In re Vivendi, S.A. Secs. Litig.

Court of Appeals for the Second Circuit
838 F.3d 223 (2016)

ELI5:

Rule of Law:

A company violates federal securities laws when it makes optimistic statements that are misleading because they omit to disclose known, material risks that call those statements into question. A misstatement can be actionable if it maintains pre-existing artificial inflation in a stock's price, not only if it introduces new inflation.

Facts:

Between 1998 and 2000, Vivendi Universal, S.A. ('Vivendi') transformed from a French utilities company into a global media conglomerate.
Throughout 2000 and 2001, Vivendi engaged in a debt-fueled acquisition spree, spending approximately $77 billion and causing its debt to balloon from €3 billion to over €21 billion.
From October 2000 to August 2002, Vivendi made numerous public statements touting its strong financial footing, aggressive EBITDA growth targets, record income, and strong free cash flow.
Internally, by mid-2001, Vivendi's finance department considered the company's liquidity situation 'tense' and later 'dangerous,' with its Treasurer and CFO repeatedly raising alarms about cash shortages and the risk of bankruptcy.
In December 2001, Vivendi's CFO, Guillaume Hannezo, explicitly warned CEO Jean-Marie Messier that a potential credit downgrade could lead to a 'liquidity crisis.'
Despite these internal warnings, Vivendi proceeded with multi-billion dollar acquisitions and publicly stated the transactions were 'not putting pressure' on the company.
In mid-2002, a series of credit downgrades occurred, and news of Vivendi's severe cash shortage and debt obligations became public.
Following these public revelations, Vivendi’s stock price plummeted, its CEO resigned, and the new management acknowledged a 'short-term liquidity issue.'

Procedural Posture:

Investors filed a Consolidated Class Action Complaint against Vivendi, its CEO, and its CFO in the U.S. District Court for the Southern District of New York.
Defendants' motion to dismiss was denied in part, and Plaintiffs filed an amended complaint.
The district court denied Defendants' motion for summary judgment.
After a three-month trial, a jury found Vivendi liable under § 10(b) for fifty-seven misstatements but found the individual executives not liable.
The district court denied Vivendi's post-trial motion for judgment as a matter of law, with the exception of one statement not at issue on appeal.
Vivendi, the defendant, appealed the judgment to the U.S. Court of Appeals for the Second Circuit.

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Issue:

Do a series of optimistic corporate statements regarding financial health and growth prospects constitute actionable securities fraud under § 10(b) and Rule 10b-5 when the company fails to disclose a known, severe, and worsening liquidity risk that renders those statements misleading?

Opinions:

Majority - Livingston, J.

Yes, a series of optimistic corporate statements regarding financial health constitutes actionable securities fraud when the company fails to disclose a known, severe liquidity risk. The plaintiffs' case was not based on Vivendi's silence or a 'pure omission,' but on affirmative statements that became misleading half-truths by omitting the material fact of the company's severe liquidity risk. The court reasoned that once a company chooses to speak on a topic, it has a duty to tell the whole truth. The court rejected Vivendi's defenses that its statements were non-actionable puffery or protected forward-looking statements under the PSLRA, finding sufficient evidence that the statements were specific, material, and made with actual knowledge of their falsity. Crucially, the court endorsed the 'inflation maintenance' theory, holding that a misstatement has a price impact not only when it introduces new inflation into a stock's price, but also when it wrongfully prevents pre-existing inflation from dissipating.

Analysis:

This decision reinforces the 'half-truth' doctrine in securities fraud, affirming that companies cannot selectively disclose positive information while omitting known, material risks that would alter the context of those disclosures. The court's explicit adoption of the 'inflation maintenance' theory aligns the Second Circuit with the Seventh and Eleventh Circuits, significantly impacting securities class actions. This holding makes it easier for plaintiffs to establish reliance and loss causation for a series of misstatements, as they do not need to prove that each individual statement caused a discrete, measurable increase in the stock price, but rather that it contributed to keeping the price artificially inflated.

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