In Re Vivendi, S.A. Securities Litigation

838 F.3d 223 (2nd Cir. 2016)


D was a centuries-old French utilities conglomerate. Jean-Marie Messier became the chief executive and chairman of the executive committee since 1994, and chairman of the company since 1996. He was a former investment banker at the firm Lazard Frères & Co. LLC. Messier formulated an ambitious plan to transform the company completely. Messier's plan was to merge the company with two other large companies that had significant media dealings; steadily supplement this new company's core media operations with various additional media acquisitions; and gradually divest the new company of its utilities and environment divisions. The games got underway in May 1998. In June 20, 2000, D announced its intent to enter into a three-way merger with Canal Plus, S.A. (Canal+), a French film and television production company; and The Seagram Company Ltd. (Seagram), a Canadian entertainment and beverage company that owned, among other things, Universal Studios and Universal Music Group. Credit-rating agencies Moody's and Standard & Poor's (S&P) undertook to reevaluate the creditworthiness of D Moody's noted a 'possible downgrade' of a particular senior class of D's debt might be on the horizon. S&P also expressed some concern. Neither Moody's nor S&P downgraded D, at the time. The three-way merger was completed on December 8, 2000, with the surviving entity being D. D became one of the world's leading media and communications companies, second only to AOL-Time Warner. D's assets included the world's largest recorded music company, one of the world's largest motion picture studios, and businesses in the global telecommunications, television, theme park, publishing, and Internet industries. Within just a few days of the three-way merger's completion D announced its acquisition of a 35% interest in Maroc Telecom, the Kingdom of Morocco's state-owned telecommunications company, for approximately €2.3 billion. D acquired publishing company Houghton Mifflin Company along with its $500 million in net debt, for approximately $2.2 billion. D announced that it would acquire full control of television company USA Networks Corporation (USA Networks) for $10.3 billion, approximately $1.6 billion of which Vivendi would finance in cash. That same day, D announced that it would invest $1.5 billion in satellite television company EchoStar Communications Corporation (EchoStar), which was expected to gain access to approximately 15 million homes in the United States when EchoStar acquired DirecTV. All this occurred in the space of 18 months. D also acquired, in whole or in part,, GetMusic LLC, RMM Records & Video, MUSIDISC, Koch Group Recorded Music, Uproar Inc., and Inc., among other media or telecommunications companies. D spent approximately $77 billion on its acquisition spree, with Seagram alone costing roughly $34 billion. D's debts associated with its media and communications operations ballooned from approximately €3 billion in early 2000 to over €21 billion in 2002. D's public statements focused on EBITDA ('Earnings Before Interest, Tax, Depreciation, and Amortization), an earnings measure that is typically considered a 'good example of [a company's] cash income' and ability to service debt. D's 'objective' was to 'grow pro forma adjusted EBITDA at an approximate 35% compound annual growth rate through 2002.' D repeatedly underscored its confidence in its plan and goals. D touted that its fiscal year 2001 quarterly results met or exceeded its EBITDA growth targets. D supplemented these statements with representations that it had 'very strong . . . results with outstanding growth,' 'the highest growth rates in the industry,' 'strong operating results,' 'free operational cash flow [that was] far above [its] objectives,' and 'strong free cash flow.' money from the banks' and it became 'more and more difficult to raise the cash.' D's liquidity became increasingly strained. D's finance department believed that D was in a dangerous position. The USA Networks and EchoStar transactions created alarming positions in a company whose case situation was already extremely tense. D's Treasurer raised the issue of a cash problem inside D at each one of D's Finance Committee meetings. D's Chief Financial Officer commented on multiple occasions that D appeared to be 'running out of cash' and 'nearing bankruptcy.' The Treasurer wrote Messier warning of the 'danger' of a downgrade by the ratings agencies. He also penned a memorandum to Messier recounting the 'painful and humiliating meetings with the ratings agencies. The Treasurer expressed clearly the extreme danger facing D. Four days after Messier was alerted to the 'danger' of a downgrade, D publicly announced its $10.3 billion USA Networks transaction and $1.5 billion EchoStar transaction. D stated that the transactions were 'not putting pressure on Vivendi Universal,' and that it anticipated maintaining 'a very comfortable . . . credit rating.' The two transactions prompted Moody's to change its rating outlook on D to 'negative.' A few weeks later, on January 7, 2002, D announced the sale of 55 million treasury shares for a total of €3.3 billion. This money was to be used mostly to reduce the company's debt. Moody's downgraded D's long-term senior debt rating from Baa2 to Baa3, citing concerns about the ability to reduce debt and return its leverage to a point that would justify a Baa2 rating. D stated that the downgrade 'had no impact on D's . . . cash situation,' and that D 'had every confidence in its ability to meet its operating targets for 2002.' S&P downgraded D's short-term debt from A-2 to A-3. D stated that it 'had no reason to fear any further deterioration in its credit rating.' D's 'cash flow situation,' was 'comfortable.' D stated, 'Even assuming an extremely pessimistic market,' Vivendi would be able to 'continue its debt reduction program in all serenity.' Unbeknownst to the public, D and Deutsche Bank entered into a private sale-and-repurchase agreement. D sold a 12.7% stake in its 63%-owned subsidiary Vivendi Environnement and agreed to repurchase those shares from Deutsche Bank at a later point. While the public remained unaware of D's deal with Deutsche Bank, D announced it was considering selling a significant stake in Vivendi Environnement when market conditions were appropriate. Vivendi's stock price took a hit when the market learned that D had already entered a sale-and-repurchase agreement with respect to some of its shares in Vivendi Environnement. Three days later, D announced the immediate sale of a 15.6% stake in Vivendi Environnement shares, including the 12.7% stake that was the subject of its repurchase-and-sale agreement with Deutsche Bank. D's stock price dropped 23%. Everyone with half a brain figured out that D was desperate for cash. D responded that 'owing to its strong free cash flow,' combined with other factors, D was 'confident of its capacity to meets its anticipated obligations over the next year.' Two days later, D negotiated a new €275 million credit line from Société Générale. Moody's downgraded D's long-term senior debt rating again to Ba1, landing D's long-term senior debt in junk territory. S&P downgraded D's long-term debt from BBB to BBB-, just a notch above junk status, and warned that liquidity concerns could prompt further downgrades. D's stock price slid approximately 26%. Financial analysts speculated that D could face a cash shortfall by the end of 2002 because it did not have the means to cover its debt repayments. D hired Goldman Sachs to assess the severity of the financial difficulties. Goldman Sachs noted that one of four possible scenarios for D was bankruptcy, as early as September or October 2002. The board of directors figured out that Messier was the source of D's troubles. Messier announced his resignation, and the next day Vivendi's stock prices tumbled 22%. D issued a press release acknowledging that the company faced a 'short-term liquidity issue.' D would have to repay creditors €1.8 billion, and €3.8 billion in credit lines would be up for renegotiation. On August 14, 2002, D's new management announced that the company faced refinancing needs of €5.6 billion, had €10 billion more in debt than is typical of a company with a BBB credit rating by S&P, and planned to sell €5 billion worth of assets over the next nine months. S&P further downgraded D's long-term debt, and D's stock price dropped more than 25%. Ps filed a class action suit alleging violations of § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and SEC Rule 10b-5. Ds moved to dismiss, arguing, that Ps had failed to specify with sufficient particularity the statements Ps alleged to be false or misleading. Ps filed a First Amended Consolidated Class Action Complaint. After several years of discovery, Ds moved for summary judgment. The motion was denied. Defendants filed a motion in limine to exclude the testimony of Ps' expert, Dr. Blaine Nye. For the most part, the motion was denied. The jury trial commenced. Ps presented a 'Book of Warnings,' a compendium of internal communications and memoranda that compared the public statements with internal discussions. Ds emphasized that D never actually experienced a full-blown liquidity crisis or defaulted on a loan; the events that occurred in the summer of 2002 merely reflected a transient hitch, from which the company ultimately rebounded. The seventy-two-page final jury verdict form identified fifty-seven alleged misstatements, some of which were alleged against D only, and others of which were alleged against D and Messier and/or Hannezo. The jury found that neither Messier nor Hannezo was liable under § 10(b) or § 20(a) for any of the alleged misstatements. It found D liable under § 10(b) for all fifty-seven alleged misstatements. The district court denied D's motions for judgment as a matter of law and for a new trial. The court awarded D judgment as a matter of law with respect to one statement. D appealed.