Opinion ID: 781005
Heading Depth: 4
Heading Rank: 1

Heading: Materiality of Statements Prior to July 14, 1998

Text: 60 The District Court found that the alleged omissions and misrepresentations regarding America West's maintenance issues, the FAA investigation, and the FAA settlement agreement were immaterial as a matter of law because the market did not immediately react, either after the June 23, 1998 Wall Street Journal disclosure of the potential FAA fines or after the July 14, 1998 announcement that the FAA had levied a $5 million fine. In doing so, the District Court applied the bright line rule suggested by the Third Circuit in Oran v. Stafford, 226 F.3d 275 (3d Cir.2000). Id. at 282 (finding that misrepresentations or omissions are immaterial as a matter of law if the market does not react immediately upon disclosure of the information). 61 Defendants urge us to adopt this per se rule, i.e., if there has been no immediate change in the stock price, the alleged misrepresentations or omissions must have been immaterial. However, we decline to do so because adoption of such a rule would contravene the Supreme Court's holdings in Basic, Inc. v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988) and TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976). 62 In Basic, the Supreme Court expressly adopted the reasonable investor standard set forth in TSC Industries for determining materiality in the Section 10(b) and Rule 10b-5 context. 485 U.S. at 231-32, 108 S.Ct. 978. The Court held that a fact is material if there is a `substantial likelihood' that a reasonable investor would consider it important in his or her decision making. Id. at 231, 108 S.Ct. 978 (quoting TSC Indus., 426 U.S. at 449, 96 S.Ct. 2126). The Court explained that, to 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, 108 S.Ct. 978 (citation omitted). In other words, materiality depends on the significance the reasonable investor would place on the withheld or misrepresented information. Id. at 240, 108 S.Ct. 978; see United States v. Bilzerian, 926 F.2d 1285, 1298 (2d Cir.1991). 63 Pursuant to Basic, we reject Defendants' argument for adoption of a bright-line rule requiring an immediate market reaction. The market is subject to distortions that prevent the ideal of a free and open public market from occurring. 485 U.S. at 246, 108 S.Ct. 978 (internal quotation marks and citation omitted). As recognized by the Supreme Court, these distortions may not be corrected immediately. See id. at 248 n. 28, 108 S.Ct. 978. Because of these distortions, adoption of a bright-line rule assuming that the stock price will instantly react would fail to address the realities of the market. Thus, we decline to adopt a bright-line rule, and, instead, engage in the fact-specific inquiry set forth in Basic. 12 Id. at 240, 108 S.Ct. 978. 64 Applying this fact-specific inquiry to the present case, Plaintiffs have sufficiently pleaded the materiality of America West's misrepresentations regarding its maintenance issues, the FAA investigation, and the FAA settlement agreement. See Warshaw v. Xoma Corp., 74 F.3d 955, 959-60 (9th Cir.1996) (finding that the company's optimistic statements, which failed to disclose concerns regarding the safety of a product and unlikelihood of agency of approval, were material). A reasonable investor would find significant the information regarding a company's deferred maintenance costs, unsafe maintenance practices, and possible sanction. In addition, a reasonable investor would consider the potential effects of each of these facts on the overall economic health of the company as significantly alter[ing] the `total mix' of information made available. TSC Indus., Inc., 426 U.S. at 449, 96 S.Ct. 2126. Moreover, although America West's disclosures of the settlement agreement had no immediate effect on the market price, its stock price dropped 31% on September 3, 1998 when the full economic effects of the settlement agreement and the ongoing maintenance problems were finally disclosed to the market. This reaction, even if slightly delayed, further supports a finding of materiality. This is particularly true because Plaintiffs offer a reason for the delay, i.e., America West continued to reassure analysts that the settlement agreement and compliance therewith would not have noticeable economic effects on the company. 13 65