SCOTUS Decision Endorses Pomerantz Evidence Standard

POMERANTZ MONITOR | JULY AUGUST 2021

Pomerantz Partner Emma Gilmore led a team of Pomerantz attorneys and twenty-seven of the foremost evidence scholars to submit an amicus brief to the Supreme Court of the United States in Goldman Sachs Group, Inc. et al v. Arkansas Teachers Retirement System, et al. (No. 20- 222). Pomerantz’s brief was the sole amicus brief devoted to one of only two issues before the Court: whether the defendants in securities fraud class actions bear the burden of persuasion when seeking to rebut the presumption of reliance originated by the Court in its landmark decision in Basic, Inc. v. Levinson, or whether the defendants bear only the lower burden of production, as Goldman Sachs argued. On June 21, 2021, the Supreme Court held, in a 6-3 decision, that the defendants bear the ultimate burden of persuasion in rebutting the Basic presumption. In so holding, the Court adopted the arguments asserted by Pomerantz and the law professors in their amicus brief.

To state a claim for securities fraud, a plaintiff must establish that she relied on a misrepresentation or omission when she bought or sold securities. The misrepresentation or omission artificially inflates a security’s price until the statement’s false or misleading nature is disclosed — at which point, the stock price falls, harming investors. If each plaintiff bringing securities fraud claims had to prove individual reliance on a specific misrepresentation, however, it would be virtually impossible to bring securities fraud claims as class actions, because each plaintiff would need to individually demonstrate how she relied on the misrepresentation when she bought or sold securities. In Basic, however, the Supreme Court held that securities fraud plaintiffs can invoke a presumption that they relied on a misrepresentation in buying or selling securities because, in an efficient market, the price of a security reflects all the company’s material public statements, including false or misleading statements. The “fraud on the market” presumption of reliance the Supreme Court established in Basic thus obviated the need for each member of a class to show reliance on a case-by-case basis, enabling securities fraud lawsuits to proceed as class actions.

To invoke the Basic presumption, a plaintiff must prove that (1) an alleged misrepresentation was publicly known; (2) it was material (i.e., significant to a “reasonable investor”); (3) the security traded in an efficient market; and (4) the plaintiff traded the security between the time the misrepresentation was made and when the truth was revealed. Once a plaintiff has established these four elements, all similarly situated class members are presumed to have relied upon the misrepresentation in deciding whether to buy or sell the security.

A defendant can rebut this presumption, however, by producing evidence reflecting that the alleged misrepresentation did not affect the price of the security.

Pomerantz’s amicus brief argued that defendants bore the heavier burden of persuasion:

Basic made clear that to overcome the presumption of reliance, defendants must actually “sever the link” between the alleged misrepresentation and the price of the security. 485 U.S. at 248. Halliburton II reaffirmed this holding and suggested that “sever[ing] the link” would require defendants to adduce “more salient” evidence than the plaintiffs. 573 U.S. at 282. Thus, the language of Basic and Halliburton II, together with their focus on advancing Congress’s intent, show that the Court imposed on defendants the burden of persuasion, and not just a burden of production, to rebut the presumption.

Goldman argued that Federal Rule of Evidence 301 places the burden of persuasion on plaintiffs. Rule 301 states that while “the party against whom a presumption is directed has the burden of producing evidence to rebut the presumption,” this “does not shift the burden of persuasion, which remains on the party who had it originally.” Therefore, Goldman argued, defendants need only produce some evidence of no price impact, leaving plaintiffs with the ultimate burden of persuasion.

Pomerantz’s amicus brief, however, argued that (i) courts have the ability to reassign the burden of persuasion to any party regardless of Rule 301, and (ii) the Supreme Court’s prior decisions had assigned to defendants the burden of persuasion with regard to the presumption of reliance. Pomerantz’s amicus brief argued that:

Courts and commentators alike have understood that when necessary to satisfy the demands of the substantive law being applied—including “statutory policy”—courts may diverge from Rule 301’s default rule and allocate the burden of persuasion to the opposing party. Indeed, this Court has declared that Rule 301 “in no way restricts the authority of a court or an agency to change the customary burdens of persuasion in a manner that otherwise would be permissible” (citations omitted).

The brief explained that the language in prior Supreme Court decisions reflected the Court’s intent to assign the burden of persuasion to defendants:

This Court’s decisions in Basic and Halliburton II [Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (2014)] reflect precisely this sort of consideration of substantive law of a statute—here section 10(b) of the Securities Act—in both creating the Basic presumption and assigning the burden of persuasion to defendants to rebut it. Thus, the statute and its substantive law apply, not the generally applicable Rule 301.

The Supreme Court adopted Pomerantz’s and the evidence scholars’ arguments. The Court began its analysis by observing that:

We have held that Rule 301 “in no way restricts the authority of a court ... to change the customary burdens of persuasion” pursuant to a federal statute. NLRB v. Transportation Management Corp., 462 U. S. 393, 404, n. 7 (1983). And we have at times exercised that authority to reassign the burden of persuasion to the defendant upon a prima facie showing by the plaintiff. See, e.g., Teamsters v. United States, 431 U. S. 324, 359, and n. 45 (1977); Franks v. Bowman Transp. Co., 424 U. S. 747, 772– 773 (1976).

The Court then held that, as Pomerantz and the law professors argued, Basic and Halliburton II did allocate the burden of persuasion to defendants:

Basic held that defendants may rebut the presumption of reliance if they “show that the misrepresentation in fact did not lead to a distortion of price.” 485 U. S., at 248 (emphasis added). To do so, Basic said, defendants may make “[a]ny showing that severs the link between the alleged misrepresentation and ... the price received (or paid) by the plaintiff.” Ibid. (emphasis added). Similarly, Halliburton II held that defendants may rebut the Basic presumption at class certification “by showing ... that the particular misrepresentation at issue did not affect the stock’s market price.” 573 U. S., at 279 (emphasis added).

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Thus, the best reading of our precedents ... is that the defendant bears the burden of persuasion to prove a lack of price impact.

Notably, in so holding, the Supreme Court cited with approval the Second Circuit’s ruling in Waggoner v. Barclays PLC, 875 F. 3d 79, 99–104 (2d Cir. 2017) that the phrase ‘[a]ny showing that severs the link’ aligns more logically with imposing a burden of persuasion rather than a burden of production.” Pomerantz successfully prosecuted the claims in Barclays, spearheading a similar amicus brief on behalf of numerous leading evidence scholars.

Pomerantz’s and the amicus professors’ win in the Supreme Court ensures that aggrieved investors can continue to aggregate their claims as a class against companies that defraud them.

Emma Gilmore stated, “The Supreme Court’s decision is a significant victory for plaintiffs and against defendants seeking to demolish the presumption of reliance that has allowed aggrieved investors to pursue securities act violations as a class. Twenty-seven of the foremost evidence scholars in the United States backed our position; not a single one backed the defendants’. This important win paves the ground for more victories on behalf of defrauded investors.”