Several pension funds brought a securities fraud class action against Goldman Sachs, alleging that the company maintained an artificially inflated stock price by making generic statements about its ability to manage conflicts — e.g., “We have extensive procedures and controls that are designed to identify and address conflicts of interest.” Plaintiffs contend that such statements were false or misleading in light of several undisclosed conflicts of interest, and that once the truth about Goldman’s conflicts came out, the stock price dropped and shareholders suffered losses.

Plaintiffs invoked the Basic presumption, which is premised on the theory that investors rely on the market price of a company’s security, which in an efficient market incorporates all of the company’s public misrepresentations. Goldman sought to defeat class certification by rebutting the Basic presumption through evidence that its alleged misrepresentations actually had no impact on its stock price. After determining that Goldman had failed to carry its burden of proving a lack of price impact, the District Court certified the class, and the Second Circuit Court of Appeals affirmed. In the U.S. Supreme Court, Goldman argued that the Second Circuit erred twice: first, by holding that the generic nature of its alleged misrepresentations is irrelevant to the price impact inquiry; and second, by assigning Goldman the burden of persuasion to prove a lack of price impact. “On the first question, the parties now agree, as do we, that the generic nature of a misrepresentation often is important evidence of price impact that courts should consider at class certification. Because we conclude that the Second Circuit may not have properly considered the generic nature of Goldman’s alleged misrepresentations, we vacate and remand for the Court of Appeals to reassess the District Court’s price impact determination. On the second question, we agree with the Second Circuit that our precedents require defendants to bear the burden of persuasion to prove a lack of price impact by a preponderance of the evidence. We emphasize, though, that the burden of persuasion should rarely be outcome determinative.”

In particular:

“Plaintiffs now concede that the generic nature of an alleged misrepresentation often will be important evidence of price impact because, as a rule of thumb, a more-general statement will affect a security’s price less than a more-specific statement on the same question. The parties further agree that courts may consider expert testimony and use their common sense in assessing whether a generic misrepresentation had a price impact. And they likewise agree that courts may assess the generic nature of a misrepresentation at class certification even though it also may be relevant to materiality, which Amgen reserves for the merits. We share the parties’ view. In assessing price impact at class certification, courts should be open to all probative evidence on that question — qualitative as well as quantitative — aided by a good dose of common sense. That is so regardless whether the evidence is also relevant to a merits question like materiality. As we have repeatedly explained, a court has an obligation before certifying a class to determine that Rule 23 is satisfied, even when that requires inquiry into the merits. And under Halliburton II, a court cannot conclude that Rule 23’s requirements are satisfied without considering all evidence relevant to price impact. The generic nature of a misrepresentation often will be important evidence of a lack of price impact, particularly in cases proceeding under the inflation-maintenance theory. Under that theory, 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. Plaintiffs typically try to prove the amount of inflation indirectly: They point to a negative disclosure about a company and an associated drop in its stock price; allege that the disclosure corrected an earlier misrepresentation; and then claim that the price drop is equal to the amount of inflation maintained by the earlier misrepresentation. But that final inference — 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. That may occur when the earlier misrepresentation is generic (e.g., “we have faith in our business model”) and the later corrective disclosure is specific (e.g., “our fourth quarter earnings did not meet expectations”). Under those circumstances, it is less likely that the specific disclosure actually corrected the generic misrepresentation, which means that there is less reason to infer front-end price inflation — that is, price impact — from the back-end price drop.”

As to the burden of proof and/or persuasion:

If, as Goldman argues, the defendant “could defeat Basic’s presumption by introducing any competent evidence of a lack of price impact — including, for example, the generic nature of the alleged misrepresentations — then the plaintiff would end up with the burden of directly proving price impact in almost every case. And that would be nearly indistinguishable from the regime that Halliburton II rejected. Thus, the best reading of our precedents — as the Courts of Appeals to have considered the issue have recognized — is that the defendant bears the burden of persuasion to prove a lack of price impact. We likewise agree with the Courts of Appeals that the defendant must carry that burden by a preponderance of the evidence.”  At the same time, however: “Although the defendant bears the burden of persuasion, the allocation of the burden is unlikely to make much difference on the ground. In most securities-fraud class actions, as in this one, the plaintiffs and defendants submit competing expert evidence on price impact. The 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 — a situation that should rarely arise.”


Goldman Sachs v. Arkansas Teacher Retirement System, No.20-222, 2021 WL 2519035 (June 21, 2021).