Goldman Sachs Gets a Pass in Teachers Retirement Class Action

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By Jennifer Bennett

Goldman Sachs will get another chance to defeat class action certification in a shareholder suit alleging it hid conflicts of interest when creating risky subprime securities before the financial crisis.

The Arkansas Teachers Retirement System and other investors claimed that Goldman Sachs Group Inc. misstated efforts to avoid conflicts of interest in its subprime mortgage-backed collateralized debt obligations. The government’s investigation of the firm’s activities caused the price of their Goldman stock to fall, they said.

The U.S. Court of Appeals for the Second Circuit Jan. 12 reversed a district court decision certifying a class of investor plaintiffs in the lawsuit. The lower court required more proof from Goldman Sachs than it should have, so the class certification was flawed, according to the appeals court’s opinion.

Securities fraud class action plaintiffs are presumed to have relied on a company’s misrepresentations. Companies can defeat that presumption—and class certification—if they show the misrepresentations didn’t affect stock price.

Evidence

Goldman Sachs produced evidence that its stock price didn’t change on days the investors said the company made misstatements. The firm needed to conclusively prove there was no price impact, the lower court said. The Second Circuit disagreed and remanded. It said Goldman Sachs needed only to produce some evidence the misstatements probably didn’t impact the stock’s price.

Four Goldman Sachs CDOs were detailed in a 2011 Senate report that found the company misled clients about subprime securities. The marketing of Abacus, one of the CDOs, led to a Securities and Exchange Commission case that Goldman paid $550 million in 2010 to resolve.

In 2014, a federal jury in Manhattan found former Goldman Sachs vice president Fabrice Tourre liable for his role in Abacus, and ordered him to pay $825,000.

The case is Ark. Teachers Ret. Sys. v. Goldman Sachs Grp., Inc. , 2018 BL 11332, 2d Cir., Docket No. 16-250, 1/12/18 .

To contact the reporter on this story: Jennifer Bennett in Washington at jbennett@bloomberglaw.com

To contact the editor responsible for this story: Seth Stern at sstern@bloomberglaw.com

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