On the same day that it issued its “Model V” decision, the Second Circuit issued another opinion in the Vivendi securities litigation addressing whether “value investors” can invoke the fraud-on-the-market presumption of reliance.
In Gamco Investors, Inc. v. Vivendi Universal, S.A., 2016 WL 5389281 (2d Cir. Sept. 27, 2016), the district court held that Vivendi had successfully rebutted the fraud-on-the-market presumption. In particular, the court found “that, given the facts in the record, Vivendi proved that GAMCO would have purchased Vivendi securities even if it had known of Vivendi’s alleged fraud.” The district court entered judgment for the defendant. (Click here for a summary of an earlier decision in the case on this issue).
On appeal, the Second Circuit rejected GAMCO’s contention that the district court had created a blanket rule barring “value investors” from invoking the fraud-on-the-market presumption because those investors do not necessarily consider the market price to be an efficient reflection of the value of the security. Instead, the panel focused on the evidence and concluded that it was sufficient to establish that “had GAMCO known of Vivendi’s liquidity problems, GAMCO would still have believed, first, that Vivendi’s securities were substantially undervalued by the market and second, that an event was likely to happen in the next few years that would awake the market to that fact.” Accordingly, “the district court did not clearly err in concluding, on this record, that in this case, and with regard to this particular fraud” that GAMCO could not establish reliance on the alleged misrepresentations.
Holding: Judgment of district court affirmed.