In re Alavi v. Genius Brands International, Inc., No. 22-55760 (9th Cir. 2024)
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The case involves shareholders of Genius Brands International, Inc., a children's entertainment company, who alleged that the company violated the Securities Exchange Act of 1934 by making fraudulent statements and omissions. The shareholders claimed that Genius concealed its relationship with a stock promoter, PennyStocks.com, misrepresented its relationship with Arnold Schwarzenegger, exaggerated the frequency of its show Rainbow Rangers on Nickelodeon Jr., falsely suggested that Disney or Netflix would acquire Genius, and overstated its rights to the works of comic book author Stan Lee.
The United States District Court for the Central District of California dismissed the shareholders' complaint, finding that they failed to adequately allege that Genius's representations were misleading or that they caused the shareholders' losses.
On appeal, the United States Court of Appeals for the Ninth Circuit affirmed in part and reversed in part the district court's decision. The appellate court held that the shareholders adequately alleged that Genius's representations regarding PennyStocks were misleading and that they caused the shareholders' losses with respect to the Rainbow Rangers, Disney/Netflix, and Stan Lee claims. However, the court affirmed the dismissal of the claim regarding Genius's relationship with Schwarzenegger, finding that the shareholders did not adequately allege loss causation. The case was remanded for further proceedings.
Court Description: Securities Fraud The panel affirmed in part and reversed in part the district court’s dismissal, for failure to state a claim, of shareholders’ securities-fraud complaint against Genius Brands International, Inc., and other defendants.
The shareholders alleged that, in violation of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 and implementing Rule 10b-5(a)-(c), Genius, a children’s entertainment company, fraudulently concealed its relationship with a stock promoter, PennyStocks.com; misstated its relationship with Arnold Schwarzenegger; exaggerated the number of times that Nickelodeon Jr. aired Genius’s show Rainbow Rangers in a week; misrepresented that Disney or Netflix would acquire Genius; and overstated its rights to the collected works of comic book author Stan Lee. * The Honorable Karen E. Schreier, United States District Judge for the District of South Dakota, sitting by designation.
Reversing in part, the panel held that the shareholders adequately pleaded that Genius’s representations regarding PennyStocks were misleading.
The panel also held that the shareholders adequately pleaded loss causation with respect to the Rainbow Rangers, Disney/Netflix, and Stan Lee claims in this fraud-on-the-market case.
Affirming in part, the panel held that the shareholders did not adequately plead loss causation with respect to the Schwarzenegger claim.
The panel remanded with instructions for the district court to determine whether the shareholders alleged facts sufficient to show the remaining elements of the PennyStocks, Rainbow Rangers, Disney/Netflix, and Stan Lee Rule 10b-5(b) claims and to consider anew whether the shareholders’ PennyStocks, Rainbow Rangers, Disney/Netflix, and Stan Lee allegations were sufficient to state a claim under Rule 10b-5(a), Rule 10b-5(c), or Section 20(a).
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