…in a nonprecedential opinion so don’t get too excited.

San Diego County Employees Retirement Association v. Johnson & Johnson represents the latest iteration of courts trying to figure out what the heck to do about fraud on the market class certification in the wake of the Supreme Court’s desperately confused Goldman Sachs Grp., Inc. v. Ark. Teacher Ret. Sys., 594 U.S. 113 (2021).

Plaintiffs alleged that J&J concealed asbestos in its talc products, resulting in multiple stock price drops as the truth dribbled out.  At class certification, J&J claimed it had rebutted the presumption of reliance by demonstrating that each allegedly corrective disclosure revealed no new information the market, and therefore could not have been responsible for the dissipation of artificial inflation.

I pause here to note that this is, I guess, the framework mandated by Goldman, but – as I have frequently screamed – it is both illogical and inconsistent with Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804 (2011) (Halliburton I). Specifically, even if J&J proves beyond a reasonable doubt that its fraudulent statements were never publicly corrected, that does not in any way shed light upon the question whether the fraud impacted stock prices to begin with – at best, it means J&J got away with it.  And that matters a lot for a merits determination, but not at all for class certification, as Halliburton I explains.

Moving on.  J&J’s argument wasn’t, in fact, that the truth was never disclosed; the argument was that the truth was disclosed to no effect, and that the disclosures identified by the plaintiffs only repackaged information that had previously been disclosed.  In a 2-1 decision, the Third Circuit concluded that, given the obscure and incomplete nature of prior disclosures, the district court had not abused its discretion in concluding that the disclosures at issue revealed new information to the market.

So, things that are notable in the majority opinion:

First, the majority held that simple republication of previously publicized facts may count as a “new” disclosure, if the second source is more credible and made to a broader audience.

Second, the majority noted that expert analysis of disparate bits of public data may qualify as new information.

Third, the majority held that if corporate management denies the truth of a disclosure, that denial mitigates any corrective effect.

Certainly, all of these holdings have their origins in prior caselaw, but Johnson & Johnson offered a particularly stark application.  Evidence about J&J’s talc and asbestos had been made public in various fora, including as trial exhibits in lawsuits, without much market reaction – until it was distilled into a jury verdict against J&J, an announcement of further lawsuits, and blog posts and press releases publicizing trial evidence.  The Third Circuit reasoned that scattershot evidence introduced in prolonged public trials might not have been understood and acted upon by investors until clearer signals gave it credibility and informed the market of the kind of liability that J&J faced.  The dissent, for the most part, objected only on the ground that the district court had not made these findings; they were the invention of the majority.

Anyway, all I can say is, this opinion is a gift to plaintiffs – not just for class cert but also for motions to dismiss, where arguments similar to J&J’s succeed in getting complaints dismissed on loss causation and materiality grounds – so it’s a shame it’s not for publication.

There is a flashing danger sign for plaintiffs, though, and this is an issue I discussed when the Second Circuit managed to make the Supreme Court’s Goldman decision even worse. In J&J, the dissent especially focused on the need for subsequent disclosures to correct earlier misstatements in order to give rise to the inference that the initial lies impacted prices.  That’s a problem because – as has frequently come up in the context of loss causation – very often the effects of a fraud are felt long before the market realizes it’s been fooled.  Like, in an extreme case, a company might suddenly declare bankruptcy, and no one realizes it was due to anything except mismanagement, until months later a fraud is revealed – by which time, of course, there’s no price movement.  It’s precisely because of that scenario that (most) courts (usually) hold that loss causation can be established without proof that the market was actually informed that the defendants lied to them.  But if courts are just going to demand that kind of evidence at class certification, well, an awful lot of defendants are going to skate by so long as they can attribute fraud losses to other factors for a long enough time period.

And another thing.  No new Shareholder Primacy podcast this week; Mike and I are on a light schedule until the end of August.  But I jotted!  Here you can read my Jotwell review of Bridget Read’s book, Little Bosses Everywhere: How the Pyramid Scheme Shaped America.