In the most closely watched securities case in recent years, the U.S. Court of Appeals for the Second Circuit reversed the certification of a class of Goldman Sachs shareholders and instructed the district court to decertify the class. The August 10 ruling in this 13-year-old lawsuit follows a favorable ruling for Goldman Sachs by the U.S. Supreme Court in 2021. Goldman Sachs also achieved a rare feat in securing three discretionary Rule 23(f) appeals of a grant of class certification from the Second Circuit, marking just the second time this has happened.
The Second Circuit’s opinion will be a critical precedent for securities class actions moving forward. It adds important guardrails to the increasingly popular “inflation-maintenance” theory of securities fraud and may help curb event-driven securities litigation. These cases are often filed after a significant disruptive event at a company causes its stock to drop—such as an environmental disaster, data privacy breach, employment scandal or government investigation—as opposed to litigation based on accounting or financial misrepresentations.
This case dates back to the 2008 financial crisis and alleged conflicts of interests in Goldman Sachs investment vehicles relating to subprime mortgages. Plaintiffs claimed that those alleged conflicts contradicted generic statements made by Goldman Sachs about its corporate principles and conflicts management procedures, which had supposedly inflated the price of Goldman Sachs stock.
The Second Circuit panel unanimously voted to decertify. Judges Richard Wesley and Denny Chin began their 70-page majority opinion by acknowledging that this case presented a “challenging question” of how to interpret the “fraud-on-the-market” presumption of class-wide reliance established by the Supreme Court in Basic v. Levinson. Relying heavily on expert evidence developed by S&C over the lengthy history of the case, the Second Circuit agreed with Goldman Sachs that the district court had failed to meaningfully apply the framework established by the Supreme Court and had improperly extended the inflation-maintenance theory. Providing guidance for future cases, the appeals court set out the “searching” review standard courts should apply when shareholder plaintiffs claim that stock price declines in response to negative news show that earlier generic statements fraudulently inflated a company’s stock price.
Judge Richard Sullivan, who had agreed with Goldman Sachs in the Second Circuit’s earlier reviews, stated in a concurring opinion that he believed all along that the case was “straightforward.” Describing the extensive expert evidence developed by S&C, he concluded that the “overwhelming evidence offered by Goldman” renders this “not a close case.” “Defendants offered persuasive and uncontradicted evidence that Goldman’s share price was unaffected by earlier disclosures of Defendants’ alleged conflicts of interest.”
The S&C team was led by Robert Giuffra Jr., David Rein, Richard Klapper, Benjamin Walker, Julia Malkina and Morgan Ratner and included Jacob Cohen, Eric Andrews, Albert Kwan, Michael Lemanski, Krystal Valentin, Miles Greene and Esther Loh.