Vivendi Files Petition For Rehearing Challenging Second Circuit’s Adoption Of Controversial “Maintenance Theory” Of Loss Causation In Securities Class Action
10/17/2016On October 11, 2016, Vivendi, S.A. moved for panel rehearing and rehearing en banc before the United States Court of Appeals for the Second Circuit following its September 27, 2016, decision affirming a jury verdict and judgment for shareholder plaintiffs in a securities class action suit. Petition for Rehearing En Banc, In re Vivendi, S.A. Sec. Litig., No. 15-180 (2d Cir. filed Oct. 11, 2016); Second Circuit Affirms Judgment Following Rare Jury Trial In Securities Class Action, Shearman & Sterling LLP Need-To-Know Litigation Weekly (Oct. 3, 2016).
In the September 27, 2016 decision, the Second Circuit ruled that a misstatement can be actionable under Section 10(b) of the Securities Exchange Act of 1934 if it results in a security maintaining an already artificially inflated price, rejecting Vivendi’s argument that a misstatement must cause an increase in a security’s price to be actionable. The Second Circuit’s acceptance of this “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 Eighth and Fifth Circuit precedent, see IBEW Local 98 Pension Fund v. Best Buy Co., 818 F.3d 775 (8th Cir. 2016), Greenberg v. Crossroads Systems, Inc., 364 F.3d 657, 665 (5th Cir. 2004); see also Eighth Circuit Holds Presumption of Reliance Rebutted Under Halliburton II and Reverses Class Certification in Securities Action, Shearman & Sterling LLP Client Publication (Apr. 14, 2016), (discussing Eighth Circuit’s decision in Best Buy).
Vivendi’s rehearing petition primarily argues that Second Circuit’s decision came down on the wrong side of this Circuit split. According to Vivendi, the “maintenance theory” inappropriately allows a fact-finder to “assume” misstatements “had the unseen effect of maintaining preexisting inflation that otherwise ‘could have dissipated,’” thereby effectively eliminating the “indispensable element” of loss causation in such cases. This approach, Vivendi concludes, is contrary to Supreme Court precedent requiring that the misrepresentation must have “actually caused” the plaintiff’s loss.
Vivendi further argues that the Second Circuit decision reflects an unprecedented expansion of this theory of causation because it would allow a finding of securities fraud on the basis of a mere assumption of causation (i) even where there was no testimony or jury instruction concerning the maintenance theory, and (ii) in cases where the defendant had been under no duty to speak.
While Vivendi’s petition makes persuasive arguments, the odds are that the Second Circuit will not grant rehearing en banc given that, in the last five years, the Second Circuit has granted the fewest petitions for rehearing of all the United States Courts of Appeals. In light of the growing Circuit split concerning the maintenance theory, however, Vivendi ultimately may be well positioned if it chooses to petition for a writ of certiorari to the Supreme Court.