By: By AgnosticPreachersKid (Own work) [CC BY-SA 3.0, via Wikimedia Commons

By: By AgnosticPreachersKid (Own work) [CC BY-SA 3.0, via Wikimedia Commons

By Betty McNeil

Securities litigation takes a variety of legal frameworks, but in more recent years litigation surrounding 10(b) of the Exchange Act and SEC Rule 10b-5 misrepresentations have led the securities litigation field. Constant litigation has led to many prominent decisions but since 2011 the Circuit Courts have been faced with a decision that, if adopted, would likely give Plaintiff Litigants an upper hand in 10b-5 misrepresentation suits.[1] For many plaintiffs, at least in the Seventh, Eleventh, and Second Circuit, the upper hand is NOW a reality.

In December 2000, Vivendi became “one of the world’s leading media and communications companies.”[2] Allegations suggest that between 2001 and 2002, Vivendi went on an acquisition spree in which it reportedly spent approximately $77 billion dollars.[3] However, with each purchase Vivendi “had to borrow money” from banks and it became difficult for Vivendi to raise the cash it needed for both its acquisitions and its accumulating debt.[4] Further, internal corporate documents suggest that financial departments within Vivendi believed that the company’s liquidity was in a dangerous state by 2001.[5] Publically, Vivendi expressed its aggressive growth prospects to its shareholders, yet failed to mention that internal meetings suggested the corporation was “running out of cash” and nearing bankruptcy.”[6] But, in 2002 Vivendi’s worst fears surfaced when Moody Credit Agency and S&P downgraded Vivendi’s debt ratings.[7] Vivendi continued to reassure its shareholders, and issued widely viewed public statements but further debt ratings followed and eventually in July 2002, Vivendi’s stock price slid approximately 26%.[8] At trial Vivendi presented numerous arguments to avoid liability, however one argument in particular restructured the foundation set forth by the Seventh and Eleventh Circuits and now provides a novel theory for Plaintiffs in securities suit.

It has long been understood that in a Rule 10b-5 private cause of action plaintiffs must demonstrate 1) an untrue statement of a material fact, or 2) an omission to state a material fact in order to make statements made not true.[9] In addition to the actionable statement, there must also be a proper connection between the misrepresentation, and the plaintiff’s injury – whether the fraud affected “the investor’s decision to engage in the transaction.”[10] In other words, under a 10b-5 cause action reliance is a rebuttable presumption that defendants can defeat by introducing evidence that the alleged misrepresentation did not in fact affect the stock.

In addition, the price impact theory (“simply concern[ed] with whether the misrepresentations affected the market price in the first place”) has long been construed as a inflation introduction theory and in this case the court was challenged with determining whether the inflation introduction theory is the end all tell all.[11] Vivendi’s argument was premised on the idea that “statements that introduce new inflation affects a company’s stock price, while statements that maintain inflation have no impact.”[12] Courts have long accepted this argument; however, the Second Circuit followed the framework outlined by the Seventh and Eleventh Circuit. Specifically, the Court found that “theories of inflation maintenance, and inflation introduction are not separate legal categories.[13] In other words, when corporations make misrepresentations that cause inflation as well as maintains an inflated stock price, at least in the Second, Seventh, and Eleventh Circuits, they will now be on the hook to demonstrate that the alleged misrepresentations did not in fact contribute to the maintained price. This case is a departure from prior precedent which simply inferred inflated price as the element to beat, and in many ways signifies a novel hurdle that defendants and defense counsels will now be charged with defeating.

[1] See Glickenhaus & Co. v. Household Intern., Inc., 787 F.3d 408 (7th Cir. May 21, 2015); FindWhat Investor Group v., 658 F.3d 1282 (11th Cir. Sept. 30, 2011) (establishing the “price maintenance” theory).

[2] In re Vivendi, S.A. Sec. Lit., 2016 WL 5389288 (2d Cir. Sept. 27, 2016).

[3] Id. at *3.

[4] Id.

[5] Id.

[6] Id. at *4.

[7] Id. at *1.

[8] Id. at *5.

[9] Id. at *7.

[10] Id. at *22.

[11] Id.

[12] Id.

[13] Id. at *24.

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