July 16, 2013 Articles

Rebutting the Fraud-on-the-Market Theory

Lessons learned from Gamco Investors, Inc. v. Vivendi

By Peter M. Saparoff, Alec J. Zadek, and Bradford Hillman

In a recent decision by the U.S. District Court for the Southern District of New York, Gamco Investors, Inc. v. Vivendi, S.A., 2013 U.S. Dist. LEXIS 28506 (S.D.N.Y. Feb. 28, 2013), the court held that the defendant successfully rebutted the fraud-on-the-market theory. Specifically, the court found that the plaintiffs did not rely on the market price of the defendant’s shares as an accurate measure of the shares’ intrinsic value. In other words, because the plaintiffs’ investment strategy relied on the assumption that the market was not efficient—an investment strategy that runs contrary to the premise underlying fraud-on-the-market theory—the plaintiffs could not benefit from the presumptions afforded by it.

Although the decision in Gamco was factually driven and, as noted by the court, “exceedingly rare,” it is noteworthy nonetheless. The decision provides instruction to defendants on how to rebut the formidable presumption of reliance. It also serves as a cautionary tale to putative plaintiffs, that they should think about whether their investment strategy was driven by factors other than a security’s market price before pursuing a securities claim.

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