Miller v. Thane International, Inc.
November 26, 2007
Cite as No. 05-56043

Ninth Circuit Reversed Judgment on Securities Class Action

On November 21, 2001, two corporations, Reliant Interactive Media, a publicly traded corporation and Thane International, a private corporation executed an agreement and plan of merger. The agreement was amended on December 6, 2001.

The agreement stipulated that a Thane International's wholly owned subsidiary would merge with and into Reliant. Upon merging, the subsidiary's corporate existence would cease and Reliant continues as the surviving corporation. Consequently, Reliant will become a wholly owned subsidiary of the Thane International.

During the pre-merger, it turned out that Thane International was not publicly traded. In the initial prospectus, listing of Thane International stock on the NASDAQ was part of the condition of the merger. This condition was admitted on the final prospectus.

However, the final prospectus contained numerous references to the shares being approved for the listing on the NASDAQ. It also contained statements touting the benefits of listing the stock on the NASDAQ.

The Final Prospectus represented that the Thane shares "have been approved for quotation and trading on the NASDAQ National Market" as long as the stock traded over-the-counter at $5 or more.

After the merger transaction closed, the stock traded about $8 per share. Management of the Thane International chose not to follow on the NASDAQ listing, for partial reasons of industry wide problems making its value quite doubtful. The stock's price plummeted and maintained.

Shareholders of Reliant brought up a Class Action Lawsuit against the Thane International, Inc. in the United States District Court for the Central District of California.

They alleged that the defendant, Thane International, Inc. violated section 12(a) (2) of the Securities Act of 1933, maintaining that the statements in the Final Prospectus had been material misrepresentations. According to this statute, there is "'virtually absolute liability'" for false statements, even innocent ones. Miller, slip op. at 15141 (quoting In re Suprema Specialties, Inc. Securities Litig., 438 F.3d 256, 269 (3d Cir. 2006)).

The defendants argued that the statements made in the Final Prospectus were not misleading since the stocks were approved for listing on the NASDAQ. Furthermore, they claimed that the prospectus did not state that Thane International promised to go ahead and list the stocks on the NASDAQ even if it was approved.

The district court, following a bench trial, judged in favor of the defendants and rejected the class plaintiffs' allegation. The judgment held that the defendants did not commit misrepresentation of the Thane's shares listing on the NASDAQ.

The class plaintiffs appealed the district court's judgment in the Ninth Circuit United States Court of Appeals reversed and remanded the judgment for further proceedings. It held that:

• Under the 28 U.S.C. § 1291 where the Ninth Circuit has jurisdiction, the district court "clearly erred" in its finding that Thane International did not commit misrepresentation that it would list the merged company’s shares on the NASDAQ. Since the fair and reasonable implication that an ordinary investor would get from the Final Prospectus is that the shares would be consequently listed in NASDAQ after approval.


• The Ninth Circuit also held that the misrepresentation or false promise to list the stocks on the NASDAQ was material under the Securities Act.