Miller v. Thane International, Inc.: Material Misrepresentation Analyzed

On August 8, 2010, the Ninth Circuit affirmed the district court’s holding in Miller v. Thane International, Inc., 615 F.3d 1095 (9th Cir. 2010), a class action lawsuit that was resolved against plaintiffs after a three day bench trial.  The case tested the boundaries of the causation requirement under the securities laws.  As the appellate court succinctly described:  "We must decide whether a material misrepresentation in a price of the company’s stock did not decline in the weeks immediately following disclosure of the correct information." 

The alleged misrepresentations arose out of a merger between Reliant Interactive Media Corporation (“Reliant”) and Thane International, Inc. (“Thane”) and appeared in a prospectus registering the shares distributed to Reliant shareholders.  In the prospectus, Thane stated that: 

• Thane stock, which had not been publicly traded previously, was “approved for quotation and trading on the NASDAQ National Market upon completion of the merger, subject to Thane’s compliance with the minimum bid price requirements of $5.00 per share.”

In fact, however, the shares were traded not on Nasdaq NMS but on the Nasdaq Bulletin Board.  

At the time of the merger the “imputed merger price” was $7.00.  On May 24, 2002, the merger was consummated. For the first twelve days, the 55,300 shares traded between $8.50 and $7.00 but tumbled to $1.95 by August 16, 2002.  Two years after the merger, Thane bought out the existing shareholders at $0.35 per share. 

Section 12(a)(2) of the Securities Act of 1933 imposes civil liability on any person (including a corporation) for including an untrue statement of material fact or omission of material fact in a prospectus or oral communication. One can avoid liability under Section 12 by proving a lack of loss causation, an affirmative defense. 

The trial court found against the shareholders, alleging that they had not shown loss causation.  Although Thane had been listed on the OTCBB, share prices did not fall below $7.00, the offering price, for 19 days.  As a result, the alleged misstatement did not cause their loss. 

Shareholders attacked the district court’s use of Thane’s stock prices to show an absence of caustion by alleging that Thane traded in an inefficient market.  Shareholders relied on Cammer v. Bloom, 711 F. Supp. 1264, 1286-87 (D.N.J. 1989), a case that set out a test for market efficiency in determining reliance under Section 10(b).  The court conceded that the high bar set forth in Cammer had not been met.  Nonetheless, the court refused to extend the reasoning of that case (and the requirement that the trading market meet the same standards of efficiency) to allegations of loss causation.  As the court reasoned:

• The absence of Cammer efficiency does not mean that prices are unreliable. Cammer efficiency, by definition, exists when the release of financial information results in an “immediate response” by the market.  Cammer, 711 F. Supp. at 1287. But an immediate response is not required for loss causation. Rather, the loss causation inquiry requires only a full response to the misrepresentation — one that is enough to assess whether the misrepresentation caused the plaintiffs’ loss. Significantly, a full response may occur in a market that is not Cammer efficient because “[e]ven an ‘inefficient’ market price is objective and contemporaneous with events,” “chang[ing] in response to news, including statements by the [principals].”

Shareholders also argued that review of the district court's decision should be de novo and that the district court erred in its conclusion that Thane’s stock reflected the failure to list on the NMS.  The court, however, concluded that the correct standard was whether the district court was clearly erroneous.  As for the factual findings below, the record contained "substantial evidence supporting the district court’s finding."  During the trial, Thane presented an expert who noted that information about Thane was disseminated on Internet bulletin board postings even though no analysts covered the company and that the stock was capable of, and did, in fact, reflect the failure to list on the NMS.  

The Ninth Circuit conceded the difference in listings on the Nasdaq NMS and OTCBB but viewed them as irrelevant.

• It is true that listing on the NMS is superior to listing on the OTCBB, at least according to our decision in Miller I, 519 F.3d at 888-92, but that is irrelevant. The question at issue here is whether listing on the OTCBB instead of the NMS actually caused the investors’ losses. The investors ask us to reason from hypothetical and expected consequences. But  predictions are not proof of what actually happened. The investors’ own expert testified that listing on the OTCBB instead of the NMS would not necessarily reduce Thane’s stock price.

The primary materials for this case may be found on the DU Corporate Governance website.