In a decision issued yesterday, Judge Scheindlin held that french media conglomerate Vivendi successfully rebutted the fraud on the market presumption of reliance in a 10b-5 action brought by Mario Gabelli’s GAMCO Investors, Inc. and certain Gabelli mutual funds, and entered judgment on behalf of Vivendi in the action. Judge Scheindlin acknowledged that rebuttal of the fraud on the market presumption is virtually impossible in all but the most extraordinary cases, but concluded that “this is just such an extraordinary case.”
The Gabelli action (like the Liberty Media action we covered here) followed a 2009 class action trial with virtually identical underlying allegations regarding Vivendi’s concealment of its alleged “liquidity risk” from late 2000 through mid-2002. Judge Scheindlin had previously held that (1) the adverse jury verdict in the class action collaterally estopped Vivendi from denying any element of the Gabelli plaintiffs’ 10(b) claims save for reliance, and (2) the Gabelli plaintiffs were entitled to the fraud on the market presumption. Yesterday’s decision came after a two-day bench trial earlier this month on the narrow issue of whether Vivendi could rebut that presumption. Judge Scheindlin found that the presumption was rebutted because the Gabelli plaintiffs did not “rely on the market price of [the Vivendi] securities as an accurate measure of their intrinsic value”:
[T] hroughout the Relevant Period: (1) Plaintiffs were value-based investors who utilized a propriety metric known as PMV to evaluate the intrinsic value of Vivendi securities; (2) the calculation of PMV relied upon by Plaintiffs to evaluate Vivendi was significantly higher than Vivendi’s market price; (3) the market price of Vivendi securities factored into Plaintiffs’ investment decision only as a comparator with PMV; and (4) the liquidity crisis at Vivendi was irrelevant to Plaintiffs’ investment decisions, except to the extent that each corrective disclosure made Vivendi a more attractive investment, by increasing the spread between Vivendi’s PMV and its market price.
Judge Schiendlin found no indication in the record that the Gabelli plaintiffs would have viewed Vivendi as a less attractive investment if they had made the liquidity disclosures plaintiffs asserted they should have – to the contrary:
Plaintiffs would have seen Vivendi as a more attractive investment. And they did: during the Corrective Disclosure Period, Plaintiffs doubled or tripled their holdings in Vivendi securities. In other words, but for the alleged misrepresentations and omissions, Plaintiffs would have been more likely to invest in Vivendi.