Wednesday, February 22, 2017

Supremes won't hear petition on ‘same price’ test to rebut reliance presumption

By Rodney F. Tonkovic, J.D.

The Supreme Court has denied certiorari for a petition asking that it clarify the proper way to rebut the presumption of reliance. The petition maintained that the proper way to rebut the presumption of reliance is to prove that an investor, knowing of the fraud, would have paid the same price in the same transaction. This "same price" test has been used by the Fifth and Seventh Circuits, but the Second Circuit declined to endorse in its opinion in this case (GAMCO Investors, Inc. v. Vivendi Universal, S.A., December 27, 2016).

Petitioner GAMCO is a value investor, meaning that it makes its own estimation of the value of a company's securities and tries to buy when the market price is lower than GAMCO's internal valuation. GAMCO claimed that Vivendi, a French multimedia company, had engaged in fraud with respect to GAMCO's transaction in Vivendi's American Depositary Shares.

The district court concluded that it was more likely than not that GAMCO did not rely on the market price of Vivendi securities because the facts demonstrated GAMCO's purchasing decisions relied in large part on an independent valuation of the worth of Vivendi securities.

The sole issue before the Second Circuit was whether Vivendi successfully rebutted the fraud on the market presumption invoked by GAMCO to satisfy the reliance element of its Section 10(b) claim. The presumption was rebutted, the court said, because the record established that GAMCO, as a value investor, would have purchased the securities even had it known of the alleged fraud since it would still have believed the deal it made was a good one.

Circumstances for rebuttal. The petition asked the Court to clarify under what circumstances the presumption of reliance might be rebutted for a value investor who trades in an efficient market, without inside information, and assumes that the price paid was "an honest figure." GAMCO argued that the test should be whether the investor would have paid the same price in the same transactions if he knew about the fraud. This objective "same price" test is the rule in the Fifth and Seventh Circuits, the petition noted, but was not applied by the Second Circuit. The petition urged the court to endorse the "same price" rule.

The petition is No. 16-818.