Court validates expert’s ‘aggressively skeptical’ disaggregation analysis

BVWireIssue #127-4
April 23, 2013

In a post-trial bid to upset the outcome, Vivendi argued to the U.S. District Court for the Southern District of New York that no jury “should have been permitted to base a verdict” on the unreliable loss causation and damages testimony Liberty’s expert gave. In particular, Vivendi took aim at the expert’s disaggregation analysis.

Liberty sued Vivendi, alleging Section 10(b) securities violations and breaches of warranties related to a merger agreement. Vivendi, it claimed, had inflated the value of its stock, which it used in 2001 to acquire USA Networks from Liberty. Subsequent revelations showed that Vivendi was in a liquidity crisis, causing its stock to fall in value. In June 2012, a jury found Vivendi liable on all claims and awarded Liberty 765 million euros ($999 million).

In its motion, Vivendi claimed Liberty’s expert had failed to prove loss causation—the cornerstone of proving damages in complex securities claims. Under this principle, Liberty could only claim damages for declines in Vivendi’s stock price that resulted from Vivendi’s misconduct.

The expert’s disaggregation analysis separated the effects the fraud (“materialization” events) had on the stock price from the effects that non-fraud-related factors (“confounding” events) produced. He examined 166 trading days between the date the merger agreement was signed and the date of the final alleged materialization event to isolate the effects of the fraud. After reviewing 16,000 news releases and thousands of analyst reports, he carved out nine days during which “everything had to do with the fraud,” he said.

Vivendi criticized the expert for ignoring what it said were several items of negative nonfraud-related news during those nine days that should have been figured into his damages calculation. But the expert had testified that he didn’t consider those news items to be material.

The court said that just because the expert “took an aggressively skeptical view of the significance of nonfraud-related news” on the nine days did not render his testimony unreliable. Also, the jury could have found that none of the confounding events Vivendi proposed were non-fraud-related and also affected Vivendi’s share price. The court let the award stand.

Find a complete discussion of the court’s decision on Liberty Media Corp. v. Vivendi Universal, S.A., 2013 U.S. Dist. LEXIS 19485 (Feb. 12, 2013), in the May Business Valuation Update; the opinion and a digest related to the parties’ pre-trial challenges are also available at BVLaw.

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