Miller v. NTN Communications Inc

United States District Court, S.D. California.

MILLER, et al.
v.
NTN COMMUNICATIONS, INC., et al.
No. 97-CV-1116 TW JAH.
May 21, 1999.

Opinion

WHELAN, J.

Exchange Act-Antifraud-Misleading Statements.-A multi-media company's failure to fully disclose details of a severance package and executive loan repayment plan may be deemed a misrepresentation. Failure to clearly explain a put option granted to a creditor may also be deemed a misrepresentation. See § 22,776, "Exchange Act-Manipulations; National Market System" division, Volume 3. Exchange Act-Antifraud-Scienter.-Allegations that corporate officers failed to fully disclose details of severance compensation and an executive loan repayment plan in SEC filings may be evidence of intentional or deliberate recklessness.See §  22,775, "Exchange Act-Manipulations; National Market System" division, Volume 3. Exchange Act-Antifraud-Materiality.-A multi-media company's failure to properly disclose details of severance compensation, an executive loan repayment plan, and put option granted to a creditor may be sufficient actions to satisfy requirements for materiality. See §  22,774, "Exchange Act-Manipulations; National Market System" division, Volume 3. Exchange Act-Antifraud-Causation.-A multi-media company's failure to timely disclose the nature of financial agreements to its auditors may result in establishing causation when the eventual disclosure dramatically affected the company's financial stability. See §  22,773, "Exchange Act-Manipulations; National Market System" division, Volume 3. Exchange Act-Reliance-Fraud on the Market.-A multi-media company's assertion that the American Stock Exchange is an inefficient market for purposes of the fraud on the market theory failed as a defense. The small number of analysts following the company's stock did not indicate that the stock was inactively traded or unresponsive to new information. See §  22,773, "Exchange Act-Manipulations; National Market System" division,) Volume 3.

Defendants NTN Communications, Inc. ("NTN"), Patrick J. Downs, Daniel C. Downs, Donald C. Klosterman, Ronald E. Hogan and Gerald P. Mclaughlin (the "individual defendants") collectively move for summary judgment, or in the alternative, partial summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. Plaintiffs oppose. All parties are represented by counsel. The court decides the matter on the papers submitted and without oral argument pursuant to Local Rule 7.1(d)(1).

I. Factual Background

Formed in the early 1980's, defendant NTN is a public company that trades on the American Stock Exchange ("AMEX") and specializes in developing multiplayer interactive entertainment and education products including an interactive game that viewers of live sports on television could play while watching a game. Plaintiffs' claims for securities fraud center around several contingent liabilities that plaintiffs allege were knowingly and intentionally concealed from the public in order to artificially inflate NTN's stock price. The individual defendants include Pat Downs and Dan Downs who were NTN executives and board members. Donald Klosterman, who also served on the NTN board. Mr. Ronald Hogan who served as NTN's chief financial officer and Mr. Gerald McLaughlin who served as NTN's executive vice president of systems.

A. The evergreen clauses

First, plaintiffs allege that NTN concealed certain details of various personal loans and compensation agreements that provided generous, but undisclosed, benefits to NTN's executive management. On January 11, 1990 NTN allegedly entered into 5 year 'fixed-term employment contracts' with the individual defendants. However, on June 19, 1992 the Board amended the employment contracts to include never-ending 'evergreen' employment terms for each executive. In other words, the new employment contracts never expired; from any point in time when the employment would terminate, a full 5 years' salary severance payment was required. Plaintiffs contend that the individual defendants wrongfully concealed the existence of these 5 year evergreen provisions from NTN attorneys and auditors preparing SEC filings during the class period. In fact, the actual disclosure of these evergreen clauses contained in each of NTN's Proxy Statements and Form 10K's filed with the SEC from 1993-1996 only reported 3 year terms for the evergreen clauses. Plaintiffs allege that without accurate knowledge of the length and preconditions of these contingent liabilities, the public was wrongfully misled regarding the true value of NTN shares.

B. The tax loans and 'notes' thereon

Second, plaintiffs allege that failure to fully disclose the truth regarding tax loans and corresponding 'notes' signed by the individual defendants in favor of NTN violated the securities laws. The notes in question originated in 1991. At that time NTN conducted a private placement of shares which required NTN executives to convert their debt in NTN into equity at $3.70 per share. Because the officers had a tax basis of zero in the shares received, they faced substantial and immediate income tax liability insofar that some of the debt they were converting to stock consisted of deferred compensation. Consequently, the officers agreed to defer receipt of the newly issued shares for at least two years. However, by June 1993 the value of NTN shares had already risen to $10 per share-increasing what would have once been a relatively small tax liability into an even larger one. In order to allegedly shift the significant tax burden that would have been generated by the sale of shares at $10 per share (approximately $6.8 million), it was agreed that NTN would 'temporarily' pay the officers' individual taxes with corporate funds in return for the officers' signing demand notes in favor of NTN that were to be allegedly repaid at a later date (the "tax loans"). By so doing, the officers could retain their share ownership in the company and not send the wrong message to the financial community by selling all of their shares on the open market. In April 1996 the tax loans were converted to a 3 year fixed term, with the first payment to NTN due from the officers in April 1997. It was further agreed that if any officer was 'terminated' the obligations due under the notes would be excused.

Plaintiffs do not challenge the propriety of the tax loans and notes, but rather, how the notes were recorded on NTN's balance sheet and public disclosure statements. During the class period, defendants contend the notes and their terms of repayment were fully disclosed in NTN's Proxy Statements filed with the SEC in 1994-1996, which were "incorporated by reference" into NTN's annual report filed with the SEC (known as Form 10K), for its fiscal years ended December 31, 1993-1995. Specifically, NTN's financial statements in part recorded assets of approximately $4 million, which allegedly included the value of the 'notes' payable to NTN. Plaintiffs allege, however, that listing the notes as assets, rather than liabilities, was an unlawful misrepresentation because undisclosed in NTN's disclosures and financial statements to the SEC was NTN's alleged plan that it had always been the intention of NTN and the individual defendants that the notes would be repaid out of the NTN funded bonus pool. That is, plaintiffs allege the notes were never intended to be repaid by the individual defendants with their own personal funds, but rather, by corporate funds generated from NTN's 'bonus pool'-which by extension would come directly from NTN's corporate earnings. As such, plaintiffs contend these notes were not truly corporate assets, but liabilities, and the public was therefore misled by defendants' omission to accurately report the diminished value of the company's holdings to the SEC and to the public at large.

Two months before the first payments were due under the 'notes,' the senior executive officers decided to resign. An independent subcommittee of the NTN Board was appointed to address severance issues for the executives' proposed resignations. The subcommittee ultimately recommended and the Board adopted an arrangement whereby the defendant officers would resign and not be 'terminated', but the sums due under the notes would still be forgiven because the notes would have only been paid out of the NTN bonus pool [FN1] anyway. Plaintiffs contend that the net result of this resignation arrangement is that the notes had always been contingent on NTN earning actual profits-thus the notes had no ascertainable value-and it violated securities laws to publicly record the notes as assets in NTN's public disclosure documents.

FN1. The term 'bonus pool' was Identified in NTN's Proxy Statements as applying to net profits over pre-set earnings thresholds.

C. The Symphony "Put"

In 1994 NTN created a partially owned subsidiary, IWN L.P., to develop and market an Internet horse wagering software platform. NTN allegedly entered into an agreement with venture capital firm Symphony L.L.P. ("the "Symphony Put") by which Symphony would invest approximately $3.5 million into IWN over a time period from March 1995 to April 1997. As part of Symphony's investment, however, Symphony insisted that it have the right to "put" or sell its entire interest in IWN back to NTN at Symphony's option. The "put" could be exercised as soon as April 1, 1997 and if exercised would require NTN to pay approximately $3.8 million in cash to Symphony within 60 days from the date of exercise. Plaintiffs allege that Symphony exercised the put option, and NTN thereby accrued liability to Symphony which was understated in its audit statement.

Based on these collective allegations, plaintiffs contend that defendants failed to truthfully report the state of NTN's financial affairs such that NTN's stock was artificially inflated until it plummeted upon the revelation of financial difficulties on April 16, 1997. On April 15, 1997 NTN shares had closed at $4 5/16. The next morning. NTN for the first time disclosed that its auditors, KPMG, had issued on April 10, 1997 a "going concern" qualification to NTN's year-end 1996 financial statement due to continuing losses and lack of liquidity. Thus, KPMG had opined that there was doubt about the company's ability to continue "as a going concern." Trading volume on April 16, 1997 swelled to 2,835,900 shares from the average daily volume of 148,026 shares during the class period. The price of NTN stock tumbled 42% from 4 5/16 to $2 1/2, a decline of 42%. This lawsuit followed.

D. The securities lawsuit is filed

On June 11, 1997 plaintiffs filed this class-action complaint alleging securities fraud on the part of NTN, certain members of its Board of Directors and executive staff [FN2] and NTN's accountants KPMG Pete Marwick ("KPMG"). By order dated November 4, 1997 the court dismissed KPMG as a defendant in this action. The court also dismissed all state law claims arising under the common law and California Corporations Code of California. On March 3, 1998 the court approved the parties' Stipulation and Order re Class Certification and granted the Motion to Certify Class. [FN3]

FN2. The individual defendants include Patrick J. Downs, Daniel C. Downs, Donaid C. Klosterman, Ronaid E. Hogan and Gerald P. McLaughlin.

FN3. The court therefore conditionally certified the class which was defined as follows: all persons who purchased common stock of NTN Communications. Inc. from and after June 11, 1994, though April 16, 1997, inclusive, (the "Class Period"), and who continued to hold such securities on April 16, 1997, and who have been damaged excluding the named defendants herein.

Only two claims remain against the individual defendants and NTN. Plaintiffs allege violations of Section 10(b) and Rule 10b-5 promulgated thereunder and violations of Section 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § §  78j(b) and 78t(a) respectively. Plaintiffs allege that defendants made misrepresentations and/or omissions regarding three categories of disclosures in NTN's Form 10-K's and Proxy Statements and in financial statements attached thereto filed with the Securities & Exchange Commission ("SEC") from June 11, 1994 to April 16, 1997 ("the class period"). The three categories include: (1) the June 19, 1992 addendums to the employment agreements for the individual defendants containing evergreen provisions; (2) the agreement modifying outstanding executive 'notes' and tax loans NTN extended to the individual defendants on April 10, 1996; and (3) the Symphony 'put option' which obligated NTN to repurchase an investment exceeding $3 million previously made by a venture capital firm Symphony Management Associates, Inc. in a wholly owned NTN subsidiary devoted to developing Internet horse wagering software.

Defendants now move for summary judgment on the grounds that (1) all matters that plaintiffs' claim were not disclosed were, in fact, disclosed; (2) defendants did not act with scienter; (3) the alleged misrepresentations and omissions are immaterial; (4) there is no loss causation flowing from the alleged misrepresentations and omissions to plaintiffs' alleged damages; (5) plaintiffs cannot establish any recoverable damages; and (6) plaintiffs cannot establish reliance on any of the alleged misrepresentations or omissions.

II. Legal Standard

Summary judgment is appropriate when there is no genuine issue as to any material fact, and the moving party is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56(c); Celotex Corp. v.. Catrett, 477 U.S. 317, 325-326, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Whether a fact is material depends on the substantive law. See Anderson v. Liberty Lobby, Inc. ., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A dispute about a material fact is "genuine" if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id.

A party seeking summary judgment always bears the initial burden of identifying evidence which it believes demonstrates the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323. The moving party can satisfy this burden by either (1) negating an essential element of the non- moving party's case or (2) by demonstrating that the nonmoving party "fail[ed] to make a showing sufficient to establish an element essential to that party's case ... on which that party will bear the burden of proof at trial." Id. at 322. Once this burden is met, the party opposing the motion must respond with "specific facts showing that there is a genuine issue for trial." Id. at 324. "The mere existence of a scintilla of evidence in support of the nonmoving party's position is not sufficient." Triton Energy Corp. v. Square D Co., 68 F.3d 1216, 1221 (9th Cir.1995).

When making this determination, all inferences drawn from the underlying facts must be viewed in the light most favorable to the party opposing the motion. See Matshita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). "Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge, [when] he [or she] is ruling on a motion for summary judgment." Anderson, 477 U.S. at 255. Summary judgment motions in securities fraud lawsuits may be defeated "only by showing a genuine issue of fact with regard to a particular statement by the company or its insiders." In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1412 (9th Cir.1994).

III. Discussion

In order to prevail on a claim under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §  78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. §  240.10b-5, plaintiffs must prove that there has been (1) a misstatement or omission (2) of material fact, (3) made with scienter, (4) on which plaintiff relied, which (5) proximately caused his or her injury. McCormick Fund v. American Companies, Inc., 26 F.3d 869, 875 (9th Cir.1994). In turn, Section 20(a) imposes secondary liability for violations of the Exchange Act on persons who, directly or indirectly, control any person liable under the Exchange Act. 15 U.S.C. §  78t(a). Unless the alleged controlled person is liable, the control person can have no liability under Section 20(a). Defendants contest all of these elements on both claims arguing that plaintiffs have failed to carry their burden on summary judgment to show that genuine issues of material fact remain for the trier of fact.

1. False or misleading statements and/or omissions

The cornerstone of any Rule 10b-5 claim is the existence of a false or misleading statement or omission. To satisfy this requirement, "the statement or omission must be shown to have been false or misleading when made." In re Stac Electronics Sec. Litig. ., 89 F.3d 1399, 1404 (9th Cir.1996) (emphasis in original).

a. The evergreen provisions

Plaintiffs contend that public statements that the individual defendants' evergreen employment agreements "expire on December 31, 1997" and that if terminated NTN was obligated to pay the defendants "an amount equal to three years' base level compensation" contained in NTN's 1995 and 1996 Proxy Statements, and incorporated into NTN's 1994 and 1995 Form 10-K's, were false when made. Plaintiffs contend this is evidenced by the June 19, 1992 addendums to the defendants' employment agreements which actually contained a five year 'evergreen' provision continually guaranteeing the defendants five years' base salary severance compensation upon termination or upon resignation. Plaintiffs insist the publicly reported severance information was materially different than the terms of the actual severance agreements insofar that NTN was truly obligated to pay five years' severance upon termination or resignation. The court agrees.
A reasonable trier of fact could certainly find that NTN's prior disclosures regarding the evergreen provisions were false or misleading when made. See e.g. Decl. of Patrick Downs, Ex. B ("the Company shall employ the Executive and the Executive shall serve the Company, as a President-Director, for an indefinite term of at least five [interlineated from 3] years commencing as of May 1, 1992 ... either party may terminate this Agreement without cause at any time on five [interlineated from 3] five years' written notice of termination." ) The publicly disclosed addendums make no mention of payments for five years or payments required merely upon an executive's resignation (as opposed to his or her termination).

Indeed, when the individual defendants decided to 'resign' in February 1997, an NTN subcommittee was formed to evaluate the defendants' severance contracts including the never-ending evergreen provisions. Predictably, the defendants contended that the evergreen provisions were for a term of 5 years such that each defendant was entitled to a lump sum payment of 5 years' salary upon termination. William Gould Depo. at 90-91, P's Ex. 67. The NTN sub-committee apparently agreed that the evergreen provisions were binding. P's Exs. 23-24; Klosterman Depo. at 109-112, P's Ex. 59; Patrick Downs Depo. at 39, 48, P's Ex. 57.

However, Galvin Miller, esq., outside counsel for the sub-committee, later determined that prior SEC filings reported the length of the evergreen contracts at 3 years, as opposed to 5 years such that the defendants' severance payment should be limited to 3 years. Id.; P's Ex. 24 at 2; Gould Depo. at 90-91. Indeed the corporate minutes of NTN's Board meeting on February 24, 1997 state "[a]lthough the proxy statements and other public documents filed with the SEC indicate three year terms, the actual [evergreen employment] documents appear to call for five years." P's Ex. 24 at 2; Klosterman Depo. at 109-112, P's Ex. 59; Patrick Downs Depo. at 39, 48, P's Ex. 57. A reasonable trier of fact could rely on this evidence to find that defendants' prior disclosures regarding the evergreen provisions were false and misleading when made.

b. The tax loans and 'notes' thereon

The same holds true for the tax loans and purported 'notes' signed by the individual defendants in favor of NTN in consideration of those loans. The terms of this arrangement were contained in NTN's 1995 and 1996 Proxy Statements and incorporated by reference in NTN's Form 10-K's for the fiscal years ended December 31, 1994 and 1995. Plaintiffs contend these disclosures unlawfully failed to disclose that "it has always been the intention that these Notes [representing the approximate $4 million of indebtedness owed by the individual defendants back to NTN] would be repaid out of the [NTN funded] bonus pool." P's Ex. 24 at 2; Klosterman Depo. at 109-112, P's Ex. 59; Patrick Downs Depo. at 39-48, P's Ex. 57. The court agrees. A reasonably jury could find that NTN's disclosures regarding the tax loans and notes were false and misleading when made. Although the notes were listed as assets in NTN's disclosure statements, plaintiffs have presented credible evidence suggesting that because the notes had always been intended to be repaid with NTN funds-they were not assets, but rather, contingent liabilities. Because defendants insist NTN's filings and disclosures are free from material omissions during the class period, genuine issues of material fact remain, and summary judgment is not warranted at this time.

c. The Symphony Put

Finally, genuine issues of material fact remain as to whether all aspects of the Symphony Put were adequately disclosed to the public during the class period. Defendants themselves admit that it is uncertain whether the Investment Agreement containing all of the details of the Symphony Put was adequately disclosed to NTN's auditors prior to the issuance of public SEC disclosures during the class period. NTN's Responses to Plaintiff's First Set of Interrogatories, June 26, 1998 at No. 8, P's Ex. 53; NTN's Responses to Plaintiff's First Set of Requests for Admissions, June 26, 1998 at No. 7, P's Ex. 54. Defendants certainly cannot deny that the Symphony Put existed insofar that it was later exercised by venture capital firm Symphony L.L.P. Genuine issues of material fact remain, however, as to whether full and honest disclosure of the Symphony Put was made to the public during the class period. [FN4]

FN4. The court rejects defendants' reliance on the truth-on-the market defense. Defendants have failed to carry their extremely high burden to invoke the defense and genuine issues of material fact remain, among other things, with respect to the circumstances, timing and manner of disclosure of the precise terms of the evergreen addendums, the tax loans/notes and the Symphony Put.

2. Scienter

"To establish section 10(b) liability, the plaintiffs must show that defendants acted with scienter, 'a mental state embracing intent to deceive, manipulate or defraud." ' In re World of Wonder Securities Litig., 35 F.3d 1407, 1424 (9th Cir.1994), quoting, Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n. 12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). Scienter can be established by deliberate or knowing conduct. Id. It can also be established by recklessness. Recklessness in private securities fraud actions is not carelessness or even gross negligence; "it instead embraces a conscious state of mind that is inherently deceptive." In re Basea Sec. Litig., 969 F.Supp. 238, 241 (S.D.N.Y.1997). It is conduct presenting such an "extreme departure from the standards of ordinary care ... that it was either known to the defendant or so obvious that [he or she] must have been aware of it." Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569 (9th Cir.1990) (en banc) (quoting Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir.1977)); see also In re Software Toolworks, Inc., 50 F.3d 615, 626 (9th Cir.1994) (scienter is shown by conduct which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it).

Here, plaintiffs have put forth substantial evidence of defendants' knowing, intentional or deliberate recklessness regarding the evergreen addendums, the tax loans/notes and the Symphony Put. [FN5] Defendants certainly had notice of the evergreen addendums and the tax notes insofar that they signed the very contracts giving rise to their generous evergreen rights and tax loans at NTN's expense. P's Exs. 6-17; Individual Defendants' Personal Decls. A reasonable trier of fact could find that defendants acted with at least deliberate recklessness by failing to fully disclose the accurate terms of the evergreen addendums and the intended source of repayment (NTN's 'bonus pool') for the tax loan/notes signed by the defendants.

FN5. In addition, plaintiffs' motion to withdraw and amend plaintiffs' statement of undisputed material fact ("UMF") No. 156 is granted. Plaintiff presented sufficient and credible evidence showing that plaintiffs' original admittance of UMF No. 156 was based on nothing other than clerical error.

Moreover, while the existence of the Symphony Put is undisputed NTN expressly admits that at one point, its own internal controller "realized that the contingent liability created by the Symphony Put was not [accurately] described in NTN's financial statements." D's Motion at 15:1-2. Although subsequent efforts were made to disclose the truth behind the Symphony Put to the public, it does not alter that fact that genuine issues remain as to whether defendants acted with at least deliberate recklessness in failing to properly disclose the terms of the Symphony Put immediately after the deal was closed with Symphony L.L.P. during the class period. Accordingly, defendants' request for summary judgment on the element of scienter is denied.

3. Materiality

Like scienter, materiality is another fact-specific element of a Rule 10b-5 claim which should normally be left for the trier of fact. See Basic v. Levinson, 485 U.S. 224, 232-234, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988); Fecht v. Price Company, 70 F.3d 1078, 1080 (9th Cir.1995). A false statement or omission will be considered 'material' under Section 10(b) if its disclosure would alter the 'total mix' of facts available to an investor and if there is a substantial likelihood that a reasonable shareholder would consider it important to his or her investment decision. Basic, 485 U.S. at 232-234. However, when no rational trier of fact can find that an alleged misrepresentation or omission was material, "summary judgment may nevertheless be justified 'in appropriate cases." ' McCormick v. Fund American Companies, Inc., 26 F.3d 869, 875 (9th Cir.1994).

Here, the court simply cannot say as a matter of law that the alleged misrepresentations and/or omissions were not 'material.' Logic dictates that a reasonable jury could find that a reasonable investor, had he or she been made aware of the whole truth behind (1) the evergreen addendums, (2) the tax loans and notes and (3) the Symphony Put, the investor would have attached material importance to the information in determining his or her choice of action to buy or sell NTN shares.

First, it is material that the public was told that the evergreen agreements were only contracts requiring three years' severance payments upon termination when in fact plaintiffs' evidence suggests the evergreen addendums created five year noncontingent liabilities payable upon termination or resignation. Second, a reasonable jury could find it material that NTN's tax loans and the defendants' notes to repay such loans were intended to be paid off with NTN 'bonus pool' money that, by necessity, would have been paid out of NTN's surplus earnings-earnings that may have arguably belonged to the shareholders. See e.g. P's Ex. 26 at 4:16-18. Third, genuine issues of material fact remain regarding the precise details of the Symphony Put and what, when, and how the public should have been made aware of the true nature of NTN's investment in IWN L.P. to develop and market an Internet horse wagering software platform. 

Regardless of the truth behind the Symphony investment, a reasonable investor would likely have considered it 'material' to the 'total mix' of NTN investment information available to the public during the class period. The materiality of the alleged omissions of liabilities becomes even more apparent when one considers their size: approximately $3 million for the Symphony Put and $4.3 million for the executives' evergreen severance compensation and repurchase of warrants. These are not trivial amounts for a company that, according to plaintiffs' expert, had experienced significant losses from operations from prior years, including 1995, and had an accumulated deficit of $23,187,000 as of December 31, 1995. P's Salomon Decl. at 5:6-9. On the evidence presented, the court cannot say that the alleged misstatements and/or omissions of corporate liabilities were clearly of no importance to the average investor during the class period. Defendants' request for summary judgment on the element of materiality is therefore denied.

4. Loss causation, reliance and damages

Another required element of a Rule 10b-5 claim is referred to as loss causation. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976); McGonigle v. Combs, 968 F.2d 810, 820 (9th Cir.1992). To establish loss causation, plaintiffs must show that the misrepresentations and omissions "adversely affected the objective value of their investment ... causing the loss for which they seek to recover." Id. at 821 (plaintiffs must show some causal connection between the defendants' improper conduct and plaintiffs' losses). That is, plaintiffs must show that the decline in price of their NTN shares was somehow related to NTN's prior nondisclosures and omissions. Id. (loss causation arises where "the misrepresentation touches upon the reasons for the investment's decline in value.").

Here, plaintiff's expert Dr. Kane has testified that NTN's shares were artificially inflated by $1 11/16 due to the defendants' failure to properly disclose contingent liabilities. Moreover, plaintiffs have submitted evidence suggesting that NTN for the first time fully disclosed its true financial condition in its 1996 Form 10-K (which included it's auditor's opinion) filed on April 16, 1997. The same day these disclosures were filed with the SEC, NTN announced in its April 16, 1997 press release that a "going concern" qualification opinion had been issued by its auditors. It is undisputed that this announcement resulted in an immediate 42% decline in NTN shares on the very day the information was made public. A reasonable trier of fact could find that the auditor's "going concern" qualification opinion was caused by or somehow 'related to' NTN's and the individual defendants' prior material misrepresentations and/or omissions regarding the evergreen addendums, the tax loans/notes and the Symphony Put.

The court rejects defendants' suggestion that loss causation has not been established because NTN's stock did not immediately react to the individual defendants' resignations on March 5, 1997 and the March 20, 1997 SEC filing which expressly disclosed that NTN would be paying three years' severance to the 'retiring' individual defendants and forgiving their multimillion dollar tax loans/notes. Defendants overlook the NTN Communications, Inc. Preliminary Conference Call on March 20, 1997 in which NTN Chief Operating Officer Gerald Sokol reassured significant members of the broker/dealer community, distributors of NTN stock, and other prominent NTN investors that the economic significance of the filings were "only about $3 to $5 million" to be spread out over a three-year period and were "truly just accounting adjustments." Transcript of March 20, 1997 NTN Preliminary Conference Call at 1, P's Ex. 26 (emphasis added); Gerald Sokol Depo ., P's Ex. 66.

A reasonable trier of fact could certainly view Sokol's statements during the conference call as a continuation in the chain of prior misrepresentations and/or nondisclosures that constituted a "fraud-on-the- market" to conceal NTN's true financial health. See generally Knapp v. Ernst & Whinney, 90 F.3d 1431, 1438 (9th Cir.1996) ("[I]n a fraud-on-the-market case, plaintiffs establish loss causation if they have shown that the price on the date of purchase was inflated because of the misrepresentation."); Gray v.. First Winthrop Corp., 82 F.3d 877, 886 (9th Cir.1996)(loss causation present if "disclosure of the truth would have reduced the proper valuation of [the] investment" (internal quotation omitted)); In re Control Data Corp. Sec. Litig., 933 F.2d 616 (8th Cir.1991)(although stock price did not immediately drop when inflated earnings were restated and stock later dropped only upon revelation that corporation had defaulted on its loan covenants, inflated earnings statement was inextricably tied to the same improper accounting procedures that concealed risk of loan default).

The fraud-on-the-market presumption is "based on the hypothesis that, in an open and developed securities market, the price of a company's stock is determined by the available material information regarding the company and its business ... Misleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements." Basic Inc., 485 U.S. at 241-42, 108 S.Ct. 978, 99 L.Ed.2d 194 (quoting Peil v. Speiser, 806 F.2d 1154, 1160-61 (3d Cir.1986)); see also In re Apple Computer Sec. Litig., 886 F.2d 1109, 1113-1114 (9th Cir.1989). Thus, the presumption of reliance is available only when a plaintiff sufficiently demonstrates that defendants made material representations or omissions concerning a security that is actively traded in an 'efficient market' thereby establishing a fraud-on-the-market. See Basic Inc., 485 U.S. at 247, 108 S.Ct. 978, 99 L.Ed.2d 194; Binder v. Gillespie, 172 F.3d 649 (9th Cir.1999).; Blackie v. Barrack, 524 F.2d 891, 906-907 (9th Cir.1975); Freeman v. Laventhol & Horwath, 915 F.2d 193, 197 (6th Cir.1990).

Defendants first argue that in order for the fraud-on-the market presumption to even apply, the market in which NTN's shares traded must be proven 'efficient.' Defendants are correct. An efficient market is one that obtains material information about a company and rapidly reflects that new information in the price of the stock. See Hurley v. Federal Deposit Ins. Corp., 719 F.Supp. 27, 34 (D.Mass.1989). While the court acknowledges that trading on the AMEX, standing alone, is not sufficient to establish an efficient market-it appears that no court has ever found that a stock trading on AMEX was inefficient for purposes of applying the fraud-on-the-market presumption. To the contrary, numerous courts have held that stocks trading on the AMEX are almost always entitled to the presumption. See e.g. Peil, 806 F.2d at 1158; Cammer v. Bloom, 711 F.Supp. 1264, 1292 (D.N.J.1989).

The court adopts the presumption here. Regardless of the number of stock analysts who followed NTN shares during the class period, defendants have failed to present sufficient evidence to show that NTN shares were "inactively traded or unresponsive to new information" during the relevant class period. Cammer, 711 F.Supp. at 1292; In re MDC Holdings Sec. Litig., 754 F.Supp. 785, 804 (S.D.Cal.1990)(J. Enright)(noting that the reasoning in Cammer was "helpful in determining whether the market is efficient"). Moreover, plaintiffs have carried their burden to show an efficient market. Specifically, the severity and timing of the decline in NTN shares on April 16, 1997 immediately after the "going concern" warning was issued directly supports plaintiffs' contention that the AMEX was an efficient market during the relevant class period. Accordingly, plaintiffs may invoke the fraud-on-the-market presumption to show reliance, and by extension, satisfy the required showing of loss causation.

This conclusion is further supported by the fact that determination of whether a misrepresentation would have the effect of defrauding the market and inflating the stock is typically a jury question. Control Data, 933 F.2d at 621. The trier of fact is uniquely situated to determine whether defendants' prior misrepresentations, taken as a whole, improperly defrauded the market and satisfied the elements of reliance and causation. While defendants rely heavily on the initial resiliency of NTN's shares in March 1997 to disprove loss causation and reliance, "a showing of a lack of price distortion, does not directly 'rebut' the reliance presumption as much as it [merely] attacks the foundational prerequisites to application of the fraud-on-the-market theory." In Re Seagate Technology II Sec. Litig., 843 F.Supp. 1341, 1355 (N.D.Cal.1994)(fraud-on-the-market presumption essentially creates "a nonrebuttable presumption of reliance in future Rule 10b-5 cases ." (quotation omitted)).

Here, plaintiffs have presented enough evidence of a sufficient causal nexus between defendants' failure to properly report the details of the evergreen addendums, tax loans/notes and the Symphony Put such that a reasonable jury could find reliance and loss causation. According to plaintiffs' evidence, honest representations regarding these prior transactions would have shown that NTN shares were over inflated. Thus, if defendants' had not made the alleged misrepresentations and/or omissions, the value of NTN shares would have been reduced, and the plaintiff class members may have chosen to entrust their money in an investment other than NTN. This is sufficient evidence of causation and reliance to withstand summary judgment.
Finally, the court is confident that should plaintiffs prevail at trial, the amount of price inflation and damages incurred during the class period can be methodically charted with historical stock charts. The process of computing class damages, which likely exist here, will be virtually a mechanical task. Accordingly, defendants' arguments regarding damages are insufficient to prevail on their motion for summary judgment. [FN6]

FN6. Defendants' challenge to the control person liability claim under Section 20(a) of the Exchange Act, 15 U.S.C. §  78t(a), is limited to establishment of primary liability under the Exchange Act. Because plaintiffs have overcome defendants' motion for summary judgment against plaintiff's primary Rule 10b-5 claim, defendants' motion as to plaintiffs' control person liability claim also fails and is therefore denied.

IV. Conclusion

In light of the foregoing, defendants' motion for summary judgment [Doc. No. 78-1], or in the alternative, partial summary judgment [Doc. No. 78- 2], are both DENIED in their entirety. Defendants' motion to strike plaintiffs' evidence submitted in opposition to defendants' motion for summary judgment [Doc. No. 106-1] is also DENIED. [FN7]

FN7. The court denies defendants' evidentiary objections. First, many of the documents objected to were submitted within defendants' own exhibits and declarations. Sec Hal Roach Studios Inc. v. Richard Feiner & Co., Inc., 896 F.2d 1542, 1551 (9th Cir.1990)(holding that district court did not err in considering unauthenticated documents where opposing party also provided copies of those documents). Moreover, the court has exhaustively reviewed well over a dozen deposition transcripts submitted by plaintiffs which authenticate most if not all of plaintiffs' documentary exhibits. See P's Exs. 57-73, 76, 78. Finally, to the extent that plaintiff has failed to authenticate certain public documents filed with the SEC, the court may still rely upon them as documents "capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned" pursuant to Fed.R.Evid. 201(b)(2). Cf. Kramer v. Time Warner Inc., 937 F.2d 767, 773-74 (2d Cir.1991)(a district court may take judicial notice of the contents of relevant public disclosure documents required by law to be filed, and actually filed, with the SEC as facts "capable of accurate and ready determination by resort to source-whose accuracy cannot reasonably be questioned."); Yuen v. U.S. Stock Transfer Co., 966 F.Supp. 944, 945 n. 1 (C.D.Cal.1997).