Ark. Teacher Ret. Sys. v. Goldman Sachs Grp.
| Docket Number | Docket No. 22-484,August Term 2022 |
| Decision Date | 10 August 2023 |
| Citation | 77 F.4th 74 |
| Parties | ARKANSAS TEACHER RETIREMENT SYSTEM, West Virginia Investment Management Board, Plumbers and Pipefitters Pension Group, Plaintiffs-Appellees, Pension Funds, Ilene Richman, Individually and on behalf of all others similarly situated, Pablo Elizondo, Thomas Draft, Individually and on behalf of all others similarly situated, Plaintiffs, Howard Sorkin, Individually and on behalf of all others similarly situated, Tikva Bochner, Individually and on behalf of herself and all others similarly situated, Dr. Ehsan Afshani, Louis Gold, Individually and on behalf of all others similarly situated, Consolidated Plaintiffs, v. GOLDMAN SACHS GROUP, INC., Lloyd C. Blankfein, David A. Viniar, Gary D. Cohn, Defendants-Appellants Sarah E. Smith, Consolidated Defendant. |
| Court | U.S. Court of Appeals — Second Circuit |
ROBERT J. GIUFFRA, JR., Sullivan & Cromwell LLP, New York, NY (Richard H. Klapper, David M.J. Rein, Benjamin R. Walker, Julia A. Malkina, Jacob E. Cohen, Sullivan & Cromwell LLP, New York, NY; Morgan L. Ratner, Sullivan & Cromwell LLP, Washington, D.C., on the brief) for Defendants-Appellants.
KANNON K. SHANMUGAM, Paul, Weiss, Rifkind, Wharton & Garrison LLP, Washington D.C. (Audra J. Soloway, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, on the brief) for Defendants-Appellants.
THOMAS C. GOLDSTEIN, Goldstein & Russell, P.C., Bethesda, MD (Kevin K. Russell, Goldstein & Russell, P.C., Bethesda, MD; Spencer A. Burkholz, Joseph D. Daley, Robbins Geller Rudman & Dowd LLP, San Diego, CA; Thomas A. Dubbs, James W. Johnson, Michael H. Rogers, Irina Vasilchenko, Labaton Sucharow LLP, New York, NY, on the brief) for Plaintiffs-Appellees.
Todd G. Cosenza, Willkie Farr & Gallagher LLP, New York, NY, for Amicus Curiae Former United States Securities and Exchange Commission Officials and Law Professors in Support of Defendants-Appellants.
Carmine D. Boccuzzi, Jr. (Victor L. Hou, Jared Gerber, on the brief) Cleary Gottlieb Steen & Hamilton LLP, New York, NY, for Amicus Curiae Economic Scholars in Support of Defendants-Appellants.
Jonathan K. Youngwood, Simpson Thacher & Bartlett LLP, New York, NY (Craig S. Waldman, Joshua C. Polster, Daniel H. Owsley, Simpson Thacher & Bartlett LLP, New York, NY; Ira D. Hammerman, Kevin Carroll, Securities Industry and Financial Markets Association, Washington, D.C.; Thomas Pinder, American Bankers Association, Washington, D.C.; Gregg Rozansky, Bank Policy Institute, Washington, D.C.; Tyler S. Badgley, U.S. Chamber Litigation Center, Washington, D.C.; Kenneth Stoller, American Property Casualty Insurance Association, Washington, D.C., on the brief) for Amicus Curiae Securities Industry and Financial Markets Association, Bank Policy Institute, American Bankers Association, Chamber of Commerce of the United States of America, American Property Casualty Insurance Association in Support of Defendants-Appellants.
Christopher E. Duffy, Vinson & Elkins LLP, New York, NY (Jeremy C. Marwell, James T. Dawson, Vinson & Elkins LLP, Washington, D.C.; Darla C. Stuckey, Randi V. Morrison, Society for Corporate Governance, New York, NY, on the brief) for Amicus Curiae Society for Corporate Governance in Support of Defendants-Appellants.
Lyle Roberts, Shearman & Sterling LLP, Washington, D.C. (George Anhang, Shearman & Sterling LLP, Washington, D.C.; William Marsh, Shearman & Sterling LLP, Dallas, TX; Cory L. Andrews, John M. Masslon II, Washington Legal Foundation, Washington, D.C., on the brief) for Amicus Curiae Washington Legal Foundation in Support of Defendants-Appellants.
Ernest A. Young, Apex, NC (Jeremy Lieberman, Emma Gilmore, Pomerantz LLP, New York, NY; Andrew L. Zivitz, Kessler Topaz Meltzer & Check, LLP, Radnor, PA; Stacey M. Kaplan, Kessler Topaz Meltzer & Check, LLP, San Fransisco, CA, on the brief) for Amicus Curiae Financial Economists in Support of Plaintiffs-Appellees.
Deepak Gupta, Gupta Wessler PLLC, Washington, D.C. (Linnet R. Davis-Stermitz, Gupta Wessler PLLC, Washington, D.C.; Salvatore J. Graziano, Jai K. Chandrasekhar, Bernstein Litowitz Berger & Grossmann LLP, New York, NY; Joseph E. White, III, Saxena White P.A., Boca Raton, FL, on the brief) for Amicus Curiae Securities Law Scholars in Support of Plaintiffs-Appellees.
John Paul Schnapper-Casteras, Schnapper-Casteras PLLC, Washington, D.C., for Amicus Curiae Better Markets, Inc. in Support of Plaintiffs-Appellees.
Carolyn E. Shapiro, Schnapper-Casteras PLLC, Washington, D.C. (John Paul Schnapper-Casteras, Schnapper-Casteras PLLC, Washington, D.C.; Daniel P. Chiplock, Lieff Cabraser Heimann & Bernstein, LLP, New York, NY, on the brief) for Amicus Curiae Former SEC Officials in Support of Plaintiffs-Appellees.
Before: WESLEY, CHIN, and SULLIVAN, Circuit Judges.
This class certification dispute has been laboring in federal court for nearly a decade. It raises challenging questions about how defendants in securities fraud class actions, having lost a motion to dismiss, can rebut the legal presumption of reliance established in Basic Inc. v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988), at the class certification stage. The case is before us again: for a third time, the district court certified, under Federal Rule of Civil Procedure 23(b)(3), a shareholder class, and, for a third time, we granted defendants leave to pursue an interlocutory appeal of that order under Rule 23(f).
Some context is required at the outset. The Basic presumption excuses classes of securities fraud plaintiffs from proving that each class member individually relied upon a defendant's alleged misrepresentations. Courts can instead presume that stock trading in an efficient market incorporates into its price all public, material information—including material misrepresentations—and that investors rely on the integrity of the market price when they choose to buy or sell that stock. At the same time, defendants can rebut the presumption and defeat class certification by demonstrating, by a preponderance of the evidence, that the misrepresentations did not actually affect, or impact, the market price of the stock. This legal terrain under Basic is familiar, and, in this appeal, uncontested.
From there, however, the journey becomes difficult. Analyzing whether a defendant has proved a lack of price impact is complicated by the fact that a misrepresentation can affect a stock's price either by causing the stock to trade at an inflated price, or as is alleged here, by maintaining inflation that is already built into the stock price. See In re Vivendi, S.A. Sec. Litig., 838 F.3d 223, 258 (2d Cir. 2016). In the latter scenario, the misrepresentation prevents preexisting inflation in a stock price from dissipating, but does not cause a price uptick. Instead, the back-end price drop—what happens when the truth is finally disclosed—operates as an indirect proxy for the front-end inflation, or the amount that the misrepresentation fraudulently propped up the stock price. Simply put, the theory goes: back-end price drop equals front-end inflation.
Fair enough. But what happens when the match between the contents of the price-propping misrepresentation and the truth-revealing corrective disclosure is tenuous? Consider two examples. In the first, an automobile manufacturer's earlier statement to the market that its best-selling vehicle passed all safety tests is followed by later news that, in fact, the car failed several crash tests. A price drop follows. There, the earlier statement is precisely negated, or rendered false, by the later news—a clean match. In the second example, however, the same back-end news (and the same price drop) is instead preceded by the manufacturer's statement to the market that it strives to ensure that all its vehicles are road-ready, that it has an elaborate testing protocol to that effect, but that the task is tall, the goal difficult to achieve. There, it is less apparent the market would understand the later news of failed crash tests revealed that, in fact, there was no protocol, or that, in fact, the manufacturer did not seek to make its automobiles safe to drive. The match between the more specific "corrective disclosure" and the earlier, more generic statement is on shakier ground. Can courts still infer that the back-end price drop equals the front-end inflation?
The Supreme Court answered that commonsense question. It explained that the "inference [] that the back-end price drop equals front-end inflation [] starts to break down" when the earlier misrepresentation is generic and the later corrective disclosure is specific, and that, "[u]nder those circumstances it is less likely that the specific disclosure actually corrected the generic misrepresentation ...." Goldman Sachs Grp., Inc. v. Ark. Tchr. Ret. Sys. (Goldman), — U.S. —, 141 S. Ct. 1951, 1961, 210 L.Ed.2d 347 (2021).
Following Goldman, courts are now directed to compare, at the class certification stage, the relative genericness of a misrepresentation with its corrective disclosure, notwithstanding that such evidence is often also highly relevant to the closely related merits question of whether the misrepresentation would have been material to a shareholder's investment calculus—which, under other Supreme Court guidance, a court may not resolve at class certification. See Amgen Inc. v. Conn. Ret. Plans & Tr. Funds, 568 U.S. 455, 133 S.Ct. 1184, 185 L.Ed.2d 308 (2013). In short, Goldman's mismatch framework requires careful trekking: district courts must analyze the price impact issue without drawing what might appear to be obvious conclusions for off-limits merits questions such as materiality. As Judge Hamilton, writing for the Seventh Circuit, put it, courts must analyze this issue "without ... thinking about a pink elephant." In re Allstate Corp. Sec. Litig, 966 F.3d...
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