Goldman Sachs shareholders argued in the Supreme Court Monday that they could sue the investment banking giant for its general statements about freedom from conflict of interest.
Shareholders said these statements were proven untrue and artificially raised Goldman’s stock.
The case, which dates back to the bank’s marketing of risky stocks prior to the 2008 financial crisis, could make it difficult for stockholders to bring future class action lawsuits over securities fraud. However, during about two hours of telephoning, the judges signaled that it was unlikely that they would reach a comprehensive decision in favor of both sides.
The case focuses on Goldman’s marketing of a synthetic secured bond called Abacus and other CDOs that has not disclosed that the company or its key customers have heavily bet against the products. Goldman ruled in 2010 with the Securities and Exchange Commission for $ 550 million for fraud related to abacus, the largest penalty a Wall Street bank has ever faced.
Shareholders, including the Arkansas Teacher Retirement System, said they lost billions on news of the SEC investigation that fueled Goldman’s stock price. The case is securities fraud, they argue, because Goldman made false statements such as “Our customers’ interests always come first” and “We have extensive procedures and controls in place to identify and address conflicts of interest.”
To date, the case has not gone beyond the class certification phase, which means shareholders are still struggling to sue together. Goldman has argued that the statements in question were too general to have any bearing on the price of its stock. The US 2nd Court of Appeals rejected this argument in an April statement that was on the side of the shareholders.
The questions raised at the hearing indicated that there may be a majority of the judges willing to overturn the Circuit 2 decision in favor of Goldman’s shareholders, but they are unlikely to contradict much of his reasoning.
The judges noted that the positions of the attorneys who argued for each side appeared to have converged since the court first approved the case. Goldman Sachs attorney, for example, has dropped the bank’s previous position that generic statements can never be the basis of a securities fraud lawsuit.
“It seems to me you are both in the middle,” said Judge Amy Coney Barrett, an appointment from former President Donald Trump, once to Tom Goldstein, attorney for shareholders. Goldstein is a partner at Goldstein & Russell and publisher of SCOTUSBlog.
Judge Stephen Breyer, appointed by former President Bill Clinton, told Sopan Joshi, a Justice Department attorney who made arguments that the case was filled with too much technical jargon.
“This seems like an area that the more I read about it, the less we write about it, the better,” said Breyer. “It’s based on very peripheral issues,” Breyer told Goldstein.
The main controversy was whether the 2nd Circuit, in its decision in favor of Goldman shareholders, might have closed the door to companies that could argue that their statements were generalized in order to thwart class action lawsuits.
The Justice Ministry, which did not speak out in favor of either party, filed a brief in February stating that the 2nd Circle’s decision on this point was ambiguous.
The DOJ asked the judges to overturn the lower court’s decision to clarify that a company could actually argue that what it said was too general to have an impact on its stock price. On the other hand, the agency said that just because a statement is generic does not automatically mean that it cannot affect the stock price.
“The parties seem to be largely in agreement with each other and with us,” Joshi said on this point during the clashes.
Goldstein agreed that the fact that a statement is general should not be excluded from consideration when a court is considering whether to bring a class action lawsuit. However, the statement of the 2nd circuit did not say otherwise, and he asked the court not to reverse the decision of the court of appeal.
In contrast, Goldman’s attorney Kannon Shanmugam argued that the 2nd Circuit statement declined to consider the generic nature of Goldman’s alleged misrepresentation. That was unfair, he argued, as general statements tended to have less influence on stock prices.
“The more general a statement is, the less likely it is that it will contain the kind of information that is in the stock price,” Shanmugam said. “We think that in this case the statements are extremely general.”
Justice Elena Kagan, appointed by former President Barack Obama, suggested that the court could do exactly what the Justice Department asked.
She asked Goldstein, “Why shouldn’t we just evacuate and say, ‘Here’s what the law really is, we want to make sure you do it under the appropriate standard?'”
Goldstein said that reversing the lower court’s opinion would be “somewhat offensive” to the lower court and essentially “literary criticism”. He said the 2nd circuit was clear in a 2018 statement on the same case.
“Both opinions are in front of you,” Goldstein told Justice Brett Kavanaugh, a Trump appointee. Goldstein said the court could clarify the 2nd Circuit opinion while affirming it, rather than reversing it.
“We are in this position where the two of you are closer together and now we have to decide what to do with the opinion of the 2nd Circle,” Barrett said at one point.
The Supreme Court decision is expected in late June.
The case is Goldman Sachs Group v Arkansas Teacher Retirement System, No. 20-222.
