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From Securities Regulation Daily, March 4, 2013

Vivendi Successfully Rebuts Fraud on the Market Presumption

By Rodney F. Tonkovic, J.D.

In what a district court characterized as "an extraordinary case," Vivendi, S.A. was able to rebut the fraud on the market presumption of reliance. Judgment was accordingly entered in Vivendi's favor, and the case was closed (GAMCO Investors, Inc. v. Vivendi, S.A., February 28, 2013, Scheindlin, S.).

An investment adviser, GAMCO Investors, Inc. (GAMCO) alleged that Vivendi, a French multimedia company, had engaged in fraud with respect to GAMCO's transaction in Vivendi's American Depositary Shares (ADS). A jury eventually found that Vivendi had acted recklessly with respect to 57 statements that misstated or omitted its true liquidity risk. The court had previously held that Vivendi was precluded from contesting the elements of an Exchange Act Section 10(b) claim, except for reliance, and that GAMCO was entitled to the fraud on the market presumption of reliance; neither truth on the market nor allegations of no price impact were available as defenses to that presumption.

The only issue before the court in this case was whether Vivendi was able to rebut GAMCO's reliance on the misrepresentations and omissions that were incorporated into the market price of Vivendi's ADS. Vivendi was required to attempt this rebuttal without arguing that the market for the ADS was inefficient, that there was no price impact, that the truth about Vivendi's misstatements was known to the market, or that GAMCO possessed non-public corrective information. Judgment was entered in Vivendi's favor.

The fraud on the market presumption. The court cited Justice White's dissent in Basic in which he stated that "rebuttal [of the fraud on the market presumption] is virtually impossible in all but the most extraordinary case." The court's findings of fact, however, led it to the conclusion that this was "just such an extraordinary case." In this case, the court explained, GAMCO did not rely on the inflated market price of Vivendi's ADS as an unbiased assessment of their value, and it could not be said that but for Vivendi's misstatements and omissions about its liquidity condition, GAMCO would not have transacted in the ADS.

The court, in its findings of fact, had determined that the plaintiffs used private market value (PMV) to determine the intrinsic value of the ADS. PMV is "the price that an informed industrialist would be willing to pay for it if each of its segments were valued independently in a private market sale" and "is completely independent of liquidity concerns and market price." Based on the plaintiff's investment analyst's calculation of Vivendi's PMV and the spread between the PMV and Vivendi's market price, the analyst consistently recommended buying or holding Vivendi securities during the relevant period.

Conclusion: no reliance on market price. There was no indication in the record, the court said, that Vivendi would have been a less-attractive investment if it had fully disclosed its liquidity condition. On the contrary, the analyst was aware of the liquidity crisis at Vivendi, and the plaintiffs doubled or tripled their holdings during the period in which corrective disclosures were made. But for the alleged misrepresentations or omissions, the court stated, the plaintiffs were more likely to invest in Vivendi because the crisis reduced the market price for Vivendi's ADS without affecting its PMV. Moreover, the court noted, the analyst believed that the liquidity problems were only a short-term concern.

The court accordingly concluded that it was more likely than not that GAMCO did not rely on the market price of Vivendi securities. Therefore, Vivendi successfully rebutted the fraud on the market presumption. The court warned: "This holding is sharply limited to its unusual facts, and should not be taken to suggest that sophisticated institutional investors or value-based investors are not entitled to the fraud on the market presumption in general."

The case is No. 03 Civ. 5911 (SAS).

Attorneys: Vincent Roger Cappucci (Entwistle & Cappucci, LLP) and Harold F. McGuire, Jr. (Yankwitt & McGuire, LLP) for Gamco Investors, Inc. Daniel Slifkin, Paul C. Saunders and Timothy Gray Cameron (Cravath, Swaine & Moore, LLP) for Vivendi Universal, S.A.

Companies: Gamco Investors, Inc.; Vivendi Universal, S.A.

TopStory: FraudManipulation NewYorkNews

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