Amicus Curiae Brief — Goldman Sachs Group, Inc., et al., Petitioners v. Arkansas Teacher Retirement System, et al.

No. 20-222

In the

Supreme Court of the United States

GOLDMAN SACHS GROUP, INC., et al.,

Petitioners,

v.

ARKANSAS TEACHER RETIREMENT SYSTEM, et al.,

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of A ppeals for the Second Circuit

BRIEF OF FORMER SEC OFFICIALS AND

LAW PROFESSORS AS AMICI CURIAE

IN SUPPORT OF PETITIONERS

Todd G. Cosenza

Counsel of Record

Charles D. Cording

Madeleine L. Tayer

Willkie Farr & Gallagher LLP

787 Seventh Avenue

New York, NY 10019

(212) 728-8000

tcosenza@willkie.com

Counsel for Amici Curiae

September 24, 2020

298300

A

(800) 274-3321 • (800) 359-6859

i

TABLE OF CONTENTS

TABLE OF AUTHORITIES..................................... ii

STATEMENT OF INTEREST ................................. 1

SUMMARY OF ARGUMENT .................................. 3

ARGUMENT ............................................................ 4

I.

II.

THE SECOND CIRCUIT’S PRICE

IMPACT

ANALYSIS

VIOLATES

HALLIBURTON II. ....................................... 4

A.

THE

SECOND

CIRCUIT’S

HOLDING

NULLIFIES

THIS

COURT’S

COMPROMISE

IN

HALLIBURTON II REGARDING

THE BASIC PRESUMPTION. ........... 4

B.

THE SECOND CIRCUIT DEFIED

HALLIBURTON II BY REFUSING

TO CONSIDER THE NATURE OF

THE

CHALLENGED

STATEMENTS

AS

PRICE

IMPACT EVIDENCE. ........................ 7

C.

IF LEFT UNCORRECTED, THE

SECOND CIRCUIT’S DECISION

WILL

ADVERSELY

IMPACT

PUBLIC COMPANIES. .................... 12

THE COURT SHOULD PROVIDE

CLARITY ON REBUTTING THE BASIC

PRESUMPTION GIVEN THE RISING

PREVALENCE

OF

INFLATION

MAINTENANCE CASES NATIONWIDE. 14

CONCLUSION ....................................................... 16

ii

TABLE OF AUTHORITIES

Cases

Page(s)

Alaska Elec. Pension Fund v. Pharmacia

Corp.,

554 F.3d 342 (3d Cir. 2009) .............................. 14

In re Allstate Corp. Securities Litigation,

966 F.3d 595 (7th Cir. 2020) ................... 9, 10, 11

Amgen Inc. v. Conn. Ret. Plans & Tr.

Funds,

568 U.S. 455 (2013) ....................................passim

Ark. Teachers Ret. Sys. v. Goldman Sachs

Grp., Inc.,

879 F.3d 474 (2d Cir. 2018) .............................. 10

Basic Inc. v. Levinson,

485 U.S. 224 (1988) ....................................passim

Dura Pharms., Inc. v. Broudo,

544 U.S. 336 (2005) ........................................... 13

Erica P. John Fund, Inc. v. Halliburton Co.,

563 U.S. 804 (2011) ....................................passim

Erica P. John Fund, Inc. v. Halliburton Co.,

718 F.3d 423 (5th Cir. 2013), vacated

and remanded by 573 U.S. 258 (2014) ........... 8, 9

FindWhat Investor Group v. FindWhat.com,

658 F.3d 1282 (11th Cir. 2011) ......................... 14

iii

Halliburton Co. v. Erica P. John Fund, Inc.,

573 U.S. 258 (2014) ....................................passim

IBEW Local 98 Pension Fund v. Best Buy

Co.,

818 F.3d 775 (8th Cir. 2016) ............................. 10

In re Pfizer Inc. Sec. Litig.,

819 F.3d 642 (2d Cir. 2016) .............................. 14

Schleicher v. Wendt,

618 F.3d 679 (7th Cir. 2010) ............................. 14

In re Vivendi, S.A. Sec. Litig.,

838 F.3d 223 (2d Cir. 2016) .............................. 14

Waggoner v. Barclays PLC,

875 F.3d 79 (2d Cir. 2017) ................................ 10

Other Authorities

Donald C. Langevoort, Judgment Day for

Fraud-on-the-Market: Reflections on

Amgen and the Second Coming of

Halliburton, 57 ARIZ. L. REV. 37, 46-47

(2015) ................................................................... 5

1

STATEMENT OF INTEREST OF AMICI

CURIAE1

The amici curiae are a group of individuals who

have a strong interest in these issues: former officials

of the United States Securities and Exchange

Commission and law professors whose scholarship

and teaching focuses on the federal securities laws.

Although each individual amicus may not endorse

every statement herein,2 this brief reflects the

consensus of the amici that the petition for certiorari

presents exceptionally important questions on the

Basic presumption and a defendant’s right to rebut

the same, the lower courts’ resolution of these issues

was incorrect and threatens to eviscerate that right,

and therefore, judicial review by this Court is

necessary. In alphabetical order, the amici curiae are:

•

Brian G. Cartwright – former General Counsel

of the U.S. Securities and Exchange

Commission from 2006 to 2009;

1 No counsel for a party authored this brief in whole or in part,

and no person or entity, other than amici curiae or their

counsel, contributed money to fund its preparation or

submission. All parties were given proper notice and have

consented to the filing of this brief pursuant to this Court’s

Rule 37.2(a).

2 In addition, the views expressed by amici here do not

necessarily reflect the views of the institutions with which

they are or have been associated whose names are included

solely for purposes of identification.

2

•

Ronald J. Colombo – Professor of Law and Dean

for Distance Education at the Maurice A.

Deane School of Law at Hofstra University;

•

Elizabeth Cosenza – Associate Professor and

Area Chair, Law and Ethics, at Fordham

University;

•

The Honorable Joseph A. Grundfest – William

A. Franke Professor of Law and Business at

Stanford Law School, and Commissioner of the

U.S. Securities and Exchange Commission

from 1985 to 1990;

•

Paul G. Mahoney – David and Mary Harrison

Distinguished Professor of Law at the

University of Virginia School of Law, and Dean

of the same from 2008 to 2016;

•

Adam C. Pritchard – the Frances and George

Skestos Professor of Law at the University of

Michigan Law School;

•

Matthew Turk – Assistant Professor of

Business Law and Ethics at Indiana

University’s Kelley School of Business;

•

Andrew N. Vollmer – Senior Affiliated Scholar,

Mercatus Center at George Mason University;

former Professor of Law, General Faculty,

University of Virginia School of Law; former

Deputy General Counsel of the SEC; and

•

Karen E. Woody – Associate Professor of Law

at Washington & Lee University School of Law.

3

SUMMARY OF ARGUMENT

The questions presented in this appeal are

extremely important to securities class actions. At

stake is whether defendants can rebut the fraud-onthe-market presumption created in Basic Inc. v.

Levinson, 485 U.S. 224 (1988), in opposing class

certification, as squarely required by this Court in

Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S.

258 (2014) (“Halliburton II”). In his vigorous dissent

from the Second Circuit Panel decision affirming the

district court’s granting of class certification, Judge

Sullivan explained that the Second Circuit’s decision

has made Basic “truly irrebuttable,” and class

certification “all but a certainty in every case.”

(Petitioners’ App. at 44a.) As detailed below, this

result eliminates the careful balance struck in

Halliburton II. There, this Court did not reverse the

judge-made Basic presumption, but held that

defendants must be afforded the opportunity to show

at class certification that alleged misstatements did

not have price impact—the premise of the efficient

market theory underlying Basic. The petition for a

writ of certiorari should be granted to make clear to

lower courts the proper approach that should be taken

in securities cases, and to remediate the significant

consequences of the Second Circuit’s nullification of

Halliburton II in the leading circuit for securities

cases and the center of the nation’s financial markets.

In short, lower courts (like the Second Circuit in its

decision below) are frustrating the objectives of

Halliburton II, and this Court should put an end to it.

These questions take on heightened importance

amid the emerging trend of securities class action

4

plaintiffs relying on the novel “inflation maintenance”

theory. This theory, never before sanctioned by this

Court, posits that a class may be certified where an

alleged misstatement does not itself introduce

inflation into the stock price, but simply maintains

inflation previously introduced through some other,

even nonfraudulent, means.

Coupling such an

expansive view of price impact with such a restrictive

view of the right to rebutting price impact recognized

in Halliburton II all but ensures near-automatic class

certification in inflation maintenance cases. That is,

a class will almost always be certified any time a

public company makes generic or aspirational

disclosures about mitigating risk or engaging in best

practices (as nearly all public companies do) and then

suffers a stock price drop. That cannot be consistent

with the aim and holding of Halliburton II. Simply

put, if the Second Circuit’s decision stands, companies

will be almost defenseless against plaintiffs’ class

certification arguments that will become de facto

irrebuttable.

ARGUMENT

I.

THE SECOND CIRCUIT’S PRICE

IMPACT ANALYSIS VIOLATES

HALLIBURTON II.

A.

The Second Circuit’s Holding

Nullifies This Court’s Compromise

in Halliburton II Regarding the

Basic Presumption.

5

In affirming the district court’s legally and

factually flawed class certification order, the Second

Circuit rendered this Court’s decision in Halliburton

II a de facto nullity. Halliburton II reflected a

compromise between the two diametrically opposed

arguments represented in that case: securities class

action defendants urged that Basic’s fraud-on-themarket presumption be overruled, while securities

class action plaintiffs urged that defendants not have

any opportunity to rebut the fraud-on-the-market

presumption at class certification.3

Since this Court’s creation of the fraud-on-themarket presumption in Basic, courts have struggled

with the presumption’s practical application. In Erica

P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804

(2011) (“Halliburton I”), this Court addressed some of

the ambiguity surrounding Basic by rejecting the

argument that plaintiffs must affirmatively show loss

causation to invoke the fraud-on-the-market

presumption. The Court reasoned that loss causation

did not relate to whether an investor had relied on a

misrepresentation “either directly or presumptively

through the fraud-on-the-market theory.” Id. at 813.

Two years later, in Amgen Inc. v. Conn. Ret. Plans &

Tr. Funds, 568 U.S. 455 (2013), this Court seemingly

leaned further in the direction of securities fraud class

action plaintiffs, holding that plaintiffs need not

establish materiality prior to class certification.

3 See Donald C. Langevoort, Judgment Day for Fraud-on-theMarket: Reflections on Amgen and the Second Coming of

Halliburton, 57 ARIZ. L. REV. 37, 46-47 (2015).

6

With Halliburton I and Amgen handed down two

years apart, this Court appeared to be steadily

lowering the bar for securities fraud class action

plaintiffs to advance their cases. In Halliburton II,

Chief Justice Roberts (joined by Justices Kennedy,

Ginsburg, Breyer, Sotomayor and Kagan) reaffirmed

the viability of the fraud-on-the-market presumption.

Importantly, while reaffirming Basic, the Court in

Halliburton II provided much-needed clarity on how

to apply the fraud-on-the-market presumption in

practice. The middle ground established by the

Supreme Court in Halliburton II provides that

defendants in securities fraud class actions must be

afforded an opportunity to rebut the fraud-on-themarket presumption of reliance “with evidence of a

lack of price impact . . . before class certification.” 573

U.S. at 277. Although the majority opinion failed to

overturn Basic and held that plaintiffs need not prove

price impact to first invoke the fraud-on-the-market

presumption, the Court also made clear that

defendants are entitled to an opportunity to rebut the

Basic presumption at class certification by presenting

evidence that severs the link between the alleged

misrepresentations and the stock price. Id. at 279–

80. Significantly, in so holding, the Halliburton II

Court cited Basic’s own lenient expression of the

standard for securities fraud class action defendants

to break that link: “[a]ny showing that severs the link

between the alleged misrepresentation and . . . the

price received (or paid) by the plaintiff” for the shares

in question. Id. at 281 (citing Basic, 485 U.S. at 248)

(emphasis added).

7

This Court’s decision in Halliburton II reflects a

carefully constructed compromise between the

apparently plaintiff-friendly trend in Halliburton I

and Amgen, and the defendants’ contention in

Halliburton II that Basic be overruled entirely. In

many ways, this compromise represents a recognition

of what was implicit in Basic: (i) the presumption of

fraud-on-the-market is exactly that, only a

presumption, and as such, is rebuttable; and (ii)

evidence introduced by defendants demonstrating the

absence of price impact before class certification will

break the link between the challenged statements and

the stock price, thereby defeating that presumption.

See 573 U.S. at 268–69. The Second Circuit here has

nullified defendants’ opportunity to rebut the Basic

presumption at the class certification stage,

undermining this Court’s work in crafting this

delicate compromise.

B.

The Second Circuit Defied

Halliburton II by Refusing to

Consider the Nature of the

Challenged Statements as Price

Impact Evidence.

The Second Circuit incorrectly viewed evidence

about the generic nature of challenged statements as

“a means for smuggling materiality into Rule 23” in

violation of Amgen. (Petitioners’ App. at 21a, n.11 &

22a.) But nothing in Amgen prohibits a court from

considering at class certification the generality or

specificity of the alleged misstatements, which

directly bears on price impact. (See id. at 45a.) In

imposing a blanket prohibition against such evidence,

8

the Second Circuit misconstrued Amgen in much the

same manner as the Fifth Circuit in Halliburton II,

which prompted this Court’s reversal in that case.

In Amgen, this Court held that proof of materiality

is not a prerequisite to certification of a securities

fraud class action. See 568 U.S. at 459. Even though

materiality is a precondition to Basic’s fraud-on-themarket presumption, the Court reasoned, “As to

materiality . . ., the class is entirely cohesive. It will

prevail or fail in unison.” Id. at 460. In so ruling, the

Amgen majority also affirmed the district court’s

refusal to consider Amgen’s “truth-on-the-market”

rebuttal evidence at the class certification stage. Id.

at 481.

On this basis, between Halliburton I and

Halliburton II, the Fifth Circuit concluded that

defendants could not offer evidence of a lack of price

impact at class certification. Erica P. John Fund, Inc.

v. Halliburton Co., 718 F.3d 423 (5th Cir. 2013),

vacated and remanded by 573 U.S. 258 (2014).

Applying Amgen, the Fifth Circuit reasoned that price

impact evidence may not be considered because, like

materiality, price impact does not bear on common

question predominance under Federal Rule of Civil

Procedure 23. Id. at 432.

The Fifth Circuit made the same error as the

Second Circuit did here: because “[t]he price impact

evidence considered here is both similar to and offered

for much the same reason as the materiality evidence”

that this Court in Amgen held should not be

considered at class certification, the Fifth Circuit

refused to credit Halliburton’s contention that it was

challenging reliance, not materiality, through its

9

truth-on-the-market defense. Id. at 434 n.10. This

Court rejected the Fifth Circuit’s analysis in

Halliburton II.

There, this Court explained that, even though the

same issues counseling against considering

materiality evidence could also apply to weighing

price impact evidence at class certification, “[p]rice

impact is different. The fact that a misrepresentation

‘was reflected in the market price at the time of the

transaction’—that it had price impact—is ‘Basic’s

fundamental premise.’ It thus has everything to do

with the issue of predominance at the class

certification stage.” Halliburton II, 573 U.S. 258, 281,

283 (internal citation omitted).

Even though the same evidence often bears on

price impact and materiality, Halliburton II holds

that, notwithstanding Amgen, price impact evidence

may be considered at class certification, not for the

purpose of rebutting materiality or rearguing a court’s

decision on the sufficiency of the complaint’s pleading

of materiality, but to demonstrate a lack of price

impact and thereby to rebut the Basic presumption.

Indeed, the Second Circuit’s decision is

inconsistent with the Seventh Circuit’s recent

decision in In re Allstate Corp. Securities Litigation,

966 F.3d 595 (7th Cir. 2020), which properly held that

the district court violated Halliburton II by failing to

consider permissible price impact evidence at class

10

certification.4

The Seventh Circuit vacated the

district court’s class certification order based on

Halliburton II’s holding that a court may not ignore

price impact evidence because it implicates meritsstage elements of the claim. In its opinion, the

Seventh Circuit underscored the “challenge” courts

face in reconciling Halliburton I, Amgen, and

Halliburton II because they must “(a) decide whether

reliance can be proven by common evidence without

(b) delving too far into the merits of the materiality or

falsity of the representations at issue, while still (c)

reserving loss causation entirely for the merits

phase[.]” Id. at 608. Consistent with these principles,

the Seventh Circuit permitted defendants to

introduce an expert report at class certification

showing that (1) there was “no statistically significant

increase in Allstate’s stock price following any of the

alleged misrepresentations” and (2) “the alleged

misrepresentations could not [i.e., as matter of logic]

4 The Second Circuit decision also deepened a circuit split

between the Second and Seventh Circuits on the one hand,

which each held that the burden of persuasion rests with a

defendant attempting to rebut the Basic presumption, see

Ark. Teachers Ret. Sys. v. Goldman Sachs Grp., Inc., 879 F.3d

474, 484-85 (2d Cir. 2018), Waggoner v. Barclays PLC, 875

F.3d 79, 104 (2d Cir. 2017), In re Allstate Corp. Securities

Litigation, 966 F.3d 595, and the Eighth Circuit on the other

hand, which held that under Federal Rule of Evidence 301,

the burden of production shifts to the defendant when the

plaintiff makes a prima facie showing of market efficiency,

but the burden of persuasion always rests with the plaintiff.

See IBEW Local 98 Pension Fund v. Best Buy Co., 818 F.3d

775 (8th Cir. 2016).

11

have had price impact because Allstate’s growth

strategy . . . was publicly disclosed in the Company’s

conference calls prior to the alleged Class Period, was

covered in analyst reports on the Company prior to

and at the beginning of the alleged Class Period and,

in an efficient market, would have already been

impounded into Allstate’s stock price.” Id. at 611.

Such evidence—similar to the evidence profferred by

Petitioners here—should have been considered by the

district court as price-impact rebuttal evidence, the

Seventh Circuit held, even though it undoubtedly

implicated the separate element of materiality. Id.

The Seventh Circuit’s approach is more consistent

with Halliburton II. Any other reading of these cases

creates a conflict between this Court’s Amgen and

Halliburton II rulings, requiring district courts to

undertake the impossible task of parsing permissible

price impact evidence from impermissible materiality

evidence. As Judge Sullivan persuasively observed, “I

don’t believe that such rigid compartmentalization is

possible[.]” (Petitioners’ App. at 45a.) Without an

affirmation from this Court that, under Halliburton

II, price impact evidence may be presented at the class

certification stage to rebut the Basic presumption,

even if the evidence also implicates materiality, lower

courts will continue to violate Halliburton II and deny

defendants the opportunity to rebut the Basic

presumption with permissible evidence. That is,

although price impact resembles materiality, it would

be “fair” for courts “to consider the nature of the

alleged misstatements in assessing whether and why”

there was no price impact. (Id. at 44a.)

12

C.

If Left Uncorrected, the Second

Circuit’s Decision Will Adversely

Impact Public Companies.

The Second Circuit’s decision impermissibly limits

the price impact evidence that district courts can

consider at class certification. Here, the Second

Circuit barred consideration of the generic nature of

the alleged misstatements, reasoning that the issue

should be dealt with at the pleading stage.

(Petitioners’ App. at 20a n.10.) But that is often not

what happens in practice. At the pleading stage,

plaintiffs regularly argue that materiality is a mixed

question of law and fact, and accordingly cases dealing

with generic statements oftentimes are not resolved

on materiality grounds at the pleading stage. This

Court should make clear that district courts must

consider all relevant price impact evidence (even if it

overlaps with materiality) at the Rule 23 stage.

The Second Circuit’s decision here risks draconian

practical consequences because publicly traded

companies routinely include generic statements of

corporate principle similar to those at issue here in

their public filings. The publication of these anodyne

statements combined with a later stock price drop

should not give rise to automatic class certification,

even if shareholders happen to lose money.

These risks are particularly heightened during the

ongoing COVID-19 crisis, where aspirational

statements about best practices amid a fast-moving

global pandemic can be weaponized by plaintiffs and

turned into a predicate for a securities fraud class

action, as securities markets around the world are

13

extremely volatile. For example, companies in the

airline, hospitality, and related industries that make

generic disclosures about business principles (e.g.,

“Customer safety always comes first,” “We meet the

highest standards of cleanliness,” or “We value the

safety of all our employees”) now face the prospect of

investor securities class action lawsuits after a stock

price drop in the event of a new COVID-19 outbreak

or another pandemic effect.

Granting class

certification in such cases is contrary to this Court’s

precedent and Congressional intent as reflected in the

Private Securities Litigation Reform Act.

See

Halliburton II, 573 U.S. at 277 (explaining that the

PSLRA was enacted “to combat perceived abuses in

securities litigation with heightened pleading

requirements, limits on damages and attorney’s fees,

a ‘safe harbor’ for certain kinds of statements,

restrictions on the selection of lead plaintiffs in

securities class actions, sanctions for frivolous

litigation, and stays of discovery pending motions to

dismiss”); see also Dura Pharms., Inc. v. Broudo, 544

U.S. 336, 345 (2005) (“The securities statutes seek to

maintain public confidence in the marketplace . . . by

deterring fraud, in part, through the availability of

private securities fraud actions. . . . But the statutes

make these latter actions available, not to provide

investors with broad insurance against market losses,

but to protect them against those economic losses that

misrepresentations actually cause.”). The private

right of action under the securities law is not intended

to function as a guarantee against stock price

declines, especially in times of crisis.

14

II.

THE COURT SHOULD PROVIDE

CLARITY ON REBUTTING THE BASIC

PRESUMPTION GIVEN THE RISING

PREVALENCE OF INFLATION

MAINTENANCE CASES NATIONWIDE.

The inflation maintenance theory permits

plaintiffs to argue that certain statements can be

actionable if they merely maintained an already

inflated stock price. See In re Pfizer Inc. Sec. Litig.,

819 F.3d 642, 659 (2d Cir. 2016). Here, the Second

Circuit applied the inflation maintenance theory to

generalized statements of corporate principle, an

unprecedented expansion of an already expansive

theory.

The only two circumstances in which any court had

previously applied the price maintenance theory

involved alleged misstatements that (1) were unduly

optimistic statements about specific, material

financial or operational information made to stop a

stock price from declining;5 or (2) falsely conveyed that

the company had met market expectations about a

specific, material financial metric, product, or event.6

In any event, whatever the merits of this theory,

general statements that companies routinely make in

5 See, e.g., In re Vivendi, S.A. Sec. Litig., 838 F.3d 223 (2d Cir.

2016); Schleicher v. Wendt, 618 F.3d 679 (7th Cir. 2010).

6 See, e.g., FindWhat Inv’r Grp. v. FindWhat.com, 658 F.3d

1282 (11th Cir. 2011); Alaska Elec. Pension Fund v. Pharmacia Corp., 554 F.3d 342 (3d Cir. 2009).

15

corporate disclosures, like the ones at issue in this

case, cannot “maintain” an inflated stock price.

Plaintiffs’ reliance on the theory comes as no

surprise given the recent surge in inflation

maintenance cases filed by securities class action

plaintiffs across the country, and defendants’

extraordinarily low success rates in rebutting the

Basic presumption in such cases. (Petitioners’ App. at

19a n.9.) This trend makes the inflation maintenance

theory susceptible to abuse at class certification,

especially if it is transformed into a catch-all for

securities fraud plaintiffs to certify investor classes

based simply on a stock drop, even when the

challenged statements were too general to cause any

price impact. If allowed to become a catch-all in this

way, it would be in direct contradiction to this Court’s

precedent, see Halliburton II, 573 U.S. 258, and would

result in effectively eliminating the price impact

requirement altogether.

Given the risk of abuse of the inflation

maintenance theory at class certification, it is

particularly important that this Court provide clarity

on what evidence courts can consider in determining

whether a defendant has rebutted the fraud-on-themarket presumption.

Otherwise, plaintiffs

nationwide will continue to benefit from the Basic

presumption, which depends on price impact, even in

cases like this where, under the inflation maintenance

theory, there is no evidence of price impact.

16

CONCLUSION

For the foregoing reasons, the amici curiae believe

that this Court should grant petitioners’ petition for a

writ of certiorari.

Respectfully submitted,

Todd G. Cosenza

Counsel of Record

Charles D. Cording

Madeleine L. Tayer

WILLKIE FARR &

GALLAGHER LLP

787 Seventh Avenue

New York, NY 10019

tcosenza@willkie.com

(212) 728-8000

Counsel for Amici

September 24, 2020