People For the American Way Foundation

Biden Judge Reverses Lower Court and Permits Securities Fraud Case to Proceed

Judge Salvador Mendoza, Jr., nominated by President Biden to the Ninth Circuit Court of Appeals, wrote a unanimous decision partly reversing a lower court and allowing a securities fraud case to proceed against a children’s entertainment company. The April 2024 decision was in Alavi v Genius Brands International, Inc.


What is the background of this case

Genius Brands International, Inc. (“GBI”) is a children’s entertainment company that produces shows like Rainbow Rangers. In response to falling stock prices, GBI undertook a number of steps in 2019-20 to boost its share price. Shareholders later filed suit, contending that GBI had violated federal law by committing fraud.

In particular, the shareholders maintained, GBI had concealed its relationship with a stock promoter that wrote favorable articles about GBI, significantly exaggerated the number of times Nickelodeon Jr had aired its Rainbow Rangers show, “misrepresented that Disney or Netflix would acquire” it, and “overstated” its rights to the collected works of “famed comic book author Stan Lee.” All this and similar misrepresentations, the shareholders contended, falsely inflated GBIs stock value.

A California district court, however, dismissed the shareholders’ complaint without even permitting discovery. The court stated that the shareholders failed to “adequately allege” that GBI committed misrepresentations concerning its relationship with the stock promoter and that the other misrepresentations caused loss. The shareholders appealed to the Ninth Circuit.


How did Judge Mendoza and theNinth Circuit Rule and Why is it Important?

Judge Mendoza wrote a unanimous opinion that reversed key parts of the lower court ruling and sent the case back so it can proceed. Based on a careful review of the complaint and the relevant caselaw, Mendoza wrote that the shareholders did “adequately allege” misrepresentations concerning GBI’s relationship with the stock promoter because they contended that GBI “misled investors” by professing that it “had not compensated any entity” to help “solicit its securities,” while the complaint alleged that GBI had done exactly that. With respect to the Rainbow Rangers, Disney/Netflix, and Stan Lee claims, Judge Mendoza explained that the complaint did allege that the value of GBI stock was temporarily “higher than it would have been” had the misrepresentations not occurred, so that “loss causation” requirements were satisfied.

Judge Mendoza’s decision is obviously important to the shareholders of GBI and their ability to get just compensation for the misrepresentations that took place. It also sets an important precedent concerning what must be alleged in a securities fraud claim, particularly in the Ninth Circuit, which includes California, Alaska, Arizona, Washington, Oregon, Hawaii, Idaho, Montana, and Nevada. The decision also serves as an important reminder of the significance of promptly confirming fair-minded nominees like Mendoza  to our federal courts