Arkansas Teacher Retirement System v. Goldman Sachs Group, Inc.

Facts

Retirement (Ps) are individuals and institutions who acquired shares in D between February 5, 2007, and June 10, 2010. The lead plaintiffs acquired D common stock within the same period. Ps filed a consolidated class action complaint in July 2011 against Ds accusing Ds of violating Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder. Ps allege defendants made material misrepresentations about D's business practices and its approach to conflicts-of-interest management. It is undisputed that the challenged statements did not cause statistically significant increases in D's stock price. Ps say the statements maintained an already-inflated stock price. According to Ps, that balloon popped when news of undisclosed conflicts of interest revealed the falsity of the challenged statements and caused the stock to drop. Ps target three dates in 2010 when they claim the false nature of the business principles and conflicts disclosure statements was revealed to the market. On April 16, 2010, the SEC initiated an enforcement action against D regarding a CDO transaction known as Abacus 2007 AC-1. The SEC accused D and its employee of committing securities fraud. It targeted D's failure to disclose in its marketing materials to various institutional customers that the hedge fund Paulson & Co. played an active role in the CDO's asset selection process, and for telling those investors that Paulson held a long interest in the Abacus CDO when, in fact, Paulson was short. The next day, D's stock price declined 12.79% from $184.27 to $160.70 per share. On April 30, 2010, Goldman's stock price dropped another 9.39% following a report from The Wall Street Journal that D was under investigation by the Department of Justice (DOJ) for its purported role in unspecified CDOs. Finally, on June 10, 2010, various media outlets reported that the SEC was investigating D's conduct in another transaction, Hudson Mezzanine Funding 2006; a further 4.52% decline in the price of D stock followed. Neither the DOJ nor the SEC took further action related to the second two corrective disclosures. The Abacus Complaint culminated in a consent judgment under which Goldman agreed to pay $550 million, and, without 'admitting or denying the allegations in the complaint . . . acknowledged' that the Abacus marketing materials were 'incomplete' and that it was a 'mistake' for Goldman to state that the reference portfolio was 'selected by' ACA Management LLC 'without disclosing the role of Paulson.' Ps claim that Ds say, lied about having extensive practices and procedures in place to manage its conflicts of interest, or otherwise knowingly failed to disclose mishaps in their conflicts protocol. Ps claim that they lost over $13 billion. The district court held that the business principles and conflicts statements were not 'so obviously unimportant to a reasonable investor' as to be immaterial as a matter of law. The court Ds' motion to dismiss, and thereafter denied Ds' motions for reconsideration of, and an interlocutory appeal from, that order. To satisfy their class certification obligation of demonstrating class-wide reliance, Ps invoked the Basic presumption, asking the district court to presume that all class members relied upon Ds' misstatements, as reflected in its price, in choosing to buy Goldman stock. Each member of the class need not directly prove that Ds' statements impacted its share price. Instead, satisfaction of Basic's prerequisites serves as an 'indirect proxy' for a showing of price impact. Ds attempted to rebut the Basic presumption. Ds called a number of experts and Ps countered with theirs. The district court disagreed with Ds and certified the class. The court declined to consider Ds' evidence regarding the pre-disclosure reports, concluding that such evidence was either 'an inappropriate truth on the market defense' or an argument for materiality that the court 'would not consider' at the class certification stage. It ruled that Ds had failed to rebut the presumption because it did not provide 'conclusive evidence that no link exists between the price decline [of D's stock] and the misrepresentations.' This court vacated and remanded holding that defendants seeking to rebut the Basic presumption must do so by a preponderance of the evidence and that it was unclear whether the district applied that standard. We held it was error for the district court to conclude that it could not consider the pre-disclosure reports. In the second round, the trial court certified the class. The court again credited Ps' expert finding that he had established a causal link between the alleged misrepresentations and the price decline following the three alleged corrective disclosures. Ds appealed again. We held the district court did not abuse its discretion in certifying the class. Ds appealed to the Supreme Court. The Court offered guidance as to how genericness concerns should fit into cases proceeding under the inflation-maintenance theory of price impact. It held that the inference of back-end price drop equals front-end inflation starts to break down when there is a mismatch between the contents of the misrepresentation and the corrective disclosure. That may occur when the earlier misrepresentation is generic (e.g., 'we have faith in our business model') and the later corrective disclosure is specific (e.g., 'our fourth quarter earnings did not meet expectations'). It explained that the 'generic nature of a misrepresentation often will be important evidence of a lack of price impact, particularly in cases proceeding under the inflation-maintenance theory' and that is true 'regardless of whether that evidence is also relevant to a merits question like materiality,' Upon remand, we noted that in evaluating the parties' competing price impact evidence, the district court did not discuss the generic nature of D's alleged misrepresentations, nor the submissions of a third D expert, Dr. Laura Starks, relevant to that inquiry. We vacated the district court's order and remanded, directing the district court to 'consider all record evidence relevant to price impact and apply the legal standard as supplemented by the Supreme Court.' The district court certified Ps' class for a third time. The district court considered, for the first time, the opinions offered by Ds' expert, Dr. Laura Starks, as well as Dr. Finnerty's rebuttals to them. It sided with Dr. Finnerty, finding that the statements' generic nature did not render them incapable of inducing investor reliance. The court applied the Supreme Court's mismatch sliding scale and found that the alleged misstatements 'are not so exceedingly more generic than the corrective disclosures that they vanquish the otherwise strong inference of price impact embedded in the evidentiary record.' It ruled that Ds failed to demonstrate a complete lack of price impact attributable to the alleged misstatements. The class certification dispute is once again before the court wherein Ds lost a motion to dismiss. The district court certified, under Federal Rule of Civil Procedure 23(b)(3), a shareholder class, and, for a third time, the court granted Ds leave to pursue an interlocutory appeal of that order under Rule 23(f).

Issues

Rule of Law

Holding and Decision

Legal Analysis

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