U.S. Supreme Court Offers Guidance on Rebutting Presumption of Reliance in Certification of Securities Class Actions
On June 21, 2021, the Supreme Court of the United States issued a securities class action opinion that clarified the types of proof—and who bears the burden of proof—necessary to support certification of a class action alleging that a company’s generic statements sustained an artificially inflated stock price. In Goldman Sachs Group v. Arkansas Teacher Retirement System, Justice Amy Coney Barrett wrote for a unanimous Court in holding that a district court can, and should, consider an alleged misrepresentation’s generic nature in assessing whether common issues of reliance warrant class certification. The Court also held—on a vote of 6-3, over a partial dissent from Justice Neil Gorsuch—that, at the class certification stage, the defendant bears the burden of persuading the district court that the generic nature of its representations rebuts a presumption of classwide reliance.
Goldman v. Arkansas Proceedings
The Goldman plaintiffs allege that Goldman Sachs sustained an artificially inflated stock price for its shares by making generic public statements about its strong internal conflict-of-interest compliance programs. The allegedly offending statements included: “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 or our business.” According to plaintiffs, the eventual public disclosure of poor compliance programs at Goldman Sachs revealed the falsity of the foregoing statements and led to a drop in Goldman Sachs’s stock price, damaging members of the proposed class who had purchased the stock at the allegedly inflated price.
For the case to be certified for class treatment, plaintiffs needed to persuade the district court that common questions of fact and law predominate among the proposed class members. For a securities fraud claim under Rule 10b-5 of the Securities Exchange Act, this required plaintiffs to demonstrate, among other things, reliance on the alleged misrepresentations. Under the so-called fraud on the market theory established by Supreme Court precedent in Basic v. Levinson, 485 U.S. 224 (1988), a rebuttable presumption of common reliance is established by facts showing that the stock at issue trades in an efficient market and that the materially false statements were known in that market. The district court determined that the plaintiffs met their burden to support class certification, and the Second Circuit affirmed.
Two Issues Before Supreme Court
Goldman Sachs asked the Supreme Court to make two separate determinations concerning the rebuttable presumption of classwide reliance. First, it asked the Court to hold that the district court should have considered the generic nature of the alleged misrepresentations in determining whether Goldman Sachs rebutted the presumption of reliance. Second, Goldman Sachs asked the Court to hold that, despite the rebuttable presumption of reliance, plaintiffs still bear the ultimate burden of persuasion on reliance to support class certification. The Court answered the first question in the affirmative and the second in the negative.
Issue One: Evidence of Generalities at Class Certification Stage
As to the first question—what types of evidence should a district court consider to determine class certification—the Goldman Court answered, “All of it.” To determine whether common issues of fact or law predominate, judges “should be open to all probative evidence on that question—qualitative as well as quantitative—aided by a good dose of common sense.” The Court rejected a rigid distinction between certification questions and merits questions. To be sure, courts typically do not consider questions of materiality at the class certification stage, and questions of a generic statement’s impact sound of materiality, yet the Goldman Court held that there can be no per se bar to such evidence at the certification stage. What matters is that the evidence is probative to the question of common reliance. Where a plaintiff alleges that a class of investors relied on pricing artificially sustained by generic statements, then a defendant should be entitled to offer facts showing the statements were too general to have a price impact.
Issue Two: Class Defendant Bears Burden of Persuasion Under Basic v. Levinson
The second question before the Goldman Court focused on how a defendant must rebut the efficient market presumption under Basic v. Levinson. The Court concluded that once a plaintiff satisfies its burden that the efficient market presumption applies, the burden of persuasion shifts to the defendant. The burden is not just to present evidence that could disprove price impact—the defendant must persuade the district court that there is no price impact and the presumption does not apply. The Goldman Court reasoned that allowing a defendant to rebut the presumption merely by presenting evidence, regardless of its quality, would weaken the presumption announced in Basic v. Levinson.
The Court acknowledged that this rule is at odds with Rule 301 of the Federal Rules of Evidence, which provides that a presumption is rebutted by the production of alternative evidence, not the persuasiveness of it. But the Court concluded that it had the authority to impose a different burden of proof for securities class actions and, indeed, that its prior precedents already did so. The majority opinion concluded that its decision “is unlikely to make much difference on the ground.” A district court will always balance all the evidence to determine whether the presumption of reliance is supportable—only where there is a true 50/50 toss-up will the different allocations come into play.
Justice Gorsuch found the majority’s reasoning unpersuasive. In a thoughtful and analytical dissent joined by Justices Clarence Thomas and Samuel Alito, Justice Gorsuch argued that, consistent with Rule 301, the burden of persuasion “remains on the party who had it originally.” The dissent also challenged the majority’s interpretation of prior precedent. “The hard truth is that in the 30-plus years since Basic this court has never (before) suggested that plaintiffs are relieved from carrying the burden of persuasion on any aspect of their own causes of action.”
So where does the Court’s Goldman decision leave us? It seems unlikely to alter federal securities class action law in a way that will deter future plaintiffs from pursuing actions. On the one hand, Goldman Sachs obtained clarity on the scope of evidence that a district court may examine at the class certification stage, but any daylight between the parties on that issues had all but disappeared by the time the parties stood (virtually) before the Supreme Court. The trade-off for that evidentiary clarity is further clarity that class-action defendants now bear the burden of persuasion in order to rebut the Basic presumption of reliance. The soundness of the majority’s prediction that its holding will not make much difference “on the ground” remains to be seen, but we suspect that many securities class action defendants would have been content with the way it was.
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