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In re Stac Electronics Securities Litigation
United States Court of Appeals for the Ninth Circuit
89 F.3d 1399 (1996)
Stac Electronics (Stac) (defendant) made data-compressing products. Stac experienced mixed sales results from year to year, sometimes reporting net losses and other times reporting increased revenues. Stac decided to go public through an initial public offering (IPO). During the lead-up to the IPO, Stac prepared a prospectus, which included several pages warning investors of risk factors, including the fact that Stac faced competition from other companies like Microsoft. The risk factors indicated that Stac’s competitors could produce similar data-compressing products, which would increase competition and could lower Stac’s revenues in the future. In addition, Stac completed public presentations concerning its IPO, issued press reports, and communicated to investment analysts. All of these efforts portrayed Stac as a good investment. Although Stac’s stock prices initially rose after the IPO, they began dropping a short time later after another software company announced its own poor financial results. Stac’s stock ultimately declined to prices well below the IPO price. Timothy Anderson (plaintiff) sued Stac on behalf of a class of plaintiffs who had purchased shares of Stac’s stock in connection with the IPO. The suit claimed that Stac was aware, but did not adequately disclose, that its competitor Microsoft was planning to introduce an improved data-compressing product that would compete with Stac. Anderson alleged that Stac’s nondisclosure represented a material misrepresentation in violation of Securities and Exchange Commission (SEC) Rule 10b-5. The lower court dismissed the suit, finding that Stac had adequately warned potential investors of the risks of investment. Anderson appealed.
Rule of Law
Holding and Reasoning (Nelson, J.)
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