Overview

It has been over three and a half years since the Supreme Court issued its seminal opinion in Goldman Sachs. Grp., Inc. v. Ark. Teacher Ret. Sys., 594 U.S. 113 (2021) (“Goldman”), which concerned securities class actions pursuing causation and damages theories under the price inflation-maintenance theory (i.e., a theory under which the “price impact is the amount of price inflation maintained by an alleged misrepresentation[.]”).[1]^,[2] During this time, the United States Court of Appeals for the Second Circuit and several district courts have had an opportunity to weigh in on Goldman’s application to motions seeking class certification. This article examines how the Supreme Court’s Goldman decision is shaping the legal landscape. 

A Recap of Goldman

In Goldman, the Supreme Court considered the question of “whether the generic nature of a misrepresentation is relevant to price impact” for putative class actions alleging violations of Section 10(b) of the Exchange Act and proceeding under the price inflation-maintenance theory.[3] The Supreme Court held that: (i) “the generic nature of an alleged misrepresentation often will be important evidence of price impact because, as a rule of thumb, a more-general statement will affect a security’s price less than a more-specific statement on the same question[;]” (ii) “courts may consider expert testimony and use their common sense in assessing whether a generic misrepresentation had a price impact[;]” and (iii) “courts may assess the generic nature of a misrepresentation at class certification even though it also may be relevant to materiality[.]”[4]

The Supreme Court also provided guidance on how courts should consider and analyze the genericness of a statement in cases proceeding under the price inflation-maintenance theory, cautioning “that the back-end price drop equals front-end inflation … break[s] down when there is a mismatch between the contents of the misrepresentation and the corrective disclosure.”[5] This is because, the Court explained, it is less likely that a specific disclosure, such as “our fourth quarter earnings did not meet expectations[,]” would correct a generic statement, such as “we have faith in our business model[.]” In those circumstances, “there is less reason to infer front-end price inflation from the back-end price drop.”[6] The Court further instructed that, “[i]n assessing price impact at class certification, courts should be open to all probative evidence on that question—qualitative as well as quantitative—aided by a good dose of common sense[,]” regardless of whether such “evidence is also relevant to a merits question like materiality.” [7]

The Court then remanded the case with instructions that the Second Circuit apply the guidance from its opinion and consider “all record evidence relevant to price impact, regardless of whether that evidence overlaps with materiality or any other merits issue.” [8]

The Second Circuit’s Application of Goldman in Goldman II

After the Supreme Court’s decision, the Second Circuit further remanded Goldman back to the district court, instructing it to “consider all record evidence relevant to price impact and apply the legal standard as supplemented by the Supreme Court.”[9] On December 8, 2021, the district court, again, certified the class and thereafter, defendants filed another request pursuant to Rule 23(f) of the Federal Rules of Civil Procedure (“Rule 23(f)”) seeking an appeal.[10] After taking the matter up for the third time, on August 10, 2023, the Second Circuit reversed the district court’s class certification order and remanded with the instruction to decertify the class (“Goldman II”).[11]  

In Goldman II, the Second Circuit held that the district court erred in finding plaintiffs demonstrated price impact because there was an insufficient “match” between the two categories of alleged misleading statements—those about Goldman’s conflicts management procedures and certain related risk factors—and the corrective disclosures.[12] The Second Circuit explained that the district court incorrectly enhanced the specificity of the first category of misstatements by considering them in tandem with the second category,[13] because the two categories were “disseminated to shareholders in separate reports at separate times” and plaintiffs had failed to present evidence that an investor would have considered them together. [14] The Second Circuit further explained, if a corrective disclosure does “not expressly identify the alleged misrepresentation as false … the truthful substitute should align in genericness with the alleged misrepresentation” (e.g., there needs to be a “match”).[15] The Second Circuit then added, Goldman requires that any gap among the front- and back-end statements as written be limited.”[16] Thus, the Second Circuit held that, given the considerable gap in specificity between the statements and the corrective disclosures, the district court should have asked “what would have happened if [the company] had spoken truthfully[] … at an equally generic level.”[17]

Rather than applying such a test, the Second Circuit held that “the district court [improperly] allowed the details and severity[] . . . of the corrective disclosure to do the work of proving front-end price impact,” despite its finding that investors would not have “consciously relied on” the alleged misstatements “in the moment” in evaluating whether to invest in Goldman.[18] But, for the back-end price drop to serve as a proxy for the front-end misrepresentation, the misrepresentation must “hold its weight in propping up the price” (i.e., there must be “some indication that investors relied upon the misstatement as written”).[19] This is because, under Goldman, evidence that the stock dropped in response to a disclosure that touches on the same subject matter as the generic statement is insufficient to establish that investors would have relied on that statement in the first instance.[20] The Second Circuit elaborated that “the central focus” must be “ensuring that the front-end disclosure and back-end event stand on equal footing; a mismatch in specificity between the two undercuts a plaintiff’s theory that investors would have expected more from the front-end disclosure.”[21] The Second Circuit further cautioned “if a stock price decline follows a back-end, highly detailed corrective disclosure . . . courts must be skeptical whether the more generic, front-end statement propped up the price to the same extent.”[22]

After reaching this conclusion, the Second Circuit provided the following road map for district courts to use when analyzing genericness for purposes of price impact at class certification. The Second Circuit explained that “a searching price impact analysis must be conducted where (1) there is a considerable gap in front-end-back-end genericness,” “(2) the corrective disclosure does not directly refer … to the alleged misstatement, and (3) the plaintiff claims … that a company's generic risk-disclosure was misleading by omission.”[23] In doing so, district courts should assess how generic the alleged misrepresentation is as a factual matter – an inquiry which the Second Circuit notes can be guided by “case law bearing on materiality[.]”[24] If there is a gap between a generic misstatement and more specific corrective disclosure, then “courts should ask … whether a truthful—but equally generic—substitute for the alleged misrepresentation would have impacted the stock price.”[25] The Court elaborated that, because the back-end price drop’s value as evidence in such cases is diminished, “courts should consider other indirect evidence of price impact,” including whether there was any “pre- or post-disclosure discussion in the market regarding a generic front-end misstatement” and whether “a truthful, equally generic substitute would not … go unnoticed by the market[.]”[26]

The Second Circuit then conducted such an analysis and held that, while plaintiff’s expert’s evidence supported analysts’ reliance on information involving the same subject matter as the alleged false statements, the expert failed to put forth evidence demonstrating investors relied on the actual conflict misstatements to assess Goldman’s conflicts management procedures.[27] Defendants’ expert, on the other hand, put forth evidence consisting “of 880 analyst reports published during the Class Period … none of which reference[d] the conflicts disclosure.”[28] Based on this, the Second Circuit found “that there [was] an insufficient link between the corrective disclosures and the alleged misrepresentations[,] and as such, defendants “demonstrated, by a preponderance of the evidence, that the misrepresentations did not impact Goldman’s stock price, and, by doing so, rebutted Basic’s presumption of reliance.” [29]

District Courts’ Applications of Goldman

Since the Court’s Goldman decision, district courts applying its framework have used varying levels of evidence to assess mismatches, with some only relying on the language of the alleged statements and corrective disclosures and others considering such language in addition to analyst commentary (or lack thereof), expert testimony, and intraday stock prices.  

For instance, the district court in IBEW Loc. 98 Pension Fund v. Deloitte & Touche LLP, 2024 U.S. Dist. LEXIS 205201, at *36-38 (D.S.C. Nov. 12, 2024), relying on only the alleged misstatements and corrective disclosures, themselves, rejected the auditor defendant’s argument that there was a mismatch between the alleged false statements in its auditor report that the Nuclear Project was “expected to be operational and to qualify for the nuclear production tax credits” and the corrective disclosure revealing the Nuclear Project would not be completed on time (or at all), finding a “mirror image” disclosure is not required under Goldman, which only requires that “the misstatement and corrective disclosure be related or relevant to one another.”[30] By contrast, in Shupe v. Rocket Cos., 2024 U.S. Dist. LEXIS 178076, at *75-76 (E.D. Mich. Sept. 30, 2024), the district court determined that there was a mismatch by relying on the language of the misrepresentations and corrective disclosures, and the fact that, similar to Goldman II, there was evidence from “defendants’ expert “suggesting that no analyst referenced” the alleged misrepresentations during the Class Period.

Whether there is a mismatch between an alleged misstatement and corrective disclosure is not always a death knell for class certification. For instance, in Del. Cnty. Emples. Ret. Sys. v. Cabot Oil & Gas Corp., 2023 U.S. Dist. LEXIS 172506, at *29-32 (S.D. Tex. Sept. 27, 2023), the district court assessed whether there was a mismatch between three categories of misleading statements concerning environmental compliance and two corrective disclosures published on the same day – a Form 10-Q disclosure revealing pollution issues in the region at issue and a press release lowering annual guidance. While the district court found there was a mismatch with the guidance update, it nevertheless determined it was “immaterial” to resolving class certification because, inter alia, defendant Cabot’s proffered evidence, intraday stock prices, failed to show that the resulting stock drop was caused solely by the guidance.[31] Accordingly, because the alleged misstatements matched the Form 10-Q disclosure and said disclosure contributed to the stock decline, Cabot failed to meet its burden to demonstrate, by a preponderance of the evidence, that the alleged misstatements had no price impact.[32] Thus, the district court held defendants failed to rebut the Basic presumption and granted class certification.[33]

On the Horizon: The Ninth Circuit’s Impending Decision in Jaeger v. Zillow Group, Inc.

The Ninth Circuit has recently been asked to weigh in on how to properly apply Goldman and Goldman II to assess the plaintiffs’-appellees’ price inflation-maintenance theory in Jaeger et al., v. Zillow Group, Inc., et al., No. 24-6605. In Zillow, plaintiffs-appellees alleged Zillow: (i) falsely attributed the increase in its homes inventory to purported improvements in the company’s automated pricing model when, in fact, Zillow had not improved its pricing model and had to apply price overlays to boost offer prices and be more competitive;[34] and (ii) concealed that its purported operational improvements were driven by reducing the scope and pay for renovation projects, causing contractors to deprioritize Zillow or decline jobs altogether.[35] The plaintiffs-appellees alleged these statements were corrected through four partially corrective disclosures revealing: (i) Zillow purchased too much inventory at too high of a price[36]; (ii) Zillow’s pausing of home acquisitions was due to, inter alia, a backlog in renovations; (iii) 66% of Zillow homes were for sale below their purchase price; and (iv) Zillow was writing down $500 million in home inventory and winding down its Zillow Offers operations because the housing market was too volatile for its pricing projections.[37]

On appeal, the Zillow defendants-appellants argued that the district court erred in certifying the class by improperly applying the more lenient “plausible connection” loss causation standard instead of the tests established in Goldman and Goldman II, and by failing to consider all record evidence demonstrating a lack of front end price impact.[38] In support of their arguments, the Zillow defendants-appellants urged the Ninth Circuit to follow the approach applied by the Second Circuit to first assess whether the corrective disclosure either “expressly and specifically negat[es] the alleged false statement” or “directly render[s] [] false” the company’s affirmative misrepresentations[.]”[39] This test was not met, the defendants-appellants argue, because none of the corrective disclosures expressly referenced the alleged misstatements or disclosed Zillow’s use of price overlays or the reduction in renovation scope and contractor pay, resulting in a “stark gap[,]” which, under Goldman and Goldman II, prohibits the use of back-end price drop as a proxy for front-end price impact.[40]

Thus, defendants-appellants contend, the court must “consider other indirect evidence of price impact to support the back-end front-end inference,” such as whether analysts reference the misstatements at issue rather than merely providing commentary that touches upon the same subject matter.[41] Here, they argued, the district court erred by failing to consider all record evidence demonstrating a lack of front end price impact, including analyst reports and expert testimony demonstrating the stock price declines were attributable to factors unrelated to the misstatements.[42]

Whether the Ninth Circuit will ultimately adopt the tests put forth by the Zillow defendant-appellants and reverse the lower court’s certification of the class remains to be seen as briefing does not conclude until the end of February and oral argument has been requested. In the meantime, as the post-Goldman legal landscape continues to develop, counsel relying on price inflation-maintenance theory should be prepared to put forth a fulsome argument and evidence to demonstrate the relationship between alleged misstatements and corrective disclosures in support of motions for class certification.

[1] All internal quotations and citations omitted.

[2] Goldman Sachs. Grp., Inc. v. Ark. Teacher Ret. Sys., 594 U.S. 113, 123 (2021).

[3] Id. at 121.

[4] Id. at 121-22.

[5] Id. at 123.

[6] Id.

[7] Id. at 122 (emphasis removed).

[8] Id. at 123-24 (emphasis removed).

[9] Ark. Teacher Ret. Sys. v. Goldman Sach Grp., Inc., 77 F. 4^th 74, 89 (2nd Cir. 2023) (“Goldman II”).

[10] In re Goldman Sachs Grp., Inc., 579 F. Supp. 3d 520, 538-539 (S.D.N.Y. Dec. 8, 2021); In Re Goldman Sachs Group, Inc. Securities Litigation, 1:10cv3461, Dkt. Entry 265 (S.D.N.Y. Mar. 9, 2022).

[11] Goldman II, 77 F. 4^th at 105.

[12] Id. at 82.

[13] Id. at 94.

[14] Id.

[15] Id. at 98 (emphasis removed).

[16] Id. at 99.

[17] Id. (emphasis removed).

[18] Id. at 99-100.

[19]  Id. at 100.

[20] See id. at 102-03.

[21]  Id. at 102.

[22] Id.

[23] Id.

[24] Id.

[25] Id.

[26] Id. at 102-03.

[27] Id. at 103-04.

[28] Id. at 104.

[29] Id. at 105.

[30] See also In re Nio, Inc. Sec. Litig., 2023 U.S. Dist. LEXIS 138011, at *48 (E.D.N.Y. Aug. 8, 2023) (rejecting argument that alleged false statements concerning construction at a manufacturing facility in Shaghai were mismatched to a disclosure reporting the plan for the facility was terminated, and further explained that while “the corrective disclosure [was] not a perfect match[,] the alleged misrepresentation here [was] quite specific[.]”); see also Edwards v. McDermott Int’l, Inc., 2024 U.S. Dist. LEXIS 34976, at *56 (S.D. Tex. Feb. 29, 2024) (“[C]ourts do not necessarily require an economist or evidence to determine whether it is more likely than not that the alleged misrepresentation had a price impact.”).

[31] Del. Cnty. Emples. Ret. Sys. v. Cabot Oil & Gas Corp., 2023 U.S. Dist. LEXIS 172506, at *33-34 (S.D. Tex. Sept. 27, 2023) (emphasis added).

[32] Id. at 34.

[33] Id. at 36.

[34]  Jaeger et al., v. Zillow Group, Inc., et al., No. 24-6605, Dkt Entry. 10.1 at 7 (Jan. 8, 2025).

[35] Jaeger, No. 24-6605, Dkt Entry. 10.1 at 8.

[36] The district court did not analyze this corrective disclosure in evaluating defendants’ mismatch arguments. See Jaeger v. Zillow Group, Inc., et al., 2024 U.S. Dist. LEXIS 151879, at *18-23 (W.D. Wash. Aug. 23, 2024).

[37] Jaeger, No. 24-6605, Dkt Entry. 10.1 at 8-9.

[38] Id. at 2, 28-29, 45-57.

[39] Id. at 31.

[40] Id. at 12, 31-34.

[41] Goldman II, 77 F. 4^th at 102; Jaeger, No. 24-6605, Dkt Entry. 10.1 at 21, 26-27.

[42] Id. at 52-57.