With all of the attention on last week’s Amgen decision, another interesting decision addressing the fraud-on-the-market presumption of reliance in securities fraud actions may have escaped notice. In GAMCO Investors, Inc. v. Vivendi, S.A. (S.D.N.Y. Feb. 28, 2013), Judge Scheindlin found that the defendant had rebutted the presumption of reliance as to a group of related investment advisers and mutual funds by showing that the plaintiffs’ investment decisions did not rely on the prices of the defendant’s securities as an accurate assessment of the value of those securities. As one of the few decisions to address this issue following a bench trial, GAMCO provides a valuable example of how the presumption of reliance can be rebutted. The decision also illustrates why individualized questions as to reliance should make class certification impossible in some fraud-on-the-market class actions.

Piggybacking on a prior class judgment against Vivendi, the plaintiffs in GAMCO invoked collateral estoppel to prevail on all of the elements of a Section 10(b) claim except for reliance, which the plaintiffs asserted could be presumed under the fraud-on-the-market theory recognized in Basic Inc. v. Levinson. The district court agreed, but held a two-day bench trial on whether Vivendi could rebut that presumption with evidence regarding how the plaintiffs decided to purchase the Vivendi securities at issue. That evidence showed that the plaintiffs calculated Vivendi’s intrinsic “private market value” and chose to buy Vivendi’s securities because they were trading at a substantial discount to the private market value. Indeed, as facts about Vivendi’s allegedly misrepresented financial situation were revealed and the price of the securities fell, the plaintiffs deemed the investment even more attractive and thus increased their holdings.

Based on that evidence, the court found that the plaintiffs “did not ‘rely on the market price of [Vivendi] securities as an accurate measure of their intrinsic value.’” The metric used by the plaintiffs to value and buy the securities was “completely independent” of the alleged fraud and the market price of the securities. The court therefore ruled that Vivendi had rebutted the presumption of reliance. The court was unmoved by the plaintiffs’ argument that Vivendi supposedly could not show that the plaintiffs would have made the same purchases at the same prices with knowledge of the alleged fraud. It also rejected the plaintiffs’ plea to allow presumed reliance because Vivendi purportedly failed to show that market prices played no part whatsoever in the plaintiffs’ decision making. The court concluded that requiring such proof would make the presumption of reliance irrebuttable and impermissibly turn Section 10(b) into a “judicially created investor insurance scheme.”

GAMCO’s reasoning suggests that similar investor-specific reliance challenges could be raised in any securities fraud suit in which the defendant develops evidence that particular investors did not view the market price as an accurate measure of the intrinsic value of the relevant security. However, the court did say that its holding was “sharply limited to its unusual facts” and should not prevent all institutional or value-based investors from claiming presumed reliance. The court also volunteered (purely in dicta) that “a class may be certified despite the presence of members who allegedly did not rely on the integrity of the market,” even though it acknowledged that individual reliance arguments are “less susceptible to proof on a class-wide basis” and “call for individualized proof” in separate trials.

Notwithstanding the district court’s suggestions that GAMCO may have limited implications in other cases, defendants in securities class actions should view the decision as confirming that individual reliance challenges are plausible obstacles to liability and class certification in many circumstances. Indeed, after Amgen, such challenges may take on even greater prominence in any litigation over the fraud-on-the-market presumption of reliance.

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