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Media Alerts - GAMCO v. Vivendi - Second Circuit
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September 27, 2016
  GAMCO v. Vivendi - Second Circuit
Headline: Second Circuit Affirms Summary Judgment, Finding No Clear Error in District Court Ruling that Defendant Rebutted Plaintiff Value Investors' Fraud-On-The-Market Presumption of Reliance

Area of Law: Securities

Issue(s) Presented: Whether the defendant corporations successfully rebutted plaintiff value investors' fraud-on-the-market presumption of reliance supporting dismissal of plaintiffs' securities fraud claim.

Brief Summary: Plaintiff-Appellants GAMCO, a group of investors, filed a securities fraud claim against Vivendi Universal, S.A. and Vivendi S.A. (collectively, "Vivendi") under § 10(b) of the Securities Exchange Act of 1934 and the Securities Exchange Commission's ("SEC") Rule 10b-5 for materially misrepresenting their liquidity. Although reliance on a material omission or misrepresentation is an element of such a claim, plaintiffs are afforded a presumption of reliance in circumstances where they rely on the integrity of the market price of the security at issue. This theory of reliance, known as the "fraud-on-the market theory," is, however, rebuttable by a defendant. The United States District Court for the Southern District of New York granted summary judgment for Vivendi, finding Vivendi successfully rebutted GAMCO's fraud-on-the-market theory of reliance by showing that GAMCO used its own value calculation to determine whether to purchase a security, rather than basing the decision on the market price alone. Furthermore, the district court found the facts demonstrated that even had GAMCO had known about Vivendi's alleged concealed liquidity problems, GAMCO still would have completed the purchase transaction. On Plaintiffs' appeal, the Second Circuit, finding no clear error, affirmed the district court's entry of judgment for Vivendi.

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Extended Summary: To succeed on a securities fraud claim brought under § 10(b) of the Securities Exchange Act of 1934 and the Securities Exchange Commission's ("SEC") Rule 10b-5, one element the plaintiff must prove is "reliance upon [a material] misrepresentation or omission." Although in most cases reliance is proven directly by demonstrating the investor was aware of the defendant's misstatement and engaged in the transaction based upon the misrepresentation, investors in certain circumstances, are afforded a presumption of reliance by showing they relied on the integrity of the market price of the security in choosing to purchase or sell. This presumption of reliance is known as the "fraud-on-the market theory" and is rebuttable by the defendant by a showing that "severs the link between the alleged misrepresentation and the price received or paid by the plaintiff, or [their] decision to trade at a fair market price."

Plaintiff-Appellants GAMCO are value investors. Value investors make an independent estimation of the value of a publicly-traded company's securities and attempt to buy the securities when the market price is lower than its own valuation, betting that the market price will rise over time. GAMCO invested in Defendants-Appellees Vivendi Universal, S.A. and Vivendi S.A. (collectively, "Vivendi") between 2000 and 2002. As the basis of their securities fraud claim, GAMCO alleged in its complaint that Vivendi misrepresented the amount of liquidity it had and, once their actual liquidity came to light, the value of the securities dropped dramatically. Vivendi moved for summary judgment and the United States District Court for the Southern District of New York granted its motion, holding the facts demonstrated that Vivendi successfully rebutted the fraud-on-the-market theory of reliance.

On GAMCO's appeal, the Second Circuit examined the factual findings made by the district court. The district court found that GAMCO's purchasing decisions were largely based on its own "Private Market Value, (PMV)," an independent calculation of the worth of the securities, that approximated the price that an informed industrialist would be willing to pay for the company, if each of its segments were valued independently in a private market sale. GAMCO then compared the PMV to the public market price. If there was a sufficiently large spread between these two numbers, as well as a type of catalyst or dynamic which it believed would cause the securities' value to move toward the PMV over time, GAMCO would purchase the security. The evidence, including testimony from GAMCO employees indicated that Vivendi's liquidity had no impact on the PMV calculation and the district court concluded that, even if GAMCO was aware of Vivendi's liquidity problems and its concealment of those problems, GAMCO's PMV would still have been materially higher than the public market price, making the purchase a good investment in GAMCO's view.

The Second Circuit found no clear error in the district court's factual findings and affirmed summary judgment for Vivendi. It concluded that the district court had a reasonable basis to hold that GAMCO did not believe that the market price necessarily equals, at any given time, the efficient value of a security and, accordingly, that Vivendi had rebutted the fraud-on-the-market presumption of reliance relied upon by GAMCO.

To read the full opinion, please visit:

Panel: Circuit Judges Carbranes, Livingston, and Lynch

Argument Date: 03/03/2016

Date of Issued Opinion: 09/27/2016

Docket Number: No. 13-1194(L), 13-1377(XAP)

Decided: Affirmed

Case Alert Author: Leigh Wellington

Counsel: Andrew J. Entwistle, Entwistle & Cappucci LLP, New York, N.Y. (Vincent R. Cappucci, Arthur V. Nealon, Jordan A. Cortez, Entwistle & Cappucci LLP, New York, N.Y., on the brief), for Plaintiffs-Appellants-Cross-Appellees; Mark A. Perry, Gibson, Dunn & Crutcher LLP, Washington, D.C. (Miguel A. Estrada, Lucas C. Townsend, Gibson Dunn & Crutcher LLP, Washington, D.C.; Caitlin J. Halligan, Gabriel K. Gillett, Gibson, Dunn & Crutcher LLP, New York, N.Y.; James W. Quinn, Gregory Silbert, Weil, Gotshal & Manges LLP, New York, N.Y.; Daniel Slifkin, Timothy G. Cameron, Cravath, Swaine & Moore LLP, New York, N.Y., on the brief), for Defendants-Appellees-Cross-Appellants.

Author of Opinion:
Per Curiam

Circuit: 2nd Circuit

Case Alert Circuit Supervisor: Professor Elyse Diamond

    Posted By: Elyse Diamond @ 09/27/2016 07:12 PM     2nd Circuit  

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