The Ninth Circuit Court of Appeals has partially reversed a lower court's dismissal of securities fraud claims against Funko Inc. and two of its officers, breathing new life into a lawsuit over massive inventory writedowns that caused the pop culture collectibles company's stock price to plummet.
In a decision filed Feb. 4, 2026, a three-judge panel led by Circuit Judge Salvador Mendoza Jr. affirmed in part and reversed in part the U.S. District Court for the Western District of Washington's dismissal of claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. The case involves Construction Laborers Pension Trust of Greater St. Louis as lead plaintiff, along with individual shareholders Paul Haddock and Jonathan Studen.
The lawsuit targets Funko Inc., known for its popular Pop! vinyl figurines and other collectibles, along with officers Andrew Perlmutter and Jennifer Fall Jung. Shareholders alleged that defendants misled investors about several critical business operations before the company suffered significant financial losses.
According to court documents, Funko's share price lost more than half its value when millions of its pop culture collectibles were written off at a loss of tens of millions of dollars. The massive writedown exposed what plaintiffs characterize as a pattern of misleading statements to investors.
The shareholder lawsuit alleges that Funko defendants misrepresented the progress of a major warehouse relocation, the quality and management of the company's inventory, its use and upgrade of information technology systems, and its distribution capabilities. These allegedly false statements created an artificial picture of the company's operational health before the devastating inventory losses came to light.
District Judge James L. Robart had initially dismissed the complaint, finding that plaintiffs failed to sufficiently allege falsity and scienter—two key elements required in securities fraud cases. Falsity requires showing that defendants' statements were objectively false or misleading, while scienter demands proof that defendants acted with intent to deceive investors or with deliberate recklessness.
However, the Ninth Circuit panel found that the district court applied overly restrictive standards in analyzing these elements. In its opinion, the appeals court clarified important legal principles governing securities fraud litigation.
The panel held that to establish falsity, securities plaintiffs may rely on either an affirmative misrepresentation theory or an omission theory. Under either approach, an allegedly misleading statement must be capable of objective verification. This standard provides plaintiffs with multiple pathways to demonstrate that defendants' statements were false or misleading to reasonable investors.
Regarding scienter, the court emphasized that this mental state element encompasses either the intent to mislead investors or deliberate recklessness to an obvious danger of misleading them. The appeals court suggested that the district court may have set too high a bar for plaintiffs to meet this requirement at the pleading stage.
The case was argued and submitted on May 23, 2025, in San Francisco before Circuit Judges Marsha S. Berzon, Michelle T. Friedland, and Salvador Mendoza Jr. The decision represents a significant development for shareholders seeking to hold corporate executives accountable for allegedly misleading statements about business operations.
Funko's business model centers on licensing popular characters from movies, television shows, video games, and other entertainment properties to create collectible figurines and merchandise. The company went public in 2017 and has faced various operational challenges as it scaled its business, including the warehouse relocation and inventory management issues at the center of this litigation.
The partial reversal means that at least some of the shareholders' claims will proceed to further litigation, potentially including discovery where plaintiffs can seek internal company documents and testimony from Funko executives. Securities fraud cases often turn on evidence of defendants' internal knowledge and communications that may contradict their public statements to investors.
For the defendants, the appeals court decision extends litigation that they likely hoped would end with the district court's dismissal. Corporate officers named in securities fraud lawsuits face potential personal liability under section 20(a) of the Securities Exchange Act if they are found to have controlled the company during the alleged misconduct.
The case will now return to the district court for further proceedings consistent with the Ninth Circuit's opinion. District Judge Robart will need to reconsider the dismissed claims under the legal standards clarified by the appeals court.
This decision adds to the body of Ninth Circuit precedent governing securities fraud litigation, particularly regarding the standards for pleading falsity and scienter. The ruling may influence how other courts in the circuit evaluate similar claims against public companies accused of misleading investors about operational challenges.