We previously reported on what we thought at the time were “unusual” arguments from Vivendi Universal, S.A. (“Vivendi”) in its summary judgment motion in opposition to the recovery of certain class-action members in the long-running In re Vivendi Universal, S.A. Securities Litigation, 02 Civ. 5571 (SAS) (S.D.N.Y.). Whether “unusual” or not, Judge Shira A. Scheindlin of the Southern District of New York has granted Vivendi’s motion in a decision which could have implications for class members, but more likely for opt-outs.

As background, after the 2009 trial in this class action litigation, a Southern District of New York jury found Vivendi liable for violation of securities laws in regard to the sale of Vivendi American Depositary Shares (“ADSs”). Since then, the parties have argued over the apportionment of damages to various class members. On May 15, 2015, the class plaintiffs and Vivendi filed cross-motions of summary judgment regarding the claims of certain class members advised by Southeastern Asset Management, Inc. (“Southeastern”). Vivendi’s opposition to Southeastern’s claims includes arguments, unusual as to class members in the class-action context, that (i) Vivendi did not cause these members any actual damages; and (ii) there was no “fraud on the market” for which Southeastern could recover.

On August 11, 2015, Judge Scheindlin issued a decision granting Vivendi’s motion and denying Southeastern’s motion. The Court made two main points in its decision. First, in regard to Southeastern’s attempts to establish the elements of fraud for its “fraud on the market” theory, Vivendi had successfully rebutted the so-called Basic presumption. Named for the holding in Basic v. Levinson, 485 U.S. 224 (1988), the Basic presumption holds that “an investor who bought stock at the market price may, at the class certification stage, avail herself of the presumption that she ‘relied on the integrity of the price set by the market’ if the market is efficient.” Op. at 14 (quoting Basic, 485 U.S. at 227). According to the Court, instead of relying on the market price of Vivendi’s ADSs, Southeastern “relied on [its] own careful assessments of Vivendi’s assets and liquidity position” in determining its valuation of the ADSs, to the point where “[e]ven had [Southeastern] known about the fraud, it would have not mattered.” Op. at 27-28. Thus, Southeastern was essentially indifferent to the market price of the securities and could not be said to have relied upon it. Since Southeastern could not show reliance as an element of fraud, Southeastern could not participate in the class members’ recovery.

Although mooted by the Court’s holding that Southeastern did not show reliance, Judge Scheindlin also held that Southeastern indeed sustained damages as a result of the fraud. Vivendi argued that since Southeastern eventually made a profit on its purchase of Vivendi ADSs, Southeastern could not prove damages. However, the Court held that considering gains made well after the close of the class period was inappropriate. Instead of using Vivendi’s metric, which argued that the Court should consider gains that occurred more than five years after the close of the class period, the Court held that the bounce-back provision of the PSLRA, which caps damages by factoring in gains that occur within 90 days of a corrective disclosure, is a better guideline. In addition, even though Southeastern sold at a profit, “the eventual profit it made on its initial investment did not include extra compensation for the out-of-pocket loss it sustained by purchasing Vivendi ADSs at inflated prices during the Class Period.” Op. at 36. Thus, fraud on the market could give rise to damages even if a party eventually made a profit on the investment.

This opinion reflects an unusual fact pattern in the class action recovery context in that the investor apparently knew of the defendant’s fraud and yet continued to invest on the philosophy that the fraud did not affect the investor’s overall conclusion that the securities were undervalued. Consequently, the precedential value of Judge Scheindlin’s decision may be limited to such circumstances and may not have broad implications for the class action recovery sphere in general.

More broadly, this dispute between Southeastern and Vivendi reflects the much more adversarial nature in the class action recovery claims process in recent years. In times past, defendants rarely participated in the allocation of funds amongst plaintiffs. More recently, however, when verdicts are being allocated to class members, defendants have become much more involved in challenging the recovery of individual class members. Class members should keep this adversarial context in mind when seeking recovery against defendants in the class action recovery space.

The decision also has implications for opt-outs and/or private plaintiffs. It highlights the importance of reviewing all of the plaintiff’s documents and interviewing plaintiff’s personnel before they file a separate action.