The rights of shareholders to pursue securities fraud class actions based on corporate misstatements were the focus of a case argued Monday before the Supreme Court.
In a petition brought by Goldman Sachs Group challenging a class-action lawsuit led by the $17.6 billion Arkansas Teacher Retirement System, Little Rock, over misrepresentations made to investors during the subprime mortgage crisis, the financial firm argued that defending against class certifications could become nearly impossible.
Other plaintiffs in the suit include the $16 billion West Virginia Investment Management Board, Charleston, and the $6.2 billion Plumbers & Pipefitters National Pension Fund, Alexandria, Va.
Certifying a class in a securities class action relies on the "fraud-on-the-market" theory validated in the Supreme Court's 1988 Basic Inc. v. Levinson decision. It presumes classwide reliance on public information that if it turns out to be misrepresented, could affect stock prices.
The 2011 lawsuit stemmed from Goldman Sachs' Abacus collateralized debt obligation, a subprime mortgage-based financial instrument assembled with the help of hedge fund Paulson & Co., whose contrary bet against the CDO was not disclosed to investors. One of the alleged misstatements in the shareholder lawsuit is that Goldman Sachs claimed to have internal controls to prevent conflicts of interest.
In 2010, Goldman Sachs paid $550 million to settle civil charges brought by the Securities and Exchange Commission and said it was "a mistake" to not disclose Paulson's role. In this case, the firm argued that its statements were too generic to affect its stock price.
Class certification of the shareholder lawsuit had been upheld by an appeals court when Goldman Sachs petitioned for Supreme Court review. During arguments Monday, several justices seemed inclined to let the case continue. "This seems like an area that, the more I read about it, the less that we write, the better," Justice Stephen Breyer said during the virtual arguments conducted over the phone.
The future of such class-action securities litigation will rely on the Supreme Court's decision later this year, argued amicus briefs for and against upholding "Basic," including one filed by six former SEC commissioners worried about making it harder to bring legal actions for corporate misrepresentations.
An amicus brief filed by 19 public pension fund members of the Council of Institutional Investors warned that removing the reliance on corporate statements "will harm shareholders and weaken the integrity of the market. Yet it will do virtually nothing to prevent the supposed threat of baseless shareholder litigation" that Goldman Sachs warned against, the CII brief said.
Kevin Lindahl, general counsel and deputy executive director of the $6.2 billion Colorado Fire & Police Pension Association, Greenwood Village, said at a pre-argument briefing that such lawsuits are "one way to hold corporations and officers of corporations accountable when they commit fraud when they say false things to the markets (and) cause a loss to the shareholders."
"Even the threat that this tool is available to us causes corporations to act with integrity.," Mr. Lindahl added.
The Society for Corporate Governance supported Goldman Sachs' position, saying in its amicus brief that defendants should not bear the burden of rebutting the reliance on public statements, and that upholding the lower court decision "will chill companies from making positive statements of principle that promote socially beneficial progress on issues such as corporate governance, diversity and the environment."
