Noah Feldman

Ruling on Goldman Sachs Was More Psychological Than Legal

The Supreme Court’s decision in the shareholders’ suit against Goldman Sachs over the bank’s transparency was extremely subtle, leaving enough room for both sides to say that they were happy with it. And it did very little, if anything, to make new law.

So what were the justices doing, exactly? The answer is that, in a high-profile case, they were assuring themselves that they had a say in pushing the lower courts toward what they consider common sense.

At issue was whether Goldman should be liable to shareholders for losses suffered when revelations of conflict of interest sent its share price tumbling. Most of the action in the opinion focused on whether the lower courts sufficiently considered Goldman’s argument that its statements — like “We have extensive procedures and controls that are designed to identify and address conflict of interest” — were so generic that no investor would rely on them.

Before the US Court of Appeals for the Second Circuit, Goldman tried to argue that, as a matter of law, such general statements should never be understood to affect a stock price. The court of appeals said no. Effectively, it noted, Goldman’s position would have required the court to conclude that the statements were immaterial to any transactions even before looking at the detailed facts of the case.

So when Goldman went to the Supreme Court, it asked for something more modest. It conceded that the general statements shouldn’t be ignored altogether. But it asked the justices to tell the Second Circuit to consider explicitly whether the generic nature of the language contributed to the supposedly inflated value of the stock.

The justices agreed with Goldman’s more modest request. They sent the case back to the Second Circuit with instructions to consider the price impact of the bank’s statements, using expert testimony if necessary to gather appropriate evidence.

Sometimes, when the justices send a case back to the lower courts, they telegraph the outcome they want. They didn’t really do that in the Goldman case. The closest they came was noting that a back-end drop in stock prices may not be very good evidence that the stock was inflated by an earlier statement.

The Second Circuit could read this observation to mean that it should conclude that the generic statements didn’t inflate the stock price. But it could also conclude that based on these facts, the subsequent drop in the stock price did demonstrate that Goldman didn’t have good conflict-of-interest protections in place.

Given this lack of clear intention from the justices, the puzzle of what they meant to do needs to be answered in psychological terms, not straightforwardly legal terms. Instinctively, the justices probably feel that generic statements are unlikely to contribute meaningfully to an inflated share price. Yet, at the same time, they understand that they aren’t especially expert in how markets incorporate information.

The decision in this case enabled the justices not to take a stand, while still signaling that they matter because they oversee the lower courts in high-profile cases.

Justice Neil Gorsuch wrote separately to say that he would also have decided a second technical issue in favor of Goldman. He would have ruled that, once evidence of price effects is introduced, a defendant like Goldman can win just by producing evidence that the generic language didn’t affect price. According to the rest of the justices, Goldman actually has to prove that it is more likely than not that the statements didn’t contribute to the price effects.

The other justices didn’t want to disturb the burdens of proof developed by the lower courts. Again, they modestly realize they aren’t going to do better than the lower courts have done. And they didn’t want to give Goldman an easier win on remand.

Justice Sonia Sotomayor wrote separately to say that the lower court decision should stay in place. She argued that the Second Circuit didn’t actually ignore the nature of the Goldman statements.

That was largely correct. But it didn’t satisfy the other justices — because it would have left the court looking and feeling irrelevant.