Trials in securities fraud cases are exceedingly rare. By way of example, just 12 securities fraud class actions have been tried to a verdict since the passage of the Private Securities Litigation Reform Act of 1995 (PSLRA). See Adam Savett, Securities Class Action Trials in the Post-PSLRA Era (July 24, 2012). Given the dearth of these cases proceeding to trial, the guidance from the courts as to what is required of securities fraud plaintiffs to prove damages is limited. Indeed, summary judgment decisions in the federal securities arena have generally eschewed analyses of damages, holding that so long as a plaintiff has proffered sufficient evidence that the alleged fraud was a substantial factor in causing shareholder losses (i.e., loss causation), summary judgment will be avoided and the issue of quantifying those losses will be reserved for trial. See, e.g., In re Vivendi Universal, S.A. Sec. Litig., 634 F. Supp. 2d 352, 364–65 (S.D.N.Y. 2009) (“[I]t is important not to confuse causation with damages when comparing competing causes for a stock decline. In theory, plaintiffs need only prove that they suffered some damage from the fraud. Liability obviously does not hinge on how much damage.”).
Fortunately for practitioners, the Southern District of New York has recently provided some needed direction in upholding a jury award under section 10(b) of the Securities Exchange Act of 1934. Judge Shira A. Scheindlin’s decision in Liberty Media Corp. v. Vivendi Universal, S.A., No. 03-civ-2175 (S.D.N.Y. Feb. 12, 2013), illuminates how the plaintiffs’ counsel and their financial expert proved damages and staved off a post-trial assault on the various components of their damages presentations to the jury. The Liberty Media decision helps to clarify what plaintiffs are required to show in order to prove damages at trial. The decision also demonstrates the latitude afforded to juries in assessing expert testimony and awarding damages when the impact on the stock price cannot be determined with mathematical precision—which, given the complex fact patterns involving multiple misrepresentations made over many months or years that are typical of securities actions, is commonly the case.
Background of Liberty Media
In re Vivendi Universal, S.A. Securities Litigation, 765 F. Supp. 2d 512 (S.D.N.Y. 2011), was a securities class action brought against Vivendi Universal, S.A., and two of the company’s senior officers for violations of section 10(b) of the Securities Exchange Act and Rule 10b-5. The class plaintiffs alleged that Vivendi and the individual defendants made 57 material misrepresentations and omissions regarding Vivendi’s liquidity position between 2000 and 2002 that artificially inflated the price of the company’s American Depositary Receipts. See Judge Holwell’s Memorandum Opinion and Order dated March 31, 2009, for details of the complex procedural history and background of these related proceedings. In a subsequent individual (non-class) action, Liberty Media Corp. v. Vivendi Universal, S.A., Liberty Media brought suit against Vivendi, alleging similar section 10(b) and Rule 10b-5 claims with respect to a subset (25) of the 57 misrepresentations and omissions alleged by the class, as well as claims for breach of express warranties under New York law. The Liberty Media action was consolidated with the class action from mid-2003 to March 2, 2009. The class action was then tried before a jury beginning in October 2009. Following a three-month trial before Judge Richard J. Holwell of the Southern District of New York, the jury returned a verdict for the class plaintiffs, finding that Vivendi had violated section 10(b) and Rule 10b-5 as to all 57 alleged misstatements or omissions.
On April 11, 2012, Judge Scheindlin issued an opinion in the related Liberty Media action, holding that, based on the jury verdict in the class action trial, Vivendi was collaterally estopped from contesting the falsity, materiality, and scienter elements of Liberty Media’s section 10(b) claims stemming from the 25 statements for which the jury found Vivendi liable. 861 F. Supp. 2d 262 (S.D.N.Y. April 11, 2012). The Liberty Media action was tried before a jury beginning the following month. On June 25, 2012, the jury returned a verdict in Liberty Media’s favor, finding Vivendi liable for violations of section 10(b) and breach of warranty, and awarding Liberty Media €765 million for each cause of action. (In her Opinion and Order dated January 19, 2013, Judge Scheindlin explained that the Special Verdict Form directed the jury to award damages in euros (and not U.S. dollars); accordingly, the damages figures set forth in the Vivendi opinions and cited in this article are denominated in euros [€].) Following the jury verdict, Vivendi renewed its motion for judgment as a matter of law pursuant to Federal Rule of Civil Procedure 50(b) or, in the alternative, for a new trial pursuant to Federal Rule of Civil Procedure 59. Among other things, Vivendi argued that the opinion of Liberty Media’s expert on loss causation and damages, Dr. Blaine Nye, was unreliable; therefore, the jury’s damages award was not supported by the record. In denying Vivendi’s motion in its entirety, the court emphasized the role of the jury in assessing damages evidence and the principle that once an expert’s methodology has survived the scrutiny of Daubert and is deemed reliable, the jury’s credibility determinations will be afforded great deference in the trial court’s inquiry under Federal Rule 50.
Disaggregation of Non-Fraud Factors
In support of its motion for judgment as a matter of law, Vivendi asserted that “[n]o jury should have been permitted to base a verdict on Dr. Nye’s inconsistent, unreliable and inadmissible testimony,” arguing that Dr. Nye’s disaggregation analysis was so flawed as to be legally insufficient to support the jury’s verdict because he failed to “disaggregate a single [non-fraud-related, company-specific] event on any one of” the nine days he identified as days on which Vivendi’s stock price declined in response to information revealing Vivendi’s true liquidity condition.
At trial, Liberty Media’s expert identified nine days on which materializations of Vivendi’s concealed liquidity risk resulted in statistically significant declines in Vivendi’s stock price, after removing market-wide and industry-wide effects. Dr. Nye further testified that although he had identified days on which Vivendi’s share price declined as a result of “non-fraud-related company-specific news,” none of these days were included among the nine materialization event days. With respect to these nine days, Dr. Nye explained that he had studied the days “for other things that happened on that day that you might need to take out that weren’t related to the concealed liquidity risk” but found no material non-fraud-related, company-specific negative news. As Dr. Nye testified, “[i]n those days, . . . everything had to do with the fraud.” Dr. Nye concluded that Liberty Media suffered around €842 million in damages due to the share price declines on these days.
In their post-trial motions, the defendants asserted that Dr. Nye’s disaggregation analysis was insufficient to support the jury’s verdict. Judge Scheindlin rejected this assertion, underscoring that the issue was one of credibility reserved for the jury:
Vivendi offers no significant arguments beyond what the jury heard and reasonably rejected at trial. Vivendi criticizes Dr. Nye for claiming to have excluded non-fraud-related company-specific events from his damages calculation, but then failing to “disaggregate a single such event on any one of his nine disclosure days.” According to Dr. Nye’s testimony, however, there simply were no confounding events during the nine days on which he identified materialization events. The credibility of Dr. Nye’s testimony was a matter for the jury, and neither legal precedent nor common sense compels the conclusion that every set of materialization event windows, no matter how small in number, must contain at least one confounding event.
Liberty Media Corp. v. Vivendi Universal, S.A., No. 03-civ-2175 (S.D.N.Y. Feb. 12, 2013) (emphasis added).
Therefore, Judge Scheindlin concluded:
[A] reasonable juror could have found that none of the ostensible confounding events put forth by Vivendi were both non-fraud-related and affected Vivendi’s share price. Dr. Nye’s testimony was not inadmissible simply because it took an aggressively skeptical view of the significance of non-fraud-related news on the nine materialization days, any more than [the defendants’ expert’s testimony] was inadmissible because of his equally aggressive but opposite interpretation of potential confounding events. The weighing of the experts’ conflicting testimony was a matter for the jury and will not be disturbed by this Court.
In that regard, the court postulated that the jury’s reduction of Dr. Nye’s damages calculation of €842 million to an award of €765 million could have been based on the jury’s conclusion that some of the confounding events presented by the defendants’ expert should have been factored into the calculation. Therefore, the court found that the jury’s verdict could be upheld, among other reasons, as having incorporated some of the confounding events Dr. Nye rejected, and thus discounting Dr. Nye’s total damages figure. The import of the court’s reasoning is that even if Dr. Nye’s disregard of particular confounding events was improper, the verdict would nonetheless withstand a motion for judgment as a matter of law or a new trial on the premise that the jury’s award, being that it represents a fraction of Dr. Nye’s total figure, can be appropriately rationalized as an exercise in disaggregation of non-fraud-related factors affecting the stock price.
The Relationship Between Inflation and Individual Misstatements
Vivendi next challenged Dr. Nye’s computation of inflation in Vivendi’s stock price, asserting that a reasonable jury could not have relied on Dr. Nye’s calculation because he arrived at the same total inflation amount in both the Liberty Media and class action trials, despite the different number of misstatements and omissions alleged in the two actions (25 versus 57). This was because Liberty Media, in bringing suit, was constrained by its merger agreement with Vivendi and could only recover for Vivendi’s misrepresentations between December 31, 2000, and December 16, 2001—a subset of the misrepresentations allegedly made during the longer class period. Despite these differences between the relevant periods and the number of misstatements and omissions alleged, Dr. Nye testified to the same level of inflation in Vivendi’s stock price during the relevant period (€22.52 per share) in both trials and did not separately calculate the inflation associated with each of these misstatements and omissions.
Judge Scheindlin expressed skepticism toward the defendants’ challenge to Dr. Nye’s inflation analysis, which, she pointed out, did not depend on a distinct, quantifiable assessment of inflation as to each alleged misrepresentation or omission:
If Dr. Nye’s analysis were based on the assumption that each of Vivendi’s misstatements played a distinct and independently measurable role in inflating Vivendi’s share price, then Vivendi’s argument might have merit. At minimum, Liberty would not be entitled to recover for whatever inflation Dr. Nye’s analysis would suggest was already built into Vivendi’s share price at the start of trading on December 21, 2000 based on Vivendi’s two earlier misstatements regarding its liquidity risk.
Id. (emphasis added)
However, because “Dr. Nye’s damages analysis did not depend on the assumption that every misrepresentation by Vivendi could be independently monetized and subtracted from Liberty Media’s damages,” his opinion was not susceptible to defendants’ post-verdict attack. As Judge Scheindlin explained:
The calculation of damages was not derived from an analysis of the specific effects of individual misrepresentations and omissions. Dr. Nye calculated the damages Liberty suffered as a result of this inflation by analyzing the declines in Vivendi’s stock price on the nine days during which the market responded to the materialization of the hidden liquidity risk. Vivendi has offered no legal basis for concluding that this was an unacceptable approach . . . . Using a different method, it might in theory have been possible to offer a more precise causal analysis, one that would have arrived at different damages calculations for the fifty-seven misrepresentations at the Class Action trial and the twenty-five at the Liberty trial. But the law does not require the use of such a fine-grained quantitative method, if one in fact exists that would produce reliable rather than spuriously precise results. The jury in this case was explicitly charged that “[d]amages need not be proven with mathematical certainty, but there must be enough evidence for you to make a reasonable estimate of damage.”
The court found that Dr. Nye’s theory satisfied the evidentiary standard, irrespective of whether the total inflation amount he calculated was the same in both actions. The court also found that Dr. Nye’s methodology satisfied the Second Circuit’s standards for proof of loss causation and damages because “plaintiffs are not required to allege the precise loss attributed to defendants’ fraud.” The court further noted that Vivendi was free to attempt to persuade the jury that Dr. Nye’s analysis—which did not depend on an independent assessment of each misstatement or omission but on a measure of the inflation caused by the cumulative issuance and reissuance of false statements over a 12-month period—should be rejected in favor of a more sophisticated analysis.
Although Judge Scheindlin did not explicitly equate Dr. Nye’s theory of loss causation and damages with the so-called “maintenance” theory of inflation—a concept dubbed by Judge Holwell in the Vivendi class action case—her analysis tracks the same principles underlying the maintenance theory. In sustaining the jury’s damages award in the class action, Judge Holwell reasoned that “a misstatement may cause inflation simply by maintaining existing market expectations, even if it does not actually cause the inflation in the stock price to increase on the day the statement is made.” Vivendi, 765 F. Supp. 2d at 561 (emphasis in original). The court explained:
It may be impossible for an expert witness to reliably disaggregate the impact of any particular misstatement from the continued force of previous misstatements. The “maintenance” theory of inflation simply reflects the reality that inflation in a company’s stock price is difficult to quantify with mathematical precision in any case, and that in a case where a company repeatedly makes statements that omit information about its liquidity risk, it is reasonable to conclude that each misstatement played a role in causing the inflation in the stock price (whether by adding to the inflation or helping to maintain it), even if it is not possible to quantify the exact impact that each statement had on the inflation.
Vivendi, 765 F. Supp. 2d at 562 (emphasis added).
Judge Scheindlin adopted this principle in Liberty Media:
[A] reasonable juror could have concluded that where losses result from a party’s failure to correct a false impression it created that a risk does not exist, the losses may be the same whether the party failed to correct the false impression on twenty-five occasions over one year or fifty-seven occasions over a year and a half. Either way, plaintiffs may suffer the same losses as a result of the materialization of the risk.
Liberty Media Corp. v. Vivendi Universal, S.A., No. 03-civ-2175 (S.D.N.Y. Feb. 12, 2013).
Judge Scheindlin’s implicit recognition of the maintenance theory of inflation and her refusal to discard Dr. Nye’s damages analysis for failure to “independently monetize” each of the 25 misstatements and omissions reinforce the viability of this framework for proving damages at trial.
Measure of Damages
Vivendi’s final challenge assailed the jury’s basis for calculating a damages award of €765 million. This award represented roughly €77 million less than Dr. Nye’s proffered damages calculation of €842 million. The defendants’ expert, by contrast, had provided a damages estimate of between €0 and €175 million. Vivendi asserted that the damages award was invalid because it bore “no relation” to either expert’s analysis and did not correspond to any of the price drops that Dr. Nye attributed to corrective disclosures. However, the court pointed out that Vivendi failed to explain what kind of “relation” the jury’s damage award must have to the experts’ proffered number. (The court also noted that Vivendi’s argument was “probably waived” because Vivendi failed to request numerical constraints on the jury’s damages award or that the jury itemize its award based on specific share price declines.) As Judge Scheindlin explained in rejecting the defendants’ challenge, “[i]f a jury may depart from expert damages calculations . . . and need not do so in a way that exactly, numerically corresponds to the rejection of specific elements of those calculations, it is difficult to understand the basis for Vivendi’s criticism . . . .”
The court approached the verdict as the likely product of the jury’s evaluation of the relative credibility of the two experts. Judge Scheindlin reasoned that the verdict suggested that the jury found Dr. Nye “largely but not entirely credible”; therefore, if the jury discounted his damage calculation by 10 percent to reflect this slightly diminished credibility, “the jury acted appropriately and within the bounds of its instructions.” If the jury “found Dr. Nye’s calculations roughly ninety percent credible . . . [, such] [c]redibility determinations are the province of the jury, and it is appropriate for damages awards to reflect credibility determinations regarding the damages calculations of experts.” Judge Scheindlin further noted that “Vivendi has not cited, and I am not aware of, any precedent for the proposition that juries departing from expert calculations must themselves reason like experts and perform technical calculations, rather than arriving at rough estimates based on reasonable but imprecise credibility determinations.” The defendants essentially admitted the propriety of such an approach by acknowledging that the jury in the class action “found Dr. Nye’s calculations non-credible by a factor of 50%.”
As another possible explanation for the amount of damages awarded by the verdict, Judge Scheindlin posited that “the jury [could have] subtracted €2.06 per share from Dr. Nye’s €22.52 per share inflation calculation by partially or wholly incorporating one or more of [the defendants’ expert’s] confounding events.” In fact, as the court observed, Liberty Media’s counsel “invited such discounting” by suggesting during closing argument that the jury could adopt its own lower inflation number for a given day if it was not sufficiently persuaded by the expert testimony regarding the inflationary impact on that day. Judge Scheindlin reiterated that this sort of analysis is permissible under the applicable Second Circuit case law because “losses resulting from securities fraud need not be proved with mathematical precision.” Moreover, the court noted, “a jury has wide discretion in determining damages, so long as it has a reasonable basis.” Therefore, Judge Scheindlin declined to parse out which materialization events the jury questioned or which confounding events it considered, stating, “[t]here were any number of reasonable paths for arriving at a damages award of €756 million based on rough credibility determinations regarding the experts’ calculations.” Because the “jury faithfully obeyed its instructions, arriving at a reasonable estimate of Liberty Media’s damages that fell between the plausible calculations of the experts,” the court declined to disturb the jury’s damage award.
The Liberty Media decision provides important guidance regarding the contours of proving securities fraud damages at trial. First, given the typical complexities posed by multiple misrepresentations and multiple disclosure events over protracted periods of time, securities fraud damages may be established without mathematical precision, so long as there is a reasonable basis in the record to support an award. To that end, juries are, by and large, given leeway to ascribe rough proportions of shareholders’ losses to the fraud based on credibility determinations concerning the expert testimony on disaggregation and are not themselves required to perform the kind of sophisticated, technical calculations carried out by experts. Second, there is no requirement that a plaintiff’s expert assign damages on a misstatement-by-misstatement basis. That is, an expert need not provide a quantifiable assessment of the specific damages attributable to each alleged misrepresentation or omission because, as courts in several circuits now recognize, misrepresentations and omissions that are effectively repeated over many months or years may cause inflation simply by maintaining existing market expectations, even if the level of inflation in the stock price does not increase on the day the misrepresentation or omission is made.
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