This article originally appeared in the March 25, 2010 issue of The Legal Intelligencer. It is reprinted here with permission.
On January 29, 2010, following a three-month trial and three weeks of deliberations, the jury in In re Vivendi Universal, S.A., No. 02-Civ.-5571, found Vivendi liable for federal securities Rule 10b-5 violations based on 57 material misstatements by the company. Damages for the class could exceed $9 billion. The jury absolved the company’s former CEO Jean-Marie Messier and former CFO Guillaume Hannezo of liability. According to Adam Savett of RiskMetrics Group, the Vivendi case is only the ninth securities class action lawsuit tried to a verdict since passage of the Private Securities Litigation Reform Act in 1995 based on post-PSLRA conduct. Most securities litigation cases are settled or dismissed. Vivendi has vowed to appeal.
Plaintiffs alleged that Vivendi made materially false and misleading statements about its liquidity and overall growth that inflated the company’s share price between October 2000 and August 2002. During this period, Vivendi embarked on an aggressive quest to transform from a French water utility company into a global media and telecommunications conglomerate. Central to that strategy were the acquisitions of The Seagram Company, which owned Universal Pictures and Universal Music Group, and Canal Plus S.A., one of Europe’s largest cable television operations, as well as a host of other acquisitions, including Houghton Mifflin Co., Studio Canal, and USA Network Entertainment. The acquisitions increased Vivendi’s debt from 3 billion euros to 21 billion euros.
During the class period, Vivendi’s CEO, Mr. Messier, repeatedly assured investors that financial results were “very strong” and that Vivendi had a “healthy balance sheet.” Eventually, in July 2002, Mr. Messier resigned among a series of market rumors that Vivendi had hidden liabilities. Soon thereafter, the company’s new CEO admitted that Vivendi “was [then] facing a liquidity problem.” The new CEO further stated in September 2002 that if Mr. Messier remained CEO beyond the date he resigned, the company would have gone bankrupt “within 10 days.” Plaintiffs alleged that the company misled investors about Vivendi’s true liquidity position and overall growth through various public statements at the same time the company was suffering massive losses and increased debt.
Early Litigation Losses
Many securities fraud cases are dismissed or settle prior to trial; Vivendi was not. Judge Baer of the District Court for the Southern District of New York denied Vivendi’s motion to dismiss for lack of subject matter jurisdiction and for failure to state claims under §§ 11, 12(a)(2), and 15 of the of the Securities Act of 1933, and §§ 10(b) and 20(a) of the Securities Exchange Act of 1934. In re Vivendi Universal, S.A. Sec. Litig., 381 F. Supp. 2d 158 (S.D.N.Y. 2003). The court granted dismissal of the §14(a) claim under the 1934 Act and the §12(a)(2) claim under 1933 Act against Mr. Hannezo, but permitted plaintiffs the opportunity to amend their complaint.
Specifically, Vivendi sought dismissal of claims brought by certain “foreign-cubed” investors - foreign plaintiffs who purchase shares of a foreign company on foreign stock exchanges - for lack of subject matter jurisdiction. The court applied the Second Circuit’s “conduct test,” and held that it had jurisdiction over the foreign-cubed plaintiffs’ claims because Vivendi’s conduct in the United States was more than merely preparatory to the fraud, and particular acts within the United States directly caused losses to foreign investors. Those acts included the plan to acquire U.S. entertainment and publishing companies, and the fact that Messrs. Messier and Hannezo spent half of their time in the United States soliciting U.S. investors.
The court also denied challenges to plaintiffs’ Rule 10(b) claims because plaintiffs pleaded sufficient facts to provide a reasonable belief that Vivendi knew its statements regarding the company’s financial health and liquidity were false, and that Vivendi indeed had a liquidity problem. The court further denied Vivendi’s safe-harbor defense (cautionary language insufficient) and truth-on-the-market defense (too fact-intensive and rarely an appropriate basis for dismissal), and concluded that the statements were more than merely inactionable puffery. The Court also held that plaintiffs sufficiently alleged scienter (the company had motive to commit fraud to acquire more companies, and Vivendi knew or should have known it misrepresented material facts about the company). For many of the same reasons, the court denied Vivendi’s motion to dismiss plaintiffs’ §§ 11, 12, 15 and 20 claims.
Vivendi sought reconsideration of its motion to dismiss, which newly presiding Judge Holwell denied. In re Vivendi Universal, S.A. Sec. Litig., 2004 U.S. Dist. LEXIS 21230 (S.D.N.Y. Oct. 19, 2004). He wrote an opinion to specifically address whether the court had subject matter jurisdiction over the foreign plaintiffs’ Rule 10(b) claims. Again applying the “conduct test,” the court concurred with Judge Baer’s decision finding jurisdiction over this dispute. Additionally, Judge Holwell stressed the significance of the fact that Vivendi’s two top executives resided and ran the company from the United States during the final year of the class period. The court further denied Vivendi’s request to certify an interlocutory appeal.
Plaintiffs subsequently moved to certify a class that encompassed domestic and foreign persons who purchased or otherwise acquired Vivendi common shares on foreign exchanges and American Depository Shares on the New York Stock Exchange between October 30, 2000 and August 14, 2002. In re Vivendi Universal, S.A. Sec. Litig., 242 F.R.D. 76 (S.D.N.Y. 2007). Vivendi argued that all foreign plaintiffs needed to be excluded from the class because of the “near certainty” that the company would be unable to assert claim preclusion to bar subsequent actions in countries where foreign plaintiffs reside. The court disagreed and certified a class of plaintiffs that included persons from the U.S., France, England, and the Netherlands because it concluded it was more likely than not that courts in these countries would recognize the enforceability of a judgment or settlement in the present case. The court’s class certification order declined to include plaintiffs from Germany and Austria because it was more likely than not that courts in these countries would not give res judicata effect to judgments or settlements in a U.S. opt-out class action.
Vivendi’s attempts to have this securities fraud case against it dismissed prior to trial ended in April 2009 when the court denied its motion for summary judgment. In re Vivendi Universal, S.A. Sec. Litig., 634 F. Supp. 2d 352 (S.D.N.Y. 2009). Vivendi moved for summary judgment against all plaintiffs based primarily on a failure to prove loss causation. Citing Second Circuit precedent, the court reasoned that “[l]oss causation is the causal link between the alleged misconduct and the economic harm ultimately suffered by the plaintiff.” Plaintiffs seeking to prove loss causation must show a connection between the alleged facts or misleading statements and one or more events disclosing the truth concealed by that fraud, and a connection between these events and actual share price declines. See Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005). The court held that plaintiffs presented a genuine issue of material fact with regard to Vivendi’s alleged concealment of a severe liquidity risk, whether that risk was revealed to the market, and if these events caused the losses. Vivendi’s motion for summary judgment was denied and the case proceeded to trial.
Vivendi Found Liable For 57 Material Misstatements, Plans To Appeal
On October 5, 2009, after years of pre-trial motions and preparation, the jury trial began. Following a three-month trial and three weeks of deliberation, the jury reached a verdict on January 29, 2010, finding Vivendi liable for 57 material misstatements. The jury exonerated Vivendi’s former executive officers, Messrs. Messier and Hannezo, of any personal liability. The verdict may entitle plaintiffs to recover as much as $9.3 billion in damages. Of course, the actual amount of damages cannot be fully estimated at this time because final payout depends on how many investors were actually in the class and whether they will all seek their payout. Each class member’s individual payout will hinge on a number of factors, including number of shares held and the purchase and sale dates.
Vivendi has stated that it plans to appeal and have the verdict overturned. For now, grounds for appeal may include the court’s ruling on subject matter jurisdiction related to foreign plaintiffs’ claims (particularly French plaintiffs), the court’s decision to include foreign investors in the class, and the method for calculation of damages. The parties will be paying close attention to the United States Supreme Court’s anticipated opinion in Morrison v. National Australia Bank, Ltd., No. 08-1191, in which the Court will address whether and under what circumstances foreign-cubed class actions may be brought under U.S. securities laws.
Vivendi is only the ninth securities class action lawsuit tried to a verdict since passage of the PSLRA based on a company’s post-PSLRA conduct. Of these nine cases, after post-verdict motions and appeals, the verdicts favor defendants five to four. This nearly 50-50 split demonstrates why most securities class action cases do not go to trial, and why parties settle when they are unable to achieve an earlier dismissal – the uncertainty and potential liability are too great. Of course, when plaintiffs assert a multi-billion dollar claim, the parties may be unable to agree on a settlement figure. For Vivendi, the fight will likely continue on appeal, and it could be years before the matter is finally resolved and actual damages are determined.
Robert L. Hickok, Thomas T. Watkinson II, and John L. Schweder, II
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