Online Exclusive: Congressional Proposal Would Give the Green Light to F-cubed Lawsuits

When Vivendi CEO Jean-Marie Messier bought a beautiful Park Avenue penthouse in New York in 2001, he likely had no idea that the purchase would one day be used as ammunition to attack his company inside a U.S. courtroom.

For many years, foreign companies believed themselves to be immune from claims in U.S. courts from aggrieved foreign investors who purchased foreign shares on foreign exchanges. These cases are termed “F-cubed,” due to the amount of “foreignness” involved.

But after shareholders alleged that Paris-based Vivendi made false and misleading statements from 2000 to 2002 that covered up company liquidity troubles on its march from being a water company to being a media conglomerate, a class of foreign plaintiffs filed suit in the Federal District Court for the Southern District of New York. They alleged Vivendi officers including Messier came to the U.S. to purchase assets as part of an alleged securities fraud.

In 2007, District Judge Richard Holwell certified a class of Vivendi shareholders from France, England and the Netherlands, along with those in the United States. In late January 2010, a jury ruled in In re Vivendi Universal, S.A. Securities Litigation that misstatements or omissions inflated Vivendi’s stock price by as much as $11, leaving the company on the hook for up to $9.3 billion in potential damages, according to the plaintiffs’ attorneys, in what could be the largest securities class action award ever.

“The Vivendi case is significant because it shows just how big the stakes can be in F-cubed cases,” says John Donnelly, a partner at Cozen O’Connor. “Shareholders would rather bring the case here in the U.S. than in France because of the potential for more discovery, a better trial, and either a settlement or a substantial verdict.”

Portrait Painted

The wheels for the verdict were set in motion after Holwell made the rare decision to certify a class of foreign shareholders. Vivendi moved to dismiss the claim as outside the subject matter scope of U.S. securities law jurisdiction. The company pointed out that only 25 percent of Vivendi’s shares were held in the U.S. through American Depositary Receipts (ADRs) and the rest were traded on foreign exchanges.

In rejecting Vivendi’s motion to dismiss the case, the judge applied a “conduct and effects test,” looking at whether the allegedly fraudulent conduct occurred in the U.S. and whether it had a substantial effect in the U.S. Holwell determined that a significant enough portion of the allegations happened inside the country.

At trial, the plaintiffs’ lawyers painted a portrait of Vivendi’s top two officers inside the U.S., Messier and ex-CFO Guillaume Hannezo, who knew about the company’s liquidity crisis and tailored the company’s accounting figures to falsely show earnings growth. Vivendi disputed these allegations as “simply not true,” and blamed the eventual drop in the company’s stock price on broader economic factors.

Vivendi will likely appeal the ruling, with hopes of getting an outcome similar in another “F-cubed” case, Morrison v. National Australia Bank Ltd. (see “F-Cubed Conflict,” March 2010).

In that case, the 2nd Circuit affirmed a lower court’s ruling that non-U.S. plaintiffs who had invested in the common stock of an Australian bank lacked a
private right of action. The appeals court declined, however, to issue a “bright line rule” that would place all F-cubed
litigation outside the scope of U.S. securities jurisdiction.

Recently, the Supreme Court agreed to hear Morrison and will decide soon what limits there are on foreign investors bringing securities claims inside U.S. courts. Legislation also is pending before Congress to address F-cubed litigation.

Amicus Arguments

The U.S. Chamber of Commerce, the Association of Corporate Counsel and others filed amicus briefs in Vivendi and Morrison warning that increased exposure to U.S. securities laws would threaten the way that foreigners treat the American marketplace. Another worry is getting foreign courts to enforce failed U.S.-based class action attempts. Indeed, in Vivendi, Holwell excluded investors from Austria and Germany from the class of plaintiffs over concerns about whether foreign courts in those countries would accord reciprocity.

Other lawyers believe that while the Supreme Court may intervene and tighten the circumstances under which foreign investors can bring securities fraud cases, it’s unlikely the justices would want to send the message that companies can come to the U.S. and commit bad deeds because of perceived immunity from securities laws.

For these attorneys, Vivendi provides an opportunity to showcase the U.S. judicial system addressing alleged corporate malfeasance based on where the allegations in dispute took place.

Owen Pell, a partner at White & Case, points to Holwell’s decision to allow class certification in the case, the result of charges that Vivendi’s U.S. conduct was not “merely preparatory,” but instead involved decisions by key Vivendi executives like Messier “to move to the United States, allegedly to better direct corporate operations and more effectively promote misleading perceptions” of Vivendi’s share price.

“Whatever happens in Morrison, you could easily see the Vivendi case as distinguishable,” says Pell. “Even if private rights of action are read narrowly and there’s a presumption against courts taking these cases [that involve foreigners], courts can make sure that the relevant proximate causes of shareholder loss occurred inside the United States.”