Business law

The Second Circuit provides valuable guidance on applying the Supreme Court’s “mismatch” price impact framework



the situation: The US Court of Appeals for the Second Circuit recently decertified a class of shareholders who alleged that Goldman Sachs maintained an inflated stock price by making false statements about its business principles and conflict of interest policies.

Development: The Second Circuit applied the U.S. Supreme Court’s “mismatch” framework to find that shareholders could not rely on specific corrective disclosures and the resulting decline in the stock price to show that general misstatements made by Goldman’s “front end” maintained the inflated stock price.

I look forward: This ruling provides corporate defendants with an important new defense against class certification in “inflation maintenance” securities lawsuits, because it enhances the options available to challenge the price effect at the class certification stage.

In June 2021, inform us On the Supreme Court’s decision Goldman Sachs Group Against Arkansas Teachers’ Retirement System. There, the Supreme Court held that courts should take into account the general nature of the misrepresentation when assessing whether to apply the law. Basic Presumption of reliance in a class action lawsuit for securities fraud. More importantly, the Court explained, “the final inference—that lower final price equals forward inflation—begins to collapse when there is a mismatch between the contents of the misrepresentation and the corrective disclosure,” and that when the misrepresentation is if the disclosure is both general and specific, “it is unlikely that The specified disclosure has already corrected the general misstatement.”

The Supreme Court reconsidered the case before the Second Circuit because it was not clear whether the Second Circuit had considered evidence relating to the general nature of the misrepresentation. The Second Circuit then found that the registry was not sufficiently developed, and referred it to the District Court to apply the Supreme Court’s “non-conformance” framework. While on remand, the district court found a sufficient congruence between Goldman’s general misrepresentations and the specific corrective disclosures issued subsequently. The District Court then determined that Goldman had failed to refute the presumption of dependence and approved the dismissal. The defendants then appealed to the Second Circuit again.

Second Circuit decision

On appeal, the Second Circuit addressed whether defendants had sufficiently rebutted the presumption of reliance at the adjudication stage by demonstrating that the general misstatements challenged on the front end failed to match the corrective disclosures identified on the back end for purposes of determining price impact under court precedent. Supreme.

If inflation is maintained, the “front-end” misrepresentation supports or maintains the inflated share price. The subsequent “backward” corrective detection detects the falsehood of the forward misrepresentation and lowers the stock price accordingly. But as the Second Circuit has noted, the Supreme Court has placed limits on the use of the back statement to create forward inflation maintenance where the corrective disclosure is specific and the prior misrepresentation is general.

The Second Circuit explained that although the Supreme Court had previously held that courts could not address materiality at the class stage, they later Goldman The decision explained that courts must consider the generality of misstatements on the front end, “particularly in cases conducted under the theory of conservation of inflation… Regardless of whether this evidence is also relevant to an objective issue such as materiality.“” Identification card. at *10 (slash added). The second chamber noted that “the decline in final prices is, at most, indirect, retrospective evidence”. Identification card. at *13, and that such indirect evidence is less compelling when the front-end misrepresentation is too general to affect, let alone support, the share price.

The court found that the District Court’s mismatch analysis, which focused on Goldman’s conflict risk disclosures, misapplied the conservation of inflation theory in assessing whether the back-corrective disclosures were indirect evidence of the price impact caused by an error in the forward data. Specifically, unlike other inflation maintenance cases in the Second Circuit, the level of specificity of the backward corrective disclosures did not match the generality of the forward misrepresentation challenged.

The court also rejected the plaintiffs’ claim that had the public risk disclosures contained a detailed admission of serious wrongdoing, a drop in prices could have followed. In rejecting this argument, the Court relied on the “duty to disclose” case law and noted that if disclosure of risk is too general for a shareholder to rely on, it is too general to result in a duty to disclose specific negative information and the company is under no obligation to disclose otherwise. Identification card. At *21.

In short, for the purposes of analyzing the effect of a price mismatch, the Court held that a plaintiff could not rely on a specific posterior event of a price decline to show the effect of a forward price “unless the forward disclosure was sufficiently detailed in the first place.” Identification card. At *62. At least in the context of the argument for maintaining inflation, the court allows domestic courts to consider evidence that influences how important a forward skew is to conduct a price effect analysis.

In conclusion, the court provided guidance for district courts and future litigants. District courts have been directed to conduct a “search price impact analysis” where: (1) there is a “significant gap” between the generality of the forward and backward data; (ii) the posterior corrective disclosure does not specifically refer to a forward misrepresentation; and (iii) the plaintiff alleges that the public risk disclosure was misleading because of the omission. Identification card. At *63. The Second Circuit then referred it to the district court with instructions to decertify the dismissal.

The Second Circuit’s ruling provides corporate defendants with an important new defense against class certification in securities litigation. While it remains to be seen how this application of the Supreme Court’s mismatch framework will impact class certification decisions in the Second Circuit and other jurisdictions, the decision offers several key takeaways for corporate defendants discussed below.

Five main meals

  1. There must be a strong match in specificity between the forward false data and the backward corrective data to prove that the forward false data affected the stock price.
  2. An unsuccessful challenge to the materiality or causation of the loss at the class stage would not prevent the defendant from making a similar argument regarding the lack of impact on price at the class approval stage.
  3. Defendants can present relevant case law and indirect evidence of materiality to rebut the presumption of reliance on class testimony.
  4. Judge Richard J. Sullivan’s approval provides courts with a “straightforward” way to resolve disputes over reliance that takes into account the generality of the alleged misstatements and the actual price impact of corrective disclosures related to public errors on the front end.
  5. This decision may make it less attractive for plaintiffs to bring securities fraud cases arising from general corporate guarantees.


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