A judge in the southern district court of New York, the overworked forum for many of the investigations into scandal-hit corporate America, is examining a class action complaint against Vivendi Universal and Jean-Marie Messier, the Franco-American media group’s ousted chairman.
The 115-page document, filed on Tuesday and produced from publicly available material, calls for the court to open a trial on behalf of shareholders seeking compensation for losses sustained when Vivendi Universal shares plunged to 15-year lows on July 3. Vivendi Universal has a month to file a reply, according to US lawyers.
Investigations are underway on both sides of the Atlantic and could effect the judge’s decision on the case’s admissibility. French prosecutors and the US Department of Justice are conducting criminal probes, while the French and US stock market watchdogs, the Commission des OpÃ©rations de Bourse and the Securities and Exchange Commission, have launched inquiries.
The lawsuit represents a tantalising prospect for Milberg Weiss Bershad Haynes & Lerach, the firm that assembled the complaint. WorldCom, Enron and Global Crossing have all filed for bankruptcy, limiting the potential for shareholders to extract compensation. But Vivendi remains solvent and could therefore be forced to pay up.
Even if Vivendi is exonerated by investigators in the US and France, it still may have to settle the lawsuit.
Few companies are willing to risk a jury trial that could award huge damages to shareholders. Once a judge rules that a class action is admissable in court, the advice of most lawyers is to settle.
The essence of the complaint is that Mr Messier artificially inflated Vivendi Universal’s share price by misrepresenting its financial position. The prosecutors allege he painted a rosy picture of the group’s cash position and failed to declare the risk of a liquidity crisis.
They cite an e-mail written by Guillaume Hannezo, former Vivendi Universal finance director to Mr Messier on December 13th 2001: “I’ve got the unpleasant feeling of being in a car whose driver is accelerating in the turns and I am in the death seat. All I ask is that all of this not end in shame.”
The prosecutors also cite a Goldman Sachs report presented to the board on June 24 – aweek before the company was downgraded to junk status by Moody’s rating agency – that suggested the group faced a risk of bankruptcy as early as September 2002. On June 26, the company said: “Owing to its strong free cash flow, combined with the execution of the disposals program and potential bond issues, Vivendi Universal is confident of its capacity to meet its anticipated obligations over the next 12 months.”
The complaint blames the liquidity crisis on Mr Messier’s “undisclosed and massive stock buyback programme, which unbeknownst to investors caused the company to spend approximately â‚¬6.3bn on Vivendi Universal’s shares”.
It also blames “undisclosed off-balance sheet liabilities”, such as the sale of 22.8m puts approximately 2 per cent of the company’s stock with an average strike price of â‚¬69 that exposed the company to a potential loss of â‚¬1.6bn.
The prosecutors allege that “even as Vivendi Universal’s share price dropped during 2001 and 2002, making it likely that the company would take a staggering loss on the options, defendants continued to conceal the nature and extent of these liabilities and to misrepresent Vivendi’s liquidity position. Even when Vivendi finally made limited disclosures of its put obligations in the spring of 2002, the disclosures were woefully inadequate.”
Second, the prosecutors allege the company inflated revenues by â‚¬7.8bn in 2001 by improperly consolidating the results of entities in which it owned minority stakes, such as Cegetel.
They cite Jean-RenÃ© Fourtou, Vivendi Universal’s new chief executive, saying that the company lacked the necessary control of Cegetel to have access to its cashflows, an argument Vivendi Universal’s new management used to justify the acquisition in December 2002 of BT’s shares in Cegetel, which took Vivendi Universal’s 44 per cent stake to 70 per cent.
Third, they claim the company used its inflated shares to bid aggressively for public companies during a $77bn binge, overpaid for them and then inflated earnings by failing to write down â‚¬29bn of impaired goodwill.
Fourth, the complaint also alleges that Vivendi Universal improperly booked revenues at US Filter, a water supply business acquired for almost $8bn, including debt, in 1999.
Vivendi Universal and Jean-Marie Messier did not comment.
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