Client Alerts

U.S. Supreme Court Accepts Case That Could Alter the Landscape of Private Securities Litigation

By: Frances Floriano Goins, David D. Yeagley and Amanda Martinsek

About: Financial Services, Securities & Commodities Litigation

January 14, 2021 – The U.S. Supreme Court recently granted certiorari to review a Second Circuit Court of Appeals decision that could alter the landscape of class action litigation under Rule 10b-5. The issue in Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement Sys., Case No. 20-222, 2020 WL 7296815 (U.S. Dec. 11, 2020), would impact the nature of the evidence that can be offered to rebut the “Basic presumption.” Goldman Sachs urges that it should have been permitted to rebut the Basic presumption at the class certification stage in an “inflation maintenance” case with evidence that the allegedly false or misleading statements were merely immaterial, generic superlatives that did not impact the stock’s price. If the Supreme Court were to agree, the decision would establish another important, real-world line of defense in securities class actions. More broadly, such a decision could further blur the lines between class certification and a case’s underlying merits, allowing courts in class certification proceedings even greater latitude to consider merits-related evidence.

In virtually all class actions, class certification is a critical juncture of the case. If the class is certified, then a company faces extraordinary pressure to settle due to the financial risk of aggregate liability and damages. If certification is defeated, then the individual plaintiff’s case usually goes away. Given these dynamics, defendants look to front-load their defenses on class certification, rendering the Supreme Court’s forthcoming “certification versus merits” decision directed to the timing of the all-important Basic presumption of significant practical importance.

In petitioning the Supreme Court to grant certiorari, Goldman Sachs argued that the decision below contravenes the Court’s prior decisions, and further that the decision of the preeminent federal circuit court in securities litigation would carry outsized weight and influence among other district and circuit courts. Interestingly, Goldman Sachs identified a circuit conflict only with respect to a secondary issue of whether a defendant seeking to rebut the Basic presumption bears just the burden of production or also the burden of persuasion. Not surprisingly, in their opposition to the petition the plaintiffs-respondents pointed to the absence of a circuit conflict, arguing that the Court’s prior decisions cited by petitioner had been accepted for review to resolve splits among the circuits.

Private class action securities litigation relies heavily on the Supreme Court’s decision in Basic, Inc. v. Levinson, 485 U.S. 244, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988), that establishes a rebuttable presumption that, in a generally efficient market where a company’s material public statements are reflected in the price of the stock, the decision to purchase or sell a company’s stock is presumed, on an across-the-board basis, to have been made in indirect reliance on those statements. The Basic presumption is the linchpin of private securities litigation because, if successfully invoked, the presumption overcomes the obstacle of proving reliance on a class-wide basis. Without it, proof of reliance on a company’s allegedly false or misleading statements would present class-defeating individualized questions of fact under Fed. R. Civ. P. 23(b)(3).

Two recent Supreme Court decisions provide additional background for the case before the Supreme Court. In Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, 568 U.S. 455, 133 S.Ct. 1184, 185 L.Ed.2d 308 (2013), the Court ruled that the materiality of an alleged false or misleading statement is a class-wide issue that, as such, goes to the ultimate merits of the case. A year later, in Halliburton Co. v. Erica P. John Fund, Inc. (Halliburton II), 573 U.S. 258, 134 S.Ct. 2398, 189 L.Ed.2d 339 (2014), the Court held that a defendant can rebut the Basic presumption (i.e., that the allegedly false or misleading statements impacted the price of the stock) at the class certification stage based on any relevant evidence, even if that evidence is also relevant to the substantive elements of the claim.

The crux of the Goldman Sachs case is whether a defendant can rebut the Basic presumption at the critical class certification juncture by showing that boilerplate aspirational statements did not have a price impact, or instead whether that showing must be deferred to the merits stage inquiry on the Rule 10b-5 element of materiality. In other words, does the nature/content of the alleged misstatements tie in under Halliburton II to the Basic presumption on class certification, or, under Amgen, only to materiality at the later merits stage, or can the nature and content of the statements relate to both? The Second Circuit ruled that a defendant could not argue the nature of the statements in seeking to rebut the Basic presumption that an already inflated stock price was thereby artificially maintained on class certification, ruling that such an inquiry is “really a means for smuggling materiality into Rule 23.” See Arkansas Teacher Retirement System v. Goldman Sachs Group, Inc., 955 F.3d 254, 267 (2d Cir. 2020), cert. granted, Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System, Case No. 20-222. The dissent viewed the majority’s approach as one of “rigid compartmentalization” that is neither possible nor required by Supreme Court precedent. Id. at 278.

Like Goldman Sachs, most 10b-5 private class action securities cases brought today are predicated on an “inflation maintenance” theory. The premise of these cases is that a company’s false or misleading statements caused an already inflated stock price to be maintained, as opposed to the more traditional theory that the stock price was artificially inflated directly by such statements. If the Supreme Court affirms, then any time a company’s stock price drops based on revelations of misconduct (also termed “event-driven securities litigation”), plaintiffs need only look back with 20/20 hindsight to a company’s prior aspirational platitudes about “controls” or “principles,” confident that, as long as they can overcome the low threshold for alleging materiality on a motion to dismiss, any lack of price impact of the generic statements will essentially be insulated from review on class certification. If, however, the Supreme Court were to reverse, a defendant company would be able to defeat class certification by showing that, due to their generic nature, its statements did not artificially maintain the inflated stock price.

The Supreme Court is confronted with a $13 billion question in the Goldman Sachs case alone, highlighting the potential impact of the case on private securities litigation. The Court could, if it reverses, further blur the lines between class certification and the merits, with direct implications for the future of the Basic presumption and broader indirect implications for overall class action jurisprudence. Either way, the Supreme Court’s decision could be a business litigation bellwether for the newly constituted Court, although notably Goldman Sachs is seeking only to modestly reinforce the Court’s 6-3 decision in Halliburton II, where four justices (Chief Justice Roberts and Justices Breyer, Sotomayor, and Kagan) in the majority in that case remain on the Court and the dissent would have overruled Basic in its entirety.

Ulmer’s Financial Services & Securities Litigation Practice Group is national in scope, representing some of the largest and most well-known institutions in the country in broker-dealer, commodities, futures, employment, consumer banking, and self-directed IRA custodian litigation, on matters ranging from FINRA arbitrations and SEC administrative proceedings to federal and state court class actions. Please feel free to reach out to one of the authors listed above if you have any questions.

The information provided in this client alert speaks only to the information and guidance we have available as of the date of publication and is subject to change. We will continue to follow further issued guidance and regulations and endeavor to post those updates via our website. This legal update was created by Ulmer & Berne LLP, and is not intended as a substitute for professional legal advice. Receipt of this client alert, by itself, does not create an attorney client relationship. For any questions, or for further information, please contact Frances Floriano Goins at, David D. Yeagley at, or Amanda Martinsek at