After 14 years of litigation, including a 2010 jury verdict finding defendant Vivendi, S.A. liable for securities fraud, together with an award to plaintiffs of $50 million in damages (plus interest) and $21 million in costs, Vivendi has failed to find succor in its appeal to the U.S. Court of Appeals for the Second Circuit. In a wide ranging decision issued September 27, 2016, the Second Circuit affirmed the District Court’s denial of motions for judgment and for a new trial, and rejected every argument on raised on appeal by defendant Vivendi. The claims in this case focused on Vivendi’s materially misleading statements — 57 of them — about its liquidity risk following $77 billion of acquisitions in 2000 and 2001 and resulting stock price crash in 2002 when its true financial picture was revealed after a ratings agency downgrade.
Among a number of points on appeal, Vivendi argued that plaintiffs liquidity risk theory was flawed as a matter of law, because liquidity risk is a concept that is so “amorphous” and “ephemeral” such that any statement related to it could not be false or misleading. The Second Circuit rejected this argument finding that liquidity risk means simply when a company is “debt rich and cash poor.” This risk, while perhaps not perfectly defined, denotes a companies ability to meet its short term financial obligations, and is actionable as a fraud claim under section 10(b). The court held:
“The jury found that knowledge of Vivendi’s true liquidity risk at any given time would have been material to a reasonable investor and that the fifty‐seven statements were individually false or misleading with respect to this risk. Without opining on whether there are indeed concepts so amorphous or broad that their concealment cannot support an actionable theory under § 10(b) as a matter of law, liquidity risk as defined in this case was not such a concept.”
The court next considered whether there was sufficient evidence to support the jury’s finding that the 57 statements were materially false or misleading with respect to liquidity risk. Applying the Supreme Court’s 2013 test in Amgen, i.e. “[w]hether a misrepresentation is material is ‘judged according to an objective standard’ that turns on ‘the significance of an omitted or misrepresented fact to a reasonable investor,'” the court found sufficient evidence to sustain the jury verdict:
“To be sure, the statements do not each repeat the precise same refrain. Some speak directly to liquidity risk, while others concern components that contributed to Vivendi’s liquidity risk. That individual alleged misstatements may relate to different aspects of a larger problem does not necessarily subvert a finding of fraud, however. It would be perverse if companies could escape liability for securities fraud simply by disseminating a network of interrelated lies, each one slightly distinct from the other, but all collectively aimed at perpetuating a broader, material lie. Where a company seeks fraudulently to hide a particularly large problem with multiple contributing factors, it is quite probable that the company will have to lie about a number of related topics in order successfully to conceal the larger issue. Just so here. Vivendi’s alleged fraud (in the jury’s reasonable estimation) is remarkable in part because the problem that Vivendi sought to conceal from the public was so vast, and touched upon so many aspects of its business, that a few scattered misstatements would not have sufficed to mask it. Vivendi needed both to systematically misrepresent its ability to satisfy its liquidity demands, and also to assiduously conceal any material facts (of which there were many) that would call into question its ability to meet its liquidity demands.”
The court went on to highlight six examples of statements made by Vivendi and concluded there was sufficient evidence to support the jury’s finding that the statements were materially false or misleading.
This is a somewhat unusual securities fraud case in that it was not settled before trial and the Second Circuit considered the appeal after a full trial and post-trial motions. 14 years is a long time for any case, but it may not be over — the ball is now in Vivendi’s hands to seek a writ of certiorari from the Supreme Court.