The Ninth Circuit did something today that courts of appeal rarely do.  It held a district court clearly erred in its findings of fact following a bench trial.  Even more unusually, the court ordered entry of judgment in favor of the plaintiffsMiller v. Thane Int’l, Inc., No. 05-56043 (9th Cir. Nov. 26, 2007).

The case arose out of a corporate merger.  The deal provided that Reliant Interactive Media, a public company, would merge into Thane International, a private one.  Reliant shareholders thus would get  Thane stock in exchange for their Reliant shares. 

The Final Prosectus represented that Thane shares "have been approved for quotation and trading on the NASDAQ National Market" so long as the stock traded over-the-counter at $5 or more.  After the transaction closed, the stock traded above $8 per share.  But Thane management chose not to follow through with listing on NASDAQ, in part because industry-wide problems made it of doubtful value.  The price of the stock took a dive and stayed there.

The plaintiffs sued under section 12(a)(2) of the Securities Act of 1933 — a law far tougher than what the usual securities class action involves.  The statute provides "’virtually absolute liability’" for false statements, even innocent ones.  Miller, slip op. at 15141 (quoting In re Suprema Specialties, Inc. Securities Litig., 438 F.3d 256, 269 (3d Cir. 2006)).

The court rejected the finding that defendants didn’t misrepresent the listing of Thane shares on NASDAQ.  The Final Prospectus, while literally true, would mislead a reasonable investor into believing that the listing would happen automatically if, as happened, the stock sold for at least $5 in post-merger OTC trading.  The court also held the misrepresentation material, basically because rock beats scissors and NASDAQ is better than OTC.

The court remanded for consideration of the "loss causation" defense and for other proceedings consistent with the opinion.  Such as swallowing gall and wormwood.

Barry Barnett

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