Goldman Sachs Grp., Inc. v. Ark. Teacher Ret. Sys.

• Decision Date: 21 June 2021
• Docket Number: No. 20-222,20-222
• Citation: 141 S.Ct. 1951,210 L.Ed.2d 347
• Parties: GOLDMAN SACHS GROUP, INC., et al., Petitioners v. ARKANSAS TEACHER RETIREMENT SYSTEM, et al.
• Court: U.S. Supreme Court

141 S.Ct. 1951

210 L.Ed.2d 347

GOLDMAN SACHS GROUP, INC., et al., Petitioners

v.ARKANSAS TEACHER RETIREMENT SYSTEM, et al.

No. 20-222

Supreme Court of the United States.

Argued March 29, 2021

Decided June 21, 2021

Kannon K. Shanmugam, Washington, DC, for the petitioners, by Mr. Sopan Joshi for the United States as amicus curiae, by special leave of the Court, supporting neither party.

Thomas C. Goldstein, San Diego, CA, for the respondents.

Richard H. Klapper, Robert J. Giuffra, Jr., David M.J. Rein, Benjamin R. Walker, Julia A. Malkina, Jacob E. Cohen, Sullivan & Cromwell LLP, New York, NY, Kannon K. Shanmugam, Counsel of Record, Stacie M. Fahsel, E. Garrett West, Paul, Weiss, Rifkind, Wharton & Garrison LLP, Washington, DC, Audra J. Soloway, Kristina A. Bunting, Sarah J. Prostko, Caroline S. Williamson, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, for Petitioners.

Thomas A. Dubbs, James W. Johnson, Michael H. Rogers, Irina Vasilchenko, Labaton Sucharow LLP, New York, NY, Thomas C. Goldstein, Kevin K. Russell, Erica Oleszczuk Evans, Goldstein & Russell, P.C., Bethesda, MD, Spencer A. Burkholz, Joseph D. Daley, Robbins Geller Rudman & Dowd LLP, San Diego, CA, for Respondents.

Justice BARRETT delivered the opinion of the Court.

This case involves a securities-fraud class action filed by several pension funds against The Goldman Sachs Group, Inc., and three of its former executives (collectively, Goldman). Plaintiffs allege that Goldman maintained an artificially inflated stock price by making generic statements about its ability to manage conflicts—for example, "We have extensive procedures and controls that are designed to identify and address conflicts of interest." Plaintiffs say that Goldman's generic statements were false or misleading in light of several undisclosed conflicts of interest, and that once the truth about Goldman's conflicts came out, Goldman's stock price dropped and shareholders suffered losses.

Below, this securities-fraud class action proceeded in typical fashion. Plaintiffs sought to certify a class of Goldman shareholders by invoking the presumption endorsed by this Court in Basic Inc. v. Levinson , 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). The Basic presumption is premised on the theory that investors rely on the market price of a company's security, which in an efficient market incorporates all of the company's public misrepresentations. For its part, Goldman sought to defeat class certification by rebutting the Basic presumption through evidence that its alleged misrepresentations actually had no impact on its stock price. After determining that Goldman had failed to carry its burden of proving a lack of price impact, the District Court certified the class, and the Second Circuit affirmed.

In this Court, Goldman argues that the Second Circuit erred twice: first, by holding that the generic nature of its alleged misrepresentations is irrelevant to the price impact inquiry; and second, by assigning Goldman the burden of persuasion to prove a lack of price impact.

On the first question, the parties now agree, as do we, that the generic nature of a misrepresentation often is important evidence of price impact that courts should consider at class certification. Because we conclude that the Second Circuit may not have properly considered the generic nature of Goldman's alleged misrepresentations, we vacate and remand for the Court of Appeals to reassess the District Court's price impact determination. On the second question, we agree with the Second Circuit that our precedents require defendants to bear the burden of persuasion to prove a lack of price impact by a preponderance of the evidence. We emphasize, though, that the burden of persuasion should rarely be outcome determinative.

I

A

Section 10(b) of the Securities Exchange Act of 1934 and its implementing regulation, Rule 10b–5, prohibit material misrepresentations and omissions in connection with the sale of securities. 48 Stat. 881, as amended, 15 U.S.C. § 78j(b) ; 17 C.F.R. § 240.10b–5 (2020). We have inferred from these provisions an implied private cause of action permitting the recovery of damages for securities fraud. Halliburton Co. v. Erica P. John Fund, Inc. , 573 U.S. 258, 267, 134 S.Ct. 2398, 189 L.Ed.2d 339 (2014) ( Halliburton II ). To recover damages, a private plaintiff must prove, among other things, a material misrepresentation or omission by the defendant and the plaintiff ’s reliance on that misrepresentation or omission. Ibid.

This case concerns the element of reliance. The "traditional (and most direct) way" for a plaintiff to prove reliance is to show that he was aware of a defendant's misrepresentation and engaged in a transaction based on that misrepresentation. Ibid. (internal quotation marks omitted). In Basic , however, we held that a plaintiff may also invoke a rebuttable presumption of reliance based on the fraud-on-the-market theory. 485 U.S., at 241–247, 108 S.Ct. 978.

The "fundamental premise" of the fraud-on-the-market theory underlying Basic ’s presumption is "that an investor presumptively relies on a misrepresentation so long as it was reflected in the market price at the time of his transaction." Erica P. John Fund, Inc. v. Halliburton Co. , 563 U.S. 804, 813, 131 S.Ct. 2179, 180 L.Ed.2d 24 (2011). To invoke the Basic presumption, a plaintiff must prove: (1) that the alleged misrepresentation was publicly known; (2) that it was material; (3) that the stock traded in an efficient market; and (4) that the plaintiff traded the stock between the time the misrepresentation was made and when the truth was revealed. Halliburton II , 573 U.S., at 268, 134 S.Ct. 2398. The defendant may then rebut the presumption through "[a]ny showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at a fair market price." Basic , 485 U.S., at 248, 108 S.Ct. 978.

Although the Basic presumption "can be invoked by any Rule 10b–5 plaintiff," it has "particular significance in securities-fraud class actions." Amgen Inc. v. Connecticut Retirement Plans and Trust Funds , 568 U.S. 455, 462, 133 S.Ct. 1184, 185 L.Ed.2d 308 (2013). The presumption allows class-action plaintiffs to prove reliance through evidence common to the class. That in turn makes it easier for plaintiffs to establish the predominance requirement of Federal Rule of Civil Procedure 23, which requires that "questions of law or fact common to class members predominate" over individualized issues. Fed. Rule Civ. Proc. 23(b)(3). Indeed, without the Basic presumption, individualized issues of reliance ordinarily would defeat predominance and "preclude certification" of a securities-fraud class action. Amgen , 568 U.S., at 462–463, 133 S.Ct. 1184 ; see Halliburton II , 573 U.S., at 281–282, 134 S.Ct. 2398.

As a result, class-action plaintiffs must prove the Basic prerequisites before class certification—with one exception. In Amgen , we held that materiality should be left to the merits stage because it does not bear on Rule 23 ’s predominance requirement. 568 U.S., at 466–468, 133 S.Ct. 1184. The remaining Basic prerequisites—publicity, market efficiency, and market timing—"must be satisfied" by plaintiffs "before class certification." Halliburton II , 573 U.S., at 276, 134 S.Ct. 2398.

Satisfying those prerequisites, however, does not guarantee class certification. We held in Halliburton II that defendants may rebut the Basic presumption at class certification by showing "that an alleged misrepresentation did not actually affect the market price of the stock." Id., at 284, 134 S.Ct. 2398. If a misrepresentation had no price impact, then Basic ’s fundamental premise "completely collapses, rendering class certification inappropriate." Id., at 283, 134 S.Ct. 2398.

B

Respondents here—whom we'll call Plaintiffs—are Goldman shareholders. They brought this securities-fraud class action against Goldman in the Southern District of New York, alleging violations of § 10(b) and Rule 10b–5.

The specific theory of securities fraud that Plaintiffs allege is known as inflation maintenance. Under this theory, a misrepresentation causes a stock price "to remain inflated by preventing preexisting inflation from dissipating from the stock price." FindWhat Investor Group v. FindWhat.com , 658 F.3d 1282, 1315 (C.A.11 2011).¹

Plaintiffs allege here that between 2006 and 2010, Goldman maintained an inflated stock price by making repeated misrepresentations about its conflict-of-interest policies and business practices. The alleged misrepresentations are generic statements from Goldman's SEC filings and annual reports, including the following:

• "We have extensive procedures and controls that are designed to identify and address conflicts of interest." App. 216 (emphasis and boldface deleted).

• "Our clients’ interests always come first." Id., at 162 (same).

• "Integrity and honesty are at the heart of our business." Id., at 163 (same).

According to Plaintiffs, these statements were false or misleading—and caused Goldman's stock to trade at artificially inflated levels—because Goldman had in fact engaged in several allegedly conflicted transactions without disclosing the conflicts. Plaintiffs further allege that once the market learned the truth about Goldman's conflicts from a Government enforcement action and subsequent news reports, the inflation in Goldman's stock price dissipated, causing the price to drop and shareholders to suffer losses.

After Goldman unsuccessfully moved to dismiss the case, Plaintiffs moved to certify the class, invoking the Basic presumption. In response, Goldman sought to rebut the Basic presumption by proving a lack of price impact. Both parties submitted extensive expert testimony on the issue.

The District Court certified the class, but the Second Circuit authorized a Rule 23(f) appeal and vacated the class-certification order. 879 F.3d 474 (2018). The...