Goldman Gets High Court Review It Sought on Investor Suits

(Bloomberg) -- The U.S. Supreme Court agreed to use an appeal by Goldman Sachs Group Inc. to consider tightening the rules for shareholders seeking to use class action lawsuits to claim securities fraud.

Goldman Sachs, which is fighting accusations it masked conflicts of interest in mortgage-backed securities it sold, says a federal appeals court made it too easy for investors to band together in a single lawsuit. The Supreme Court will hear arguments next year and probably rule by June.

“We’re pleased the Supreme Court has decided to hear our appeal,” Maeve DuVally, a spokesperson for the New York-based bank, said in a statement.

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 SEC said Goldman Sachs created and sold 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.

The Goldman Sachs appeal centers on the rules the Supreme 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.

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.

A divided federal appeals court in New York said Goldman Sachs couldn’t use that line of argument to prevent the suit from being certified as a class action. The panel said the firm would have to wait to make those contentions later in the case.

The investors urged the Supreme Court to reject the appeal, saying the lower court reached the right conclusion. Business trade groups are backing the appeal.

The lawsuit against Goldman Sachs had a settlement value of about $350 million before the Supreme Court intervened, according to Bloomberg Intelligence analyst Elliot Stein.

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

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