The Ninth Circuit upheld a ruling concluding that plaintiffs
failed to establish loss causation in an action where the share price did not
decline following the emergence of the truth in a Securities Act Section 12(2)
action. Miller v. Thane International, Inc., Case No. 09-55474 (9th Cir.
Aug. 9, 2010). The shareholder complaint is based on the merger of Thane
International, Inc and Reliant Interactive Media Corp. through a stock exchange
in May 2002. The imputed price was $7 per share.
The prospectus stated that Thane stock would be listed for
trading on the NASDAQ National Market after the merger, subject to compliance
with the $5 exchange minimum. Post merger, however, the shares were list on the
NASDAQ Over-the-Counter Bulletin Board. The stock traded above the merger price
until June 24, 2002, when it fell to $6 per share. Following a disappointing
earnings announcement the next day, the share price dropped to $5.25 and soon
went below $5 where it remained. Earnings continued to decline and in August
2002 the company stated it was delaying listing on the NMS. The share price
continued to tumble. Thane bought out existing shareholders in February 2004 at
$0.35 per share.
The case was tried to the bench for three days and dismissed
for lack of materiality. The Ninth Circuit reversed. On remand, the district
court again dismissed the case. This time, the court concluded on Thane's
motion that plaintiffs failed to establish loss causation.
First, the Circuit Court considered whether the share prices
could be used to determine loss causation since the Bulletin Board is not an
efficient market. The court rejected this argument, concluding that a lack of
efficiency does not per se render the share prices unreliable. Accordingly,
those prices can be used in the loss causation analysis.
Second, the Circuit Court affirmed dismissal of the action.
Here, the district court concluded that Thane's stock price impounded the
failure to list on the NMS before it fell below the merger price. Thane's
expert testified that during the nineteen-day period following the merger, and
during which the share price remained above the merger price, the information
about trading on the Bulletin Board rather than the NMS was absorbed into the
price. Plaintiffs' expert agreed with this proposition.
Finally, the court rejected a claim by plaintiffs that loss
causation could be based on the disclosure of additional information about the
misrepresentation an earnings release made just before the share price dropped.
While that report did discuss the fact that the shares were listed on the OTC
Bulletin Board rather that on NMS, that fact had long been obvious. Accordingly,
it added nothing to the available information about the misrepresentation. The
record here is undisputed that after the truth emerged the share price remained
at or above the merger price for days and did not fall below $7 until after the
disappointing earnings release. Plaintiffs failed to establish loss causation.
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