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Liberty Media Corp. v. Vivendi Universal, S.A.

United States District Court, S.D. New York

February 12, 2013

LIBERTY MEDIA CORPORATION, LMC Capital LLC, Liberty Programming Company LLC, LMC USA VI, Inc., LMC USA VII, Inc., LMC USA VIII, Inc., LMC USA X, Inc., Liberty HSN LLCHoldings, Inc., and Liberty Media International, Inc., Plaintiffs,
VIVENDI UNIVERSAL, S.A., and Universal Studios, Inc., Defendants.

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[Copyrighted Material Omitted]

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Macey R. Stokes, Esq., Baker Botts LLP, Houston, TX, R. Stan Mortenson,

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Esq., Michael L. Calhoon, Esq., Alexander M. Walsh, Esq., Baker Botts LLP, Washington, D.C., for Plaintiffs.

Daniel Slifkin, Esq., Cravath Swaine & Moore LLP, New York, NY, James P. Quinn, Esq., Penny P. Reid, Esq., Weil, Gotshal & Manges LLP, New York, NY, for Defendants.


SHIRA A. SCHEINDLIN, District Judge.


Plaintiffs, Liberty Media Corporation and certain of its subsidiaries (collectively, " Liberty" ), sued defendants, Vivendi Universal, S.A. and Universal Studios, Inc. (collectively, " Vivendi" ), alleging violations of federal securities law and breach of express warranty under New York state law. In particular, Liberty sued Vivendi for violations of Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission (" SEC" ) Rule 10b-5 (collectively, " Section 10(b)" ). Liberty also sued Vivendi for breach of four different express warranties contained in the Agreement and Plan of Merger and Exchange (" Merger Agreement" ) that was signed on December 16, 2001. On June 25, 2012, the jury found Vivendi liable for violating Section 10(b) and for breach of warranty. The jury awarded Liberty € 765 million in damages for each cause of action.[1]

Vivendi now renews its motion for judgment as a matter of law pursuant to Federal Rule of Civil Procedure 50(b), or, in the alternative, for a new trial pursuant to Federal Rule of Civil Procedure 59. Vivendi argues on various grounds that Liberty's evidence at trial was legally insufficient on both liability and damages.

For the following reasons, Vivendi's motion is denied.


Familiarity with the facts and procedural background of this case is assumed. Only those facts necessary to the disposition of Vivendi's motion will be noted.

On December 16, 2001, the parties signed the Merger Agreement, which involved, in part, a commitment for Liberty to exchange its multiThé matiques (" MTH" ) shares for Vivendi securities.[2] On May 7, 2002, the merger closed. [3] In March 2003, plaintiffs brought an individual action (the " Liberty Action" ) asserting various claims against defendants under both federal securities law and state common-law theories.[4] Two months later, Judge Harold Baer, Jr., consolidated the Liberty Action with a separate securities class action (the " Class Action" ) filed

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against Vivendi in July 2002. [5] In the Class Action, U.S. and foreign shareholders of Vivendi alleged that they purchased certain shares at artificially inflated prices as a result of defendants' material misrepresentations and omissions regarding a concealed risk of a liquidity crisis at Vivendi.[6] In 2004, the consolidated action was transferred to Judge Richard J. Holwell.[7] On March 2, 2009, Judge Holwell vacated Judge Baer's consolidation order.[8]

The Class Action was tried before a jury from October 2009 to January 2010. [9] On January 29, 2010, the jury returned its verdict, finding that Vivendi had violated Section 10(b) as to all fifty-seven misstatements alleged by the Class Action plaintiffs, and that Vivendi acted recklessly with respect to each statement.[10] On April 11, 2012, after the deconsolidated Liberty Action had been reassigned to this Court, I issued an opinion explaining that based on the jury's finding at the Class Action trial, Vivendi was collaterally estopped from contesting the falsity, materiality, and scienter elements of Liberty's Section 10(b) claim for twenty-five statements for which the Class Action jury found Vivendi liable.[11]

The Liberty Action was tried before a jury from May to June 2012. On June 25, 2012, the jury returned its verdict, finding Vivendi liable for violating Section 10(b) and for breach of warranty.[12]


A defendant is entitled to judgment as a matter of law if, after a party has been fully heard on an issue during trial, the Court finds that " a reasonable jury would not have a legally sufficient evidentiary basis to find for the party on that issue ...." [13] In ruling on a motion for judgment as a matter of law, the trial court is required to

consider the evidence in the light most favorable to the party against whom the motion was made and to give that party the benefit of all reasonable inferences that the jury might have drawn in his favor from the evidence. The court cannot assess the weight of conflicting evidence, pass on the credibility of the witnesses, or substitute its judgment for that of the jury.[14]

A jury verdict should not be set aside lightly. A court may not grant judgment as a matter of law unless: (1) there is such a " ‘ complete absence of evidence supporting the verdict that the jury's findings could only have been the result of sheer

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surmise and conjecture’ " or (2) there is " ‘ such an overwhelming amount of evidence in favor of the movant that reasonable and fair minded [persons] could not arrive at a verdict against [it].’ " [15]

Under Federal Rule of Civil Procedure 50(b),

[n]o later than 28 days after the entry of judgment ... the movant may file a renewed motion for judgment as a matter of law and may include an alternative or joint request for a new trial under Rule 59 ... In ruling on the renewed motion, the court may: (1) allow judgment on the verdict, if the jury returned a verdict; (2) order a new trial; or (3) direct entry of judgment as a matter of law.

The legal test for granting a new trial under Rule 59 is less stringent than for granting judgment as a matter of law. " Unlike a motion for judgment as a matter of law, a motion for a new trial may be granted even if there is substantial evidence to support the jury's verdict." [16] Nevertheless, " ‘ [a] motion for a new trial ordinarily should not be granted unless the trial court is convinced that the jury has reached a seriously erroneous result or that the verdict is a miscarriage of justice.’ " [17]

With regard to the merits of Liberty's claims, under New York law, a breach of warranty claim sounds " essentially in contract." [18] To prevail, a party must establish the existence of a contract containing a bargained-for express warranty with respect to a material fact, reliance on that warranty, a breach of that warranty, and damages suffered as a result of the breach.[19]

A Section 10(b) claim requires proof by a preponderance of the evidence that, in connection with the purchase or sale of a security: (1) defendants made an untrue statement of material fact, or omitted to state a material fact which made what was said, under the circumstances, misleading; (2) defendants acted with scienter; (3) plaintiffs justifiably relied on the misstatement or omission; and (4) plaintiffs suffered an economic loss as a result of the misstatement or omission.[20] As part of the fourth element, plaintiffs must prove " loss causation," which is, in the words of Judge Holwell,

the required " causal link" between the alleged fraud and the subsequent decline in value of the stock when the fraud comes to light. It is typically shown by the reaction of the market to a " corrective disclosure" which reveals a prior

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misleading statement. However, loss causation may also be shown by the " materialization of risk" method, whereby a concealed risk— here, a liquidity crisis— comes to light in a series of revealing events that negatively affect stock price over time. Unlike corrective disclosures, these events do not identify prior company statements as misleading, but they must reveal new information previously concealed and fall within the " zone of risk" concealed so that the events were foreseeable consequences of the fraud. In addition, a plaintiff must show that the loss was caused by materializations of the concealed risk and not other factors.[21]


Vivendi offers six arguments for setting aside the jury's verdict and granting judgment as a matter of law, or in the alternative for a new trial: (1) Liberty failed to prove causation and damages because the opinion of Liberty's expert, Dr. Blaine Nye, is legally defective and unreliable; (2) Liberty failed to prove causation because the alleged events or disclosures that ostensibly caused Liberty's losses did not reveal a previously undisclosed risk; (3) the jury's damages award is not supported by any evidence in the record; (4) Liberty failed to prove Section 10(b) reliance; (5) Vivendi proved that Liberty was not obligated to close the transaction, thereby establishing an affirmative defense; and (6) Vivendi was unfairly prejudiced by the admission of evidence regarding falsity and therefore is entitled to a new trial.[22]

I address each argument in turn.

A. Dr. Nye's Opinion

Vivendi argues that it should be granted judgment as a matter of law because " [n]o jury should have been permitted to base a verdict on Dr. Nye's inconsistent, unreliable, and inadmissible testimony." [23] In particular, Vivendi argues that Dr. Nye's testimony provided a legally insufficient evidentiary basis for the jury's loss causation and damages findings.[24] To establish loss causation, Liberty was required to " prove both that the loss it suffered was foreseeable and that the loss was caused by events that revealed information concerning Vivendi's true liquidity risk that previously had been concealed by the false/untrue or misleading statements." [25]

Vivendi challenges Dr. Nye's testimony under five headings.[26] For the reasons stated below, Vivendi's challenges are without merit.

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1. Disaggregation

A number of factors may affect a company's stock price, including fluctuations in the market as a whole, news affecting the industry to which the company belongs, and the release of information specifically related to the company. [27] Under the principle of loss causation, Liberty is only entitled to damages for declines in Vivendi's stock price that resulted from events that represented materializations of Vivendi's previously concealed liquidity risk. [28] Liberty thus bore the burden of disaggregating the effects of such " materialization" events on Vivendi's stock price from the effects of other, non-fraud-related " confounding" events.[29]

At trial, Dr. Nye testified that he had examined each of the 166 trading days between December 16, 2001, the day on which the Merger Agreement was signed, and August 14, 2002, the date of the final alleged materialization event, to determine if there was a statistically significant decline in Vivendi's stock price on any of those days after removing market and industry effects.[30] Dr. Nye also testified to removing company-specific effects on the stock price that were not related to the disclosure of Vivendi's concealed liquidity risk.[31] To perform these analyses, Dr. Nye testified to having reviewed all publicly available information about Vivendi over the period noted above, including sixteen thousand news releases and several thousand analyst reports.[32]

In the end, Dr. Nye identified nine days on which statistically significant negative returns resulted from materializations of Vivendi's concealed liquidity risk.[33] Dr. Nye testified that he had also identified days on which Vivendi's share price dropped as a result of non-fraud-related company-specific news, but that none of these days were among the nine days of materialization events.[34] In addition, Dr. Nye testified that he had studied each of the nine materialization days " for other things that happened on that day that you might need to take out that weren't related to the concealed liquidity risk." [35] When

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challenged on cross-examination, Dr. Nye clarified that he had found no material non-fraud-related company-specific negative news on the nine materialization days: " In those days, ... everything had to do with the fraud." [36] Dr. Nye concluded that Liberty suffered roughly € 842 million in damages from the net share price declines over the nine materialization days.[37]

By contrast, Vivendi's expert, Dr. William Silber, testified that there was competing negative news on several of the materialization days that could have affected Vivendi's stock price.[38] For example, Dr. Silber testified that on June 24, 2002, the fourth of the materialization days, " there was an announcement overnight that News Corp. .... was not going to buy Telepiu," a Vivendi subsidiary.[39] On cross-examination, Liberty challenged the significance of Dr. Silber's alleged confounding events, either by questioning whether they had any effect on Vivendi's stock price, or by questioning whether the market perceived the events as liquidity-related, or both. For example, in the case of the news regarding the Telepiu sale, Dr. Silber conceded under cross-examination that " [i]t didn't seem to affect the stock price." [40] In addition, Liberty introduced evidence suggesting that the market perceived Vivendi's effort to sell Telepiu as liquidity-related.[41]

The jury was charged with the following instruction regarding damages under Section 10(b):

Liberty bears the burden of separating the alleged fraud from any other factors that may have affected Vivendi's stock price and ascrib[ing] some rough proportion of the whole loss to the alleged false or misleading statement. Vivendi is not liable for any loss resulting from those other non-fraud related events.[42]

Having heard the competing testimony of the parties' experts, the jury found that Liberty's reliance on Vivendi's statements caused Liberty to suffer an economic loss of € 765 million.[43]

Vivendi now argues that Dr. Nye's disaggregation analysis was so flawed as to be legally insufficient to support the jury's verdict on loss causation and damages.[44] But Vivendi offers no significant arguments beyond what the jury heard and reasonably rejected at trial.[45] Vivendi criticizes Dr. Nye for claiming to have excluded non-fraud-related company-specific events from his damages calculation, but then failing to " disaggregate a single

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such event on any one of his nine disclosure days." [46] According to Dr. Nye's testimony, however, there simply were no confounding events during the nine days on which he identified materialization events. [47] The credibility of Dr. Nye's testimony was a matter for the jury, and neither legal precedent nor common sense compels the conclusion that every set of materialization event windows, no matter how small in number, must contain at least one confounding event.[48]

Viewing the evidence in the light most favorable to upholding the jury's verdict, I conclude that a reasonable juror could have found that none of the ostensible confounding events put forth by Vivendi were both non-fraud-related and affected Vivendi's share price.[49] Dr. Nye's testimony was not inadmissible simply because it took an aggressively skeptical view of the significance of non-fraud-related news on the nine materialization days, any more than Dr. Silber's testimony was inadmissible because of his equally aggressive but opposite interpretation of potential confounding events. The weighing of the experts' conflicting testimony was a matter for the jury and will not be disturbed by this Court.

2. One-day Event Window

At trial, Dr. Nye testified that he measured the share price declines resulting from the materialization events by using a " one-day event window." [50] That is, for each materialization event, Dr. Nye measured the change in Vivendi's share price in response to the event over the course of one trading day, from market close to market close.[51] Dr. Nye explained that he chose a one-day event window, rather than a longer window of a month or a shorter window of less than a day, because over a day the market becomes more or less efficient.[52] That is, over a day of trading any public information relevant to a stock has been " fully absorbed and reflected in the market price." [53]

Dr. Nye testified that the current academic standard for measuring the effect of the release of information on a stock's price " is to extend the event period to the close of ... trading on the day ...

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