Ark. Teachers Ret. Sys. v. Goldman Sachs Grp., Inc.
| Decision Date | 12 January 2018 |
| Docket Number | Docket No. 16-250,August Term 2016 |
| Parties | ARKANSAS TEACHERS RETIREMENT SYSTEM, West Virginia Investment Management Board, Plumbers and Pipefitters Pension Group, Ilene Richman, Individually and on Behalf of All Others Similarly Situated, Pablo Elizondo, Howard Sorkin, Individually and on Behalf of All Others Similarly Situated, Tivka Bochner, Ehsan Afshani, Louis Gold, Thomas Draft, Individually and on Behalf of All Others Similarly Situated, Plaintiffs–Appellees, v. GOLDMAN SACHS GROUP, INC., Lloyd C. Blankfein, David A. Viniar, Gary D. Cohn, Defendants–Appellants. |
| Court | U.S. Court of Appeals — Second Circuit |
THOMAS C. GOLDSTEIN, Goldstein & Russell, P.C., Bethesda, MD (Susan K. Alexander, Andrew Love, Robbins Geller Rudman & Dowd LLP, San Francisco, CA; Thomas A. Dubbs, James W. Johnson, Michael H. Rogers, Labaton Sucharow LLP, New York, NY, on the brief ) for Plaintiffs–Appellees.
ROBERT J. GIUFFRA, JR., (Richard H. Klapper, David M.J. Rein, on the brief ), Sullivan & Cromwell LLP, New York, NY, for Defendants–Appellants.
Max W. Berger, Salvatore J. Graziano, Bernstein Litowitz Berger & Grossmann LLP, New York, NY; Blair Nicholas, Bernstein Litowitz Berger & Grossmann LLP, San Diego, CA; Robert D. Klausner, Klausner, Kaufman, Jensen & Levinson, Plantation, FL, for Amicus Curiae National Conference on Public Employee Retirement Systems in support of Plaintiffs–Appellees.
Rachel S. Bloomekatz, Deepak Gupta, Gupta Wessler PLLC, Washington, D.C.; Mark I. Gross, Jeremy A. Lieberman, Pomerantz LLP, New York, NY; Robert D. Klausner, Klausner, Kaufman, Jensen & Levinson, Plantation, FL, for Amicus Curiae Louisiana Sheriffs’ Pension and Relief Fund in support of Plaintiffs–Appellees.
Daniel P. Chiplock, Lieff Cabraser Heimann & Bernstein, LLP, New York, NY, for Amicus Curiae National Association of Shareholder and Consumer Attorneys in support of Plaintiffs–Appellees.
Jeffrey W. Golan, Barrack, Rodos & Bacine, Philadelphia, PA; James A. Feldman, Washington, D.C., for Amici Curiae Evidence Scholars in support of Plaintiffs–Appellees.
Barbara A. Jones, AARP Foundation Litigation, Pasadena, CA, for Amici Curiae AARP and AARP Foundation in support of Plaintiffs–Appellees.
David Kessler, Kessler Topaz Meltzer & Check, LLP, Radnor, PA; Ernest A. Young, Apex, NC, for Amici Curiae Procedure Scholars in support of Plaintiffs–Appellees.
Robert V. Prongay, Glancy Prongay & Murray LLP, Los Angeles, CA, for Amici Curiae Securities Law Professors in support of Plaintiffs–Appellees.
George T. Conway III, Wachtell, Lipton, Rosen & Katz, New York, NY, for Amici Curiae Former SEC Officials and Law Professors in support of Defendants–Appellants.
Charles E. Davidow, Marc Falcone, Robyn Tarnofsky, Paul, Weiss, Rifkind, Wharton & Garrison LLP, Washington, D.C.; Ira D. Hammerman, Kevin M. Carroll, Securities Industry & Financial Markets Association, Washington, D.C., for Amicus Curiae Securities Industry & Financial Markets Association in support of Defendants–Appellants.
Lewis J. Liman, Cleary Gottlieb Steen & Hamilton LLP, New York, NY; Kate Comerford Todd, U.S. Chamber Litigation Center, Inc., Washington, D.C., for Amicus Curiae Chamber of Commerce of the United States of America in support of Defendants–Appellants.
Before: Cabranes, Wesley, Circuit Judges, Sessions, District Judge.**
Investors in a securities fraud class action traditionally have a problem proving that "questions of law or fact common to class members predominate over ... questions affecting only individual members" under Federal Rule of Civil Procedure 23(b)(3). The presumption established in Basic Inc. v. Levinson , 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988), addressed that problem by allowing courts to presume that the price of stock traded in an efficient market reflects all public, material information—including misrepresentations—and that investors rely on the integrity of the market price when they choose to buy or sell stock. Basic also established, however, that defendants may rebut the presumption, and therefore defeat class certification, by showing the misrepresentations did not actually affect the price of the stock. The question presented in this case is what defendants must do to meet that burden.
In light of this Court’s recent pronouncement that defendants bear the burden of persuasion to rebut the Basic presumption by a preponderance of the evidence, see Waggoner v. Barclays PLC , 875 F.3d 79 (2d Cir. 2017), and for the additional reasons stated herein, we VACATE the September 24, 2015 Order of the United States District Court for the Southern District of New York (Crotty, J. ) granting plaintiff’s motion for class certification and REMAND for further proceedings consistent with this opinion.
Plaintiffs-appellees acquired shares of common stock in The Goldman Sachs Group, Inc. ("Goldman") between February 5, 2007 and June 10, 2010. In July 2011, they commenced a securities fraud action in the District Court against Goldman and several of its directors (collectively, "defendants"), for violating section 10(b) of the Securities Exchange Act and Rule 10b–5 promulgated thereunder. See 15 U.S.C. § 78j(b) ; 17 C.F.R. § 240.10b–5.
In their consolidated class action complaint, plaintiffs alleged that defendants made material misstatements about Goldman’s efforts to avoid conflicts of interest, causing the value of their stock to decline.1 Specifically, they alleged that defendants made the following statements in Goldman’s Form 10–K filings and Annual Report, as well as in shareholder conference calls:
Joint App’x 81–87.
Plaintiffs claimed that these statements about Goldman’s efforts to avoid conflicts of interest were false and misleading because Goldman acted in direct conflict with the interests of its clients in at least four collateralized debt obligation ("CDO") transactions involving subprime mortgages between 2006 and 2007, most notably the Abacus 2007 AC–1 ("Abacus") transaction involving hedge-fund client Paulson & Co. Plaintiffs alleged that Goldman permitted Paulson, its client, to play an active role in the asset selection process for Abacus, without revealing to institutional investors that Paulson held the sole short position and thus chose particularly risky mortgages that it hoped "would perform poorly or fail." Plaintiffs claimed that Goldman’s role in Abacus, which ultimately resulted in a $550 million settlement with the SEC, "allow[ed] a favored client to benefit at the expense of Goldman’s other clients," creating a conflict of interest at odds with the company’s public statements.
The complaint asserted that Goldman created similar conflicts of interest in three other CDO transactions involving subprime mortgages: Hudson Mezzanine Funding 2006–1 ("Hudson"), Anderson Mezzanine Funding 2007–1 ("Anderson"), and Timberwolf I ("Timberwolf"). Goldman allegedly contributed equity to the portfolios in those transactions and told investors it was "aligned" with them, while simultaneously holding substantial short positions opposite their investments.
Although plaintiffs invested in Goldman—but not any of the CDOs described above—they claimed Goldman’s conflicted roles in the transactions revealed that the company did not have "extensive procedures and controls ... designed to identify and address conflicts of interest" and that it was not "dedicated to complying fully with the letter and spirit of the laws," as its public statements had suggested.
Plaintiffs alleged that news of government enforcement actions against Goldman on three occasions in mid-2010 revealed the falsity of defendants’ statements and caused the company’s share prices to decline. On April 16, 2010, the SEC filed a securities fraud action against Goldman and one of its employees regarding the Abacus transaction, for failing to disclose to potential investors that Paulson played a significant role in the asset selection process. Following the announcement, the company’s stock price declined 13% from $184.27 to $160.70 per share on April 16, 2010. On April 30, 2010, the company’s share price dropped another 9% from $160.24 to $145.20 after the Wall Street Journal reported that Goldman was under investigation by the Department of Justice for its purported role in the CDOs. And on June 10, 2010, the press reported that the SEC was investigating Goldman’s conduct in the Hudson CDO, which resulted in a further 2% decline in the price of Goldman stock.2
According to plaintiffs, these three "corrective disclosures"3 revealed to the market the falsity of defendants’ statements regarding Goldman’s efforts to avoid conflicts of interest. Plaintiffs claimed that, on April 16, April 30, and June 10, 2010, the market learned for the first time that Goldman had created "clear conflicts of interest with its own clients" by "intentionally packag[ing] and s[elling] ... securities that were designed to fail, while at the...
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