UNITED STATES DisrRicr COURT SOUTHERN DISTRICT OF NEW YORK x : Civil ActionNo. IN RE VIVENDI UNIVERSAL, S.A. 02 Civ. 5571 (IIB) SECURITIES LITIGATION x CONSOUDATED CLASS iataLOEMEUM This Document Relates To All Actions —x Jury Trial Edat BASIS OF ALLEGATIONS Lead Plaintiff:3, by their undersigned attorneys, on behalf of themselves and the class they seek to represent, for their Consolidated Class Action Complaint (the "Complaint", make the following allegations against defendants based upon the investigation conducted by and under the supervision of plaintiffs' counsel, which included reviewing and analyzing infeurnation relating to the relevant time period obtained from numerous public and proprietary winces (such as LEXIS- NE)IS, Dow Jones and Bloomberg) - including, i= she. Securities and Exchange Commission ("SEC") filineft, other regulatory flings and repot% publicly available annual reports, press releases, published in news articles and other media reports (whether disseminated in print or by electrcadc media), and reports of securities analysts and investor advisory services, in order to obtain the information necessary to plead plaintiffs claims with particularity. Lead Plaintiffs'investigation also included interviewing or consulting with i3adividuals, including finmer employees of Vivendi Universal, SA ("Vivendi" or the "Company") and its subsided= who are knowledgeable about defendant Vivendi's business. Lead Plaintiffs believe that further substantial evidentiary support willexist for the allegations sot footth herein slier a reasonable opportunity for discovery. SUMMARY OP THE CCiMPLALaTla 1. Lead Plairaiffi bring this securities fraud class action against Vivendi and two of its most senior fernier °Mors; defenchmt JeanaMatie Messier (i'Messier), Vivendfs CEO and Cheirraall (until he was fumed to resign on July 3, 2007), arid defendant Guillaume Hawsezo ("Hrmnezo"), Vivendi's CFO (until he resigned on July 9, 2002). Lead Plaintiffs bring this action (a) on behalf of themselves and all persons who purchased or otherwise acquired the common stock anal American Depository Shares ("ADSsul) of Vivendi (the 'Purchaser Class") between. October 30, 2000 and August 14, 2002 inclusive (the "Class Period"), alleging violations of the Securities Exchange Act of 934 (the "Exchange Act"); (b) on behalf of thanatalves and all persons who acquired Vivendi's common stock or ADSs (the "Merger Subclass") pursuant to a registration staiement and prospectus dated October 30, 2000 issued in connection with the three- way merger (the "Merger") of Vivendi, Seagram Company Limited (''Seagram n) and Canal Plus, SA. ("Canal Plus"), alleging violations of the Securities Act oft 933 (the "Securities Act"); and (e) on behalf of themselves and all persons who were shareholders of Vivendi or Seagram RS Of November 25, 2000 and entitled to vote on the lvferger (the "Proxy Subclass") pursuant to the proxy/prospectus issued in connection with the Merger, alleging violations of the Exchange Act, 2. Although defendant Vivaldi started out as a strain French-based water utility, immediately prior to and during the Class Period defendant Messier caused Vivaldi to embark on an extraordinary $77 billion acquisition. binge that transformed Vivendi into a huge international conglomerate. In particular, as a result of its bnee-way, $46 billion. Merger with -2- , Seagram (the parent of Universal Studios end Universal Music) and Canal Plus (one of Europe's largest cable TV operators) in October 2000, \Awl:di instantly became one of the wortis largest media and entettninMent companies. At all material times during the Class Period, Viventli's "Media and Communications" we:dons and its "Envircuamented Services' operations (which include its water utility subsidiaries) have constituted the two core areas of the Comptuars business_ 3. In the period leading up to the October 2000 Merger and thereafter throughout the Class Period, defendants reported strong revenue and earnings, and portrayed Vrvendi as a company that was generating sufficient cash flow to satisfy its debt obligations on approximately $21 billion in debt that it had amassed in connection with financing its $77 Mon acquisition spree — even though other media and communications companies in the 'United States and Europe were suffining through a period of retrenohMent and contraction. As a result of defendants' repeated upbeat earnings announcements and assurances concerning the Company's growth and its ability to meet its massive debt obligations, the price of Vivendl's ADSs and =MEMEL stock was kept artificially inflated throughout the Class Period. 4. However, as defendants knew but did not disclose, Vivendi's operations and financial condition were dramatically weaker than 'Mad their public statements portrayed. For example, immediately prior to and during the CISS$ Period, Vivendi (using its increasingly infimed common stock as currency to finance many of its acquisitions) bid aggressively for several large companies, with the result that Vivendi substantinlly overpaid for them. Moreover, subsequent events (unbeknownst to investors) confirmed that these winked wales could ;riot generate sufficient cash Dow to justify their high acquisition cost, with the result that Viveruilis -3- balance sheet was bloated with teas of bitt4ons of dollars of inflated "goodwill" whose value had been =timidly impaired and should have beeii wriltaa down. The fame of the Vivendi conglomerate to generate earnings in line with its publicly-touted eat:hums Ther threatened the Companys liquidity, given that the Company needed. to generate massive amounts of cash flow from. operations to satisfy its obligations on over $21 billion Wixib of debt. 5. To conceal the deteriorating state of Viverves newly constructed corporate empire, Vivandi engaged in a variety ofimproper asset- and revenne-inflating practices during and immediately prior to the Class Period that enabled the Company to artificially inflate its reported assets, revenue, income and earnings per share CEPS") at the end of the Company'$ quarterly reporting periods, rendering Viveudfs publicly filed frnsmcial statements and other communications regarding the corn.peny's financial performance complained of herein matetially faIse and misleading. 6. Vivendi's immoper accounting (as detailed herein at Ti 119-80) hicluded. inter 11_14, Min to take timely write-offs of over €29 billion in. goochvill associated with Vivendrs acquisitions, including its acquisitions of U.S. Filter and Canal Plus. Defendants s failure, in violation of U.S. Generally Accepted Accounting Principles (" U.S. GAAP"), to take timely Write-ofts for impaired goodwill caused Vivendi to improperly delay recognizing offsetting charges of over €7. billion against the Company's earnings during the Class Period, with the restalttbat Vivencli's reported earnings and EPS -were inflated under U.S. OAAP by tens of billions of dollars during the Class Period. 7. In addition to its failure to properly account for impaired goodwill, Thendi also engaged in a variety of improper revenue recognition and cecpealse-deaating pre.ctices, and other related miscooduct, to inflate its reported finaroelsi pc:dormant*. These practices included, kgzr A, (a) reporting and consolidating into its own financial statements billions Of dollars of revenue from entities (such as Cegetel and Maroc Telecom) in which Vivendi held only a minotitt stake and which Vivendi did not counni, in violation of U.S. GAAP (as detailed below at ri 148-68): and (b) recognizing 100% °feta =nate "upfront" (i.e., in contract year one) on billions of dollars of multi-year =drams in a practice known as 'booking backlog," even though Viveadi bad not yet performed its obligations under those multiyear cataracts and U.S. OAAP recprked that the revenue on such contracts be recognized ratably over time as Vivaldi actually performed the contracted-for services (as detailed below at 169-80). 8- The foregoing improper accounting practices not only allowed Vivendi to keep its stock price artificially high, but also facilitated defendants' fraudulent efforts to conceal the Company's growing liquidity problems. For example, on December 6, 2001, defendant Messier assured the investing public that "Vivendi Universal is in a very strong position, with solid performance in virtually every business," and just a week lair alter having announced. that it vveuld raise $25 billion by selling a $1.5 billion interest in British Sky Broadcasting Plc (TAW) and a $1.06 billion interest in Vivendi Envitramement Vivendi stated that these asset sales would give Vivcndi "room to monotone" for additional acquisitions, and enable it "to cover any eventual needs from different opportunities far strategic partnerships.' On. December 17, 2001, Viveadi then announced that it would be acquiring USA Networks for approximately $10 billion. -5- ' • 9. Oaheblown to illrireStots, however„Vrvendis business at that 61310 was moiling but "strong and decidedly lacked "room fur rorm.neuvre." To the corduay, as the Wan Street Jetrire later =Ported. An Comm( lived a potentially catastrophic liquidity crisis: On Dec. 13 last year (2001], [defendant] liannezo sent [defendant) Messier, [Viven.di's] chairman . a desperate handwritten. piea. "I've gof the unpkasantfeeling ekes: bt a car whose striper Is accelentting in the tarns and that rm in ase death seat," wrote Ain Hanna% the company's chieffinancial officer. "Al 1 task Is Mat all of this not end he Awe That very day, unknown to investors