June 24, 2021

The Supreme Court Provides Guidance on the Standard for Deciding Price Impact at Class Certification in Securities Fraud Cases

In Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System, the U.S. Supreme Court answered two important questions regarding the standards that govern class certification in securities fraud actions, affirming the majority views of courts below. Those questions relate to proving whether alleged misrepresentations affected the defendant’s stock price, a concept known as price impact.

First, building on its 2014 Halliburton decision that courts should consider all evidence relevant to price impact at the class certification stage, the Court held that the generic nature of the alleged misrepresentations should be considered in deciding price impact, even though that evidence also is relevant to the subsequent merits stage of the case. Second, the Court held that a defendant opposing class certification bears the burden of proving by a preponderance of the evidence a lack of price impact of the alleged misrepresentations. As a result of the Goldman decision, courts must evaluate the full scope of available price impact evidence — even evidence that overlaps with the merits — in deciding whether to certify a class while requiring defendants to bear the burden of proving no price impact.


The Goldman decision arises out of a putative securities fraud class action against Goldman Sachs Group, Inc. and certain of its former executives (together, “Goldman”) in which the plaintiffs allege that Goldman violated Section 10(b) of the Securities Exchange Act of 1934 and its implementing regulation, Rule 10b-5, by making supposed misrepresentations about its conflict of interest policies and practices. The statements at issue are generic, including “[o]ur clients’ interests always come first” and “[i]ntegrity and honesty are at the heart of our business.” The plaintiffs are proceeding under the so-called “inflation maintenance” or “price maintenance” theory, which provides that a misrepresentation that does not move the stock price still can have a price impact if it serves to maintain an already inflated stock price. The plaintiffs claim that Goldman’s generic statements maintained an allegedly inflated stock price, which failed to reflect that Goldman was engaging in supposedly conflicted transactions without disclosing its conflicts. The plaintiffs also claim that Goldman shareholders suffered losses when the public disclosure of Goldman’s supposed conflicts caused Goldman’s stock price to drop.

In moving for class certification, the plaintiffs invoked Basic v. Levinson, 486 U.S. 224 (1988), which permits securities fraud class action plaintiffs to rely on a class-wide, rebuttable presumption of reliance on the theory that the defendant’s stock price incorporates all public information, including all alleged misrepresentations. In response, Goldman sought to rebut the Basic presumption by arguing that the alleged misrepresentations were too generic to have an impact on its stock price and by presenting expert testimony intended to show that the alleged misrepresentations did not have an impact on its stock price.

The district court certified a class, concluding that Goldman had failed to prove by a preponderance of the evidence that the alleged misrepresentations had no price impact. On appeal, that decision was vacated by the U.S. Court of Appeals for the Second Circuit on the ground that the district court had not considered all evidence relevant to price impact. After considering additional evidence, the district court again certified a class, again concluding that Goldman had failed to prove by a preponderance of the evidence that the alleged misrepresentations had no price impact. On appeal, a divided Second Circuit affirmed.

The Goldman Decision

In an opinion authored by Justice Barrett, the Supreme Court unanimously held: “In assessing price impact at class certification, courts should be open to all probative evidence on that question — qualitative as well as quantitative — aided by a good dose of common sense.” The Court explained that under its decision in Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (2014), “a court cannot conclude that [the class certification] requirements are satisfied without considering all evidence relevant to price impact.” Such evidence includes the generic nature of a misrepresentation – even though such evidence “is also relevant to a merits question like materiality,” which the Court previously held could not be considered at class certification. As the Court explained: “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: “[W]hen the earlier misrepresentation is generic (e.g., ‘we have faith in our business model’) and the later corrective disclosure is specific (e.g., ‘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 front-end price inflation — that is, price impact — from the back-end price drop.” Eight Justices doubted whether the Second Circuit had in fact considered the generic nature of the alleged misrepresentations and, therefore, the Court vacated the Second Circuit’s decision and remanded the case to the Second Circuit for further consideration. Justice Sotomayor, concluding that the Second Circuit had properly considered the generic nature of the alleged misrepresentations, dissented from the Court’s decision to vacate and remand.

The Court then addressed Goldman’s argument that the plaintiffs, not Goldman, should be required to bear the burden of persuasion on price impact at class certification. Writing for a majority of six Justices, Justice Barrett concluded that the best reading of the Court’s precedents is that defendants bear the burden of persuasion to prove a lack of price impact by a preponderance of the evidence. The Court noted, however, that “[t]he defendant’s burden of persuasion will have bite only when the court finds the evidence in equipoise — a situation that should rarely arise.” Joined by Justices Thomas and Alito, Justice Gorsuch dissented in part, concluding that the burden of persuasion with respect to price impact should be on the plaintiff.

Notably, the Court refused to address the validity of the inflation-maintenance theory itself, leaving that question for another day: “Although some Courts of Appeals have approved the inflation maintenance theory, this Court has expressed no view on its validity or its contours. We need not and do not do so in this case.”