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In re Vivendi Universal

March 31, 2009

IN RE VIVENDI UNIVERSAL, S.A. SECURITIES LITIGATION


MEMORANDUM OPINION AND ORDER

Defendants move for partial summary judgment for lack of standing against plaintiffs in the above-captioned actions. Defendants argue that all plaintiffs lack constitutional standing because they have no proprietary interest in the claims they bring or the shares from which the claims arise. In addition, defendants argue that certain plaintiffs also lack statutory standing because they have failed to produce sufficient evidence that they possess authority to sue and unrestricted investment discretion. Plaintiffs respond to defendants' constitutional point by arguing that either they qualify for an exception to the constitutional bar traditionally afforded to trusts, or they have been or will be assigned the claims by the underlying funds they represent. Plaintiffs respond to defendants' statutory point by asserting that documents they have produced raise a genuine issue of material fact with regard to their authority to sue and unrestricted investment discretion. In the alternative, should the Court find that plaintiffs do not have standing, plaintiffs request leave to substitute the funds they represent as the real parties in interest under Rule 17 of the Federal Rules of Civil Procedure ("FRCP"). For the reasons stated herein, defendants' motion is granted in part and denied in part.

BACKGROUND

This is one of three opinions in this matter the Court is issuing today, with the other two providing the Court's decision on defendants' motion for reconsideration of class certification and defendants' motions for summary judgment for failure to prove loss causation. Plaintiffs' allegations and a more detailed summary of the facts are set out at greater length in the Court's opinion addressing the issue of loss causation, and the Court assumes familiarity with that opinion. Only the facts relevant to the issue of standing are described here.

This case began as a putative class action against defendant Vivendi Universal S.A. ("Vivendi") and two of its former senior officers, Jean-Marie Messier, and Guillaume Hannezo, for violations of U.S. securities law. Defendants were alleged to have made various material misrepresentations and omissions concerning Vivendi's liquidity position in 2001 and 2002. The truth allegedly began to leak into the market in 2002 when Vivendi announced several asset sales, and the credit rating agencies downgraded Vivendi's debt. An opinion by Judge Baer, later adhered to by this Court on reconsideration, found that Messier and Hannezo's extensive activities in New York City in 2001 and 2002 were sufficient for subject matter jurisdiction and the application of U.S. law to the dispute. In re Vivendi Universal, S.A. Sec. Litig., 381 F. Supp. 2d 458 (S.D.N.Y. 2002); In re Vivendi Universal, S.A. Sec. Litig., No. 02 Civ. 5571 (RJH), 2004 WL 2375830 (S.D.N.Y. Oct. 22, 2004).

Although Vivendi is a corporation organized under the laws of France, its securities traded on both the New York Stock Exchange ("NYSE") as American Depository Shares ("ADSs") and the Paris Bourse as ordinary shares. By order dated March 22, 2007, this Court certified a class of Vivendi shareholders from the United States, France, England, and the Netherlands. In re Vivendi Universal, S.A. Sec. Litig., 242 F.R.D. 76 (S.D.N.Y. 2007). Shareholders not from France, England or the Netherlands who purchased on the Bourse were excluded from the class. Many of these shareholders owned their shares through various funds that pooled the shares with other assets for the purpose of earning a return. These funds were in turn managed by various entities, and it is these entities (the "Individual Plaintiffs") that have brought suit on behalf of the funds in the above-captioned actions (the "Individual Actions"). By order dated January 7, 2008, the Court consolidated the Individual Actions with the class and related actions by the Liberty Media plaintiffs*fn1 and GAMCO Investors, Inc. ("GAMCO"). The Court allowed discovery to proceed on an accelerated schedule, and defendants first moved for summary judgment on standing against the Individual Plaintiffs and GAMCO in August 2008.

After plaintiffs had responded to defendants' moving brief but before defendants had filed their reply, the Court of Appeals issued its decision in W.R. Huff Asset Management Co. v. Deloitte & Touche LLP, 549 F.3d 100 (2d Cir. 2008). The decision, described in greater detail below, announced a new standard for constitutional standing to bring suit under U.S. securities laws. Defendants argued in their reply that plaintiffs did not meet this standard. Individual plaintiffs and GAMCO responded by moving for leave to file sur-replies. The Court granted plaintiffs' motions and denied defendants' requests for further briefing.

DISCUSSION

Defendants' motions raise three issues: (1) whether plaintiffs have standing to sue on behalf of Vivendi shareholders simply by virtue of their special relationship with them; (2) whether post-filing assignments by shareholders operate to give plaintiffs standing; and (3) whether the Court may allow shareholders to substitute for plaintiffs under Rule 17 of the FRCP at this stage in the litigation. The first issue depends almost entirely on the rule in Huff. The second and third issues depend on the law of standing more generally.

I. Standing to Sue

A. The Rule and its Exception in Huff

"Article III standing consists of three 'irreducible' elements: (1) injury-in-fact, which is a 'concrete particularized' harm to a 'legally protected interest'; (2) causation in the form of a 'fairly traceable' connection between the asserted injury-in-fact and the alleged actions of the defendant; and (3) redressability, or a non-speculative likelihood that the injury can be remedied by the requested relief." Huff, 549 F.3d at 106-07 (quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992)) (emphasis in original). Because plaintiffs purchased Vivendi shares on behalf of their clients, and because it was those clients who suffered losses due to defendants' alleged fraud, defendants' argument focuses on the injury-in-fact requirement. (Def. Reply Br. Individual Pl. at 5 ("Individual Plaintiffs have not suffered the injury-in-fact required by Article III because they did not purchase Vivendi securities on their own behalf."); Def. Reply Br. GAMCO at 2 ("GAMCO does not and cannot show it has satisfied Article III's injury-in-fact requirement.").) The fact that plaintiffs are not the beneficial owners of the securities does not necessarily mean that they lack standing to bring their claims. Should the evidence show that plaintiffs own the claims by virtue of an assignment, there would be little doubt that they have standing. See Connecticut v. Physicians Health Servs. of Conn., Inc., 287 F.3d 110, 117 (2d Cir. 2002) ("[A] valid and binding assignment of a claim (or a portion thereof)-not only the right or ability to bring suit-may confer standing on the assignee.") (emphasis in original). Absent such a valid assignment, the issue becomes whether plaintiffs occupy some middle ground that grants them standing.

In Huff, appellee W.R. Huff Asset Management ("Huff") argued that it occupied just such a middle ground by virtue of its "discretionary authority to make investment decisions for its clients" and possession of its clients' "power of attorney" to bring suit on their behalf. Huff, 549 F.3d at 103. In fact, the district courts had understand these factors to be sufficient for Huff to qualify as a "purchaser or seller" and therefore to have statutory standing to bring its claims under the securities laws. See, e.g., In re eSpeed, Inc. Sec. Litig., 232 F.R.D. 95, 98 (S.D.N.Y. 2005); Weinberg v. Atlas Air Worldwide Holdings, Inc., 216 F.R.D. 248, 255 (S.D.N.Y.2003). Presumably, plaintiff Huff concluded that constitutional standing and statutory standing were coextensive in its case. The Court of Appeals, however, rejected this argument and articulated distinct requirements for Article III standing.

Reasoning from the Supreme Court's recent decision in Sprint Communications Co. v. APCC Services, Inc., 128 S.Ct. 2531 (2008), the Court of Appeals held that "[i]n our view, Sprint makes clear that the minimum requirement for an injury-in-fact is that the plaintiff have legal title to, or a proprietary interest in, the claim." Huff, 549 F.3d at 108. Having neither title nor a proprietary interest in its clients' securities, the court concluded that Huff lacked constitutional standing. Importantly, the court also considered and rejected the possibility that Huff qualified for one of the "few well-recognized prudential exceptions to the 'injury-in-fact' requirement." Citing Kowalski v. Tesmer, 543 U.S. 125 (2004), the Court of Appeals held that the law permitted "third-party standing" where the plaintiff can demonstrate "(1) a close relationship to the injured party and (2) a barrier to the injured party's ability to assert its own interests." Huff, 549 F.3d at 109. Pursuant to this exception, the law permitted "[t]rustees [to] bring suits to benefit their trusts; guardians ad litem [to] bring suit to benefit their wards; receivers [to] bring suit to benefit their receiverships; assignees in bankruptcy [to] bring suit to benefit bankrupt estates; [and] executors [to] bring suit to benefit testator estates." Id. at 109-10 (quoting Sprint, 128 S.Ct. at 2543). The court rejected the notion of "investment manager standing", holding that the "investment advisor-client relationship is not the type of close relationship courts have recognized as creating a 'prudential exception'" and that there was no barrier to Huff's clients bringing suits themselves. Id. at 110. Indeed, Huff's clients were sophisticated investors, and some already had filed such suits. Id.

Some additional context is helpful to understanding Huff's "prudential exception" to the injury-in-fact requirement. First, given Huff's reference to the "irreducible" elements of Article III standing and the nature of its analysis, this Court assumes that the Court of Appeals was not using the word "prudential" as it is frequently used to distinguish the "judicially self-imposed limits on the exercise of federal jurisdiction" from the constitutional limits that cannot be abrogated by Congress. See United Food and Commercial Workers Union Local v. Brown Group, 517 U.S. 544, 551 (1996). Without any action by Congress, the courts have permitted certain plaintiffs to bring suit despite not having personally suffered an injury-in-fact, and Huff's exception appears to be of this ilk. Compare id. (noting that under "[t]he modern doctrine of associational standing", an organization "may sue to address its members' injuries, even without a showing of injury to the association itself") with Huff, 549 F.3d at 109 (placing trustees, guardians ad litem, and receivers within its exception).

Second, a comparison of the exception to the rule indicates the importance of the distinction between having title to the claim at issue and having title to the securities from which the claims derive. In several of the examples cited by Huff, the plaintiffs often possess some aspect of title to the underlying assets. See RESTATEMENT (THIRD) OF TRUSTS§ 2 cmt. d ("it is usually true . . . that the trustee has legal title [to the trust property]"); NEW YORK JUR. 2D Receivers § 1 ("[a] statutory receiver has such power and authority as the statute under which he is created gives him or her, and such a statute may provide for the vesting of title to property in the receiver"); Reagan v. Ross, 691 F.2d 81, 83 n.5 (2d Cir. 1982) ("the general rule is that the bankruptcy trustee takes title to all the property of the bankrupt") (citations omitted); but see RESTATEMENT (THIRD) OF TRUSTS§ 7 cmt. a (whereas "[a] trustee . . . has title to the trust property[,] a guardian of property does not have title to the property, but has only certain powers and duties to deal therewith for the benefit of the ward, the ward having title to the property"). Nevertheless, courts often do not speak of these plaintiffs as "owning" claims arising from the assets to which they have title because, owing to the special nature of their relationship to the assets' beneficial owners, the law grants these plaintiffs the right-if not imposes on them the duty-to bring these claims. See RESTATEMENT (SECOND) OF TRUSTS§ 280 ("The trustee can maintain such actions at law and equity or other proceedings against a third person as he could maintain if he held the trust property free of trust."); NEW YORK JUR. 2D Receivers § 86 ("The permanent receiver of a corporation has the power to sue in his or her own name or otherwise for the recovery of the property, debts, and causes of action of the corporation."); NEW YORK JUR. 2D Infants § 129 (guardian may bring claims covering the real estate of the ward). Accordingly, whereas the material issue under the Huff rule is alternatively whether the plaintiff has suffered the claimed injury or been assigned the claim, the material issue under the Huff exception is whether the special relationship between plaintiff and the beneficial owner of the claim is such that the right to bring the claim inures to the plaintiff by operation of law.

Third, the two requirements for the Huff exception to apply define the outer bounds of the special relationship between plaintiffs and the beneficial owners of the claims. The legal principles that assign claims to plaintiffs in the examples above generally operate in conjunction with others to bar the beneficial owners from bringing those claims. See RESTATEMENT (SECOND) OF TRUSTSĀ§ 281 ("Where the trustee could maintain an action at law or suit in equity or other proceeding against a third person if the trustee held the trust property free of trust, the beneficiary cannot maintain an action at law against the third person . . . [except when] the beneficiary is in possession of the subject matter of the trust . . . ."); NEW YORK JUR. 2D Parties Ā§ 8 (providing that infants, the mentally ill, and ...


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