UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

Transcription

1 Case 8:03-cv JVS-SGL Document 250 Filed 03/17/2009 Page 1 of 7 Present: The James V. Selna Honorable Karla J. Tunis Deputy Clerk Not Present Court Reporter Attorneys Present for Plaintiffs: Attorneys Present for Defendants: Not Present Not Present Proceedings: (In Chambers) Order Granting Defendants Motion for Judgment on Loss Causation (Fld ) Denying Plaintiffs Motion for damages and control personal liability (Fld ) Denying Defendants Motion for Order for Examination of Individual claimants on Loss causation, Knowledge, and Related Equitable Defenses (Fld ) Denying Defendants Motion for Judgment on Lack of Control person Liability and Good Faith defenses (Fld ) Defendants Thane International, Inc., et al. (collectively, Thane ) move for judgment on the issue of loss causation and for an order to examine individual claimants as to certain affirmative defenses, as well as for an order establishing the consideration paid for relevant stock, setting an appropriate interest rate, and determining whether four individual defendants were control persons of Thane. Plaintiff Joseph Milkowski ( Milkowski ), on behalf of himself and a class of persons who acquired shares of Thane pursuant to a merger between a wholly-owned subsidiary of Thane and Reliant Interactive Media Corp. ( Reliant ), opposes and files his own motion on stock value, interest rate, and control person liability. Thane s motion on loss causation is GRANTED; all other relief is DENIED as moot. I. Background This case is before the Court on remand from the Ninth Circuit. The action was CV-90 (06/04) Page 1 of 7

2 Case 8:03-cv JVS-SGL Document 250 Filed 03/17/2009 Page 2 of 7 brought against Thane pursuant to Section 12(a)(2) of the Securities Act of 1933 (the Act ), 15 U.S.C. 77l(a)(2), and pursuant to Section 15 of the Act, 15 U.S.C. 77o, alleging control person liability against four individual defendants. Following a bench trial, this Court previously held that Thane had not misrepresented to investors that it would list its shares on the NASDAQ National Market System ( NASDAQ ), and, even if so, those misrepresentations were not material. Miller v. Thane Int l, Inc., 372 F. Supp. 2d 1198 (C.D. Cal. 2005). The Ninth Circuit reversed and remanded, finding that Thane s final prospectus misrepresented that Thane shares would be listed on the NASDAQ, and that this misrepresentation was material. Miller v. Thane Int l, Inc., 519 F.3d 879, 893 (9th Cir. 2008). II. Discussion On remand, this Court is instructed to enter judgment in favor of the plaintiffs, to address loss causation, and to conduct further proceedings consistent with this opinion. Id. The moving papers present five post-trial issues: (1) loss causation, (2) control person liability, (3) stock valuation, (4) setting an appropriate interest rate, and (5) resolving various affirmative defenses. Because the issue of loss causation is dispositive of this case, the Court need not address other issues. Section 12(b) of the Act governs loss causation. Under this provision, Milkowski may not recover any portion or all of the amount recoverable... other than the depreciation in value of the subject security resulting from such part of the prospectus... not being true or omitting to state a material fact. 15 U.S.C. 77l(b). On this issue, the Ninth Circuit observed: Thane International argues that the district court s finding that Thane International stock did not react during its first nineteen days of OTCBB [NASDAQ s Over-the-Counter Bulletin Board] listing supports a finding that its failure to list on the NASDAQ was not the direct cause of any loss of value. Without expressing any opinion as to the strength of this argument, we remand to the district court to address the issue of loss causation in the first instance, following the general rule [that] a federal appellate court does not consider an issue not passed upon below. CV-90 (06/04) Page 2 of 7

3 Case 8:03-cv JVS-SGL Document 250 Filed 03/17/2009 Page 3 of 7 Miller, 519 F.3d at 892 (alteration in original) (internal quotations and citation omitted). On the one hand, Thane contends that this language permits the Court to find no loss causation based on the evidence. The Ninth Circuit specifically instructed this Court to address loss causation, id. at 893, an otherwise pointless exercise in futility if the materiality holding is interpreted as necessarily precluding a finding of no loss causation. (Reply at 1.) On the other hand, Milkowski notes that the Ninth Circuit held that it was error to consider[] the movement in share price of a stock that did not trade on an efficient market to determine materiality under the circumstances of this case. Miller, 519 F.3d at 888. Milkowski contends that there is no basis for a different analytical protocol for the issue of loss causation than there is for the issue of materiality. (Oppo. at 1.) At the outset, it is important to focus on the Ninth Circuit s materiality analysis. The Ninth Circuit in effect held that a representation to list on the NASDAQ is material as a matter of law given the circumstances of this case, where the representation was made as a reason for merger. Miller, 519 F.3d at 892. In so holding, the Ninth Circuit found that this Court could not reach a contrary conclusion based on the stock s postmerger trading because the fact that the newly merged Thane International never did trade on an efficient market. (Id.) The Ninth Circuit did not reject this Court s factual finding that Thane impounded the fact of non-listing within nineteen days of the merger, or any other of the indicia relied upon by this Court in finding that the stock impounded the fact of non-listing. Moreover, the Ninth Circuit placed significance on the qualifier under the circumstances of this case, which was added to its amended opinion. 1 On a close reading of the materiality holding, it is evident that this qualifier refers, primarily, to statements in Thane s prospectus concerning the benefits of national listing. 519 F.3d at 888 ( We also emphasize the context and manner of presentation of the references to NASDAQ listing. The NASDAQ is discussed no fewer than six times throughout the pages of the Final Prospectus, including on the cover page,... [and] is even cited as one of Reliant s Reasons for the Merger. ); id. at 892 ( Certainly, Thane believed that fact 1 Compare Miller, 508 F.3d 910, 919 ( The district court erred when it considered the movement in share price of a stock that did not trade on an efficient market to determine materiality. ), with 519 F.3d at 888 ( The district court erred when it considered the movement in share price of a stock that did not trade on an efficient market to determine materiality under the circumstances of this case. ) (emphasis supplied). CV-90 (06/04) Page 3 of 7

4 Case 8:03-cv JVS-SGL Document 250 Filed 03/17/2009 Page 4 of 7 was important in the total mix of information presented, or it would not have included the representation in the first place. ). The analysis of loss causation and the stock s ability to impound the fact of non-listing is not similarly freighted with that qualifier. Materiality and loss causation are distinct concepts, as recognized by the Ninth Circuit. Id. at 892; Mot. at 6-7 & n.9 (citing, inter alia, Akerman v. Oryx Commc ns, Inc., 609 F. Supp. 363, 689 (S.D.N.Y. 1984)). With this background the Court turns to the question of whether Thane has carried its burden to show that its failure to list on the NASDAQ was not the direct cause of any loss of value. According to the Ninth Circuit in In re Worlds of Wonder Securities Litigation, 35 F.3d 1407, 1422 (9th Cir. 1994), this burden is heavy but not insurmountable. Given the unique factual circumstances of this case, the Court concludes that Thane has carried this burden. Significantly, the facts which the Court recites below in support of its conclusion are uncontroverted. 2 The issue here is not whether all of the Cammer factors for market efficiency are rigorously met, 3 but whether Thane s stock impounded the fact that Thane did not list on the NASDAQ without a depressing effect on its price. Despite the dearth of case law on the issue of impoundment in a less than fully efficient market, 4 there are good reasons to find impoundment under the circumstances here. Indeed, this Court previously identified 2 And counsel for Milkowski so conceded at oral argument. 3 Cammer v. Bloom, 711 F. Supp. 1264, (D.N.J. 1989), and its progeny set a very high bar for a finding of market efficiency in the class certification context. 4 Akerman, however, supports the conclusion that a lack of loss causation can be found in a less than fully efficient market. The court in Akerman held that a misrepresentation in a registration statement was material but that defendants proved that the misrepresentation did not cause plaintiffs losses. 609 F. Supp. at 366 ( Although plaintiffs showed that the statements in the Oryx prospectus were theoretically material, defendants have successfully demonstrated that the decline in the value of Oryx stock was in fact caused by factors other than the matters misstated. ); id. at 372 ( Although plaintiffs initially carried their minimal burden of establishing a prima facie case by showing materiality, defendants have come forward with a credible, factually supported demonstration of the lack of any connection between the drop in value of Oryx securities and the misstatements. ). The court reached this holding notwithstanding certain indicia of inefficiency, given that the price of a thinly traded over-the-counter new-issue stock such as Oryx cannot always be counted on to respond to... an announcement of an error in its prospectus. Id. at 368. CV-90 (06/04) Page 4 of 7

5 Case 8:03-cv JVS-SGL Document 250 Filed 03/17/2009 Page 5 of 7 evidence supporting the conclusion that Thane had the ability to impound the fact of nonlisting within the nineteen-day period immediately following the merger, during which Thane s stock traded at or above its imputed price as of the merger, $7.00, 5 and even rose to $8.50. Miller, 372 F. Supp. 2d at First, although the expert testimony was that Thane s stock did not trade in an efficient market, both experts agreed that Thane stock had the ability to absorb information. Id. at 1210 (citing 2 Tr. 203, , 312). The Ninth Circuit also observed that Thane s stock price could incorporate market price moving information. 519 F.3d at (Thane stock s 46% price decline following its August 14, 2002 earnings announcement was the result of a general slump in the industry about this time, which was compounded by the company s failure to find and market the hit product it had hoped to find. Thane International s flagship product, an exercise machine called the AB-Doer, was not flying off the shelves as it once had. ); id. at 884 (noting that Thane s stock price tumbled in response to the August 14, 2002 earnings announcement). More specifically, the Milkowski s expert even agreed that Thane stock had the ability to absorb the specific fact that the stock had not listed on the NASDAQ. 372 F. Supp. 2d at 1211 (citing 2 Tr. 204). Whereas Thane s earnings announcement carried a good deal of complexity beyond a simple comparison with prior earnings, and therefore was more difficult for the market to absorb, its failure to list on the NASDAQ after the merger was totally transparent, and therefore could be absorbed by the market immediately. 6 The record demonstrates that there was a cause-and-effect relationship between Thane-specific information and the price of the stock. At oral argument, Milkowski argued that there were two events: the failure to list and the effect on management s credibility. However, Professor Cornell testified that there was a single event as a result of the failure to list. (Cornell Decl., 17; Trial Ex. 177, p. 104 (pagination per article).) Apart from generic testimony by Professor Cornell that he would pay more for a well-run company, there is no evidence in the record that 5 Thane asserts that the imputed price was $6.89; Milkowski assert it was $6.99. The Court uses $7.00 for simplicity. 6 One plaintiff testified that [a]ny idiot can tell where a stock trades by simply looking, and Thane s expert characterized the fact as open and obvious to the market as soon as Thane began trading. Miller, 372 F. Supp. at 1210 n.13 (citing Miller Depo. at 60, and Cornell Decl. 23). CV-90 (06/04) Page 5 of 7

6 Case 8:03-cv JVS-SGL Document 250 Filed 03/17/2009 Page 6 of 7 shareholders reacted adversely to management in addition to any reaction (or lack of reaction) to the failure to list. Second, the stock price reacted to events generally in the market and in the peer group identified by Thane s expert. 372 F. Supp. 2d at This further indicates that the stock had the ability to impound market information, and was not simply a random walk divorced from information available to the market. Third, it is significant that Reliant, which traded on the OTCBB immediately prior to the merger, traded in an efficient market. 7 Although Thane represented a new product mix with new management, it was therefore not an entity unknown to the marketplace, such as an IPO. Id. Fourth, there was never any inability to sell shares into the market following the merger, or any rush to dump Thane shares. Id. (citing 2 Tr. 212.) Fifth, at least as reflected in internet bulletin board postings, the fact of non-listing was known fairly promptly to those who followed the Raging Bull website. Id. at Thus, on the question of what the Court is to make of Thane s trading history in the nineteen days following the merger, the Court agrees with Milkowski s expert that one cannot pinpoint when any given piece of information would be impounded by the stock, but nevertheless finds that this time period was adequate to impound the fact of the non-listing in the stock price and yet the stock failed to react negatively for nineteen full days. This is sufficient to establish, ex post, that Thane s failure to list on the NASDAQ was not the direct cause of any loss of value. The record supports a finding of cause and effect or more precisely, non-effect even in the absence of a completely efficient market. Milkowski has not rebutted this showing with any evidence. Accordingly, the Court finds, as a matter of fact, that nineteen days was sufficient 7 The parties stipulated to this fact in the Pre-Trial Conference Order. CV-90 (06/04) Page 6 of 7

7 Case 8:03-cv JVS-SGL Document 250 Filed 03/17/2009 Page 7 of 7 time for the market to absorb Thane s non-listing on the NASDAQ, 8 notwithstanding inefficiencies in the market. In turn, there was no loss causation, and there is no need to address the other issues presented in the moving papers. III. Conclusion For the foregoing reasons, the Court GRANTS Thane s motion on the issue of loss causation, and DENIES all other relief as moot. Counsel for defendants shall prepare, serve and submit, forthwith, a proposed judgment consistent with the Court s ruling. Initials of Preparer kjt 00 : 00 8 Notably, even Milkowski s expert conceded that, although the market would give Thane a ten-day grace period within which to list, the market could absorb the fact of Thane s non-listing. Miller, 372 F. Supp. 2d at 1207 (citing 2 Tr ). CV-90 (06/04) Page 7 of 7