Following a jury trial on class action securities fraud claims, Judge Shira Scheindlin of the Southern District of New York determined that one class member was not entitled to a recovery because it did not rely on a false statement when it purchased the company's stock. In re Vivendi Universal, S.A. Securities Litig., No. 02-cv-5571, 2015 WL 4758869 (S.D.N.Y. August 11, 2015). Her ruling is one of only a handful of cases in which a defendant had an opportunity to challenge the presumption of reliance on market price on an evidentiary record.
In the Vivendi action, a class of investors asserted securities fraud claims based on certain statements about the company's liquidity. After a verdict for the plaintiffs on class-wide issues of liability, Judge Scheindlin established post-trial proceedings to adjudicate individualized issues of reliance and damages. Within those proceedings, the defendants challenged whether one class member—a "value investor" that used a "price-value ratio" to identify underpriced stocks—relied on the market price when purchasing Vivendi shares.
By way of background, a plaintiff in a securities action may prove reliance in two ways: either directly by proving that he relied on a false statement that was believed to be true, or indirectly by proving that he relied on the "integrity of the market price," which unbeknownst to the investor was compromised by a false statement. The latter method of proving reliance was established by the Supreme Court in Basic v. Levinson, 485 U.S. 224 (1988), which held that investors who buy and sell stock in well-developed, impersonal markets are entitled to a presumption of reliance at class certification under certain circumstances. Basic also made clear, however, that the presumption of reliance is rebuttable by "[a]ny showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at a fair market price."
In Vivendi, Judge Scheindlin determined that the value investor had purchased a large block of Vivendi shares after four of the nine corrective statements were made, and the investor admitted that "none of the nine corrective disclosures" had "corrected any misunderstanding" about the value of Vivendi's business. Indeed, the trader responsible for purchasing Vivendi shares testified that he "was not misled" by the allegedly fraudulent statements, and described the company's liquidity crisis as "overblown." Moreover, the investor's decision to purchase Vivendi shares depended "heavily" on its proprietary price-to-value formula, which used market price only as a comparator: The investor sought to purchase companies with shares priced at 60 percent or less of the investor's proprietary valuation. In light of that evidence, Judge Scheindlin held that the investor had not relied either directly on a false statement or on the integrity of the market price when deciding to purchase Vivendi shares. The court noted the "key difference" between relying on market price as a comparator in a trading formula, as the value investor did here, and "relying on the integrity of the market price," as required by Basic to demonstrate reliance.
Judge Scheindlin rejected the plaintiffs' contention that the Supreme Court's decision in Halliburton Co. v. Erica P. John Fund (Halliburton II), 134 S. Ct. 2398 (2014), precluded this defense. In Halliburton II, Chief Justice John Roberts noted that a "value investor" may rely on the price of a stock so long as he traded "on the belief that the market price will incorporate public information within a reasonable period." Judge Scheindlin agreed that read "in isolation" that portion of Halliburton II supported the plaintiffs' position because the value investor's trading strategy "derived," in part, from market price, and the investor hoped that the market price would "move in the direction" of its proprietary valuation. But Halliburton II considered the reliance element at class certification, where investors are entitled to a presumption of reliance under certain circumstances. The Court in Halliburton II did not intend to "jettison" the presumption of reliance at class certification in favor of an "iron-clad" rule that investors always rely on market price. Indeed, Judge Scheindlin noted that the Halliburton II decision acknowledged that not all investors will "rely on the security's market price as an unbiased assessment of [its] value," and the evidence in this case demonstrated that the value investor did not rely on market price.
The Vivendi decision may be noteworthy less for its holding than simply the court's opportunity to consider the element of reliance on a fully-developed factual record. In the years following Basic, the question of how to rebut the presumption of reliance on an investor-by-investor basis has been overshadowed by the question of when the challenges can be made. In Halliburton II, the Court confirmed a defendant's right to challenge the class's entitlement to the presumption at class certification. But it also held that if the plaintiffs can prove the "prerequisites for invoking the presumption," a class may be certified, even if doing so "leav[es] individualized questions of reliance in the case" for adjudication down the line. Whether or not such an approach makes sense in theory, as Justice Thomas noted in his dissent in Halliburton II, the "in terrorem settlement pressures brought to bear by certification" all but preclude defenses deferred until the merits stage. Yet, notwithstanding these procedural hurdles, it is likely that many class members would be unable to prove reliance if required to do so. The Vivendi decision therefore offers a glimpse into a successful challenge to a sophisticated investor's reliance on market price, and suggests that such challenges—when the opportunities arise—may be more successful than not.