Publications

Supreme Court: The Basic Presumption Can Be Rebutted by Showing There Was No Price Impact Even Though That Evidence Is Also Relevant to Materiality

On June 21, 2021, in Goldman Sachs Group v. Arkansas Teacher Retirement System, 141 S. Ct. 1951 (2021) (Barrett, J.), the Supreme Court vacated the Second Circuit’s class certification affirmance in a securities fraud class action brought under Section 10(b).[1] The Court unanimously held that a court must consider all probative evidence, including the nature of the alleged misrepresentations, in assessing price impact at the class certification stage. An eight-justice majority of the Court further held that it was not clear that the Second Circuit properly considered the generic nature of the alleged misrepresentations at issue and for that reason vacated and remanded back to the Second Circuit. The Court directed the Second Circuit on remand to reassess the district court’s price impact determination, taking into account “all record evidence relevant to price impact, regardless [of] whether that evidence overlaps with materiality or any other merits issue.” A six-justice majority of the Court also held that a defendant seeking to overcome the Basic presumption bears the burden of persuasion to prove a lack of price impact, which must be carried by a preponderance of the evidence.

Plaintiff stockholders relied on a stock price inflation-maintenance theory asserting that the alleged misrepresentations caused the bank’s stock price to remain inflated until the truth regarding certain conflicts of interest was revealed and the bank’s stock price fell. Defendants sought to defeat class certification by rebutting the presumption of reliance established in Basic v. Levinson, 485 U.S. 224 (1988) with evidence that their alleged misrepresentations had no stock price impact. The district court determined that defendants failed to carry their burden of proving a lack of price impact and certified the class, and the Second Circuit affirmed.

With respect to assessing price impact at the class certification stage, the Supreme Court observed 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.” The Court reasoned that when the alleged misrepresentation is generic and the back-end corrective disclosure is specific, the argument that the back-end price drop equals front-end inflation starts to “break down” and it is less likely that the disclosure corrected the alleged misrepresentation, meaning that there is less reason to infer price impact.

Subsequently, the Second Circuit sent the case back to the district court seeking a ruling using “all record evidence relevant to price impact.” On December 8, 2021, the district court concluded that defendants failed to rebut the Basic presumption by a preponderance of the evidence and therefore granted the motion for class certification. In re Goldman Sachs Sec. Litig., 2021 WL 5826285 (S.D.N.Y. 2021) (Crotty, J.). Specifically, the court concluded that defendants failed to establish a lack of price impact by a preponderance of the evidence. The court determined that the alleged misstatements were not so generic as to diminish their power to maintain pre-existing price inflation, and given the strong evidence of price impact, the court found that the statements did in fact maintain price inflation. As to defendants’ argument that such statements are commonplace the court questioned why such statements “would have achieved such ubiquity in the first place were they incapable of influencing (including by maintaining) a company’s stock price.”