In Miller v. Thane Int’l, Inc., 2007 WL 4147327 (9th Cir. Nov. 26, 2007), the Ninth Circuit held that even “literally true” statements in a prospectus may be actionable under Section 12(a) of the Securities Act of 1933 and, for the first time in the Ninth Circuit, held that a representation by a company that it would be listed on NASDAQ is material to investors. This decision serves to remind counsel advising companies on their public disclosures to investors that they cannot rely entirely upon the literal truth of the disclosures to protect them from liability under the federal securities laws.

At issue in this case was the acquisition by Thane International, a privately held company, of Reliant Interactive Media Corporation, which was publicly held. The terms of the merger called for a stock-for-stock exchange whereby investors would receive 0.3049459 shares of Thane stock in exchange for each share of Reliant stock. In the Final Prospectus, Thane represented that “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” (emphasis added).

After the merger, Thane stock began trading on OTCBB and not NASDAQ. The stock began trading in May 2002 in the range of $8.50 per share, sinking below $5.00 per share about one month later (and never recovering). In February 2004, Thane completed a “going private” transaction, pursuant to which all Thane shareholders were bought out at just 35 cents per share. Shortly thereafter, a class of Thane investors brought claims under Sections 12(a)(2), alleging that Thane’s prospectus falsely represented that the stock received as part of the merger would be listed on NASDAQ.

The district court found that the challenged statement in the prospectus was not misleading because Thane was, as represented in the prospectus, qualified to be listed on NASDAQ. The district court also held, in the alternative, that the statement could not be deemed material because there was no stock price drop after Thane’s stock began trading on OTCBB.

The Ninth Circuit reversed. As an initial matter, the Ninth Circuit rejected the district court’s holding that, because the statement was true, it could not support liability under Section 12(a)(2). While the Ninth Circuit did concede that the statements were “literally true” because Thane had secured approval for NASDAQ listing more than two weeks before filing the Final Prospectus, it nonetheless held that this was insufficient to avoid liability:

[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.

Applying this standard, the Ninth Circuit held that the “fair and reasonable implication an ordinary investor” would reach from the Final Prospectus was that Thane would “actually list its shares on NASDAQ.”

The Ninth Circuit also disagreed with the district court regarding the materiality of the challenged statement in the prospectus. The Ninth Circuit held that “[t]he district court erred when it considered the movement in share price of a stock that did not trade on an efficient market to determine materiality.” Elaborating further, the court cited to testimony by the plaintiffs’ expert and concluded that “there can be no dispute that NASDAQ listing carries objective benefits that directly and positively affect corporate earnings, investor returns and a stock’s pool of potential shareholders.”

Miller serves as a reminder to companies and their counsel that even literally true statements in SEC filings and press releases carry some risk of federal securities liability. It is important for companies to resist the temptation to draft disclosures too finely, as those disclosures often will be judged both in hindsight and in context from the perspective of a reasonable stock market investor, not the perspective of a high-powered corporate attorney.