case 16-250, document 129, 08/19/2016, 1845267, page1 of ......labaton sucharowllp 140 broadway new...

16-250To Be Argued By:

THOMAS C. GOLDSTEIN

IN THE

United States Court of AppealsFOR THE SECOND CIRCUIT

PENSION FUNDS,Plaintiff,

ARKANSAS TEACHERS RETIREMENT SYSTEM, WEST VIRGINIA INVESTMENT

MANAGEMENT BOARD, PLUMBERS AND PIPEFITTERS PENSION GROUP, ILENE

(Caption continued on inside cover)

ON APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF NEW YORK

BRIEF FOR PLAINTIFFS-APPELLEES ARKANSAS TEACHER

RETIREMENT SYSTEM, WEST VIRGINIA INVESTMENT

MANAGEMENT BOARD AND PLUMBERS AND

PIPEFITTERS PENSION GROUP

d

THOMAS A. DUBBS

JAMES W. JOHNSON

MICHAEL H. ROGERS

LABATON SUCHAROW LLP

140 Broadway

New York, New York 10005

(212) 907-0700

SUSAN K. ALEXANDER

ANDREW LOVE

ROBBINS GELLER RUDMAN

& DOWD LLP

Post Montgomery Center

One Montgomery Street, Suite 1800

San Francisco, California 94104

(415) 288-4545

THOMAS C. GOLDSTEIN

GOLDSTEIN & RUSSELL, P.C.

7475 Wisconsin Avenue, Suite 404

Bethesda, Maryland 20814

(202) 362-0636

Attorneys for Plaintiffs-Appellees Arkansas Teacher Retirement System,

West Virginia Investment Management Board and

Plumbers and Pipefitters Pension Group

Case 16-250, Document 129, 08/19/2016, 1845267, Page1 of 70

RICHMAN, Individually and on behalf of all others similarly situated, PABLO

ELIZONDO, HOWARD SORKIN, Individually & on behalf of all others similarly

situated, TIKVA BOCHNER, EHSAN AFSHANI, LOUIS GOLD, THOMAS DRAFT,

Individually & on behalf of all others similarly situated,

Plaintiffs-Appellees,

—against—

GOLDMAN SACHS GROUP, INC., LLOYD C. BLANKFEIN,

DAVID A. VINIAR, GARY D. COHN,

Defendants-Appellants,

SARAH E. SMITH,

Defendant.


CORPORATE DISCLOSURE STATEMENT

Lead Plaintiffs Arkansas Teacher Retirement System, West Virginia

Investment Management Board Plumbers, and Pipefitters Pension Group are not

corporations. They do not issue stock and are not controlled by any publicly held

corporation.


ii

TABLE OF CONTENTS

Page

CORPORATE DISCLOSURE STATEMENT ......................................................... i

TABLE OF AUTHORITIES ................................................................................... iv

STATEMENT OF THE CASE .................................................................................. 1

I. Allegations of Plaintiffs’ complaint ................................................................ 2

II. The District Court’s denial of Defendants’ motion to dismiss and denial of reconsideration ................................................................................. 6

III. The District Court’s grant of Plaintiffs’ motion for class certification ........... 8

SUMMARY OF THE ARGUMENT ...................................................................... 12

ARGUMENT ........................................................................................................... 16

I. Defendants’ merits defenses are not properly before this Court. .................. 17

A. “Loss causation” is not properly addressed on class certification. ..... 19

B. “Materiality” is not properly addressed on class certification. ........... 21

C. Defendants offer no basis to resolve on class certification their merits “truth on the market” defense. ........................................ 23

II. The District Court correctly held that a defendant may defeat the Basic presumption by establishing the absence of price impact by a preponderance of evidence—and correctly concluded that Defendants here failed to do so. ........................................................................................ 25

A. Defendants mischaracterize the District Court’s holding. .................. 26

B. The District Court’s preponderance standard is correct. ..................... 30

C. Defendants’ “loss causation” evidence did not prove an absence of price impact by a preponderance of the evidence. .......................... 35

III. Defendants’ falsehoods and omissions were material. .................................. 39

IV. Defendants’ misconduct is not immunized by the fact that it maintained the inflated price of Goldman’s stock. .......................................................... 47

A. Price maintenance is a well-established theory of securities fraud liability. ...................................................................................... 48

B. There is no basis for Defendants’ attempt to narrowly define the actionable misrepresentations that artificially maintain the price of a stock. ............................................................................................ 53


iii

V. The District Court correctly rejected Defendants’ challenge under Comcast to Plaintiffs’ damage model at the class certification stage. .......... 56

CONCLUSION ........................................................................................................ 59


iv

TABLE OF AUTHORITIES

Page(s)

Cases

Abell v. Potomac Ins. Co., 858 F.2d 1104 (5th Cir. 1988), vacated in part on other grounds sub nom. Fryar v. Abell, 492 U.S. 914 (1989) ............................................................................................ 30

Alabama By-Products Corp. v. Killingsworth, 733 F.2d 1511 (11th Cir. 1984) .......................................................................... 34

Alaska Elec. Pension Fund v. Pharmacia Corp., 554 F.3d 342 (3d Cir. 2009) ............................................................................... 49

American Coal Co. v. Benefits Review Bd., 738 F.2d 387 (10th Cir. 1984) ............................................................................ 34

Amgen Inc. v. Conn. Retirement Plans & Trust Funds, 133 S. Ct. 1184 (2013) .................................................................................passim

Aranaz v. Catalyst Pharm. Partners, 302 F.R.D. 657 (S.D. Fla. 2014) ............................................................. 22, 25, 31

Basic v. Levinson, 485 U.S. 224 (1988) .....................................................................................passim

Boca Raton Firefighters & Police Pension Fund v. Bahash, 506 F. App’x 32 (2d Cir. 2012) .......................................................................... 45

Caiola v. Citibank, N.A., 295 F.3d 312 (2d Cir. 2002) ............................................................................... 42

Cammer v. Bloom, 711 F. Supp. 1264 (D.N.J. 1989) ........................................................................ 35

Carpenters Pension Trust Fund of St. Louis v. Barclays PLC, 310 F.R.D. 69 (S.D.N.Y. 2015) .............................................................. 17, 30, 49

City of Boston v. SS Texaco Texas, 773 F.2d 1396 (1st Cir. 1985) ............................................................................. 34


v

City of Livonia Emp. Ret. Sys. v. Wyeth, 284 F.R.D. 173 (S.D.N.Y. 2012) .................................................................. 38, 49

City of Pontiac Policemen’s & Firemen’s Ret. Sys. v. UBS AG, 752 F.3d 173 (2d Cir. 2014) ................................................................... 40, 44, 45

City of Sterling Heights Gen. Emps.’ Ret. Sys. v. Prudential Fin., Inc., No. 12-5275, 2015 WL 5097883 (D.N.J. Aug. 31, 2015) .................................. 31

Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013) .................................................................................passim

In re Comverse Tech., Inc. Sec. Litig., 543 F. Supp. 2d 134 (E.D.N.Y. 2008) ................................................................ 17

Conn. Ret. Plans & Trust Funds v. Amgen, 660 F.3d 1170 (9th Cir. 2011), aff’d, 133 S. Ct. 1184 (2013) .............................................................................. 24

DuPont v. Brady, 828 F.2d 75 (2d Cir. 1987) ................................................................................. 34

In re DVI, Inc. Sec. Litig., 639 F.3d 623 (3d Cir. 2011) ............................................................................... 30

ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187 (2d Cir. 2009) ................................................................... 39, 41, 44

Erica P. John Fund, Inc. v. Halliburton Co., 309 F.R.D. 251 (N.D. Tex. 2015) ................................................................. 32, 38

Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804, 131 S. Ct. 2179 (2011) ..................................................... 13, 19, 20

FindWhat Inv’r Grp. v. FindWhat.com, 658 F.3d 1282 (11th Cir. 2011) .............................................................. 48, 50, 54

Fogarazzo v. Lehman Bros., Inc., 263 F.R.D. 90 (S.D.N.Y. 2009) .......................................................................... 31

Ganino v. Citizens Utilities Co., 228 F.3d 154 (2d Cir. 2000) ............................................................................... 17


vi

Glickenhaus & Co. v. Household Int’l, Inc., 787 F.3d 408 (7th Cir. 2015) .................................................................. 49, 50, 54

Gurary v. Nu-Tech Bio-Med, Inc., 303 F.3d 212 (2d Cir. 2002) ............................................................................... 34

Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) .................................................................................passim

IBEW Local 98 Pension Fund v. Best Buy Co., 818 F.3d 775 (8th Cir. 2016) .................................................................. 51, 52, 53

Ind. Pub. Ret. Syst. v. SAIC, 818 F.3d 85 (2d Cir. 2016) ............................................................... 40, 42, 43, 44

James v. River Parishes Co., 686 F.2d 1129 (5th Cir. 1982) ............................................................................ 34

Local 703, I.B. of T. Grocery & Food Emp. Welfare Fund v. Regions Fin. Corp., 762 F.3d 1248 (11th Cir. 2014) .......................................................................... 48

In re MBIA, Inc., Sec. Litig., 700 F. Supp. 2d 566 (S.D.N.Y. 2010) ................................................................ 17

McIntire v. China MediaExpress Holdings, Inc., 38 F. Supp. 3d 415 (S.D.N.Y. 2014) ............................................................ 31, 49

N.L.R.B. v. Tahoe Nugget, Inc., 584 F.2d 293 (9th Cir. 1978) .............................................................................. 34

Nathenson v. Zonagen Inc., 267 F.3d 400 (5th Cir. 2001) .................................................................. 48, 50, 54

Plough, Inc. v. Mason & Dixon Lines, 630 F.2d 468 (6th Cir. 1980) .............................................................................. 34

Reese v. Bahash, 574 F. App’x 21 (2d Cir. 2014) .......................................................................... 45

In re Sadia, S.A. Sec. Litig., 269 F.R.D. 298 (S.D.N.Y. 2010) ........................................................................ 31


vii

In re Salomon Analyst Metromedia Litig., 544 F.3d 474 (2d Cir. 2008) ............................................................................... 33

Schleicher v. Wendt, 618 F.3d 679 (7th Cir. 2010) .................................................................. 48, 50, 54

Silverman v. Motorola, Inc., 798 F. Supp. 2d 954 (N.D. Ill. 2011) .................................................................. 38

Strougo v. Barclays PLC, No. 14-cv-5797, 2016 WL 413108 (S.D.N.Y. 2016) ......................................... 31

Thorpe v. Walter Inv. Mgmt., Corp., No. 1:14-cv-20880-UU, 2016 U.S. Dist. LEXIS 33637 (S.D. Fla. Mar. 16, 2016) .................................................................................... 30

In re Vivendi Universal S.A. Sec. Litig., 765 F. Supp. 2d 512 (S.D.N.Y. 2011) ................................................................ 49

Wallace v. Intralinks, 302 F.R.D. 310 (S.D.N.Y. 2014) ........................................................................ 31

In re WorldCom, Inc. Sec. Litig., 219 F.R.D. 267 (S.D.N.Y. 2003) ........................................................................ 17

Rules

Fed. R. Civ. P. 23(f) ..........................................................................................passim

Fed. R. Evid. 301 ............................................................................................... 33, 34

Other Authorities

Brief for Petitioners, Halliburton II, 2013 WL 6907610 ......................................... 33

Fifth Circuit Pattern Jury Instructions § 7.1 (2014) ................................................. 31

Ninth Circuit Manual of Jury Instructions: Civil § 18.6 (2007) .............................. 31

Verdict, SEC v. Tourre, No. 1:10-cv-03229-KBF, (S.D.N.Y. Aug. 1, 2013), ECF No. 439 ................................................................ 6


1

STATEMENT OF THE CASE

In this suit under the securities laws, Appellee shareholders (Plaintiffs)

allege that Appellants (Defendants) made material misrepresentations and

omissions regarding the conflict of interest policies and business practices of

Goldman Sachs (Goldman). Defendants (Goldman and certain of its executives)

moved to dismiss, asserting that their falsehoods were immaterial puffery. In

rulings that are not now before this Court, the District Court (Crotty, J.) disagreed,

denied the motion to dismiss, and denied reconsideration.

Plaintiffs then moved to certify a class. In a detailed opinion, the District

Court granted that motion. Preliminarily, Defendants renewed their materiality

objection and argued that the marketplace in any event knew the truth about the

conflicts of interest. The Court held those arguments were not properly before it

on class certification, because they are common merits issues for all plaintiffs and

do not cause individualized questions to predominate, and were meritless in any

event.

The Court found that it was essentially undisputed that the plaintiff

shareholders established each of the requisite elements for invoking the

presumption that they relied on Defendants’ statements in common under Basic v.

Levinson, 485 U.S. 224 (1988). The Court held that the presumption applied to the

allegation that Defendants’ falsehoods and omissions had maintained an artificially


2

inflated price for Goldman’s stock. The District Court further held that: (i) experts

for both Plaintiffs and Defendants agreed that there were disclosures that caused

statistically significant stock drops on the corrective disclosure dates; and

(ii) Defendants’ theory that alternative causes led to the stock declines did not

sever the link between the misrepresentations and the price drop because

Defendants failed to show that the corrective disclosures caused none of the drop

in Goldman’s stock price. Finally, the Court held that Plaintiffs’ damages

methodology was common to the class as well, because it was based on Plaintiffs’

common theory of liability.

In this interlocutory appeal of the class certification order under Fed. R. Civ.

P. 23(f) (Rule 23), Defendants allege that every one of the District Court’s

holdings was erroneous.

I. Allegations of Plaintiffs’ complaint

Goldman is a well-known investment banking, securities, and investment

management firm that, among other things, creates complex securities investments

for its clients. During the Class Period (February 5, 2007 – June 10, 2010), these

included collateralized debt obligations (CDOs)—securities that pool cash flow-

generating assets, such as mortgages and mortgage derivatives. Theoretically,

Goldman could offer such CDO securities to its private clients as “long”

investments knowing itself that the CDOs were likely to perform poorly or fail,


3

while at the same time taking its own “short” investment positions in the CDOs

and reaping the resultant profits. But the ordinary expectation absent some further

disclosure, of course, is that Goldman would not profit at its clients’ expense.

Goldman’s Form 10-K repeatedly recognized, consistent with its statements

prior to the Class Period, the importance of such issues in that it “increasingly

ha[d] to address potential conflicts of interest, including situations where our

services to a particular client or our own proprietary investments or other interests

conflict, or are perceived to conflict, with the interests of another client.” Joint

Appendix (“JA”) 82-83 (Compl. ¶ 134). And Defendants identified such issues as

important to Goldman’s success. Acknowledging that in a competitive

environment the bank’s clients obviously would not invest if it were possible that

Goldman was secretly betting against them, the annual report explained that

“[i]ntegrity and honesty are at the heart of our business.” JA87 (Compl. ¶ 154).

Goldman’s Form 10-K confirmed that “[o]ur reputation is one of our most

important assets.” Id. And an executive elaborated on an investors’ call, “[m]ost

importantly, and the basic reason for our success, is our extraordinary focus on our

clients.” Id.

Goldman and its executives repeatedly reinforced the expectation that its

interests were aligned with its clients on this central issue. For example, the Form

10-K identified “extensive procedures and controls that are designed to . . . address


4

conflicts of interest.” Id. Goldman’s annual report was unambiguous: the bank

stressed that its “clients’ interests always come first. Our experience shows that if

we serve our clients well, our own success will follow.” Id. It committed to

“complying with fully with . . . ethical principles that govern us.” Id.

Goldman also addressed four specific CDOs. For example, with respect to

the Abacus CDO, Goldman represented that the underlying mortgage assets for the

CDO were selected by a neutral third party, ACA Management LLC. Regarding

the other CDOs, Goldman stated that it had invested in positions consistent with its

clients’ interests.

In April and June 2010, press reports revealed that Defendants’

representations had been false when made and that Defendants had misrepresented

their own interest in the CDOs failing and how they had permitted a client to

structure the Abacus CDO to lose money. Special Appendix (“SA”) 2-4. The

reality was that, in conflict with Defendants’ representations and concealed from

the market, Goldman had invested in three CDOs (known as Hudson, Anderson,

and Timberwolf I) but then taken much greater short positions in which it stood to

gain directly if the CDOs lost money for its clients. For example, Goldman

misleadingly touted its $6 million equity (i.e., long) investment in Hudson, but had

secretly taken a $2 billion short position; and it had described holding up to $21

million in Anderson, but secretly taken a $135 million short position. In addition,


5

Goldman had permitted Paulson & Co. (a hedge fund client of the bank) to play an

active role in selecting the assets underlying the Abacus CDO that it sold to other

Goldman clients, with Abacus designed so that Paulson would profit from the

CDO’s losses. Just as intended, investors lost—and Paulson gained profits of—$1

billion.

In that April and June 2010 period:

A litigation release by the Securities and Exchange Commission (SEC), a New York Times article, and analyst reports revealed that the SEC had sued Goldman and a Goldman vice president for fraud in structuring and marketing the Abacus CDO. Goldman’s price decreased by 12.79%, an abnormal (i.e., unexpected) return of -9.27%. SA2-3.

The Senate Subcommittee on Investigations released internal Goldman documents revealing that Goldman profited by betting against the CDOs it sold to its clients. Goldman’s stock price decreased by 3.41%, an abnormal return of -1.68%. SA3.

The Wall Street Journal revealed a federal criminal investigation into possible securities fraud in Goldman’s mortgage lending. Analysts downgraded Goldman’s stock, which decreased by 9.39%, an abnormal return of -7.75%. SA3-4.

Reports revealed a SEC investigation of the Hudson CDO, as well as a suit by a hedge fund against Goldman arising from the Timberwolf CDO. Goldman’s stock declined 2.21%, an abnormal return of -4.25%. SA4.1

1 One of Defendants’ experts, Dr. Paul Gompers, conducted his own event study, which conceded the statistical significance of these stock declines. See JA5001 (Gompers Cert. Decl. ¶ 64) (concluding that Goldman’s April 16, 2010 stock price movement was “a decrease of 12.79


6

Goldman subsequently paid a $550 million fine to the SEC for its conduct

with respect to the Abacus CDO, at the time the largest fine ever paid to the SEC.

Goldman admitted that its representations regarding Abacus and Paulson’s role

were “incomplete” and “a mistake.” JA212 at ¶ 3 (Goldman’s SEC Consent

Decree dated July 14, 2010). Moreover, the SEC accused Fabrice Tourre, a

Goldman vice president, of engaging in fraudulent conduct in structuring and

marketing Abacus. After trial, Tourre was found liable on six of the SEC’s seven

counts, including aiding and abetting Goldman’s fraud in connection with Abacus.

Verdict, SEC v. Tourre, No. 1:10-cv-03229-KBF, (S.D.N.Y. Aug. 1, 2013), ECF

No. 439.

Plaintiffs subsequently brought this suit as a putative class action, alleging

that Defendants violated Sections 10(b) and 20(a) of the Exchange Act, as well as

SEC Rule 10b-5.

II. The District Court’s denial of Defendants’ motion to dismiss and denial of reconsideration

Defendants moved to dismiss Plaintiffs’ complaint on a number of grounds,

including that its challenged misrepresentations were immaterial puffery as a

matter of law. The District Court denied the motion. JA359.

percent . . . and was statistically significant”); JA5008 (¶ 79) (April 30, 2010 stock price movement was “a decrease of 9.39 percent . . . and was statistically significant”); JA5011 (¶ 89) (June 10, 2010 stock price movement was “a decrease of 2.21 percent . . . and was statistically significant”).


7

The District Court recognized that Goldman hid and misrepresented

Paulson’s role in selecting the assets for the Abacus CDO in order to benefit from

its $1 billion short position. Goldman also falsely represented that it had “aligned

incentives” with its clients through long positions in Hudson, Anderson, and

Timberwolf I, when it actually stood to profit far more from losses in those CDOs.

These were both material misrepresentations and omissions. JA362.

Further, the District Court recognized that those misrepresentations and

omissions were material because they would alter the total mix of information that

investors would deem to be relevant. Goldman substantially misled its

shareholders about its own business practices. Further, by concealing Goldman’s

actual business practices, the falsehoods caused Goldman’s stock to trade at an

artificially high price until the truth about Goldman’s value was revealed and the

stock price dropped substantially to match the previously concealed reality.

JA376-77.

Defendants’ falsehoods were not vague and immaterial puffery. JA377.

Goldman’s statements instead related both to specific business practices and

particular transactions, going to the core of Goldman’s value proposition to the

market. JA380.

In a further detailed opinion, the District Court denied Defendants’ motion

for reconsideration, which addressed intervening decisions of this Court discussing


8

the line between material misrepresentations and immaterial puffery. JA388-91.

The District Court explained that Defendants’ misrepresentations and omissions

were material under those precedents. Among other things, the District Court held

that, unlike generalized, “open-ended, indefinite, or subjective” statements,

Defendants’ “‘statements about business practices were directly related to the

subject of the fraud.’” JA392 (quoting Gusinsky v. Barclays PLC, 944 F. Supp. 2d

279, 290 n.74 (S.D.N.Y. 2013), aff’d in relevant part, 750 F.3d 277).

III. The District Court’s grant of Plaintiffs’ motion for class certification

Plaintiffs moved to certify a class of Goldman shareholders who acquired

shares during the period of the misrepresentations and omissions. The District

Court granted the motion. SA1.

The District Court explained that at class certification Plaintiffs are entitled

to a presumption of common reliance under Basic based on their showing that the

market for the stock was efficient, the misrepresentations were public, and

Plaintiffs traded the stock between the time the misrepresentations were made and

when the truth was revealed. SA6. The Court also acknowledged Plaintiffs’

allegations that Defendants’ misrepresentations were material. Id. In this case,

“there is no real dispute concerning the market efficiency for Goldman’s stock.”

SA10. Nor was there any dispute about publicity or market timing.


9

The District Court then turned to Defendants’ contention that they had

rebutted the Basic presumption by showing that the misrepresentations and

corrective disclosures had no “price impact”—i.e., factually the falsehoods did not

actually affect the stock’s price at the time Plaintiffs purchased the shares. Citing

decisions of multiple other courts, the District Court clearly articulated the burden

of proof: “Defendants must demonstrate a lack of price impact by a preponderance

of the evidence.” SA6 n.3.

Preliminarily, the District Court rejected Defendants’ passing assertion that

the complaint must be dismissed because the misrepresentations did not increase

the price of Goldman’s stock but only, according to the complaint, maintained its

already inflated price. The Court explained that such an argument was contrary to

settled precedent, as “[p]rice impact can be shown by a stock price reaction either

at the time of the statement or at the time of the corrective disclosure, and analysis

of price impact usually focuses on stock price movement at the time the truth is

disclosed.” SA11 (alterations omitted).

Defendants did not attempt to disprove “price impact” directly—i.e., that

their misrepresentations and omissions did not artificially maintain the price of

Goldman’s stock at the time Plaintiffs purchased their shares. Rather, they sought

to make that point indirectly in three ways.


10

First, Defendants argued that other causes explained all of the subsequent

decline in the price of Goldman’s stock at the time of the corrective disclosures.

Citing two expert reports, Defendants asserted that the market actually responded

to the government investigations, not the disclosure of Defendants’

misrepresentations which were the subject of those investigations. Plaintiffs

submitted their own expert report and rebuttal report, as well as materials

demonstrating the market’s response. Assessing the record before it, the District

Court

determine[d] that Defendants have failed to demonstrate a complete lack of price impact. Defendants cannot show that the total decline in the stock price on the corrective disclosure dates is attributable simply to the market reaction to the announcement of enforcement actions and not to the revelation to the market that Goldman had made material misrepresentations about its conflicts of interest policies and business practices.

SA10-11.

Second, Defendants argued that they could disprove price impact indirectly

by showing that their misrepresentations were immaterial puffery. According to

Defendants, because immaterial information does not affect stock prices as a

matter of law, it necessarily cannot have a price impact as a matter of fact. The

District Court rejected that argument, which it explained is “inappropriate at the

class certification stage and in any event has been previously rejected by the

Court” in its prior opinions. SA12 n.5.


11

Third, Defendants argued that the market previously had not reacted

negatively to disclosures about other conflicts of interest. The District Court

recognized that such a “truth on the market” defense is also not properly

considered at class certification. SA11. Nor, the District Court reasoned, could

Defendants repackage the same argument as the claim that “the market placed no

detectable value” on such disclosures. Id. That characterization itself is not

properly addressed as part of class certification because it “speaks to the

statements’ materiality and not price impact.” Id. But in any event, evidence

about the market’s reaction on “dates where different forms and degrees of

misstatements were revealed” would not establish that none of the price decline

resulted from the disclosure of Defendants’ falsehoods. SA11-12.

Finally, the District Court rejected Defendants’ argument that class

certification was inappropriate because Plaintiffs supposedly had failed to present a

common damages methodology. Defendants argued that the class’s damages

methodology must account for Defendants’ argument that some of the price

decline occurred due to factors other than the corrective disclosure. The District

Court held that argument failed for two reasons. Under the Supreme Court’s

decision in Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013), plaintiffs must

present a measure of “damages stemming from the accepted [class-wide] theory of

liability, and not the extent to which that liability can be proven,” which is instead


12

a common question for the class as a whole. SA13-14. Also, Defendants’

arguments regarding price impact “would not defeat the class’s predominance

because it would affect all class members in the same manner.” SA14.

The District Court accordingly held that class certification was appropriate.

Defendants sought interlocutory review of the class certification order under Rule

23(f).

SUMMARY OF THE ARGUMENT

Defendants present a scattershot attack on every ruling by the District Court.

In fact, the Court correctly certified this case as a class action. There is no dispute

that Plaintiffs, shareholders in Goldman stock, are similarly situated. Nor is there

any dispute that they present the common claim that Defendants’ falsehoods and

omissions maintained the artificially inflated price of Goldman’s stock, then

injured Plaintiffs when the subsequent “corrective disclosures” of the fraud

revealed the truth and caused the stock price to fall. Such a case is ideally suited to

class action treatment.

Defendants’ three principal arguments are not properly presented by this

interlocutory appeal of the District Court’s class certification order, because each

goes to the merits of the case and presents an issue that affects each class member

in common. Even if correct, those arguments would not establish that

individualized issues predominate over common questions—quite the opposite:


13

every one of those arguments applies equally to every claim of every one of the

Plaintiffs. Thus, it is vastly more efficient and sensible to decide those issues in a

single class action, rather than through multiple individual shareholder suits. See

Part I, infra.

1. Defendants argue that the evidence showed there was no “loss causation”—i.e., that the corrective disclosure of Defendants’ misrepresentations and omissions did not cause Goldman’s price to decline. The Supreme Court held in Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804, 131 S. Ct. 2179 (2011) (“Halliburton I”), however, that loss causation is not properly determined on class certification.

2. Defendants next argue that that their falsehoods were immaterial puffery as a matter of the law and, therefore, could not have affected the stock price. The Supreme Court held in Amgen Inc. v. Conn. Retirement Plans & Trust Funds, 133 S. Ct. 1184 (2013), that materiality is a merits defense that is not properly determined on class certification.

3. Defendants finally argue that the market was already aware of the truth regarding Goldman’s conflicts of interest. The District Court correctly held that this argument is simply another means of disputing materiality, which under Amgen is a common issue resolved only on the merits.

Even if this Court were to reach Defendants’ arguments, they lack merit.

Defendants argue that the District Court applied the wrong legal standard, and

misevaluated the evidence, in holding that Defendants had failed to prove that the

corrective disclosures had no “price impact.” That argument principally relies on a

misstatement of the District Court’s holding, which was actually that “Defendants


14

must demonstrate a lack of price impact by a preponderance of the evidence” and

had failed to do so. SA6 & n.3 (collecting cases). Defendants’ legal challenge to

that ruling relies on two short phrases that address a completely different question:

Defendants’ failure to prove that alternative causes were responsible for all—as

opposed to only part—of the decline in the stock price. Moreover, Defendants’

factual assertion that their evidence was uncontested misstates the record, which

includes substantial proof that the market reacted negatively to the disclosure that

Defendants’ representations were false because Goldman had profited greatly at its

clients’ expense. See Part II, infra.

Defendants’ falsehoods and omissions were also material, both alone and in

combination. As the District Court twice found in denying Defendants’ motion to

dismiss and motion for reconsideration, the misrepresentations were specific and

misleading, and they addressed a question of great importance to the marketplace:

Goldman’s policies for avoiding investment strategies that would lead it to profit

from its clients’ losses. Those misrepresentations moreover falsely explained

Goldman’s design of the financial instruments, characterizing them as crafted to

meet client demand rather than for Goldman (and Paulson in Abacus) to profit.

Defendants also ignore Plaintiffs’ well-pleaded allegation that Defendants’

omissions—specifically, their concealment of these conflicts of interests, including

the role of Paulson in selecting the assets—were material. See Part III, infra.


15

Defendants next repeat their argument that the securities laws do not

recognize a claim that material misrepresentations can maintain an artificially

inflated stock price. That theory would immunize every material misrepresentation

that falsely continues to support misinformation already in the marketplace,

because it merely keeps the stock price where it already stood. Three courts of

appeals have correctly rejected Defendants’ argument; no court has accepted it.

Defendants may rebut the presumption of shareholders’ common reliance if the

defendants’ falsehoods or their correction had no price impact, which “affects” the

price of the stock at the time it was purchased. Halliburton Co. v. Erica P. John

Fund, Inc., 134 S. Ct. 2398, 2414 (2014) (“Halliburton II”). See Part IV, infra.

Finally, there is no merit to Defendants’ argument that Plaintiffs’ proof that

they suffered common damages is inadequate under Comcast. In Comcast, the

plaintiffs’ damages report relied on four separate theories of liability, only one of

which proceeded on a class-wide basis. There was no proof that the damages on

that one theory were common to the class. This is a very different case. Plaintiffs’

theory of damages tracks their theory of liability, which the District Court held

could proceed as a class action. Comcast rejects Defendants’ argument that

Plaintiffs’ expert was required to account for Defendants’ theory of the case,

holding that the correct inquiry assumes that the plaintiffs will prevail on their

properly pleaded class-wide theory of liability. See Part V, infra.


16

The District Court’s class certification order should accordingly be affirmed.

ARGUMENT

Defendants complain the District Court’s class certification order subjects

them to “a multi-year investor class seeking billions of dollars in damages.” Brief

for Defendants-Appellants Seeking Reversal of Class Certification Pursuant to

Federal Rule of Civil Procedure 23(f) (“Br.”) 2. But if Defendants wanted to avoid

the prospect of liability to their shareholders for gross misrepresentations and

omissions that have triggered unprecedented fines and governmental enforcement

actions, and that caused Plaintiffs’ losses, they should have told and disclosed the

truth as the law requires. There is no merit to Defendants’ apparent view that,

because they caused such a large injury, this Court should strip their victims of the

only efficient remedy provided by the law, before Plaintiffs have any opportunity

to prove their case.

Plaintiffs’ claim that these corporate defendants misled the market, injuring

those who purchased Goldman’s shares at an artificially inflated price, is perfectly

suited to class action treatment under Rule 23. Those misrepresentations and

omissions affected all these similarly situated shareholders in the same way. If

anything, Defendants’ arguments prove that point. They principally complain that

the corrective disclosures did not cause Plaintiffs’ losses, and that the statements

underlying Plaintiffs’ complaint were immaterial as a matter of law or already


17

known to the entire market. Those arguments go to the merits of the case. They

are common to every member of the class and therefore reinforce the District

Court’s conclusion that common issues predominate.

I. Defendants’ merits defenses are not properly before this Court.

Defendants principally argue that class certification should be denied

because (i) the corrective disclosures did not cause the price of Goldman’s stock to

decline (i.e., that there was no “loss causation”); (ii) their misstatements were

immaterial puffery as a matter of law; and (iii) the truth about Goldman’s conflicts

of interest had already been disclosed to the market. These are classic, well-

recognized defenses on the merits to securities claims. See, e.g., Ganino v.

Citizens Utilities Co., 228 F.3d 154, 167 (2d Cir. 2000) (“The truth-on-the-market

defense is intensely fact-specific and is rarely an appropriate basis for dismissing a

§ 10(b) complaint for failure to plead materiality.”); In re MBIA, Inc., Sec. Litig.,

700 F. Supp. 2d 566, 581 (S.D.N.Y. 2010) (treating a truth-on-the-market defense

as a merits defense); In re Comverse Tech., Inc. Sec. Litig., 543 F. Supp. 2d 134,

150 (E.D.N.Y. 2008) (leaving consideration of a truth-on-the-market defense to

fact-finders); In re WorldCom, Inc. Sec. Litig., 219 F.R.D. 267, 279 (S.D.N.Y.

2003) (declining to examine materiality of misstatements or to determine who will

“prevail on the merits” at class certification stage); Carpenters Pension Trust Fund

of St. Louis v. Barclays PLC, 310 F.R.D. 69, 99-100 (S.D.N.Y. 2015) (“[W]hether


18

plaintiffs will be able to prove loss causation” is a “question[] that go[es] to the

merits and not whether common issues predominate.”). They are accordingly not

properly presented in this interlocutory appeal of the District Court’s class

certification order.

These common issue arguments cannot be recharacterized—as Defendants

argue—as indirect means of disproving “price impact.” On Defendants’ contrary

view, a wide array of factual merits defenses—for example, that the Defendants

did not make the statements at all—are litigable through class certification. Such

defenses would suggest that the stock price did not move in response to

Defendants’ misrepresentations. The consequence of accepting that broad

understanding of the class certification inquiry would be stark, including for the

work of this Court: the recognized limitations on the questions that are resolved

through class certification would be substantially undermined; and all those issues

could be litigated on an interlocutory basis in this Court. This Court’s jurisdiction

under Rule 23(f) is limited to the question of class certification precisely to

maintain the narrow exception to the settled rule that appeals must await a final

judgment.

Nor is there any need to mutate these merits defenses into questions of class

certification in order to permit the early dismissal of meritless suits. Defendants

can litigate them early in the case through a motion to dismiss, prior to class


19

certification. This case is a perfect example. Even before considering class

certification, the District Court gave thorough consideration to Defendants’ motion

to dismiss, rejecting their merits argument that their misrepresentations and

omissions were immaterial. See supra at 6-7. Defendants all but ignore those

rulings and now seek to litigate that exact common merits question in this Court,

candidly arguing that the District Court should have “den[ied] class certification

for the same reasons this action should have been dismissed in the first place:

because Defendants’ general statements challenged here could not have impacted

Goldman Sachs’ stock price as a matter of law.” Br. 37 (emphasis added).

A. “Loss causation” is not properly addressed on class certification.

Defendants argue that, as a factual matter, their falsehoods did not have any

“price impact.” But they do not attempt to prove that point directly. “Price

impact” refers to the effect on the stock price at the time plaintiffs purchased their

shares. Halliburton I, 131 S. Ct. at 2187. Defendants’ evidence instead relates to a

different question: “loss causation”—viz., whether the subsequent corrective

disclosures caused the later decline in Goldman’s stock price. See Br. 13-14.

That argument is not properly before this Court. The Supreme Court held in

Halliburton I that “loss causation” is not properly considered as part of the class

certification inquiry. In that case, the Fifth Circuit held that a class could not be

certified unless the plaintiffs first proved that the corrective disclosures caused the


20

decline in the stock price that allegedly was the source of plaintiffs’ losses. The

Supreme Court unanimously reversed. It explained that loss causation did not

rebut the Basic presumption that investors relied in common on the defendants’

misrepresentations because “[l]oss causation addresses a matter different from

whether an investor relied on a misrepresentation, presumptively or otherwise,

when buying or selling a stock.” Halliburton I, 131 S. Ct. at 2186. “The fact that a

subsequent loss may have been caused by factors other than the revelation of a

misrepresentation has nothing to do with whether an investor relied on the

misrepresentation in the first place, either directly or presumptively through the

fraud-on-the-market theory.” Id. The Court contrasted “price impact”—the front-

end effect of the misrepresentations on the stock price at the time it was purchased

by the plaintiffs—which is relevant to class certification, because it goes to the

premise of the Basic presumption that purchasers rely on material information in

the marketplace.

Defendants’ argument falls squarely within the holding of Halliburton I.

They assert that the price of Goldman’s stock fell for reasons other than the

disclosure of Defendants’ fraud—in particular, because the market was concerned

with the cost of governmental investigations. Br. 18-20. But as the Supreme Court

explained, even if that is so, it does not disprove that the misrepresentations and


21

omissions affected the stock price in the first place and thus does not negate the

Basic presumption that the shareholders relied in common.

B. “Materiality” is not properly addressed on class certification.

Defendants next argue that their misrepresentations and omissions were

immaterial puffery as a matter of law. That argument is precluded by the Supreme

Court’s decision in Amgen. The square, unambiguous holding of that case is that

materiality is not properly addressed at class certification. 133 S. Ct. at 1191. The

Court reasoned that materiality is common to the class as a whole—defeating the

claim of every class member—so it would not defeat the Basic presumption of

reliance by each class member on the efficiency of the market and would not

suggest that the claims of the separate class members were individualized. Id. at

1196. That reasoning holds true no matter whether materiality is considered as a

matter of pleading (which it almost always would be) or factual proof.

Defendants argue to the contrary that “Amgen expressly recognized that

‘[b]ecause immaterial information, by definition, does not affect market price, it

cannot be relied upon indirectly by investors who, as the fraud-on-the-market

theory presumes, rely on the market price’s integrity.’” Br. 39 (quoting 133 S. Ct.

at 1195). That is true, but misses the far more important point: the Supreme Court

recognized that fact in the course of rejecting Defendants’ precise argument. The

Court specifically accepted that materiality “is an essential predicate of [Basic’s]


22

fraud-on-the-market theory,” Amgen, 133 S. Ct. at 1195 (emphasis added), then

held that it was not to be addressed at class certification, id. at 1196.

Defendants respond that Halliburton II later permitted defendants to directly

disprove “price impact” at class certification—an issue that is equally common to

the class. But the Supreme Court explained that “price impact” was an exception

to the ordinary rule because that issue is already squarely litigated at class

certification through the Basic presumption. Halliburton II, 134 S. Ct. at 2412. It

made no sense, the Court reasoned, to permit plaintiffs to allege price impact

indirectly but to forbid the defendants from disproving price impact directly. The

Court in Halliburton II devoted an entire section to reaffirming and distinguishing

Amgen’s holding that other merits defenses common to the class—including

particularly materiality—may not be litigated through the back door of class

certification. Id. at 2416-17. Halliburton II thus holds that materiality “should be

left to the merits stage”—indeed, “wholly confined to the merits stage.” 134 S. Ct.

at 2416.

Defendants thus necessarily ask this Court to underrule Amgen by adopting

the exact argument the Supreme Court rejected: that because immaterial

information cannot affect the price of a stock as a matter of law, it necessarily

proves that their misrepresentations and omissions could not have affected

Goldman’s stock price as a matter of fact. See, e.g., Aranaz v. Catalyst Pharm.


23

Partners, 302 F.R.D. 657, 670 (S.D. Fla. 2014) (“[W]hile the presumption of price

impact may be rebutted at the class certification stage by directly showing an

absence of price impact, it may not be indirectly rebutted by showing that the

misrepresentation was immaterial.”).

C. Defendants offer no basis to resolve on class certification their merits “truth on the market” defense.

Defendants argue next that “the market learned on dozens of dates—prior to

Plaintiffs’ purported ‘corrective’ disclosure dates—about Goldman Sachs’ alleged

conflicts of interest, including alleged conflicts with investors in the CDOs.” Br.

15. The District Court held that this “truth on the market” defense is not properly

adjudicated at class certification. SA11 (citing Amgen, 133 S. Ct. at 1204).

Defendants cannot and do not dispute that legal rule. Indeed, the Supreme Court in

Amgen recognized that proof that the market already knew the truth is itself merely

an indirect means of proving that the defendants’ statements were immaterial. 133

S. Ct. at 1203.

In this Court, Defendants present a straightforward invocation of this Court’s

precedent addressing the “truth on the market” defense: “Plaintiffs had to

demonstrate that the price declines on their ‘corrective disclosure’ dates were

caused by the market’s first knowledge that Defendants’ general statements about

conflicts controls and business principles were untrue.” Br. 51 (citing In re

Omnicom Grp., Inc. Sec. Litig., 597 F.3d 501, 501 (2d Cir. 2010)); see also id.


24

(“Plaintiffs made no effort to establish that the news of enforcement activity on

their alleged ‘corrective disclosure’ dates represented the market’s first knowledge

of alleged Goldman Sachs client conflicts or even CDO-related client conflicts.”).

That is precisely the merits argument that is common to the class as a whole and

incontestably is not adjudicated as part of the class certification inquiry. See, e.g.,

Conn. Ret. Plans & Trust Funds v. Amgen, 660 F.3d 1170, 1177 (9th Cir. 2011),

aff’d, 133 S. Ct. 1184, 1203 (2013).

Defendants briefly attempt to repackage the identical claim in service of

their argument (just discussed) that the corrective disclosures could not have had a

price impact as a matter of law. Br. 47. Their logic is that because the market did

not previously react to similar disclosures, the actual corrective disclosures must

have been immaterial, meaning that the price decline must (by process of

elimination) have been attributable to the markets’ reaction to the cost and

distraction of the governmental investigations. Id.

Defendants’ attempt to recharacterize their argument as one about the

materiality of their statements fails because it is squarely precluded by Amgen’s

holding that materiality itself is not a question to be resolved on class certification.

See supra at 21-23. The District Court correctly explained that Defendants’ theory

“speaks to the statements’ materiality and not price impact, and accordingly the

Court will not consider this information at the current stage of the litigation.”


25

SA11. As noted, Amgen itself explicitly recognizes that the “truth on the market”

defense is just an indirect way of disproving materiality—precisely Defendants’

argument in this Court. 133 S. Ct. at 1203; see, e.g., Aranaz, 302 F.R.D. at 671

(“[A] truth-on-the-market defense may not be used at the class certification stage

to prove an absence of price impact so as to show a lack of predominance because

it goes to materiality; as previously stated, the truth’s presence on the market

renders the alleged misrepresentation immaterial.”).

Defendants’ loss causation, materiality, and truth-on-the-market defenses are

accordingly not properly presented by this Rule 23(f) appeal.

II. The District Court correctly held that a defendant may defeat the Basic presumption by establishing the absence of price impact by a preponderance of evidence—and correctly concluded that Defendants here failed to do so.

Defendants argue that the District Court erred by supposedly “creating a

virtually insurmountable legal standard that to rebut Basic’s fraud-on-the-market

presumption under Halliburton II, Defendants must ‘demonstrate a complete

absence of price impact’ with ‘conclusive evidence.’” Br. 2 (quoting SA13)

(emphasis in Br.); see also id. 6, 24. That argument rests on a serious

mischaracterization of the ruling below, which in fact correctly held that (i)

Defendants may rebut the Basic presumption by a preponderance of the evidence,

but (ii) that rebuttal must explain the entirety of the effect on the price, not merely

part of it.


26

A. Defendants mischaracterize the District Court’s holding.

The District Court’s holding is straightforward, clear, and unambiguous:

“Defendants must demonstrate a lack of price impact by a preponderance of the

evidence.” SA6 n.3. Defendants address that square holding only in one sentence

in a late footnote in their brief. See Br. 33-34 n.15. Even that terse, buried

acknowledgment omits the District Court’s important citation to still other cases

correctly applying the preponderance standard. See SA6 n.3 (citing Aranaz, 302

F.R.D. at 670 (citing, in turn, Basic, 485 U.S. at 248); In re Moody’s Corp. Sec.

Litig., 274 F.R.D. 480, 490 (S.D.N.Y. 2011)). Defendants also omit that the

District Court directly tied its correct statement of the law to its recognition of how

the Basic “presumption . . . is rebuttable.” SA6.

Defendants nonetheless make the difficult argument that the District Court

ignored its own correct understanding of the law, instead “creat[ing] its own

standard requiring Defendants to rule out any possibility of price impact with

‘conclusive evidence.’” Br. 33-34 n.15. It would be surprising, and outside

ordinary experience, for the District Court to apply a legal rule that is drastically

different from the one it announced, which is supported by a consensus of

authority and all the cases on which it expressly relied. Defendants give no reason

to believe that the experienced District Judge was either dishonest or forgot the law

that the Court had just stated so plainly and that every other court applies.


27

Defendants’ contrary argument depends on misstating the ruling below by

wrenching out of context two snippets from the District Court’s thorough

opinion—neither amounting even to a complete sentence and neither in any tension

with the preponderance standard. They quote the District Court’s reference to “a

complete lack of price impact” (SA10-11) and “conclusive evidence that no link

exists between the price decline and misrepresentation” (SA12-13). But

Defendants omit any discussion of the actual argument the District Court was

discussing, which makes those statements by the District Court entirely correct. In

fact, the two quotations refer to what fact Defendants must prove (i.e., that there

was no price impact at all), not the quantum of evidence by which they must prove

it (i.e., a preponderance of the evidence).

Below, Plaintiffs submitted an expert report showing that Defendants’

falsehoods and omissions had a substantial effect on Goldman’s stock price.

JA437. Defendants then opposed class certification with expert reports claiming

that the subsequent price decline actually resulted from other factors, such as the

market’s conclusion that any governmental investigation would be costly and time

consuming (JA4967-5420)—an argument that they repeat in this Court. See infra

Part II.C. Plaintiffs in turn replied that this was an easy case at the certification

stage because, even if some of the price decline were attributable to those

considerations, Defendants had nonetheless failed to prove by a preponderance of


28

the evidence the relevant fact: that those alternative considerations explained all of

the decrease in the price. As the District Court recognized, Defendants must prove

the absence of any price impact (the fact) by a preponderance of the evidence (the

quantum of proof). See SA12 (citing Aranaz, 302 F.R.D. at 672 (“Even assuming

arguendo that [an important company announcement] was substantially more

important than the alleged misrepresentation . . . , it does not follow that the

misrepresentation did not account for any of the 42% spike in stock price.”)).”

A hypothetical illustrates the point. Imagine that in response to the

plaintiffs’ allegation that misstatements caused a 10% increase in the stock price,

the defendants argued that 6% was instead attributable to other factors. In that

hypothetical, the defendants obviously would not have proved an absence of price

impact by a preponderance of the evidence—the remaining 4% increase would

admittedly still be attributable to the fraud.

The District Court held that “conclusive evidence that no link exists between

the price decline and misrepresentation” would indeed “sever the link” between the

shareholders’ purchases and the market price, rebutting the Basic presumption

regarding reliance. SA13. By contrast, wading into an attribution of causation

other than Defendants’ showing of a 100% separate intervening event broaches the

common issue of loss causation—which Halliburton I precludes.


29

In this case, the District Court considered the competing expert submissions

and concluded that Defendants had failed to prove that their misrepresentations and

omissions did not affect Goldman’s stock price for just that reason. It explained:

But whether or not the market was focused to some degree on the impact the enforcement actions would have on the stock price [as Defendants’ experts argued] does not mean that no decline in stock price is attributable to the revelation of misstatements. Dr. Gompers’ analysis fails to demonstrate that no part of the decline was caused by the corrective disclosure. Likewise, while Dr. Choi’s report focuses on the fact that the announcements of enforcement actions would cause a level of decline, Dr. Choi fails to demonstrate that it would cause the entirety of the decline that occurred here.

SA12. Of particular note, the District Court in this discussion once again required

Defendants to “demonstrate” the absence of price impact—fully consistent with its

express recognition of the “preponderance” standard—rather than disprove it

“conclusively” as Defendants contend. Id.

Defendants ignore the District Court’s actual ruling, plucking snippets of its

discussion of Defendants’ distinct obligation to disprove price impact, as if the

Court were instead rejecting the preponderance standard of proof it had announced.

Here is the actual context for those statements, underlining the language that

Defendants strip out of context:

The Court determines that Defendants have failed to demonstrate a complete lack of price impact. Defendants cannot show that the total decline in the stock price on the corrective disclosure dates is attributable simply to


30

the market reaction to the announcement of enforcement actions and not to the revelation to the market that Goldman had made material misstatements about its conflicts of interest policies and business practices.

SA10-11.

Defendants’ attempt to demonstrate a lack of price impact merely marshals evidence which suggests a price decline for an alternate reason, but does not provide conclusive evidence that no link exists between the price decline and the misrepresentation.

SA12-13.

The District Court thus correctly concluded that Defendants must prove an

absence of price impact by a preponderance of the evidence. The language quoted

by Defendants merely refers to the District Court’s conclusion that Defendants had

failed to do so, at the least, with respect to the entire decline in the price of

Goldman’s stock. There was no error.

B. The District Court’s preponderance standard is correct.

The District Court’s adoption of the preponderance standard is consistent

with rulings of other courts, which Defendants ignore, and which correctly

understand the Supreme Court’s precedents to require defendants to rebut the Basic

presumption by a preponderance of the evidence. See, e.g., In re DVI, Inc. Sec.

Litig., 639 F.3d 623, 638 (3d Cir. 2011); Abell v. Potomac Ins. Co., 858 F.2d 1104,

1120 (5th Cir. 1988), vacated in part on other grounds sub nom. Fryar v. Abell,

492 U.S. 914 (1989); Thorpe v. Walter Inv. Mgmt., Corp., No. 1:14-cv-20880-UU,

2016 U.S. Dist. LEXIS 33637, at *42 (S.D. Fla. Mar. 16, 2016); Barclays, 310


31

F.R.D. at 97; City of Sterling Heights Gen. Emps.’ Ret. Sys. v. Prudential Fin.,

Inc., No. 12-5275, 2015 WL 5097883, at *12 (D.N.J. Aug. 31, 2015); Aranaz, 302

F.R.D. at 670; Wallace v. Intralinks, 302 F.R.D. 310, 317-18 (S.D.N.Y. 2014);

McIntire v. China MediaExpress Holdings, Inc., 38 F. Supp. 3d 415, 434

(S.D.N.Y. 2014); In re Sadia, S.A. Sec. Litig., 269 F.R.D. 298, 316 (S.D.N.Y.

2010); Fogarazzo v. Lehman Bros., Inc., 263 F.R.D. 90, 106 (S.D.N.Y. 2009); see

also, e.g., Fifth Circuit Pattern Jury Instructions § 7.1, at 75 (2014); Ninth Circuit

Manual of Jury Instructions: Civil § 18.6, at 431 (2007). See generally Strougo v.

Barclays PLC, No. 14-cv-5797, 2016 WL 413108, at *15 n.110 (S.D.N.Y. 2016)

(collecting authorities).

Defendants nonetheless argue that even the preponderance standard is far

too strict. Lacking any authority adopting their view in the lower courts, they

reach back almost three decades to what they characterize as “Basic’s holding that

‘any showing that severs the link between the alleged misrepresentation and . . . the

price received (or paid) by the plaintiff . . . will be sufficient to rebut the

presumption of reliance.” Br. 6 (quoting Halliburton II, 134 S. Ct. at 2415)

(emphasis in Br.) (ellipses in Halliburton II). This is yet another attempt to

substitute misplaced italics for actual precedent and argument.

The critical language from Basic is not the phrase “any showing” but the

Supreme Court’s explanation of what must be shown: the defendants’ proof must


32

“sever the link” between the investors’ decision to purchase and the stock price.

This is just another way of saying that they must rebut the presumption of price

impact. Though Basic was decided decades ago, no court has held—as Defendants

seemingly advocate—that “any showing” of any kind is sufficient to rebut the

presumption of price impact. If such a whisker-thin requirement were the law, the

presumption would be pointless and amount to nothing at all in practice—literally

“anything” would rebut it.

The Supreme Court’s reference to “any showing” addresses a different issue.

Halliburton II holds that defendants may rebut the presumption of common

reliance by showing directly, on a misrepresentation-by-misrepresentation basis,

that there was no price impact. See Halliburton II, 134 S. Ct. at 2415-16; see also

Erica P. John Fund, Inc. v. Halliburton Co., 309 F.R.D. 251 (N.D. Tex. 2015)

(“Halliburton Remand”) (analyzing each misstatement on an individual basis for

purposes of price impact). The basis for Basic’s presumption is the fact that

investors rely on the fact that an efficient market incorporates public material

information. In any given case, the defendants may prove the presumption is

inapplicable indirectly by showing that the stock did not trade on an efficient

market. Basic, 485 U.S. at 248. Or they may defeat the presumption directly by

showing that the particular misrepresentations at issue did not affect the stock price

at the time the plaintiffs bought it. Halliburton II, 134 S. Ct. at 2417. Halliburton


33

II’s holding is that defendants may produce “direct evidence” of a lack of price

impact from their misstatements. Id. No court has accepted Defendants’ radical

misreading of the Supreme Court’s precedents to hold that “any” quantum of proof

is sufficient to rebut the Basic presumption.

No different result follows from the Supreme Court’s passing “see also”

citation in Basic to Federal Rule of Evidence 301. After Basic, this Court held that

the “burden of showing that there was no price impact is properly placed on

defendants.” In re Salomon Analyst Metromedia Litig., 544 F.3d 474, 483 (2d Cir.

2008). No subsequent ruling undermines that holding. As Defendants grudgingly

acknowledge, in the decades since Basic was decided (including after Halliburton

II), other courts have similarly rejected this argument and applied a preponderance

standard; none has accepted it. Br. 30 n.11; see supra at 30-31. Basic did not hold

that Rule 301 established the applicable burdens of proof and production. Every

other subsequent Supreme Court ruling involving Basic, including Halliburton

II—in which the defendants similarly relied on Rule 301 (Brief for Petitioners,

Halliburton II, 2013 WL 6907610, at *55-56)—omitted any reference to that Rule

altogether.

Defendants’ only argument is that Rule 301 by its terms applies to every

presumption in federal court. Br. 30. But that is wrong. An obvious example is

the presumption of reliance in Rule 10b-5 cases involving material omissions,


34

which is rebutted by a preponderance of the evidence. See DuPont v. Brady, 828

F.2d 75, 78 (2d Cir. 1987). Courts have repeatedly rejected the argument that Rule

301 uniformly governs presumptions and burden-shifting; there are numerous

contexts in which it does not apply. See, e.g., City of Boston v. SS Texaco Texas,

773 F.2d 1396, 1398 (1st Cir. 1985); American Coal Co. v. Benefits Review Bd.,

738 F.2d 387 (10th Cir. 1984); Alabama By-Products Corp. v. Killingsworth, 733

F.2d 1511, 1513 (11th Cir. 1984); James v. River Parishes Co., 686 F.2d 1129,

1133 (5th Cir. 1982); Plough, Inc. v. Mason & Dixon Lines, 630 F.2d 468, 472 (6th

Cir. 1980); N.L.R.B. v. Tahoe Nugget, Inc., 584 F.2d 293, 297 (9th Cir. 1978). See

also, e.g., Gurary v. Nu-Tech Bio-Med, Inc., 303 F.3d 212 (2d Cir. 2002).

It specifically would make no sense to treat Basic as recognizing a

presumption that could be burst by any contrary evidence. Basic’s “fraud on the

market” doctrine is “a substantive doctrine of securities-fraud law,” Amgen, 133 S.

Ct. at 1193, not one created under Rule 301, which by its terms applies only when

not provided by statute, see Fed. R. Evid. 301. Basic recognizes an economic

truism—that stock prices are affected when certain premises exist: public

information is material and the relevant market is efficient. The presumption

applies at class certification only if the plaintiffs prove the market’s efficiency.

Basic, 485 U.S. at 248 n.27. The District Court in this case thus found that the

market for Goldman stock was efficient under the well-established criteria


35

summarized in Cammer v. Bloom, 711 F. Supp. 1264, 1283-87 (D.N.J. 1989).

SA10; see supra at 8. Some weak quantum of evidence that, for example, a

particular market was not perfectly efficient would not overcome that proof and

require each shareholder to separately prove his or her individual reliance on the

defendants’ misstatements.

C. Defendants’ “loss causation” evidence did not prove an absence of price impact by a preponderance of the evidence.

Even if this Court considers Defendants’ loss causation argument that the

corrective disclosures did not reduce the price of Goldman’s stock as an indirect

means of disproving price impact, but see supra at 19-21, that argument still fails.

Preliminarily, it is a non sequitur. Defendants’ theory of alternative cause is that

Goldman’s stock price declined because the market feared the governmental

investigations and potential settlements. But those are the direct and inevitable

consequence of Defendants’ misstatements and omissions. This is not a case in

which an investigation arises from conduct that is per se unlawful and that would

have occurred even if customers and shareholders had been told the truth. Here, if

Defendants had told the truth, the investigations would never have occurred

because Defendants would have disclosed the conflicts of interest and acted

lawfully. Defendants have never explained why they are immune from liability for

the resulting precipitous decline in Goldman’s stock price, and no explanation is

apparent.


36

Defendants’ argument in any event fails as a matter of fact. They contend

that the record on this issue was entirely one-sided—supposedly composed only of

their “unrebutted evidence” (Br. 9)—so that they effectively prevail by default.

The District Court correctly rejected Defendants’ argument based on the

record. Defendants rely on the two expert reports, discussed above, purporting to

identify other causes for the decline in Goldman’s stock price. See supra at 10, 29.

But as the District Court found, even giving those submissions their full worth,

they would prove by a preponderance only that part of the price declined owed to

those other factors.

Further, even though it was not their burden to do so, Plaintiffs submitted

significant evidence that precludes any finding that Defendants carried their burden

of proof. Defendants omit that, as the District Court correctly recognized, Plaintiffs

submitted a detailed evidentiary response to Defendants’ experts, including

through the rebuttal report of Plaintiffs’ expert Dr. Finnerty, who

argues that Dr. Gompers failed to show the absence of price impact because he relied on Dr. Choi’s allegedly incomplete opinion; failed to consider contemporaneous market commentary discussing Goldman’s conflicts of interest and breaches of business practices; and failed to consider that the extent of Goldman’s misconduct was not known to investors until April 16, 2010. Id. ¶¶ 176-84. Dr. Finnerty also asserts that Dr. Choi did not ‘investigate the price impact of the revelation of Goldman’s fraudulent conduct on the three alleged corrective disclosure dates,’ and that he was ‘unable to separate the stock price impact of the announcement of


37

any of the three regulatory actions from the impact of the disclosure of the underlying allegedly fraudulent behavior.’ Id. ¶ 188.

SA9-10; see JA437 (opening report), JA5439 (rebuttal report).

Plaintiffs also presented substantial evidence that the market reaction was

due in significant part to investors’ concerns about the underlying misconduct

revealed (and not simply the prospect of an SEC enforcement action). For

example, Plaintiffs pointed to market commentary expressing grave concern about

the conflicts of interests and improper business practices disclosed:

“It’s hard to imagine the damage that these developments have done already to Goldman Sachs’s reputation. The company has always maintained a public position that the business of investment banking depends on trust, integrity and putting clients’ interests first.” JA5702 (The Wall Street Journal, Apr. 21, 2010) (emphasis added).

“In its corporate profile, the company says its culture distinguishes it from other firms and ‘helps to make us a magnet for talent.’ That culture is summed up in the firm’s ‘14 Business Principles,’ which preach an almost militant philosophy of putting the client before the firm. Now it’s that very philosophy that has been questioned by the government.” JA5696 (The Associated Press, Apr. 18, 2010) (emphasis added).

“The product [Abacus] was new and complex, but the deception and conflicts are old and simple. . . . Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.” JA5699 (Chicago Tribune, Apr. 17, 2010) (quoting Director of the SEC


38

Division of Enforcement, Robert Khuzami) (emphasis added).

In addition, Defendants’ disclosure expert, Mr. Porten, admitted that Defendants’

failure to adequately manage Goldman’s conflicts of interest and failure to

preserve its reputation would have price impact. See JA5712-13, 5716 (Porten Tr.

at 199:23-200:6; 203:5-16; and 303:21-304:17).

Moreover, the best evidence of a statement’s effect on stock prices is often

how the market reacts when the truth is disclosed. See, e.g., Halliburton Remand,

309 F.R.D. at 262. Defendants do not dispute that Goldman’s stock price dropped

significantly in response to the corrective disclosures on April 16, April 30, and

June 10, 2010. See Br. 18; JA468-69, 481-82, 484 (Finnerty Decl. ¶¶ 81, 115,

119); JA5498-5512 (Finnerty Reb. Decl. ¶¶ 176-206). In fact, Defendants’ own

expert found statistically significant stock declines due to Goldman-specific news

on those dates. See JA5001-02, 5008, 5011-12 (Gompers Decl. ¶¶ 62, 64, 79, 89);

JA 5664-68 (Gompers Tr. 284:22-298:2).

Such proof is sufficient to establish price impact in itself—or at the least, to

preclude dismissal for lack of price impact. See, e.g., Halliburton II, 134 S. Ct. at

2414-15 (price impact can be measured by looking at market’s reaction to

corrective disclosure); Silverman v. Motorola, Inc., 798 F. Supp. 2d 954, 976 (N.D.

Ill. 2011); City of Livonia Emp. Ret. Sys. v. Wyeth, 284 F.R.D. 173, 182 (S.D.N.Y.

2012).


39

The District Court thus correctly found that, in light of Plaintiffs’

submissions, Defendants could not negate the entire decline in the price that

occurred in response to the corrective disclosures. See supra at 10, 28. That

conclusion makes perfect sense. If the market cared about the cost of a

governmental investigation (as Defendants argue), it surely also cared about the

accuracy of the corrective disclosures and the prospect that the company would

actually be held liable for Defendants’ misstatements. In that respect, and given

Plaintiffs’ expert reports, the District Court correctly recognized that the “link is

obvious.” SA12.

III. Defendants’ falsehoods and omissions were material.

Even if this Court considers Defendants’ merits argument that their

misrepresentations were immaterial puffery, but see supra at 21-23, the District

Court correctly held that Defendants’ conduct cannot be deemed immaterial as a

matter of law because their misrepresentations and omissions were not “so

obviously unimportant to a reasonable investor that reasonable minds could not

differ on the question of their importance.” ECA, Local 134 IBEW Joint Pension

Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 197 (2d Cir. 2009).

Defendants’ statements and omissions concealed Goldman’s CDO fraud by

emphasizing that Goldman was attentive to resolving conflicts of interest and was

focused on client service, including in the specific context of the CDOs. The


40

subsequent revelation of Goldman’s fraud—which necessarily debunked

Defendants’ representations—had a devastating impact on Goldman’s reputation

and stock price.

Defendants counter that “[n]o reasonable investor could construe the

challenged statements as guarantees that Goldman Sachs would always

successfully resolve client conflicts, or that no employee would ever violate the

Firm’s business principles.” Br. 35 n.17 (emphasis added). Defendants thus

believe that they are free to make bald-faced misrepresentations to the market

about important business practices so long as they avoid ironclad promises that by

their terms apply to every transaction in which they engage.

That is an impossibly high bar to liability, and foreign to settled principles of

materiality. When a party makes statements about its business practices,

reputation, and integrity, those statements are actionable if they contain specific

falsehoods, or if an omission makes the statement misleading. See City of Pontiac

Policemen’s & Firemen’s Ret. Sys. v. UBS AG, 752 F.3d 173, 185 (2d Cir. 2014).

Even relatively general statements are actionable if they “emphasize [the

company’s] reputation for integrity or ethical conduct as central to its financial

condition,” or “are clearly designed to distinguish the company” from its

competitors. Ind. Pub. Ret. Syst. v. SAIC, 818 F.3d 85, 98 (2d Cir. 2016). Some

indicia of materiality are if a misstatement “conceal[s] an unlawful transaction,” or


41

is significant “in relation to the company’s operations.” ECA, 553 F.3d at 198.

Defendants’ statements and omissions meet that standard.

First, the statements regarding conflicts of interest were specific, significant,

and concealed transactions that were (because of the undisclosed conflicts)

unlawful. For instance, Goldman’s annual reports described exactly the conflict at

issue here, i.e., “situations where our services to a particular client or our own

proprietary investments or other interests conflict, or are perceived to conflict, with

the interests of another client,” and then insisted that it had “extensive procedures

and controls” designed to identify and address such conflicts. JA81 ¶ 134. The

clear implication is that Goldman was not knowingly creating such conflicts by

permitting Paulson secretly to structure Abacus, and that it was not marketing long

positions in Hudson, Anderson, and Timberwolf I to clients while itself holding

massive short positions in those same CDOs. Indeed, Goldman told its CDO

clients the exact opposite of the truth: that its incentives were “aligned” with theirs

because it held long positions in the equity tranches. JA94 ¶ 169.

As the District Court recognized, Goldman thus also made material

omissions “regarding Paulson’s role in the asset selection process” for Abacus, as

well as its own conduct in relation to “the Hudson, Anderson, and Timberwolf I

transactions” because, having represented that it had a long interest in the CDOs, it

was required to disclose its short position. See JA374-76 (citing SEC v. Goldman


42

Sachs & Co., 790 F. Supp. 2d 147, 162-63 (S.D.N.Y. 2011)); accord Caiola v.

Citibank, N.A., 295 F.3d 312, 331 (2d Cir. 2002) (once defendant spoke about a

topic, “it had a duty to be both accurate and complete”). These omissions,

combined with Defendants’ statements, substantially altered the total mix of

information about how Goldman was conducting its business. See SAIC, 818 F.3d

at 96 (holding that SAIC’s failure to disclose known fraud was actionable, and

rejecting the argument that the fraud related only to a small part of SAIC’s

business).

As evidenced by the historically large penalty that Goldman paid to the

government, the CDO fraud was material to the company’s operations as a whole.

But no Goldman investor who believed Defendants’ statements regarding conflicts

of interest could have suspected that the fraud was even occurring, and so

Defendants’ statements and omissions were material as well. Thus, the District

Court correctly held that Defendants’ “statements regarding conflicts of interest

alone” gave rise to “a viable claim.” JA394.

Second, Defendants made additional specific misrepresentations to

rationalize the creation of synthetic CDOs, insisting that Goldman created them in

order to satisfy “client demand” for long exposure when in truth they were created

to provide short opportunities for Paulson and for Goldman itself. JA76, 83

¶¶ 124, 140-41. Thus, Defendants again obscured how Goldman was making its


43

money: not from serving or aligning with its clients, but by profiting at those

clients’ expense.

Third, Defendants’ statements about Goldman’s focus on clients are

actionable because those statements “emphasize[d Goldman’s] reputation for

integrity or ethical conduct as central to its financial condition.” SAIC, 818 F.3d at

98 (emphasis added). Lloyd Blankfein stated that the “client franchise” is “the

lifeblood of Goldman Sachs.” JA75, 87 ¶¶ 121, 154. He testified before Congress

that “if our clients believe that we don’t deserve their trust we cannot survive.”

JA89 ¶ 155. David Viniar stated that “the basic reason for our success, is our

extraordinary focus on our clients.” JA87 ¶ 154. And in Goldman’s annual

reports, the company repeated that if its reputation was diminished it would be

“most difficult to restore,” and that it was therefore “dedicated to complying fully

with the letter and spirit of the laws, rules and ethical principles that govern us. Our

continued success depends upon unswerving adherence to this standard.” Id. These

statements assured investors that Goldman had not been deliberately sabotaging

the interests of a large number of its clients in order to benefit Paulson and itself. In

context, these statements were even more suggestive: as the contagion from the

failure of the subprime mortgage market began to spread, Goldman initially fared

better than most other banks precisely because of its stellar reputation—and its


44

stock fell especially hard when it became clear that Goldman’s reputation was

buttressed by misrepresentations. JA89-91, 45-46 ¶¶ 156-57, 29-30.

Defendants liken these statements to nonactionable statements from other

cases. But they elide critical distinctions. Unlike the general statements about

prudent risk management in ECA, for example, the complaint does not allege

“mere mismanagement”—it alleges concealment of fraud. Compare JA377 with

ECA, 553 F.3d at 206; see also SAIC, 818 F.3d at 96 (recognizing that such

concealment is actionable). While investors could never plausibly interpret an

investment bank’s bragging about its risk-management skills as a guarantee that it

will never make a bad investment, they are entitled to believe that when a bank

claims that it will serve its clients faithfully and with a focus on conflicts of

interest, it will not market toxic assets to those clients while concealing its identity

as the ultimate short party. Any other result would transform “[w]ords such as

‘honesty,’ ‘integrity,’ and ‘fair dealing’” into “mere shibboleths.” JA373 n.8.

Moreover, unlike the statements found nonactionable in UBS, 752 F.3d at

183, Defendants’ statements were not “explicitly aspirational,” but instead

“involve[d] ‘misrepresentations of existing facts,’” JA377—describing a set of

policies designed to address conflicts of interest when Goldman in fact “had an

entirely different undisclosed policy,” UBS, 752 F.3d at 186 n.58, of selling

“financial products to clients despite clear and egregious conflicts,” JA393.


45

Indeed, despite the Defendants’ statements to the contrary, Goldman had

essentially no conflict management applicable to those CDOs. Cf. UBS, 752 F.3d

at 186 n.58 (explaining that claims to have adequate risk management would be

actionable if the company actually had “no risk diversification at all”).

This case also is nothing like the non-precedential decisions in Boca Raton

Firefighters & Police Pension Fund v. Bahash, 506 F. App’x 32 (2d Cir. 2012),

and Reese v. Bahash, 574 F. App’x 21 (2d Cir. 2014). There, the rating agency’s

investors knew that the agency was paid by issuers and would receive input from

issuers, and so its general statements regarding conflicts of interest could not be

construed as a guarantee that its ratings would be free from issuer influence. In

other words, the issuers were the rating agency’s clients, and investors understood

that the agency would serve the clients. Here, however, Goldman betrayed its

clients by knowingly selling them toxic assets, and nothing about its business

model made such a conflict natural or inevitable.

Defendants also indirectly challenge materiality by contesting loss causation.

They argue that Goldman’s tendency to betray its clients was publicized before the

corrective disclosures, such that the market price already accounted for it. Br. 52.

Instead, they contend that it was the fact that the government had filed fraud

charges against Goldman on the corrective disclosure dates that triggered the stock

price declines. But even if the Court agrees with Defendants that the


46

announcement of the enforcement actions also had an effect on Goldman’s stock

price, Defendants cannot argue with a straight face that the evidence in the record

proves no effect on Goldman’s stock price from the damage to its reputation that

resulted from the corrective disclosures.

That is because the prior disclosures Defendants cite were substantially less

complete and credible than the corrective disclosures, and they included detailed

false denials from Goldman itself. For example, Defendants place great weight on

a December 23, 2009 New York Times article, which alluded to the CDO fraud. But

in that article, a Goldman spokesman continued to state that the CDOs “were made

to satisfy client demand for such products,” and that “clients knew Goldman might

be betting against mortgages linked to the securities.” JA352. Moreover, the

article never mentioned the key fact about Abacus: that the offering did not

disclose Paulson’s role in selecting the securities.2 Instead, the article stated that

“investors could have rejected the C.D.O. if they did not like the assets.” JA353.

And it falsely stated that investors in the Hudson CDO “were not misled because

they were advised that Goldman was placing large bets against the securities.”

JA354. The other disclosures Defendants cite are similarly either equivocal or not

from sources that would be credible enough to move the market. An efficient

2 Defendants also cite a New York Times book review that does mention Paulson’s role in selecting securities. Br. 52. But that book review is not a journalistic review of the facts; it contains no sourcing; and it never mentions any CDO by name. The book reviewed lionizes Paulson.


47

market incorporating this information therefore could not confidently conclude that

Goldman had committed fraud on the scale it had, or betrayed its clients to the

degree it had. The corrective disclosures, by contrast, were unequivocal, detailed,

and credible—and therefore far more damning to Goldman’s statements regarding

conflicts and client service.

IV. Defendants’ misconduct is not immunized by the fact that it maintained the inflated price of Goldman’s stock.

Defendants argue that the class may not be certified as a matter of law

because their misstatements “had no stock price impact when made,” in the

particular sense that “none of [the] challenged statements caused any increase in

the price of Goldman Sachs’ stocks on any of the 18 days when those statements

were made.” Br. 42. But, as the District Court explained, that the misstatements

caused no increase in the stock price “when made is insignificant.” SA11.

“Plaintiffs’ argument is that the misstatements simply served to maintain an

already inflated stock price,” which fell once the truth became known. Id. In such

cases, “the fact that there was no stock price increase when the statements were

made does not suggest a lack of price impact.” Id. Defendants’ view is that, as a

matter of law, the securities laws permit outright misrepresentations that bolster

misinformation already believed by the market. That cannot be, and is not, the

law. Defendants’ arguments to the contrary are unpersuasive.


48

A. Price maintenance is a well-established theory of securities fraud liability.

Defendants note that this Court has “never decided” whether such a “price

maintenance” case is “legally sustainable under Rule 10b-5.” Br. 45 (quoting In re

Pfizer Inc. Sec. Litig., 819 F.3d 642, 655 (2d Cir. 2016)). But they admit that the

Fifth, Seventh, and Eleventh Circuits have all rejected their argument, so that the

ruling they seek would create an unmistakable circuit conflict. See Nathenson v.

Zonagen Inc., 267 F.3d 400, 419 (5th Cir. 2001) (recognizing that “public

statements falsely stating information which is important to the value of the

company’s stock . . . may affect the price of the stock even though the stock’s

market price does not soon thereafter change”); Schleicher v. Wendt, 618 F.3d 679,

683-85 (7th Cir. 2010) (same); FindWhat Inv’r Grp. v. FindWhat.com, 658 F.3d

1282, 1317 (11th Cir. 2011) (“Defendants whose fraud prevents preexisting

inflation in a stock price from dissipating are just as liable as defendants whose

fraud introduces inflation into the stock price in the first instance.”); Local 703,

I.B. of T. Grocery & Food Emp. Welfare Fund v. Regions Fin. Corp., 762 F.3d

1248, 1259 (11th Cir. 2014) (holding that a defendant may not defeat the Basic

presumption simply by showing that “confirmatory information” did “not cause a


49

change in the market price”) (quoting FindWhat, 658 F.3d at 1310).3 Defendants’

arguments for creating that circuit conflict are unpersuasive.

a. Contrary to Defendants’ submission, price maintenance suits have long

been accepted and reflect the economic reality—which Defendants do not deny—

that a misrepresentation can affect a stock, and therefore become “reflected in the

market price,” Halliburton II, 134 S. Ct. at 2414, in more than one way. To be

sure, it can cause investors to wrongly believe that the stock has been undervalued,

which will produce an increase in the stock price. Defendants argue that the

securities laws are limited to those circumstances. But that assertion ignores that a

misrepresentation can also affect the price, even if the price stays the same or even

falls, in reaction to the misrepresentation. It may be “tempting to think that

inflation can be measured by observing what happens to the stock immediately

after a false statement is made. But that assumption is often wrong.” Glickenhaus

& Co. v. Household Int’l, Inc., 787 F.3d 408, 415 (7th Cir. 2015) (emphasis

added). For example, Judge Easterbook has explained:

If a firm says that it lost $100 million, when it actually lost $200 million—and analysts had expected it to announce that it lost only $50 million—then the

3 Defendants’ position has also been repeatedly rejected by district courts within this Circuit. See, e.g., McIntire v. China MediaExpress Holdings, Inc., 38 F. Supp. 3d 415, 434 (S.D.N.Y. 2014); Livonia Emps. Ret. Sys., 284 F.R.D. at 182; In re Vivendi Universal S.A. Sec. Litig., 765 F. Supp. 2d 512, 561 (S.D.N.Y. 2011); Barclays, 310 F.R.D. at 86-88, 95. The Third Circuit has accepted the logical premises of the price maintenance theory as well, rejecting the claim that a lack of front-end price impact demonstrates a statement was immaterial. See Alaska Elec. Pension Fund v. Pharmacia Corp., 554 F.3d 342, 352 (3d Cir. 2009).


50

announcement will cause the stock’s price to fall. But the fall won’t be as much as the truth would have produced. People who buy the stock after the announcement, and before the truth comes out, pay too much; they will lose money when the rest of the bad news emerges. This is no different in principle from a firm’s announcement of a $200 million profit, when the truth is $100 million; only the signs on the numbers differ.

Schleicher, 618 F.3d at 684. In such a case, there can be no genuine dispute that

“the fraud had been transmitted through market price.” Halliburton II, 134 S. Ct.

at 2415-16.

The same is true ipso facto of false statements that prevent stock prices from

falling to reflect the true state of things. If, for example, the market erroneously

expects earnings of $1 per share, and a firm falsely confirms that expectation, that

deception will maintain the stock price, which would not be expected to move. See

Nathenson, 267 F.3d at 419. But anyone relying on the market price propped up

by the misrepresentation is fairly viewed as having relied on the misrepresentation

just as much as if the stock price had risen. See id.; Glickenhaus, 787 F.3d at 418

(Basic presumption applies when “false statements cause[] the full amount of

inflation to remain in the stock price, even if the price didn’t change at all, because

had the truth become known, the price would have fallen then”). The fact that the

front-end impact on the price was for the price to remain stable proves nothing

“because the market has already digested [the erroneous] information and

incorporated it into the price.” FindWhat, 658 F.3d at 1310.


51

Defendants nonetheless claim that the Supreme Court implicitly forbade

price maintenance suits in Halliburton II by stating that the Basic presumption

“‘could be rebutted by appropriate evidence’ that either ‘the asserted

misrepresentation (or its correction) did not affect the market price of the

defendant’s stock.’” Br. 42 (quoting 134 S. Ct. at 2414) (emphasis by

Defendants). This language addresses the merits of the case, not class certification.

But in any event, Defendants’ added emphasis in the quoted language from

Halliburton II is misleading: the Supreme Court made clear that the deception

must “affect the market price.” 134 S. Ct. at 2408. As discussed, deception

concretely “affects” a stock when it maintains an already artificially high price or

prevents the price from declining as far as it otherwise would if the truth were

disclosed.

b. Defendants say the Eighth Circuit has adopted their position by “holding

that defendants’ ‘evidence of no “front-end” price impact rebutted the Basic

presumption.’” Br. 42 (quoting IBEW Local 98 Pension Fund v. Best Buy Co., 818

F.3d 775, 783 (8th Cir. 2016)). While the Eighth Circuit chose not to apply the

price-maintenance theory to the unusual facts before it, and while the rationale of

that decision is not clear, the holding is far more fact-specific. In Best Buy, the

defendant made certain earnings forecasts in a press release, then stated that the

company was currently “on track” to meet or exceed the forecast in an investor call


52

two hours later. After the press release, the stock price went up; after the investor

call, the price stayed the same. Id. at 777-78. The statements in the press release

included cautionary language the district court found sufficient to invoke the

PSLRA’s safe harbor provision for forward-looking statements. Id. at 778 & n.2

(citing 15 U.S.C. § 78u-5(c)). The conference call did not.

The defendants argued that the conference call had no price impact because

the stock price did not move again after the call. Although the Eighth Circuit

noted the call’s lack of front-end price impact, it ultimately held that the

defendants had sustained their burden on price impact through a combination of

evidence, including: (a) the plaintiffs’ own expert’s testimony “that the ‘economic

substance’ of the non-fraudulent press release statements and the alleged

misrepresentations in the immediately following conference call was ‘virtually the

same,’” id. at 782; and (b) the plaintiffs’ expert “opined that investors gave the . . .

press release ‘great weight,’” id. It was this evidence “[c]ombined with the

absence of further price impact following the conference call [that] was direct

evidence investors did not rely on the executives’ confirming statements two hours

earlier.” Id. (emphasis added); see also id. at 783 (same). The majority also noted

that “[t]his was not a case where a third party professional confirmed the accuracy

of a company’s inaccurate financial statements,” thereby seeming to leave open the

viability of a price maintenance theory in that circumstance, rather than adopting


53

the categorical rule that lack of front-end impact necessarily rebuts the Basic

presumption. Id. at 782.

The dissent thus was careful to indicate that the court’s ruling generally left

open the viability of price-maintenance claims in other contexts, rather than

creating a circuit conflict, by explaining that the “majority has thus not joined the

circuit courts that have recognized price maintenance theories to be cognizable

under the Securities Exchange Act.” Id. at 784 (Murphy, J., dissenting) (emphasis

added). But even if the Eighth Circuit had put itself in opposition to the majority

view, its opinion offers no convincing response to the far more thorough analysis

of the Seventh and Eleventh Circuits, or to the arguments set forth in this brief.

B. There is no basis for Defendants’ attempt to narrowly define the actionable misrepresentations that artificially maintain the price of a stock.

Defendants assert that this Court should limit price maintenance claims to

“special circumstances” that coincidentally mimic the precise facts of other

circuits’ cases, namely when a defendant (a) makes an “unduly optimistic

statement” specifically intended to stop a price from declining; or (b) falsely

“conveys that the company has met market expectations, when in fact it has not.”

Br. 45-46 (quoting In re Scientific Atlanta, Inc. Sec. Litig., 571 F. Supp. 2d 1315,

1340-41 (N.D. Ga. 2007)). That argument lacks merit.


54

No circuit artificially limits its recognition of the price maintenance theory

to the specific facts of the case before it. Nor does Defendants’ proposed

limitation make any sense: if the other requirements of the securities laws are

satisfied, there is no reason that immunity should be granted for misstatements that

harm shareholders by propping up the price of a stock that later comes crashing

down when the truth is revealed. Other Circuits’ precedents thus stand for the

broader proposition, consistent with straightforward economic reality, that

misrepresentations can become reflected in a stock price not only by increasing the

price, but also by maintaining it or slowing its fall. See, e.g., FindWhat, 658 F.3d

at 1316 (“There is no reason to draw any legal distinction between fraudulent

statements that wrongfully prolong the presence of inflation in a stock price and

fraudulent statements that initially introduce that inflation.”); Nathenson, 267 F.3d

at 419 (recognizing principle and then giving an “example” of false statement

confirming market expectations on earning); Glickenhaus, 787 F.3d at 418-19

(explaining that in Schleicher, 618 F.3d 679, “the parties argued about the

distinction between misrepresentations that cause a stock price to rise and those

that prevent it from falling, as if that distinction had some legal significance . . . .

We explained why it does not. . . .”). Defendants do not offer any rationale for

limiting the price maintenance doctrine to the facts of the first handful of cases in

which it was recognized.


55

Defendants’ further attempt to put the burden of proof on Plaintiffs in price-

maintenance suits is another instance of their unwillingness to accept the Supreme

Court’s precedent governing class certification in securities cases. As discussed,

when deception maintains an inflated price, that is a form of price impact. An

essential part of the holding in Halliburton II is that at class certification it is the

defendants’ burden to prove lack of price impact, not the plaintiffs’ burden to

establish it. See 134 S. Ct. at 2414. When the plaintiffs establish the prerequisites

of the Basic presumption, and the defendants do not rebut that presumption, the

plaintiffs need not prove price impact. The Court explained that “if a plaintiff

shows that the defendant’s misrepresentation was public and material and that the

stock traded in a generally efficient market, he is entitled to a presumption that the

misrepresentation affected the stock price.” Id. (emphasis added).

Defendants claim that their right to rebut the Basic presumption “would be

rendered meaningless” unless the burden of proof is reversed in a price

maintenance case. Br. 45. Not so. A defendant may put on direct evidence that

the misstatements did not have the effect of keeping the price of the stock at an

inflated level.4

4 In this case, Defendants argue that they disproved “loss causation”—i.e., that they demonstrated that the corrective prices did not cause the stock price to go down. As discussed supra at 19-21, the better view is that argument is not properly before this Court, given the holding of Halliburton I that loss causation is not determined on class certification. But if this Court disagrees, then in a “price maintenance” case the defendants may disprove “price impact” indirectly by showing by a preponderance of the evidence that the corrective disclosure had no


56

V. The District Court correctly rejected Defendants’ challenge under Comcast to Plaintiffs’ damage model at the class certification stage.

Defendants finally challenge the District Court’s holding that Plaintiffs’

damages theory—and expert report—satisfied the requirements of Comcast Corp.

v. Behrend, 133 S. Ct. 1426, 1433 (2013), at class certification. Defendants’

theory is that Plaintiffs’ damages model failed to incorporate the fact that

(according to Defendants) some of the decline in the price of Goldman stock was

owed to other factors, including particularly “the highly publicized reports of

government lawsuits and investigations.” Br. 56.

On Defendants’ view, the District Court can determine class certification

only if it first decides the merits of the plaintiffs’ case—or at least resolves all the

factual disputes over precisely how much of a price decline is attributable to the

defendants’ fraud. In turn, if the plaintiffs fail to correctly anticipate how the

District Court will decide that contested question, then their damages model is

invalid and the class may not be satisfied. No decision has ever adopted such a

rule or endorsed such an absurd result.

The District Court correctly reasoned that

at the class certification stage, Plaintiffs must only show that their damages model “actually measure[s] damages that result from the class’s asserted theory of injury.” Roach, 778 F.3d at 407 (emphasis added). Plaintiffs’

effect on the stock price’s decline. As the District Court correctly held, Defendants failed to do so in this case.


57

model does that. The possibility that Defendants could prove that some amount of the price decline is not attributable to Plaintiffs’ theory of liability does not preclude class certification. Comcast speaks to measuring damages stemming from the accepted theory of liability, and not the extent to which that liability can be proven.

SA13-14. The District Court further explained that Defendants’ argument bore no

relation to whether the case should proceed on a class-wide basis because “any

failure of the methodology to ‘disaggregate the losses purported attributable to

disclosures about government enforcement activities from those that Plaintiffs

attribute to the challenged statements,’ Def. Sur Reply at 5, would not defeat the

class’s predominance because it would affect all class members in the same

manner.” SA 14.

Defendants err in their reliance on Comcast, which was a very different case.

There, the plaintiffs’ argument that the class suffered class-wide damages relied on

four different theories of antitrust injury. The district court, however, held that

three of the four could not be proved on a class-wide basis. Comcast, 133 S. Ct. at

1431. It was unclear whether the sole surviving claim did in fact affect all class

members equally. Id. at 1434 (“For all we know, cable subscribers in Gloucester

County may have been overcharged because of petitioners’ alleged elimination of

satellite competition (a theory of liability that is not capable of classwide

proof[.]”). The Supreme Court held that the plaintiffs’ theory of common class-


58

wide damages “must be consistent with its liability case.” Id. at 1433 (quoting

ABA Section of Antitrust Law, Proving Antitrust Damages: Legal and Economic

Issues 57, 62 (2d ed. 2010)). But it made clear that the district court should assume

that the plaintiffs would “prevail,” not that it should evaluate (or assume) the

merits of the defendants’ substantive arguments:

If [plaintiffs] prevail on their claims, they would be entitled only to damages resulting from reduced overbuilder compensation, since that is the only theory of antitrust impact accepted for class-action treatment by the District Court. It follows that a model purporting to serve as evidence of damages in this class action must measure only those damages attributable to that theory.

Id.

The District Court’s ruling in this case was completely consistent with

Comcast, in two independent respects. Most obviously, the District Court

recognized—and Defendants do not dispute—that Plaintiffs’ theory of liability

gives rise to damages that are susceptible to class-wide proof. That theory

accordingly presents a common question, not one that requires individualized

adjudication. In addition, even if the Court were to account for Defendants’

arguments about alternative causes of the decline in share prices, those causes—as

opposed to the alternative theories of liability in Comcast—affected all class

members equally. If Defendants’ objections are correct, then their misstatements

and omissions had a smaller effect on the price of Goldman’s stock than Plaintiffs’


59

allege. Damages would still be obviously completely appropriate for decision on a

class-wide basis, not through relitigation in multiple individual lawsuits.

CONCLUSION

The District Court’s class certification order should be affirmed.

DATED: August 19, 2016 Respectfully submitted,

/s/ Thomas C. Goldstein

THOMAS C. GOLDSTEIN

GOLDSTEIN & RUSSELL, P.C. THOMAS C. GOLDSTEIN 7475 Wisconsin Avenue Suite 850 Bethesda, MD 20814 Telephone: 202/362-0636 866/574-2033 (fax)

LABATON SUCHAROW LLP THOMAS A. DUBBS JAMES W. JOHNSON MICHAEL H. ROGERS 140 Broadway, 34th Floor New York, NY 10005 Telephone: 212/907-0700 212/818-0477 (fax)


60

ROBBINS GELLER RUDMAN & DOWD LLP SUSAN K. ALEXANDER ANDREW S. LOVE Post Montgomery Center One Montgomery Street, Suite 1800 San Francisco, CA 94104 Telephone: 415/288-4545 415/288-4534 (fax)

Attorneys for Plaintiffs-Appellees Arkansas Teacher Retirement System, West Virginia Investment Management Board, and Plumbers and Pipefitters Pension Group


CERTIFICATE OF COMPLIANCE

This brief complies with the type-volume limitation of FED. R. APP. P.

32(a)(7)(B) because the brief contains 13,880 words, excluding the parts of the

brief exempted by FED. R. APP. P. 32(a)(7)(B)(iii). This brief complies with the

typeface requirements of FED. R. APP. P. 32(a)(5) and the type style requirements

of FED. R. APP. P. 32(a)(6) because the brief has been prepared in a proportionally

spaced typeface using Microsoft Word 2010 in 14-point Times New Roman font.

/s/ Thomas C. Goldstein

THOMAS C. GOLDSTEIN

Dated: August 19, 2016


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