Goldman Sachs Secures Class Decertification
By: Robert Finkel and Sasha Marseille, Wolf Popper LLP
Pension funds that serve as Lead Plaintiffs in a class action securities lawsuit should understand that the class certification stage is a hurdle to jump over. The recent Second Circuit decision: Ark. Teacher Ret. Sys. v. Goldman Sachs Grp., Inc., 2023 U.S. App. LEXIS 20815 (2d Cir. Aug. 10, 2023), is an illustration on how a class can become decertified.
This is an excerpt from NCPERS Fall 2023 issue of PERSist, originally published October 24, 2023.
On August 10, 2023, the Second Circuit Court of Appeals issued an order to decertify a class action securities lawsuit against Goldman Sachs.1 The lawsuit has been ongoing for over a decade and stems from allegations of conflicts of interest related to collateralized debt obligations (CDOs) and an enforcement action by the U.S. Securities and Exchange Commission (SEC) against Goldman Sachs.
The Plaintiffs in the lawsuit alleged that Goldman Sachs maintained an inflated share price caused by misrepresentations concerning its business principles and conflict-of-interest policies. The Plaintiffs further alleged that the true facts were revealed to the market when the SEC sued Goldman Sachs on April 16, 2010 “for making material misleading statements and discussions in connection with” ABACUS 2007 AC-1. Almost immediately, the price of Goldman Sachs common stock fell sharply. The stock fell further when the Department of Justice announced that it was commencing a criminal investigation. These disclosures are said to have caused Goldman's stock price to drop by 21% from $184.27 on April 15, 2010, to $145.20 on April 30, 2010.2
The issue before the Second Circuit Court was the District Court's application of the U.S. Supreme Court's guidance on the “fraud-on-the-market” theory. The fraud on the market theory is based on the principle that “stock trading on theoretically efficient markets like the New York Stock Exchange or Nasdaq incorporates all public, material information, including material misrepresentations, into its share price.”3 Defendants must rebut that presumption by severing the link between the misrepresentation and the price paid by Plaintiffs for the Goldman Sachs shares. The Second Circuit also had to assess the generic nature of Goldman Sachs' business principles statements and whether a reasonable investor would have relied on the truth of those statements.4
Generally, plaintiffs in securities litigation lawsuits argue that shares are inflated during the class period by the amount by which the stock price declines at the end of the class period when the truth about the company is revealed. However, the Supreme Court in Goldman stated that the inference that the back-end price drop equals front-end inflation weakens when there is a mismatch between the contents of the misrepresentation and the corrective disclosure.5
Following the Supreme Court's 2021 decision in Goldman, courts were directed to compare, at the class certification stage, the relative genericness of a misrepresentation with its corrective disclosure.6 Ultimately, the Second Circuit agreed with Goldman Sachs that the District Court failed to meaningfully apply the inflation-theory framework established by the Supreme Court because there was no evidence that investors relied on Goldman Sachs' generic statements of its business principles. The Second Circuit reversed the District Court's class certification order, and remanded the case back to the District Court with instructions to decertify the class.
About the authors:
Robert C. Finkel is a senior partner and member of the executive committee at Wolf Popper LLP. Robert is a graduate of the Columbia Law School, Class of 1981 (where he was a Harlan Fiske Stone Scholar), and the University of Pennsylvania, Class of 1978, where he obtained a B.S. in accounting from the Wharton School of Business and a B.A. in history from the College of Arts and Sciences. Robert began his employment in the 1980s with two large New York City defense firms. Robert became a partner at Wolf Popper LLP effective January 1, 1992. He has been repeatedly designated a Super Lawyer® in Securities Litigation.
Robert has written for The New York Law Journal on subjects including shareholder voting rights and ERISA class actions. He can be reached at firstname.lastname@example.org or (212) 451-9620.
Sasha Marseille is a graduate of The George Washington University Law School (J.D., 2020). While in law school Sasha was a student attorney in the Public Justice Advocacy clinic, where she represented low-income clients in wage and hour cases.
After law school, Sasha served as an attorney advisor at The U.S. Department of Health and Human Services, Departmental Appeals Board, where she assisted the administrative appeals judges in adjudicating Medicare related exclusions imposed by Medicare providers or suppliers.
Sasha is admitted to the bar of the State of New York.
1Ark. Teacher Ret. Sys. v. Goldman Sachs Grp., Inc., 2023 U.S. App. LEXIS 20815, at *18 (2d Cir. Aug. 10, 2023) (“ATRS III”).
2 Richman v. Goldman Sachs Group, Inc., 274 F.R.D. 473, 474-75 (S.D.N.Y. 2011).
3ATRS III at *18 (citing Basic Inc. v. Levinson, 108 S. Ct. 978, 991 (1988)).
4 ATRS III at *32.
5Goldman Sachs Grp., Inc. v. Ark. Tchr. Ret. Sys. (Goldman), 141 S. Ct. 1951, 1961 (2021).
6 ATRS III at *8.