The Supreme Court agreed Friday to review a petition by Goldman Sachs Group challenging a class-action suit led by the $17.6 billion Arkansas Teacher Retirement System over misrepresentations made to investors during the subprime mortgage crisis, and questioning whether shareholders have too much power to pursue such class-action alliances.
Other plaintiffs in the suit include the $16 billion West Virginia Investment Management Board, Charleston, and the $6.2 million Plumbers and Pipefitters National Pension Fund, Alexandria, Va.
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. Its contrary bet against the CDO was not disclosed to investors, leading in 2010 to Goldman Sachs' $550 million settlement with the Securities and Exchange Commission.
The shareholders' suit was held up in appeals by Goldman Sachs until April following a ruling to proceed by a federal court in New York.
Goldman Sachs petitioned the Supreme Court to revisit what it said are important and recurring legal issues affecting securities class actions. "Without this court's intervention, the errant decision from the most important court of appeals for securities litigation will have enormous practical consequences for public companies," the firm said in its petition.
Goldman Sachs is supported by several industry groups concerned that class certifications for such lawsuits should require investors to show that corporate misstatements had a material impact on share prices.
In its amicus brief, the Society for Corporate Governance, representing corporate governance professionals, warned that if generic corporate statements are allowed to justify certifying an investor class, companies "will be disincentivized from making additional disclosures beyond the bare minimum," including on ESG goals such as diversity, gender pay equity or climate change.
Oral arguments not yet scheduled for 2021 are expected to center on a unanimous 2014 Supreme Court decision in Halliburton Co. vs. Erica P. John Fund that was considered a victory for institutional investors. That decision largely upheld a 25-year-old legal precedent that allows class actions to go forward on the presumption that stock prices can be negatively affected by corporate actions or misrepresentations, but gave corporate defendants an opening to rebut lawsuits at earlier stages.
