Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System

A 2010 shareholder lawsuit focuses on whether alleged misleading statements hurt investor value. More than 10 years later it has found itself with the US Supreme Court

Originally filed in 2010, the US Supreme Court agreed to hear the case Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System on 11 December last year.

Between then and 29 March, when oral arguments were first heard, a number of key things have happened: 38 investor groups and individuals signed a statement in support of the plaintiffs; legal, pension and consumer experts discussed the implications of the case at a press conference; and a group including six former US Securities and Exchange Commission (SEC) commissioners – among them ex- SEC Chairs William Donaldson and Arthur Levitt – cautioned the Supreme Court against a judgment that might make it more difficult for investors to sue companies through class action lawsuits.

There have also been a large number of ‘brief amici curiae’ – submissions from so-called ‘friends of the court’, state securities regulators, investor advocates, pension funds and others, who have no direct involvement but an interest in the outcome.


Currently, the arguments before the Supreme Court are about whether shareholders can even bring the case to court. It was filed by investors who bought stock in Goldman Sachs just before the 2008 financial crisis. The investors are seeking $13bn in damages against Goldman Sachs and three former executives. They allege that they bought shares at a price that was inflated by false statements about its standards of conduct. These statements include the following: “Our clients’ interests always come first” and “We have extensive procedures and controls that are designed to identify and address conflicts of interest”. 

At the time, Goldman was, along with a large number of other Wall St banks, engaged in creating and selling a type of mortgage-backed security known as a ‘collateralized debt obligation’ (CDO), backed at times by sub-prime mortgages – risky loans made to house purchasers with imperfect credit.

In one instance, it is alleged that Goldman worked with a hedge fund customer, Paulson & Co, which was planning to short a particular CDO, known as ABACUS 2007-AC1, before selling it to other customers without any associated warnings. At the same time, it has been alleged that one of Goldman’s internal trading desks followed those funds also with large bets against the mortgages to generate $4bn in profits for itself.

That Goldman was selling these securities without full disclosures is not at issue. The bank was slapped with one of the highest SEC fines ever at the time ($550m) and acknowledged, among other things, that its marketing materials for the subprime products it sold contained incomplete information.

At the time, Lorin Reisner, Deputy Director of the SEC’s Division of Enforcement, said: “The unmistakable message of this lawsuit and today’s settlement is that half-truths and deception cannot be tolerated and that the integrity of the securities markets depends on all market participants acting with uncompromising adherence to the requirements of truthfulness and honesty.”

Latest developments

At the first oral hearing at the end of March, according to a Supreme Court of the United States (SCOTUS) blog, evidence centred around two questions: is the generic-nature of the statements enough to help Goldman Sachs prove they did not affect stock prices; and who is responsible for proving that the statements were material enough to affect stock prices – the plaintiff or the defendant.

On the second question, the judges felt there was not a lot of daylight between the plaintiffs and defendants. The plaintiffs agreed that how generic the statements were is important, but at times it seemed that the only point of disagreement was whether the judges could use their common sense to determine whether they were generic or whether they were required by law to rely only on expert testimony.

Another theme of the arguments – and one on which many of the amicus briefs rely – is the concept of the ‘inflation-maintenance’ theory of securities fraud. Barbara Roper, Director of Investor Protection at the Consumer Federation of America tells RI: “In inflation-maintenance cases, plaintiffs argue that the false statements helped to maintain an artificially high price (a price that would have been lower if the truth were known). They argue that investors who bought at that inflated price were harmed when the truth is exposed and the price drops.”

“So, in the Goldman case,” she continues, “they aren’t arguing that Goldman’s false statements about its rigorous policies to address conflicts and always putting customers’ interests first drove the stock price up; they are arguing that these false statements helped to maintain an inflated stock price.”

“No Company is Too Big or Too Powerful to be Held Accountable” statement

Filed with the Supreme Court by a number of trade unions, such as AFSCME, SEIU and the International Brotherhood of Teamsters, as well as a number of other investor and consumer protection agencies, this statement says: “We believe that no company should be able to hide behind procedural issues to avoid accountability for clear misconduct.” The statement alleges that the generic statements Goldman Sachs made about conflicts of interest and customers’ interests “carry specific regulatory meaning and thus cannot be dismissed as mere ‘puffery’”. The ability for investors to hold corporations legally accountable for securities fraud is “critical to both deterring fraud and recouping investor losses”, it concludes.

The press conference

In the press conference mentioned at the start of this article, pension fund, consumer protection and legal experts discussed the legal outcomes at stake. Roper, commenting on the discussion of the ‘genericity’ of Goldman’s statements at that conference, tells RI: “The obligation to act in customers’ best interests and have rigorous controls to address conflicts of interest are enshrined in our securities laws, most recently as the central requirements of the SEC’s recently implemented Regulation Best Interest. If those statements have no meaning, then the new standards of conduct for broker-dealers also have no meaning. So, it is ironic, to say the least, to see SIFMA [the Securities Industry and Financial Markets Association that has filed two amicus briefs with the American Bankers Association and the Chamber of Commerce] among others making that argument when they so passionately defended Regulation Best Interest as providing meaningful new protections for investors.”

The amicus brief

Potentially one of the more influential amicus briefs, from a group of 13 former SEC commissioners and senior employees, makes three main points. The first is that the SEC relies on ‘inflation-maintaining’ statements in many of its enforcement cases. Goldman’s lawyers are relying on arguments that question the inflation-maintenance theory altogether. Second, executives have powerful incentives to inflate stock prices temporarily so that they can benefit in the short term. And three, that private litigation over such statements is an important complement to SEC enforcement action.

The brief warns that preventing the case from being heard – the defendants’ plea to the Supreme Court – will have a disastrous effect on the market and the SEC’s and investors’ ability to enforce trust.

Goldman’s argument

Goldman’s lawyers are arguing two points of law. Using the arguments outlined in the SCOTUS blog above, they are not arguing about the events that surround the case, but claiming that the case should not be tried at all. In the first instance, the lawyers claim that they should have been able to rebut the assumption that the ‘misleading statements’ had any impact on Goldman’s stock price at all.

At issue here, they say, is the ability of shareholders to bring suit against companies for securities fraud because they have made “certain aspirational and generic statements of the sort that virtually every public company makes”. If the court grants such rights, it is claimed, the markets will be awash with class action suits on this basis.

It remains to be seen whether the court’s current, well-known pro-corporate bias will lead to a ruling in favour of the defendants. Roper notes: “While experts caution against reading too much into the questioning during oral arguments, I think those who follow the Court far more closely than I do came away with the impression that the Court is likely to decide the case on much narrower grounds than the original briefs on either side staked out. We’re hoping they are reading the Court correctly.” A decision is expected by the summer.