Jason Halper is partner, Matthew Karlan is special counsel, and Nicholas Caros is an associate at Cadwalader, Wickersham & Taft LLP. This post is based on their Cadwalader memorandum. Related research from the Program on Corporate Governance includes Rethinking Basic, by Lucian Bebchuk and Allen Ferrell (discussed on the Forum here); and Price Impact, Materiality, and Halliburton II, by Allen Ferrel and Andrew H. Roper (discussed on the Forum here).
On March 29, the United States Supreme Court heard oral argument in Goldman Sachs Group, Inc., et al. v. Arkansas Teacher Retirement System, et al., No. 20-222. The closely-watched case raises a host of important issues concerning the substantive and procedural requirements for certifying a securities fraud class action. Most notably, the Court will clarify what evidentiary burden a defendant bears in attempting to rebut the “fraud on the market” presumption of reliance that permits claims asserted under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) to proceed as class (as opposed to individual) actions. While the Court has opined on this issue in past decisions, including in its seminal Basic v. Levinson decision in 1988, which established the doctrine, and more recently in Amgen and Halliburton I & II, the lower courts have struggled to apply those rulings consistently.
More broadly, the case implicates the challenges lower courts have faced in applying the Supreme Court’s instruction that class action plaintiffs, whether in the Section 10(b) context or otherwise, “must affirmatively demonstrate” compliance with Federal Rule of Civil Procedure 23. As the Court held in Comcast and Wal–Mart, the “Rule ‘does not set forth a mere pleading standard.’ Rather, a party must not only ‘be prepared to prove that there are in fact sufficiently numerous parties, common questions of law or fact,’ typicality of claims or defenses, and adequacy of representation, as required by Rule 23(a). The party must also satisfy through evidentiary proof at least one of the provisions of Rule 23(b),” including that “questions of law or fact common to class members predominate over any questions affecting only individual members.” Importantly, the Court made clear that “such an analysis will frequently entail ‘overlap with the merits of the plaintiff’s underlying claim.’”