Goldman Class Cert. Ruling Has COVID-19 Implications: Amici

By Dean Seal
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Law360 (May 22, 2020, 8:06 PM EDT) -- A group of law professors and former SEC officials said Friday that the Second Circuit's recent split-panel ruling against Goldman Sachs in a heavily watched class certification fight creates risks to public companies that are now exacerbated by the COVID-19 crisis.

In an amicus brief, the group supported Goldman's request for an en banc review of an appellate panel's April ruling that the bank could not decertify an investor class accusing it of concealing conflicts of interest because it had not rebutted the presumption of reliance established under Basic Inc. v. Levinson .

As one dissenting judge and the bank contend, the majority chose to deliberately ignore the generic nature of Goldman's allegedly misleading representations about being conflict-free on the basis that the class-certification stage was too soon to consider whether the representations were material to investors.

But to ignore evidence indicating investors were not relying on those "generic" alleged misrepresentations at the class certification stage would make it impossible to ever rebut the Basic presumption at that stage, since a plaintiff could point to any similar "anodyne statements" about a company's compliance, point to a later stock-drop and create a securities fraud allegation that would make it all the way through class certification, the amici said in their brief Friday.

"These risks are particularly heightened during the ongoing COVID-19 crisis, where aspirational statements about best practices amid a fast-moving global pandemic can be weaponized by plaintiffs and turned into a predicate for a securities fraud class action, as securities markets around the world are extremely volatile," according to the brief.

The amici group consists of a former general counsel for the U.S. Securities and Exchange Commission, a former SEC commissioner and a handful of law professors from prestigious universities around the country. They were one of four sets of amici to submit briefs in support of Goldman on Friday, though appear to be the only ones to implicate the ongoing novel coronavirus pandemic.

The long-running litigation stems from a collateralized debt obligation transaction Goldman underwrote in April 2007 that lost CDO investors $1 billion after Goldman allegedly helped a client short the CDO while simultaneously selling it elsewhere. The bank settled a 2010 SEC enforcement action over the allegations for $550 million.

The shareholder action, brought by Goldman's shareholders and not the CDO investors, claims the firm made misrepresentations about being conflict-free to maintain an artificially inflated stock price that was deflated when the SEC action revealed conflicts of interest involved with the CDO transaction.

The investors won class certification in September 2015. The Second Circuit reversed certification for the investors in January 2018, finding the lower court judge had held Goldman to too high of a standard of proof for showing that its alleged misstatements about being conflict-free hadn't affected its stock price.

The case was remanded to the district court, but the class was recertified in August 2018. Goldman again appealed, arguing that the lower court had erroneously extended the narrow scope of the "price maintenance theory" — the idea that misstatements can fraudulently keep an artificially boosted stock price from dropping — to encompass its general statements about business principles and conflicts warnings, despite the fact that the theory has historically applied only to "concrete, unduly optimistic" statements made in order to prevent an expected stock drop.

The Second Circuit panel unanimously disagreed with that argument, finding that none of the cases Goldman cited as requiring such special circumstances applies the price maintenance theory so narrowly, at the class certification stage or otherwise, or distinguishes "general" statements from "specific" ones.

One judge did, however, side with the second facet of Goldman's appeal — that it had rebutted the Basic presumption of reliance with evidence showing 36 instances prior to the 2010 SEC action in which Goldman claims the news media reported on the bank's conflict of interest and violation of business practices with no correlating decline in stock price, and thus no artificial inflation based on its alleged misstatements.

Goldman is now seeking an en banc hearing to see if the Second Circuit will take on the view of the dissenting judge. According to the bank's recent petition for a new hearing, the majority's ruling misapplies the precedential case of Halliburton Co. v. Erica P. John Fund Inc. because the majority declined to consider the generic nature of Goldman's alleged misstatements.

The majority had said that doing so would be an assessment of the alleged misstatements' materiality, which isn't supposed to be considered during the class certification phase. But according to Goldman and Friday's amici, the U.S. Supreme Court held in Halliburton that defendants could rebut the Basic presumption at class certification by disproving price impact, and that courts could not artificially limit the evidence they consider when assessing price impact, "even though such proof is also highly relevant at the merits stage."

"To adopt the rationale of the panel's ruling would undermine the Supreme Court's delicate compromise and nullify defendants' ability to rebut the Basic presumption at class certification," according to law professors and former SEC officials on Friday.

Todd Cosenza, counsel for the amici, told Law360 his clients "hope [their] brief assists the Second Circuit in understanding Goldman's request for an en banc review, particularly as its recent split-panel ruling in our view renders Halliburton II and represents an unprecedented expansion of the price maintenance theory."

"And given the ongoing COVID-19 crisis, a rehearing now is especially important as the ruling could leave companies that make generic disclosures about mitigating risk with respect to COVID almost defenseless against plaintiffs' class certification arguments," Cosenza said.

Counsel for the investors and Goldman did not respond to requests for comment Friday.

The investors are represented by Thomas A. Dubbs, James W. Johnson, Irina Vasilchenko and Michael H. Rogers of Labaton Sucharow LLP, Kevin K. Russell and Thomas C. Goldstein of Goldstein & Russell PC and Spencer A. Burkholz and Joseph D. Daley of Robbins Geller Rudman & Dowd LLP.

Goldman Sachs is represented by Robert J. Giuffra Jr., Richard H. Klapper, David M.J. Rein, Benjamin R. Walker, Julia Malkina and Jacob E. Cohen of Sullivan & Cromwell LLP.

The amici group is represented by Todd G. Cosenza of Willkie Farr & Gallagher LLP.

The suit is In re: Goldman Sachs Group Inc. Securities Litigation, case number 18-3667, in the U.S. Court of Appeals for the Second Circuit.

--Editing by Michael Watanabe.

For a reprint of this article, please contact reprints@law360.com.

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