The long-running In re Vivendi Universal, S.A. Securities Litigation, 02 Civ. 5571 (SAS) (S.D.N.Y.), recently took an interesting turn as defendant Vivendi Universal, S.A. has deployed some unusual arguments in opposing the recovery of certain class-action members.  These arguments from Vivendi are unusual in the class action recovery context, and we will have to see whether the court gives them any weight.  If either of these arguments should prevail, it may well signal a new trend in challenging class member claims in certain settlements, particularly those of “value investors” who actively seek to acquire shares in companies that they believe the market has undervalued.

As background, after the 2009 trial in this class action litigation, a Southern District of New York jury found Vivendi Universal, S.A. (“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 (2) there was no “fraud on the market” for which Southeastern could recover.

In regard to damages, Vivendi argues in its briefing that federal securities laws do not entitle an investor who profits on its investment to receive a “windfall” for supposed losses simply by virtue of being a member of a securities fraud class action.  According to Vivendi, Southeastern acquired $148 million in Vivendi ADSs towards the end of the class period and then continued buying and selling ADSs for years afterwards.  By the end of the class period, Southeastern was the single largest institutional investor in Vivendi and remains a large Vivendi shareholder today.  Vivendi claims that if all transactions are included—even those after the class period—Southeastern profited.  (It is unclear whether Southeastern profited if considering only the transactions during the class period.)

Vivendi thus argues that, having profited on its investment, Southeastern cannot show any damages and thus its claims should be dismissed.  Vivendi cites a series of Southern District of New York and Second Circuit cases supporting its argument, including Carlisle Ventures, Inc. v. Banco Espanol de Credito, S.A., 176 F.3d 601, 606 (2d Cir. 1999), in which the Second Circuit held that “plaintiffs can prove no damages” and reversed a “windfall” award where plaintiffs “recouped [more than] their investment and continued to hold their partnership interests.”  Even if Southeastern were to claim that Vivendi’s fraud caused Southeastern damage in the form of lower profits, the Carlisle court stated that it could find no case where the court “awarded a purchaser of shares the difference between the purchase price and the actual ‘true value’ of the shares at the time of purchase when the purchasers had already sold the shares at a profit.”  Carlisle Ventures, 176 F.3d at 607.  Further, although thePSLRA “look-back period” limits damages when a stock price recovers shortly after a corrective disclosure, Vivendi argues that the look-back rule does not eliminate the requirement that a § 10(b)plaintiff must prove its actual losses.  To this end, Vivendi cites In re Veeco Instruments, Inc. Sec. Litig.,No. 05–MD–01695 (CM)(GAY), 2007 U.S. Dist. LEXIS 16922, 2007 WL 7630569, *7 (S.D.N.Y. June 28, 2007), where the court held that “Section 21(D) of the PSLRA does not provide a measure of damages, but rather imposes a cap on the damages available to a plaintiff.”

Vivendi also argues in a separate brief that Southeastern cannot prove justifiable reliance, a required element for fraud claims, because Southeastern’s own admissions preclude its reliance on a “fraud on the market” theory.  According to Southeastern, the effect of Vivendi’s fraud was to mislead investors as to Vivendi’s market price as an accurate measure of liquidity risk.  However, according to Vivendi, Southeastern invested in Vivendi ADSs because of its belief that the market had mispriced the securities, not in spite of it, and the inaccurate Vivendi market price did not affect Southeastern’s long-term valuation of the ADSs.

Vivendi’s argument here is complicated by the fraud-on-the-market theory as it applies to value investors, who actively seek stocks of companies that they believe the market has undervalued.  Ostensibly, Southeastern could claim to have been value investors in Vivendi, and surely the securities laws must protect value investors from fraud on the market as well.  To counter this, Vivendi argues that value investors can recover using a fraud-on-the-market theory only when the fraud concerns a different factor in the market price than the one the value investor believes the market has misjudged.  In other words, if Southeastern believed the market had inaccurately valued Vivendi ADSs due to misjudging liquidity risk, then Southeastern could later make a fraud-on-the-market argument regarding any factor in Vivendi’s valuation other than liquidity risk.  If Southeastern had discovered an artificially low market price, it could not later turn around and claim to have been defrauded for the same reason it had considered the price to be artificially low.  In fact, Vivendi claims that Southeastern admitted that none of Vivendi’s corrective disclosures revealed information that Southeastern did not already know.

Please note that while class plaintiffs’ attorneys filed motions and declarations on behalf of Southeastern, there does not appear to be a legal memo on behalf of Southeastern on the docket, so our analysis of Vivendi’s claims and arguments is principally based on Vivendi’s briefs.