Robert J. MEYER, Individually and on Behalf of all Others Similarly Situated, et al., Plaintiffs, City of Southfield Fire & Police Retirement System, Plaintiff-Appellant, v. William Britton GREENE, William S. McCalmont, Janna L. Connolly, KPMG LLP, St. Joe Company, Peter S. Rummell, Defendants-Appellees, Michael L. Ainslie, et al., Defendants.
No. 12-11488.
United States Court of Appeals, Eleventh Circuit.
Feb. 25, 2013.
710 F.3d 1189
| Count | Approximate Date | Entry Number | General Description |
|---|---|---|---|
| 7 | 12/7/2010 | BYV-0004364-2 | supervision approximately 96 boxes of dairy products |
In violation of
A TRUE BILL
FOREPERSON
/s/ Wifredo A. Ferrer
WIFREDO A. FERRER
UNITED STATES ATTORNEY
/s/ James A. Raich
JAMES A. RAICH
ASSISTANT UNITED STATES ATTORNEY
Sharon L. Nelles, M. David Possick, David Edward Swarts, Sullivan & Cromwell, LLP, New York City, Dennis K. Larry, Clark, Partington, Hart, Larry, Bond & Stackhouse, Pensacola, FL, John P. Brumbaugh, Jason R. Edgecombe, King & Spalding, LLP, Atlanta, GA, Clifford C. Higby, Bryant & Higby, Chartered, Panama City, for Defendants-Appellees.
WILSON, Circuit Judge:
The City of Southfield Fire & Police Retirement System (“Southfield” or the “Investors“) appeals the dismissal of its consolidated class-action securities fraud complaint against the St. Joe Company (“St. Joe” or the “Company“) and St. Joe‘s current and former officers for alleged violations of
I. Background
St. Joe is a publicly traded company that began as a timber and paper company in the 1930s and is now one of the largest real-estate development corporations in the State of Florida.2 To that end, the Company owns approximately 577,000 acres of land throughout northern Florida аnd operates its business in four key segments: (1) residential real estate; (2) commercial and industrial real estate; (3) rural land sales; and (4) timber. St. Joe was ambitiously invested in the Florida real estate market in the 1990s and 2000s; however, when the real estate market crashed during the period of February 19, 2008, through July 1, 2011 (the Class Period), the value of the Company‘s real estate holdings declined precipitously and the Company effectively ceased development of many of its projects. According to the Investors, despite knowledge of the crumbling real-estate market and the poor performance of its portfolio, St. Joe failed to write down the value of these assets in its quarterly and annual reports to the SEC.
The complaint alleges that the Company‘s failure to take impairment charges3 resulted in material overstatements of the value of its holdings and of its performance during the Class Period. Pursuant to Generally Accepted Accounting Principles (GAAP), the determination of whether an asset‘s value requires impairment hinges upon whether that asset is “held for sale” or “held and used.” Assets “held for sale” are substantially completed and ready to be sold; these assets must be booked at the lower of carrying value or fair market value less costs to sell. The lion‘s share of the properties at issue here, however, were properties under development, which in accounting parlance are treated as assets “held and used.” Assets “held and used” are held on the books at carrying value—the amount listed on the balance sheet—unless management makes
The Investors argue that the truth about St. Joe‘s overstated real estate holdings began to come to light on October 13, 2010, when David Einhorn, a prominent short-sale hedge fund investor, gave a presentation at the Value Investing Conference entitled “Field of Schemes: If You Build It, They Won‘t Come” (the Einhorn Presentation).4 During the presentation, Einhorn suggested that St. Joe‘s assets were significantly overvalued and therefore “should be” impaired.5 In the two days of trading that followed, St. Joe‘s stock dropped some 20% on unusually high volume.6
The Investors initially filed a complaint on November 3, 2010, based solely upon the drop in share price following the Einhorn Presentation. The district court dismissed that complaint without prejudice pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995 (PSLRA),
Meanwhile, on January 10, 2011, St. Joe disclosed that the SEC had initiated an informal inquiry “into St. Joe‘s policies and practices concerning impairment of investment in real estate assets.” Six months thereafter, on July 1, 2011, the Company announced that the SEC had issued an order of private investigation regarding St. Joe‘s compliance with federal antifraud securities provisions and ownership reporting requirements, in addition to its books, records and internal controls. The Investors subsequently filed an amended complaint incorporating these disclosures as allegations and adding the allegations of various confidential witnesses.
The district court again dismissed the complaint, this time with prejudice. It found that Southfield had failed to allege loss causation because the Einhorn Presentation was based solely on publicly available information, and the SEC investigations indicated nothing more than a risk of
On January 27, 2012, a few weeks following the district court‘s dismissal, St. Joe announced a new business strategy that would result in the impairment of $325 million to $375 million in assets in the fourth quarter of 2011. Plaintiffs moved under Rule 59 to alter or amend the judgment in light of this “newly discovered evidence.” The motion was denied, and this appeal followed.
II. Discussion
We review a district court‘s order dismissing a complaint de novo, taking all well-pleaded facts as true and construing them in the light most favorable to the nonmoving party. World Holdings, LLC v. Federal Republic of Germany, 701 F.3d 641, 649 (11th Cir. 2012). To state a claim for securities fraud under
1. The Fraud-on-the-Market Theory in § 10(b) Claims
The original moorings of the
Not surprisingly, and because the fraud-on-the-market theory permits them to forego the onerous task of demonstrating individual reliance on a purported misstatement, plaintiffs in class-action securities fraud cases often invoke it to establish their prima facie case. The present case is no exception. The Investors allege in their complaint that they are “entitled to a presumption of reliance under the fraud[-]on[-]the[-]market doctrine” because “the market for St. Joe‘s common stock promptly digested current information regarding St. Joe from all publicly available sources.” We therefore assume, for purposes of this motion, that the market for St. Joe‘s common stock is efficient and that all publicly available information is incorporated into the market price of St. Joe‘s stock. As will be shown, however, though the fraud-on-the-market theory relieves the Investors of the requirement that they show reliance, it also has a dire—and indeed fatal—effect on their ability to demonstrate loss causation.
2. Loss Causation
To show loss causation in a
An example is instructive here: consider a company that manufactures two entirely discrete product lines, such as laptop computers and flat-screen televisions. Assume that the company fraudulently misrepresents that it sold two million laptops in a quarter, when in fact it had sold only one million. Based on this information, the price of the stock is artificially inflated from $20 per share to $30 per share. If an investor purchases the stock at the inflated $30 price but sells it at the same price before the truth becomes known, he has quite literally suffered no loss. See Dura, 544 U.S. at 342 (“[A]t the moment the transaction takes
By ensuring that only losses actually attributable to a given misrepresentation are cognizable, the loss causation requirement ensures that the federal securities laws do not “becom[e] a system of investor insurance that reimburses investors for any decline in the value of their investments.” Robbins, 116 F.3d at 1447. In this way, loss causation polices the realm of
How, then, might a plaintiff go about proving loss causation? In a fraud-on-the-market case such as that presented here, plaintiffs often demonstrate loss causation circumstantially, by: (1) identifying a “corrective disclosure” (a release of information that reveals to the market the pertinent truth that was previously concealed or obscured by the company‘s fraud); (2) showing that the stock price dropped soon after the corrective disclosure; and (3) eliminating
The Investors in the present case base their theory of loss causation on three purported corrective disclosures: (1) the Einhorn Presentation; (2) the Company‘s disclosure of an informal SEC investigation in January 2011; and (3) the Company‘s announcement in July 2011 that the SEC‘s informal investigation had ripened into a “private order of investigation.” We address each in turn, and explain why none qualify as a corrective disclosure for purposes of our federal sеcurities laws.
A. The Einhorn Presentation
The Investors first argue that the Einhorn Presentation qualifies as a corrective disclosure because it contained in-depth analysis of information not readily available to the investing public and revealed to the market that St. Joe‘s real-estate assets “needed to be impaired.” The problem with this argument is that it ignores the very efficient market hypothesis upon which the Investors’ entire claim is based.
“The efficient market theory . . . posits that all publicly available information about a security is reflected in the market price of the security.” Thompson, 610 F.3d at 691 (Tjoflat, J., concurring in part and dissenting in part). Therefore, any information released to the public is immediately digested and incorporated into the price of a security. “A corollаry of the efficient market hypothesis is that disclosure of confirmatory information—or information already known by the market—will not cause a change in the stock price.” FindWhat, 658 F.3d at 1310. It follows that “[c]orrective disclosures must present
The Einhorn Presentation contained a disclaimer on the second slide of the presentation stating that all of the information in the presentation was “obtained from publicly available sources.” Indeed, the material portions of the Einhorn Presentation were gleaned entirely from public filings and other publicly available information.9 Because a corrective disclosure “obviously must disclose new information,” the fact that the sources used in the Einhorn Presentation were already public is fatal to the Investors’ claim of loss causation. See FindWhat, 658 F.3d at 1311 n. 28 (emphasis supplied).
That result makes good sense. Having based their claim of reliance on the efficient market theory, the Investors must now abide by its consequences. The Investors specifically invoked the efficient market theory in their complaint, stating that “at all relevant times, the market for St. Joe‘s common stock was an efficient market” and that all relevant information was therefore reflected by the price of St. Joe‘s stock. They did so to avail themselves of Basic‘s presumption of reliance, so that each member of the putative class would not have to show that he or she individually relied upon the Company‘s аlleged misstatements in making a given purchase of stock. See Basic, 485 U.S. at 247. The efficient market theory, however, is a Delphic sword: it cuts both ways. The Investors cannot contend that the market is efficient for
The Investors next venture an alternative argument: they contеnd that the Einhorn Presentation qualifies as a corrective disclosure despite its reliance on public information because it provided “expert analysis of the source material” that was previously unavailable to the market. The problem with this argument, of course, is that the mere repackaging of already-public information by an analyst or short-seller is simply insufficient to constitute a corrective disclosure. See In re Omnicom, 597 F.3d at 512 (“A negative . . . characterization of previously disclosed facts does not constitute a corrective disclosure. . . .“); see also Teachers’ Ret. Sys. of La. v. Hunter, 477 F.3d 162, 187 (4th Cir. 2007) (explaining that the attribution of an improper purpose to previously disclosed facts is not a corrective disclosure); In re Merck & Co., Inc. Sec. Litig., 432 F.3d 261, 270-71 (3d Cir. 2005) (holding that the Wall Street Journal‘s analysis of prеviously available information is not a corrective disclosure). After all, if the information relied upon in forming an opinion was previously known to the market, the only thing actually disclosed to the market when the opinion is released is the opinion itself, and such an opinion, standing alone, cannot “reveal[] to the market the falsity” of a company‘s prior factual representations.10 FindWhat, 658 F.3d at 1311 n. 28 (internal quotation marks omitted). In fact, such opinions are exactly the type of confounding information, including “changed economic circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions, or other events,” that do not qualify as corrective disclosures for purposes of loss causatiоn. Dura, 544 U.S. at 343. If every analyst or short-seller‘s opinion based on already-public information could form the basis for a corrective disclosure, then every investor who suffers a loss in the financial markets could sue under
The present case provides a prime example of why that is so. David Einhorn was not an insider at St. Joe, and the information upon which he relied in making his bearish call had been public for months before he made the presentation. Moreover, as a short-seller, Einhorn was bound to profit if the price of St. Joe‘s shares swooned in reaction to his presentation. Further, Einhorn was a maven of Wall Street, well known for accurately рredicting the downfall of Lehman Brothers only two years prior. Given Einhorn‘s reputation, then, it is no great surprise that investors might flee like rats from a sinking ship upon news that he viewed a stock‘s prospects as grim.12 Put another way, because the information used in the presentation had already been public for some time, the decline in the value of St. Joe‘s shares in the wake of the Einhorn Presentation was not due to the fact that the presentation was revelatory of any fraud, but was instead due to “changed investor expectations” after an investor who wielded great clout in the industry voiced a negative opinion about the Company. See Dura, 544 U.S. at 342-43 (explaining the “tangle of factors” that affect stock price but do not qualify for purposes of lоss causation).
Finally, we note that the opinions in the Einhorn Presentation, though certainly pessimistic about the future, were not necessarily revelatory of any past fraud. The Einhorn Presentation systematically analyzed several of St. Joe‘s real-estate developments and explained why, in Einhorn‘s view, the Company would not be able to recoup the carrying value of these holdings. Because management‘s determination that it would not reap future cash flows in excess of the asset‘s carrying value would require an impairment under GAAP‘s accounting treatment for assets “held and used,” Einhorn explained his belief that St. Joe‘s assets “should be” or “need[ed] to” be impaired. Moreover, in summarizing his presentation, Einhorn equivocated, explaining that “if no impairment is needed, there has been a negative return on development,” but that “if [St. Joe] needs to take an impairment, the return on development is highly negative.” When all is weighed in the balance, we think these are statements about potential future action, not “reve[lations] to the market” of some previously concealed fraud or misrepresentation. See FindWhat, 658 F.3d at 1311. That is yet another reason why they do not qualify as corrective disclosures for purposes of loss causation.
B. The SEC Investigations
The Investors next argue that the Company‘s disclosure of the two SEC investigations should qualify as corrective disclosures because the investigations caused St. Joe‘s stock price to drop and covered the same subject matter—the value of St. Joe‘s reаl-estate holdings—as the fraud alleged in the complaint. But a corrective disclosure must “reveal[] to the market the falsity of [a] prior misstatement[].” FindWhat, 658 F.3d at 1311 n. 28 (internal quotation marks omitted). According to the complaint, although the January disclosure did indicate that the SEC was “conducting an informal inquiry
In our view, the commencement of an SEC investigation, without more, is insufficient to constitute a corrective disclosure for purposes of
In sum, the complaint as framed by the Investors fails to adequately allege loss
AFFIRMED.
WILSON
CIRCUIT JUDGE
Luis W. LEBRON, Individually and as Class Representative, Plaintiff-Appellee, v. SECRETARY, FLORIDA DEPARTMENT OF CHILDREN AND FAMILIES, Defendant-Appellant.
No. 11-15258.
United States Court of Appeals, Eleventh Circuit.
Feb. 26, 2013.