Southern District of New York Rule Defendant Failed to Rebutt Basic Presumption of Confidence, Grants Class Certification Motion for Third Time | Shearman & Sterling LLP

On December 8, 2021, Judge Paul A. Crotty of the United States District Court for the Southern District of New York granted a motion for class certification in a securities fraud class action lawsuit against an institution Financial Services (the “Company”) under the Securities Exchange Act of 1934. With respect to Goldman Sachs Group, Inc. Sec. Litigation., n ° 10-3461 (PAC) (December 8, 2021). This is the third time that the district court has upheld the plaintiffs’ request for collective certification in this case, following several decisions of the Second Circuit and of the Supreme Court.

More recently, the District Court’s second-class certification order was reviewed by the Supreme Court. In June 2021, in a decision referred to here, the Supreme Court overturned and remanded the decision of the Second Circuit upholding the certification of a group by the district court because there was “sufficient doubt” as to whether the second circuit had taken into account the generic nature misrepresentation by the company. Specifically, the Supreme Court has ruled that, in the context of collective certification in a case involving claims under section 10 (b) of the Exchange Act: (i) the generic nature of a misrepresentation is important evidence of the impact on prices that courts should consider at the class certification stage, regardless of whether such evidence overlaps materiality and any other substantive issue, and (ii) the defendants have the burden of persuasion to prove the absence of impact on prices by a preponderance of evidence in order to rebut the presumption of confidence established under the Supreme Court decision in Basic Inc. v. Levinson. In a covered decision here, the Second Circuit noted that the district court’s collective certification decision did not address the generic nature of the alleged misrepresentations in its assessment of the relevant evidence for the impact on prices, nor the expert and rebuttal reports. parts that focused on the generic nature of the alleged statements. The second circuit therefore returned the case to the district court, arguing that the parties’ arguments “raise factual issues better assessed by the district court in first instance”.

On December 8, 2021, following the remand of the Second Circuit, the District Court ruled that, even under the “clarified guidance” of the Supreme Court, the defendants had not refuted the Basic presumption of confidence at the class level by a preponderance of evidence. The district court concluded that the evidence indicated that the alleged inaccuracies had some impact on the price of the defendant’s shares during the class action period. The complainants claimed that the company’s statements regarding certain business policies and practices, including that the company had strong institutional systems to manage and mitigate conflicts of interest, helped to maintain an inflated share price. Both sides presented evidence regarding the price impact through a briefing, additional briefing, expert reports and an evidentiary hearing. The district court concluded that the complainants’ expert report “establishes at the very least[d] a link between news of the Company’s conflicts and subsequent declines in stock prices ”and did not find the defendants’ expert analyzes convincing to question this link. The district court acknowledged that the Supreme Court clarified that the courts “cannot complete their investigation there” but “must also assess whether the subsequent deduction required for class certification under the theory of maintenance of l ‘inflation. . . is fatally compromised by the generic nature of these inaccuracies, a “mismatch” in generics between the inaccuracy and corrective disclosure, or other common sense factors. The district court concluded, however, that a “review of all the compelling evidence of the impact on prices reveals that the alleged inaccuracies had some impact on the price of [the Company]’s stock’ during the class action period, and as a result, the defendants have failed to establish the absence of price impact by a preponderance of evidence.

In reaching this conclusion, the district court considered a number of arguments regarding the generic nature of the company’s misrepresentation. First, the district court rejected the argument that the “generic” claims at issue could have no impact on prices in law, noting that the Supreme Court had not addressed this issue directly and that Judge Sotomayor had stated in its agreement that genericness – the legal test was “materiality under another name”.

Second, the district court ruled that the alleged inaccuracies were not so generic as to reduce their power to maintain pre-existing price inflation, and that while some may “sound like platitudes when read in isolation, others are much more substantial ”. As examples of what the district court found “more substantial”, the court included statements such as: “we increasingly have to deal with potential conflicts of interest, including situations where our services to a client particular or our own investments or other interests conflict, or are perceived to conflict with the interests of another client ”and“[w]We have extensive procedures and controls that are designed to identify and resolve conflicts of interest. The district court said that even what it was conceding were more generic statements, such as “[i]integrity and honesty are at the heart of our business ”-“ can reinforce misconceptions about [the Company]”Business practices of” when read in conjunction with more specific statements. The district court also found that the plaintiffs’ expert report linking the three alleged corrective disclosures to statistically significant declines in the company’s share price was strong evidence that the statements were sustaining price inflation.

Third, the district court found that the company had presented no evidence purporting to show that if the company had replaced the alleged inaccuracies with the alleged truth about its disputes, its stock price would have held up. Although the district court credited the defense expert’s testimony that “some of the misrepresentations alleged here were unlikely, in a vacuum, to consciously influence investor behavior,” the court also found the The complainants ‘expert’s compelling criticism that “true and contrary surrogates for alleged misrepresentation would have impacted investors’ subsequent decision making. The Court said that “the right measure of keeping inflation by a company that chooses to speak out” is not what might have happened if a company had remained silent, but what would have happened if it had said the truth. “(Quoting In re Vivendi, SA Sec. Litigation., 838 F.3d 223, 257 (2d Cir. 2016)).

Fourth, the district court rejected what it called the company’s argument that the publication of generic statements of the type made by many other companies means that investors do not trust those statements. The Court said that what it called “this ‘strength in numbers’ argument” misinterprets the theory of sustaining inflation, which the Court said does not depend on “whether these statements were consciously made. invoked, at the time, by investors evaluating [defendant]”but rather on” if the statements maintained an already inflated share price “by” strengthen[ing]”a misconception.

Finally, the district court considered the alleged “discrepancy” between the alleged generic inaccuracies and the subsequent corrective disclosures. The Supreme Court said that, according to the theory of maintaining inflation, the inference of the impact on prices “begins to crumble when there is a mismatch between the content of the false declaration and the disclosure. corrective “because:”[u]In these circumstances, it is less likely that the specific disclosure actually corrected the generic misrepresentation. The district court interpreted this as a “sliding scale” that should be used to guide a trial court’s consideration of this particular evidentiary issue. Under this approach, the district court concluded that the alleged inaccuracies “are not so much more generic than the corrective disclosures as to nullify the otherwise strong inference of price impact built into the evidentiary record.” The district court concluded that “the comfortable, but certainly not unlimited, generic gap between the alleged inaccuracies and subsequent corrective disclosures does not meet the company’s burden of demonstrating the complete absence of price impact. attributable to alleged inaccuracies ”.

As we noted at the time, the Supreme Court’s ruling last June may help defendants have a better chance of rebutting the presumption of a class action suit by providing evidence that there had been no d ‘affect pricing given the generic nature of the alleged inaccuracies, but it did not provide lower courts with a clear line rule. The district court’s application of the Supreme Court’s guidance shows that in the absence of such a rule, it may not be difficult for courts to find that a combination of a drop in stock prices and suspected generic misstatements is sufficient.

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