The Ninth Circuit Court of Appeals has breathed new life into a securities fraud lawsuit against Funko Inc., the pop culture collectibles company known for its ubiquitous Pop! vinyl figures. In a decision filed Tuesday, the appeals court partially reversed a district court's dismissal of claims under federal securities laws.
The case, *Construction Laborers Pension Trust of Greater St. Louis v. Funko Inc.* (9th Cir. 2026), centers on allegations that Funko and two of its officers, Andrew Perlmutter and Jennifer Fall Jung, misled investors about critical business operations before the company suffered massive inventory losses.
Funko's stock price plummeted by more than 50% when the company was forced to write off millions of pop culture collectibles at a loss of tens of millions of dollars. The dramatic stock decline triggered the shareholder lawsuit, with investors claiming they were deceived about the company's true financial condition.
The shareholders, led by the Construction Laborers Pension Trust of Greater St. Louis along with individual plaintiffs Paul Haddock and Jonathan Studen, alleged that Funko executives made misleading statements about several key areas of the business. These included the progress of a major warehouse relocation project, the quality and management of the company's vast inventory of collectibles, upgrades to information technology systems, and the company's distribution capabilities.
The U.S. District Court for the Western District of Washington initially dismissed the complaint, finding that the plaintiffs had failed to adequately allege both falsity and scienter - the intent to deceive or reckless disregard for the truth that is required under federal securities laws. District Judge James L. Robart concluded that the shareholders had not met the legal standards for bringing their claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.
However, the Ninth Circuit panel, consisting of Circuit Judges Marsha S. Berzon, Michelle T. Friedland, and Salvador Mendoza Jr., found that the district court had applied the legal standards too strictly in some respects. Judge Mendoza authored the opinion for the three-judge panel.
The appeals court clarified important principles governing securities fraud cases. The panel held that to establish falsity - a key element of any securities fraud claim - plaintiffs may rely on either an affirmative misrepresentation theory or an omission theory. This means shareholders can succeed by showing either that defendants made false statements or that they failed to disclose material information they were required to reveal.
The court emphasized that any allegedly misleading statement must be capable of objective verification, setting a clear standard for what types of claims can proceed to trial. The panel also addressed the scienter requirement, explaining that it means "the intent to mislead investors or deliberate recklessness to an obvious danger," though the full text of this portion of the opinion was not included in the available excerpt.
The case highlights the ongoing challenges facing companies in the collectibles and entertainment merchandise industry. Funko, which went public in 2017, has built its business model around licensing popular culture properties and producing vinyl figures, plushies, and other collectibles based on characters from movies, television shows, video games, and other media.
Inventory management is particularly critical for companies like Funko, which must accurately predict consumer demand for specific collectibles tied to entertainment properties that can quickly rise and fall in popularity. The company's business model requires significant upfront investment in manufacturing products based on licensing agreements, making accurate inventory forecasting essential to profitability.
The warehouse relocation mentioned in the lawsuit likely refers to operational challenges that many growing companies face as they scale their distribution networks. For a company dealing with physical products like collectibles, efficient warehouse operations and technology systems are crucial for managing inventory levels and fulfilling customer orders.
The Ninth Circuit's decision does not mean Funko will ultimately be found liable for securities fraud. Instead, it allows the case to proceed past the initial motion to dismiss stage, meaning the shareholders will have the opportunity to conduct discovery and potentially prove their claims at trial.
The ruling serves as a reminder to public companies about the importance of accurate and complete disclosure to investors, particularly regarding operational challenges that could materially impact financial performance. Companies facing significant business changes, such as warehouse relocations or technology upgrades, must carefully consider their disclosure obligations to shareholders.
For Funko's shareholders, the decision provides a path forward to seek damages for their investment losses. The case will now return to the district court, where the parties will likely engage in the discovery process to gather evidence supporting their respective positions.
The outcome of this case could have broader implications for how courts evaluate securities fraud claims in the consumer products and entertainment merchandise sectors, particularly regarding the types of operational disclosures that companies must make to investors.