Ninth Circuit Rules Market Efficiency Not Required for Loss Causation Defense

August 12, 2010

In Miller v. Thane Int’l, Inc., No. 09-55474, 2010 WL 3081488 (9th Cir. Aug. 9, 2010),  the United States Court of Appeals for the Ninth Circuit clarified the affirmative defense of loss causation. Specifically, the Ninth Circuit held that a defendant can establish the absence of loss causation defense through stock price evidence even where there were material misrepresentations and the stock was not traded in a Cammer-efficient market.

Factual Background

In November 2001, Thane International Inc. agreed to merge with Reliant Interactive Media Corp. Reliant shareholders received one Thane share valued at $7.00 per share in exchange for each Reliant share. Thane filed a prospectus with the Securities and Exchange Commission in which it represented that its stock was approved for quotation and trading on the NASDAQ National Market System (NMS) upon completion of the merger. After the merger was consummated, however, Thane shares began trading on the NASDAQ Over-the-Counter Bulletin Board (OTCBB), not on the NMS.

For the first 19 days following the merger, Thane’s shares traded higher than the $7.00 per share merger price Reliant shareholders had paid. The stock price eventually declined to $6.00 and later fell below $5.00 after Thane reported disappointing earnings for the fiscal year. Thane shares never again rose to $7.00. 

Reliant investors who acquired shares of Thane in the merger filed a class action suit against Thane, for violations of Section 12(a)(2) of the Securities Act of 1933. The investors alleged that Thane’s prospectus representation that Thane shares would list on the NMS was materially misleading.

Procedural Background

After certifying the investors’ class and conducting a three-day bench trial, the United States District Court for the Central District of California held that Thane did not violate Section 12(a)(2) of the Securities Act. The district court found that Thane’s prospectus did not contain materially misleading representations. 

On appeal, the Ninth Circuit disagreed. Miller v. Thane Int’l, Inc., 519 F.3d 879, 892 (9th Cir. 2008). The Ninth Circuit remanded to the district court the issue of whether Thane could nevertheless prevail by establishing the affirmative defense of lack of loss causation. Id. at 892-93. 

On remand, the district court granted Thane’s Motion for Judgment on Loss Causation and found that the investors did not suffer a loss because Thane’s stock price remained above the merger price for 19 days after the merger. The investors appealed again, and the Ninth Circuit then affirmed.

Materially Misleading Representations Do Not Alone Establish Loss Causation

The investors first argued that the district court’s award of judgment to Thane on the lack of loss causation was foreclosed by the Ninth Circuit’s previous ruling that Thane’s prospectus contained materially misleading representations. Miller v. Thane Int’l, Inc., No. 09-55474, 2010 WL 3081488, at *3 (9th Cir. Aug. 9, 2010). The Ninth Circuit rejected this argument and explained that “[i]f a ruling on materiality foreclosed an affirmative defense of loss causation, that affirmative defense would be. . .‘a nullity.’” Id. The court further explained that the materiality inquiry concerns “whether a ‘reasonable investor’ would consider a particular misstatement important,” while the loss causation inquiry assesses “whether a particular misstatement actually resulted in loss.” Id.

The Cammer Test for Market Efficiency Does Not Extend to Loss Causation

The investors also challenged the district court’s reliance on Thane’s stock’s price. They argued that such reliance was inappropriate in the absence of market efficiency as defined in Cammer v. Bloom, 711 F. Supp. 1264, 1286-87 (D.N.J. 1989). Miller, 2010 WL 3081488, at *4. The Ninth Circuit acknowledged that “there is no dispute that the Cammer test. . .is not met in this case,” but held that “stock price evidence may be used in a loss causation assessment when the market for a stock is not Cammer-level efficient.” Id. The Ninth Circuit explained that “[t]he absence of Cammer efficiency does not mean that prices are unreliable.” Id. The court further explained that the loss causation inquiry does not require an “immediate response” by the market, but rather “only a full response to a misrepresentation — one that is enough to assess whether the misrepresentation caused the plaintiffs’ loss.” Id. The Ninth Circuit declined to apply the Cammer test to “assess[] loss causation” and rejected “a per se rule that it is inappropriate to rely on stock prices in an inefficient market to determine loss causation.” Id. at *5.

There Is No Loss Causation Where the Stock’s Pre-Drop Price Absorbs the True Information

Based on the evidentiary record, the Ninth Circuit upheld the district court’s finding that the “Thane stock price could impound the fact of listing on the OTCBB instead of the NMS in the 19-day period before the price dropped below the merger price the investors paid for the stock.” Id. at *6. The court rejected the investors’ argument that the stock’s low volume in the 19 days before its price dropped below the merger price undermined this conclusion. Id. “Low volume. . .does not necessarily indicate an unreliable market price. Rather, it could indicate that the market price is in equilibrium because neither buyers nor sellers believe they can profit by acting.” Id

The Ninth Circuit also rejected the investors arguments that (1) Thane’s August 2002 earnings report “disclosed additional information about the misleading representation and management’s integrity,” and (2) “focusing on the changes in price in the first 19 days is inappropriate because some of the truth regarding the misleading representation was not publicly available until the August 2002 earnings report.” Id. at *7. The court held to the contrary that Thane’s August 2002 earnings report “reiterated information that was obvious immediately after the merger, namely, that Thane was not going to be listed on the NMS because of market conditions.” Id.


The Ninth Circuit’s careful distinctions between loss causation on the one hand and materiality and market efficiency on the other make clear that the affirmative defense of loss causation is alive, well and still developing as a powerful argument for defendants accused of violating the securities laws.

For more information about the subject matter of this alert, please contact the lawyers listed below:

Dale E. Barnes, Co-chair, Securities Litigation, 415.393.2522

Jordan D. Hershman, Co-chair, Securities Litigation, 617.951.8455

This article was originally published by Bingham McCutchen LLP.