A proposed class-action lawsuit led by the $20.7 billion Arkansas Teacher Retirement System, Little Rock, against Goldman Sachs Group hit a roadblock Monday when the U.S. Supreme Court ordered the 2nd U.S. Circuit Court of Appeals in New York to reconsider allowing shareholders to pursue a class action over alleged misrepresentations made during the subprime mortgage crisis about its ethical principles and internal controls over conflicts of interest.
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. Goldman Sachs' contrary bet against the CDO was not disclosed to investors, leading to its $550 million settlement with the Securities and Exchange Commission in 2010.
The Supreme Court's 8-to-1 decision agreed with Goldman Sachs' argument that its issuer statements may have been too generic to affect Goldman's stock price. The appeals court will now reconsider the question.
Goldman Sachs had also warned in its Supreme Court petition that shareholders have too much power to pursue such class-action alliances, and allowing the lawsuit to continue "will have enormous practical consequences for public companies." That stance was 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.
The Supreme Court did agree with the appeals court that defendants, not shareholder plaintiffs, bear the burden of persuasion to prove a lack of price impact.
It is an important victory for investors, said Laura Posner, a partner with Cohen Milstein, who wrote an amicus brief for securities administrators supporting the plaintiffs. “The decision confirms that defendants bear the burden to demonstrate by a preponderance of evidence a lack of the price impact, including in cases where the price maintenance theory is alleged.”