Justices to parse evidentiary rules in securities class actions
on Mar 26, 2021 at 4:11 pm
The hardest part of summarizing Goldman Sachs Group v. Arkansas Teacher Retirement System is explaining to somebody who is not a securities lawyer what the practical impact of the case might be. The case features seemingly arcane questions about how evidentiary rules interact with certain types of shareholder lawsuits. Complicating things further, the parties have shifted their positions through the course of litigation, so that the dispute remaining by the end of the briefing will seem to the outsider (and perhaps to the justices) quite narrow. Still, the court’s resolution of those technical issues may affect a core question of securities law: When should investors be able to maintain lawsuits against companies for misstatements that allegedly distorted the market?
The case, which will be argued on Monday, involves the process of class certification in a securities class action that relies on the “fraud-on-the-market” theory validated in the Supreme Court’s 1988 decision in Basic Inc. v. Levinson. Federal courts certify cases for class-based adjudication only if they find that common issues “predominate,” and an important issue in securities litigation challenging misstatements by defendants is whether the plaintiffs relied on the misstatement. Plaintiffs who did not rely on the misstatement in buying or selling stock cannot recover. And if the question of reliance must be determined on a plaintiff-by-plaintiff basis, then usually there will not be a class action. Basic solves that problem for plaintiffs by adopting a presumption of classwide reliance whenever the misrepresentation was public, the stock was traded in an efficient market, and the plaintiffs traded between the date of the misrepresentation and the date when the truth of the matter became public. The premise of that rule is that plaintiffs who traded in the market at a time when the price was inflated by the defendants’ misstatements implicitly relied to their detriment on those misstatements.
This case raises two separate questions about what defendants must do to rebut the Basic presumption, which they can do (according to Basic) by “showing that the misrepresentation did not lead to a distortion in price.”
The first question before the justices involves “generic” misrepresentations, platitudinous statements about the ethics of the defendants that convey little or no information about the firms’ financial activities. In this case, for example, investors led by the Arkansas Teacher Retirement System say they were deceived by statements from Goldman Sachs in which Goldman asserted that “Our clients’ interests always come first,” “Integrity and honesty are at the heart of our business,” and “We are dedicated to complying fully with the letter and spirit of the laws, rules, and ethical principles that govern us.” The investors allege that those statements are false because of a variety of conflicts of interest that affected certain securities sold by Goldman Sachs.
Goldman Sachs argues that the generic nature of the statements is relevant in assessing whether the statements in fact led to a distortion in the price of the relevant securities. That is a shift from an earlier stage of the litigation, when Goldman Sachs argued that generic statements as a matter of law could not be found to distort price, and thus could not be the basis of a securities-fraud class action. At the Supreme Court, though, Goldman Sachs argues only that the court of appeals erred in holding that the generic nature of the statements was entirely irrelevant to the firm’s efforts of Goldman Sachs to rebut the Basic presumption.
For their part, the plaintiffs now admit that courts can consider the generic nature of the statements in evaluating efforts to rebut the Basic presumption (though they argued in the lower courts that the nature of the statements is wholly irrelevant). They argue at the Supreme Court that defendants cannot rely merely on “intuition” or “common sense” assessments of the effect of the statements; they must introduce expert testimony about the likely effect of the statements on price. They also insist that the court of appeals did not find the generic nature of the statements wholly irrelevant; rather, the plaintiffs contend, the lower courts simply rejected the evidence that Goldman Sachs presented about those statements.
Goldman Sachs, in turn, replies that there is no basis in Basic or elsewhere for drawing a distinction between expert testimony and other forms of evidence. Because the alleged misstatements are the basis for the action against Goldman Sachs, the firm argues that those statements and their likely effect must be relevant. Moreover, Goldman Sachs points to an expert report submitted in the district court that it portrays as precisely on point: providing expert testimony about why the challenged statements were not likely to affect the market price of the relevant securities.
The second question before the court involves the burden of persuasion on the question of classwide reliance. The law of evidence distinguishes between the burden of “production” and the burden of “persuasion.” A party bears the burden of production on an issue if the law provides that it will lose on that issue if it fails to produce relevant evidence that would justify a finder of fact in accepting the party’s view of the issue. In this case, for example, all agree that Goldman Sachs bears a burden of production under the presumption created in Basic; plaintiffs will prevail on the issue of classwide reliance unless defendants produce evidence adequate to rebut that presumption. The burden of persuasion, by contrast, determines which party ultimately must persuade the factfinder of the truth of a particular point. For example, in securities-fraud litigation like this case, the plaintiffs bear the burden of persuading the factfinder that the challenged misstatements were materially misleading.
The burden-of-persuasion question here is a narrow one: In a case in which a defendant rebuts the Basic presumption (arguably this case), does the burden of persuasion stay with the defendant or does it shift back to the plaintiff? Goldman Sachs points to Federal Rule of Evidence 301, which states that “the party against whom a presumption is directed has the burden of producing evidence to rebut the presumption” (the burden of production discussed above), but that the burden of persuasion “remains on the party who had it originally.” For Goldman Sachs, that rule compels the view that the burden of persuasion after rebuttal lies on the plaintiffs (who ordinarily bear the burden of persuasion on all affirmative elements of the case). The plaintiffs argue that Rule 301 is much more flexible, pointing to a variety of contexts in which courts have allocated the burden of persuasion in a way that makes sense in any particular context. More broadly, the plaintiffs argue that Basic and ensuing decisions of the Supreme Court have placed the underlying burden of persuasion directly on defendants, who can prevail at the class-certification stage only if they affirmatively prove an absence of price impact.
[Disclosure: Goldstein & Russell, P.C., whose attorneys contribute to SCOTUSblog in various capacities, is counsel for the Arkansas Teacher Retirement System in this case. The author of this article is not affiliated with the firm.]