Securities Industry Commentator by Bill Singer Esq

BREAKING NEWS: Goldman Sachs Group, Inc., et al. v. Arkansas Teacher Retirement System, et al. (Opinion, United States Supreme Court, No.20-222 / June 21, 2021)

The Dangers of Working While Black on Wall Street / You're unlikely to get hired. From there, you're less likely to get promoted, and more likely to be fired. (The Nation by Susan Antilla)

Veteran Journalist Susan Antilla Discomforts Wall Street Over Racism (BrokeAndBroker.com Blog)

Pro Se Customer Claimant Awarded Damages in E*Trade Failure to Execute Arbitration

In the Matter of the Arbitration Between David White, Claimant, v. E*Trade Securities LLC, Respondent (FINRA Arbitration Award)

Two Architects Of Fraudulent Scheme Sentenced For Processing Over $150 Million Through U.S. Financial Institutions (DOJ Release)

Stock Promoters Charged In "Pump And Dump" Securities Fraud Scheme (DOJ Release)

SEC Charges Minnesota Man with Running a Pump-And-Dump Scheme (SEC Release)

SEC Order Determining Whistleblower Award Claim (Award Denied)

SEC Order Determining Whistleblower Award Claim ($4 million Award)

SEC Order Determining Whistleblower Award Claim (Two Awards)

Attorney Convicted of 28 Counts in FusionPharm Fraud Case Loses Federal Appeal (BrokeAndBroker.com Blog)

Respondent shareholders (Plaintiffs) filed this securities-fraud class action alleging that The Goldman Sachs Group, Inc., and certain of its executives (collectively, Goldman) violated securities laws and regulations prohibiting material misrepresentations and omissions in connection with the sale of securities. 15 U. S. C. §78j(b); 17 CFR §240.10b-5. Plaintiffs allege that Goldman maintained an artificially inflated stock price by repeatedly making false and misleading generic statements about its ability to manage conflicts. Under Plaintiffs' inflation-maintenance theory, Goldman's alleged misrepresentations caused its stock price to remain inflated until the market reacted to the truth about Goldman's practices-at which point Goldman's stock price dropped and Plaintiffs suffered losses. Seeking to certify a class of Goldman shareholders harmed by reliance on Goldman's alleged misrepresentations, Plaintiffs invoked the presumption, endorsed by the Court in Basic Inc. v. Levinson, 485 U. S. 224, that investors are presumed to rely on the market price of a company's security, which in an efficient market will reflect all of the company's public statements, including misrepresentations. The Basic presumption allows class-action plaintiffs to prove reliance through evidence common to the class. Goldman in turn sought to defeat class certification by rebutting the Basic presumption through evidence that its alleged misrepresentations had no impact on its stock price. After an initial round of litigation which resulted in a remand from the Second Circuit, the District Court certified the class based on Goldman's failure to establish by a preponderance of the evidence that its alleged misrepresentations had no price impact. The Second Circuit authorized an appeal under Federal Rule of Civil Procedure 23(f), and affirmed in a divided decision, finding that the District Court's price impact determination was not an abuse of discretion. Goldman now argues that the Second Circuit erred twice: first, by holding that the generic nature of Goldman's alleged misrepresentations is irrelevant to the price impact inquiry; and second, by assigning Goldman the burden of persuasion to prove a lack of price impact. 

Held: 

1. The generic nature of a misrepresentation often is important evidence of price impact that courts should consider at class certification, including in inflation-maintenance cases. That is true even though the same evidence may be relevant to materiality, an inquiry reserved for the merits phase of a securities-fraud class action. See Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, 568 U. S. 455. A court has an obligation before certifying a class to determine that Rule 23 is satisfied, Comcast Corp. v. Behrend, 569 U. S. 27, 35, and a court cannot make that finding in a securities-fraud class action without considering all evidence relevant to price impact. See Halliburton Co. v. Erica P. John Fund, Inc., 573 U. S. 258, 284 (Halliburton II). The parties now accept this legal framework but dispute whether the Second Circuit properly considered the generic nature of Goldman's alleged misrepresentations. Because the Court concludes that the Second Circuit's opinions leave sufficient doubt on this question, the Court remands for the Second Circuit to consider all record evidence relevant to price impact, regardless whether that evidence overlaps with materiality or any other merits issue. Pp. 6-9. 

2. Defendants bear the burden of persuasion to prove a lack of price impact by a preponderance of the evidence at class certification. The Court has held that nothing in Federal Rule of Evidence 301 constrains the Court's authority to change customary burdens of persuasion under a federal statute, see NLRB v. Transportation Management Corp., 462 U. S. 393, 404, n. 7, and the Court has exercised this authority to reassign the burden of persuasion to the defendant in other contexts. Goldman does not challenge the Court's relevant precedents, but questions whether the Court exercised this authority in establishing the Basic framework pursuant to the securities laws. The Court concludes that Basic and Halliburton II did allocate to defendants the burden of persuasion to prove a lack of price impact. As relevant here, Basic explains that defendants may rebut the presumption of reliance if they "show that the misrepresentation in fact did not lead to a distortion of price" by making "[a]ny showing that severs the link between the alleged misrepresentation and . . . the price received (or paid) by the plaintiff." 485 U. S., at 248 (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). These references to a defendant's "showing" require a defendant to do more than produce some evidence relevant to price impact; the defendant must "in fact" "seve[r] the link" between a misrepresentation and the price paid by the plaintiff. Moreover, Halliburton II's holding that plaintiffs need not directly prove price impact to invoke the Basic presumption, 573 U. S., at 278-279, would be negated in almost every case if a defendant could shift the burden of persuasion to the plaintiffs by mustering any competent evidence of a lack of price impact (including, for example, the generic nature of the alleged misrepresentations). Thus, the best reading of the Court's precedents assigns defendants the burden of persuasion to prove a lack of price impact by a preponderance of the evidence. Even so, that allocated burden will be outcome determinative only in the rare case in which the evidence is in perfect equipoise. Pp. 9-12. 

955 F. 3d 254, vacated and remanded. 

BARRETT, J., delivered the opinion of the Court, in which ROBERTS, C. J., and BREYER, KAGAN, and KAVANAUGH, JJ., joined in full; in which THOMAS, ALITO, and GORSUCH, JJ., joined as to Parts I and II-A; and in which SOTOMAYOR, J., joined as to Parts I, II-A-1, and II-B. SOTOMAYOR, J., filed an opinion concurring in part and dissenting in part. GORSUCH, J., filed an opinion concurring in part and dissenting in part, in which THOMAS and ALITO, JJ., joined. 

Plaintiffs allege here that between 2006 and 2010, Goldman maintained an inflated stock price by making repeated misrepresentations about its conflict-of-interest policies and business practices. The alleged misrepresentations are generic statements from Goldman's SEC filings and annual reports, including the following: 

According to Plaintiffs, these statements were false or misleading-and caused Goldman's stock to trade at artificially inflated levels-because Goldman had in fact engaged in several allegedly conflicted transactions without disclosing the conflicts. Plaintiffs further allege that once the market learned the truth about Goldman's conflicts from a Government enforcement action and subsequent news reports, the inflation in Goldman's stock price dissipated, causing the price to drop and shareholders to suffer losses.

Whether sincere or motivated by image concerns, Wall Street's heightened passion for addressing the racism in its midst has opened an important conversation about recruitment, promotion, and pay policies in one of the nation's most lucrative businesses. Missing from the dialogue so far, though, are some key questions: When racism does occur, how do firms treat Black employees who complain? And what happens to Black people when they take their complaints to arbitration or to court?

AKHAVAN and WEIGAND, working with others, including principals from one of the leading on-demand marijuana delivery companies in the United States (the "Company"), planned and executed a scheme to deceive United States banks and other financial institutions into processing over $150 million in credit and debit card payments for the purchase and delivery of marijuana products (the "Scheme").

The Scheme involved the deception of virtually all of the participants in the payment processing network, including issuing banks in the United States (the "Issuing Banks") and Visa and MasterCard.  The primary method used by AKHAVAN, WEIGAND, and other co-conspirators to deceive the Issuing Banks involved the purchase and use of shell companies that were used to disguise the marijuana transactions through the use of phony merchants (the "Phony Merchants").  The shell companies were used to open offshore bank accounts with merchant acquiring banks and to initiate credit card charges for marijuana purchases made through the Company.  AKHAVAN and WEIGAND worked with other co-conspirators to create these phony merchant accounts - including phony online merchants purportedly selling dog products, diving gear, carbonated drinks, green tea, and face creams - and established Visa and MasterCard merchant processing accounts with one or more offshore acquiring banks.  They then arranged for more than a dozen Phony Merchants to be used by the Company to process debit and credit card purchases of marijuana products.  Many of the Phony Merchants purported to be based in the United Kingdom, but, despite being based outside the United States, claimed to maintain U.S.-based customer service numbers.

To facilitate the Scheme, webpages were created and deployed to lend legitimacy to the Phony Merchants.  The Phony Merchants typically had web pages suggesting that they were involved in selling legitimate goods, such as carbonated drinks, face cream, dog products, and diving gear.  Yet these companies were actually being used to facilitate the approval and processing of marijuana transactions.  The defendants' scheme even involved fake visits to those websites to make it appear as though the websites had real customers and were operating legitimate online businesses.

The defendants' scheme also involved the use of online tracking pixels.  Because the descriptors listed on Company customers' credit card statements often were the URLs for the Phony Merchant websites, Company customers were sometimes confused and did not recognize the transactions on their credit card statements.  The defendants and their co-conspirators were concerned that confused customers would call their Issuing Banks and inadvertently reveal the Scheme by indicating that they had purchased marijuana products and/or that they had made a purchase through the Company.  To lessen the risk that customers would be confused, the defendants used a number of techniques, including online tracking pixels to track which users had visited the Company's website.  If a Company customer had visited the Company's website and went to the URL listed on the customer's credit card statement, the customer would automatically be re-routed to a webpage connected to the Company so that the customer would understand what the real purchase had been for (i.e., from the Company).  However, in order to hide the Scheme, the defendants ensured that if a third-party such as a bank or credit card company investigator visited a URL for a Phony Merchant, they would not be re-routed, and would therefore be unable to discern any connection between the Phony Merchant website and the Company and/or the sale of marijuana products. 

Over $150 million in marijuana credit and debit card transactions were processed using the Phony Merchants.  Some of the merchant websites listed for those transactions included: diverkingdom.com, desirescent.com, outdoormaxx.com, and happypuppybox.com.  Moreover, none of the Phony Merchant website names listed for those transactions referred to the Company or to marijuana.  AKHAVAN, WEIGAND, and others also worked with and directed others to apply incorrect merchant category codes ("MCCs") to the marijuana transactions in order to disguise the nature of those idtransactions and create the false appearance that the transactions were completely unrelated to marijuana.  Some of the MCCs/categories listed for the transactions included freight carrier, trucking; clock, jewelry, watch, and silverware; stenographic services; department stores; music stores/pianos; and cosmetic stores.  

AKHAVAN was the leader of the transaction laundering scheme and WEIGAND was responsible for interfacing with the acquiring banks regarding the offshore bank accounts used by the Phony Merchants.

[T]he defendants acquired large amounts of stock in dormant public shell companies that traded over-the-counter at low prices, often less than $0.01 per share. The defendants then assumed control over the shell companies by creating fake and filing fake resignation letters and board resolutions purporting to announce the resignation of the existing management team and the appointment of one or more conspirators as new officers and directors of the companies. The conspirators used their control over the hijacked shell companies to issue fraudulent press releases and filings designed to fraudulently inflate and "pump up" the price of the hijacked companies' stock. The defendants then sold or "dumped" their stock at the fraudulently inflated prices.

[M]iller hijacked or controlled at least seven defunct public issuers between September 2017 and April 2019. The complaint alleges that, over the course of the scheme, Miller purchased shares of the issuers on the open market, made false filings with the SEC and issued false press releases regarding his, or his nominees', alleged role with five of the issuers. The complaint further alleges that Miller filed false documents with the offices of at least three Secretaries of State to reinstate these issuers, and submitted similar false documents to transfer agents and OTC Markets Group, Inc. As alleged, Miller coordinated the reposting of the false information and documents on social media to pump the issuers' stock. According to the complaint, Miller's scheme defrauded unsuspecting retail investors who purchased the respective issuers' securities at inflated prices, while Miller reaped approximately $126,000 in profits from his sales of the issuers' securities.

Claimant provided extraordinary assistance to Enforcement staff, including: (1) participating in hours of telephonic interviews and exchanging more than 125 emails with staff; (2) providing documents and explaining their significance to staff; and (3) identifying key witnesses. Claimant also took personal and professional risks by raising concerns internally in an effort to remedy the misconduct.

[T]he information provided by Claimant 1 concerning alleged securities violations by

Redacted caused Enforcement staff to open an investigation. The information provided by Claimant 2 and Claimant 3 concerning alleged securities violations by Redacted

caused Enforcement staff to open a separate investigation. Both investigations culminated in the filing of the Covered Action.

[W]hile the Redacted *** investigation eventually led the Enforcement Staff to investigate Redacted, the record demonstrates that Claimant 2 and Claimant 3 did not provide any information about misconduct by Redacted Redacted. Rather, the Enforcement Staff independently developed the evidence that led to the charges against Redacted with respect to the Redacted . We therefore find that the ***

% allocation to Claimant 2 and Claimant 3 and ***% allocation to Claimant 1 appropriately reflects their respective contributions under the circumstances

We also find that Claimant 2 and Claimant 3 should be treated as joint whistleblowers. We previously treated Claimant 2 and Claimant 3 as joint whistleblowers in connection with the Redacted Covered Action and issued them a joint %*** award; at no time did they contest their status as joint whistleblowers. Additionally, here, they submitted a joint whistleblower award application through the same counsel with respect to the same underlying information provided to the Commission.

• Securities Industry Commentator
• Bill Singer