Influential appeals court signals interest in revisiting securities class certification test
By Alison Frankel
Aug 29 (Reuters) -The federal appellate court that oversees the lion’s share of U.S. investor class actions signaled on Wednesday that it may not be done tinkering with its test for shareholders trying to band together to pursue fraud claims.
The New York-based 2nd U.S. Circuit Court of Appeals issued an order calling for oral arguments on a petition for mid-case review by shareholders of mining company Kirkland Lake Gold (now a subsidiary of Agnico Eagle Mines AEM.TO). The shareholders contend that a Manhattan trial judge erred last March when he refused to certify a class to proceed with claims that Kirkland Lake’s former CEO misled investors about the company’s reluctance to grow through acquiring smaller mining operators.
It's rare for appellate courts to grant petitions for mid-case, or interlocutory appeal, as Kirkland Lake pointed out in its brief opposing shareholders’ petition. But interlocutory appeals have been crucial in the development of securities class action precedent.
As you probably recall, the U.S. Supreme Court used an interlocutory appeal by investment bank Goldman Sachs to refine some of the rules for shareholder class certification in 2021. The 2nd Circuit subsequently offered its initial interpretation of the Supreme Court's Goldman Sachs test in a post-remand interlocutory appeal by the bank in 2023.
Now shareholders are trying to turn the tables, hoping to use an interlocutory appeal to blunt the impact of the 2nd Circuit’s 2023 Goldman ruling, in which the 2nd Circuit instructed trial judges to use heightened scrutiny when evaluating the price impact of "generic" misstatements that allegedly allowed the company to maintain an inflated share price.
Under the appellate court's "mismatch" theory, when a company's share price falls in response to a specific event, judges should be wary of shareholder claims that the stock drop reflects the impact of anodyne statements that, in hindsight, were allegedly false.
To be clear: The 2nd Circuit has not yet granted the petition by Kirkland Lake shareholders. Wednesday’s order instead calls for argument by their shareholders' appellate lawyers from Goldstein, Russell & Woofter and Kirkland Lake’s lawyers from Paul, Weiss, Rifkind, Wharton & Garrison on whether the 2nd Circuit should hear the case. That argument is scheduled for Sept. 10.
But the mere call for oral argument on the petition for interlocutory appeal suggests that shareholders have at least piqued the interest of the 2nd Circuit, since circuit courts hardly ever hear oral arguments on such petitions.
Kirkland Lake investors allege that the company’s former CEO made three false statements about Kirkland Lake’s willingness to grow through acquiring other mining businesses. In one 2018 statement, the CEO described a demanding “minimum standard” Kirkland Lake maintained for potential merger partners. And in two statements in 2019, the CEO emphasized Kirkland Lake’s intention to grow organically rather than through acquisitions.
Shareholders contend that Kirkland Lake’s subsequent 2019 acquisition of a “poorly performing” company proved the falsity of the CEO's three statements. They assert that the nearly 18% stock drop when Kirkland Lake announced the 2019 deal showed the company’s share price had been artificially inflated by the CEO’s reassurances.
U.S. District Judge Paul Oetken of Manhattan rejected those arguments in a March 29 decision denying class certification. Citing the 2nd Circuit’s 2023 Goldman ruling, Oetken said there was a mismatch between the CEO’s general comments about Kirkland Lake’s plan to grow organically and the “corrective disclosure” of the M&A deal. The judge looked at a variety of factors, including consideration of whether Kirkland Lake’s share price would have been different if the CEO had made an equally generic statement acknowledging that the company was “considering external growth through M&A.” He concluded that Kirkland Lake had rebutted the presumption that the CEO’s alleged misrepresentations affected the company’s share price.
Oetken reached the same conclusion about the CEO’s “minimum standards” statement, despite acknowledging that the statement was not as generic as the CEO’s comments about organic growth.
The judge said there was nevertheless a “substantive mismatch” between the CEO’s statements and Kirkland Lake’s subsequent disclosure of the 2019 deal, pointing to defense arguments that the minimum standards comment was meant to address Kirkland’s long-term, forward-looking expectations for acquired companies rather than in-the-moment metrics for merger partners.
In their petition for interlocutory appeal, investors argued that Oetken misconstrued the Goldman test in several ways.
For one, they said, when the judge cited Goldman’s “mismatch” test to justify his heightened analysis of the CEO’s minimum standards statement, he went too far by concluding that the statement was not false. That’s a question for jurors, not judges, according to the petition.
Investors also argued that Oetken wrongly applied heightened scrutiny to the CEO’s statements about growing organically instead of seeking M&A deals. Those statements, the petition argued, were not nearly as generic as the anodyne reassurances about Goldman Sachs' ethics in the case that led to the 2nd Circuit’s Goldman test.
Oetken was too quick, according to investors, to apply Goldman’s “searching price impact analysis” to relatively specific statements that were not a clear mismatch with the market’s back-end reaction to the 2019 deal.
“Drawing the right line is important,” investors said, because the Goldman mismatch test “puts a heavy thumb on the scale against a finding of price impact.”
Kirkland Lake, as you would expect, countered that the petition itself shows the intensely fact-bound nature of Oetken’s decision, which, in the company’s view, faithfully applied the 2nd Circuit’s guidance from the 2023 Goldman decision.
“None of these case-specific objections to the district court’s careful opinion require this court’s immediate intervention, particularly when petitioner can appeal this ruling after final judgment, and particularly when the district court’s careful decision was in any event correct,” the Kirkland Lake brief said.
Investors’ lawyers at Goldstein Russell and Kirkland Lake's counsel from Paul Weiss declined to comment. Shareholders were represented below by Christian Levis of Lowey Dannenberg, who did not respond to a query. Kirkland Lake's parent, Agnico Eagle, also did not respond.
When the 2nd Circuit issued its 2023 Goldman ruling, it acknowledged that its new test for class certification was “complex,” and that “whatever analytical approaches might be warranted in future cases remains to be seen.”
Kirkland Lake investors are hoping the appeals court will use their case to clarify when and how trial judges should apply the Goldman mismatch test. But first, they’ll have to persuade a panel of judges to take the case during next week’s oral argument.
Read more:
Goldman Sachs appellate ruling is boon for securities class action defendants
Kirkland Lake Gold sued in U.S. over Detour purchase
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