On December 11, 2020, the United States Supreme Court granted a petition for certiorari to review a decision from the United States Court of Appeals for the Second Circuit to address whether a defendant in a securities class action may rebut the presumption of classwide reliance recognized in Basic Inc. v. Levinson, 485 U.S. 224 (1988), by pointing to the generic nature of the alleged misstatements in showing that the statements had no impact on the price of the security (and whether, in seeking to do so, a defendant has the burden of persuasion).  Goldman Sachs Group, Inc. v. Arkansas Teacher Ret. Sys., No. 20-222 (U.S. Dec. 11, 2020). 

In the underlying decision by the Second Circuit, which was discussed (along with prior decisions of the court in this matter) in prior posts, a divided panel of the Court of Appeals held that defendants may not seek to rebut the Basic presumption at the class certification stage by pointing to the generic and aspirational nature of the alleged misstatements to demonstrate that the statements had no price impact on the security because allowing defendants to do so would “smuggl[e] materiality,” a merits issue, into the price-impact inquiry reserved for class certification.  In dissent, Judge Sullivan stated that he did not believe that the majority's “rigid compartmentalization” of the materiality and price-impact inquiries is “possible, much less required” and that “[o]nce a defendant has challenged the Basic presumption and put forth evidence demonstrating that the misrepresentation did not affect share price, a reviewing court is free to consider the alleged misrepresentations in order to assess their impact on price” and the “mere fact that such an inquiry ‘resembles' an assessment of materiality does not make it improper.”  Petitioners argued that the Second Circuit's decision contravenes the Supreme Court's decision in Halliburton II because it “erroneously bars a defendant from relying on the nature of the alleged misstatements to show the absence of an impact on the price of the relevant security when seeking to rebut the Basic presumption of reliance at the class-certification stage.”  

The Second Circuit also held that defendants bear the burden of persuasion to rebut the Basic presumption.  Petitioners noted the circuit split on this issue and argued that “[b]oth the private cause of action for securities fraud (with its reliance requirement) and the Basic presumption are judicial creations” and that under Rule 301 of the Federal Rules of Evidence, “unless a federal statute provide[s] otherwise, the party against whom a presumption is directed has the burden of producing evidence to rebut the presumption,” while the “burden of persuasion” does not shift and “remains on the party who had it originally.”  According to petitioners, had the burden of persuasion been correctly allocated, “this would have been an easy case”—citing Judge Sullivan's dissent, which observed that petitioners' own evidence “demonstrated” that the alleged misstatements “had no impact” on the stock price, a point that respondents “offered no hard evidence, expert or otherwise, to refute.”

Numerous amici filed briefs urging the Supreme Court to grant review, in what will be one of the most closely watched securities cases of 2021.

Originally Published by Shearman & Sterling, December 2020

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.