U.S. Supreme Court Clarifies the Permissible Evidence and Burdens at Class Certification in Securities-Fraud Cases

The U.S. Supreme Court held that courts should consider the generic nature of a misrepresentation when assessing price impact in securities-fraud suits and that defendants bear the burden of persuasion to prove a lack of price impact at class certification.

In Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System, securities-fraud plaintiffs alleged that Goldman maintained an inflated share price by making misrepresentations about its conflict-of-interest policies. The statements at issue included generalized language attesting to "extensive procedures and controls" and "integrity and honesty."

Plaintiffs sought to certify a class of Goldman shareholders and invoked the presumption in Basic Inc. v. Levinson, 485 U.S. 224 (1988), that investors rely on the market price of a company's security, which, in turn, incorporates a company's alleged misrepresentations. Goldman sought to rebut the presumption of reliance and thus defeat class certification with evidence that its alleged misrepresentations were too generic to impact its stock price.

The district court certified the class, and the Second Circuit affirmed. The Second Circuit's ruling cast doubt on whether the generic nature of alleged misrepresentations could be considered when determining whether to certify a class, rather than at the merits stage when courts assess the materiality of the statements.

The Supreme Court unanimously held that the generic nature of a misrepresentation often is important evidence of price impact that courts should consider at the class certification stage. The Court emphasized that in assessing the price impact of a statement at class certification, courts must consider all probative evidence. Courts may consider expert testimony, but should also use common sense. If the statements did not impact price, in light of all available evidence, the requirements for class certification have not been met (because, without the Basic presumption, individualized issues of reliance will predominate).

In a separate part of the Court's opinion that garnered six votes, the Court further held that defendants bear the burden of persuasion to prove a lack of price impact at class certification. The Court reasoned that Basic compelled an exception to the general rule that a presumption allocates only the burden of production, and required defendants to make a showing—by a preponderance of the evidence—that severs the link between an alleged misrepresentation and a company's stock price. The majority noted that both plaintiffs and defendants submit competing expert evidence on price impact in most securities-fraud class actions and so the allocation of the burden of persuasion should matter only in the rare case where the evidence is in perfect equipoise.

Goldman Sachs also offered an opportunity for the Court to weigh in on the viability of the "inflation maintenance" theory of securities fraud, recognized in at least the Second, Seventh, and Eleventh Circuits. While noting the presence of this theory in the case, the Court in its analysis did not address the theory's viability, leaving that question for another day.

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