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Supreme Court Signals Narrow Ruling Likely on Goldman Investor Suit

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What You Need to Know

  • The clash is the court’s first over shareholder lawsuits since former President Trump appointed three justices and created a 6-3 conservative majority.
  • The Supreme Court case centers on rules the court has crafted to determine whether shareholders have enough in common with one another to press a securities-fraud suit as a class action.
  • “This seems like an area that, the more I read about it, the less that we write, the better,” Justice Stephen Breyer said.

The U.S. Supreme Court signaled it is headed toward a narrow ruling on shareholder lawsuits as the justices grappled with accusations that Goldman Sachs Group Inc. misled investors in the lead-up to a 2010 Securities and Exchange Commission fraud lawsuit against the firm.

Hearing arguments Monday by phone, the justices suggested they might tell a lower court to revisit whether Goldman Sachs shareholders could press a class action suit. But several justices also indicated they had only minor quibbles with the reasoning of the appeals court decision to let the suit go forward.

“This seems like an area that, the more I read about it, the less that we write, the better,” Justice Stephen Breyer said.

The clash is the court’s first over shareholder lawsuits since former President Donald Trump appointed three justices and created a 6-3 conservative majority. Corporate advocates are looking to take advantage of that majority to put tighter limits on shareholder lawsuits.

But conservative and liberal justices alike suggested the issues in the Goldman Sachs case had narrowed as it bounced up and down the court system. “It seems to me that you’ve both moved towards the middle,” Justice Amy Coney Barrett said.

The investors, led by the Arkansas Teacher Retirement System, say they were deceived by Goldman Sachs’ repeated public assurances that it was being vigilant about avoiding conflicts of interest.

They say the assurances proved to be false, as details emerged about a group of so-called collateralized debt obligations, known as CDOs, including the Abacus portfolio that was at the center of the SEC suit.

Abacus Portfolio

The SEC said in its 2010 lawsuit that Goldman Sachs created and sold Abacus without disclosing that the hedge fund Paulson & Co. helped pick the underlying securities and bet against the vehicle. Goldman shares tumbled 13% on the day the suit was filed.

Later that year, Goldman paid $550 million to settle with the SEC, a record amount for a Wall Street firm. Though Goldman didn’t admit wrongdoing, the firm said it made a “mistake” in not disclosing the Paulson & Co. role, an unusual acknowledgment in an SEC case.

The Supreme Court case centers on the rules the court has crafted to determine whether shareholders have enough in common with one another to press a securities-fraud suit as a class action.

In 1988, the high court said judges can presume that investors all relied on any public misrepresentations when they bought shares.

But that ruling also said defendants can rebut that presumption — and block certification of the class action — by showing that the statements had no impact on the share prices.

Goldman Sachs says its assurances about conflicts were so “generic” they couldn’t possibly have been responsible for propping up the stock price.

The statements included promises in regulatory filings that the firm had “extensive procedures and controls that are designed to identify and address conflicts of interest” and that “our clients’ interests always come first.”

Wall Street’s peddling of CDOs remains a touchstone of the global financial crisis, evidence to many that clients came second to the massive profits bankers were making for themselves. Much of the 2008 economic collapse was fueled by losses suffered by banks and hedge funds that owned the complex securities.

Ultimately, the U.S. government was forced to provide a $700 billion taxpayer-financed bailout for the financial industry.

The case, which the court is scheduled to decide by late June, is Goldman Sachs v. Arkansas Teacher Retirement System, 20-222.

(Photo: Nicky Loh/Bloomberg)

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