Court Opinion

ID: 3050558
Source: CourtListenerOpinion
Date Created: 2015-10-13 23:31:46.032062+00
Date Added: 2024-06-11T12:44:27.415572
License: Public Domain

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,
               Plaintiffs-Appellants,        No. 05-56043
                 v.
                                              D.C. No.
                                            CV-03-01031-JVS
THANE INTERNATIONAL, INC.;
WILLIAM F. HAY; DENISE                         OPINION
DUBARRY-HAY; KEVIN J. MCKEON;
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

  Before: Barry G. Silverman, Kim McLane Wardlaw, and
               Jay S. Bybee, Circuit Judges.

                 Opinion by Judge Wardlaw

                            15129
15132           MILLER v. THANE INTERNATIONAL

                          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, Cal-
ifornia, for the plaintiffs-appellants.

Daniel J. Tyukody and Michael C. Tu, Orrick, Herrington &
Sutcliffe LLP, Los Angeles, California, for the defendants-
appellees.

                          OPINION

WARDLAW, Circuit Judge:

   Class plaintiffs appeal the district court’s judgment, follow-
ing 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
                MILLER v. THANE INTERNATIONAL            15133
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 Sys-
tem (“NASDAQ”), and if so, whether those misrepresenta-
tions 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
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 Bul-
letin 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 Securi-
ties and Exchange Commission (“SEC”). The stockholder let-
15134           MILLER v. THANE INTERNATIONAL
ter 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.

   The Final Prospectus omitted the express listing condition
found in the Initial Prospectus. Although there are several ref-
erences to listing the merged company’s stock on the NAS-
DAQ sprinkled throughout the Final Prospectus, those
references contained literal representations that the merged
company’s shares had been approved for trading on the NAS-
DAQ, and not that the shares were actually listed on the NAS-
DAQ. 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:
               MILLER v. THANE INTERNATIONAL            15135
    The combined company is expected to meet the ini-
    tial listing requirements of the NASDAQ National
    Market, which would provide the Reliant stockhold-
    ers with greater liquidity than they have with Reliant
    common stock trading on the over-the-counter mar-
    ket.

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 compli-
    ance with the minimum bid price requirements of
    $5.00 per share.

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 invest-
ment 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 quo-
    tation and trading of its common stock on the Nas-
    daq 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 dis-
cussed Thane International’s covenant to secure the NAS-
DAQ listing:

    Thane shall use commercially reasonable efforts to
    cause its outstanding Thane Common Stock immedi-
15136               MILLER v. THANE INTERNATIONAL
     ately 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 issu-
     ance, 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 mate-
rial 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. How-
ever, 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 NAS-
DAQ immediately after the merger, but instead waited to list
once a secondary offering of shares was completed. Accord-
ing 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
   1
     Plaintiffs 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 cal-
culate 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.
                MILLER v. THANE INTERNATIONAL            15137
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 gen-
eral slump in the industry about this time. This was com-
pounded 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:

    In May and June of [2002], we met with our invest-
    ment bankers to discuss an underwritten public
    offering of our common stock. Our investment bank-
    ers advised us that we could potentially obtain more
    favorable pricing for the public offering if we imple-
    mented 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 condi-
    tions 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 “going-
private” transaction in which all Thane International share-
holders were bought out at $0.35 per share. The shares had
never been listed on the NASDAQ.
15138            MILLER v. THANE INTERNATIONAL
   Plaintiffs filed an action in the district court, alleging viola-
tions 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 Internation-
al’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.

   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 state-
ments in the Final Prospectus regarding NASDAQ listing
were not false or misleading. Id. at 1205-06. The court rea-
soned that the representations in the Final Prospectus were
“literally true,” in that they did not promise that Thane Inter-
national 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 represen-
tation with that determined to be false in Blasdel v. Mullenix,
356 F. Supp. 924, 925 (W.D. Okla. 1971), where the defen-
dant 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 condi-
                MILLER v. THANE INTERNATIONAL              15139
tion that the merger would be completed only if Thane Inter-
national 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 elim-
inated, 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 state-
ments were not material. Id. at 1208-09. After hearing from
both sides’ experts, the district court considered the move-
ment in Thane International’s share price in the aftermath of
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 immedi-
ately 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). Whether a mis-
representation is material is a “mixed question of law and
fact, involving as it does the application of a legal standard to
a particular set of facts.” TSC Indus., Inc. v. Northway, Inc.,
426 U.S. 438, 450 (1976). We review mixed questions of law
and fact de novo. Mathews v. Chevron Corp., 362 F.3d 1172,
1180 (9th Cir. 2004).
15140           MILLER v. THANE INTERNATIONAL
    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 transporta-
    tion or communication in interstate commerce or of
    the mails, by means of a prospectus or oral commu-
    nication, which includes an untrue statement of a
    material fact or omits to state a material fact neces-
    sary 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 com-
merce, (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 state-
ments 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 omis-
sions. 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
                MILLER v. THANE INTERNATIONAL              15141
    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 provi-
sion that does not require an allegation that defendants pos-
sessed 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 pro-
vide [securities] buyers with a right to rescind, without proof
of fraud . . . .” ). Moreover, the purchaser need not prove reli-
ance 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 quota-
tion” 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 list-
ing, 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 Pro-
spectus by their terms promise no more than that.
15142            MILLER v. THANE INTERNATIONAL
   [3] Yet, as the district court recognized, literal truth is not
the standard for determining whether statements in a prospec-
tus 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 McMa-
han, 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 repre-
sented 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 “pro-
vide[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 sup-
ply and demand, was thus touted as a contemporaneous bene-
fit 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 com-
pares 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 Internation-
al’s listing on the NASDAQ market a condition to the merger,
                   MILLER v. THANE INTERNATIONAL                     15143
but that this condition was dropped by the time the Final Pro-
spectus 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 con-
nect 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 compo-
nent of this condition over which it had any control: Thane
International had applied for and received approval for NAS-
DAQ 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 omit-
ted 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 will-
ingness 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.,
  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 defen-
dant from liability for misrepresentations in a given filing or statement.
See Apple Computer, 886 F.2d at 1114-15.
15144             MILLER v. THANE INTERNATIONAL
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 dili-
gence. All that is required is ignorance of the untruth or omis-
sion.”) (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 presenta-
tion” of the references to NASDAQ listing. Convergent Tech-
nologies, 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 presump-
tion 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 presump-
tion 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 (1984) (citation omitted). The district court’s
  3
   The 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.
                MILLER v. THANE INTERNATIONAL              15145
misrepresentation findings were based almost entirely on the
documentary record—evidence that is more amenable to eval-
uation by a reviewing court. Specifically, the relevant evi-
dence consisted primarily of the SEC filings themselves and
the witnesses’ written declarations. After examining the docu-
mentary 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 con-
tained false and misleading representations as to the NAS-
DAQ 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 dis-
trict 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 abil-
ity 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 mar-
ket to determine materiality. Therefore, its conclusion that
Thane International’s misrepresentations were immaterial is
error.

   [5] Thane International is liable under Section 12(a)(2) only
if the misrepresentations in the Final Prospectus were material
to the decision of voters to approve the merger. 15 U.S.C.
§ 77l(a)(2) (referring to a prospectus containing “an untrue
15146              MILLER v. THANE INTERNATIONAL
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 omit-
ted fact is material if there is a substantial likelihood that a
reasonable shareholder would consider it important in decid-
ing 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 misrepre-
sented 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 inves-
tor as having significantly altered the “total mix” of informa-
tion 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 inves-
tors attach to the market in which a company trades, conclud-
ing “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.

  On behalf of the plaintiff class, Candace Preston, founding
member of Financial Markets Analysis, LLC, emphasized the
  4
    Though 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).
  5
    Cornell cited relevant factors such as a company’s number of outstand-
ing shares, its public float, market capitalization, analyst coverage, media
coverage, number of institutional shareholders, and volatility.
                    MILLER v. THANE INTERNATIONAL                      15147
benefits that accompany NASDAQ listing as compared to list-
ing on the OTCBB. She declared that NASDAQ stocks gener-
ally 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 regis-
tration 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 mar-
gin, 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 testi-
fied 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
confers a degree of prestige on a stock because of that mar-
ket’s more rigorous listing standards.
  6
     Stocks 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.
   7
     The district court credited this testimony, but found that the statistical
evidence demonstrated that NASDAQ listing conferred only a small aver-
age 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 per-
cent of the companies switching from the NASDAQ to the OTCBB, but
that they actually rose for about 40 percent.
15148              MILLER v. THANE INTERNATIONAL
   [6] Whether a false promise to list shares on a national
exchange like the NASDAQ is material appears to be a ques-
tion of first impression in our or any of our sister circuits. At
least two district courts have suggested that such a misrepre-
sentation can be 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. Num-
ber Nine also represented that it was in compliance with all
relevant NASDAQ listing requirements and that it had no rea-
son to foresee that its shares might be delisted from the NAS-
DAQ. 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.

   The district court found that Number Nine misrepresented
  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.
                 MILLER v. THANE INTERNATIONAL             15149
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 agreed that based on the evi-
dence presented and without regard to the actual performance
of Thane International’s stock, the fact of NASDAQ listing
would be material, though only “marginally” so. We agree
that Thane International’s promise to list its shares on the
NASDAQ was material. Even accepting as true all of Cor-
nell’s testimony, there can be no dispute that NASDAQ list-
ing 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 patch-
work of Blue Sky laws adopted by the various states. Describ-
ing 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 securi-
    ties offerings in 52 separate jurisdictions; satisfy a
    multitude of separate books and records require-
    ments; 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
“Uniform” is “Uniform?”—An Evaluation and Critique of
the ULOE, 36 Emory L.J. 357, 359 (1987) (noting that com-
15150               MILLER v. THANE INTERNATIONAL
plying with both federal and Blue Sky requirements involves
“substantial” costs and logistical challenges).

   Exemption from Blue Sky registration is especially advan-
tageous 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 secur-
ities 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 issu-
ers”).

   [8] Investors also receive advantages because NASDAQ-
listed 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 attrac-
tive investment. The district court found the difference mini-
mal, noting that average spreads are only six cents higher on
the NASDAQ than on the OTCBB, and that some stocks actu-
ally saw their spreads increase after switching to the NAS-
DAQ. 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 NAS-
DAQ listing attracts investors that would not invest in a bulle-
tin board stock. We find particularly significant Preston’s
uncontested testimony that all but a “very limited number” of
institutional investors are prohibited, under their bylaws, from
investing in stocks traded on the OTCBB. According to the
  9
   Especially for stocks, like Thane International, that trade in a relatively
low price range.
                 MILLER v. THANE INTERNATIONAL                15151
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 expo-
sure to potential investors. Third, as Preston testified, NAS-
DAQ 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 con-
text 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 cir-
cumstances, the stamp of NASDAQ approval could very well
provide some reassurance to potential investors.

   [11] A reasonable Reliant shareholder would have wanted
to know where the new Thane International shares would be
trading and would have viewed the fact of Thane Internation-
al’s nonlisting “as having significantly altered the ‘total mix’
of information made available.” TSC Indus., 426 U.S. at 449.
We therefore hold that Thane International’s misrepresenta-
tions regarding NASDAQ listing were material.
  10
    See 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.
15152           MILLER v. THANE INTERNATIONAL
                     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 misrepre-
sentation, 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 neces-
sarily establish that there was no loss resulting from any mate-
rial 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 NAS-
DAQ 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 con-
sider an issue not passed upon below.’ ” Golden Gate Hotel
Ass’n v. City & County of San Francisco, 18 F.3d 1482, 1487
(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.