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From Securities Regulation Daily, August 12, 2015

Failure of reliance takes 13-year-old Vivendi lawsuit off the air

By Anne Sherry, J.D.

Vivendi Universal, S.A. successfully rebutted the Basic presumption of reliance as to an investment adviser’s 2000-2002 transactions in Vivendi American Depositary Receipts. The adviser relied on its own assessments rather than the integrity of the market in trading Vivendi securities, the Southern District of New York found, severing the link between the alleged misrepresentations and the price or decision to trade and rebutting the reliance presumption. Having thus decided the last remaining issue in the case, the court granted Vivendi’s motion to dismiss (In re Vivendi Universal, S.A. Securities Litigation, August 11, 2015, Scheindlin, S.).

Background. The class action concerned alleged misrepresentations that misstated or omitted Vivendi’s true liquidity risk. The jury returned a verdict finding that Vivendi acted recklessly. After the court stated that Vivendi was entitled to rebut the presumption of reliance on an individual basis if it made separate inquiries into the class members’ individual circumstances, Vivendi conducted such an inquiry into the circumstances of the investment adviser’s transactions. The parties cross-moved for summary judgment.

Investments. As fund manager and investment adviser, Southeastern Asset Management exercised full investment discretion on behalf of the claimants. Southeastern is a value investor that considers a company’s line of business, management, and stock valuation before making an investment. Its ultimate decision to invest depends on its proprietary price-value ratio valuations. Before investing in Vivendi, Southeastern conducted an extensive evaluation of the company’s debt and assets, some of which were already familiar to Southeastern, having been standalone public companies before Vivendi acquired them.

Southeastern purchased Vivendi ADSs in large quantities even after Vivendi made corrective disclosures about its liquidity position and French regulators stormed the company’s offices. The adviser ultimately amassed over 45 percent of Vivendi’s total outstanding ADSs. The Southeastern analyst responsible for tracking Vivendi testified that he was confident in the level of Vivendi’s debt and continued to purchase ADSs after the ratings agencies downgraded Vivendi, marking the last day of the class period. Southeastern earned a large overall return on its investment, meeting its investment objectives.

Reliance. The Basic presumption that an investor trading in an efficient market relied on the integrity of the market may be rebutted by severing the link between the misrepresentation and either the price of the plaintiff’s trade or the plaintiff’s decision to trade at a fair market price. The court held that Vivendi rebutted this presumption because Southeastern was indifferent to the fraud at the company. The market price of the ADSs was not important to the adviser’s calculation of their intrinsic value, which instead was based on careful assessments of Vivendi’s assets and liquidity position. Although the Court in Halliburton II stated that a “value investor … need only trade stock based on the belief that the market price will incorporate public information within a reasonable period” to benefit from the reliance presumption, this isolated statement must be taken in context. There is a difference between relying on the market price of a stock and relying on the integrity of the market price in trading that stock. All investors rely on the former, but the very premise of Basic establishing a rebuttable presumption is that not all investors rely on the latter.

The case is No. 02-cv-5571.

Attorneys: Sol Schreiber (Milberg LLP), Corey D. Holzer (Holzer & Holzer, LLC) and James Stuart Notis (Gardy & Notis, LLP) for Miami Group. Christine M. Mackintosh (Grant & Eisenhofer P.A.) for GAMCO Investors, Inc. Joseph F. Rice (Motley Rice) for Barclays Global Investors Deutschland. Eric James Belfi (Labaton Sucharow LLP) for KBC Asset Management SA. Luke Orion Brooks (Coughlin Stoia Geller Rudman & Robbins LLP), Michael J. Malone (King & Spalding LLP) and Michael A. Paskin (Cravath, Swaine & Moore LLP) for Vivendi Universal.

Companies: Retirement System for General Employees of the City of Miami Beach; Prigest S.A.; Tocqueville Finance S.A.; GAMCO Investors, Inc.; Barclays Global Investors Deutschland; KBC Asset Management SA; Vivendi Universal, S.A.

MainStory: TopStory FraudManipulation InvestmentAdvisers NewYorkNews

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