The Delaware Supreme Court Tuesday has reinstated a lawsuit charging that Viacom manipulated its stock price during its takeovers of Paramount Communications and Blockbuster Entertainment.
Suit, in which $1.6 billion in damages are sought, was originally filed by lead plaintiff Emil Rossdeutscher in 1998. The trial court dismissed it, however, ruling that the suit had been brought too late under federal securities laws. In Tuesday’s lengthy opinion, a three-judge panel held that the lawsuit could be brought forth as a state claim for violation of the covenant of good faith and fair dealing. State claims have a longer statute of limitations.
The case will now go back to the trial court for a series of pre-trial determinations, including whether the case can proceed as a class action.
Viacom general counsel Michael Fricklas said, “We intend to vigorously defend this lawsuit and believe it to be without merit.”
Suit stems from Viacom’s 1994 acquisitions of Paramount, for $10 billion, and Blockbuster, for $7.7 billion later that year. Derivative securities were issued to Paramount and Blockbuster shareholders in connection with the merger. These securities were designed to provide a “collar” to protect Par and Blockbuster shareholders in the merger. Their value varied inversely to the value of Viacom stock at certain specified time periods after the mergers.
Plaintiffs allege that Viacom deliberately released false economic data at the critical time periods for the purpose of artificially inflating the price of its stock. Aim was to reduce the payout on the derivative securities to Paramount and Blockbuster shareholders.
According to the complaint, which is detailed in the opinion, Viacom released false financial information to coincide with the critical periods for Par and Blockbuster shareholders. The stock price would spike and then fall back once the market realized the information was false. By then, however, the critical period had passed and the damage was done to shareholders.
According to the charges, Viacom manipulated the stock price by, among other things, understating amortization costs and deferring purchases of videos for Blockbuster, leading to higher reported profits. The rosy financial results, in turn, led to “buy” recommendations for Viacom stock from analysts, which pushed the share price higher.