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Ninth Circuit Reinstates Putative Class Action Against Children’s Entertainment Company, Holding Actionable Misstatements And Loss Causation Adequately Alleged
04/16/2024On April 5, 2024, the United States Court of Appeals for the Ninth Circuit affirmed in part and reversed in part the dismissal of a putative class action asserting claims under the Securities Exchange Act of 1934 against a company that licenses children’s entertainment content and certain of its officers. In re Genius Brands Int’l, Inc. Sec. Litig., —F.4th—, 2024 WL 1473942 (9th Cir. 2024). Plaintiffs alleged that the company made actionable misstatements after it was told that its shares would be delisted from the NASDAQ exchange. The Court held that plaintiffs adequately alleged that the company’s conduct rendered certain challenged statements misleading, that plaintiffs adequately alleged loss causation for certain claims, and that one claim was appropriately dismissed for failure to plead loss causation.
First, the Court reversed the district court’s conclusion with respect to one claim where the district court held plaintiffs failed to plead an actionable misrepresentation. The Court explained plaintiffs contended the company made a misleading statement when the company stated that it “ha[d] not … paid or agreed to pay to any Person any compensation for soliciting another to purchase any other securities of the Company,” because the company allegedly had, in fact, arranged for favorable articles to be published about the company. Id. at *5. The Court held this statement was adequately alleged to be false as either a misleading statement or actionable omission. Id. As to a misleading statement theory, the Court held that the purchase of securities is solicited when someone petitions, entices, lures or urges another to purchase a security, which the company did by having favorable media coverage disseminated about it. Id. As to an omission theory, the Court explained that, while the company did not have an affirmative duty to disclose it had arranged for favorable news coverage about itself, in stating that it had not “paid or agreed to pay to any Person any compensation for soliciting another to purchase any other securities of the Company,” the company was required to disclose its efforts to secure favorable coverage. Id. at *6.
Next, the Court turned to claims the district court dismissed for failure to plead loss causation, or which the company otherwise contended should be dismissed for failure to plead loss causation.
The Court observed that one claim was appropriately dismissed because plaintiffs failed to identify a corrective disclosure—“a moment where the truth about these statements was revealed.” Id. at *7. The Court explained that the challenged statement—in which the company indicated a celebrity would invest in it—was not revealed to be false by the company’s disclosure that the celebrity would be compensated in connection with some of the company’s entertainment offerings. Id. As the Court noted, investing in the company and developing content with the company were not “mutually exclusive” events. Id.
The Court then explained that plaintiffs had plausibly alleged loss causation in connection with a statement about how often one of the company’s programs was shown on a television channel devoted to children’s programming. Id. at *8. The Court held the district court had wrongly suggested plaintiffs needed to plead that the company’s stock price had initially increased on the basis of the alleged misstatement; instead, the Court held plaintiffs only needed to plead that the company’s stock had been inflated by the alleged misstatement, which only requires a plaintiff to plead that a stock price was higher than it would have been had the false statements not been made. Id. In other words, “initial price inflation and initial price increase are not one and the same; a price increase is one way of demonstrating that the price was higher than it would have been, but it is not the only way.” Id. (emphasis in original). Moreover, the Court emphasized that plaintiffs expressly alleged that the company’s statements about how often its programming was aired on a particular channel did increase the company’s stock by over 25%, and that the stock price then allegedly fell on reports from short sellers that the company’s statements were inaccurate. Id. at *9. And the Court held that the short seller reports were adequately alleged to be corrective disclosures because they synthesized public information into a form that was “readily digestible.” Id. at *9–10.
The Court similarly explained that plaintiffs adequately alleged loss causation in connection with the company’s post on social media—in a statement filled with dollar signs and attaching a news article that speculated the company was about to be acquired—because plaintiffs sufficiently alleged the company’s conduct had the effect of making the company’s stock price higher than it otherwise would have been had the company not done so. Id. at *10–11. The Court also held that plaintiffs adequately alleged the company’s subsequent issuance of a press release that merely announced the company would jointly own content generated by a comic book author amounted to a corrective disclosure, because the press release’s failure to discuss a potential acquisition allegedly signaled to the market that the company was not going to be purchased imminently. Id. at *11.
Finally, with respect to the company’s announcement that it would jointly own the comic book author’s content and use that to create entertainment, the Court concluded that plaintiffs adequately alleged loss causation because, while the company’s stock price was allegedly falling both before and after the challenged statement was made, plaintiffs plausibly alleged that the company’s stock price was higher than it would have been had the company not made this statement. Thus, it was plausible that the company’s stock price would have fallen even more, had the statement not been made. Id. at *12.
The Court directed that, on remand, the district court should assess whether plaintiffs otherwise adequately alleged that the challenged statements constituted actionable misrepresentations. Id.
