Supreme Court to Hear Goldman Sachs Fraud Case Appeal

Supreme Court to Hear Goldman Sachs Fraud Case Appeal
The U.S. Supreme Court in Washington on June 13, 2005. (Mark Wilson/Getty Images)
Matthew Vadum

The Supreme Court has agreed to consider making it tougher for shareholders to bring class-action lawsuits in securities fraud cases.

The decision to hear the case, Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System, came Dec. 11 on appeal from the 2nd Circuit Court of Appeals. The respondents are the Arkansas Teacher Retirement System, West Virginia Investment Management Board, and the Plumbers and Pipefitters National Pension Fund.

The court provided no rationale for its decision, which is its custom.

Goldman Sachs has been accused of concealing conflicts of interest in mortgage-backed securities it sold. The firm claims the appeals court made it unduly easy for aggrieved investors to unite in a single lawsuit.

“We’re pleased the Supreme Court has decided to hear our appeal,” a spokesperson for the Wall Street firm said in a Dec. 11 statement.

“This is the most important securities case to come before the Court since Halliburton Co. v. Erica P. John Fund Inc.,” a 2014 Supreme Court ruling, Goldman Sachs argued in its petition to the high court, filed on Aug. 21.

“It presents recurring questions of huge practical significance concerning the presumption of classwide reliance first recognized in Basic Inc. v. Levinson,” a 1988 Supreme Court ruling. This is a presumption “that plaintiffs must invoke for a private securities case to proceed as a class action seeking potentially billions of dollars in damages.”

Goldman contends it was denied justice by the lower court because, in the Halliburton ruling, the Supreme Court “made clear that a defendant must be afforded a meaningful opportunity at the class-certification stage to rebut the Basic presumption, by showing that the alleged misrepresentation had no impact on the price of the relevant security.”

In other words, the 1988 ruling held that judges are allowed to presume investors detrimentally relied on any publicly made misrepresentations when they purchased shares. The same decision also held that defendants can rebut that presumption by demonstrating that the misrepresentations didn’t affect share prices. Goldman claims its assurances about conflicts were so “generic” they couldn’t be responsible for boosting the stock price, according to a Bloomberg summary.

The 2nd Circuit rejected that position, saying Goldman couldn’t use it to stop the lawsuit from being certified as a class action, but said the company could raise the issue later in the case.

In an Oct. 21 brief in opposition, the other side attacked Goldman’s reasoning, saying the investment bank was asking the court to find that “a defendant can defeat class certification by showing that its challenged statements are immaterial, so long as it labels that argument a ‘price impact,’ rather than a ‘materiality,’ defense.”

“No court has ever accepted that position,” the brief stated.

Whether Goldman’s argument is as weak as the three pension funds maintain will be for the Supreme Court to decide after oral argument in the new year.

The funds’ position is that Goldman engaged in deceit by issuing false public assurances that it was carefully avoiding conflicts of interest.

The U.S. Securities and Exchange Commission (SEC) sued the firm in 2010 regarding a risky investment portfolio called ABACUS 2007-AC1, which the agency said Goldman packaged and sold without disclosing that a hedge fund, Paulson & Co. Inc., was betting against the investment. Goldman stock plummeted 13 percent the day of the transaction, and the company handed over $550 million to settle SEC allegations that it “misled investors in a subprime mortgage product just as the U.S. housing market was starting to collapse.”

“This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing,” Robert Khuzami, SEC enforcement director, said in 2010.

The counsel of record for the Arkansas Teacher Retirement System, Thomas C. Goldstein of Bethesda, Md., didn’t immediately respond to a request by The Epoch Times for comment.