United States: Second Circuit Accepts Controversial "Inflation-Maintenance" Theory Of Securities Fraud Liability

In so-called "price maintenance" securities fraud cases, plaintiffs argue that a misrepresentation that does not cause a stock's price to rise can nevertheless be actionable under Section 10(b) of the Securities Exchange of 1934 ("Exchange Act") on the theory that the misrepresentation prevented a stock's artificially-inflated price from falling. The Seventh and Eleventh Circuits have accepted price maintenance as a cognizable theory of liability under the Exchange Act.1 However, in IBEW Local 98 Pension Fund v. Best Buy Co., the Eighth Circuit, at least in the view of Judge Murphy in dissent, effectively rejected price maintenance as a cognizable theory under the Exchange Act when it held that a defendant had rebutted the fraud-on-the-market presumption of reliance by showing a lack of price impact pursuant to the US Supreme Court's decision in Halliburton II.2 On the same day that Best Buy was decided, the US Court of Appeals for the Second Circuit, in In re Pfizer Inc. Securities Litigation, discussed the theory, but noted that the Second Circuit had not and was not in Pfizer endorsing the theory.3

In In re Vivendi, S.A. Securities Litigation, No. 15-180 (2d Cir. Sept. 27, 2016), the Second Circuit agreed with the Seventh and Eleventh Circuits and endorsed price maintenance as a cognizable theory of securities fraud liability. The Vivendi Court accordingly rejected the argument that an alleged misstatement must be associated with an increase in artificial inflation to have an actionable "price impact." Rather, the Court held, an alleged misstatement can affect the market price of a stock by maintaining already-existing inflation. Thus, a securities fraud defendant cannot avoid liability for an alleged misstatement merely because the misstatement is not associated with an increase in the stock's price, regardless whether the preexisting inflation was the result of the defendant's fraud. However, because Vivendi did not address the propriety of class certification and did not discuss Best Buy, it remains to be seen whether the Second Circuit will view the Vivendi decision as effectively foreclosing an argument that lack of price impact can defeat class certification in the face of evidence that the prior inflation was "maintained" by the alleged misrepresentation or omission.


Vivendi was an appeal from a jury verdict finding Vivendi Universal, S.A. ("Vivendi") liable for securities fraud under Section 10(b) and Rule 10b-5. The class plaintiffs were investors in Vivendi's stock between October 30, 2000 and August 14, 2002. They alleged that during this period, the defendants (Vivendi, its CEO and its CFO) made 57 material misstatements on the subject of Vivendi's "liquidity risk" — i.e., its ability to timely meet its financial obligations and fund its operations — in connection with and resulting from the company's various acquisitions and related efforts to transition from a utilities conglomerate into a global media powerhouse. The jury found that neither the CEO nor the CFO was liable for the alleged misstatements, but found Vivendi liable under Section 10(b) for all 57 alleged misstatements. The district court awarded Vivendi judgment as a matter of law with respect to one statement (a determination not appealed by plaintiffs), but otherwise denied Vivendi's motion for judgment as a matter of law and for a new trial.4

The Vivendi Decision

On appeal, Vivendi argued, among other things, that the district court abused its discretion in admitting the testimony of plaintiffs' expert, Dr. Blaine Nye, on damages and loss causation. Nye had performed a standard event study to determine whether, and the extent to which, Vivendi's stock price was artificially inflated during the class period due to the market's misapprehension of the company's true liquidity risk.5 However, Nye's analysis did not purport to prove that that misapprehension was caused by Vivendi's alleged fraud and did not assume that the inflation was due to misrepresentations. As the Court explained, "[a]rtificial inflation is not necessarily fraud-induced, for a falsehood can exist in the market (and thereby cause artificial inflation) for reasons unrelated to fraudulent conduct."6

Because Nye did not determine the amount of artificial inflation in reference to whether that inflation was due to Vivendi's alleged misstatements, his testimony did not exhibit any obvious correlation between the inflation increases he identified and the timing of the challenged statements. Indeed, 42 of the challenged statements were not associated with an immediate increase in the price inflation calculated by Nye's model. Vivendi argued that this lack of correlation rendered Nye's testimony unreliable because, as to those 42 statements, there was no "price impact," meaning that those statements could not be actionable under the securities laws. Rather, Vivendi argued, Nye's testimony necessarily rested on an impermissible "inflation maintenance" theory — i.e., that statements that merely maintain already extant inflation nonetheless affect a company's stock price.7

The Second Circuit rejected Vivendi's argument that a statement must be associated with an increase in inflation to be actionable. The Vivendi Court explained that "price impact," as relevant to the transaction causation or reliance inquiry, simply concerns whether the alleged misrepresentation "'affected the market price.'"8 Moreover, the Court reasoned, Vivendi's contention that statements that merely maintain inflation have no such effect rested on two "problematic" premises: that the inflation would have remained if Vivendi had simply remained silent; and that Vivendi had the option of remaining silent even though it in fact chose to speak.9

As to the first point, the Court noted that preexisting inflation could remain unchanged in the face of silence, but it might not. However, where, as here, the defendant does not remain silent, it cannot be known whether the inflation would have remained unchanged in the face of silence. And because the Court viewed Vivendi's premise that inflation would have continued in the face of silence as dubious (believing that the truth likely would have eventually come out on its own if no longer hidden by a misstatement's perpetuation of the market's misconception), it determined that it was "far more coherent" to conclude that a material misstatement in the context of preexisting inflation "does not simply maintain the inflation, but indeed 'prevents [the] preexisting inflation in a stock price from dissipating.'"10

Second, the Court questioned whether it was even relevant what would have happened had Vivendi chosen not to speak. It is "well-established," the Court explained, that once a company speaks on an issue or topic, it has a duty to tell the whole truth, even if there is no existing independent duty to disclose information on the issue or topic.11 Thus, "once a company chooses to speak, the proper question for purposes of our inquiry into price impact is not what might have happened had a company remained silent, but what would have happened if it had spoken truthfully."12

Having dispelled with what it determined were the "erroneous principles" upon which Vivendi's argument rested, the Court concluded that "it is hardly illogical or inconsistent with precedent to find that a statement may cause inflation not simply by adding it to a stock, but by maintaining it."13 Were that not so, the Court continued, "companies could eschew securities-fraud liability whenever they actively perpetuate (i.e., [through] affirmative misstatements) inflation that is already extant in their stock price, as long as they cannot be found liable for whatever originally introduced the inflation."14 "'We decline to erect a per se rule that, once a market is already misinformed about a particular truth, corporations are free to knowingly and intentionally reinforce material misconceptions by repeating falsehoods with impunity."15 Thus, the Court rejected Vivendi's argument that "the 'price impact' requirement inherent in the reliance element of a private § 10(b) action means that an alleged misstatement must be associated with an increase in inflation to have any effect on a company's stock price."16

The Significance of Vivendi

The Second Circuit currently has before it challenges to class certification orders in securities class actions presenting "price maintenance" theories. In those cases, arguments that, under Halliburton II, the fraud-on-the- market presumption of reliance had been rebutted by showing that the alleged misrepresentations had not had any "price impact" were unsuccessful in the district court. However, the Eighth Circuit's Best Buy decision, reversing a class certification order on the basis that the presumption of reliance had been rebutted under Halliburton II, presented Circuit Court authority in support of such a position. The Vivendi appeal did not concern a class certification order, and the opinion did not discuss the Eighth Circuit's Best Buy decision. Thus, although Vivendi's analysis is potentially adverse to such an argument, it remains to be seen whether the Second Circuit will apply Vivendi to the class certification context and treat the decision as having effectively rejected the analysis and holding of Best Buy.


 1 See Glickenhaus & Co. v. Household Int'l, Inc., 787 F.3d 408, 419 (7th Cir. 2015); FindWhat Inv'r Grp. v. FindWhat.com, 658 F.3d 1282, 1314 (11th Cir. 2011).

 2 See 818 F.3d 775, 784 (8th Cir. 2016) (Murphy, J., dissenting); Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398, 2410 (2014) ("Halliburton II") (holding that defendants have the right to rebut the fraud-on-the-market presumption of reliance by providing evidence showing the alleged misrepresentations did not actually affect the stock price); see also Eighth Circuit Holds Presumption Of Reliance Rebutted Under Halliburton II And Reverses Class Certification In Securities Action

 3 See 819 F.3d 642 (2d Cir. 2016); see also Second Circuit Stresses Control, Not Attribution, In Applying Janus's "Ultimate Authority" Test, And Also Allows Expert Testimony In Support Of An "Inflation-Maintenance" Theory Of Liability

4 See In re Vivendi Universal, S.A. Secs. Litig., 765 F. Supp. 2d 512, 545 (S.D.N.Y. 2011).

 5 Vivendi, slip op. at 59-62.

 6 Id. at 66.

 7 Id. at 67-68.

 8 Vivendi, slip op. at 69 (quoting Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 805, 814 (2011) ("Halliburton I")).

9 Vivendi, slip op. at 70.

10 Vivendi, slip op. at 71 (quoting FindWhat, 658 F.3d at 1317).

11 Vivendi, slip op. at 72.

12 Id. at 73

13 Id.

14 Id.

15 Vivendi, slip op. at 75 (quoting FindWhat, 658 F.3d at 1317).

16 Vivendi, slip op. at 78. The Court also questioned how, even if it were valid, Vivendi's price impact argument would suggest that the district court abused its discretion in admitting Nye's testimony. The Court explained that Nye's model measured "actual inflation" due to investors not knowing the truth about Vivendi's liquidity risk (as opposed to "fraud-induced inflation," i.e., the difference between the stock price and what the price would have been if the defendants had spoken truthfully). His testimony was thus relevant to loss causation because the total amount of actual inflation he identified was the maximum amount of loss potentially caused by Vivendi's alleged misstatements, and was also relevant to damages because his model provided a means for calculating each plaintiff's damages. At most, Vivendi's price impact argument, if successful, would imply that plaintiffs could not establish reliance with respect to some of the relevant misstatements, but that would not render Nye's testimony wholly irrelevant to loss causation or damages or render his calculation of artificial inflation unreliable. See id. at 76-78.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.