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Daily Dicta: Groundhog Day for Goldman Sachs in $13B Securities Suit

Signage for Goldman Sachs Group Inc. is displayed at the One Raffles Link building, which houses one of the Goldman Sachs (Singapore) Pte offices, in Singapore, on Saturday, Dec. 22, 2018.

Talk about déjà vu.

The U.S. Court of Appeals for the Second Circuit—again—is hearing an interlocutory appeal after a Manhattan district court judge—again—certified a novel securities fraud class against Goldman Sachs, attracting a slew of amicus briefs—again—by big-name lawyers who warn of dire consequences if the lower court ruling stands.

Because hey, if you don’t succeed, try, try again. Great works are performed not by strength, but by perseverance. The one who falls and gets up is stronger than the one who never tried. Success is no accident.

Sorry I got lost for a moment there in motivational platitudes. Sort of like the ones underlying this crazy-pants case, which is entering its ninth year of litigation.

As the four high-powered amicus briefs filed between Friday and Tuesday attest, the suit remains of intense interest to the financial services industry—and indeed, to just about every publicly traded company.

I’ve written about it before, but here’s a quick refresher. Investors who bought Goldman stock between February 5, 2007, and June 10, 2010 sued after the Wall Street giant’s share price bottomed out amidst allegations of misconduct stemming from the so-called Abacus transaction.

Jenna Greene
Jenna Greene

Goldman is represented by a team from Sullivan & Cromwell led by Robert Giuffra Jr.



Plaintiffs lawyers from Robbins Geller Rudman & Dowd and Labaton Sucharow—plus appellate ace Thomas Goldstein of Goldstein & Russell, who came on board in late December—claim Goldman misled investors with statements in various annual reports and SEC filings. These include: “Our reputation is one of our most important assets” and “Our clients’ interests always come first” and “Integrity and honesty are at the heart of our business” and “We have extensive procedures and controls that are designed to…address conflicts of interest.”

But then Goldman allegedly packaged certain mortgage-backed securities to help favored client John Paulson, who was short on the position, at the expense of lesser clients. In 2010, Goldman paid the U.S. Securities & Exchange Commission $550 million to settle the case, admitting it made “a mistake.”

So, er, what about all those lofty promises to Be Best?

The plaintiffs lawyers certainly make a good point about Goldman coming across as a total hypocrite, but does anyone actually take aspirational statements like these seriously? As in, did investors rely on them to the point of artificially propping up Goldman’s stock price?

U.S. District Judge Paul Crotty in Manhattan seems inclined to think they did. “Goldman must not be allowed to pass off its repeated assertions that it complies with the letter and spirit of the law, values its reputation, and is able to address ‘potential’ conflicts of interest as mere puffery or statements of opinion,” he wrote in 2012 when he refused to dismiss the case,

Crotty certified the investor class in 2015, was reversed and remanded, and re-certified it in August of 2018.

Now it’s back before the Second Circuit, which in December granted interlocutory review for the second time. The newly-filed crop of amicus briefs show why the case matters so much.

The U.S. Chamber of Commerce, represented by Cleary Gottlieb Steen & Hamilton partners Lewis Liman and Jared Gerber plus in-house counsel Steven Lehotsky, offers a broad overview of what’s at stake.

“Every company makes general statements about ethics, codes of conduct, or similar topics; indeed, the SEC requires every company that it regulates to file a copy of its code of ethics with the commission and make it available to the public, either by posting it online or otherwise,” Liman wrote. “There can be no real question that virtually every piece of bad news later announced by a company can be alleged to be linked in some attenuated way to such earlier, required general statements.”

He continued, “The practical effect of the district court’s ruling would be to excuse plaintiffs from proving price impact at the class certification stage and permit them to proceed with a potentially ruinous class action lawsuit whenever they can allege a link (however attenuated) between negative news and some earlier statement (however general).”

Simpson Thacher & Bartlett litigation department co-chair Jonathan Youngwood leads a team representing the Securities Industry and Financial Markets Association and the Bank Policy Institute, and echoed those concerns.

“The district court’s dramatic expansion of the price maintenance theory in this case poses a financial threat to the amici’s members, many of which make or have made general statements regarding their business practices and principles and which, from time to time, experience stock drops following the announcement of unforeseen events such as government investigations,” Youngwood wrote.

“While plaintiffs allege (without evidence) that the statements maintained Goldman’s stock price, Goldman’s general aspirational statements are not equivalent to the types of concrete, specific misrepresentations this court has found are necessary to support price maintenance claims.”

Willkie Farr & Gallagher’s Todd Cosenza represents a group of 10 former SEC officials and law professors, including Stanford Law professor and former SEC commissioner Joseph Grundfest; Brian Cartwright, who was general counsel of the SEC from 2006 to 2009; and Paul Mahoney, who was dean of the University of Virginia School of Law from 2008 to 2016.

Their concern is not of the ‘Oh-my-God-we’re-all-going-to-get-sued’ variety. Rather, they focus on what they see as “clear legal errors” by the district court.

They point to the Supreme Court’s 2014 decision in Halliburton II. The high court held that before a securities fraud class is certified, the defendants must be given the chance to present evidence that severs the link between alleged misrepresentations and the declining stock price.

But that didn’t happen here. Instead, Cosenza wrote, Crotty “eviscerates” the Halliburton II decision and renders it “a de facto nullity” by relying on “plaintiffs’ baseless speculation (that could never be rebutted) of price impact.”

Fried, Frank, Harris, Shriver & Jacobson partner Michael Keats weighed in on behalf of a group of economics scholars, who call for (surprise) more rigorous economic analysis.

“Importantly, from an economic perspective, one cannot simply conclude that stock price inflation was maintained by certain statements just because a subsequent disclosure or event leads to a stock price decline,” Keats wrote. “In particular, price maintenance cannot be assumed to have occurred where a company merely has expressed general business principles, as most public companies do.”

Keats continued, “Plaintiffs’ expert appears simply to have assumed that he did not need to prove or demonstrate through economic analysis that the misstatements caused or maintained price inflation …We believe that rigorous economic analysis is required to determine if a stock’s price was actually inflated, and whether a set of challenged statements caused or maintained that price inflation.”