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The longstanding suit over housing bubble-era investment actions taken by Goldman Sachs has recently moved between the district court in Manhattan and the U.S. Court of Appeals for the Second Circuit since being filed in 2010.

Late on Tuesday, the suit shifted back in favor of the plaintiffs, after U.S. District Judge Paul Crotty of the Southern District of New York again granted class certification to the investors in the suit. This, after an appellate panel in January reversed and remanded Crotty's earlier class certification and instructed the district court to review evidence that Goldman believed defeated the class.

The suit was first filed shortly after the housing market bubble popped. The plaintiffs accused Goldman of making public misstatements about the conflicts of interest policies and business practices related to funds dealing in collateralized debt obligations backed by residential mortgage-backed securities. These include the Abacus fund that allowed its client, investor John Paulson's hedge fund, to have an active role in selecting assets for the fund, without disclosing the fact Paulson held the sole short position.

The suit's lengthy proceedings ultimately ended up at the Second Circuit on interlocutory appeal over the initial class certification. There, the panel sided with Goldman over issues related to the standard for securities class actions laid down in the U.S. Supreme Court's 1988 decision in Basic v. Levinson.

On remand, Crotty reviewed the Basic presumption, which relies on the fraud-on-the-market-theory. Defendants could rebut the Basic presumption and defeat class certification, the appellate panel said, if, by a preponderance of the evidence, that the misstatements can be shown not to have had an effect on the market.

In his 11-page decision, Crotty quickly found that the witnesses and evidence put on by Goldman failed to do just that.

The plaintiffs' expert testified that the misstatements, while not themselves the cause of inflated stock prices, served to maintain the inflated price. The inflation was allegedly uncovered on three specific dates, when federal regulators and prosecutors at different times began investigating Goldman's fund management practices, after which Goldman's stock price declined.

Two separate Goldman experts testified in opposition. The experts noted that on 36 occasions during the relevant time periods, news stories appeared about Goldman's conflicts in the funds and none had an impact on the company's stock price. This, according to Crotty, supposedly proved the misstatements had no price impact, and that the revelation of client conflicts had not contributed to the later declines after government investigations were revealed.

The experts also suggested that the price declines that did happen were exclusively due to enforcement activities.

The arguments were unavailing to Crotty, who found the plaintiffs' arguments established a link between the news of Goldman's conflicts and the subsequent stock decline, which was sufficient to meet the Basic presumption. The reports of government action provided new information not described in the 36 news articles, making them more credible and reliable, the judge said. The experts failed to credibly explain how the hard evidence revealed by government investigators about the scope of Goldman's conflicts did not contribute to the price decline that followed, according to the judge.

The argument that the news of the enforcement themselves was the cause of the decline also failed, as it relied on a flawed analysis tied to small samples of similar scenarios for other companies, Crotty found.

“Defendants have failed to tip the scale in their favor on this issue,” the judge wrote.

The debate over this key aspect of the suit is likely far from over. An appeal appears certain, sooner or later, as the Second Circuit's decisions in similar cases will be used to argue that similar statements by other banks and firms can have no price impact.

Goldman's legal team is led by Sullivan & Cromwell partner Robert Giuffra Jr. He declined to comment.

The lead plaintiffs are represented by co-counsel Labaton Sucharow partner Thomas Dubbs and Robbins Geller Rudman & Dowd partner Spencer Burkholz. They declined to comment.