Goldman Gets Review of Investor MBS Suit in Top Court Ruling


The U.S. Supreme Court gave Goldman Sachs Group Inc. a new chance to stop a lawsuit that accuses the company of misleading shareholders by masking conflicts of interest in mortgage-backed securities it sold.

The justices on Monday set aside a federal appeals court ruling that had let the suit go forward as a class action, saying it wasn’t clear the lower court adequately considered Goldman’s contention that its disputed statements were too generic to support the suit. The high court sent the case back to the New York-based 2nd U.S. Circuit Court of Appeals to revisit the issue.

The investors, led by the Arkansas Teacher Retirement System, say they were deceived by Goldman Sachs’s repeated public assurances that it was being vigilant about avoiding conflicts of interests. The shareholders say those assurances proved false when the Securities and Exchange Commission sued the company in April 2010 over a portfolio known as Abacus.

The case was the first high court clash over shareholder lawsuits since former President Donald Trump appointed three justices. Goldman and its business allies argued that the appeals court ruling made it too easy for shareholders to press class action fraud suits.

The Supreme Court decision “shifts a little power back” to companies defending against shareholder suits, said Noelle Reed, head of the litigation group in the Houston office of Skadden, Arps, Slate, Meagher & Flom.

Still, she said the ruling is narrow and won’t place major new hurdles on investors. “I don’t think it dramatically undercuts the ability of plaintiffs to bring class actions,” Reed said.

During arguments in March, the justices suggested the issues had narrowed as the case bounced up and down the court system.

Goldman’s shares were up 2.0% at 2:33 p.m. in New York. That was in line with the rebound across the sector on Monday after shares of the major banks had slumped last week.

“We are pleased the Supreme Court has vacated the grant of class certification and we will continue to vigorously defend ourselves as the case returns to the lower courts,” Maeve DuVally, a spokeswoman for Goldman Sachs, said in an emailed statement.

Paulson & Co.

The law firm for the suing shareholders said it welcomed the decision in the long-running case.

“Since this case was first filed more than 11 years ago, Goldman Sachs has spared no expense to avoid facing a jury for misleading investors about its role in the financial crisis,” Robbins Geller Rudman & Dowd LLP said in an emailed statement.

In its 2010 lawsuit, the SEC accused Goldman Sachs of creating and selling Abacus without disclosing that the hedge fund Paulson & Co. helped pick the underlying securities and bet against the vehicle. Shares of Goldman Sachs dropped 13% that day, and the firm later paid $550 million to settle with the SEC.

Though Goldman didn’t admit wrongdoing, the firm said it made a “mistake” in not disclosing the Paulson & Co. role, an unusual acknowledgment in an SEC case.

The Supreme Court appeal centered on the rules the court has crafted to determine whether shareholders have enough in common with one another to press a suit as a class action.

In 1988, the high court said judges can presume that investors all relied on any public misrepresentations when then bought shares. But that ruling also said defendants can rebut that presumption by showing that the misrepresentations had no impact on the share prices.

Barrett Opinion

Goldman Sachs says it should be able to meet that requirement by showing that its assurances about conflicts were so “generic” they couldn’t be responsible for propping up the stock price. The statements included promises in regulatory filings that the firm had “extensive procedures and controls that are designed to identify and address conflicts of interest” and that “our clients’ interests always come first.”

Writing for the high court, Justice Amy Coney Barrett said both sides in the case agreed that “the generic nature of a misrepresentation often will be important evidence of a lack of price impact.” She said the 2nd Circuit had left “sufficient doubt” about whether it adequately looked at that issue.

“It is unclear whether the 2nd Circuit properly considered the generic nature of Goldman’s alleged misrepresentations,” Barrett wrote.

In a separate part of the ruling that rejected a Goldman Sachs argument, Barrett said securities-fraud defendants bear the burden of persuading a judge that the disputed statements didn’t affect the stock price. She added, however, that the issue “should rarely be outcome determinative” and would kick in “only when the court finds the evidence in equipoise.”

Justice Sonia Sotomayor issued a partial dissent, saying she would have let the suit go forward.

Justice Neil Gorsuch also issued a partial dissent, saying he would have put the so-called burden of persuasion on the plaintiffs. Justice Clarence Thomas and Samuel Alito joined Gorsuch’s opinion.

The case is Goldman Sachs v. Arkansas Teacher Retirement System, 20-222.

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.