To certify a class on behalf of all investors who purchased shares during the class period, plaintiffs usually invoke a presumption of reliance created by the Court in the Basic case. Under the Basic presumption, plaintiffs can establish class-wide reliance by showing (1) that the alleged misrepresentations were publicly known, (2) that they were material, (3) that the stock traded in an efficient market, and (4) that the plaintiff traded the stock between the time that the misrepresentations were made and when the truth was revealed. These requirements are based on the efficient market hypothesis, which, as relevant here, posits that in an efficient market any material statements will impact a stock’s price. If all four elements are met, any investor trading in such a market can be presumed to have relied upon the stock’s price and all material statements (or misstatements) about the stock. Accordingly, the Court has held that the Basic requirements are merely an “indirect proxy for price impact,” which is the true underpinning of the presumption of reliance.
Defendants have the ability to rebut the Basic presumption, and defeat class certification, by demonstrating that the alleged misrepresentations did not have any price impact. The questions presented in Goldman are whether defendants can do so by pointing to the generic nature of the alleged misrepresentations and whether a defendant seeking to rebut the Basic presumption has only a burden of production or also the ultimate burden of persuasion.
At oral argument, the Court appeared peeved that the first question might not be much of a question at all. Chief Justice Roberts asked petitioners (Goldman) whether there was “any daylight on the substantive question between the [parties] concerning the generic statements?” And, indeed, both sides (as well as the government as amicus) agreed that the generic nature of the misstatements could be evidence of a lack of price impact. As a result, the argument focused on two sub-issues: (a) does the court have to rely solely on experts in assessing the existence of price impact, and (b) did the Second Circuit’s decision below really fail to take the generic nature of the alleged misstatements into account.
As to whether courts need to rely solely on experts, the justices appeared sympathetic to petitioners’ argument that the court also could apply its own judgment. Justice Breyer, in particular, noted that “Take the statement for what it’s worth. Listen to the experts, and don’t check your . . . common sense at the door. That’s what judges do. So why are we hearing that issue?” Similarly, Justice Barrett wondered whether all that was now on the table was a “ruling on that very, very narrow issue, saying, sure, judges can also consider their common sense.” And, indeed, both the government and the respondents argued that courts could rely on common sense in determining price impact, although respondents suggested that “the more there is expert testimony . . . the more the judge ought to be evaluating the experts” and not relying on his or her own view of “how economic markets work.”
There did appear to be a genuine disagreement, however, on whether the Second Circuit really had held that the generic nature of the alleged misstatements could not be considered. Justice Sotomayor appeared to agree with the government and respondents that the Second Circuit’s opinion below contained some ambiguity on that point and suggested that the best approach might be to affirm the decision while clarifying the correct law. Meanwhile, petitioners and respondents debated whether, if the Court were to decide that the correct legal standard had not been applied, the Second Circuit’s decision should be reversed (petitioners) or merely vacated and remanded with further instructions (respondents). This issue, as the government pointed out, is meaningful to the parties, but does not impact the Court’s formulation of the law.
Finally, on the second question presented, only two justices indicated that they might support petitioners’ argument that plaintiffs should bear the burden of persuasion as to price impact given that they bear the overall burden of persuasion as to class certification. Justice Gorsuch expressed concern that “the plaintiff might be able to do nothing and just rest on the presumption that there’s a price impact in the face of direct evidence that there wasn’t.” Similarly, Justice Alito questioned how a judge is supposed to deal with a situation where the plaintiffs were not required to provide evidence of price impact. On the other hand, respondents correctly pointed out that every court of appeals that has addressed the issue, including the Seventh Circuit in a decision joined by then-Circuit Judge Barrett, has found that defendants bear the burden of persuasion in rebutting the Basic presumption. Moreover, after persistent questioning from Justice Gorsuch, respondents conceded that if plaintiffs choose to rely entirely on the presumption in the face of direct evidence of no price impact a court “absolutely can find that the defendants prevail.”
Overall, it would appear that the Court is headed for a narrow decision (a) clarifying that courts can and should take the generic nature of the alleged misstatements into account when assessing price impact, and (b) holding that defendants have the burden of persuasion in rebutting the Basic presumption of reliance. But whether that decision, which is expected by June, will come in the form of an affirmance, reversal, or vacatur is far from clear.
Disclosure: The author of The 10b-5 Daily assisted the Washington Legal Foundation in the submission of an amicus brief in support of the petitioners.