Supreme Court Decides Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System

On June 21, 2021, the U.S. Supreme Court decided Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System, holding that: (1) the generic nature of misrepresentation is often important evidence of price impact that courts should consider when certifying a class in securities class actions and (2) the defendant bears the burden of persuasion to prove lack of price impact by the preponderance of the evidence at the certification stage.

A group of investors filed a securities-fraud class action against the Goldman Sachs Group and three of its former executives, claiming that Goldman Sachs maintained an artificially high stock price through representations about how it could adequately handle conflicts-of-interest. The plaintiffs claim that these statements were false and when the truth came to light, Goldman Sachs’ stock price plummeted.

The plaintiffs moved to certify the class. To show that the class members uniformly relied on the misrepresentation, the plaintiffs invoked the Court’s precedent in Basic Inc. v. Levinson, 485 U.S. 224 (1988), which created a rebuttable presumption that an investor relies on a misrepresentation if the misrepresentation was publicly known and material, the stock was traded in an efficient market, and the investor bought the stock after the misrepresentation was made, but before the truth was revealed. Goldman Sachs tried to defeat the presumption by arguing that the generic misrepresentation had little impact on stock price. The district court certified the class and the Second Circuit affirmed the decision.

The Supreme Court made two main holdings. First, it held that the nature of the misrepresentation can provide important evidence of whether a misrepresentation had an effect on stock price. This is because a more generic statement will affect price less than a specific statement. The parties actually did not dispute this point — instead, they disagreed about whether the Second Circuit properly considered the generic nature of Goldman’s misrepresentations. The court was obligated to consider all evidence bearing upon the question even if the same evidence is also relevant to the merits question of materiality. Because the Court ultimately determined it was unclear if the Second Circuit considered all record evidence on price impact, it remanded for further consideration.

Second, the Court held that the Second Circuit properly required the defendant, rather than the plaintiffs, to bear the burden of persuasion on the price impact theory. The Court held that it had the authority to transfer the burden of persuasion to the defendant, and in fact, had done so previously in prior cases. The Court was therefore bound by the prior precedent and the burden of persuasion rested squarely with Goldman Sachs.

Justice Barrett delivered the opinion of the Court, in which Chief Justice Roberts and Justices Breyer, Kagan, and Kavanaugh joined. Justice Sotomayor filed an opinion concurring in the judgment in part and dissenting in part. Justice Gorsuch filed an opinion concurring in part and dissenting in part, which was joined by Justices Thomas and Alito.