The Recorder: 9th Circuit Reverses Rare Verdict in Securities Class Action

A securities class action that was rare two years ago for being tried to verdict may be headed back to district court, with the defense's win in jeopardy.

On Monday, the 9th U.S. Circuit Court of Appeals ruled that a Canadian direct marketing company had misrepresented merger details in public filings with the Securities and Exchange Commission, and that those misrepresentations were material to shareholders.

The materiality of an unfulfilled promise to list shares on a big exchange appears to be an issue of first impression among the federal circuit courts.

Monday's decision reversed a defense verdict by Central District of California Judge James Selna. Unless there is an appeal, the case will go back to Selna to consider if the misrepresentations caused a drop in the value of the company's stock.

In January 2002, Thane International Inc., a privately held corporation, moved to acquire Reliant Interactive Media Corp., which had stock trading on the Over-the-Counter Bulletin Board. Thane initially promised in a letter to Reliant stockholders that as a condition of the merger, Thane's stock would be listed on the Nasdaq or another national stock exchange, according to the 9th Circuit ruling.

The final prospectus omitted that specific listing requirement, but represented that the merged company's shares had been approved for trading on the Nasdaq. And once the merger deal was completed in May 2002, Thane stock started trading over the OTCBB.

According to Monday's ruling, the reported share price in the weeks following the merger ranged between $7 and $8.50. The price dropped a few months later below $2 on a poor earnings report, and then the company repurchased stock at 35 cents a share before the plaintiffs sued.

After reviewing the "context and manner of presentation" of Thane's references to a Nasdaq listing, the 9th Circuit held that the company had made misrepresentations to investors. The court also held that those misrepresentations were material.

"There can be no dispute that NASDAQ listing carries objective benefits that directly and positively affect corporate earnings, investor returns, and a stock's pool of potential shareholders," Judge Kim McLane Wardlaw wrote in the opinion.

Judges Barry Silverman and Jay Bybee joined Wardlaw in the unanimous published decision.

Orrick, Herrington & Sutcliffe's Michael Tu, who tried the case for Thane, referred a call to his co-counsel, Orrick partner Daniel Tyukody.

Tyukody said he disagreed with the decision, calling it "contrary to accepted economic understanding."

Harwood Feffer's Joel Feffer, one of the plaintiffs lawyers based in New York, could not be reached for comment. Glancy Binkow & Goldberg's Lionel Glancy, local counsel in the 9th Circuit case, called the appeals decision "an important victory for shareholders' rights."

The ruling is Miller v. Thane International Inc., 07 C.D.O.S. 13338.