In re Goldman Sachs Group, Inc. Securities Litigation

Background

The investors allege that Goldman Sachs Group, Inc. and certain senior executives violated Section 10(b) of the Securities Exchange Act, Rule 10b-5, and Section 20(a). They contend that Goldman made false or misleading statements about its conflicts of interest, procedures for managing those conflicts, business principles, reputation, and commitment to clients. The alleged statements appeared in filings, earnings calls, investor conferences, press statements, and annual reports.

The investors’ theory is that the statements fraudulently maintained an already-inflated stock price. They seek to represent a class of people and entities that purchased or otherwise acquired Goldman common stock between February 5, 2007, and June 10, 2010, and were damaged as a result.

The court had previously dismissed claims based on Goldman’s alleged failure to disclose that it received notices from the Securities and Exchange Commission, while allowing the claims concerning conflicts-of-interest statements to continue. The court had also previously granted class certification, but appellate decisions required further consideration of whether Goldman had rebutted the presumption of reliance used at the class-certification stage.

Legal Standard

For a private claim under Section 10(b), an investor generally must prove reliance on a material misrepresentation or omission. Under the Basic presumption, an investor is presumed to have relied on a public misstatement if it was reflected in the market price when the investor traded. To invoke that presumption, investors must establish that the statements were publicly known, the stock traded in an efficient market, and they traded during the relevant period. The court noted that materiality was not required to be shown at the class-certification stage because it concerns the merits of the claims rather than whether common issues predominate for class treatment.

Goldman could rebut the presumption at class certification by proving, by a greater-than-50-percent evidentiary showing, that the alleged misstatements had no effect on the stock price. Because the investors alleged inflation maintenance rather than inflation introduction, the relevant question was whether the stock price would have fallen earlier if Goldman had spoken truthfully, not whether the statements initially raised the price.

The Supreme Court instructed courts to consider the generality of the statements, whether the statements and later corrective disclosures differed in specificity, and all other evidence bearing on price impact. The court treated any difference in specificity as a sliding-scale issue that could weaken the inference of price impact but did not automatically defeat the investors’ theory.

Evidence Considered

The investors relied on three statistically significant stock-price declines. They identified a 12.79 percent decrease after an April 16, 2010 disclosure concerning Goldman’s role in the ABACUS collateralized debt obligation, a 9.39 percent decrease after April 30, 2010 reports concerning Goldman’s mortgage-trading practices, and a 2.21 percent decrease after June 10, 2010 reports concerning conflicts surrounding another collateralized debt obligation. Their expert, Dr. John Finnerty, attributed the declines to disclosures about Goldman’s conflicts and the conduct underlying the related enforcement activity. He also linked the declines to earlier inflation through market commentary concerning Goldman’s conflicts procedures and reputation.

Goldman’s experts disputed that the alleged misstatements affected the stock price. Dr. Paul Gompers examined 36 earlier dates and concluded that reports concerning Goldman’s conflicts had not caused abnormal stock-price movements. Dr. Stephen Choi concluded that the April 2010 decline was attributable entirely to the enforcement action rather than the underlying disclosures about Goldman’s conduct. Dr. Laura Starks opined that investors generally did not use broad or aspirational statements about business principles, reputation, and conflict management in making investment decisions, and she found that the analyst reports she reviewed did not directly refer to the alleged misstatements.

Dr. Finnerty criticized these analyses. He maintained that the earlier reports lacked the specific details, hard evidence, credibility, or absence of mitigating commentary found in the later disclosures. He also argued that Dr. Starks’s review was too narrow because it focused on direct quotations in analyst reports and omitted other market commentary and references to the subject matter of the alleged statements.

Court’s Analysis

The court credited Dr. Finnerty’s analysis and found persuasive evidence linking the three stock-price declines to detailed public revelations about Goldman’s conflict management and conduct. It rejected Dr. Gompers’s analysis because the later disclosures contained new, documented information, including internal Goldman communications, and carried additional credibility because of their source. It also rejected Dr. Choi’s analysis as novel, unreliable, based on a small and unsuitable comparison group, and incapable of addressing all three disclosures.

The court found that the statements were not uniformly generic. Some statements were broad assurances about integrity and honesty, but others specifically described Goldman’s conflicts and procedures for addressing them. The court concluded that the statements, considered together, could reinforce investors’ belief that Goldman properly managed conflicts. Goldman had not shown that truthful statements about its alleged conduct would have left the stock price unchanged.

The court also rejected Goldman’s argument that similar statements by other companies made the statements incapable of maintaining price inflation. The court explained that an inflation-maintenance theory focuses on whether statements reinforced an existing misconception, not whether investors consciously changed their behavior when each statement was made.

Finally, the court considered the alleged mismatch between the broad statements and the more detailed corrective disclosures. It concluded that the disclosures concerned the same subject—Goldman’s conflicts and infrastructure for managing them—and that the difference in detail did not overcome the otherwise strong evidence of price impact. Goldman therefore did not establish a complete lack of price impact by a preponderance of the evidence.

Disposition

The court concluded that the alleged misstatements had some impact on Goldman’s stock price during the class period and that Goldman had failed to rebut the Basic presumption. The court granted the investors’ motion for class certification and directed the Clerk to terminate the motion at ECF No. 135. The opinion did not decide whether Goldman ultimately violated the securities laws or whether the investors will prevail on the merits.