Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-05-56043/USCOURTS-ca9-05-56043-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

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FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

HOWARD MILLER, on behalf of 

himself and all others similarly

situated; JOSEPH J. MILKOWSKI, No. 05-56043

Plaintiffs-Appellants, D.C. No.

v. CV-03-01031-JVS 

THANE INTERNATIONAL, INC.; ORDER AND

WILLIAM F. HAY; DENISE AMENDED

DUBARRY-HAY; KEVIN J. MCKEON; OPINION

MARK TAYLOR,

Defendants-Appellees. 

Appeal from the United States District Court

for the Central District of California

James V. Selna, District Judge, Presiding

Argued and Submitted

May 9, 2007—Pasadena, California

Filed November 26, 2007

Amended March 18, 2008

Before: Barry G. Silverman, Kim McLane Wardlaw, and

Jay S. Bybee, Circuit Judges.

Opinion by Judge Wardlaw

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COUNSEL

Joel C. Feffer and Daniella Quitt, Wechsler Harwood LLP,

New York, New York, and Lionel Z. Glancy and Peter A.

Binkow, Glancy Binkow & Goldberg LLP, Los Angeles, California, for the plaintiffs-appellants. 

Daniel J. Tyukody and Michael C. Tu, Orrick, Herrington &

Sutcliffe LLP, Los Angeles, California, for the defendantsappellees. 

ORDER

The opinion filed November 26, 2007 and published at 508

F.3d 910 is superceded by the amended opinion below. 

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The panel has voted to deny Appellees’ Petition for

Rehearing and Suggestion of Rehearing En Banc. 

The full court has been advised of the Suggestion of

Rehearing En Banc, and no active judge has requested a vote

on whether to rehear the matter en banc. Fed. R. App. P. 35.

The Petition for Rehearing and Suggestion of Rehearing En

Banc are DENIED. No further petitions for rehearing may be

filed.

AMENDED OPINION

WARDLAW, Circuit Judge: 

Class plaintiffs appeal the district court’s judgment, following a bench trial, in favor of Thane International, Inc. and its

officers and directors (collectively, “Thane International”) on

plaintiffs’ action brought under Section 12(a)(2) of the Securities Act of 1933 (the “Act”), 15 U.S.C. § 77l(a)(2) and under

Section 15 of the Act, 15 U.S.C. § 77o, alleging control person liability against individual defendants. We must decide

whether Thane International misrepresented to investors that

it would list its shares on the NASDAQ National Market System (“NASDAQ”), and if so, whether those misrepresentations were material. The district court answered “no” to both

questions. We have jurisdiction under 28 U.S.C. § 1291. We

hold that the district court clearly erred when it found that

Thane International did not misrepresent that it would list the

merged company’s shares on the NASDAQ. We also hold

that these misrepresentations were material. We therefore

reverse and remand for further proceedings. 

I. Factual and Procedural Background

This appeal arises out of a merger transaction between

Reliant Interactive Media Corporation (“Reliant”), a publicly

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traded corporation, and Thane International, a privately held

corporation. Reliant and Thane International executed an

agreement and plan of merger on November 21, 2001, which

was amended on December 6, 2001. Under the terms of the

agreement, Reliant shareholders would receive 0.3049459

shares of Thane International common stock for each share of

Reliant common stock surrendered upon completion of the

merger. A wholly owned subsidiary of Thane International

would merge with and into Reliant. The separate corporate

existence of the subsidiary would cease, and Reliant would

continue as the surviving corporation. Reliant would then

become a wholly owned subsidiary of Thane International.

Premerger, Reliant stock traded on the Over-the-Counter Bulletin Board (“OTCBB”), while Thane International’s stock

was not publicly traded. 

On January 3, 2002, Thane International filed a combined

proxy statement and prospectus (the “Initial Prospectus”), as

part of a Registration Statement on Form S-4, with the Securities and Exchange Commission (“SEC”). The stockholder letter accompanying the Initial Prospectus stated that, as a

condition to the merger, Thane International shares would be

listed for trade on the NASDAQ, or another national

exchange:

It is a condition to the merger that the shares of

Thane common stock to be received by stockholders

of Reliant in connection with the merger be quoted

or listed on the NASDAQ national market or a

national securities exchange. 

The Registration Statement was amended on February 21,

2002, March 29, 2002, April 23, 2002, and finally, on April

26, 2002, at which point the SEC declared it effective (the

“Final Prospectus”). In the meantime, by letter dated April 9,

2002, NASDAQ notified Thane International that its shares

were approved for listing on the NASDAQ. 

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The Final Prospectus omitted the express listing condition

found in the Initial Prospectus. Although there are several references to listing the merged company’s stock on the NASDAQ sprinkled throughout the Final Prospectus, those

references contained literal representations that the merged

company’s shares had been approved for trading on the NASDAQ, and not that the shares were actually listed on the NASDAQ. For example, the cover page of the Final Prospectus

states: 

The shares of Thane common stock to be received

by stockholders of Reliant in connection with the

merger have been approved for quotation and trading

on the NASDAQ National Market upon completion

of the merger, subject to Thane’s compliance with

the minimum bid price requirements of $5.00 per

share. 

Under the heading “Reliant’s Reasons for the Merger,” the

Prospectus represents: 

The combined company is expected to meet the initial listing requirements of the NASDAQ National

Market, which would provide the Reliant stockholders with greater liquidity than they have with Reliant

common stock trading on the over-the-counter market. 

Under the heading “Per Share Market Price Information,” the

Prospectus informed investors: 

The Thane common stock to be issued in connection

with the merger has been approved for quotation and

trading on the Nasdaq National Market upon the

completion of the merger, subject to Thane’s compliance with the minimum bid price requirements of

$5.00 per share. 

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In the Final Prospectus’s section on “QUESTIONS AND

ANSWERS ABOUT THE MERGER,” the hypothetical

investor asks, “Will Reliant continue as a public company if

the merger agreement is approved?” The hypothetical investment advisor replies: 

No. Reliant will become a wholly-owned subsidiary

of Thane upon the completion of the merger, and

Reliant stockholders will become holders of Thane

common stock. Thane has received approval for quotation and trading of its common stock on the Nasdaq National Market upon completion of the merger,

subject to Thane’s compliance with the minimum

bid price requirements of $5.00 per share.

The Final Prospectus also included a copy of the Merger

Agreement. Section 6.5(b) of the Merger Agreement discussed Thane International’s covenant to secure the NASDAQ listing:

Thane shall use commercially reasonable efforts to

cause its outstanding Thane Common Stock immediately after the Merger to be approved for quotation

on the Nasdaq National Market System or, in

Thane’s reasonable discretion another national

securities exchange, subject to official notice of issuance, as promptly as practicable after the date hereof,

and in any event prior to the Effective Time. 

Thane International was required to “compl[y] in all material respects with all covenants” as a condition precedent to

Reliant’s obligation to consummate the merger. In the April

9, 2002 letter, NASDAQ notified Thane International that it

had approved Thane International’s listing application. However, in April 2002, members of Thane International’s Board

of Directors met with their investment bankers, who advised

the Board that shareholder value would be maximized if

Thane International did not list its common stock on the NAS2510 MILLER v. THANE INTERNATIONAL

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DAQ immediately after the merger, but instead waited to list

once a secondary offering of shares was completed. According to William Hay, Thane International’s Chairman and

Chief Executive Officer, the secondary offering was to be

completed as early as mid-July, approximately six weeks after

the merger was consummated. During those six weeks, the

bankers recommended that Thane International trade its

shares on the OTCBB. 

On May 20, 2002, Reliant’s shareholders approved the

merger, which was consummated on May 24, 2002. Thane

International stock commenced trading that day over the

OTCBB. 

Thane International shareholders experienced a wild ride.

Between May 24 and June 11, 2002, the reported share price

ranged between $8.50 and $7.00.1 The stock closed at $6.00

on June 24, 2002. Thane International reported its Fiscal Year

2002 earnings on June 25, 2002, and the stock closed that day

at $5.25. On June 28, 2002, Thane International’s closing

price sunk below $5.00 per share, and never again closed

above $5.00. 

On August 14, 2002, Thane International announced its

quarterly earnings in its 10-Q filing with the SEC. The results

were disastrous, with earnings falling 46 percent over the

same quarter the previous year. Apparently, there was a general slump in the industry about this time. This 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. The 10-Q stated: 

1Plaintiffs calculate the “merger price”—the value of Reliant stock each

Reliant shareholder exchanged for each Thane International share they

received as part of the merger—at $6.99 per share, while defendants calculate it at $6.89 per share. We agree with the district court that resolution

of this dispute does not affect the outcome of this case. 

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In May and June of [2002], we met with our investment bankers to discuss an underwritten public

offering of our common stock. Our investment bankers advised us that we could potentially obtain more

favorable pricing for the public offering if we implemented our move to the NASDAQ National Market

in conjunction with the underwritten [secondary]

public offering. Over the course of June and July we

have been preparing for the public offering, but we

have recently concluded that present market conditions are no longer favorable for an underwritten

public offering of common stock. As such, we are

currently evaluating the listing of our common stock

on a national market. 

Thane International shares tumbled on the news, closing at

$1.95 on August 16, 2002. 

In February 2004, Thane International completed a “goingprivate” transaction in which all Thane International shareholders were bought out at $0.35 per share. The shares had

never been listed on the NASDAQ. 

Plaintiffs filed an action in the district court, alleging violations of Section 12(a)(2) of the Act, 15 U.S.C. § 77l(a)(2), for

misrepresentation in connection with a securities offering and

of Section 15 of the Act, 15 U.S.C. § 77o, for control person

liability against individual defendants William Hay; Denise

DuBarry-Hay, William Hay’s wife and Thane International’s

Chief Creative Officer; Kevin McKeon, Thane International’s

Chief Financial Officer; and Mark Taylor, Thane International’s Chief Operating Officer and President. Plaintiffs allege

that the Final Prospectus contained material misstatements of

fact because it implied that Thane International shares would

be listed on the NASDAQ. The district court certified the

plaintiff class and confirmed Joseph J. Milkowski as the

named class representative. 

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The district court conducted a three-day bench trial. In a

Memorandum of Decision, the district court held that the

defendants had not violated Section 12(a)(2) of the Act for

two reasons. Miller v. Thane Int’l, Inc., 372 F. Supp. 2d 1198

(C.D. Cal. 2005). First, the district court found that the statements in the Final Prospectus regarding NASDAQ listing

were not false or misleading. Id. at 1205-06. The court reasoned that the representations in the Final Prospectus were

“literally true,” in that they did not promise that Thane International shares would actually be listed on the NASDAQ. Id.

at 1205. Rather, they merely represented that the shares would

be or already had been approved or qualified for NASDAQ

listing. Id. at 1204. The district court contrasted this representation with that determined to be false in Blasdel v. Mullenix,

356 F. Supp. 924, 925 (W.D. Okla. 1971), where the defendant had represented that the corporation’s shares “would be

listed” on the New York Stock Exchange. Miller, 372 F.

Supp. 2d at 1205. 

The district court also gave weight to the “drafting history

of the Prospectus,” finding it “reinforce[d]” his conclusion

that the representations are literally true. Id. The district court

noted that the Initial Prospectus contained an explicit condition that the merger would be completed only if Thane International listed its shares on the NASDAQ, but that the

condition had been omitted from subsequent versions of the

prospectus—including the Final Prospectus. Id. The district

court concluded that dropping this condition demonstrated

that Thane International did not actually promise to list its

shares on the NASDAQ because “if a condition to list is eliminated, a reasonable investor would infer that there was no

promise to list.” Id. 

Second, in the alternative, the district court held that even

if the Final Prospectus contained false statements, those statements were not material. Id. at 1208-09. After hearing from

both sides’ experts, the district court considered the movement in Thane International’s share price in the aftermath of

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the merger as a probative indicator of materiality, even though

it acknowledged that Thane International’s shares did not

trade on an efficient market. Id. at 1206-11. It held that

because Thane International stock did not depreciate immediately following its listing on the OTCBB, even though the

market had the ability to incorporate that information into

Thane International’s share price, the fact of nonlisting on the

NASDAQ was not material. Id. at 1210-11. 

Plaintiff class timely appealed. 

II. Jurisdiction and Standard of Review

We have jurisdiction over final judgments of the district

court under 28 U.S.C. § 1291. We review the district court’s

factual findings for clear error. Fed. R. Civ. P. 52(a); SEC v.

Rubera, 350 F.3d 1084, 1094 (9th Cir. 2003). As the Supreme

Court stated in TSC Industries, Inc. v. Northway, Inc., 

The issue of materiality may be characterized as

a mixed question of law and fact, involving as it

does the application of a legal standard to a particular set of facts. In considering whether summary

judgment on the issue is appropriate, we must bear

in mind that the underlying objective facts, which

will often be free from dispute, are merely the starting point for the ultimate determination of materiality. The determination requires delicate assessments

of the inferences a “reasonable shareholder” would

draw from a given set of facts and the significance

of those inferences to him, and these assessments are

peculiarly ones for the trier of fact. Only if the established omissions are “so obviously important to an

investor, that reasonable minds cannot differ on the

question of materiality” is the ultimate issue of materiality appropriately resolved “as a matter of law” by

summary judgment. 

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426 U.S. 438, 450 (1976) (footnotes omitted). 

III. The Final Prospectus Contained Misleading

Statements

Section 12(a)(2) of the Act imposes civil liability on 

[a]ny person who . . . offers or sells a security . . .

by the use of any means or instruments of transportation or communication in interstate commerce or of

the mails, by means of a prospectus or oral communication, which includes an untrue statement of a

material fact or omits to state a material fact necessary in order to make the statements, in the light of

the circumstances under which they were made, not

misleading (the purchaser not knowing of such

untruth or omission), and who shall not sustain the

burden of proof that he did not know, and in the

exercise of reasonable care could not have known, of

such untruth or omission . . . . 

15 U.S.C. § 77l(a)(2). Thus, to prevail under Section 12(a)(2),

a plaintiff must demonstrate (1) an offer or sale of a security,

(2) by the use of a means or instrumentality of interstate commerce, (3) by means of a prospectus or oral communication,

(4) that includes an untrue statement of material fact or omits

to state a material fact that is necessary to make the statements not misleading. The district court noted, and the parties

do not dispute, that only the fourth element is at issue here.

A.

[1] We must therefore first determine whether the Final

Prospectus contains false or misleading statements or omissions. We have recognized that statements literally true on

their face may nonetheless be misleading when considered in

context, warning: 

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[A]n issuer’s public statements cannot be analyzed

in complete isolation. “Some statements, although

literally accurate, can become, through their context

and manner of presentation, devices which mislead

investors. For that reason, the disclosure required by

the securities laws is measured not by literal truth,

but by the ability of the material to accurately inform

rather than mislead prospective buyers.” 

In re Convergent Tech. Sec. Litig., 948 F.2d 507, 512 (9th Cir.

1991) (quoting McMahan & Co. v. Wherehouse Entm’t, Inc.,

900 F.2d 576, 579 (2d Cir. 1990)); see also Kaplan v. Rose,

49 F.3d 1363, 1372 (9th Cir. 1994). 

[2] “Section 12(a)(2) is a virtually absolute liability provision that does not require an allegation that defendants possessed scienter.” In re Suprema Specialties, Inc. Sec. Litig.,

438 F.3d 256, 269 (3d Cir. 2006) (internal quotation marks

omitted); see also Gustafson v. Alloyd Co., Inc., 513 U.S. 561,

578 (1995) (“It is understandable that Congress would provide [securities] buyers with a right to rescind, without proof

of fraud . . . .”). Moreover, the purchaser need not prove reliance on the misrepresentations. See Gustafson, 513 U.S. at

576, 578. 

B.

The disputed statements in the Final Prospectus fall broadly

into two categories. Certain representations assert that Thane

International expects to have its shares “approved for quotation” on the NASDAQ once the merger is completed and the

$5.00 threshold is met. Other representations indicate that

Thane International has already secured such approval. 

These statements are literally true. Thane International did

make an effort to have its shares approved for NASDAQ listing, and Thane International did actually secure that approval

on April 9, 2002, more than two weeks before it filed the

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Final Prospectus. The disputed statements in the Final Prospectus by their terms promise no more than that. 

[3] Yet, as the district court recognized, literal truth is not

the standard for determining whether statements in a prospectus are misleading. We held in Convergent Technologies that

“ ‘[s]ome statements, although literally accurate, can become,

through their context and manner of presentation, devices

which mislead investors.’ ” 948 F.2d at 512 (quoting McMahan, 900 F.2d at 579). Plaintiff class contends that the Final

Prospectus implied that Thane International would actually

list its shares on the NASDAQ. We agree with the Plaintiff

class. The fair and reasonable implication an ordinary investor

would derive from all the listing representations is that, after

approval, the shares would be listed on the NASDAQ once

the $5.00 threshold was met. The Final Prospectus represented that Thane International shares were expected to be

approved for NASDAQ listing, and, in the next breath, that

Reliant’s shareholders could look forward to being “provide[d] . . . with greater liquidity than they have with Reliant

common stock trading on the over-the-counter market”

(emphasis added). Greater liquidity, i.e. greater ability to

quickly trade at values reasonable in light of underlying supply and demand, was thus touted as a contemporaneous benefit of the merger. That representation surely suggests a

commitment to listing the shares on the NASDAQ—once the

$5.00 condition was met (which was immediately upon

merger)—for approval alone would do absolutely nothing to

increase a stock’s liquidity. It is only once the stock actually

trades on a national market that liquidity would increase.

Moreover, that portion of the Final Prospectus favorably compares Thane International stock’s future listing with Reliant’s

current listing on the OTCBB. The clear implication is that

Thane International shares would not trade on the OTCBB,

but would instead list on the NASDAQ, which is expressly

invoked in the first part of the very same sentence. 

The district court relied heavily on the “drafting history” in

finding that the Final Prospectus was not misleading. It

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observed that the Initial Prospectus made Thane International’s listing on the NASDAQ market a condition to the merger,

but that this condition was dropped by the time the Final Prospectus was accepted by the SEC and distributed to Reliant

shareholders. The underlying premise of the district court’s

reasoning is that investors would read not only the effective

Final Prospectus, but also previous drafts, would further connect the dots between various passages related to NASDAQ

listing, and could only conclude that Thane International had

not committed to the NASDAQ listing. 

We reject that premise for two reasons. First, this premise

overlooks the fact that by the time the Final Prospectus was

issued, Thane International had already fulfilled the component of this condition over which it had any control: Thane

International had applied for and received approval for NASDAQ listing. All that remained as a predicate for listing was

for Thane International shares to reach a minimum bid price

of $5.00. Second, investors are not generally required to look

beyond a given document to discover what is true and what

is not. See In re Apple Computer Sec. Litig., 886 F.2d 1109,

1114 (9th Cir. 1989) (“Ordinarily, omissions by corporate

insiders are not rendered immaterial by the fact that the omitted facts are otherwise available to the public.”); Dale v.

Rosenfeld, 229 F.2d 855, 858 (2d Cir. 1956) (“Availability

elsewhere of truthful information cannot excuse untruths or

misleading omissions in the prospectus. Readiness and willingness to disclose are not equivalent to disclosure.”) (internal

quotation marks omitted).2 We will not presume or require

that investors independently seek out prior versions of SEC

2

In the context of a “fraud on the market” Rule 10b-5 class action,

where reliance is presumed based on the price of a stock, availability to

the public of truthful information may be relevant to the extent the stock’s

price has not actually been skewed by any misrepresentations. However,

in an action that does not involve the fraud on the market presumption,

that truthful information is available elsewhere does not relieve a defendant from liability for misrepresentations in a given filing or statement.

See Apple Computer, 886 F.2d at 1114-15. 

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filings or otherwise familiarize themselves with the “drafting

history” of a prospectus. Cf. Sanders v. John Nuveen & Co.,

Inc., 619 F.2d 1222, 1229 (7th Cir. 1980) (“Section 12(2)

does not establish a graduated scale of duty depending upon

the sophistication and access to information of the customer.

A plaintiff under § 12(2) is not required to prove due diligence. All that is required is ignorance of the untruth or omission.”) (citations omitted). Therefore, it was error to impute

knowledge of the contents of the Initial Prospectus to Reliant

shareholders who received the Final Prospectus.3

We also emphasize the “context and manner of presentation” of the references to NASDAQ listing. Convergent Technologies, 948 F.2d at 512 (quoting McMahan, 900 F.2d at

579). The NASDAQ is discussed no fewer than six times

throughout the pages of the Final Prospectus, including on the

cover page, the contents of which are closely regulated by the

SEC. See Regulation S-K, 17 C.F.R. § 229.501(b). Indeed,

§ 229.501(b)(4) required Thane International to disclose

whether “any national securities exchange or the Nasdaq

Stock Market lists the securities offered.” The listing on the

national exchange is even cited as one of “Reliant’s Reasons

for the Merger.” Read in context, these repeated references

suggest nothing short of actual listing on the NASDAQ. 

[4] The clear error standard is a high bar, but “the presumption of correctness that attaches to factual findings is stronger

in some cases than in others. The same ‘clearly erroneous’

standard applies to findings based on documentary evidence

as to those based entirely on oral testimony, but the presumption has lesser force in the former situation than in the latter.”

3The district court relied on testimony from plaintiffs’ expert witness

that “people” and “the market” would have paid attention to and absorbed

the shifting promise between the Initial and Final Prospectuses. Even

accepting this testimony as true, that “people” and “the market” would

have noticed the change does not make the statements themselves any less

misleading. 

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Bose Corp. v. Consumers Union of United States, Inc., 466

U.S. 485, 500 (1984) (citation omitted). The district court’s

misrepresentation findings were based almost entirely on the

documentary record—evidence that is more amenable to evaluation by a reviewing court. Specifically, the relevant evidence consisted primarily of the SEC filings themselves and

the witnesses’ written declarations. After examining the documentary record, we have a “definite and firm conviction that

a mistake has been committed.” Easley v. Cromartie, 532

U.S. 234, 242 (2001) (citation and internal quotation marks

omitted). Therefore, we hold that the Final Prospectus contained false and misleading representations as to the NASDAQ listing and that the district court clearly erred in finding

otherwise. 

IV. The Misleading Statements Were Material

The district court held in the alternative that even if Thane

International misrepresented that it would list its shares on the

NASDAQ, any such misrepresentations were immaterial. To

conclude that the misrepresentations were immaterial, the district court reasoned that Thane International’s shares did not

decline in value even after the market absorbed the fact that

Thane International shares were not trading on the NASDAQ.

Although it acknowledged that Thane International shares did

not trade on an efficient market, the district court found by a

preponderance of the evidence that those shares had the ability to incorporate the obvious fact of nonlisting into their

price. 

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. Therefore, its conclusion that Thane International’s misrepresentations were immaterial is clear error. 

[5] Thane International is liable under Section 12(a)(2) only

if the misrepresentations in the Final Prospectus were material

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to the decision of voters to approve the merger. 15 U.S.C.

§ 77l(a)(2) (referring to a prospectus containing “an untrue

statement of a material fact or omit[ting] to state a material

fact . . . .”). The Supreme Court articulated the standard for

materiality in securities actions in TSC Industries: “An omitted fact is material if there is a substantial likelihood that a

reasonable shareholder would consider it important in deciding how to vote.” 426 U.S. at 449.4

 Assessing materiality is

a “fact-specific inquiry” that “depends on the significance the

reasonable investor would place on the withheld or misrepresented information.” Basic Inc. v. Levinson, 485 U.S. 224,

240 (1988). “[T]o fulfill the materiality requirement ‘there

must be a substantial likelihood that the disclosure of the

omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.’ ” Id. at 231-32 (quoting TSC Indus., 426

U.S. at 449). 

The district court received testimony from both sides’

experts on the question of materiality. Testifying for Thane

International, Bradford Cornell, Professor of Finance at the

Anderson Graduate School of Management at the University

of California, Los Angeles, minimized the importance investors attach to the market in which a company trades, concluding “value derives from the company itself and not where it

trades.” He also testified that liquidity is determined by a

company’s inherent characteristics,5 not the market on which

it trades. He generally regarded listing on the NASDAQ as a

cosmetic benefit of secondary importance to investors who

focus on a company’s fundamentals. 

4Though TSC Industries involved SEC Rule 14a-9, we have adopted its

materiality standard in Section 12 actions. See Casella v. Webb, 883 F.2d

805, 807-08 (9th Cir. 1989). 

5Cornell cited relevant factors such as a company’s number of outstanding shares, its public float, market capitalization, analyst coverage, media

coverage, number of institutional shareholders, and volatility. 

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On behalf of the plaintiff class, Candace Preston, founding

member of Financial Markets Analysis, LLC, emphasized the

benefits that accompany NASDAQ listing as compared to listing on the OTCBB. She declared that NASDAQ stocks generally enjoy greater liquidity, and thus reduced spreads,6

 leading

to greater investor returns.7 NASDAQ-listed shares are also

exempt from state-by-state “Blue Sky” laws, which require

companies offering securities to undergo burdensome registration processes in certain states in addition to the various

federal registration requirements. This translates into lower

compliance costs, more favorable terms for raising capital,

and thus, all things being equal, higher earnings and share

prices. NASDAQ-listed shares can also be purchased on margin, i.e. purchased with money on loan from a stockbroker.

This can lead, all things being equal, to a larger investor base

and higher returns. 

Preston testified, and Thane International did not dispute,

that institutional investors almost universally shun OTCBB

stocks, which significantly cuts into the base of demand for

those shares (thus depressing their price). Preston also testified that OTCBB stocks are not regularly quoted in financial

publications like the Wall Street Journal, which further

decreases their exposure to potential investors and decreases

price transparency. She also explained that NASDAQ listing

6Stocks that are less liquid have greater “spreads” between the bid and

ask prices, i.e. the difference between the price buyers are willing to pay

and the price sellers are willing to accept. All things being equal, investors

enjoy greater returns as the size of a stock’s spread diminishes. 

7The district court credited this testimony, but found that the statistical

evidence demonstrated that NASDAQ listing conferred only a small average advantage for liquidity and spreads. It noted one study showing that

for stocks switching from the OTCBB to the NASDAQ, the mean

decrease in spreads was less than six cents per share, and the mean

increase in trading volume was only around 20 percent. The district court

also noted the study’s finding that spreads fell for approximately 60 percent of the companies switching from the NASDAQ to the OTCBB, but

that they actually rose for about 40 percent. 

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confers a degree of prestige on a stock because of that market’s more rigorous listing standards. 

[6] Whether a false promise to list shares on a national

exchange like the NASDAQ can be a material omission

appears to be a question of first impression in our or any of

our sister circuits. At least two district courts have suggested

that such a misrepresentation is material, however. In Blasdel,

Mullenix told Blasdel that shares of his corporation would be

traded on the New York Stock Exchange. 356 F. Supp. at 925.

In fact, the shares were never listed there. Id. at 926. The district court concluded that this misrepresentation was material

and that Mullenix had therefore violated Section 12 of the

Act. Id. at 925, 927.8

In KA Investments LDC v. Number Nine Visual Technology

Corp., KA Investments bought 300 shares of Number Nine’s

preferred stock for $3 million. 2002 U.S. Dist. LEXIS 18690

at *4, Fed. Sec. L. Rep. (CCH) P92,024 (D. Mass. 2002). The

purchase agreement stated as a condition that KA Investments

could convert those shares into common stock. Id. at *4-5.

“KA Investments’ strategy was predicated on its ability to

then trade Number Nine’s common stock on the NASDAQ

National Market, where the stock was listed as of March 31,

1999, or on some other comparable market.” Id. at *5. Number Nine also represented that it was in compliance with all

relevant NASDAQ listing requirements and that it had no reason to foresee that its shares might be delisted from the NASDAQ. Id. at *6. Subsequently, it emerged that Number Nine

was not in compliance with NASDAQ’s listing requirements

and its shares were delisted. Id. at *14. Number Nine was

given the option to instead list its shares on the NASDAQ

Small Cap Market, but it declined to do so. Id. at *15 n.7. 

8

It is not clear whether shares of the corporation in Blasdel were traded

on an exchange other than the New York Stock Exchange, or whether they

were never listed on any exchange at all. Nevertheless, it is apparent that

the district court attached significance to the promise to list the shares on

a national exchange. 

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The district court found that Number Nine misrepresented

its status with respect to NASDAQ listing. Id. at *34. It then

stated: “Neither do the defendants seriously dispute that this

misrepresentation concerned a matter of material interest to

KA Investments, given its express plan to trade Number

Nine’s common stock.” Id. The district court proceeded to

discuss other elements of the plaintiff’s Rule 10b-5 action, on

the assumption that the materiality requirement was satisfied.

Id. at *34-44. 

[7] Here, the district court found that based on the evidence

presented and without regard to the actual performance of

Thane International’s stock, the fact of NASDAQ listing was

“marginally material.” Miller, 372 F. Supp. 2d at 1208. We

agree that Thane International’s promise to list its shares on

the NASDAQ was material. Even accepting as true all of Cornell’s testimony, there is no factual dispute between the

experts that NASDAQ listing carries objective benefits that

directly and positively affect corporate earnings, investor

returns, and a stock’s pool of potential shareholders. Earnings

benefit because NASDAQ-listed companies are not required

to comply with the patchwork of Blue Sky laws adopted by

the various states. Describing the burden imposed by Blue

Sky compliance, SEC Chairman Arthur Levitt explained to

the Senate Committee on Banking, Housing, and Urban

Affairs:

While securities markets today are global, issuers

and securities firms still must register many securities offerings in 52 separate jurisdictions; satisfy a

multitude of separate books and records requirements; and bear the substantial costs of compliance

with the overlapping requirements. 

The Securities Investment Promotion Act of 1996: Hearings

on S. 1815 Before the Senate Comm. on Banking, Housing,

and Urban Affairs, 104th Cong. 32 (1996); see also Therese

H. Maynard, The Uniform Limited Offering Exemption: How

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“Uniform” is “Uniform?”—An Evaluation and Critique of

the ULOE, 36 Emory L.J. 357, 359 (1987) (noting that complying with both federal and Blue Sky requirements involves

“substantial” costs and logistical challenges). 

Exemption from Blue Sky registration is especially advantageous for a small company, like Thane International, for

which fixed compliance costs will factor as a more significant

expenditure. A small company unwilling or unable to pay to

comply with a state’s Blue Sky regulations cannot offer securities within that state, which adversely affects the company’s

ability to raise capital. See Rutheford B. Campbell, Jr., The

Impact of NSMIA on Small Issuers, 53 Bus. Law. 575, 580

(1998) (noting “the drag on capital formation imposed by

state blue sky regulations, especially as concerns small issuers”). 

[8] Investors also receive advantages because NASDAQlisted shares have greater liquidity (as Thane International’s

Final Prospectus stated) and thus have smaller spreads, on

average, than shares traded on the OTCBB. Larger spreads

entail a larger built-in loss at the time a stock is purchased,

which, all things being equal, makes that stock a less attractive investment. The district court found the difference minimal, noting that average spreads are only six cents higher on

the NASDAQ than on the OTCBB, and that some stocks actually saw their spreads increase after switching to the NASDAQ. But pennies count in the world of investing,9

 and even

if some stocks fare better on the OTCBB than the NASDAQ,

the opposite more often holds. 

[9] The evidence also compels the conclusion that NASDAQ listing attracts investors that would not invest in a bulletin board stock. We find particularly significant Preston’s

uncontested testimony that all but a “very limited number” of

9Especially for stocks, like Thane International, that trade in a relatively

low price range. 

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institutional investors are prohibited, under their bylaws, from

investing in stocks traded on the OTCBB. According to the

New York Stock Exchange, 48.3 percent of the total corporate

equities in the United States were owned by institutional

investors in 2001, the year before the Final Prospectus was

sent to Reliant shareholders.10 Institutional investors control

an enormous portion of investment dollars—dollars that could

not flow into Thane International shares if they were listed on

the OTCBB, thus slashing into the stock’s base of demand. 

[10] Three other facts suggest that NASDAQ listing may

attract a larger pool of investors than listing on the OTCBB.

First, NASDAQ-listed shares can be purchased on margin,

while shares on the OTCBB cannot. Second, OTCBB shares

are not regularly quoted in popular investment periodicals like

the Wall Street Journal, which may decrease a stock’s exposure to potential investors. Third, as Preston testified, NASDAQ listing lends a degree of prestige to a stock because it

means the company has met that exchange’s more rigorous

listing standards. We find this third fact significant in the context of a company which, like Thane International, had not

previously traded its shares publicly, so that investors were

without an established track record to provide confidence in

the company’s prospects and management. Under these circumstances, the stamp of NASDAQ approval could very well

provide some reassurance to potential investors. 

[11] Here, Thane International’s prospectus induced Reliant shareholders to vote for the merger in part because the

“combined company [would meet] the initial listing requirements of the NASDAQ National Market, which would provide the Reliant stockholders with greater liquidity than they

have with Reliant common stock trading on the over-the10See New York Stock Exchange, NYSEData.com Factbook: Holdings

of Corporate Equities in the U.S. by Type of Institution, available at

http://www.nysedata.com/nysedata/asp/factbook/viewer_

edition.asp?mode=table&key=2673&category=12. 

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counter market.” A reasonable Reliant shareholder would

have wanted to know that in fact Thane International would

not be listed on the NASDAQ, and would not enjoy the

greater liquidity Thane International promised. The omission

of this information “significantly altered the ‘total mix’ of

information made available” at the time of the vote. TSC

Indus., 426 U.S. at 449. Certainly, Thane believed that fact

was important in the total mix of information presented, or it

would not have included the representation in the first place.

We believe that reasonable minds cannot differ on the conclusion that Thane International’s misrepresentations regarding

NASDAQ listing were material to Reliant shareholders’ decision to vote for the merger. Therefore, the district court

clearly erred by concluding otherwise, particularly in light of

the undisputed fact that the newly merged Thane International

never did trade on an efficient market. 

V. Loss Causation

A Section 12 defendant is liable only for depreciation that

results directly from the misrepresentation at issue. See 15

U.S.C. § 77l(b). Because the district court found no misrepresentation, however, it did not reach loss causation. Thane

International urges that we should affirm the district court’s

judgment because the district court’s factual findings necessarily establish that there was no loss resulting from any material misrepresentations. Specifically, Thane International

argues that the district court’s finding that Thane International

stock did not react during its first nineteen days of OTCBB

listing supports a finding that its failure to list on the NASDAQ was not the direct cause of any loss of value. 

[12] 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.’ ” Golden Gate Hotel

Ass’n v. City & County of San Francisco, 18 F.3d 1482, 1487

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(9th Cir. 1994) (quoting Singleton v. Wulff, 428 U.S. 106, 120

(1976)). 

VI. Conclusion

Thane International’s Final Prospectus misrepresented that

Thane International shares would be listed on the NASDAQ,

and, under the circumstances, that misrepresentation was

material. We therefore remand to the district court with

instructions to enter judgment in favor of the plaintiffs, to

address loss causation, and to conduct further proceedings

consistent with this opinion. 

REVERSED and REMANDED.

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