18-3667 Ark. Tchr. Ret. Sys. v. Goldman Sachs Grp., Inc. UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT ______________

August Term 2020

(Submitted: August 11, 2021 | Decided: August 26, 2021)

Docket No. 18-3667

ARKANSAS TEACHER RETIREMENT SYSTEM, WEST VIRGINIA INVESTMENT MANAGEMENT BOARD, PLUMBERS AND PIPEFITTERS PENSION GROUP,

Plaintiffs-Appellees,

v.

GOLDMAN SACHS GROUP, INC., LLOYD C. BLANKFEIN, DAVID A. VINIAR, GARY D. COHN,

Defendants-Appellants. † ______________

Before: WESLEY, CHIN, and SULLIVAN, Circuit Judges.

Plaintiffs-Appellees, shareholders of Goldman Sachs Group, Inc., brought this class action lawsuit against Goldman Sachs and several of its former executives (collectively, “Goldman”) alleging that Goldman committed securities fraud by misrepresenting its conflicts-of-interest policies and practices. In 2015, the district court certified a class of shareholders under Federal Rule of Civil Procedure 23(b)(3). We vacated and remanded, holding that the district court failed to apply the preponderance-of-the-evidence standard in deciding whether

† The Clerk of the Court is respectfully directed to amend the caption as set forth above. Goldman rebutted the “Basic presumption,” which presumes that the shareholders relied on Goldman’s public misrepresentations when they purchased its stock at market price. In 2018, the district court again certified the class, and we affirmed, rejecting Goldman’s arguments that the district court failed to apply the correct legal standard or that it otherwise abused its discretion. The Supreme Court vacated and remanded because it was uncertain that we properly considered the generic nature of Goldman’s alleged misrepresentations in reviewing the district court’s decision. Because it is unclear whether the district court considered the generic nature of Goldman’s alleged misrepresentations in its evaluation of the evidence relevant to price impact and in light of the Supreme Court’s clarifications of the legal standard, we VACATE the class certification order of the district court and REMAND for further proceedings consistent with this opinion. _________________

ROBERT J. GIUFFRA, JR., Sullivan & Cromwell LLP, New York, NY (Richard H. Klapper, David M.J. Rein, Benjamin R. Walker, Julia A. Malkina, Jacob E. Cohen, Sullivan & Cromwell LLP, New York, NY; Kannon K. Shanmugam, Paul, Weiss, Rifkind, Wharton & Garrison LLP, Washington, DC, on the brief), for Defendants-Appellants.

THOMAS C. GOLDSTEIN, Goldstein & Russell, P.C., Bethesda, MD (Kevin K. Russell, Goldstein & Russell, P.C., Bethesda, MD; Spencer A. Burkholz, Joseph D. Daley, Robbins Geller Rudman & Dowd LLP, San Diego, CA; Thomas A. Dubbs, James W. Johnson, Michael H. Rogers, Irina Vasilchenko, Labaton Sucharow LLP, New York, NY, on the brief), for Plaintiffs- Appellees. ________________

PER CURIAM:

Plaintiffs-Appellees (hereinafter, “Plaintiffs”), shareholders of Goldman

Sachs Group, Inc., brought this class action lawsuit against Goldman Sachs and

several of its former executives (collectively, “Goldman”) alleging that Goldman

2 committed securities fraud by misrepresenting its conflict-of-interest policies and

practices. The facts and procedural history, which we reference here only as

necessary to explain our decision, are detailed in our previous opinions. See, e.g.,

Ark. Tchrs. Ret. Sys. v. Goldman Sachs Grp., Inc. (“ATRS I”),

(2d

Cir. 2018).

BACKGROUND

In 2018, 1 the United States District Court for the Southern District of New

York (Crotty, J.) granted Plaintiffs’ motion to certify a class of shareholders under

Federal Rule of Civil Procedure 23(b)(3). See In re Goldman Sachs Grp., Inc. Sec.

Litig., No. 10 CIV. 3461 (PAC),

, at *6 (S.D.N.Y. Aug. 14, 2018),

aff’d sub nom. Ark. Tchr. Ret. Sys. v. Goldman Sachs Grp., Inc., (“ATRS II”),

(2d Cir. 2020), vacated and remanded,

(2021). To recover damages,

Plaintiffs “must prove, among other things, a material misrepresentation or

omission by [Goldman] and [Plaintiffs’] reliance on that misrepresentation or

omission.” Goldman Sachs Grp., Inc. v. Ark. Tchr. Ret. Sys.,

, 1958

1The district court previously certified a class in 2015, see In re Goldman Sachs Grp., Inc. Sec. Litig., No. 10 CIV. 3461 PAC,

, at *8 (S.D.N.Y. Sept. 24, 2015), which we vacated and remanded upon finding that it was unclear whether the district court had applied the preponderance-of-the-evidence standard in determining whether Goldman rebutted the Basic presumption, see ATRS I,

.

3 (2021). Plaintiffs invoked the Basic presumption, a rebuttable presumption that all

shareholders had relied on Goldman’s public misrepresentations when they

purchased its stock, premised on the theory that investors rely on all of a

company’s public misrepresentations when trading stock in an efficient market.

See Basic Inc. v. Levinson,

(1988). By allowing courts to infer

reliance on a classwide basis, the Basic presumption helps plaintiffs in securities

class actions to satisfy Rule 23(b)(3)’s requirement that “the questions of law or

fact common to class members predominate over any questions affecting only

individual members.” Fed. R. Civ. P. 23(b)(3).

As Goldman acknowledged, Plaintiffs met their burden of proving the

elements of the Basic presumption required for class certification: that Goldman’s

alleged “misstatements were publicly known, [its] shares traded in an efficient

market, and [Plaintiffs] purchased the shares at the market price after the

misstatements were made but before the truth was revealed.” 2 ATRS I,

. However, the Basic presumption is not insuperable. A defendant may

2 The Basic presumption also requires the alleged misrepresentation to be “material.” See Goldman,

. However, plaintiffs do not need to prove materiality before class certification. See

(“[M]ateriality should be left to the merits stage because it does not bear on Rule 23’s predominance requirement.”).

4 rebut the Basic presumption by making “[a]ny showing that severs the link

between the alleged misrepresentation and either the price received (or paid) by

the plaintiff, or his decision to trade at a fair market price.” Basic,

.

If a defendant can establish that the alleged misrepresentation “did not actually

affect the market price of the stock”––i.e., that it had no “price impact”––“then

Basic’s fundamental premise ‘completely collapses, rendering class certification

inappropriate.’” Goldman,

(quoting Halliburton Co. v. Erica P. John

Fund, Inc.,

, 283–84 (2014)).

Plaintiffs brought this action under the inflation-maintenance theory. They

allege that Goldman’s statements regarding its conflicts-of-interest policies and

practices in SEC filings and annual reports between 2006 and 2010, such as “[w]e

have extensive procedures and controls that are designed to identify and address

conflicts of interest,” J.A. 88, and “[w]e are dedicated to complying fully with the

letter and spirit of the laws,” J.A. 93, were misleading because Goldman had

pursued conflicted transactions during that period. Plaintiffs argue the statements

maintained an already-inflated stock price “by preventing preexisting inflation

from dissipating from the stock price,” and once the truth about Goldman’s

conflicts was revealed in government enforcement actions and news reports (the

5 “corrective disclosures”), “the inflation in Goldman’s stock price dissipated,

causing the price to drop and shareholders to suffer losses.” Goldman, 141 S. Ct. at

1959–60 (citation omitted).

In the inflation-maintenance context, “price impact is the amount of price

inflation maintained by an alleged misrepresentation—in other words, the amount

that the stock’s price would have fallen ‘without the false statement.’”

at 1961

(quoting Glickenhaus & Co. v. Household Int’l, Inc.,

(7th Cir. 2015));

see also In re Vivendi, S.A. Sec. Litig.,

(2d Cir. 2016) (“[T]he proper

question for purposes of our inquiry into price impact is not what might have

happened had a company remained silent, but what would have happened if it

had spoken truthfully.”). 3

Goldman submitted evidence to show that its alleged misrepresentations

had no price impact. It introduced expert testimony from Dr. Paul Gompers, who

3 Although Glickenhaus, the Seventh Circuit case quoted by the Supreme Court, facially appears to conflict with our holding in Vivendi, Glickenhaus also explains that price inflation is measured by what would have happened if the defendant had told the truth. See Glickenhaus,

(“The best way to determine the impact of a false statement is to observe what happens when the truth is finally disclosed and use that to work backward, on the assumption that the lie’s positive effect on the share price is equal to the additive inverse of the truth’s negative effect.”). The Supreme Court also stated that it “need not and do[es] not” express its views on the “validity or . . . contours” of the inflation-maintenance theory. Goldman,

n.1. Vivendi’s articulation of price impact in the inflation-maintenance context thus remains the law of this Circuit.

6 argued that the lack of movement in Goldman’s stock price in response to news

articles regarding Goldman’s conflicts published on 36 dates prior to the corrective

disclosures showed that the alleged misrepresentations had no price impact, and

Dr. Stephen Choi, who suggested the price drops following the corrective

disclosures were due to news of enforcement activities rather than Goldman’s

conflicts. It also submitted a report from Dr. Laura Starks, who concluded that

Goldman’s statements would not have influenced investors because of their

generic nature. Plaintiffs’ expert Dr. John D. Finnerty challenged the

methodologies and findings of Goldman’s experts.

The district court concluded that Goldman failed to establish by a

preponderance of the evidence that its alleged misrepresentations had no price

impact. See In re Goldman,

, at *6. It found Dr. Gompers’s

arguments unpersuasive, determining that “[t]he first corrective disclosure

included new material information that had not been described in any of the 36

more generic reports on conflicts.” Id. at *4. It also rejected Dr. Choi’s findings as

unreliable and credited Dr. Finnerty’s criticisms of Dr. Choi’s methodologies. See

id. at *5–6. The court granted Plaintiffs’ motion for class certification. See id. at *6.

7 On a Rule 23(f) appeal, 4 we affirmed the district court’s order certifying the

class. See ATRS II,

. Goldman principally contended that the district

court erred in applying the inflation-maintenance theory, arguing that “general

statements, like those challenged here, are incapable of impacting a company’s

stock price as a matter of law.” Goldman’s Br. at 46. It also argued that the court

misconstrued its evidence and misapplied the preponderance of the evidence

standard. We rejected Goldman’s request to narrow the inflation-maintenance

theory, holding that its proposal to exclude general statements as a matter of law

too closely resembled the materiality inquiry, which is inappropriate at the class

certification stage. See ATRS II,

. We also concluded that the district

court did not clearly err in its evaluation of the evidence and that it correctly

applied the preponderance of the evidence standard. See

at 271–74. 5

The Supreme Court vacated our judgment and remanded for further

4Rule 23(f) provides that “[a] court of appeals may permit an appeal from an order granting or denying class-action certification under [Rule 23].” Fed. R. Civ. P. 23(f). 5Judge Sullivan dissented, explaining that he would reverse the district court’s finding because in his view, “the generic quality of Goldman’s alleged misstatements, coupled with the undisputed fact that Goldman’s stock price did not move on any of the 36 dates on which the falsity of the alleged misstatements was revealed to the public, clearly compels the conclusion that the stock drop following the corrective disclosures was attributable to something other than the misstatements alleged in the complaint.” See ATRS II, 955 F.3d at 278–79 (Sullivan, J., dissenting) (internal quotation marks and citation omitted).

8 proceedings consistent with its opinion. See Goldman,

. The Court

determined that “it is unclear whether [this Circuit] properly considered the

generic nature of Goldman’s alleged misrepresentations in reviewing the [d]istrict

[c]ourt’s price impact determination,”

and instructed that on remand we “take

into account all record evidence relevant to price impact, regardless whether that

evidence overlaps with materiality or any other merits issue,”

. The

parties subsequently submitted supplemental briefing summarizing all evidence

in the record relating to the price impact of the corrective disclosures, including

the generic nature of Goldman’s alleged misrepresentations.

DISCUSSION

The Supreme Court’s decision instructs us to reassess the district court’s

price impact determination, upon which the court’s class certification order rests.

“We review a district court’s grant of class certification for abuse of discretion,”

Levitt v. J.P. Morgan Sec., Inc.,

(2d Cir. 2013), reviewing de novo

“the conclusions of law underlying that decision” and “for clear error the factual

findings underlying” its ruling, such as the court’s price impact determination,

(quoting Teamsters Loc. 445 Freight Div. Pension Fund v. Bombardier Inc.,

(2d Cir. 2008)). “Under the clear error standard, we may not reverse [a

finding] even though convinced that had [we] been sitting as the trier of fact, [we]

9 would have weighed the evidence differently. Rather, a finding is clearly

erroneous only if although there is evidence to support it, the reviewing court on

the entire evidence is left with the definite and firm conviction that a mistake has

been committed.” Atl. Specialty Ins. Co. v. Coastal Env't Grp. Inc.,

(2d Cir. 2019) (alterations in original) (internal quotation marks and citations

omitted).

In its petition for certiorari, Goldman abandoned its argument before us that

the inflation-maintenance theory should not apply to generic statements as a

matter of law. See Petition for Writ of Certiorari, Goldman,

(No. 20-

222). Instead, it argued that the generic nature of the statements is relevant to the

price impact inquiry regardless of the overlap with materiality. See id. at 3.

Plaintiffs ultimately agreed the generic nature is relevant, and by the time of the

Supreme Court’s decision, the parties “disagree[d] only about whether [this

Circuit] properly considered the generic nature of Goldman’s alleged

misrepresentations.” Goldman,

. Because the Court was left with

“sufficient doubt on this score,” it remanded for us to take into account “all record

evidence relevant to price impact,” including the generic nature of Goldman’s

10 statements. 6

It is “our general policy that the trial court should consider arguments—and

weigh relevant evidence—in the first instance.” Florez v. Cent. Intel. Agency,

(2d Cir. 2016). The district court’s decision granting class certification

did not discuss the generic nature of Goldman’s alleged misrepresentations in its

evaluation of the evidence relevant to price impact. Nor did it discuss Dr. Starks’s

expert report, which focused on the generic nature of Goldman’s statements, or

Dr. Finnerty’s rebuttal to Dr. Starks’s arguments. See generally In re Goldman,

. The parties’ supplemental briefs confirm that their arguments before

us raise fact-intensive issues better evaluated by the district court in the first

instance.

The Supreme Court’s clarifications of the legal standard further support our

decision to vacate and remand to the district court. See, e.g., United States v.

Highsmith,

(2d Cir. 2012) (vacating and remanding to the district

court for resentencing consistent with the panel’s opinion and the Supreme

6 Plaintiffs suggest in their supplemental briefing that “Goldman has forfeited any objection that the district court erred in failing to account for the nature of the statements.” Pls.’ Suppl. Br. at 3 n.1. In adherence to the Supreme Court’s decision, we need not address whether Goldman sufficiently preserved the argument.

11 Court’s intervening decision). Although the Supreme Court did not disturb our

legal conclusions, it supplemented them with new ideas. For example, the Court

made explicit that expert testimony as well as “common sense” should inform

courts’ evaluation of the evidence and agreed with the parties that “a more-general

statement will affect a security’s price less than a more-specific statement on the

same question.” Goldman,

(citation omitted). The Court also

specified that the inference required for the inflation-maintenance theory—“that

the back-end price drop equals front-end inflation—starts to break down when

there is a mismatch between the contents of the misrepresentation and the

corrective disclosure,” which “may occur when the earlier misrepresentation is

generic . . . and the later corrective disclosure is specific.”

. Finally, on

the burden of persuasion, the Court agreed with our holding that Goldman bears

the burden but explained that “[t]he district court’s task is simply to assess all the

evidence of price impact—direct and indirect—and determine whether it is more

likely than not that the alleged misrepresentations had a price impact. The

defendant’s burden of persuasion will have bite only when the court finds the

evidence in equipoise.”

.

Because it is unclear whether the district court considered the generic nature

12 of Goldman’s alleged misrepresentations, and in light of the Supreme Court’s

clarifications of the legal standard, we vacate the district court’s order and remand

for further proceedings consistent with this opinion and the opinion of the

Supreme Court. On remand, the district court should consider all record evidence

relevant to price impact and apply the legal standard as supplemented by the

Supreme Court. We express no views as to whether the evidence suffices to rebut

the Basic presumption or whether the district court might want to accept

additional briefing by the parties.

CONCLUSION

We VACATE the district court’s August 14, 2018 order granting Plaintiffs’

motion for class certification and REMAND for further proceedings consistent

with this opinion and the Supreme Court’s opinion. Any future appeals of the

district court’s decisions in this action shall be referred to this panel.

13