Vivendi Securities Class Action

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					     Vivendi Securities Class Action
     Louis F. BURKE 1 and Christopher J. GRAY 2

                                        A    United States District Court sitting      remainder of Vivendi’s shares were
                                        in New York City rejected arguments by         ordinary shares traded primarily on the
                                        defendants Vivendi, S.A. (“Vivendi”) that      Paris Bourse and held predominantly by
                                        certain European investors could not           persons in France and the rest of Europe.
                                        participate as class members in a securities
                                        class action arising out of Vivendi’s much-    Between 1996 and 2001, Vivendi, under
                                        publicized accounting problems. The            the leadership of CEO Jean-Marie
                                        Court certified a class including non-         Messier, caused the company to engage
                                        United States Vivendi shareholders from        in several multi-billion dollar acquisitions
                                        the United Kingdom, France and                 of U.S. and non-U.S. companies by using
                                        Holland, but declined to certify the class     Vivendi stock as payment and by
                                        to include investors from Austria and          borrowing cash against future earnings.
                                        Germany. In certifying the class,3 the         In the course of financing these
                       Louis F. BURKE   court distinguished between countries in       acquisitions, Vivendi incurred substantial
                                        which the judgment in a U.S.-style “opt        additional debt.
                                        out” class action would likely be
                                        recognized and enforced in the event that      The plaintiffs in the Vivendi class action
                                        defendants prevail in the Vivendi class        alleged that the company reported
                                        action, and countries in which such a          materially false and misleading financial
                                        judgment would be unenforceable. The           results and made false filings with the
                                        decision is significant because the court      United States Securities and Exchange
                                        rejected defendants’ arguments that the        Commission (“SEC”) that, inter alia,
                                        inclusion of foreign investors in the class    failed to timely record goodwill
                                        would render the action unmanageable           impairments and improperly applied
                                        and that a class action would not be a         generally accepted accounting principles
                                        superior procedural device to individual       (“GAAP”) 4. Although Vivendi was
                                        litigation for resolving class members’        allegedly on the verge of insolvency by
                                        claims. The decision is also significant       the end of 2001, defendants continued to
                                        because the court certified a class            reassure investors that Vivendi had
                                        including foreign investors who                sufficient cash to meet its obligations for
                  Christopher J. GRAY   purchased their Vivendi shares on the          the next twelve months. Defendants
                                        Paris Bourse (as well as those who             continued with these assurance even
                                        purchased Vivendi ADSs on the New              though by the time defendant Messier
                                        York Stock Exchange).                          was forced out as CEO, Vivendi was
                                                                                       allegedly on the verge of being unable to
                                        The    Factual     and     Procedural          pay its bills and was on the edge of
                                        Background of the Vivendi Class Action         bankruptcy. Vivendi later wrote down the
                                                                                       value of its assets by billions of dollars and
                                        Vivendi is a French corporation engaged        declared a multi-billion dollar loss for
                                        in the news and entertainment media            2002.
                                        business, as well as so-called
                                        “Environmental Services.” At relevant          Disgruntled shareholders brought
                                        times, Vivendi had approximately 1.08          multiple class action lawsuits against
                                        billion shares outstanding, of which           Vivendi, Messier and Vivendi Chief
                                        twenty-five percent of these were held by      Financial Officer Guillaume Hannezo
                                        United States shareholders as American         (“Hannezo”) beginning in July 2002.
                                        Depositary Shares (“ADSs”) traded on           The class actions were later consolidated
                                        the New York Stock Exchange. The               into a single case. Defendants moved to

68    N° 2007-3                                                                              Reunir a los abogados del mundo
                                                                                                                                                  EJERCICIO DE LA ABOGACÍA
dismiss the consolidated class action,          nothing as a result of the class action         The Vivendi Court’s Country-By-
arguing, inter alia, that plaintiffs’           judgment, but are forever barred from           Country      Analysis    Concerning
complaint insufficiently described the          pursuing individual claims against the          Enforceability of the Judgment in an
alleged fraud, that the Court lacked            class action defendants that overlap with       “Opt Out” Class Action
jurisdiction over the claims brought by         the claims in the class action10.
foreign class members who bought                                                                United States courts have “somewhat
Vivendi ordinary shares traded on               Even class members who have no active           haphazardly” (in the words of the Vivendi
foreign markets, and that defendants’           participation in the class action               court) grappled with the question of when
alleged unlawful conduct had insufficient       whatsoever will have their claims against       it is appropriate to permit foreign investors
nexus with the United States for a U.S.         defendants released in connection with          to assert claims against companies as part
court to assert subject matter jurisdiction5.   the entry of judgment in a Fed. R. Civ. P.      of a class action, due to the fact that some
                                                23(b)(3) class action, unless the class         foreign jurisdictions will not recognize and

The court denied in part and granted in         members take the affirmative step of            enforce a judgment in an “opt out” class

                                                                                                                                                  LEGAL PRACTICE
part defendants’ motion to dismiss,             “opting out” of the class action and            action as precluding subsequent claims by
leaving plaintiffs able to assert               pursuing individual claims. Thus, in            class members in the event that the class
substantially all of their claims against       settling a class action, defendant buys         action is unsuccessful15. After reviewing the
defendants 6. In its ruling, the court          peace with a defined class of persons, for      various cases that had addressed this issue,
rejected defendants’ contentions that           an ascertainable sum. Class members’            the Vivendi court carefully analyzed the
Vivendi and the individual defendants’          subsequent claims may be barred “where          law in each of France, Great Britain,
conduct had insufficient nexus with the         there is a realistic identity of issues         Austria, Germany and the Netherlands to
United States, and noted that both of the       between the settled class action and the        determine whether the courts in those
alleged principal individual actors             subsequent suit, and where the                  countries are likely to enforce a judgment
Vivendi’s accounting fraud (Messier and         relationship between the suits is at the        in a U.S.-style “opt out” class action against

Hannezo) moved to the United States             time of the class action foreseeably            absent class members.
during 2001 and that many of the                obvious to notified class members.”11 A

statements alleged to be false and              class action settlement may “prevent class      France
misleading were made by defendant               members from subsequently asserting
Messier after he had moved to New               claims relying on a legal theory different      In order for a foreign judgment to be
York7.                                          from that relied on in the class action         enforeceable and given res judicata effect in
                                                complaint, but depending on the very            France, the foreign judgment must be

On July 15, 2005, plaintiffs filed a motion     same set of facts.”12                           granted exequatur.16 Exequatur is a
to certify a class pursuant to Rules 23(a)                                                      procedure pursuant to which the courts of

and 23(b)(3) of the Federal Rules of Civil      In the event that a class action is litigated   France evaluate a foreign judgment to
Procedure consisting of all persons who         to a judgment in favor of the defendant,        determine whether it is enforceable in
purchased or otherwise acquired Vivendi         the defendant also obtains a release            France.
ordinary shares or ADSs between                 against both the named plaintiffs in the
October 30, 2000 and August 14, 2002 8.         class action, and the absent class members      The exequatur procedure has three
                                                who are members of the class. As one U.S.       prongs. The first prong is that the foreign
Federal Rule of Civil Procedure 23              federal court observed: “[I]f defendants        court must properly have jurisdiction
and the “Opt-Out” Class Action                  prevail against a class they are entitled to    under French law (the “jurisdictional
                                                a victory no less broad than a defeat           prong”). In order to satisfy the
In most class actions for damages under         would have been.”13                             jurisdictional prong the following
Federal Rule of Civil Procedure 239, the                                                        conditions must be met: (1) the case must
procedural rule setting forth the               Because of this rule, and in the interest of    not fall within the exclusive jurisdiction of
standards for certification of class actions    fairness and mutuality, U.S. courts have        the French courts; (2) the circumstances of
in the federal courts of the United States,     attempted to permit foreign investors to        the case or judgment at issue must be
a class of persons defined by the district      participate in class actions only in cases in   linked in a “characterized manner” to the
court is represented by one or more             which the defendant would have the fair         foreign court; and (3) the choice of the
“class representatives,” who prosecute          benefit of a victory on the merits, i.e.,       foreign court must not be fraudulent.17
claims on behalf of the class. In the event     when the defendant would be able to             The Vivendi court found that the
that the class action case is litigated to a    enforce a class action judgment in the          jurisdictional prong would probably be
judgment in favor of the plaintiffs (or, as     defendant’s favor in the home countries of      met in a French court because a number of
happens much more frequently, settled           foreign class members. As framed by the         the fraudulent acts occurred in the United
on a classwide basis), all members of the       Vivendi court, this question turns on           States, trading in Vivendi securities
class who submit the required claims            whether the foreign country would               occurred in the United States, and
paperwork by a deadline set by the court        enforce a class action judgment even            individual defendants moved to the United
are entitled to participate in the proceeds     against an absent class member who had          States.18 Therefore, the Vivendi court
of the judgment. Those who do not               no individual active participation in the       reasoned, it would be unlikely that a
either submit a claim or provide notice to      United States class action14.                   French court would find that the plaintiffs
the defendants that they wish to be                                                             engaged in forum shopping by bringing
excluded from the class (or “opt out”) by                                                       the case in the United States.
the deadline set by the court receive

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     The second prong of the exequatur             power of the court over the defendant.28         between the Austrian court and the foreign
     procedure is that the foreign court must      Therefore, an English court will enforce a       court.35 Formal reciprocity can only be
     have applied the appropriate law under        foreign judgment if it is finds either that      established by treaty or an Austrian decree
     French conflict-of-law principles (the        the defendant was present within the             establishing reciprocity.36
     “applicable-law prong”).19 This factor will   foreign court’s jurisdiction when
     be satisfied if it is determined that an      proceedings were instituted, or that the         Since there are no treaties of reciprocity
     equivalent decision would have been           defendant submitted to the foreign court’s       between Austria and the United States, and
     reached by a French court.20 The Vivendi      jurisdiction.29                                  Austria has issued no decrees regarding the
     court found that based on the substantive                                                      enforcement of U.S. judgments, the
     similarities of U.S. and French laws          Under this standard, the Vivendi court           Vivendi court concluded that an Austrian
     prohibiting the dissemination of false and    found that an English court would be likely      court would most likely not enforce a U.S.
     misleading information to shareholders,       to enforce a judgment in the Vivendi             judgment.37
     the law of France and the United States is    action. The court rejected a defense
     considerably equivalent and the applicable-   contention that the courts of England            Netherlands
     law prong was met.21                          would refuse to enforce a judgment in an
                                                   opt-out class action against absent class        Finally, the Vivendi court held that a
     The final exequatur prong is known as the     members because the absent class                 Dutch court would be likely to enforce a
     “public policy prong” and requires that the   members were not individally served with         judgment in the Vivendi class action.38 The
     decision in the foreign court must            process.30 The court reasoned that the           court noted that while shareholder class
     not contravene French concepts of             inference that absent class members could        actions are not currently available as a
     international public policy.22 The Vivendi    not be bound by a judgment in the Vivendi        remedy under Dutch law, recently enacted
     court determined that the U.S.-style “opt     case contravened Rule 19.6 of the (English)      class action legislation in other areas of law
     out” class action model is not offensive to   Civil Procedure Rules, which specifically        and shows that the recognition of the
     French conceptions of international public    allows absent parties to be bound by a           judgment would not be contrary to
     policy.23 The court rejected defense          judgment in a representative action.31           fundamental principle of fairness under
     contentions including the argument that                                                        Dutch law.39 Therefore, the court held,
     an “opt out” class action violates the        Germany                                          plaintiffs had “shown a probability that
     French principle of law known as nul ne                                                        Dutch courts would recognize a judgment
     plaide par procureur, which essentially       The Vivendi court concluded that it is not       or settlement in this action.”40
     holds that no person can make a legal claim   likely that a German court will enforce a
     in court without making his identity          judgment in an opt-out class action.32 The       Conclusion: As Vivendi Illustrates,
     known individually in the proceedings.24      court was not persuaded by the defense           There Should Be No Overarching
     The Vivendi court reasoned that an opt-       contention that enforcing a judgment in          Legal Impediment to Increasing
     out class action does not violate this        the Vivendi class action would likely violate    Foreign Investor Participation in U.S.
     principle because absent class members in     the German legal principle of ordre public,      Shareholder Class Actions
     an opt-out class action are reasonably        which establishes the right of all citizens to
     identifiable as participating parties. The    be hard and participate in legal                 Despite finding itself constrained to
     court further noted that French law           proceedings that affect their rights.33 The      exclude German and Austrian class
     appears to be evolving in the direction of    court reasoned that the actual notice to         members from the Vivendi class, the
     permitting U.S.-style opt-out class           class members required in a class action         Vivendi court rejected many arguments by
     actions.25                                    under (United States) Fed. R. Civ. P.            defendants that, if accepted, would require
                                                   23(b)(3) would, if carried out in an             the rejection of many or all foreign class
     Finally, the court concluded that it was      appropriate manner, likely satisfy German        members in U.S. class actions.
     unlikely that a French court would find       due process requirements.
     that there was fraud or undue forum-                                                           The court rejected generic contentions
     shopping in procuring a judgment in the       However, unlike France and England,              that notice to foreign class members would
     Vivendi class action, and concluded as        Germany has never utilized or recognized         be “unmanageable” 41, that certification of a
     follows: [A] judgment in this case would,     collective or representative actions in          single class was inappropriate because the
     more likely than not, be granted              which the litigation results obtained by a       New York Stock Exchange and the Paris
     recognition at such time as an exequatur      party representative bind non-parties.34         Bourse are not “perfectly integrated”
     proceeding is instituted.”26                  Based on the fact that the concept of a          markets42 and that foreign investors could
                                                   representative action appears to be alien to     not serve as class representatives on behalf
     Great Britain                                 German law, the court concluded that             of U.S. investors if they purchased on the
                                                   “plaintiffs have not shown a probability         Paris Bourse rather than the New York
     The Vivendi court next considered             that German courts will give res judicata        Stock Exchange43.
     whether the courts of England would           effect to the judgment in this case.”
     recognize and enforce a judgment in an                                                         Thus, the Vivendi decision is fairly read to
     opt-out class action. An English court will   Austria                                          suggest that foreign investors are eligible
     enforce a foreign judgment if it finds that                                                    to participate in U.S. securities class
     the court that entered the judgment was       As the Vivendi court noted, an Austrian          actions both as absent class members and
     competent to do so.27 Competency is           court will only recognize a foreign              as full-fledged class representatives, albeit
     determined by examining the jurisdictional    judgment if there is formal reciprocity          with certain exceptions.

70   N° 2007-3                                                                                              Rassembler les avocats du monde
                                                                                                                                                                                                        EJERCICIO DE LA ABOGACÍA
The Vivendi decision comes at a time                             3
                                                                     The court certified a class defined as follows: “all            13
                                                                                                                                          Bersch v. Drexel Firestone, Inc., 519 F.2d 974, 996
                                                                     persons from the United States, France, England, and                 (2d Cir.1975).
when foreign institutional investors have                            the Netherlands who purchased or otherwise acquired             14
                                                                                                                                         See id.
shown increasing interest in participating                           ordinary shares or American Depository Shares of                15
                                                                                                                                         See Decision at *16 et seq.
in U.S. class actions, as evidenced by                               Vivendi Universal, S.A. between October 30, 2000 and            16
                                                                                                                                         Decision at *18-19.
recent research showing that 12% of U.S.                             August 14, 2002.” In re Vivendi Universal, S.A. Sec.            17
                                                                                                                                         Decision at *19.
                                                                     Litig., 2007 WL 149046 at *35 (S.D.N.Y. May 21,                 18
                                                                                                                                         Decision at *20-21.
securities class actions in 2006 attracted at                        2007)(hereinafter referred to as the “Decision”).               19
                                                                                                                                         Decision at *22.
least one foreign institutional investor                         4
                                                                     GAAP is catch-all term for the standards that govern            20
                                                                                                                                         See id.
seeking appointment as lead plaintiff 44 (up                         financial reporting in the United States, and consists of       21
                                                                                                                                         Decision at *23.
from zero participation in 1999 and                                  those principles recognized by the accounting                   22
                                                                                                                                         Decision at *24.
                                                                     profession as the conventions, rules, and procedures            23
                                                                                                                                         See id.
2000)45. This trend could quickly be
                                                                     necessary to define accepted accounting practice at the         24
                                                                                                                                         Decision at *24.
reversed if U.S. courts showed an                                    particular time. SEC Regulation S-X, 17 C.F.R. §                25
                                                                                                                                         Decision at *26.
inclination to reject foreign institutional                          210.4-01(a)(1), provides that financial statements filed        26
                                                                                                                                         Decision at *26.

investors as lead plaintiffs and class                               with the SEC, which are not prepared in compliance              27
                                                                                                                                         Decision at *27.
                                                                     with GAAP, are presumed to be misleading and                    28
                                                                                                                                         See id.

                                                                                                                                                                                                        LEGAL PRACTICE
representatives due to their perceived                               inaccurate.                                                     29
                                                                                                                                         See id.
susceptibility to unique defenses.                               5
                                                                     See 381 F. Supp. 158 (S.D.N.Y. 2003), reconsideration
                                                                                                                                         Decision at *27.
                                                                     denied, 2004 WL 2375830 (S.D.N.Y. Oct. 22, 2004).
                                                                                                                                         See id.
                                                                                                                                         Decision at *29.
The careful and highly persuasive Vivendi                        6
                                                                     See id.                                                         33
                                                                                                                                         See id.
decision, while not binding on other U.S.                        7
                                                                     See 2004 WL 2375830, at *4.                                     34
                                                                                                                                         Decision at *30.
District Courts, bodes well for increased                        8
                                                                     Decision at *2.
                                                                                                                                         Decision at *30.
participation in U.S. class actions by                                                                                               36
                                                                                                                                         See id.
                                                                     Rule 23 provides in pertinent part as follows:                  37
                                                                                                                                         See id.
foreign institutional investors because of                           Rule 23. Class Actions                                          38
                                                                                                                                         Decision at *31.
its scholarly consideration, and rejection,                          (a) Prerequisites to a Class Action.                            39
                                                                                                                                         See id.
                                                                     One or more members of a class may sue or be sued as
of the principal defense arguments for the                           representative parties on behalf of all only if (1) the class
                                                                                                                                         See id.

wholesale rejection of foreign investors as
                                                                                                                                         Decision at *34.
                                                                     is so numerous that joinder of all members is                   42
                                                                                                                                         See id.
participants in U.S. class actions.                                  impracticable, (2) there are questions of law or fact

                                                                                                                                         This conclusion is not square stated, but is implicit in
                                                                     common to the class, (3) the claims or defenses of the              the court’s rejection of the need to certify sub-classes of
                                                                     representative parties are typical of the claims or                 purchasers of ordinary Vivendi shares and Vivendi
                                                                     defenses of the class, and (4) the representative parties           ADSs. See id.
                                                                     will fairly and adequately protect the interests of the         44
                                                                                                                                         The Private Securities Litigation Reform Act of 1995
                                  Louis F. BURKE                     class.                                                              (“PSLRA”) establishes the procedure for appointment
                                                                     (b) Class Actions Maintainable.
                               Louis F. BURKE, P.C.                                                                                      of the lead plaintiff in a securities class action. The

                                                                     An action may be maintained as a class action if the                process begins when the first plaintiff, within 20 days
                                                                     prerequisites of subdivision (a) are satisfied, and in              after filing the initial action, publishes a notice of
                            Christopher J. GRAY                      addition:                                                           pendency which informs class members, inter alia, of

                          Christopher J. GRAY, P.C.                  (1) the prosecution of separate actions by or against               their right to seek appointment as lead plaintiff.
                                                                     individual members of the class would create a risk of              PSLRA § 21D(a)(3)(A)(I). Within 60 days of such
                                                                     (A) inconsistent or varying adjudications with respect to           publication, any person or group of persons may apply
                                                                     individual members of the class which would establish               to the court for appointment as lead plaintiff. PSLRA
                                                                     incompatible standards of conduct for the party                     § 21D(a)(3)(A)(I).
                                                                     opposing the class, or                                             The court “shall adopt a presumption that the most
                                                                     (B) adjudications with respect to individual members of            adequate plaintiff in any private action arising under
                                                                     the class which would as a practical matter be                     [the Securities Act and the Exchange Act, respectively]
                                                                     dispositive of the interests of the other members not              is the person or persons that
                                                                     parties to the adjudications or substantially impair or            (aa) either has filed the complaint or made a motion in
                                                                     impede their ability to protect their interests; or                response to a notice under subparagraph (A)(I);
                                                                     (2) the party opposing the class has acted or refused to           (bb) in the determination of the Court has the largest
                                                                     act on grounds generally applicable to the class, thereby          financial interest in the relief sought by the class; and
                                                                     making appropriate final injunctive relief or                      (cc) otherwise satisfies the requirements of Rule 23 of
                                                                     corresponding declaratory relief with respect to the               the Federal Rules of Civil Procedure.”
                                                                     class as a whole; or                                               The presumption that the person or group of persons
                                                                     (3) the court finds that the questions of law or fact              with the largest financial interest (usually interpreted to
                                                                     common to the members of the class predominate over                mean the largest losses traceable to the alleged fraud) is
                                                                     any questions affecting only individual members, and               the most adequate class representative will be rebutted
                                                                     that a class action is superior to other available methods         only upon proof by a member of the class that the
                                                                     for the fair and efficient adjudication of the controversy.        person or group will not fairly and adequately protect
                                                                     The matters pertinent to the findings include: (A) the             the interests of the class or is subject to unique defenses
                                                                     interest of members of the class in individually                   that render such putative lead plaintiff incapable of
                                                                     controlling the prosecution or defense of separate                 adequately representing the class. See In re
                                                                     actions; (B) the extent and nature of any litigation               Donnkenny, Inc. Securities Litigation, 171 F.R.D.
                                                                     concerning the controversy already commenced by or                 156, 157 (S.D.N.Y. 1997).
                                                                     against members of the class; C) the desirability or               Thus, some of the arguments that the Vivendi
    Louis F. Burke is a sole practitioner in New York City           undesirability of concentrating the litigation of the
    who specializes in securities and commodity futures                                                                                 defendants raised in opposing class certification could,
                                                                     claims in the particular forum; (D) the difficulties likely        if credited, also militate against the appointment of a
    litigation. Mr. Burke is President of the UIA’s Litigation       to be encountered in the management of a class action.
    Commission.                                                                                                                         foreign institutional investor as lead plaintiff.
                                                                      See Wal-Mart Stores, Inc. v. Visa U.S.A., Inc., 396            45
                                                                                                                                          Accountability Goes Global: International
    Christopher J. Gray maintains a law practice in New               F.3d 96, 107 (2d Cir. 2005)
    York concentrated in complex litigation, arbitration,                                                                                 Investors and U.S. Securities Class Actions
    and class actions and currently represents the plaintiffs
                                                                      TBK Partners, Inc. v. Western Union Corp., 675                      (Institutional Shareholder Services, May 2007),
    in several class action and shareholder derivative cases          F.2d 456, 461 (2d Cir.1982).                                        available at
    pending in state and federal court. Mr. Gray holds a law     12
                                                                      Nat’l Super Spuds, Inc. v. N.Y. Mercantile Exch.,                   GoesGlobal.pdf.
    degree from Georgetown and a bachelor’s degree from               660 F.2d 9, 18 n. 17 (2d Cir.1981).
    the University of Wisconsin.

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