In what Judge Shira A. Scheindlin of the Southern District of New York called an “extraordinary case,” French multimedia company Vivendi, S.A. has scored an unusual victory based on a successful rebuttal of the fraud-on-the-market presumption of reliance, which the Supreme Court established 15 years ago in the seminal decisions of Basic v. Levinson, 485 U.S. 224 (1998). Though the stakes were relatively small—the Vivendi investor alleged only $3.5 million in damages—the decision is significant. It is one of the few in which a defendant successfully rebutted the almost impenetrable fraud-on-the-market presumption.
The court’s opinion in Gamco Investors, Inc. v. Vivendi, S.A. came after a two day bench trial on the limited issue of whether Vivendi could rebut the fraud-on-the-market presumption. Vivendi was collaterally estopped from challenging any elements of the plaintiff’s 10b-5 claims, other than reliance, following an earlier class action jury verdict concerning similar claims regarding Vivendi’s liquidity status.
The case turned on a few key facts. First, the plaintiffs were value investors that employed an investment strategy based on a proprietary model called a “Private Market Value,” or PMV. The PMV was designed to capture a company’s “intrinsic value,” as distinct from a company’s traditional market capitalization. In other words, the investor’s strategy was expressly not dependent on the market’s view of the company. Second, to the extent the plaintiffs’ claims were based on alleged misstatements by Vivendi concerning liquidity issues, testimony at trial indicated that, in fact, these issues made Vivendi a more attractive investment for the plaintiffs. Such statements, in plaintiffs’ view, depressed Vivendi’s market price without affecting its PMV, thereby increasing the spread between the two and consequently plaintiffs’ opportunity for profit. Third, consistent with the plaintiffs’ investment strategy, the plaintiffs doubled or tripled their holdings in Vivendi during a period in which Vivendi made a series of corrective disclosures that “completely revealed Vivendi’s true liquidity condition.”
Judge Scheindlin determined that, based on plaintiffs’ investment strategy, it was more likely than not that plaintiffs did not rely on the market price of Vivendi’s securities as an accurate measure of their intrinsic value. The court indicated that its ruling was sharply limited to its facts, and should not be read to suggest that institutional or value investors are not otherwise entitled to the fraud-on-the-market presumption, noting that the use of sophisticated investment models does not in and of itself foreclose a finding of material reliance on market price.
Notwithstanding Judge Scheindlin’s qualifying language, life under the Basic presumption of reliance is getting more complicated. Just a few weeks ago, in the Amgen case, Justices Alito and Thomas fired their own shot across the bow of the fraud-on-the-market presumption, suggesting that the presumption may rest on a faulty economic premise and thus may be ripe for reconsideration. Amgen Inc., et al. v. Conn. Retirement Plans & Trust Funds, No. 11-1085, slip op. at 1 (Alito, J., concurring) and 4 n.4 (Thomas, J., dissenting) (Feb. 27, 2013).