The Ninth Circuit upheld a ruling concluding that plaintiffs failed to establish loss causation in an action where the share price did not decline following the emergence of the truth in a Securities Act Section 12(2) action. Miller v. Thane International, Inc., Case No. 09-55474 (9th Cir. Aug. 9, 2010). The shareholder complaint is based on the merger of Thane International, Inc and Reliant Interactive Media Corp. through a stock exchange in May 2002. The imputed price was $7 per share.

The prospectus stated that Thane stock would be listed for trading on the NASDAQ National Market after the merger, subject to compliance with the $5 exchange minimum. Post merger, however, the shares were list on the NASDAQ Over-the-Counter Bulletin Board. The stock traded above the merger price until June 24, 2002, when it fell to $6 per share. Following a disappointing earnings announcement the next day, the share price dropped to $5.25 and soon went below $5 where it remained. Earnings continued to decline and in August 2002 the company stated it was delaying listing on the NMS. The share price continued to tumble. Thane bought out existing shareholders in February 2004 at $0.35 per share.

The case was tried to the bench for three days and dismissed for lack of materiality. The Ninth Circuit reversed. On remand, the district court again dismissed the case. This time, the court concluded on Thane’s motion that plaintiffs failed to establish loss causation.

First, the Circuit Court considered whether the share prices could be used to determine loss causation since the Bulletin Board is not an efficient market. The court rejected this argument, concluding that a lack of efficiency does not per se render the share prices unreliable. Accordingly, those prices can be used in the loss causation analysis.

Second, the Circuit Court affirmed dismissal of the action. Here, the district court concluded that Thane’s stock price impounded the failure to list on the NMS before it fell below the merger price. Thane’s expert testified that during the nineteen-day period following the merger, and during which the share price remained above the merger price, the information about trading on the Bulletin Board rather than the NMS was absorbed into the price. Plaintiffs’ expert agreed with this proposition.

Finally, the court rejected a claim by plaintiffs that loss causation could be based on the disclosure of additional information about the misrepresentation an earnings release made just before the share price dropped. While that report did discuss the fact that the shares were listed on the OTC Bulletin Board rather that on NMS, that fact had long been obvious. Accordingly, it added nothing to the available information about the misrepresentation. The record here is undisputed that after the truth emerged the share price remained at or above the merger price for days and did not fall below $7 until after the disappointing earnings release. Plaintiffs failed to establish loss causation.