Authored by Jason Clouser.

The U.S. Court of Appeals for the Eleventh Circuit vacated a District Court’s entry of summary judgment on plaintiff shareholders’ claims against an internet commerce company, finding that the defendants could be held liable for knowingly reinforcing false information and thereby preventing already existing stock price inflation from dissipating.

Defendant Miva, Inc. is an online advertising company that provides “pay-per-click” services. Advertisers pay Miva based on the number of times internet users click on their advertising. A group of investors brought this action in 2005, claiming that the company committed fraud by not disclosing that a large part of its revenue was from companies that engaged in “click fraud.” Click fraud artificially inflates the number of clicks registered on advertisements through the use of spyware and other software, rather than by attracting potential consumers. The plaintiffs claimed that the stock price dropped and that they suffered losses after the company revealed that click fraud had been contributing to its revenue.

The District Court dismissed several of the plaintiffs’ claims for, among other things, failing to allege scienter adequately and granted summary judgment to the defendants on claims arising out of two alleged misrepresentations. Plaintiffs appealed and the Eleventh Circuit affirmed the dismissal of the claims for failing to plead a securities fraud claim adequately.

However, the Eleventh Circuit vacated the District Court’s order granting summary judgment with respect to claims arising out of two misrepresentations that helped to maintain the inflated stock price. The District Court had granted summary judgment based on the testimony of plaintiffs’ expert that the inflation of the stock price predated the statements at issue, reasoning that since the inflation already existed, the misrepresentations at issue could not have caused it. The Eleventh Circuit held that this was erroneous, pointing out that whether a misrepresentation caused the initial inflation of the stock price or merely helped maintain that inflation is analytically irrelevant. As a result, the Eleventh Circuit vacated the decision, noting that “fraudulent misstatements that prolong inflation can be just as harmful to subsequent investors as statements that create inflation in the first instance.”

Findwhat Investor Group v., No. 10-10107 (11th Cir. Sept. 30, 2011).