September 3, 2010

Impounding Information

There was an interesting appellate decision last month in one of the few securities class actions to be tried to a verdict.

In 2005, Thane International won a bench trail in a case concerning the company's 2002 acquisition of Reliant Interactive Media. A class of Reliant investors brought Securities Act claims seeking recission of the merger. In particular, they alleged that Thane's pre-merger prospectus contained misrepresentations because it implied that Thane shares would list on the Nasdaq National Market. The company actually commenced trading on the OTCBB.

The Ninth Circuit subsequently found that the district court had erred in holding that the prospectus did not contain material misrepresentations, but remanded so that the district court could address the issue of loss causation. On remand, the district court granted judgment for Thane because the company's stock price did not decline below the merger price until nineteen days after trading began on the OTCBB. The plaintiffs appealed again.

In Miller v. Thane Int'l, Inc., 2010 WL 3081488 (9th Cir. Aug. 9, 2010), the court found that "stock price evidence may be used in loss causation assessment" even if the market for the stock was inefficient. In the instant case, Thane's expert demonstrated that that the company's "stock price could and did impound [i.e., absorb] information about Thane during this nineteen-day period, including the listing on the OTCBB." Accordingly, the court declined to find that the district court erred in holding that the misrepresentations did not cause any loss.

Holding: Judgment affirmed.

Quote of note: "[T]he materiality inquiry concerns whether a 'reasonable investor' would consider a particular misstatement important. It is hypothetical and objective. By contrast, the loss causation inquiry assesses whether a particular misstatement actually resulted in loss. It is historical and context-dependent."

Thanks to John Letteri for sending in the decision.

Posted by Lyle Roberts at September 3, 2010 8:44 PM | TrackBack
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