The Supreme Court Clarifies Standards For Rebutting Presumption Of Reliance At Class Certification Stage In Securities Litigation

• Published date: 02 November 2021
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Criminal Law, Corporate and Company Law, Class Actions, Trials & Appeals & Compensation, Securities, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Cahill Gordon & Reindel LLP
• Author: Mr Bradley J. Bondi, Joel Kurtzberg, Adam S. Mintz and Grace A. McAllister

To establish a securities fraud claim, plaintiffs must show they relied on the alleged misrepresentations or omissions that are the subject of the lawsuit. The individualized nature of that inquiry had the potential to pose a crippling hurdle to plaintiffs' efforts to certify a securities fraud class, because a plaintiff seeking to certify such a class typically must show that "questions of law or fact common to class members predominate over any questions affecting only individual members."¹

The Supreme Court of the United States addressed that issue in Basic Inc. v. Levinson and adopted the "fraud-on-the-market" theory. Under that theory, so long as the securities at issue trade in an efficient market, plaintiffs are entitled to a class-wide presumption of reliance.² Defendants can rebut the presumption by "sever[ing] the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff or his decision to trade at a fair market price."³ In practice, however, courts tend to defer consideration of those issues until after class certification, because they also are relevant to merits issues such as materiality and loss causation, which the Supreme Court has held were not appropriately considered at class certification.⁴

On June 21, 2021, the Supreme Court decided Goldman Sachs Grp., Inc. v. Arkansas Tchr. Ret. Sys., 141 S. Ct. 1951 (2021) ("Goldman v. Arkansas"),⁵ which addressed questions about the standards for rebutting the Basic presumption. The Court held that (i) whether an alleged misrepresentation is generic, and therefore unlikely to affect price, is relevant at the class certification stage, even though it is also relevant to the merits issue of materiality and (ii) defendants seeking to rebut the Basic presumption have the ultimate burden of proof to show a lack of price impact at the class certification stage. While the Court clarified the standards for rebutting the Basic presumption, it did not substantially alter those standards, as some commentators had expected.

I. Factual and Procedural Background

In Arkansas Teacher Ret. Sys. v. Goldman Sachs Group, Inc., 955 F.3d 254 (2d Cir. 2020), plaintiffs, a group of shareholder pension funds, filed a putative class action against Goldman Sachs and certain of its executives, alleging that defendants made misrepresentations in Goldman Sachs' Securities and Exchange Commission ("SEC") filings and annual reports about conflicts of interest, which artificially inflated the company's stock price. The alleged misrepresentations included generic statements, such as "[w]e have extensive procedures and controls that are designed to identify and address conflicts of interest" and "[o]ur clients' interests always come first." However, in a settlement agreement with the SEC related to Goldman Sachs' involvement in several collateralized debt obligations ("CDOs"), the company settled with the SEC for failing to disclose a conflict of interest in connection with the creation of its CDOs (e.g., the role of Paulson & Co. in the selection of mortgages that constituted the CDOs and Paulson & Co.'s position as a short seller). Plaintiffs alleged that this settlement rendered Goldman Sachs' disclosures about its policies and procedures regarding conflicts of interest inaccurate.

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