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SUPREME COURT OF THE UNITED STATES
_________________
No. 20–222
_________________
GOLDMAN SACHS GROUP, INC., et al.,
PETITIONERS
v. ARKANSAS TEACHER RETIREMENT SYSTEM,
et al.
on writ of certiorari to the united states
court of appeals for the second circuit
[June 21, 2021]
Justice Barrett delivered the opinion of the
Court.
This case involves a securities-fraud class
action filed by several pension funds against The Goldman Sachs
Group, Inc., and three of its former executives (collectively,
Goldman). Plaintiffs allege that Goldman maintained an artificially
inflated stock price by making generic statements about its ability
to manage conflicts—for example, “We have extensive procedures and
controls that are designed to identify and address conflicts of
interest.” Plaintiffs say that Goldman’s generic statements were
false or misleading in light of several undisclosed conflicts of
interest, and that once the truth about Goldman’s conflicts came
out, Goldman’s stock price dropped and shareholders suffered
losses.
Below, this securities-fraud class action
proceeded in typical fashion. Plaintiffs sought to certify a class
of Goldman shareholders by invoking the presumption endorsed by
this Court in
Basic Inc. v.
Levinson,
485 U.S.
224 (1988). The
Basic presumption 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. For its part, 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 affirmed.
In this Court, Goldman argues 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.
I
A
Section 10(b) of the Securities Exchange Act
of 1934 and its implementing regulation, Rule 10b–5, prohibit
material misrepresentations and omissions in connection with the
sale of securities. 48Stat. 881, as amended, 15 U. S. C.
§78j(b); 17 CFR §240.10b–5 (2020). We have inferred from these
provisions an implied private cause of action permitting the
recovery of damages for securities fraud.
Halliburton Co. v.
Erica P. John Fund, Inc.,
573 U.S.
258, 267 (2014) (
Halliburton II ). To recover
damages, a private plaintiff must prove, among other things, a
material misrepresentation or omission by the defendant and the
plaintiff ’s reliance on that misrepresentation or omission.
Ibid.
This case concerns the element of reliance. The
“traditional (and most direct) way” for a plaintiff to prove
reliance is to show that he was aware of a defendant’s
misrepresentation and engaged in a transaction based on that
misrepresentation.
Ibid. (internal quotation marks omitted).
In
Basic, however, we held that a plaintiff may also invoke
a rebuttable presumption of reliance based on the
fraud-on-the-market theory. 485 U. S., at 241–247.
The “fundamental premise” of the
fraud-on-the-market theory underlying
Basic’s presumption is
“that an investor presumptively relies on a misrepresentation so
long as it was reflected in the market price at the time of his
transaction.”
Erica P. John Fund, Inc. v.
Halliburton
Co.,
563 U.S.
804, 813 (2011). To invoke the
Basic presumption, a
plaintiff must prove: (1) that the alleged misrepresentation was
publicly known; (2) that it was material; (3) that the stock traded
in an efficient market; and (4) that the plaintiff traded the stock
between the time the misrepresentation was made and when the truth
was revealed.
Halliburton II, 573 U. S., at 268. The
defendant may then rebut the presumption through “[a]ny showing
that severs the link between the alleged misrepresentation and
either the price received (or paid) by the plaintiff, or his
decision to trade at a fair market price.”
Basic, 485
U. S., at 248.
Although the
Basic presumption “can be
invoked by any Rule 10b–5 plaintiff,” it has “particular
significance in securities-fraud class actions.”
Amgen Inc.
v.
Connecticut Retirement Plans and Trust Funds,
568 U.S.
455, 462 (2013). The presumption allows class-action plaintiffs
to prove reliance through evidence common to the class. That in
turn makes it easier for plaintiffs to establish the predominance
requirement of Federal Rule of Civil Procedure 23, which requires
that “questions of law or fact common to class members predominate”
over individualized issues. Fed. Rule Civ. Proc. 23(b)(3). Indeed,
without the
Basic presumption, individualized issues of
reliance ordinarily would defeat predominance and “preclude
certification” of a securities-fraud class action.
Amgen,
568 U. S., at 462–463; see
Halliburton II, 573
U. S., at 281–282.
As a result, class-action plaintiffs must prove
the
Basic prerequisites before class certification—with one
exception. In
Amgen, we held that materiality should be left
to the merits stage because it does not bear on Rule 23’s
predominance requirement. 568 U. S., at 466–468. The remaining
Basic prerequisites—publicity, market efficiency, and market
timing—“must be satisfied” by plaintiffs “before class
certification.”
Halliburton II, 573 U. S., at 276.
Satisfying those prerequisites, however, does
not guarantee class certification. We held in
Halliburton II
that defendants may rebut the
Basic presumption at class
certification by showing “that an alleged misrepresentation did not
actually affect the market price of the stock.”
Id., at 284.
If a misrepresentation had no price impact, then
Basic’s
fundamental premise “completely collapses, rendering class
certification inappropriate.”
Id., at 283.
B
Respondents here—whom we’ll call
Plaintiffs—are Goldman shareholders. They brought this
securities-fraud class action against Goldman in the Southern
District of New York, alleging violations of §10(b) and Rule
10b–5.
The specific theory of securities fraud that
Plaintiffs allege is known as inflation maintenance. Under this
theory, a misrepresentation causes a stock price “to
remain
inflated by preventing preexisting inflation from dissipating from
the stock price.”
FindWhat Investor Group v.
FindWhat.com, 658 F.3d 1282, 1315 (CA11 2011).[
1]
Plaintiffs allege here that between 2006 and
2010, Goldman maintained an inflated stock price by making repeated
misrepresentations about its conflict-of-interest policies and
business practices. The alleged misrepresentations are generic
statements from Goldman’s SEC filings and annual reports, including
the following:
“We have extensive procedures and controls that
are designed to identify and address conflicts of interest.” App.
216 (emphasis and boldface deleted).
“Our clients’ interests always come first.”
Id., at 162 (same).
“Integrity and honesty are at the heart of our
business.”
Id., at 163 (same).
According to Plaintiffs, these statements were
false or misleading—and caused Goldman’s stock to trade at
artificially inflated levels—because Goldman had in fact engaged in
several allegedly conflicted transactions without disclosing the
conflicts. Plaintiffs further allege that once the market learned
the truth about Goldman’s conflicts from a Government enforcement
action and subsequent news reports, the inflation in Goldman’s
stock price dissipated, causing the price to drop and shareholders
to suffer losses.
After Goldman unsuccessfully moved to dismiss
the case, Plaintiffs moved to certify the class, invoking the
Basic presumption. In response, Goldman sought to rebut the
Basic presumption by proving a lack of price impact. Both
parties submitted extensive expert testimony on the issue.
The District Court certified the class, but the
Second Circuit authorized a Rule 23(f ) appeal and vacated the
class-certification order. 879 F.3d 474 (2018). The Second Circuit
held that Goldman, as the defendant, bears the burden of persuasion
to prove a lack of price impact by a preponderance of the evidence.
But it concluded that the District Court erred by holding Goldman
to a higher burden of proof and by refusing to consider some of
Goldman’s price impact evidence.
On remand, the District Court certified the
class again, finding that Goldman’s expert testimony failed to
establish by a preponderance of the evidence that its alleged
misrepresentations had no price impact. The Second Circuit again
authorized a Rule 23(f ) appeal and this time affirmed in a
divided decision. 955 F.3d 254 (2020). As relevant here, the Court
of Appeals held that the District Court’s price impact
determination was not an abuse of discretion. In dissent, Judge
Sullivan concluded that “the generic quality of Goldman’s alleged
misstatements, coupled with” Goldman’s expert testimony, compelled
the conclusion that Goldman proved a lack of price impact.
Id., at 278–279.
We granted certiorari. 592 U. S. ___
(2020).
II
Goldman argues that the Second Circuit erred
in two respects: first, by concluding that the generic nature of
alleged misrepresentations is irrelevant to the price impact
question; and second, by placing the burden of persuasion on
Goldman to prove a lack of price impact. We address these arguments
in turn.
A
1
On the first question—whether the generic
nature of a misrepresentation is relevant to price impact—the
parties’ dispute has largely evaporated. 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.” Brief for
Respondents 15; see Tr. of Oral Arg. 6–7, 59, 79. 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. See Tr. of Oral Arg. 12, 64. 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. See
id., at 23, 65.
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.’ ”
In
re Allstate Corp. Securities Litig., 966 F.3d 595, 613,
n. 6 (CA7 2020) (quoting Langevoort, Judgment Day for
Fraud-on-the-Market: Reflection on
Amgen and the Second
Coming of
Halliburton, 57 Ariz. L. Rev. 37, 56 (2015);
emphasis added). 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 “determin[e] that Rule 23 is satisfied, even when
that requires inquiry into the merits.”
Comcast Corp. v.
Behrend,
569 U.S.
27, 35 (2013); see
Wal-Mart Stores, Inc. v.
Dukes,
564 U.S.
338, 351, and n. 6 (2011). And under
Halliburton II, a
court cannot conclude that Rule 23’s requirements are satisfied
without considering
all evidence relevant to price impact.
See 573 U. S., at 284.[
2]
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.”
Glickenhaus & Co. v.
Household Int’l,
Inc., 787 F.3d 408, 415 (CA7 2020). 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. See,
e.g., id., at 413–417;
In re Vivendi, S. A. Securities Litig., 838 F.3d
223, 233–237, 253–259 (CA2 2016).
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.
2
The parties do not dispute any of this. They
disagree only about whether the Second Circuit properly considered
the generic nature of Goldman’s alleged misrepresentations. Because
the Second Circuit’s opinions leave us with sufficient doubt on
this score, we remand for further consideration.[
3] On remand, the Second Circuit must take
into account
all record evidence relevant to price impact,
regardless whether that evidence overlaps with materiality or any
other merits issue.
B
Goldman also argues that the Second Circuit
erred by requiring Goldman, rather than Plaintiffs, to bear the
burden of persuasion on price impact at class certification.
Goldman relies exclusively on Federal Rule of Evidence 301, which
provides in full:
“In a civil case, unless a federal statute
or these rules provide otherwise, the party against whom a
presumption is directed has the burden of producing evidence to
rebut the presumption. But this rule does not shift the burden of
persuasion, which remains on the party who had it originally.”
According to Goldman, Rule 301 applies to the
Basic presumption at class certification, and, as a result,
a plaintiff ’s satisfaction of the
Basic prerequisites
shifts only the burden of
production to the defendant. Once
a defendant discharges that burden by producing any competent
evidence of a lack of price impact, Goldman says, the
Basic
presumption is rebutted and the plaintiff must carry the burden of
persuasion to show price impact.
We disagree. We have held that Rule 301 “in no
way restricts the authority of a court . . . to change
the customary burdens of persuasion” pursuant to a federal statute.
NLRB v.
Transportation Management Corp.,
462 U.S.
393, 404, n. 7 (1983). And we have at times exercised that
authority to reassign the burden of persuasion to the defendant
upon a prima facie showing by the plaintiff. See,
e.g.,
Teamsters v.
United States,
431
U.S. 324, 359, and n. 45 (1977);
Franks v.
Bowman Transp. Co.,
424 U.S.
747, 772–773 (1976).
Goldman does not ask us to revisit these
precedents. So the threshold question here is not whether we have
the authority to assign defendants the burden of persuasion to
prove a lack of price impact, but instead whether we already
exercised that authority in establishing the
Basic framework
pursuant to the securities laws. We conclude that
Basic and
Halliburton II did just that.
Basic held that defendants may rebut the
presumption of reliance if they “
show that the
misrepresentation
in fact did not lead to a distortion of
price.” 485 U. S., at 248 (emphasis added). To do so,
Basic said, defendants may make “[a]ny
showing that
severs the link between the alleged misrepresentation and
. . . the price received (or paid) by the plaintiff.”
Ibid. (emphasis added). Similarly,
Halliburton II
held that defendants may rebut the
Basic presumption at
class certification “by
showing . . . that the
particular misrepresentation at issue did not affect the stock’s
market price.” 573 U. S., at 279 (emphasis added).
Goldman and Justice Gorsuch argue that these
references to a defendant’s “showing” refer to the defendant’s
burden of production.
Post, at 6–8 (dissenting opinion)
(hereinafter the dissent). On this reading,
Basic and
Halliburton II require a defendant merely to offer “evidence
that, if believed, would support a finding” of a lack of price
impact.
Post, at 5. But
Basic and
Halliburton
II plainly require more: The defendant must “in fact” “seve[r]
the link” between a misrepresentation and the price paid by the
plaintiff—and a defendant’s mere production of
some evidence
relevant to price impact would rarely accomplish that
feat.[
4]
Accepting Goldman and the dissent’s argument
would also effectively negate
Halliburton II ’s holding
that plaintiffs need not directly prove price impact in order to
invoke the
Basic presumption. 573 U. S., at 278–279.
If, as they urge, 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. See
Waggoner v.
Barclays PLC, 875
F.3d 79, 99–104 (CA2 2017) (“the phrase ‘[a]ny showing that severs
the link’ aligns more logically with imposing a burden of
persuasion rather than a burden of production”);
In re
Allstate, 966 F. 3d, at 610–611 (“
Basic said that
‘[a]ny showing
that severs the link’ would be sufficient to
rebut the presumption, not that mere production of evidence would
defeat the presumption” (citation omitted)). We likewise agree with
the Courts of Appeals that the defendant must carry that burden by
a preponderance of the evidence. See
Waggoner, 875
F. 3d, at 99;
In re Allstate, 966 F. 3d, at
610.
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. Cf.
Medina v.
California,
505 U.S.
437, 449 (1992) (preponderance of the evidence burden matters
“only in a narrow class of cases where the evidence is in
equipoise”).
* * *
The Second Circuit correctly placed the burden
of proving a lack of price impact on Goldman. But because it is
unclear whether the Second Circuit properly considered the generic
nature of Goldman’s alleged misrepresentations in reviewing the
District Court’s price impact determination, we vacate the judgment
of the Second Circuit and remand the case for further proceedings
consistent with this opinion.
It is so ordered.
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