Goldman asks 2nd Circuit to re-examine price-impact rebuttal standard

October 19, 2015

(Reuters) – As the securities class action bar continues to figure out exactly how the U.S. Supreme Court’s 2014 ruling in Halliburton v. Erica P. John Fund is going to impact shareholder fraud cases, Goldman Sachs and its lawyers at Sullivan & Cromwell want a say.

The bank has asked the 2nd U.S. Circuit Court of Appeals to hear its appeal of a Sept. 24 opinion certifying a class of Goldman investors to sue over statements in which the bank claimed to put its clients’ interests ahead of its own. U.S. District Judge Paul Crotty of Manhattan ruled shareholder lawyers from Labaton Sucharow and Robbins Geller Rudman & Dowd showed Goldman’s share price dropped in response to four different events casting doubt on those statements. The so-called corrective disclosures included the 2010 Securities and Exchange Commission’s announcement of an enforcement action against the bank for its structuring of the infamous Abacus collateralized debt obligation, which led to a nearly 13 percent stock drop; and a 2010 Wall Street Journal report that Goldman was under criminal investigation, which sent the share price down more than 9 percent.

The bank tried unsuccessfully to use the 2014 Halliburton decision to block class certification. In the Halliburton decision, as you doubtless recall, the Supreme Court left in place the “fraud on the market” framework that allows shareholders sue as a class without proving individually that they relied on the defendant’s supposed misrepresentations. But the court also said defendants can attempt to rebut the presumption of investor reliance.

Goldman attempted to do just that, arguing that shareholders didn’t sell off the bank’s stock because they suddenly realized they’d placed unwarranted reliance on its conflict-of-interest promises but because they were worried about fallout from government investigations. It provided Judge Crotty with expert reports showing that Goldman’s share price didn’t increase when the bank put out puffery about putting its clients’ interests ahead of its own and that investors didn’t dump shares in response to 34 different press reports about Goldman’s alleged profiteering at the expense of its clients. The stock price only responded, according to Goldman’s experts, when the SEC and Justice Department got involved.

Judge Crotty found that evidence wasn’t good enough to rebut the presumption of reliance. “Defendants’ attempt to demonstrate a lack of price impact merely marshals evidence which suggests a price decline for an alternate reason, but does not provide conclusive evidence that no link exists between the price decline and the misrepresentation,” he wrote. “Where defendants cannot demonstrate a complete absence of price impact, and where plaintiffs have demonstrated an efficient market, the presumption (of reliance) applies, and plaintiffs have demonstrated classwide reliance.”

In its request for 2nd Circuit review of Judge Crotty’s opinion, Goldman contends the judge has set an impossible standard for defendants, demanding they show a “complete absence of price impact.” The bank argues that’s not what the Supreme Court laid out in Halliburton, and urged the appeals court to take the case “to clarify and standardize the evidentiary showing required to rebut the .. presumption” of reliance.

Goldman has backing in amicus briefs from the Securities Industry and Financial Markets Association, the U.S. Chamber of Commerce and several securities law professors, including academics who urged the Supreme Court in 2014 to do away with the presumption of reliance.

Class counsel Thomas Dubbs of Labaton called Goldman’s request for 2nd Circuit review “a brilliant, intellectually dishonest effort to recast already decided non-class issues as class questions.” Even Goldman’s experts, Dubbs said in an email, admitted that the bank’s share price dropped when its alleged client conflicts came to light. That alone, he said, means shareholders can be presumed to have relied on Goldman’s supposed misrepresentations.

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