Opinion ID: 1228615
Heading Depth: 1
Heading Rank: 3

Heading: The Final Prospectus Contained Misleading Statements

Text: 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. § 77 l (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.
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: [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). 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, 115 S.Ct. 1061, 131 L.Ed.2d 1 (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, 115 S.Ct. 1061.
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 Final Prospectus. The disputed statements in the Final Prospectus by their terms promise no more than that. 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 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 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. 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. Bose Corp. v. Consumers Union of United States, Inc., 466 U.S. 485, 500, 104 S.Ct. 1949, 80 L.Ed.2d 502 (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, 121 S.Ct. 1452, 149 L.Ed.2d 430 (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.