affect the price. Barrett does not completely rely on these quotations. She also explained the view of most people that putting the plaintiff on the burden of proof “will…effectively deny [the court’s ruling in Halliburton] The plaintiff does not need to directly prove the price impact. “If introduced”any Barrett wrote that the “lack of strong evidence of price impact” was sufficient for the defendant to overturn this hypothesis, and then “the plaintiff would ultimately bear the responsibility of directly proving the price impact in almost all cases.” Gorsuch, Thomas, and Alito disagreed with this holding .

Barrett finally pointed out that “the distribution of the burden is unlikely to have much impact on the ground” because it “will only be affected when the court finds a balance of evidence-this should rarely happen.” I found this to be A proper summary of the decision may also have little effect. If Sotomayor is correct, that the Second Circuit has considered the general nature of false statements here, then it is likely that it will not be difficult to generate another opinion that authorizes a collective ruling to authenticate the case.

[Disclosure: Goldstein & Russell, P.C., whose attorneys contribute to SCOTUSblog in various capacities, is counsel for the Arkansas Teacher Retirement System in this case. The author of this article is not affiliated with the firm.]