Courthouse Steps Decision Webinar: Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System

Litigation Practice Group Teleforum

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The Supreme Court issued its decision in Goldman Sachs Group, Inc., v. Arkansas Teacher Retirement System on June 21, 2021.  Justice Barrett delivered the opinion of the Court, which Chief Justice Roberts and Justices Breyer, Kagan, and Kavanaugh joined in full.

In this case, a group of Goldman shareholders sought to certify a class action suit against Goldman arguing that they had detrimentally relied on Goldman’s alleged misrepresentations about conflict management, which had resulted in inflation maintenance and subsequent shareholder loss.  In arguing for class certification, the plaintiffs relied on the Supreme Court’s 1988 Basic Inc. v. Levinson decision allowing plaintiffs to prove reliance based on evidence common to the class. Goldman argued against certification and against the Basic presumption by presenting evidence showing the alleged misrepresentations had not affected stock prices.

On its second attempt, the District Court certified a class and the Second Circuit affirmed.  In its decision, the Supreme Court remanded to the Second Circuit to consider the generic nature of the alleged misrepresentations even though that evidence might get to materiality not usually considered at the initial certification stage under Rule 23.  The Court also clarified the Basic presumption holding that a defendant does bear the burden of persuasion to rebut the presumption of reliance allowed to class action plaintiffs.


  • Theodore "Ted" Frank, Director of Litigation and Senior Attorney, Hamilton Lincoln Law Institute 

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As always, the Federalist Society takes no position on particular legal or public policy issues; all expressions of opinion are those of the speaker.

Event Transcript



Dean Reuter:  Welcome to Teleforum, a podcast of The Federalist Society's practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group Teleforum calls, become a Federalist Society member today at



Guy DeSanctis:  Welcome to The Federalist Society's webinar call. Today, July 1, we discuss the Courthouse Steps decision in Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System. My name is Guy DeSanctis, and I am Assistant Director of Practice Groups at The Federalist Society. As always, please note that all expressions of opinion are those of the expert on today's call.


      Today, we are fortunate to have with us Ted Frank, Director of Litigation and Senior Attorney, Hamilton Lincoln Law Institute. Throughout the panel, if you have any questions, please submit them through the Question and Answer feature so that our speaker will have access to them for when we get to that portion of the webinar. With that, thank you for being with us today. Ted, the floor is yours.


Theodore "Ted" Frank:  Thank you. And thanks to The Federalist Society for hosting yet another one of these great programs. As mentioned, today we're discussing Goldman Sachs Group v. Arkansas Teacher Retirement System, which was a Supreme Court decision that came down last week. For full disclosure, my public interest law firm is adverse to ATRS, the respondent here, in two cases in the First and Seventh Circuits. If you heard my discussion of the oral arguments back in the March Courthouse Steps Teleforum, there's going to be a lot of overlap, so you may want to fast forward ten minutes if you're listening to the time-delayed version of this.


      This is another in a series of cases divining the viability and limits of the fraud on the market doctrine in securities litigation. And to recap what that is and where that comes about, courts have inferred a private right of action for securities fraud from Section 10(b) of the Securities Exchange Act of 1934. The elements of such a claim are a material misstatement or omission, scienter, a connection with the purchase or sale of security, economic loss, loss causation, i.e., that the misrepresentation caused the asserted loss, and the element at issue in the case — line of cases here — reliance.


      To obtain class certification litigation, one must prove that common issues predominate. And you would think reliance would be difficult to prove on a class-wide basis. Normally, isn't it an individualized consideration? Did this shareholder rely? Did that shareholder rely? But in Basic v. Levinson, the Supreme Court endorsed the fraud on the market theory of reliance. If you think the stock market is an efficient market, then a stock's price reflects all public information about the stock. And therefore, defendant's public misrepresentations presumptively affect the market price of a stock, and thus, everybody who purchases the stock at the resultantly inflated price before a corrective statement issues is, therefore, relied on the misrepresentations when they paid too much for the stock.


      Now, a defendant can rebut the presumption. As Basic says, any showing that severs the link between the alleged misrepresentation and either the prize received or paid by a plaintiff or his decision to trade at a fair market price rebuts the presumption. If the defendant shows that the misrepresentation, in fact, did not lead to a distortion in price, it breaks the causal connection by eliminating the basis for finding that the fraud had been transmitted through the market price. In the Halliburton, Amgen trilogy of cases, the Court interpreted Basic, and it's a trilogy of two names because there are two Halliburtons out of the three cases.


      In Halliburton I and Amgen, the Court heard that someone seeking to demonstrate fraud on the market for purposes of class certification need not prove substantive elements at the loss causation on materiality. These were merits questions. But in Halliburton II, the Court held that a court [inaudible 04:06] defendant offers to show that an alleged misrepresentation did not affect the price of this relevant security, even if that same evidence would be highly relevant at the merit stage. The Court reasoned that a defendant is entitled to rebut the basic presumption through any evidence showing that the asserting misrepresentation, or its correction, did not affect the market price of the defendant's stock, even if it went to the merits.


      The Court observed that Basics requirements are "an indirect proxy" for price impact, and an indirect proxy should not preclude directed the evidence that the market price was not, in fact, affected. Now, in permitting the defendant's rebut, the basic presumption through evidence of the absence of price impact, Halliburton II made clear that price in back differs from materiality. While materiality is a substantive element of a securities claim, "The fact that a misrepresentation was reflected in the market price at the time of the transaction has everything to do with the issue of predominance at the class certification stage." The Court thus prohibits a court from artificially limiting the evidence of at class certification and expressly permit an event and to seek to defeat the basic presumption at that stage through direct as well as indirect price in backed evidence.


      So the challenge for courts lies in the fact that both reliance and loss causation overlap the materiality of the alleged misrepresentations. And that sets up this case. Goldman Sachs, like every company, has generic statements of ethical aspirations you can find on Successories posters and corporate statements. Our client's interests always come first. Integrity and honesty are the heart of our business -- yada, yada, yada. Of course, when you purchase stock, you go through a corporation's PR, press releases, and their statements, and you look for those bold printed 18 point font descriptions of their values, and you decide whether to buy stock on those grounds.


      In 2010, the SCC engaged in enforcement actions and investigations against Goldman over collateralized debt obligations, CDOs it sold in the run-up to the financial crisis in 2006 and 2007, alleging that Goldman had conflicts of interest when it sold CDOs it knew it would decline in value. These never resulted in criminal charges, but the stock price declined in response to the news of these government actions. Plaintiffs sued, alleging that the generic statements Goldman made about its ethics were misleading because they didn't disclose that Goldman had these conflicts of interest and might face government actions over it. And therefore, they caused loss when they were corrected by the revelations of the investigations. Goldman argued that the generic statements were immaterial as a matter of law. The district court disagreed and denied a motion to dismiss.


      So at the class certification stage, Goldman tried to rebut the Basic fraud on the market presumption. Goldman argued that the general aspirational statements alleged as the statements could not have affected the stock price, and it contended that the nature of the statements was relevant evidence in assessing price impact despite any overlap with considerations relevant to materiality merits issue. Goldman noted that there are dozens of public press reports about alleged conflicts of interest that did not cause its stock to decline, for example.


      The district court certified the class. It refused to consider Goldman's evidence about the nature of the challenge statements and about the failure of Goldman's stock price to decline in response to the news reports. It reasoned that the evidence related only to the statement's materiality and not the price impact and ultimately determined that Goldman had not rebutted the Basic presumption because they had not "conclusively proven a complete lack of price impact."


      The first time around, the Second Circuit reversed. It held that the district court failed to provide the preponderance of evidence standard in whether Goldman had rebutted the presumption and failed to consider the evidence of price impact. Price impact differs from materiality in a crucial respect because it refers to the effect of misrepresentation on stock price. But Goldman -- the Second Circuit rejected Goldman's argument that Federal Rule of Evidence 301 about burden of persuasion applied. Goldman argued that it only had the burden of production, not the burden of persuasion. The Second Circuit held that Goldman also had the burden of persuasion.


      On remand, Goldman litigates the issue. They present multiple expert reports and price impact. For example, none of the 800 analyst reports on Goldman Sachs in the relevant time frame mentioned any of the statements at issue. Plaintiffs rebutted this with a single expert. He performed your standard litigation expert study of cherry-picking and ignoring alternative hypotheses and then jumps to the conclusion that there's a price impact. Plaintiffs argued that there was inflation maintenance aprice.


      The inflation maintenance theory is the notion that even though a statement, when made, may not have had an impact on the stock price, it somehow maintains the price at an inflated level. But they had no explanation of when the original inflation occurred. Goldman's, obviously, a little frustrated by this sort of hand waiving when the district court, again, certifies the class determining that Goldman had failed to rebut the Basic presumption by a preponderance of the evidence. The court rejected Goldman's argument that the statements at issue were so generic that they could not have impacted the stock price. So Goldman appeals to the Second Circuit again.


      The Second Circuit assigns a completely different panel to the issue and affirms this time the class certification in a 2-1 decision. Notwithstanding the first panel's decision in Halliburton II, the court characterizes Goldman's argument as an attempt to smuggle materiality into Rule 23. According to the Second Circuit, whether misstatements are too general to demonstrate price impact has nothing to do with whether common questions predominate because the issue of materiality is common to all class members. The court noted that defendants could still challenge materiality later when they move for summary judgment.


      Now, having refused to consider the generic nature of the alleged misstatements, the court of appeals proceeded to determine that Goldman failed to rebut the Basic presumption by a preponderance of evidence characterizing Goldman's burden as a heavy one because they needed to show that the entire price decline on the corrective disclosure dates was due to something other than their alleged misstatements. The court repeatedly stressed that Goldman bore the burden of persuasion in rebutting the presumption. Judge Sullivan dissents and complains that the Second Circuit's panel majority's approach had the effect of making Basic errebuttable, concluding that the generic quality of Goldman's alleged misstatements coupled with Goldman's expert testimony compelled the conclusion that Goldman proved to like price impact.


      Goldman petitions for cert, and they successfully get it on two questions. First, whether a defendant in a securities class action may rebut the presumption of class-wide reliance under Basic by pointing to the generic nature of the alleged misstatements and showing that the statements had no impact on the price of security even though that evidence is also relevant to the substantive element of materiality as Halliburton presumably all ready decided. And two, the question of Federal Rule of Evidence 301, whether defendant seeking to rebut the Basic presumption has the burden of production or also, as the Second Circuit held, the ultimate burden of persuasion.


      So once this gets to the merits stage, the division between the parties, in the words of Justice Barrett's majority opinion, "Largely evaporated." Goldman had argued that generality demonstrated legal immateriality but backs down and instead argues that yeah, statements generality can support other evidence of lack of an in price -- lack of a price impact, and it just goes to the likelihood of the price impact and that judges can make that determination as a matter of common sense. Respondents argued that expert's evidence matters more than common sense, and whereas they argued below that the courts shouldn't consider the evidence at all, they concede Halliburton II is correct, and the courts should consider the nature of the statement in determining price impact.


      Now, this was potentially an important case because rebuttal of the Basic presumptions happened only five times at the class cert stage. Goldman argued that Halliburton II, promising that defendants would be able to rebut the Basic presumption, is such a narrow thing that its promise has been betrayed and that the result would be that any stock drop will inevitably result in reverse-engineered securities class action based on generic statements that everybody makes. But after everybody's concessions at the merit stage, there wasn't really anything left to litigate. Goldman conceded that plaintiff's inflation maintenance theory could conceivably be valid, and plaintiffs conceded that if disproof of price impact touches on materiality, that shouldn't preclude its evaluation under Halliburton II. And so that's how the opinion came down.


      Now, this is the new stuff. Goldman wanted reversal. They got remand. The Court holds, very narrowly, that the generic nature of a misrepresentation often is important evidence of price impact that courts should consider a class certification including in inflation maintenance cases, even if it overlaps of the materiality merits question as everybody sort of agreed at oral argument, refusing to say that it could never lead to price impact.


      How does this play out? Well, as the majority opinion states, for example, if there's a mismatch between the content of the misrepresentation and the corrective disclosure, such as when the earlier misrepresentation is generic such as we have faith in our business model and the later corrective disclosures specific, our fourth-quarter earnings did not meet expectations. It is less likely that the specific disclosure actually corrected the generic misrepresentation, which means that there is less reason to infer content price inflation that is price impact from the back end price dropped. Well, how do you weigh that? Let's talk about that later.


      On the second question, the Court concludes that the second -- well, going on to the first question, the Court concludes that the Second Circuit's opinions leave sufficient out on whether they fairly evaluated this question and remands for the Second Circuit to consider all of the record evidence relevant to price impact regardless of whether that evidence overlaps with materiality or any other merits issue. On the second question, the Court concludes that Basic and Halliburton II did allocate to defendants the burden of persuasion to prove the lack of price impact, but the Court says who cares. This does make a big difference. No plaintiff -- it's only going to matter if things are perfectly [inaudible 16:05].


      And maybe that's right, and no plaintiff or defendant is going to fail to produce evidence on this in courts or unlikely to let matters turn on the burden. It's very rare for a court to say this is simply a toss-up, so I'm going with the burden of persuasion. In dissent -- or in partial dissent, Justice Sotomayor, writing by herself, agrees with the reasoning but not with the conclusion. She thought that Goldman forfeited the argument that they raised at the Supreme Court when they were at the Second Circuit and that the Court unfairly quotes language from the Second Circuit, that the Second Circuit did apply the correct tests in the context of Goldman's more aggressive argument below and therefore, she would have affirmed.


      There is a three-justice concurrence from — and partial concurrence — from Gorsuch, joined by Thomas and Alito, on the Federal Rule of Evidence 301 question on the burden of persuasion, asking why should a defendant carry some burden of persuasion in a plaintiff's claim for securities fraud and saying it's a mistake to parse terms in the Basic decision and a judicial opinion with a kind of punctilious exactitude to statutory languages -- the Court did.


      So what does this mean? Well, the Supreme Court decision doesn't give lower courts a lot of guidance other than to use "common sense." "As a rule of thumb, a more general statement will affect a securities price less than a more specific statement on the same question." That's going to be very helpful to litigants. So when has a district court committed reversible error? When it adopts expert testimony that contradicts common sense. What's the quanta of common sense that defeats a quack expert and creates an abuse of discretion -- the clear error? We're not getting an answer from this decision.


      On remand, I'm going to be surprised if anybody on the Second Circuit panel is going to change their mind. And if anything, in this particular case, it's going to rationalize a bigger attorney fee request if this case settles because plaintiffs will argue that they defended their case in the Supreme Court and three times at the Second Circuit now. So going forward, it looks like we're going to have these sorts of generic statement cases. As in AIG, amicus briefs said in the merits frequently event-driven claims allege that generic or aspirational statements similar to the ones made by virtually every public company maintained inflation in the company's stock price. Allegations of wrongdoing nearly always conflicted some level of generality of a company's code of conduct or other statements of corporate policy.


      So it is not difficult for plaintiffs to allege that negative reporting on disclosures corrected a price. A prior generic policy statement such as we strive to comply of all applicable laws. So the result is that just about any corporate controversy that coincides with a drop in stock price can be recharacterized as a securities fraud. Examples abound, COVID-19 exposure on cruise ships, wildfires, data breaches, sexual harassment allegations of all sorts of grounds for event-driven claims of securities fraud supposedly tied to generalized statements.


      And in the words of Bloomberg columnist Matt Levine, "Everything is securities fraud." As he describes this case, the plaintiff's theory here is that Goldman's stock price was too high because it kept talking about how much integrity it had. And the proof is that when the news came out that it had less integrity, and the stock price dropped. But that is not quite how a normal person would describe what happened. What happened is not that Goldman went around saying our client's interests always come first, and then one day it said we've done an audit and actually our client's interests usually come fourth, and the stock dropped.


      What happened is that Goldman went around saying our client's interests always come first, and then a global financial crisis occurred in part -- in very small part because Goldman's client's interests did not always come first, and then Goldman's stock dropped. Did that mean that Goldman stock was too high because Goldman was lying about its client's interest always coming first? Well, now that's a jury question. So expect director and officer insurance prices to go up.


      And the ultimate effect will be a wealth transfer from diversified investors paying more money to insurance companies to eventually pay too well to wealthy trial lawyers and that sort of wealth transfer and lower returns for investors. So plaintiffs won but don’t describe this as a victory for shareholders.


      And if I can put in a plug for my work at the Hamilton Lincoln Law Institute, we can't do anything to stop meritless securities cases. That's a matter for Congress when the Supreme Court interprets the law in a manner that, in practice, will let anything go. But one aspect of such cases, independent of this case, is that shareholders are not only punished by the litigation. They're punished a second time when the attorney fee request comes in.


      As I earlier mentioned, we have two cases pending in the First and Seventh Circuit involving the respondent here, Arkansas Teacher Retirement Systems, and both involve very credible [inaudible 21:33] allegations where money went to politicians and the class, as a result, got overcharged by the attorneys. And there's just a systemic problem where securities attorneys are getting millions and millions of dollars more from the settlements of these types of litigations than they would get in a competitive market charging well above market rates, claiming risk far above the actual risk that they're undergoing. And their portfolio of securities cases earns well above lodestar returns.


      Now, no individual shareholder has the incentive to investigate and litigate attorney fee abuses. That takes a lot of attorney time. Even a very large shareholder has very little money at stake. And even if you are successful in reducing attorney's fees, it's rare for courts to award you for doing so. For example, in one case, we won tens of millions of dollars for shareholders, and after two appeals to the Second Circuit, all we got for doing so was $33,000.00, which was below our lodestar.


      So essentially, the only people that can afford to bring these challenges to abusive attorney fee requests is a public interest firm like ours, like HLLI, and if we don't challenge the fees, no one will. And if pension funds and shareholders don't retain us to investigate these cases pro bono, they're costing themselves money because we can't come in without a client. So that's my plug. Feel free to reach out to me about these issues if you're a big pension fund, especially, or if you're a government official that has some say over big-budget funds.


      If you want a silver lining about this case, one place where Goldman Sachs may be especially important is in ESG investing. ESG investing argues for investing in companies that, in effect, make more generic statements about particular values and whatnot, emphasizing things above and beyond shareholder return, the importance of environmental stewardship or diversity, or what have you. And what cases like Goldman Sachs teach us is that corporations that engage in this sort of wordplay are setting themselves up for securities losses later because the fascinating thing is that while most investors invest in companies because of their estimates of future cash flows, ESG investors are arguing that investors should put a premium on values beyond such cash flows in the stock market.


      So if the companies have problems that contradict the generic statements about environmental stewardship or what have you, a plaintiff's arguing for a price inflation, this theory of these generic statements -- they actually have some economic sense now in the ESG investment context because you have these hedge funds and whatnot setting up investment portfolios based on corporate agreements to comply with some degree of values.


      So companies that decide to adopt or appeal to the ESG investment paradigm may be hurting their shareholders in two ways. One, by prioritizing executive's personal, political preferences above those of shareholder finances. And two, by setting up the company for additional securication, securities litigation liability in the long run. If I were a really cynical plaintiffs firm, I might set up an ESG rating organization that tallies up generic statements and rates companies based on these generic statements and then have that organization rush in and issue instantaneous ratings downgrades when bad news happens. And then you use all of that to back a price inflation theory. Anyway, those are my thoughts. I look forward to your questions. And now we get to see how well I can figure out whether people are asking questions in the Chat under the Zoom technology.


Guy DeSanctis:  At the moment, it doesn't appear we've got any questions yet. Is there anything else you'd like to discuss while we see if we get a question from someone? Or anything you'd like to cover besides what's all ready been said?


Theodore "Ted" Frank:  I always get asked that as we wait for questions, and I should really leave some magical statement in reserve [Laughter]. But I kind of let everything go, and maybe I scared away all of the participants on the Zoom call [Laughter]. It's a shame. I really would look forward to answering questions.


Guy DeSanctis:  It looks like we may have someone here.


Theodore "Ted" Frank:  Is someone typing? Nobody is typing.


Guy DeSanctis:  Yeah, I thought we may get one, but I guess not. I guess if you don't --


Theodore "Ted" Frank:  Oh, there we go.


Guy DeSanctis:  Oh, there it is. Yeah.


Theodore "Ted" Frank:  Will WAG go away? I don't know what WAG is, unfortunately. And maybe that's a failing on my part, or maybe I'm just misunderstanding the question. Can you specify a little more? If you could type this -- type out what you mean by WAG in the Chat or in the Q and A. Oh, ESG. I don't think ESG is going to go away. I think there are too many people who are interested in it and -- yeah, autocorrect will do that [Laughter].


      So the question said WAG but meant ESG. I think this will make ESG more expensive and may be a reason to avoid ESG or companies that appealed to ESG, as you're making your own investment decisions. But I don't think it will get rid of ESG by itself. I think that's going to have to be shareholders fleeing the companies that are putting shareholders second and third and expressly adopting we're putting our executive's political self-interest first rather than trying to maximize shareholder returns.


      As Noel Friedman would say, you don't want to delegate a corporation to be doing these things. You want to maximize your own shareholder returns. And then with that money, maybe you yourself can decide to invest in the environment or The Federalist Society or whatever it is you want to invest in. But these are decisions that people can make in an open market so long as we continue to have these decisions and they're not forced upon us by the SCC or by Senator Warren legislation. Any other questions? Hearing none -- I'm going to kick it back to Guy to close us out.


Guy DeSanctis:  Sounds good. Thank you.


Theodore "Ted" Frank:  These are just the statements of me and not The Federalist Society. Or did you all ready say that?


Guy DeSanctis:  I said that at the beginning, I believe.


Theodore "Ted" Frank:  Okay.




Guy DeSanctis:  On behalf of The Federalist --


Theodore "Ted" Frank:  [Inaudible 28:53] my idiosyncratic views.


Guy DeSanctis:  Well, on behalf of The Federalist Society, I want to thank our expert, Ted Frank, for the benefit of his valuable time and expertise today. And I want to thank our audience for joining and participating. We also welcome listener feedback by email at [email protected]. As always, keep an eye on our website and your emails for announcements about upcoming Teleforum calls and virtual events. Thank you all for joining us today. We are adjourned.




Dean Reuter:  Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at