Miller v. Thane International, Inc.
615 F.3d 1095 (2010)
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Rule of Law:
Under Section 12(a)(2) of the Securities Act, a defendant can successfully raise the affirmative defense of lack of loss causation by demonstrating that a security's price did not decline following the revelation of a material misrepresentation. Stock price evidence can be used to prove the misrepresentation did not cause the investor's loss, even if the security trades in an inefficient market.
Facts:
- In November 2001, Thane International, Inc. ('Thane') and Reliant Interactive Media Corp. ('Reliant') agreed to merge.
- Under the merger agreement, Reliant shareholders would exchange their shares for Thane shares at an imputed price of approximately $7.00 per share.
- Thane's pre-merger prospectus stated that its stock was 'approved for quotation and trading on the NASDAQ National Market [NMS]' upon completion of the merger.
- On May 24, 2002, the merger was completed, but Thane's shares began trading on the NASDAQ Over-the-Counter Bulletin Board (OTCBB), a less prestigious market, not the NMS.
- For the first nineteen days of trading (twelve trading days), Thane's stock price remained between $7.00 and $8.50, at or above the $7.00 merger price.
- On June 25, 2002, after Thane reported disappointing earnings, its stock price dropped to $5.25 and subsequently fell below the $5.00 NMS minimum listing price.
- On August 14, 2002, Thane announced further disappointing earnings and confirmed the NMS listing was on hold, after which the stock price fell to $1.95 per share.
- In February 2004, Thane bought out its remaining shareholders for $0.35 per share.
Procedural Posture:
- A class of investors filed suit against Thane International, Inc. in the U.S. District Court for the Central District of California, alleging violations of Section 12(a)(2) of the Securities Act of 1933.
- Following a bench trial, the district court entered judgment for Thane, finding the prospectus was not materially misleading.
- The investors appealed to the U.S. Court of Appeals for the Ninth Circuit.
- In the first appeal ('Miller I'), the Ninth Circuit reversed, holding that the prospectus was materially misleading.
- The Ninth Circuit remanded the case to the district court to address Thane's affirmative defense of lack of loss causation.
- On remand, the district court granted Thane's Motion for Judgment on Loss Causation, concluding the misrepresentation did not cause the investors' loss.
- The investors (appellants) appealed that judgment back to the U.S. Court of Appeals for the Ninth Circuit, with Thane as the appellee.
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Issue:
Does a material misrepresentation in a prospectus cause an actionable loss under Section 12(a)(2) when the company's stock price does not decline below the purchase price in the period immediately following the revelation of the truth, even if the stock trades in an inefficient market?
Opinions:
Majority - O'Scannlain
No. A material misrepresentation does not cause an actionable loss where the defendant proves that the subsequent depreciation in the security's value resulted from causes other than the misrepresentation. The court held that materiality and loss causation are distinct concepts; a finding of a material misrepresentation does not preclude a defendant from asserting the affirmative defense of lack of loss causation. The court rejected the argument that stock price evidence is unreliable in an inefficient market for the purpose of determining loss causation, declining to apply the strict 'Cammer' test for market efficiency used in other contexts. Instead, the court found that even an inefficient market can 'impound,' or fully absorb, information over time. Because Thane’s stock price did not fall below the merger price for nineteen days after the market learned the truth about the OTCBB listing, the district court did not clearly err in concluding that the subsequent price drop was caused by unrelated negative business news, not the initial misrepresentation about the listing exchange.
Analysis:
This decision significantly clarifies the scope of the loss causation defense under Section 12(a)(2), especially for securities trading in inefficient markets. By distinguishing loss causation from the 'fraud-on-the-market' theory's stringent efficiency requirements (the 'Cammer' test), the court empowers defendants to use stock price stability following a corrective disclosure as powerful evidence that a misstatement did not cause the plaintiff's loss. This ruling reinforces that materiality alone is insufficient for recovery; plaintiffs must overcome the separate hurdle of loss causation. It makes it more difficult for shareholder plaintiffs to succeed in cases where a stock price does not react negatively and immediately to the revelation of a misstatement, thereby protecting issuers from liability for losses caused by broader market or company-specific factors.
