The fraud-on-the-market theory involves two rebuttable presumptions that permit a finding of reliance: that (1) misrepresentations by an issuer affect the price of securities traded in the open market, and (2) investors rely on the market price of securities as an accurate measure of their intrinsic value. If the investor did not rely on such agent, there has been no reliance. Thus a defendant should be able to attack such an investor's claim by being allowed to offer proof that the reliance was upon matters extraneous to the market.
Plaintiffs bring this securities fraud action. They allege that a number of material misstatements and omissions made by defendant Vivendi, S.A. (“Vivendi”) artificially inflated the price of Vivendi American Depositary Shares ("ADS's"), and that plaintiffs were harmed when they relied on this inflated price in connection with Vivendi ADS's that they purchased on the New York Stock Exchange during the period running from October 30, 2000 through August 14, 2002.
Was Vivendi able to rebut the fraud on the market presumption of reliance?
The Court issued judgement for the company and held that the company rebutted the fraud on the market presumption because private market values, the metric that the investors used to determine the intrinsic value of the company's securities, was completely independent of liquidity concerns and market price, and thus, there was no indication that the investors would have viewed the company as a less attractive investment if the company had fully disclosed its liquidity condition at all relevant times.