Judge Scheindlin yesterday denied French media conglomerate Vivendi, S.A.’s renewed motion for judgment as a matter of law under Rule 50(b) and for a new trial under Rule 59. The decision confirms the jury verdict against Vivendi awarding plaintiff Liberty Media 765 million Euros based on securities fraud and breach of warranty claims based on a merger transaction between the two companies in 2001. The Liberty Media trial followed a class action trial in late 2009, in which a class of French and U.S. shareholders won a securities fraud verdict over Vivendi for allegedly hiding its true liquidity risk from the market from late 2000 through mid-2002. Judge Scheindlin had earlier ruled that the verdict in the class action estopped Vivendi from contesting the falsity, materiality and scienter elements of Liberty Media’s claims, thus leaving only reliance, loss causation and damages to be tried to the Liberty Media jury.
Vivendi challenged the jury verdict as deficient on six separate grounds, including a failure to establish loss causation based on the testimony of Liberty’s damages expert and the failure to prove that the events or disclosures that caused Vivendi’s share price to decline revealed the fraud. Judge Scheindlin was unmoved, finding that Vivendi’s criticisms of Liberty’s damages expert went to the weight and credibility of his testimony, and were within the purview of the jury. Moreover, Judge Scheindlin held that the specific events that caused Vivendi’s share price to drop did not have to have been previously undisclosed risks. Instead, it was enough that they were within the “zone of risk” hidden by the alleged fraud, that their occurrence and subsequent share price declines were sufficient to establish loss causation under the Second Circuit’s Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005). As Judge Scheindlin explained:
Lentell asks whether a reasonable investor who believed the fraud would perceive the zone of risk as remote or highly unlikely, not whether such an investor would perceive any specific event within the zone of risk as unlikely. What Judge Holwell noted in response to Vivendi’s identical argument in the Class Action is equally true in the present case: plaintiffs have “offered substantial evidence that the zone of risk — a liquidity crisis — would have been thought unlikely by shareholders who believed Vivendi’s repeated assurances about its financial health.”
Judge Schiendlin also went on to explicitly distinguish between a “corrective disclosure” securities fraud claim – in which each disclosure that causes the share price to decline must reveal something about the specific fraudulent misstatements – and a “materialization of an undisclosed risk” securities fraud claim – in which no such one-for-one corrective is required to prove causation.
The Second Circuit distinguished in Omnicom between the proof of loss causation based on a theory of corrective disclosure, and proof of loss causation based on a theory of materialization of the risk. Under the former theory, “loss causation can be established by a ‘corrective disclosure to the market’ that ‘reveal[s] . . . the falsity of prior recommendations.’” Under the latter theory, loss causation can be established by showing “‘that the loss was foreseeable and caused by the materialization of the risk concealed by the fraudulent statement.’” In rejecting the Omnicom plaintiffs’ corrective disclosure argument, the Second Circuit noted that none of the ostensible disclosures put forth by plaintiffs “even purported to reveal some then-undisclosed fact with regard to the specific misrepresentations alleged in the complaint.” Vivendi infers from Omnicom that Liberty had the burden to prove that “the allegedly corrective events” in the present case “related to the ‘specific misrepresentations alleged’” in the present case. But what Judge Holwell stated in the context of the Class Action trial also applies here: “This is not a corrective disclosure case. Rather, plaintiffs are proceeding under a materialization of the risk theory.” Vivendi’s invocation of the Second Circuit’s language in analyzing the Omnicom plaintiffs’ corrective disclosure argument is misplaced. It was not necessary for Liberty “to establish a one-to-one correspondence between concealed facts and the materialization of the risk.”