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 )). 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 ( GS ) 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 ( GS ) 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' ( GS ) 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.

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