Supreme Court Clarifies, but Declines to Significantly Alter, Class Certification Battleground in Securities-Fraud Class Actions
Defendants have historically faced an uphill battle to defeat class certification in securities-fraud class actions. The United States Supreme Court’s recent decision in Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System provides clarification regarding the scope of evidence a court must consider in ruling on such motions, although it does not significantly alter the landscape of class certification disputes in securities-fraud cases.
In Goldman, the plaintiffs alleged that Goldman maintained an artificially inflated stock price by making repeated material misrepresentations about its conflict-of-interest policies and business practices. The alleged misrepresentations included generic statements from Goldman’s SEC filings and annual reports, such as: “We have extensive procedures and controls that are designed to identify and address conflicts of interest;” “Our clients’ interests always come first;” and “Integrity and honesty are at the heart of our business.” Plaintiffs alleged these statements were materially misleading because Goldman engaged in several conflicted transactions without disclosing the conflicts, thereby maintaining Goldman’s stock prices at artificially inflated levels. Once Goldman’s conflicts surfaced, Plaintiffs alleged, Goldman’s stock prices dropped and shareholders sustained losses.
In certain securities-fraud class action cases, defendants may defeat class certification if they can demonstrate that the alleged misrepresentations actually had no impact on the price of the stock. The evidence that defendants offer on price impact often parallels the evidence relevant to the ultimate merits of the case, specifically whether the alleged misrepresentations were material. Before the Goldman decision, there was uncertainty as to whether, in determining price impact for purposes of class certification, courts could consider evidence relevant to determining the materiality of the alleged misrepresentations.
In opposing class certification, the defendants in Goldman offered evidence that the alleged misrepresentations were too general in nature to impact the company’s stock price. The United States District Court for the Southern District of New York certified a class after finding that Defendants failed to satisfy their burden of proving a lack of price impact. The case then moved between the Second Circuit and the District Court before consideration by the Supreme Court.
By the time the issue reached the Supreme Court, Plaintiffs conceded, and the Supreme Court ultimately agreed, that “the generic nature of a misrepresentation often will be important evidence of a lack of price impact,” and that courts should consider such evidence regardless of whether it is also relevant to a merits question like materiality. The only issue remaining before the Supreme Court was whether the Second Circuit properly considered such evidence. Because the Court determined that the Second Circuit’s opinion was unclear on this point, the Court remanded the case to the Second Circuit with instructions to consider all evidence presented by Defendants as to price impact. The opinion also clarified that Defendants bore the burden of persuasion, by a preponderance of evidence, to prove a lack of price impact at class certification. However, Justice Barrett tempered the practical significance of this burden, noting the “allocated burden will be outcome determinative only in the rare case in which the evidence is in perfect equipoise.”
The decision carries practical significance, but is unlikely to reinvent the landscape of securities-fraud class actions. Defense counsel’s ability to delve into merits considerations, like materiality, at the class certification stage may facilitate a swifter defeat to a proposed class in cases where plaintiffs rely heavily on generic statements. The decision may also place a higher burden on plaintiffs to justify the price impact of generic statements. However, the opinion does not offer any additional guidance on how courts should weigh the evidence on price impact. Accordingly, courts retain considerable discretion in determining these critical issues and the bar remains high for defendants, who bear the burden of persuasion in showing that the alleged misrepresentations had no price impact.
