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Arkansas Teachers Retirement System v. Goldman Sachs Group, Inc.

United States Court of Appeals, Second Circuit

January 12, 2018

ARKANSAS TEACHERS RETIREMENT SYSTEM, WEST VIRGINIA INVESTMENT MANAGEMENT BOARD, PLUMBERS AND PIPEFITTERS PENSION GROUP, ILENE RICHMAN, individually and on behalf of all others similarly situated, PABLO ELIZONDO, HOWARD SORKIN, individually and on behalf of all others similarly situated, TIVKA BOCHNER, EHSAN AFSHANI, LOUIS GOLD, THOMAS DRAFT, individually and on behalf of all others similarly situated, Plaintiffs-Appellees,
v.
GOLDMAN SACHS GROUP, INC., LLOYD C. BLANKFEIN, DAVID A. VINIAR, GARY D. COHN, Defendants-Appellants. [*]

          Argued: March 15, 2017

         Defendants-Appellants Goldman Sachs Group, Inc., Lloyd Blankfein, David A. Viniar, and Gary D. Cohn, appeal from a September 24, 2015 order of the United States District Court for the Southern District of New York (Crotty, J.), certifying a class of plaintiffs who purchased shares of common stock in Goldman Sachs Group, Inc., between 2007 and 2010. Plaintiffs alleged that defendants made material misstatements about Goldman's efforts to avoid conflicts of interest, and that those misstatements caused the value of their shares to decline. To establish the predominance of class-wide issues under Federal Rule of Civil Procedure 23(b)(3), plaintiffs invoked the rebuttable presumption of reliance established in Basic Inc. v. Levinson, 485 U.S. 224 (1988). In light of this Court's recent pronouncement that defendants seeking to rebut the Basic presumption must do so by a preponderance of the evidence, see Waggoner v. Barclays PLC, 875 F.3d 79 (2d Cir. 2017), and for the additional reasons stated herein, we VACATE the District Court's order and REMAND for further proceedings consistent with this opinion.

          THOMAS C. GOLDSTEIN, Goldstein & Russell, P.C., Bethesda, MD (Susan K. Alexander, Andrew Love, Robbins Geller Rudman & Dowd LLP, San Francisco, CA; Thomas A. Dubbs, James W. Johnson, Michael H. Rogers, Labaton Sucharow LLP, New York, NY, on the brief) for Plaintiffs-Appellees.

          ROBERT J. GIUFFRA, JR., (Richard H. Klapper, David M.J. Rein, on the brief), Sullivan & Cromwell LLP, New York, NY, for Defendants-Appellants.

          Max W. Berger, Salvatore J. Graziano, Bernstein Litowitz Berger & Grossman LLP, New York, NY; Blair Nicholas, Bernstein Litowitz Berger & Grossmann LLP, San Diego, CA; Robert D. Klausner, Klausner, Kaufman, Jensen & Levinson, Plantation, FL, for Amicus Curiae National Conference on Public Employee Retirement Systems in support of Plaintiffs-Appellees.

          Rachel S. Bloomekatz, Deepak Gupta, Gupta Wessler PLLC, Washington, D.C.; Mark I. Gross, Jeremy A. Lieberman, Pomerantz LLP, New York, NY; Robert D. Klausner, Klausner, Kaufman, Jensen & Levinson, Plantation, FL, for Amicus Curiae Louisiana Sheriffs' Pension and Relief Fund in support of Plaintiffs-Appellees.

          Daniel P. Chiplock, Lieff Cabraser Heimann & Bernstein, LLP, New York, NY, for Amicus Curiae National Association of Shareholder and Consumer Attorneys in support of Plaintiffs-Appellees.

          Jeffrey W. Golan, Barrack, Rodos & Bacine, Philadelphia, PA; James A. Feldman, Washington, D.C., for Amici Curiae Evidence Scholars in support of Plaintiffs-Appellees.

          Barbara A. Jones, AARP Foundation Litigation, Pasadena, CA, for Amici Curiae AARP and AARP Foundation in support of Plaintiffs-Appellees.

          David Kessler, Kessler Topaz Meltzer & Check, LLP, Radnor, PA; Ernest A. Young, Apex, NC, for Amici Curiae Procedure Scholars in support of Plaintiffs-Appellees.

          Robert V. Prongay, Glancy Prongay & Murray LLP, Los Angeles, CA, for Amici Curiae Securities Law Professors in support of Plaintiffs-Appellees.

          George T. Conway III, Wachtell, Lipton, Rosen & Katz, New York, NY, for Amici Curiae Former SEC Officials and Law Professors in support of Defendants-Appellants.

          Charles E. Davidow, Marc Falcone, Robyn Tarnofsky, Paul, Weiss, Rifkind, Wharton & Garrison LLP, Washington, D.C.; Ira D. Hammerman, Kevin M. Carroll, Securities Industry & Financial Markets Association, Washington, D.C., for Amicus Curiae Securities Industry & Financial Markets Association in support of Defendants-Appellants.

          Lewis J. Liman, Cleary Gottlieb Steen & Hamilton LLP, New York, NY; Kate Comerford Todd, U.S. Chamber Litigation Center, Inc., Washington, D.C., for Amicus Curiae Chamber of Commerce of the United States of America in support of Defendants-Appellants.

          Before: Cabranes, Wesley, Circuit Judges, Sessions, District Judge. [*]

          Wesley, Circuit Judge

         Investors in a securities fraud class action traditionally have a problem proving that "questions of law or fact common to class members predominate over . . . questions affecting only individual members" under Federal Rule of Civil Procedure 23(b)(3). The presumption established in Basic Inc. v. Levinson, 485 U.S. 224 (1988), addressed that problem by allowing courts to presume that the price of stock traded in an efficient market reflects all public, material information-including misrepresentations-and that investors rely on the integrity of the market price when they choose to buy or sell stock. Basic also established, however, that defendants may rebut the presumption, and therefore defeat class certification, by showing the misrepresentations did not actually affect the price of the stock. The question presented in this case is what defendants must do to meet that burden.

         In light of this Court's recent pronouncement that defendants bear the burden of persuasion to rebut the Basic presumption by a preponderance of the evidence, see Waggoner v. Barclays PLC, 875 F.3d 79 (2d Cir. 2017), and for the additional reasons stated herein, we VACATE the September 24, 2015 Order of the United States District Court for the Southern District of New York (Crotty, J.) granting plaintiff's motion for class certification and REMAND for further proceedings consistent with this opinion.

         BACKGROUND

         Plaintiffs-appellees acquired shares of common stock in The Goldman Sachs Group, Inc. ("Goldman") between February 5, 2007 and June 10, 2010. In July 2011, they commenced a securities fraud action in the District Court against Goldman and several of its directors (collectively, "defendants"), for violating section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder. See 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5.

         I. Plaintiffs' Allegations of Fraud

         In their consolidated class action complaint, plaintiffs alleged that defendants made material misstatements about Goldman's efforts to avoid conflicts of interest, causing the value of their stock to decline.[1] Specifically, they alleged that defendants made the following statements in Goldman's Form 10-K filings and Annual Report, as well as in shareholder conference calls:

Our reputation is one of our most important assets. As we have expanded the scope of our business and our client base, we increasingly have to address potential conflicts of interest, including situations where our services to a particular client or our own proprietary investments or other interests conflict, or are perceived to conflict, with the interest of another client . . . .
We have extensive procedures and controls that are designed to identify and address ...

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