Supreme Court's Goldman decision declared a win by investor advocates

Supreme Court's Goldman decision declared a win by investor advocates
Remanding the shareholder suit against Goldman to the appeals court leaves unresolved questions about the legal weight of conflict-of-interest pledges.
JUN 21, 2021

Investor advocates declared victory Monday after the Supreme Court sent back to an appeals court a case in which Goldman Sachs was accused of hiding conflicts of interest related to sales of mortgage-backed securities.

The Arkansas Teacher Retirement System, other pension funds and individual investors who bought Goldman shares between February 2007 and June 2010 allege the price of the stock was influenced by Goldman’s claims that it avoided conflicts of interest.

The plaintiffs asserted that Goldman knew of conflicts surrounding the sales of collateralized debt obligations made up of subprime mortgages. They brought a class action suit in 2011 following Goldman’s $550 million settlement with the SEC in 2010.

The U.S. 2nd Circuit Court of Appeals affirmed the class designation last April. Goldman appealed the 2nd Circuit’s decision to the Supreme Court, arguing that the appeals court made it too easy to bring a class-action suit. The firm asserted that its statements about putting its clients’ interests first were generic and aspirational and didn’t affect the stock price.

In its decision, the Supreme Court returned the case to the 2nd Circuit for further review.

“The parties … dispute whether the Second Circuit properly considered the generic nature of Goldman’s alleged misrepresentations,” Justice Amy Coney Barrett wrote for the majority. “Because the Court concludes that the Second Circuit’s opinions leave sufficient doubt on this question, the Court remands for the Second Circuit to consider all record evidence relevant to price impact, regardless whether that evidence overlaps with materiality or any other merits issue.”

Barrett was joined in the opinion by Chief Justice John Roberts and Justices Stephen Breyer, Elena Kagan and Brett Kavanaugh. Justices Clarence Thomas, Samuel Alito, Neil Gorsuch and Sonia Sotomayor concurred with parts of the decision and dissented with other parts.

“From the perspective of investors, this is like an asteroid that completely missed the earth,” said Paul Bland, executive director of Public Justice, a nonprofit legal advocacy group. “Goldman Sachs was looking to make it much harder for investors to bring securities fraud cases, and that just didn’t happen.”

The Supreme Court didn’t fully embrace the positions of either Goldman or the plaintiff pension plans and investors. But the decision to send the case back to the 2nd Circuit was welcomed by Barbara Roper, director of investor protection at the Consumer Federation of America.

“This is the narrow remand we were hoping for,” Roper said. “In that sense, this is a win for us.”

Goldman Sachs countered that the Supreme Court decision gives it another chance to prevail.

“We are pleased the Supreme Court has vacated the grant of class certification and we will continue to vigorously defend ourselves as the case returns to the lower courts,” Goldman spokesperson Maeve DuVally said in an emailed statement.

IMPLICATIONS FOR REG BI?

The case has implications for Regulation Best Interest, the broker investment advice standard that went into force last year, according to investor advocates. Reg BI prohibits brokers from putting their interests ahead of those of their customers.

If Goldman doesn’t have to abide by its statement about avoiding conflicts of interest, could firms also dodge Reg BI’s strictures?

Roper has qualms about the Supreme Court opinion referring to the “generic nature” of Goldman’s statement on conflicts of interest.

“One concern is what appears to be an underlying assumption that statements about policies to protect investors from conflicts of interest are generic in nature, when that’s the principle at the heart of Regulation Best Interest,” she said.

But Bland said that if the Supreme Court were going to hold that Goldman’s statement was generic, it would have thrown the case out. Instead, the decision reflects the fact that misleading information can affect stock price.

“The court resoundingly affirmed the presumption that the market operates based on information,” he said.

The case was the first one involving a shareholder dispute that the Supreme Court has decided since former President Donald Trump appointed three justices, including Barrett, to give the court a 6-3 conservative majority.

“It's nice to see a brand-new justice writing such a good opinion for investors,” said Salvatore Graziano, a partner at Bernstein Litowitz Berger & Grossman.

Bloomberg News contributed to this story.

Latest News

More Americans are invested in the elections than the stock market
More Americans are invested in the elections than the stock market

A substantial number of people in a new 2,200-person survey believe their wealth, their "wallet power" and their retirement timelines are at stake.

Stocks rally to fresh highs as JPMorgan drives bank gains
Stocks rally to fresh highs as JPMorgan drives bank gains

The S&P 500 headed toward its 45th record in the year helped in part by a surprise interest income gain at the Wall Street giant.

Boosting payouts on cash crimps wealth management at Wells Fargo
Boosting payouts on cash crimps wealth management at Wells Fargo

Meanwhile, Wells Fargo’s WIM group reported close to $2.3 trillion at the end of last month.

Another AI-washing case shows where SEC is headed
Another AI-washing case shows where SEC is headed

The Securities and Exchange Commission has focused on "black-and-white" allegations of AI washing, but that could broaden out to a gray area that may loop in more financial services companies, a lawyer says.

High-net-worth giving splits along generational and gender lines, find BofA survey
High-net-worth giving splits along generational and gender lines, find BofA survey

More than nine in 10 HNWIs prioritize charitable giving, but demographics help shape the whys and the hows.

SPONSORED Destiny Wealth Partners: RIA Team of the Year shares keys to success

Discover the award-winning strategies behind Destiny Wealth Partners' client-centric approach.

SPONSORED Explore four opportunities to elevate advisor-client relationships

Morningstar’s Joe Agostinelli highlights strategies for advisors to deepen client engagement and drive success