The Supreme Court is set to hear arguments from Goldman Sachs in a long-running case that could have major implications for shareholders seeking to bring securities-fraud lawsuits.
Arguments are scheduled to begin at 10 a.m. ET Monday and will be streamed live as the court continues to meet remotely as a precaution against Covid-19.
The case, which dates to the Great Recession, concerns statements that the investment bank made while it was marketing "Abacus," an investment known as a synthetic collateralized debt obligation.
Goldman advertised Abacus to its clients without disclosing that hedge fund manager John Paulson played a role in selecting its portfolio of subprime mortgages. Paulson's hedge fund, Paulson & Co., had placed enormous bets on Abacus' failure.
After Abacus collapsed amid the housing crisis, Paulson made $1 billion and Goldman's customers lost about the same amount. Goldman ultimately paid $550 million to settle fraud charges brought by the Securities and Exchange Commission in 2010 — the largest ever penalty faced by a Wall Street bank. In the settlement, the bank didn't admit or deny the allegations.
The shareholders bringing the lawsuit, including the Arkansas Teacher Retirement System and a pension fund for plumbers and pipefitters, have said they lost as much as $13 billion when Goldman's stock tumbled following disclosures of the SEC's fraud investigation.
The shareholders alleged that Goldman was lying when it made claims like "Integrity and honesty are at the heart of our business" and "Our clients' interests always come first" even while marketing Abacus and other CDOs that it had bet against.
Those statements, the shareholders said, kept Goldman's stock artificially high.
Goldman has argued that the statements the shareholders cited are too vague and generic to be the basis of a securities-fraud case. The bank has also argued that the statements didn't affect the stock price.
While many securities-fraud cases stem from false comments that cause a share price to rise, the Goldman shareholders are arguing instead that Goldman's alleged manipulation was "inflation maintenance," or preventing the stock from falling. The Supreme Court has never recognized such an argument, though some lower courts have acknowledged it.
The shareholders, who have been litigating since 2011, are seeking to bring the case as a class action on behalf of all the purchasers of Goldman stock between February 2007 and June 2010.
A district court has twice said that the shareholders may do so, and the 2nd U.S. Circuit Court of Appeals approved that decision in April.
Goldman asked the Supreme Court to review the 2nd Circuit's decision, saying that allowing it to stand would be "devastating" for public companies. It has called the case the most important securities case to come before the Supreme Court since 2014, when the justices ruled in a case involving oil-field services giant Halliburton.
Goldman attorney Kannon Shanmugam, a partner at the firm Paul, Weiss, wrote in court papers that a loss for the bank would mean that shareholders bringing securities-fraud suits in the future would be able to cite "boilerplate aspirational statements that nearly all companies make."
In a friend-of-the-court brief, the Society for Corporate Governance wrote that the 2nd Circuit's opinion could have a chilling effect on companies seeking to make statements promoting diversity or opposing harassment in the workplace.
The decision gives "companies a financial incentive to stay silent on important social issues, out of fear that even generalized or aspirational statements will become the basis for allegations of crippling securities-fraud liability," wrote Jeremy Marwell, an attorney for the group and a partner at the firm Vinson & Elkins.
On the other side, financial transparency groups have argued that Goldman should be held accountable.
Stephen Hall, legal director at Better Markets, which filed a brief in support of the shareholders, said Goldman's argument was "strained."
"As we explain in the brief, even before the ABACUS deal, the bank's top executives knew full well that they were increasingly engaging in deals that presented stark conflicts of interest, and they also knew they had to do a better job of managing those conflicts," Hall said in a statement.
"Yet any such good intentions were completely abandoned — along with honest disclosures — as the bank aggressively sought to profit from the downward-spiraling mortgage market in 2007, at the huge expense of investors and ultimately shareholders," he added.
Barbara Roper, director of investor protection at the Consumer Federation of America, said a win for Goldman "would let companies off the leash, ushering in a wide range of misleading behavior that could materially harm U.S. investors."
The Department of Justice, under President Joe Biden, filed a brief in February that it said was in support of neither party.
In the brief, the DOJ urged the justices to reverse the 2nd Circuit's opinion and order the appeals court to consider the case again while giving more consideration to Goldman's argument that its statements were too generic to have affected the share price.
Shanmugam will represent Goldman in Monday's arguments. The shareholders will be represented by Tom Goldstein, a veteran Supreme Court lawyer who is known for publishing SCOTUSBlog. Sopan Joshi, a Justice Department lawyer, will represent the United States.
A decision in the case is expected by the summer.
The case is Goldman Sachs Group v. Arkansas Teacher Retirement System, No. 20-222.