Second Circuit Affirms Judgment Following Rare Jury Trial In Securities Class Action
On September 27, 2016, the U.S. Court of Appeals for the Second Circuit affirmed the judgment for shareholder plaintiffs in a securities class action suit against Vivendi Universal, S.A. (“Vivendi”), following a lengthy jury trial, which found Vivendi liable for securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934. In re Vivendi, S.A. Securities Litigation, No. 15-180-cv(L), 15-208-cv (XAP), 2016 WL 5389288 (2d Cir. Sept. 27, 2016). Plaintiffs were a class of investors who purchased Vivendi common stock between 2000 and 2002. In affirming, the Court found sufficient evidence in the record to support the jury’s conclusion that Vivendi materially misstated its liquidity risk in a manner that either inflated or maintained Vivendi’s stock price, and that the revelation of the truth about Vivendi’s liquidity risk caused a drop in Vivendi’s share price. The case is significant for a number of reasons, including the affirmance of a verdict arising out of a rare securities class action trial, and its analysis of loss causation and the controversial “price maintenance” theory of loss causation.
Vivendi first argued on appeal that the judgment was deficient because plaintiffs’ case at trial amounted to an impermissible “pure omission” theory, which can only be maintained in a Section 10(b) case under very limited circumstances rarely present in a class action. The Court rejected this argument, noting that the trial judge required specific alleged misstatements to be included on the jury verdict form and instructed the jury against relying on a “pure omission” theory, and that plaintiffs had given examples of alleged misstatements during the trial and addressed the jury form’s fifty-seven alleged misstatements during closing argument. Thus, based on the “proof at trial with reference to the charged theory,” the Court held there was no basis to conclude that the verdict was based on an impermissible “pure omission” theory. In addition, the Court rejected Vivendi’s argument that liquidity risk was too “amorphous” a concept to support a conclusion that the challenged statements were false or misleading. The Court held to the contrary that the concept was sufficiently concrete to be actionable, and that sufficient evidence existed to support the jury’s determination that a reasonable investor could find each of the alleged misstatements materially false or misleading.
The Court also rejected Vivendi’s arguments that certain alleged misstatements were non-actionable opinions, puffery, or forward-looking statements. The Court first dispensed with Vivendi’s argument as to non-actionable opinions, holding that Vivendi waived this argument by failing to raise it below. The Court also rejected Vivendi’s argument that certain statements were mere puffery, finding sufficient evidence to support the jury’s conclusion that the statements were not so general that a reasonable investor could not have relied upon them in evaluating whether to purchase Vivendi shares. Similarly, the Court rejected Vivendi’s argument that certain statements were forward-looking and therefore protected by the safe-harbor provision of the Private Securities Law Reform Act (“PSLRA”). The Court held that the PSLRA safe harbor did not apply, as certain of these statements also contained present representations (for example, that Vivendi entered 2001 with a “very strong balance sheet”) and sufficient evidence supported the jury’s conclusion that Vivendi’s “kitchen-sink” disclaimers were not meaningful cautionary language and that Vivendi had actual knowledge that the statements were false or misleading.
The Court also rejected an argument that an alleged misstatement must be associated with an increase in artificial inflation to have an actionable “price impact,” and held that a securities fraud defendant cannot avoid liability for an alleged misstatement merely because the misstatement is not associated with an increase in the stock’s price. Rather, a misstatement can be actionable if it results in maintaining an artificially inflated price. Separately, defendants argued that, because Vivendi did not release a specific corrective disclosure regarding its liquidity risk, there was an insufficient causal link between the alleged misstatements and plaintiffs’ loss. The Court held, however, that loss causation requires merely demonstrating that the “subject” of the alleged misstatement or omission was the cause of the loss suffered, which can be shown by events constructively disclosing the fraud, not only through a precise corrective disclosure. In support of the jury’s conclusion, the Court noted evidence at trial of a number of such events, including news that Vivendi was forced to liquidate 55 million treasury shares and large stakes in its subsidiaries, as well as downgrades and warnings from rating agencies.
The Second Circuit’s acceptance of a “price maintenance” theory of loss causation is consistent with holdings of the Seventh and Eleventh Circuits, see, e.g., Glickenhaus & Co. v. Household Int’l, Inc., 787 F.3d 408 (7th Cir. 2015), FindWhat Inv’r Grp. v. FindWhat.com, 658 F.3d 1282 (11th Cir. 2011), but arguably inconsistent with an Eighth Circuit decision that some have interpreted has rejecting such a theory, see IBEW Local 98 Pension Fund v. Best Buy Co., No. 14-3178 (8th Cir. Apr. 12, 2016).