## Facts

- Investors who bought Citizens Utilities Company common stock between May 7, 1996 and August 7, 1997 sued Citizens and three senior officers under Exchange Act § 10(b), Rule 10b-5, and § 20(a).
- Citizens publicly emphasized a long history of steadily increasing revenue and earnings, and it faced an anticipated shortfall when it learned it would not receive roughly $38 million from Pacific Bell in 1996.
- Citizens had received about $10.1 million in payments labeled as fees tied to loans to Hungarian Telephone & Cable Corp. (HTCC) in 1995, but recognized those amounts as revenue in the first half of 1996.
- Plaintiffs alleged Citizens’ filings and public statements for 1996 reported strong quarterly earnings increases (15% for Q1 and 10% for Q2) without disclosing that much of the reported improvement reflected shifting HTCC-related revenue into 1996 rather than “new” earnings.
- Plaintiffs alleged that the accounting presentation and related omissions misled investors about the company’s growth trend, inflated the stock price, and contributed to losses when later earnings disappointed and corrective information emerged.
- The challenged amounts were characterized by the district court as about $22 million, approximately 1.7% of Citizens’ 1996 revenues.

## Issues

1. Whether alleged misstatements and omissions about revenue recognition can be held immaterial as a matter of law based solely on their small percentage of annual revenue (about 1.7%).
2. Whether the absence of an immediate stock-price decline following corrective disclosures establishes immateriality as a matter of law.
3. Whether dismissal should be sustained on other Rule 10b-5 elements where the district court also referenced potential pleading defects beyond materiality.

## Decision

- The Second Circuit reversed the district court’s ruling that the alleged misstatements were immaterial as a matter of law.
- The court held that materiality cannot be determined by a single numerical benchmark and must consider qualitative factors.
- The court rejected treating a lack of immediate market price reaction as dispositive proof of immateriality.
- The court vacated the remainder of the judgment and remanded for further proceedings under the correct materiality standard, leaving further consideration of other elements to the district court.

## Legal Principles

- An omission or misstatement is material if there is a substantial likelihood that a reasonable investor would view it as significantly altering the total mix of available information.
- Quantitative size (such as a percentage of revenue) is a relevant starting point but not controlling; qualitative considerations may render small misstatements material.
- Qualitative factors supporting materiality include whether the challenged accounting masks a change in earnings, maintains an appearance of consistent growth, or helps a company meet market expectations.
- Absence of an immediate stock-price drop after disclosure may be relevant evidence but does not, standing alone, establish immateriality as a matter of law.
- Dismissal at the pleading stage is improper where the complaint plausibly alleges facts that, if proven, could support materiality under the total-mix standard.

## Conclusion

The Second Circuit held that alleged accounting misstatements could not be dismissed as immaterial solely because they were a small percentage of annual revenue or because the stock price did not immediately react, and it remanded for further proceedings applying a materiality analysis that includes qualitative factors.


Ganino v. Citizens Util. Co., 228 F.3d 154 (2d Cir. 2000)