On November 27, 2007, JDS Uniphase announced (here) that following a month-long trial in the securities lawsuit pending against the company and four of its former executives, the jury returned a verdict in favor of all defendants on all claims. News reports discussing the verdict can be found here and here. Law.com has a detailed November 28, 2007 article discussing the verdict here. Background regarding the JDSU securities lawsuit can be found here and my prior post discussing the JDSU trial can be found here.
The JDSU trial was being closely watched because trials in securities cases are so rare. The Securities Litigation Watch blog documents here just how rare trials in securities lawsuits are, but also points out here that coincidentally a trial is currently underway in the Apollo Group securities lawsuit as well. (Alert reader Cathy Power reports that the Apollo Group trial currently underway in federal court in Phoenix before Judge Teilborg is scheduled to run through February 2008.)
The JDSU plaintiffs of course are now free to appeal the trial outcome, which, given their sunk costs and the $20 billion in claimed damages, seems like a certainty. As they lick their wounds and contemplate their appeal, the plaintiffs might well be heartened to consider a development in the Ninth Circuit that took place just a day before the JDSU jury verdict.
As rare as a securities trial is, an appellate decision following a securities trial is an even more unusual event. In a November 26, 2007 opinion (here), the Ninth Circuit reversed and remanded the defense verdict of Central District of California Judge James Selna following a three-day bench trial in a securities lawsuit.
The case arises out of the 2002 merger of Reliant Interactive Media Corporation and Thane International. Prior to the merger, Reliant’s stock was traded on the OTCBB, while Thane’s stock was not publicly traded. As part of the merger, Reliant’s shareholders were to receive Thane stock. The lawsuit essentially turns on what representations Thane made about where its shares would be traded after the merger.
The plaintiffs contend that Thane represented that its shares would be listed on NASDAQ. It appears that the initial draft of the Prospectus stated that Thane’s post-merger stock would be listed on NASDAQ or another national stock exchange. The final Prospectus omitted the specific listing requirement, but said only that Thane’s shares had been approved for trading on NASDAQ – which appears to have been true. Thane did not, however, list its shares on NASDAQ. Its investment bankers apparently advised the company to forestall the NASDAQ listing until the company could complete a planned post-merger secondary offering. Thane’s shares traded on the OTCBB after the merger was consummated in May 2002 and its shares initially traded in the range of $7 to $8.50 a share.
Thane neither listed its shares with NASDAQ nor completed a secondary offering. Instead, as the court noted, “Thane International shareholders experienced a wild ride.” Its share price sank to $2.00 on August 16, 2002 news of unfavorable financial results, and its share price thereafter continued to drop, Thane completed a February 2004 “going private” transaction at 35 cents a share.
The plaintiffs filed suit alleging violation of Section 12(a)(2) of the Securities Act of 1933 and also control person liability against several of Thane’s directors and officers under Section 15 of the Securities Act of 1933. The district court, following a three-day bench trial, held that the defendants had not violated Section 12 because the statements in the final Prospectus about Thane’s approval for a NASDAQ listing were “literally true.” The district court further held that even if there were misrepresentations, they were not material because the share price did not drop its initial 18 days of trading, even though the stock obviously was not listed on NASDAQ – suggesting that investors were not perturbed by the OTCBB trading.
The Ninth Circuit reversed the district court, holding that there were material misrepresentations. The Ninth Circuit’s holding is interesting because the Ninth Circuit in fact agreed with the district court that the statements in the Prospectus about the NASDAQ listing were “literally true.” However, the Ninth Circuit went on to note that “literal truth is not the standard for determining whether the statements in the Prospectus were misleading.” The Ninth Circuit found a number of statements in the Prospectus that give “the clear implication that Thane International shares would not trade on the OTCBB, but instead would list on the NASDAQ.” The “repeated references suggest nothing short of actual listing on NASDAQ.” Therefore, the Ninth Circuit was of a “firm and definite conviction” that the district court erred in finding otherwise.
The Ninth Circuit also found that the district court erred in concluding that any misrepresentations were immaterial. The Ninth Circuit examined the parties’ respective expert witnesses’ trial testimony at length and clearly was persuaded by the plaintiffs’ expert’s testimony that the NASDAQ provides significant investor advantages over the OTCBB, and so misrepresentations about where the post-merger Thane shares would trade were not only misleading but material. (NASDAQ officials will undoubtedly be quite heartened to learn how persuaded the Ninth Circuit was of the advantages that NASDAQ offers.)
Finally, the Ninth Circuit found that the district court had not reached the issue of loss causation, and therefore declined to review that issue. Instead, the Ninth Circuit remanded the case to the district court “to enter judgment in favor of the plaintiffs, to address loss causation, and to conduct further proceedings consistent with this opinion.”
The Ninth Circuit’s opinion is unusual for what it is in and of itself, an appeal from a securities lawsuit trial. But it also involves an unusual legal context (that is, it is a rare case involving Section 12 claims only) that turned upon very specific and narrow factual issues. The loss causation issue may ultimately prove to be significant. While I suppose former Reliant shareholders contend they would not have voted in favor of the transaction at all if they had known that the post-merger shares would have only traded on OTCBB, it is hard to see what the absence of a NASDAQ listing had to do with anything. The company’s stock cratered within a few weeks after the merger based on the company’s poor performance, which clearly would have happened even if the stock had been listed on NASDAQ.
But in any event, the Ninth Circuit’s opinion is a good reminder that even a trial verdict is not the final word, and appellate review can substantially affect or even determine the ultimate outcome of the case. Trial is after all just one more procedural stage, and even a party that loses a verdict can appeal and perhaps live to see another day – or even prevail. (Whether an appellate court is more or less willing to set aside a jury verdict than a judge’s verdict following a bench trial is a different topic, of course, but leave that one for another day…)
And so these are the thoughts that I imagine that the Connecticut Retirement Plans and Trust Funds -lead plaintiff in the JDSU Uniphase case – are telling themselves now as they ready their notice of appeal.
In my earlier post discussing the JDSU trial (here), I ruminated on the possible reasons why so few securities cases go to trial. After considering a few alternatives, I speculated that the real reason so few securities cases go to trial is that in the end, plaintiffs’ attorneys really have no interest in or incentive to try these cases. After this well publicized verdict in a prominent case like the JDSU trial, plaintiffs’ counsel will undoubtedly have even less interest in trying securities lawsuits. The availability of appeal alternatives might provide some consolation, but it would have to seem preferable to avoid juries altogether.
Law.com has a November 27, 2007 article discussing the Ninth Circuit’s opinion in the Thane International case here.