Respondent shareholders (Plaintiffs) filed this securities-fraud class action alleging that The Goldman Sachs Group, Inc., and certain of its executives (collectively, Goldman) violated securities laws and regulations prohibiting material misrepresentations and omissions in connection with the sale of securities. 15 U. S. C. §78j(b); 17 CFR §240.10b-5. Plaintiffs allege that Goldman maintained an artificially inflated stock price by repeatedly making false and misleading generic statements about its ability to manage conflicts. Under Plaintiffs' inflation-maintenance theory, Goldman's alleged misrepresentations caused its stock price to remain inflated until the market reacted to the truth about Goldman's practices-at which point Goldman's stock price dropped and Plaintiffs suffered losses. Seeking to certify a class of Goldman shareholders harmed by reliance on Goldman's alleged misrepresentations, Plaintiffs invoked the presumption, endorsed by the Court in Basic Inc. v. Levinson, 485 U. S. 224, that investors are presumed to rely on the market price of a company's security, which in an efficient market will reflect all of the company's public statements, including misrepresentations. The Basic presumption allows class-action plaintiffs to prove reliance through evidence common to the class. Goldman in turn sought to defeat class certification by rebutting the Basic presumption through evidence that its alleged misrepresentations had no impact on its stock price. After an initial round of litigation which resulted in a remand from the Second Circuit, the District Court certified the class based on Goldman's failure to establish by a preponderance of the evidence that its alleged misrepresentations had no price impact. The Second Circuit authorized an appeal under Federal Rule of Civil Procedure 23(f), and affirmed in a divided decision, finding that the District Court's price impact determination was not an abuse of discretion. Goldman now argues that the Second Circuit erred twice: first, by holding that the generic nature of Goldman's 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.Held:1. The generic nature of a misrepresentation often is important evidence of price impact that courts should consider at class certification, including in inflation-maintenance cases. That is true even though the same evidence may be relevant to materiality, an inquiry reserved for the merits phase of a securities-fraud class action. See Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, 568 U. S. 455. A court has an obligation before certifying a class to determine that Rule 23 is satisfied, Comcast Corp. v. Behrend, 569 U. S. 27, 35, and a court cannot make that finding in a securities-fraud class action without considering all evidence relevant to price impact. See Halliburton Co. v. Erica P. John Fund, Inc., 573 U. S. 258, 284 (Halliburton II). The parties now accept this legal framework but dispute whether the Second Circuit properly considered the generic nature of Goldman's alleged misrepresentations. Because the Court concludes that the Second Circuit's opinions leave sufficient doubt on this question, the Court remands for the Second Circuit to consider all record evidence relevant to price impact, regardless whether that evidence overlaps with materiality or any other merits issue. Pp. 6-9.2. Defendants bear the burden of persuasion to prove a lack of price impact by a preponderance of the evidence at class certification. The Court has held that nothing in Federal Rule of Evidence 301 constrains the Court's authority to change customary burdens of persuasion under a federal statute, see NLRB v. Transportation Management Corp., 462 U. S. 393, 404, n. 7, and the Court has exercised this authority to reassign the burden of persuasion to the defendant in other contexts. Goldman does not challenge the Court's relevant precedents, but questions whether the Court exercised this authority in establishing the Basic framework pursuant to the securities laws. The Court concludes that Basic and Halliburton II did allocate to defendants the burden of persuasion to prove a lack of price impact. As relevant here, Basic explains that defendants may rebut the presumption of reliance if they "show that the misrepresentation in fact did not lead to a distortion of price" by making "[a]ny showing that severs the link between the alleged misrepresentation and . . . the price received (or paid) by the plaintiff." 485 U. S., at 248 (emphasis added). Similarly, Halliburton II held that defendants may rebut the Basic presumption at class certification "by showing . . . that the particular misrepresentation at issue did not affect the stock's market price." 573 U. S., at 279 (emphasis added). These references to a defendant's "showing" require a defendant to do more than produce some evidence relevant to price impact; the defendant must "in fact" "seve[r] the link" between a misrepresentation and the price paid by the plaintiff. Moreover, Halliburton II's holding that plaintiffs need not directly prove price impact to invoke the Basic presumption, 573 U. S., at 278-279, would be negated in almost every case if a defendant could shift the burden of persuasion to the plaintiffs by mustering any competent evidence of a lack of price impact (including, for example, the generic nature of the alleged misrepresentations). Thus, the best reading of the Court's precedents assigns defendants the burden of persuasion to prove a lack of price impact by a preponderance of the evidence. Even so, that allocated burden will be outcome determinative only in the rare case in which the evidence is in perfect equipoise. Pp. 9-12.955 F. 3d 254, vacated and remanded.BARRETT, J., delivered the opinion of the Court, in which ROBERTS, C. J., and BREYER, KAGAN, and KAVANAUGH, JJ., joined in full; in which THOMAS, ALITO, and GORSUCH, JJ., joined as to Parts I and II-A; and in which SOTOMAYOR, J., joined as to Parts I, II-A-1, and II-B. SOTOMAYOR, J., filed an opinion concurring in part and dissenting in part. GORSUCH, J., filed an opinion concurring in part and dissenting in part, in which THOMAS and ALITO, JJ., joined.
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 Second Circuit held that Goldman, as the defendant, bears the burden of persuasion to prove a lack of price impact by a preponderance of the evidence. But it concluded that the District Court erred by holding Goldman to a higher burden of proof and by refusing to consider some of Goldman's price impact evidence.On remand, the District Court certified the class again, finding that Goldman's expert testimony failed to establish by a preponderance of the evidence that its alleged misrepresentations had no price impact. The Second Circuit again authorized a Rule 23(f ) appeal and this time affirmed in a divided decision. 955 F. 3d 254 (2020). As relevant here, the Court of Appeals held that the District Court's price impact determination was not an abuse of discretion. In dissent, Judge Sullivan concluded that "the generic quality of Goldman's alleged misstatements, coupled with" Goldman's expert testimony, compelled the conclusion that Goldman proved a lack of price impact. Id., at 278-279.
After a prolonged interlocutory appeals saga that has prompted three decisions from the Second Circuit, one from the Supreme Court, and untold pages of cumulative briefing, this Court is again asked to resolve the parties' class certification dispute.By now, the facts of this case are well-known, having been set forth in this Court's prior opinions. See, e.g., Richman v. Goldman Sachs, 868 F. Supp. 2d 261 (S.D.N.Y. 2012). In brief, Lead Plaintiffs ("Plaintiffs") allege Goldman Sachs Group, Inc, and some of its senior executives (collectively, "Defendants" or "Goldman") violated Section 10(b) of the Exchange Act, Rule 10b5 promulgated thereunder, and Section 20(a) of the Exchange Act. Specifically, they accuse Defendants of making false and misleading statements pertaining to Goldman's conflict of interest policies and business practices, which were later exposed as false through reports of Goldman's conflicted role in certain collateralized debt obligation ("CDO'') transactions.Plaintiffs again seek to certify the following class: "All persons or entities who, between February 5, 2007, and June 10, 2010, purchased or otherwise acquired the common stock of The Goldman Sachs Group, Inc. ('Goldman' or the 'Company'), and were damaged thereby . . . ." See Pls.' Class Cert. Mem. 1 n. 1, ECF No. 136. Upon due consideration of all evidence before the Court, and in light of the clarified guidance from the Supreme Court and Second Circuit, the Court again concludes that Defendants have failed to rebut the Basic presumption by a preponderance of the evidence. Accordingly, the motion for class certification is GRANTED.
Plaintiffs' claims fall within the inflation-maintenance, rather than the inflation-introducing, category of actionable misstatements: that is, Plaintiffs claim Defendants' false statements fraudulently maintained, rather than induced, an inflated share price.
Underlying Plaintiffs' claims is the charge that Goldman duped its investors into believing Goldman was aligned with their interests, and indeed had robust institutional systems to manage and mitigate conflicts of interest, while the company was in fact actively betting against the success of its investors' positions. Plaintiffs assert Goldman artificially maintained an inflated stock price through misrepresentations as to its conflicts of interest and internal conflict procedures, only for its stock price to plunge when the market learned the truth. The misstatements alleged in the Consolidated Class Action Complaint (the "Complaint") include, among others, the following:Our reputation is one of our most important assets. As we have expanded the scope of our business and our client base, we increasingly have to address potential conflicts of interest, including situations where our services to a particular client or our own proprietary investments or other interests conflict, or are perceived to conflict, with the interest of another client . . . .We have extensive procedures and controls that are designed to identify and address conflicts of interest . . . .Our clients' interests always come first. Our experience shows that if we serve our clients well, our own success will follow . . . .We are dedicated to complying fully with the letter and spirit of the laws, rules and ethical principles that govern us. Our continued success depends upon unswerving adherence to this standard . . . .Most importantly, and the basic reason for our success, is our extraordinary focus on our clients. . . .See Compl. ¶, ¶ 134, 154, ECF No. 68.Integrity and honesty are at the heart of our business.
Defendants allegedly made these statements in a variety of settings, including Form 10-Ks, earnings calls, investor conferences, statements to the press, and Goldman's annual reports to shareholders (which contained "The Goldman Business Principles," from which some of the alleged misstatements originated). See id. ¶,¶ 127, 154, 277. Taken together, Plaintiffs allege, these misstatements formed the foundation of Goldman's broader campaign to stoke its own value by "promot[ing] its reputation as the preeminent Wall Street bank focused first and foremost on responsible business practices that placed their clients' needs paramount to all else." See id ¶,¶,13, 151-57,271-306
The Court previously granted in part and denied in part Defendants' motion to dismiss. It dismissed claims arising from Defendants' alleged failure to disclose Goldman's receipt of Wells Notices from the Securities and Exchange Commission ("SEC"), but allowed claims arising from the alleged misstatements concerning Goldman's conflicts of interest to proceed. See Richman, 868 F. Supp. 2d at 280.1
Plaintiffs then moved for class certification. In 2015, the Court granted their motion, finding that Plaintiffs had satisfied the four requirements under Rule 23(a) and successfully invoked the Basic presumption, and that Defendants had failed to rebut this presumption. See In re Goldman Sachs Grp., Inc. Sec. Litig. ("2015 Certification"), 2015 WL 5613150, at *1 (S.D.N.Y. 2015). The Second Circuit vacated this order and, on remand, suggested the Court further develop the factual record to aid in reevaluating whether Defendants had rebutted the Basic presumption by a preponderance of the evidence. See Ark. Teachers Ret. Sys. v. Goldman Sachs Grp., Inc. ("ATRS I''), 879 F.3d 474,482,484 (2d Cir. 2018). The Court then solicited supplemental briefing from the parties, held an evidentiary hearing, heard oral argument, and thereafter concluded that Defendants had failed to rebut the Basic presumption by a preponderance, and again certified the class. See In re Goldman Sachs Grp., Inc. Sec. Litig. ("2018 Certification"), 2018 WL 3854757 (S.D.N.Y. Aug. 14, 2018).2
Defendants again appealed. This time, the Second Circuit affirmed, holding that this Court had correctly applied the inflation-maintenance theory, properly allocated the burden of rebutting the Basic presumption, and permissibly concluded that Defendants had failed to present evidence sufficient to carry that burden. See Ark. Tchr. Ret. Sys. ("ATRS II"), 955 F.3d at 271. The Second Circuit also rejected Defendants' argument, raised on appeal, that so-called "general" statements cannot, as a matter of law, impact share price. Id. at 267-68.
Defendants then petitioned for, and the Supreme Court granted, certiorari. Before the Supreme Court, Defendants abandoned their argument that what they now labeled "generic" statements could not impact stock price as a matter of law. See Ark. Tchr. Ret. Sys. ("ATRS III"), 11 F.4th at 142. Instead, they emphasized that the generic nature of a statement is relevant evidence of price impact as a matter of fact. See id. Plaintiffs conceded this point, and the Supreme Court enshrined it in its opinion: "[T]he generic nature of a misrepresentation often is important evidence of price impact that courts should consider at class certification." Goldman, 141 S. Ct. at 1958. It then remanded to the Second Circuit because it was "unclear" whether the Second Circuit had done so, id. at 1963, and the Second Circuit remanded to this Court for the same reason. See ATRS III, 11 F.4th at 143. Upon remand, the Court solicited from the parties two rounds of supplemental briefing to aid its application of the clarified standards set forth above.3 See ECF No. 249.
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Footnote 1: The Court then denied Defendants' subsequent motions for partial reconsideration and for certification of that denial for interlocutory appeal. See In re Goldman Sachs Grp., Inc. Sec. Litig., 2014 WL 5002090 (S.D.N.Y. Oct. 7, 2014).
Footnote 2: Aff'd sub nom. Ark. Tchr. Ret. Sys. v. Goldman Sachs Grp., Inc., 955 F.3d 254 (2d Cir. 2020), vacated and remanded, 141 S. Ct. 1951 (2021), and vacated and remanded sub nom. Ark. Tchr. Ret. Sys. v. Goldman Sachs Grp., Inc., 11 F.4th 138 (2d Cir. 2021).
Footnote 3: Upon reviewing the record, the Court determined both parties had already submitted evidence that fully addressed the factual issues raised in the remand orders, including the extent to which the alleged misstatements were too generic to influence Goldman's stock price. It therefore did not invite the parties to supplement the substantial evidentiary record already in place from the 2018 and 2015 class certification proceedings. See ECF No. 249.
at Page 28 of the SDNY OpinionThus, in light of the otherwise convincing evidence of price impact, the Court finds that the comfortable, though certainly not boundless, gap in genericness between the alleged misstatements and subsequent corrective disclosures fails to satisfy Defendants' burden to demonstrate a complete lack of price impact attributable to the alleged misstatements.CONCLUSIONApplying the fresh guidance from the Supreme Court and the Second Circuit, the Court's thorough review of all evidence probative of price impact reveals that the alleged misstatements had some impact on the price of Goldman's stock during the Class Period. Thus, because Defendants have failed to establish a lack of price impact by a preponderance of the evidence, Plaintiffs' motion for class certification is granted.
Now this is not the end. It is not even the beginning of the end. but it is, perhaps, the end of the beginning.