Four-and-a-half years ago, when a jury socked Vivendi SA with an estimated $9.3 billion securities fraud verdict, it was easy to second-guess the company’s bold decision to let the class action go to trial. But the U.S. Supreme Court’s decision in Morrison v. National Australia Bank helped Vivendi dodge a vast portion of the verdict—and now the company’s lawyers are busy trying to bury what’s left of the spoils.
In a series of letters filed in the case over the past several weeks, Vivendi counsel James Quinn of Weil, Gotshal & Manges argues that sophisticated investors shouldn’t share in what remains of the verdict because they didn’t rely on the misstatements identified by the jury. If Vivendi can succeed in blocking those investors’ claims, Quinn predicts, the company’s remaining liability may be measured in the mere millions. (You can read the letters here, here and here.)
U.S. District Judge Shira Scheindlin scheduled a status conference for Thursday to resolve various discovery issues relating to Vivendi’s reliance arguments. The law firm representing the class, Abbey Spanier, has protested that there is “substantial disagreement” over the sorts of documents and testimony Vivendi should be able to seek.
Federal jurors in Manhattan returned a verdict in January 2010 that Paris-based Vivendi misled shareholders about its financial condition. A year later, however, now-retired U.S. District Judge Richard Holwell dismissed most of the claims in the case based on Morrison, which made it much much harder for foreign investors to avail themselves of U.S. securities laws. Holwell’s decision, which restricted the case to claims by certain holders of Vivendi American Depository Shares, trimmed Vivendi’s exposure by an estimated 90 percent.
Now the lawyers are fighting over the claims process, in which Vivendi shareholders applied to share in the remaining pool of money. In an Aug. 15 letter to Judge Scheindlin, who inherited the case from Holwell, Vivendi’s lawyers at Weil indicated that they plan to argue that hundreds of sophisticated investors that filed claims shouldn’t recover a cent because they didn’t actually rely on Vivendi’s misstatements. These large investors account for a fraction of the number of claimants, but they’re in line to collect the lion’s share of the damages.
By knocking out these investors on reliance grounds, Weil’s Quinn told us that he and his cocounsel at Cravath, Swaine & Moore could reduce Vivendi’s remaining exposure by approximately 98 percent.
Vivendi successfully field-tested its tactic of litigating individual investors’ reliance in a prior dispute with GAMCO Investors Inc. GAMCO opted out of the class action and brought an identical securities fraud case against Vivendi, alleging $3.5 million in damages. It was able to coast through the pleadings stage by invoking the fraud-on-the-market doctrine, a bedrock feature of securities class actions that creates a presumption that investors relied on a company’s public misstatements.
While the fraud-on-the-market presumption can be rebutted, it’s nearly impossible to do so in practice. Vivendi pulled it off in March 2013, however, by pointing out that Gamco decided to invest in Vivendi based on its own sophisticated internal evidence about the company’s share value. Cravath Swaine & Moore’s Paul Saunders and Timothy Cameron represented Vivendi in that case, and Saunders hinted last year that the GAMCO ruling would come back to bite the class action plaintiffs.
There’s a bit of precedent for Vivendi’s strategy of trying to bounce investors from the claims process on reliance grounds. Household International Inc. launched a similar strategy after it lost a verdict now valued at $2.46 billion in 2009. Household’s objections to the claimants are on hold pending appeal.
Still, postverdict claims disputes in investor class actions are rare, largely because there have only been a handful of jury trials in the history of securities class action litigation. “We’re breaking some new ground here,” Quinn said.
While Vivendi has used Morrison to great advantage, it’s had less success capitalizing on Halliburton v. Erica P. John Fund, in which the Supreme Court grappled with the fraud-on-the-market presumption directly and ultimately upheld the doctrine in June.
In a short order issued on Monday, Scheindlin denied Vivendi permission to file a new motion for judgment as a matter of law based on Halliburton. Vivendi had argued that Halliburton established that plaintiffs must show that misrepresentations actually caused stock price inflation, and that this burden wasn’t met at trial. Scheindlin ruled that Holwell adequately addressed the issue in a prior ruling years earlier and that Vivendi’s route forward is to appeal that ruling.
Plaintiffs counsel Arthur Abbey of Abbey Spanier didn’t return a call seeking comment.