Goldman Sachs Looks to Appeals Court in Abacus Shorts Case

By Chris Bruce

Goldman Sachs may soon find out whether investors can press ahead with class claims that the bank misled them about its role in several deals that plaintiffs say led to about $13 billion in losses ( In re Goldman Sachs Group Inc., 2d Cir., 16-cv-00250, reply brief 9/19/17 ).

The case now before a federal appeals court in New York centers on how defendants in securities fraud suits can fight a legal presumption that investors — at least those in modern well-developed markets — relied on public statements that allegedly run afoul of the 1934 Securities Exchange Act.

If defendants win that question and defeat a motion for class certification, they likely win the case, Ann M. Lipton, a former securities litigator and now a professor at the Tulane University Law School in New Orleans, told Bloomberg BNA. It’s hard to maintain such cases outside of a class context, she said.

By contrast, she said, plaintiffs have the edge if questions can be resolved later on. “Plaintiffs win if determinations can be put off until trial, because they know that trials are rare and settlement is more common,” she said.

In 1989, the U.S. Supreme Court said there’s a presumption that investors relied on such statements in certain types of cases. In 2014, the court reaffirmed that stance, but also said defendants can try to overcome the presumption at an early stage of the litigation when the court decides whether investors should proceed as a class.

This case tackles the next phase of that debate by asking what evidence defendants must present to rebut the presumption of reliance and short-circuit class certification.

Investors Allege Misrepresentation

At issue is a 2010 lawsuit by pension funds and other investors who alleged misstatements in connection with Goldman’s sale of collateralized debt obligations (CDOs) known as Abacus, Anderson, Hudson, and Timberwolf. The plaintiffs said Goldman had conflicts of interests in those deals because it took a significant short position in each.

In 2015, Senior Judge Paul A. Crotty of the U.S. District Court for the Southern District of New York certified a class of investors in this case. They alleged that Goldman made misleading statements about its business practices in connection with its sale of the CDOs.

Crotty denied Goldman’s bid to deny certification, saying it didn’t rebut the presumption that investors relied on its statements. Goldman, Crotty said, “failed to demonstrate a complete lack of price impact.”

Crotty’s decisions are frequently upheld by the Second Circuit. According to Bloomberg Law’s Litigation Analytics, in 117 instances involving class certification orders in all kinds of cases, Crotty was affirmed in 87 of those (or 74.4 percent), while seeing 14 reversals (12 percent). In the 16 remaining outcomes (13.7 percent), he was either affirmed in part or reversed in part on appeal.

It’s a closer call in terms of securities class actions. Crotty was affirmed in five instances (a 55.6 percent rating), with the remaining 4 instances being affirmed or reversed in part, translating into a 44.4 percent affirmance / reversal in part rating.

‘Virtually Insurmountable.’

Goldman asked the Second Circuit to reverse Crotty’s certification order, saying it sets a “virtually insurmountable” burden of persuasion on defendants who try to fight certification motions. Goldman also argued that its stock price dropped as a result of investigations brought by the Securities and Exchange Commission and the Justice Department, not the alleged misrepresentations.

In 2010, Goldman reached a $550 million settlement with the SEC in connection with claims that Goldman allowed a client, the Paulson & Co. hedge fund, to select assets for the Abacus CDO. Also in 2010, FINRA fined Goldman $650,000 for failing to disclose that two traders had received Wells notices from the SEC in connection with the Abacus CDO. The DOJ eventually dropped its probe of Goldman in 2012.

The plaintiffs say Goldman should be allowed to make its stock-price claims and other arguments, but not at the class certification stage.

Goldman has support from the Securities Industry and Financial Markets Association and others. In a May 2016 filing, SIFMA said Crotty’s ruling practically guarantees certification of class securities cases where a government enforcement action is followed by a stock-price drop.

A Fresh Test

Eric C. Chaffee, professor of law at the University of Toledo College of Law in Toledo, Ohio, said the case asks how strong evidence must be to rebut the presumption of reliance in actions under Section 10(b) and Rule 10b-5.

In its 2014 decision, “the Supreme Court was clear that the presumption of reliance could be rebutted during the class certification stage, but the contours of how that is done were left somewhat open,” Chaffee told Bloomberg BNA in an email. “Goldman is asserting that the district court is demanding that it prove too much,” said Chaffee, who’s also the editor of the Securities Law Prof Blog.

The case was argued in March and a decision could come at any time. One factor that may complicate Goldman’s case is In re Vivendi, S.A. Sec. Litig. (Miami Grp. v. Vivendi, S.A.), 838 F.3d 223, a September 2016 decision by the Second Circuit. In Vivendi, the Second Circuit said alleged misstatements may still be actionable even if prices didn’t shift, because if a stock’s price is already inflated, misstatements may just be propping them up.

According to Lipton, that’s a challenge for Goldman, because as a practical matter, this case is about how much factual analysis a court can plug into a class certification proceeding. “After Vivendi, the defendants are stuck with an extremely factual argument,” she said. “The difficulty for the court is determining at what stage these factual questions are going to be decided.”

To contact the reporter on this story: Chris Bruce in Washington at

To contact the editor responsible for this story: Michael Ferullo at

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