Goldman Sachs signaled Friday that it will ask the U.S. Supreme Court to review a decision by the 2nd U.S. Circuit Court of Appeals upholding certification of a class of investors who contend the bank lied about putting clients’ interests ahead of its own in advance of revelations about Goldman’s controversial Abacus CDO offering.
The hint came in the form of a motion asking the 2nd Circuit to stay the case in advance of Goldman’s petition for Supreme Court review. I sincerely doubt the 2nd Circuit will grant the stay. As I’ll explain, the court has twice agreed to Goldman’s interlocutory requests to review class certification rulings by the trial judge, U.S. District Judge Paul Crotty of Manhattan. And after the 2nd Circuit’s ruling in April (955 F.3d 254), the bank asked for a rehearing, mustering considerable amicus support from the business lobby. The 2nd Circuit denied that request on June 15. The new stay motion, in other words, isn’t telling the 2nd Circuit anything it hasn’t already heard from Goldman and its supporters.
But the stay motion serves as a preview of the arguments that Goldman Sachs will eventually make at the Supreme Court in a case that – at least according to the bank and the business lobby – gives shareholders nearly unfettered power to win certification of class actions based on anodyne and ubiquitous corporate mission statements. The Supreme Court, as you know, held in 2014’s Halliburton v. Erica P. John Fund (134 S.Ct. 2398) that defendants are entitled to attempt to rebut the presumption that investors relied on corporate misrepresentations, the keystone of shareholder class actions. Goldman is poised to argue that the 2nd Circuit has tied defendants’ hands by refusing to consider the nature of the alleged corporate lies.
I reached out to Thomas Goldstein of Goldstein & Russell, who successfully represented the shareholders suing Goldman at the 2nd Circuit. He did not provide comment on Goldman’s motion. The lead plaintiff in the class action is the Arkansas Teacher Retirement System. Robbins Geller Rudman & Dowd and Labaton Sucharow are lead counsel.
The case is based on Goldman Sachs’ notorious Abacus collateralized debt obligation, a subprime mortgage-based financial instrument that Goldman assembled in 2007 at the request of, and with assistance from, the hedge fund Paulson & Co. In 2010, Goldman reached a $550 million settlement with the Securities & Exchange Commission to resolve allegations that it duped Abacus investors by failing to disclose Paulson’s involvement – and failing to reveal that the hedge fund had simultaneously bet on the CDO to fail. (Goldman acknowledged in the settlement that its marketing materials contained incomplete information.)
The Arkansas Teachers’ case alleges that Goldman Sachs misled its shareholders in corporate statements about the bank’s robust conflict of interest policies and commitment to putting its clients’ interests ahead of its own. The shareholders’ theory is that Goldman’s share price remained artificially high because investors believed the bank’s allegedly false statements and ultimately fell when revelations about Abacus and related CDOs proved the falsity of those assurances.
Goldman has long argued, among other points, that generic statements about business integrity were immaterial to investors. Broadly speaking, the bank contended that its share price did not fall because investors suddenly realized they’d been misled about Goldman’s commitment to clients’ interests – but rather because shareholders were rattled by news of the government’s investigation of Abacus and other Goldman CDOs.
The class action first came to the 2nd Circuit in 2018. The appeals court vacated Judge Crotty’s original class certification decision and remanded the case with instructions that he decide whether Goldman could meet a burden of persuasion to rebut the presumption that shareholders relied on its alleged misrepresentations.
In the case’s second interlocutory trip to the appeals court, the 2nd Circuit majority, Judges Richard Wesley and Denny Chin, said Judge Crotty had fairly weighed the evidence when he concluded that the bank failed rebut the presumption. In dissent, Judge Richard Sullivan said the majority had looked at the issue from the wrong vantage point. No reasonable investor, Judge Sullivan said, could have relied on Goldman’s generic assurances about its business practices.
That’s the theme Goldman is emphasizing in the new stay motion, seemingly in a preview of the points it will eventually argue to the Supreme Court. (The bank has added counsel from Paul, Weiss, Rifkind, Wharton & Garrison to the Sullivan & Cromwell team that has represented it throughout this decade-long case.) According to Goldman, the 2nd Circuit majority disregarded the Supreme Court’s directive in the 2014 Halliburton decision by failing to consider whether the bank’s allegedly deceptive representations about its business practices were inherently immaterial and therefore had no impact on Goldman’s share price.
“This case is an excellent vehicle for the Supreme Court to address whether the nature of challenged statements may be used to show lack of price impact at the class-certification stage, because that issue is outcome-determinative,” the motion said. “If the court had allowed itself to consider the nature of these generic statements, this case would have been decided in defendants’ favor.”
The Supreme Court held in 2013’s Amgen v. Connecticut Retirement Plans (133 S.Ct. 1184) that shareholders need not prove the materiality of alleged corporate misrepresentations in order to win class certification. But Goldman’s stay motion argues that the 2nd Circuit went too far by deciding not even to consider materiality, ignoring Halliburton’s holding that (in the bank’s description) “defendants are entitled to present price impact evidence at the class-certification stage even if such evidence also bears on a merits issue.”
As I said, I don’t think the 2nd Circuit will be swayed by the motion. Will the Supreme Court? Goldman Sachs does not cite a circuit split on whether courts can consider the materiality of alleged misstatements in deciding if defendants have rebutted the presumption of reliance. Instead, Goldman appears to be hoping that the justices will take note of its argument that the 2nd Circuit has drastically expanded corporate exposure to shareholders by making it impossible to defeat class certification in cases based on generic statements of business principles.
That seems like a tough sell, but you can be sure Goldman won’t settle this case until it has made its pitch at the Supreme Court.
Reporting by Alison Frankel