The U.S. Court of Appeals for the Eleventh Circuit Feb. 25 affirmed the dismissal of a would-be securities fraud class action against St. Joe Co.,(JOE) a Florida-based real-estate development company, finding that the plaintiffs failed to adequately plead loss causation for their 1934 Securities Exchange Act Section 10(b) claim (Meyer v. Greene, 11th Cir., No. 5:11-cv-00027-RS-EMT, 2/25/13).
Judge Charles R. Wilson held that although the “fraud-on-the-market theory” assumption relieved the plaintiffs of the need to show reliance, “it also ha[d] a dire—and indeed fatal—effect on their ability to demonstrate loss causation.” None of the purported corrective disclosures cited by the plaintiffs, the court said, showed a “causal connection between the misrepresentation and the investment's subsequent decline in value.”
According to the complaint, St. Joe allegedly materially overstated the value of its real estate holdings even though it knew that the Florida real estate market had collapsed after 2008. The company, according to the plaintiffs, failed to write down the value of these assets in various filings with the Securities and Exchange Commission even though it knew that “the carrying value of the land could never be recovered.”
The complaint asserted that “the truth” about St. Joe's allegedly overstated real estate holdings surfaced in October 2010 when David Einhorn, a prominent hedge fund investor, gave a presentation during which he suggested that St. Joe's assets “'should be' impaired.” Following Einhorn's presentation, price of St. Joe's stock dropped approximately 20 percent “on unusually high volume,” the court said.
The plaintiffs also cited two separate announcements by St. Joe's about the Securities and Exchange Commission's informal inquiry into the company's impairment practices and a related order of investigation as corrective disclosures that caused the company's stock price to drop.
Soon after the district court's dismissal of the complaint, St. Joe announced the “impairment of $325 million to $375 million in assets in the fourth quarter of 2011,” the court recounted. Following a failed motion to alter or amend the judgment in light of the “newly discovered evidence,” this appeal followed.
The appeals court agreed that the plaintiffs did not need to show reliance because they were entitled to the presumption afforded by the fraud-on-the-market theory.
However, the court ruled, the plaintiffs's claims fail on loss causation. The court addressed the three purported corrective disclosures on which the plaintiffs based their loss causation theory: Einhorn's presentation and St. Joe's two announcements about the SEC's investigations.
Disagreeing that Einhorn's presentation qualified as a corrective disclosure, the court held that “the fact that the sources used in the Einhorn Presentation were already public is fatal to the Investors' claim of loss causation.”
Under the efficient market theory, “any information released to the public is immediately digested and incorporated into the price of a security,” the court said. Since the information in the Einhorn presentation was already public, it did not convey new information. “Having based their claim of reliance on the efficient market theory, the Investors must now abide by its consequences,” the court said.
The court also rejected the plaintiffs' claim that while the information was publicly available, it was still was a corrective disclosure because it was an “'expert analysis of the source material.'” The court added in a footnote that it was not deciding “whether an analyst or short-seller's opinion can ever constitute a corrective disclosure. … We merely note that if they do exist, such opinions—like black swans—will be the exception, not the rule.“
The court also declined to characterize St. Joe's announcements of the SEC investigations as corrective disclosures.
Although St. Joe's stock price dropped following both of the announcements, “the SEC never issued any finding of wrongdoing or in any way indicated that the Company had violated the federal securities laws,” the court said. “The commencement of an SEC investigation, without more, is insufficient to constitute a corrective disclosure for purposes of § 10(b),” the court added.
While the announcement of an SEC probe may be followed by a drop in stock prices, the court said, “that is because the investigation can be seen to portend an added risk of future corrective action. That does not mean that the investigations, in and of themselves, reveal to the market that a company's previous statements were false or fraudulent.”
To see the opinion, go to /uploadedfiles/BNA_V2/Images/From_BNA_V1/News/Meyer-v.-Greene(1).pdf.
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