Life’s Little Ironies

The Vivendi securities litigation continues to lead to interesting decisions. To recap, in 2010 the company lost a trial verdict in a securities class action with potential damages of $9.3 billion. As to who could collect those damages, however, the court found that it was unclear because “certain means of rebutting the presumption of reliance [under the fraud on the market theory] require an individualized inquiry into the buying and selling decisions of particular class members.”

The class action verdict and reliance ruling also had an effect on related cases brought by investors who were not part of the class. In particular, Vivendi was precluded from contesting the elements of a Section 10(b) claim, other than the element of reliance. In one of these individual cases – GAMCO Investors, Inc. v. Vivendi, S.A., 2013 WL 132583 (S.D.N.Y. Jan. 10, 2013) – the court addressed a motion for summary judgment by GAMCO. In opposition to the motion, Vivendi argued that it had raised material questions of fact with respect to GAMCO’s reliance. The court agreed.

(1) Reasonableness – The court found that Vivendi had “presented evidence establishing that [GAMCO] employees privately corresponded and/or met with Vivendi management during the relevant time period.” If GAMCO learned corrective non-public information from these meetings, it could not “claim that it reasonably relied on the market price of Vivendi securities” in making its purchases.

(2) Reliance on Stock Price – GAMCO was a value-based investor that measured Vivendi’s worth by calculating the “amount that an informed industrialist would pay for a company’s assets in a private-market transaction.” Vivendi presented evidence that the impact of the company’s liquidity crisis (i.e., the fraudulently omitted information) on this calculation would have been “minor.” The court found that this evidence was sufficient “to raise a material question of fact as to whether GAMCO would have transacted in Vivendi securities even if it had known its true liquidity condition.”

Holding: GAMCO’s motion for summary judgment denied.

Quote of note: “It is somewhat ironic that GAMCO, a value-based investor, is relying on the fraud on the market presumption, which is grounded on the reliability of the market price that value-based investors spend their lives second-guessing.”

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