The Second Circuit, in keeping with its recent decision in Waggoner v. Barclays, reaffirmed that defendants must satisfy the burden of persuasion by a preponderance of the evidence to rebut the presumption established by the Supreme Court in Basic, Inc. v. Levinson. The plaintiffs-appellees, who had acquired shares of Goldman Sachs stock between 2007 and 2010, claimed violations of section 10(b) of the Securities Exchange Act and Rule 10b–5, based on Goldman’s alleged misstatements regarding its efforts to avoid conflicts of interest. Specifically, the plaintiffs claimed that these statements were false and misleading because Goldman acted in direct conflict with the interests of its clients in at least four collateralized debt obligation transactions involving subprime mortgages between 2006 and 2007, most notably the Abacus 2007 AC–1 (“Abacus”) transaction involving hedge-fund client Paulson & Co. The plaintiffs claimed that Goldman’s role in Abacus, which resulted in a $550 million SEC settlement, “allow[ed] a favored client to benefit at the expense of Goldman’s other clients,” creating a conflict of interest at odds with the company’s public statements.

The plaintiffs moved for class certification, and, to satisfy Rule 23(b)(3)’s predominance requirement regarding the reliance element of their securities fraud claims, they invoked the Basic presumption, under which a court “presumes that the market price [of shares] reflected the misstatements and that all class members relied on that price[.]” The defendants, Goldman and several of its directors, sought to rebut the Basic presumption through declarations and affidavits stating that Goldman stock experienced no price increase on the dates of the conflict of interest statements and no price decrease on several occasions prior to 2010 when the press reported Goldman’s conflicts of interest in the Abacus and related transactions. The district court applied the Basic presumption in favor of the plaintiffs and found that the defendants’ evidence failed to “conclusively” rebut the presumption. The district court certified the class, and the defendants appealed under Rule 23(f).

On appeal, the defendants argued that, in accordance with Federal Rule of Evidence 301 and the language of Basic, they needed only to produce evidence to rebut the Basic presumption, and that the district court imposed an impermissibly high burden by requiring them to present conclusive proof that there was no price impact. The Second Circuit reaffirmed its finding in Barclays, which was decided after the district court’s order, reiterating that a defendant seeking to rebut the Basic presumption must satisfy the burden of persuasion by a preponderance of the evidence – a higher burden than the mere production of evidence. The panel went on to conclude that “[a]lthough the District Court acknowledged that standard in a footnote,” it was “unclear . . . whether the [district] court required more of defendants than a preponderance of the evidence” when it found that the defendants failed to “conclusively” prove a “complete absence of price impact.” The panel therefore vacated the district court’s order and remanded for reconsideration of the defendants’ evidence in light of the Barclays standard.

Ark. Teachers Ret. Sys. v. Goldman Sachs Grp., Inc., No. 16-250, 2018 WL 385215 (2d Cir. Jan. 12, 2018).