FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
HOWARD MILLER, on behalf of
himself and all others similarly
situated,
Plaintiff,
and No. 09-55474
JOSEPH J. MILKOWSKI, D.C. No.
Plaintiff-Appellant, 8:03-cv-01031-JVS-
v. SGL
THANE INTERNATIONAL, INC.; OPINION
WILLIAM F. HAY; DENISE 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 6, 2010—Pasadena, California
Filed August 9, 2010
Before: Diarmuid F. O’Scannlain and Richard C. Tallman,
Circuit Judges, and Frederic Block, Senior District Judge.*
Opinion by Judge O’Scannlain
*The Honorable Frederic Block, Senior United States District Judge for
the Eastern District of New York, sitting by designation.
11265
11268 MILLER v. THANE INTERNATIONAL
COUNSEL
Joel C. Feffer, Harwood Feffer LLP, New York, New York,
argued the cause and filed the briefs for the plaintiffs-
appellants. Daniella Quitt, Harwood Feffer LLP, New York,
New York, and Lionel Z. Glancy, Glancy Binkow & Gold-
berg LLP, Los Angeles, California, were also on the briefs.
Daniel J. Tyukody, Orrick, Herrington & Sutcliffe LLP, Los
Angeles, California, argued the cause and filed the brief for
the defendants-appellees. Michael C. Tu and Jason L. Krajcer,
both of Orrick, Herrington & Sutcliffe LLP, Los Angeles,
California, were also on the brief.
OPINION
O’SCANNLAIN, Circuit Judge:
We must decide whether a material misrepresentation in a
prospectus caused actionable loss to shareholders when the
MILLER v. THANE INTERNATIONAL 11269
price of the company’s stock did not decline in the weeks
immediately following disclosure of the correct information.
I
A
Section 12(a)(2) of the Securities Act of 1933 imposes civil
liability on “any person who . . . offers or sells a security . . .
by the use of any means or instruments . . . in interstate com-
merce . . . 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 state-
ments . . . not misleading.” 15 U.S.C. § 77l(a)(2). Accord-
ingly, “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” by “any person.” Miller v. Thane Int’l, Inc., 519
F.3d 879, 885 (9th Cir. 2008), amending 508 F.3d 910 (9th
Cir. 2007). The Act defines “person” to include individuals
and corporations. 15 U.S.C. § 77b(a)(2). Additionally,
“[e]very person who, by or through stock ownership, agency,
or otherwise . . . controls any person liable under [Section
12(a)(2)] shall also be liable jointly and severally with and to
the same extent as such controlled person.” Id. § 77o.
Section 12 liability may be avoided by way of an affirma-
tive defense of lack of loss causation. The statute provides
that if a person “proves that any portion or all of the amount
recoverable under subsection (a)(2) of this section represents
other than the depreciation in value of the subject security
resulting from such part of the prospectus or oral communica-
tion . . . not being true or omitting to state a material fact . . .
then such portion or amount . . . shall not be recoverable.” 15
U.S.C. § 77l(b). Consequently, “[a] Section 12 defendant is
11270 MILLER v. THANE INTERNATIONAL
liable only for depreciation that results directly from the mis-
representation at issue.” Miller, 519 F.3d at 892.
B
With the relevant statutory framework in mind, we turn
now to the facts of this case. In November 2001, defendant
Thane International, Inc. (“Thane”), a company that markets
consumer products through homeshopping channels, infomer-
cials, and other similar means, and Reliant Interactive Media
Corp. (“Reliant”) agreed to merge. The merger agreement
provided for Reliant shareholders to receive shares of Thane
for their shares of Reliant. The “imputed merger price”—the
value of Reliant stock each Reliant shareholder exchanged for
each Thane share—was approximately $7.00. Significantly,
the prospectus Thane filed with the Securities and Exchange
Commission (“SEC”) stated that Thane stock, which had not
been publicly traded previously, was “approved for quotation
and trading on the NASDAQ National Market upon comple-
tion of the merger, subject to Thane’s compliance with the
minimum bid price requirements of $5.00 per share.” Never-
theless, after the merger was consummated on May 24, 2002,
Thane shares commenced trading not on the NASDAQ
National Market System (“NMS”), but on the NASDAQ
Over-the-Counter Bulletin Board (“OTCBB”).
In the nineteen days (twelve trading days) between May 24
and June 11, 2002, Thane’s shares traded between $8.50 and
$7.00, above the merger price that Reliant shareholders had
paid. On June 24, 2002, however, the stock closed at $6.00.
The next day Thane reported disappointing earnings for the
fiscal year, and the stock closed at $5.25. It soon thereafter
dropped below $5.00, never to rise again above that minimum
price for listing on the NMS.
On August 14, 2002, Thane announced further disappoint-
ing quarterly earnings, partly caused by a slump in the indus-
try. It also reported that it had originally delayed listing on the
MILLER v. THANE INTERNATIONAL 11271
NMS in order to time it with a secondary public offering, but
that recent business developments had put listing on the NMS
on hold. Thane shares tumbled to $1.95 by August 16, 2002.
In February 2004, Thane bought out existing shareholders at
a price of $0.35 per share.
C
In September 2002, a class of individual Reliant investors
who acquired shares of Thane in the merger (“investors”)
filed suit against Thane and four of its executives (collec-
tively, “Thane”) in federal district court, alleging violation of
section 12(a)(2) of the Securities Act of 1933, 15 U.S.C.
§ 77l(a)(2), and control person liability under section 15 of
the Securities Act of 1933, id. § 77o, and seeking rescission
of the merger, recovery of damages, and fees. Specifically,
the investors alleged that Thane’s pre-merger prospectus con-
tained materially misleading representations because it
implied that Thane shares would list on the NMS.
After certifying the investors’ class and conducting a three-
day bench trial, the district court held that Thane did not vio-
late section 12(a)(2). Miller v. Thane Int’l, Inc., 372 F. Supp.
2d 1198 (C.D. Cal. 2005). The court found that the prospectus
did not contain misleading representations, id. at 1205-06, and
that even if it did, any misleading representations were not
material because Thane’s stock price did not depreciate below
the merger price after the market became aware of the truth,
id. at 1208-11.
In a prior appeal, we reversed, ruling that the district court
clearly erred. Miller, 519 F.3d at 892 (“Miller I”). In our
view, the prospectus contained statements that, although liter-
ally true, constituted misleading representations regarding
where Thane stock would list. Id. at 885-88. Moreover, we
held that those representations were material because a rea-
sonable investor would have wanted to know that Thane stock
would be listed on the OTCBB instead of the NMS in light
11272 MILLER v. THANE INTERNATIONAL
of the advantages associated with the latter market. Id. at 888.
Even though there were materially misleading representa-
tions, however, we recognized that Thane could still prevail
by establishing the affirmative defense of lack of loss causa-
tion. See 15 U.S.C. § 77l(b). “Without expressing any opinion
as to the strength of [Thane’s] argument,” we “remand[ed] to
the district court to address the issue of loss causation in the
first instance,” and to conduct other proceedings as appropri-
ate. Miller I, 519 F.3d at 892-93.
On remand, the district court granted Thane’s Motion for
Judgment on Loss Causation. The district court observed that
there could be no loss as long as Thane’s stock price remained
at or above the price of $7.00 that the investors had paid for
the stock in the merger and that, consequently, there could be
no loss causation if the stock price did not drop below $7.00
after reacting to the nonlisting on the NMS. The stock
remained at or above that price for nineteen days. Accord-
ingly, the district court focused on whether the stock price
“impounded,” i.e., absorbed,1 the nonlisting on NMS in this
nineteen-day period. It held that Thane had carried its burden
to show that the stock did so. The investor class timely
appealed.
II
In this second appeal, the investors advance two arguments
that the district court erred as a matter of law in finding an
absence of loss causation.
1
The word “impound” is used in securities law as a synonym for “ab-
sorb.” E.g., In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 275 (2d Cir.
1993) (Winter, J., dissenting); Chester S. Spatt, Chief Econ. & Dir., Office
of Econ. Analysis, SEC, Keynote Address at the Wilton Park Conference
on Capital Flows and the Safety of Markets: Volatility, Price Discovery
and Markets (Nov. 10, 2006), available at http://www.sec.gov/news/
speech/2006/spch111006css.htm.
MILLER v. THANE INTERNATIONAL 11273
A
The investors first argue that the district court’s award of
judgment to Thane on loss causation is foreclosed by Miller
I. In their view, our holding in the investors’ favor on materi-
ality forecloses an award of judgment to Thane on loss causa-
tion.
[1] But loss causation and materiality are different con-
cepts in the statutory scheme. Indeed, the statute provides a
loss causation defense even when there are materially mis-
leading representations. 15 U.S.C. § 77l(b). If a ruling on
materiality foreclosed an affirmative defense of loss causa-
tion, that affirmative defense would be, as Thane correctly
recognizes, “a nullity.”
[2] Moreover, the materiality inquiry concerns whether a
“reasonable investor” would consider a particular misstate-
ment important. Miller I, 519 F.3d at 889 (discussing reason-
able investor test for materiality in a section 12(a)(2) claim);
see TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449
(1976). It is hypothetical and objective. Basic Inc. v. Levin-
son, 485 U.S. 224, 231-32 (1988). By contrast, the loss causa-
tion inquiry assesses whether a particular misstatement
actually resulted in loss. Miller I, 519 F.3d at 892. It is histori-
cal and context-dependent. See Lane v. Page, 649 F. Supp. 2d
1256, 1297 (D.N.M. 2009) (contrasting ex post causation and
ex ante materiality assessments). In any event, our remand to
determine loss causation “in the first instance” would not
have made sense if a particular ruling on loss causation were
foreclosed. Miller I, 519 F.3d at 892.
In re Gilead Sciences Securities Litigation, 536 F.3d 1049
(9th Cir. 2008), is fully consistent with this well-established
framework. In that case, we reversed the dismissal of a securi-
ties claim, rejecting the district court’s view that a temporal
gap between a misrepresentation and a drop in stock price
rendered loss causation per se implausible. Id. at 1058. Rely-
11274 MILLER v. THANE INTERNATIONAL
ing on an observation in a prior case on materiality, we
explained that markets are sometimes not immediately
responsive to misrepresentations. Id. (citing No. 84 Employer-
Teamster Joint Council Pension Trust Fund v. Am. West
Holding Corp., 320 F.3d 920 (9th Cir. 2003)). The investors
argue that such reliance establishes that our ruling in Miller
I on materiality forecloses the district court’s finding on loss
causation. But that two inquiries are related does not mean
that they are the same.
[3] The investors contend that, even if materiality and loss
causation are different concepts, the district court’s decision
repeats verbatim the same reasoning we rejected when we
ruled on materiality. But we did not reject the district court’s
reasoning that Thane stock prices were reliable even though
the market was inefficient, which is what we now review.
Rather, we rejected the district court’s reasoning that histori-
cal stock prices are relevant to the reasonable investor test,
which focuses on hypothetical, not actual, investors. We did
not comment on the reliability of Thane’s stock prices, other
than to state what is undisputed, namely, that the stock traded
in an inefficient market. Miller I, 519 F.3d at 888.
B
The investors next challenge the district court’s reliance on
Thane’s stock prices. They argue that such reliance was inap-
propriate in the absence of market efficiency as defined in
Cammer v. Bloom, 711 F. Supp. 1264, 1286-87 (D.N.J. 1989).
[4] Cammer outlined a test for market efficiency in the
context of a section 10(b) securities fraud class action. To pre-
vail under section 10(b), a plaintiff must show he justifiably
relied on the alleged misrepresentation. Binder v. Gillespie,
184 F.3d 1059, 1063 (9th Cir. 1999) (citing 15 U.S.C.
§ 78j(b) and 17 C.F.R. § 240.10b-5).2 In order to ease the bur-
2
Justifiable reliance is not an element of the cause of action at issue
here. 15 U.S.C. § 77l(a)(2).
MILLER v. THANE INTERNATIONAL 11275
den of showing reliance for each member in a plaintiff class,
which is necessary to obtain class certification, courts have
presumed reliance when there is “fraud on the market,” i.e.,
the whole market is deceived by a misrepresentation such that
“[m]isleading statements . . . defraud purchasers of stock even
if the purchasers do not directly rely on the misstatements.”
Basic, 485 U.S. at 241-42. A plaintiff establishes fraud on the
market by demonstrating that a security is actively traded in
an “efficient market,” in which prices immediately reflect all
publicly available information. Id. at 246-48. Cammer sets out
five well-recognized factors “designed to help make the cen-
tral determination of efficiency in a particular market.”
Binder, 184 F.3d at 1065. There is no dispute that the
Cammer test, which sets a high bar, is not met in this case.
We must decide, therefore, whether stock price evidence may
be used in a loss causation assessment when the market for a
stock is not Cammer-level efficient.
[5] We hold that it may. The absence of Cammer effi-
ciency does not mean that prices are unreliable. Cammer effi-
ciency, by definition, exists when the release of financial
information results in an “immediate response” by the market.
Cammer, 711 F. Supp. at 1287. But an immediate response is
not required for loss causation. Rather, the loss causation
inquiry requires only a full response to the misrepresentation
—one that is enough to assess whether the misrepresentation
caused the plaintiffs’ loss. Significantly, a full response may
occur in a market that is not Cammer efficient because
“[e]ven an ‘inefficient’ market price is objective and contem-
poraneous with events,” “chang[ing] in response to news,
including statements by the [principals].” Eckstein v. Balcor
Film Investors, 8 F.3d 1121, 1130 (7th Cir. 1993).
[6] Indeed, the Cammer test is not appropriate for assess-
ing loss causation. That test was developed in support of a
judicial presumption allowing plaintiffs to avoid a significant
obstacle in certifying a class in securities fraud litigation. Due
process concerns require that class certification meet rigorous
11276 MILLER v. THANE INTERNATIONAL
standards in securities cases. See Unger v. Amediys Inc., 401
F.3d 316, 320, 322 (5th Cir. 2005) (“Because this inquiry can
prove decisive for class certification, and because, given the
realities of litigation costs, certification can compel settle-
ments without trial, courts have frequently applied rigorous,
though preliminary, standards of proof to the market effi-
ciency determination.”). The Cammer test’s high bar is one
such rigorous standard. But the same high bar is inappropriate
to determine loss causation, where due process concerns
regarding class certification do not exist.
No court has applied Cammer to loss causation, nor even
to any area other than class certification, as the investors
admit. Quite the contrary, the Second Circuit abstained from
a Cammer-like inquiry in Akerman v. Oryx Communications,
Inc., 810 F.2d 336 (2d Cir. 1987). That court relied on stock
price evidence without assessing market efficiency in order to
affirm an award of summary judgment to defendants who had
raised the affirmative loss causation defense. Id. at 341-42. In
fact, the Akerman court relied on price evidence despite rec-
ognizing that the stock at issue traded in a “thin market,” i.e.,
an inefficient market. Id. at 343. Although Akerman predates
Cammer, it postdates Basic, which instituted the type of judi-
cial inquiry into market efficiency of which Cammer is but
one example.
[7] We are persuaded by Akerman and follow it. Accord-
ingly, we decline to extend Cammer to loss causation. In so
doing, we reject a per se rule that it is inappropriate to rely on
stock prices in an inefficient market to determine loss causa-
tion.
III
The investors also contend that the district court improperly
found that Thane’s stock price impounded the failure to list on
the NMS before it fell below the merger price.
MILLER v. THANE INTERNATIONAL 11277
A
The investors argue that our standard of review of the dis-
trict court’s finding should be de novo. We disagree.
The loss causation inquiry is not a question of law reviewed
de novo because it involves “the application of a legal stan-
dard to a particular set of facts.” TSC Indus., 426 U.S. at 450.
Indeed, loss causation determinations involve assessments
that are “peculiarly ones for the trier of fact” because they
require drawing “inferences . . . from a given set of facts.” Id.
at 450. We have held that such determinations—whether clas-
sified as questions of fact or as mixed questions of law and
fact—are reviewed for clear error. Arrington v. Merrill Lynch,
Pierce, Fenner & Smith, Inc., 651 F.2d 615, 619 (9th Cir.
1981) (holding that materiality, scienter, and reliance determi-
nations are reviewed for clear error). Accordingly, we do so
here. We will not reverse unless we have “a definite and firm
conviction that a mistake has been committed.” Exxon Co. v.
Sofec, Inc., 54 F.3d 570, 576 (9th Cir. 1995).
B
Turning to the merits, the question is whether the district
court clearly erred in holding that Thane established the
absence of loss causation. Because the stock price movements
are undisputed, we focus on whether the district court clearly
erred in finding that the Thane stock price could impound the
fact of listing on the OTCBB instead of the NMS in the
nineteen-day period before the price dropped below the
merger price the investors paid for the stock.
[8] The record contains substantial evidence supporting the
district court’s finding. Thane’s expert stated that Thane’s
stock price could and did impound information about Thane
during this nineteen-day period, including the listing on the
OTCBB, which was disseminated on Internet bulletin board
postings even though no analysts covered Thane. The district
11278 MILLER v. THANE INTERNATIONAL
court found this expert credible, and we are extremely defer-
ential to credibility determinations. Anderson v. City of Besse-
mer City, 470 U.S. 564, 575 (1980). The investors’ best
challenge to the expert’s credibility is that he testified in favor
of disregarding prices in an inefficient market in Furtherfield
Partners, L.P. v. Perelman, 2002 WL 32151542 (Del. Ch.
Oct. 1, 2002). But we see no reason to overturn the district
court’s credibility finding on that basis: Furtherfield involved
a “change of control” transaction and it is well-established
that there are “control premiums” not reflected in the price of
an individual share for blocks of shares that provide control
of a company. The investors also argue that the fact that the
stock traded on low volume, a mere 55,300 shares, in the
nineteen days before it dropped below the merger price under-
mines the expert’s conclusion. Low volume, however, 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. In
fact, the investors’ own account supports this version of
events: they stated that they decided to hold on to their shares
for investment reasons, not because low volume prevented
them from selling their shares.
In any event, even the investors’ expert admitted that
Thane’s stock price could absorb information. We recognized
as much in Miller I when we said that Thane’s stock price
slump in August “was compounded by the company’s failure
to find and market the ‘hit’ product it had hoped to find.” 519
F.3d at 883-84. Moreover, the stock price “tumbled” approxi-
mately forty-six percent in response to the August 2002 earn-
ings report, which paralleled the identical percentage drop in
earnings compared to the same quarter in the prior year, id.,
and the difference between listing on the OTCBB instead of
the NMS is simpler to decode than an earnings report, as even
one of the investors admitted.
The investors argue that this August 2002 earnings report
disclosed additional information about the misleading repre-
MILLER v. THANE INTERNATIONAL 11279
sentation and management’s integrity, namely that manage-
ment “intentionally” did not list on the NMS. Although the
investors do not spell out their position, they appear to argue
that focusing on the changes in price in the first nineteen days
is inappropriate because some of the truth regarding the mis-
leading representation was not publicly available until the
August 2002 earnings report.
The August 2002 earnings report, however, reiterated infor-
mation that was obvious immediately after the merger,
namely, that Thane was not going to be listed on the NMS
because of market conditions. Even the investors’ expert testi-
fied that the market was aware of Thane’s nonlisting at the
outset of the merger, long before the August 2002 earnings
report, and it was obvious that Thane could not list on the
NMS in August because its stock price was below the $5
minimum. Moreover, the August 2002 earnings report is not,
as investors argue, a “mea culpa” that undermined manage-
ment’s integrity for the first time. That integrity was under-
mined, if at all, by the failure to list on the NMS. The earnings
report did not provide evidence that such failure, involving a
decision not to list even though Thane’s stock was approved
to do so, was any more “intentional” than it had been in the
days immediately subsequent to the merger.
It is true that listing on the NMS is superior to listing on the
OTCBB, at least according to our decision in Miller I, 519
F.3d at 888-92, but that is irrelevant. The question at issue
here is whether listing on the OTCBB instead of the NMS
actually caused the investors’ losses. The investors ask us to
reason from hypothetical and expected consequences. But
predictions are not proof of what actually happened. The
investors’ own expert testified that listing on the OTCBB
instead of the NMS would not necessarily reduce Thane’s
stock price.
[9] In light of the evidence of impoundment before the dis-
trict court and despite the investors’ detailed arguments
11280 MILLER v. THANE INTERNATIONAL
regarding other evidence, we do not have “a definite and firm
conviction that a mistake [was] committed” when the district
court found that Thane’s stock price impounded information
about the nonlisting on the NMS before it fell below the
merger price that investors paid for it. Exxon Co., 54 F.3d at
576.
IV
For the foregoing reasons, the judgment of the district court
is
AFFIRMED.