Since Basic v. Levinson,1 investors bringing claims under §10(b) of the Securities Exchange Act of 1934 have enjoyed a rebuttable presumption of reliance on alleged material misstatements or omissions, provided the shares they transacted traded in an efficient market. Because few securities cases go to trial, there have been few cases in which courts have considered whether defendants have, on an individual basis, rebutted the presumption of reliance. A recent decision by Judge Shira A. Scheindlin of the U.S. District Court for the Southern District of New York, however, "is just such an extraordinary case."2 Scheindlin’s decision in GAMCO v. Vivendi demonstrates that the presumption is indeed rebuttable, particularly where shareholders made investment decisions based on sophisticated valuations detached from a security’s market price and the defendant’s alleged misrepresentations.
In GAMCO, plaintiffs alleged that the defendant company failed to disclose its liquidity problems, thus inflating the price of its shares.3 After a bench trial, Scheindlin ruled that defendants had rebutted the presumption that plaintiffs relied on Vivendi’s misrepresentations because the evidence showed that plaintiffs determined that Vivendi was an attractive investment regardless of the liquidity concerns allegedly hidden from the market.4 As more defendants consider the feasibility of litigating securities fraud cases through trial, GAMCO offers a useful template for how to try questions of individual reliance.
