97 F.4th 1171
9th Cir.2024Background
- Genius Brands International, a small children’s entertainment company, saw its stock dip below NASDAQ’s $1.00 requirement in 2019, prompting efforts to boost prices.
- Plaintiffs (shareholders) alleged Genius committed securities fraud by making false statements or omissions about: a stock promoter (PennyStocks.com), its relationship with Arnold Schwarzenegger, how often its show aired, potential acquisition rumors by Disney/Netflix, and its rights to the Stan Lee Universe.
- The district court dismissed all claims under Rule 12(b)(6), finding shareholders failed to adequately allege falsity, loss causation, or scienter for most claims.
- Plaintiffs appealed, focusing on whether their allegations of misleading statements/omissions and loss causation sufficed to survive dismissal.
- The Ninth Circuit reviewed the dismissal de novo, applying heightened pleading standards for securities fraud.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Were statements regarding PennyStocks misleading? | Genius misled by denying it hired anyone to solicit securities. | Genius claims no misleading representation; no duty to disclose. | Statements were plausibly misleading; dismissal reversed. |
| Was loss causation adequately pled for certain statements? (Rainbow Rangers, Disney/Netflix, Stan Lee) | Loss causation shown by stock price reactions to corrective disclosures or market understanding of the truth. | Plaintiffs failed to allege initial price increases or adequate disclosures. | Loss causation was adequately pled for Rainbow Rangers, Disney/Netflix, and Stan Lee, but not for Schwarzenegger. |
| Did the Schwarzenegger statement cause loss? | Statement falsely inflated stock; loss followed disclosure. | No correction revealed; tweet and later disclosure unrelated. | No loss causation adequately pled for Schwarzenegger; dismissal affirmed. |
| Should Rule 10b-5(a)-(c) and §20(a) claims proceed? | Predicate 10b-5(b) claims sufficient to revive scheme/individual liability claims. | All claims fail if 10b-5(b) claims fail. | Remanded for district court to reconsider these claims on surviving issues. |
Key Cases Cited
- In re Facebook, Inc. Sec. Litig., 87 F.4th 934 (9th Cir. 2023) (discusses loss causation in securities fraud under 10b-5)
- Dura Pharms., Inc. v. Broudo, 544 U.S. 336 (2005) (establishes the loss causation requirement in securities fraud)
- In re Bofl Holding, Inc. Sec. Litig., 977 F.3d 781 (9th Cir. 2020) (articulates standards for pleading loss causation in securities fraud)
- In re VeriFone Sec. Litig., 11 F.3d 865 (9th Cir. 1993) (test for whether a statement is misleading to a reasonable investor)
- Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049 (9th Cir. 2008) (on what constitutes a corrective disclosure)