On February 27, 2013, Judge Shira A. Scheindlin of the U.S. District Court for the Southern District of New York entered judgment in favor of Cravath’s client, Vivendi, S.A., and dismissed a securities fraud action brought by GAMCO Investors, Inc. and related entities controlled by Mario Gabelli. This is the first public market purchase case in which the presumption of reliance has been successfully rebutted at a trial on the merits. The opinion serves as precedent for future cases.
In their complaint, Plaintiffs alleged that Vivendi committed securities fraud by concealing a liquidity risk in 2001 and 2002. In 2010, a jury ruled against Vivendi on similar claims brought by a class of shareholders. As a result, Vivendi was precluded from: (i) re‑litigating the falsity, materiality, scienter and loss causation elements of the claims under Section 10(b) of the Securities Exchange Act of 1934 and (ii) using the truth‑on‑the‑market defense. Thus, the sole issue to be decided was whether Vivendi was able to rebut the fraud‑on‑the‑market presumption that Plaintiffs claimed was the basis of their reliance. Following a two‑day bench trial on February 18 and 19, 2013, the Court concluded that Vivendi had successfully rebutted the fraud‑on‑the‑market presumption and entered judgment in Vivendi’s favor.
The Court recognized that attempts to rebut the presumption are “exceedingly rare” and that it is “only the unusual case in which compatible findings of materiality and nonreliance can be made.” The Court concluded that, based on the findings of fact, this was “just such an extraordinary case.”
Cravath achieved this victory by developing a complete evidentiary record that demonstrated that Plaintiffs did not rely on the market price as an “accurate measure of the stock’s intrinsic value” in making their purchases of Vivendi stock and by proving that they would have made those purchases even if they had known of the existence of an alleged liquidity risk. Quoting from partner Timothy G. Cameron’s closing argument, the Court adopted Vivendi’s “useful formulation of the transaction causation test” in concluding that the market price of the security at issue was not a “‘motivating driving force’ behind Plaintiffs’ investment decision.” Here, the Court found, “but for the alleged misrepresentations and omissions, Plaintiffs would have been more likely to invest in Vivendi.” Accordingly, the Court concluded that “Vivendi has therefore carried its burden and rebutted the fraud on the market presumption.”
The Cravath team was led by Of Counsel Paul C. Saunders and partner Timothy G. Cameron and included associates Margot A. Miller, Xiao Liu and Sarita Prabhu. The case is Gamco Investors, Inc. v. Vivendi, S.A., No. 03‑cv‑5911 (SAS).