Arkansas Teacher Retirement System v. Goldman Sachs Group, Inc.

Pension funds including the Arkansas Teacher Retirement System (collectively, the funds) (plaintiffs) brought a securities-fraud class action in federal district court against the Goldman Sachs Group, Inc. (Goldman) (defendant). The funds asserted that Goldman had maintained an artificially inflated stock price by repeatedly making generic statements about Goldman’s ability to manage conflicts of interest based on Goldman’s purported internal procedures and policies. Goldman’s statements on the issue effectively stated that the company had controls in place to identify and address conflicts of interest. The funds claimed that these statements were false or misleading because Goldman actually had several undisclosed conflicts of interest and that when the truth about the conflicts was revealed, Goldman’s stock price dropped, causing the funds to suffer losses. Goldman’s corrective disclosures about the conflicts addressed details of specific transactions about which conflicts of interest were alleged. The funds sought certification of a class of shareholders based on a presumption—recognized by the United States Supreme Court in Basic Inc. v. Levinson—that in trading a company’s shares, investors have relied on a company’s public material misrepresentations because those misrepresentations would be reflected in the shares’ market price in an efficient market. Goldman sought to rebut the Basic presumption, and thereby defeat class certification, by showing a lack of price impact (i.e., that any alleged misrepresentations had no impact on Goldman’s stock price). The district court certified the class, and the Second Circuit affirmed. The United States Supreme Court granted certiorari and held that at the class-certification stage, trial courts should compare the generic nature of a defendant’s alleged misrepresentation with the subsequent specific corrective disclosure to determine whether there is a match between the two. On remand, the district court found that Goldman failed to rebut the Basic presumption and certified the class. Goldman appealed.