Rebutting the FOTM Presumption in an Efficient Market

Judge Scheindlin (S.D.N.Y.) addressed an important securities law issue that is the subject of academic debate more often than the basis of a judicial opinion: how to rebut the fraud on the market (FOTM) presumption of reliance.  GAMCO Investors, Inc. v. Vivendi, S.A. (09 Civ. 7962 (SAS) decided Feb. 28, 2013) (Download VivendiSDNYopinion) presented that issue in a case where Vivendi was collaterally estopped from denying any of the elements of plaintiffs' section 10(b) claims except for reliance; plaintiffs were entitled to the FOTM presumption of reliance; and neither truth on the market nor allegations of no price impact were available as defenses to the presumption.  Moreover, the parties agreed that during the relevant period plaintiffs did not possess non-public corrective information about Vivendi's misstatements; the plaintiffs did not directly rely on Vivendi's material misstatements; during the relevant period, the market for Vivendi's ADS's was efficient.  In short, the only issue was whether Vivendi could rebut the FOTM presumption of reliance.  A bench trial was held on this issue, after which the court concluded that indeed Vivendi had successfully rebutted the presumption because the plaintiffs "did not rely on the inflated market value of Vivendi ADS's as an 'unbiased assessment of [their] value.'"

The plaintiffs, a number of companies affiliated with Gabelli Asset Management, Inc.,purchased Vivendi securities during a period when Vivendi made misstatements to cover up its liquidity crisis.  Plaintiffs allege that the misstatements inflated the market price of Vivendi ADS's and consequently harmed the plaintiffs when they relied on the inflated price in making their purchases.  The court, however, found that plaintiffs' investment philosophy was based on the intrinsic "Private Market Values" of a company, i.e., "the price that an informed industrialist would be willing to pay for it, if each of its segments were valued independently in a private market sale."  Plaintiffs' investment philosophy was to invest in companies whose PMVs are substantially higher than their market capitalizations.

The court specifically found that plaintiffs believed that Vivendi's liquidity crisis was a short-term concern that made it a more attractive investment because it reduced the market price of Vivendi securities without reducing its PMV. Consistent with this, plaintiffs were increasing their Vivendi holdings during the period when corrective disclosures about the liquidity crisis were introduced into the marketplace. Accordingly, Vivendi's liqudity crisis was irrelevant to plaintiffs' decision to purchase Vivendi securities.

The court cautioned that this was an "extraordinary case" because Vivendi was able to rebut the FOTM presumption in an efficient market by establishing that plaintiffs did not, in fact, rely on the inflated market value of the securities and that "it cannot be said that but for Vivendi's misstatements and omissions about its liquidity condition, Plaintiffs would not have transacted in Vivendi ADS's."  The court further stated that the holding was "sharply limited to its unusual facts, and should not be taken to suggest that sophisticated institutional investors or value-based investors are not entitled to the [FOTM] presumption in general."