Published February 25, 2013
A federal appeals court has made it harder for investors to rely on reports from short sellers when bringing securities fraud lawsuits, in a case against a Florida developer long criticized by prominent hedge fund manager David Einhorn.
The 11th U.S. Circuit Court of Appeals in Atlanta said St Joe Co was not liable to investors whose shares lost value after Einhorn, who runs Greenlight Capital Inc, accused the developer of vastly overvaluing its real estate holdings.
A three-judge panel said Einhorn's October 2010 presentation "Field of Schemes: If You Build It, They Won't Come" was mainly a repackaging of publicly available information about St. Joe, and thus not something the company needed to disclose itself.
"Einhorn was a maven of Wall Street," Circuit Judge Charles Wilson wrote for the panel. "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."
Shares of St. Joe fell 19.6 percent in the two days after Einhorn spoke, and dropped further after the Watersound, Florida-based company in January and July 2011 revealed two U.S. Securities and Exchange Commission probes. The 11th Circuit said these revelations also did not support a securities fraud claim.
St. Joe has long rejected Einhorn's criticisms, though it did in January 2012 announce a writedown of some assets. The company now owns about 567,000 acres of land, mainly in northwest Florida. The SEC has not issued any finding of wrongdoing.
DEFEAT FOR INVESTORS
Monday's decision is a defeat for plaintiffs led by the City of Southfield Fire & Police Retirement System in Michigan.
It is also a setback for investors who may wish to pursue securities fraud claims based on information that is already in the public market. While the 11th Circuit decision applies in Alabama, Florida and Georgia, other U.S. courts may cite it.
"It's a great opinion," Sharon Nelles, a partner at Sullivan & Cromwell representing St. Joe, said in a telephone interview. "The 11th Circuit plainly wrote with the intent of setting forth and clarifying loss causation principles for future cases."
Douglas Wilens, a lawyer for the plaintiffs, did not immediately respond to a request for comment.
Einhorn gained prominence from highlighting accounting issues at Lehman Brothers Holdings Inc before the Wall Street bank went bankrupt in 2008.
On Friday, he won a court ruling blocking Apple Inc from allowing a shareholder vote on a proposal limiting its ability to issue preferred stock, which Einhorn opposed, that had been bundled with two other proposals that Einhorn favored.
In his presentation at the Value Investing Conference, Einhorn ridiculed St. Joe for overexpansion, saying one of its sites looked "more like a moonscape than a luxury development."
Einhorn, who began shorting St Joe stock in 2006, said the shares deserved to trade at less than half its level at the time, and could eventually fall to zero.
In suing, shareholders sought to recover under the "fraud-on-the-market" theory, which assumes that a stock price reflects all public information, including material misrepresentations.
They claimed that the Einhorn presentation and the disclosures of the SEC probes were "corrective disclosures" of previously concealed fraud that entitled them to recover.
But in upholding the January 2012 dismissal of the case by a Panama City, Florida federal judge, Wilson said an analyst's or short seller's opinion needed to reveal "something previously hidden or actively concealed" to be a corrective disclosure.
He also said announcing an SEC probe did not qualify because it merely highlighted "an added risk of future corrective action," not that prior statements were false or fraudulent.
Nelles said she believed this is the first federal appeals court to address whether the launch of an SEC investigation by itself was a corrective disclosure under securities fraud laws.
St. Joe shares traded at $24.54 prior to Einhorn's presentation. In Monday afternoon trading, they were down 30 cents at $22.25 on the New York Stock Exchange.
The case is Meyer at al v. Greene et al, 11th U.S. Circuit Court of Appeals, No. 12-11488.
(Reporting by Jonathan Stempel in New York; Editing by Bernard Orr)