Vivendi squelches big investor’s $57 million claim in class action

August 12, 2015

(Reuters) – The French media company Vivendi proved Tuesday that it is possible to rebut the infamous presumption in securities class actions that investors relied on market-distorting corporate misrepresentations. U.S. District Judge Shira Scheindlin of Manhattan granted Vivendi’s motion for summary judgment against claims by the institutional investor Southeastern Asset Management, or SAM, concluding that the evidence – including a five-hour deposition of the analyst who oversaw SAM’s Vivendi stake – showed SAM did not make investment decisions based on Vivendi’s supposedly fraudulent statements.

That’s quite a win for Vivendi and its lawyers at Weil Gotshal & Manges. Vivendi was found liable to a class of investors back in 2010, after a rare securities class action trial. Last December, Judge Scheindlin entered a partial final judgment against the company, awarding investors about $50 million in damages and interest. But Vivendi retained the right to challenge claims by some big investors. SAM was the biggest of them. It held more than 45 percent of Vivendi’s American Depository Receipts during part of the alleged fraud. If Vivendi had lost summary judgment, it would have been on the hook for $57 million in damages – more than it owes the rest of the investor class.

Judge Scheindlin had previously ruled for Vivendi in an individual fraud suit the Gabelli Funds brought after the class won the jury verdict on liability. The judge held in that case that Vivendi successfully established the Gabelli Funds did not make investment decisions based on its supposed misstatements.

But that 2013 decision occurred before the U.S. Supreme Court’s 2014 opinion in Halliburton v. Erica P. John Fund, which changed Scheindlin’s analysis a bit. The class, represented by Abbey Spanier, argued in its motion for summary judgment on SAM’s investment that the justices in Halliburton reinforced the idea, first codified in 1988’s Basic v. Levinson, that fraud distorts the market price of shares. So according to the class, investors that use price-to-value ratios to evaluate their holdings, as SAM did, inevitably rely, even if indirectly, on fraudulent statements.

Judge Scheindlin agreed that Halliburton’s discussion in dicta of “value investors” might seem, in isolation, to back the class’s argument. She pointed out, however, that Halliburton and its predecessor, Basic, addressed reliance only in the context of class certification. “There is a key difference between relying on the market price of a stock – in the way SAM does in calculating PVR – and relying on the integrity of the market price in trading that stock,” she wrote. “The very premise of the Basic presumption is that not all investors rely on the integrity of the market price … Successfully navigating the choppy waters of class certification on a sturdy ship named Basic does not guarantee safe passage for the rest of the journey.”

SAM’s own analyst testified that the market price of Vivendi’s shares wasn’t an important consideration for him, the judge wrote. The analyst said that even if he had known the corporation was misleading investors about its liquidity, it wouldn’t have mattered, and that he did not believe he had been misled about Vivendi’s debt. Those facts, Scheindlin said, were enough for Vivendi to rebut the presumption that SAM relied on corporate misrepresentations.

The judge said her ruling in this case doesn’t mean that sophisticated investors with their own pricing strategies cannot recover losses from securities fraud defendants. “It is easy to imagine a situation in which an institutional investor is legitimately duped by a fraud and loses a substantial sum of money as a result,” she said. “These simply are not the facts here.”

Scheindlin did reject Vivendi’s attempt to limit SAM’s potential damages by arguing that the investment manager ended up holding its Vivendi shares for more than five years and eventually made a killing on its investment. The judge said that although the law isn’t entirely clear, damages should be based on the mean trading price during 90 day “bounce-back” period after the last corrective disclosure, as the Private Securities Litigation Reform Act anticipates. If the mean trading price during the 90-day bounce-back is less than the inflated price investors paid before the fraud was revealed, shareholders can recover damages, she ruled.

Vivendi counsel James Quinn of Weil said in an email that the company may bring similar summary judgment motions against two other institutional investors but SAM was “by far the biggest claimant.” Lead class counsel Arthur Abbey didn’t respond to my email request for comment.

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