Robert J. Meyer v. William Britton Greene

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[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 12-11488
________________________
D.C. Docket No. 5:11-cv-00027-RS-EMT
ROBERT J. MEYER,
Individually and on Behalf of all
Others Similarly Situated, et al.,
Plaintiffs,
CITY OF SOUTHFIELD FIRE & POLICE RETIREMENT SYSTEM,
Plaintiff - Appellant,
versus
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.
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________________________
Appeal from the United States District Court
for the Northern District of Florida
________________________
(February 25, 2013)
Before HULL, WILSON and ANDERSON, Circuit Judges.
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 §§ 10(b) and 20(a) of the
Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. §§ 78j(b), 78t(a), and
Securities and Exchange Commission (SEC) Rule 10b–5, 17 C.F.R. § 240.10b–5.
The Investors argue that the district court erred in holding that they failed to
adequately plead loss causation, actionable misrepresentation, or scienter, and also
by denying their post-judgment motion to alter or amend. Because we agree that
the facts as alleged in Southfield’s complaint fail to show loss causation, we
affirm. 1
1
The Investors’ initial complaint was dismissed without prejudice; therefore, the
complaint before us is the First Amended Complaint. Nonetheless, for the sake of clarity and
ease of analysis, we refer to the First Amended Complaint as simply the “complaint,” unless
otherwise indicated.
2
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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 and 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
charges resulted in material overstatements of the value of its holdings and of its
2
The facts below, which we take as true for purposes of the present motion to dismiss,
are gleaned from the Investors’ complaint.
3
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performance during the Class Period.3 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 a
determination, based upon reasonably objective inputs, that the carrying amount is
not recoverable, i.e., that the projected undiscounted cash flows from the asset’s
future use do not meet or exceed that asset’s carrying value. The gravamen of the
Investors’ complaint is that the Company overstated its real estate holdings when it
unreasonably failed to take impairment charges on assets “held and used” despite
management’s knowledge that, because the market had deteriorated, the carrying
value of the land could never be recovered.
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
3
An impairment charge is a non-recurring charge taken to write down the value of an
asset with an overstated carrying value. Taking an impairment charge results in a non-operating
expense and reduces a company’s earnings accordingly.
4
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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), 15 U.S.C. § 78u–4. It found that the initial complaint failed
to adequately plead loss causation, an actionable misrepresentation, or scienter, and
granted the Investors leave to file an amended complaint.
4
A “short sale” is the “sale of a security that the seller does not own or has not contracted
for at the time of sale, and that the seller must borrow to make delivery.” Black’s Law
Dictionary 1366 (8th ed. 2004). A short-seller realizes capital gains when the price of the
security drops, because the seller can then buy back the shares previously borrowed at a lower
price. See id.
5
Though the complaint does not include Einhorn’s entire 139-slide presentation as an
exhibit, “if [a] document’s contents are alleged in a complaint and no party questions those
contents, we may consider such a document” in its entirety so long as it is central to the
plaintiff’s case. Day v. Taylor, 400 F.3d 1272, 1276 (11th Cir. 2005); see Horsley v. Feldt, 304
F.3d 1125, 1134 (11th Cir. 2002). We accordingly incorporate the entire Einhorn Presentation
for purposes of our analysis.
6
St. Joe shares trade on the New York Stock Exchange under the ticker symbol “JOE.”
According to the complaint, the price of St. Joe shares dropped $4.80 to close at $19.74 per share
in the days following the Einhorn Presentation. Incidentally, St. Joe shares have rallied back in
recent months, and traded at $23.92 per share at the close on February 1, 2013.
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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 accounting problems. It
further found that the Investors had failed to allege actionable misrepresentation
because reasonable professionals could have disagreed about whether GAAP
required St. Joe to write down its real estate assets. Finally, the district court held
that the Investors had failed to adequately allege scienter because there was no
indication that the Company purposefully misrepresented the value of its assets or
acted with reckless disregard as to their veracity.
6
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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 § 10(b)
of the Exchange Act and Rule 10b–5 promulgated thereunder, a plaintiff must
adequately allege: (1) a material misrepresentation or omission; (2) scienter—a
wrongful state of mind; (3) a connection between the misrepresentation and the
purchase or sale of a security; (4) reliance, “often referred to in cases involving
public securities markets (fraud-on-the-market cases) as transaction causation”; (5)
economic loss; and (6) “loss causation, i.e., a causal connection between the
material misrepresentation and the loss.” Dura Pharms., Inc. v. Broudo, 544 U.S.
336, 341–42, 125 S. Ct. 1627, 1631 (2005) (emphasis omitted) (internal quotation
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marks omitted).7 Because the resolution of this case turns upon the interplay
between the fraud-on-the-market theory and loss causation, we first set forth some
elementary principles of the so-called efficient market hypothesis and the fraud-on-
the-market theory, and then explain why those principles mandate that the
Investors’ claims fail for want of loss causation.
1. The Fraud-on-the-Market Theory in § 10(b) Claims
The original moorings of the § 10(b) implied right of action are found in the
common-law tort actions of misrepresentation and deceit. Dura, 544 U.S. at 341,
125 S. Ct. at 1631. Therefore, and because reliance was an essential element of a
claim for misrepresentation at common law, a plaintiff in a § 10(b) suit must
demonstrate reliance—that is, that he or she actually relied upon the alleged
misrepresentation. Erica P. John Fund, Inc. v. Halliburton Co., ––– U.S. ––––,131
S. Ct. 2179, 2184 (2011). “The traditional (and most direct) way a plaintiff can
demonstrate reliance is by showing that he was aware of a company’s statement
and engaged in a relevant transaction—e.g., purchasing common stock—based on
that specific misrepresentation.” Id. at 2185 (emphasis omitted). “In that situation,
the plaintiff plainly would have relied on the company’s deceptive conduct.” Id.;
see also Robbins v. Koger Props., Inc., 116 F.3d 1441, 1447 (11th Cir. 1997)
7
Though the Investors also bring a claim under § 20(a) of the Exchange Act, liability
under § 20(a) is derivative to liability under § 10(b), so the analysis of the Investors’ § 20(a)
claim is subsumed by the analysis of their § 10(b) claim. See Thompson v. RelationServe Media,
Inc., 610 F.3d 628, 635–36 (11th Cir. 2010).
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(explaining that reliance “is established when the misrepresentations or omissions
cause the plaintiff to engage in the transaction in question” (internal quotation
marks omitted)). In securities claims, however, the Supreme Court has permitted a
“rebuttable presumption of reliance based on what is known as the ‘fraud-on-the-
market theory.’” Halliburton, 131 S. Ct. at 2185. The fraud-on-the-market theory,
which “derive[s] from the so-called efficient market hypothesis . . . [provides] that
‘in an open and developed securities market, the price of a company’s stock is
determined by the available material information regarding the company and its
business.’” FindWhat Investor Grp. v. FindWhat.com, 658 F.3d 1282, 1309–10
(11th Cir. 2011) (quoting Basic Inc. v. Levinson, 485 U.S. 224, 241, 108 S. Ct.
978, 989 (1988)), cert. denied, 133 S. Ct. 109 (2012). Therefore, “the market price
of shares traded on well-developed markets reflects all publicly available
information, and, hence, any material misrepresentations,” Basic, 485 U.S. at 246,
108 S. Ct. at 991, and we can presume “that an investor relies on public
misstatements whenever he buys or sells stock at the price set by the market,”
Halliburton, 131 S. Ct. at 2185 (internal quotation marks omitted).
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
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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 § 10(b) claim, a plaintiff must offer “proof of a
causal connection between the misrepresentation and the investment’s subsequent
decline in value.” Robbins, 116 F.3d at 1448; see 15 U.S.C. § 78u–4(b)(4)
(requiring that the plaintiff prove that the misrepresentation “caused the loss for
which the plaintiff seeks to recover”). “In other words, in a fraud-on-the-market
case, the plaintiff must prove not only that a fraudulent misrepresentation
artificially inflated the security’s value but also that ‘the fraud-induced inflation
that was baked into the plaintiff’s purchase price was subsequently removed from
the stock’s price, thereby causing losses to the plaintiff.’” Hubbard v.
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BankAtlantic Bancorp, Inc., 688 F.3d 713, 725 (11th Cir. 2012) (quoting
FindWhat, 658 F.3d at 1311).
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, 125 S. Ct. at 1631 (“[A]t the moment the
transaction takes place, the plaintiff has suffered no loss; the inflated purchase
payment is offset by ownership of a share that at that instant possesses equivalent
value.” (emphasis in original)). Furthermore, if the market subsequently learns
that the company’s flat-screen television business, which was not the subject of the
misrepresentation, has been crushed by the competition, and the stock price drops
to $15 per share, the investor has still suffered no loss on account of the
misrepresentation. That is because the fraud-induced inflation is still priced into
the shares, and the drop in the stock’s price was caused by other aspects of the
company’s business. The drop in price is wholly unrelated to the
misrepresentation. As the Supreme Court explained it: “When the purchaser
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subsequently resells [his] shares . . . at a lower price, that lower price may reflect,
not the earlier misrepresentation, but changed economic circumstances, changed
investor expectations, new industry-specific or firm-specific facts, conditions, or
other events, which taken separately or together account for some or all of that
lower price.” Id. at 342–43, 125 S. Ct. at 1632. If, however, the wool is eventually
pulled from the market’s eyes and the truth becomes known about the company’s
misrepresentation of the amount of laptop computers it sold, a decline in stock
price in reaction to the revelation—which is often called a “corrective
disclosure”—will have been caused by the fraud and will be compensable. See
FindWhat, 658 F.3d at 1310. That is the essence of loss causation.
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 § 10(b) claims,
guarding against their use as an in terrorem device to force companies to settle
claims simply to avoid the cost and burden of litigation. See Dura, 544 U.S. at
347–48, 125 S. Ct. at 1634 (explaining that allowing a plaintiff to forego the loss
causation requirement “would bring about harm of the very sort the [federal
securities] statutes seek to avoid” and “transform a private securities action into a
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partial downside insurance policy”); see also Thompson, 610 F.3d at 667 (Tjoflat,
J., concurring in part and dissenting in part) (discussing the legislative history of
the PSLRA and Congress’s concern that so-called strike suits might become a
“litigation tax” on American business). Put another way, though § 10(b) is
designed to protect against fraud, it is not a prophylaxis against the normal risks
attendant to speculation and investment in the financial markets, and loss causation
therefore ensures that private securities actions remain a scalpel for defending
against the former, while not becoming a meat axe exploited to achieve the latter.
To realize those objectives, loss causation does not require proof that the
fraudulent misrepresentation was the sole cause of a security’s loss in value, but
the plaintiff must still demonstrate that the fraudulent statement was a “substantial”
or “significant” cause of the decline in price. See Hubbard, 688 F.3d at 726 (citing
Robbins, 116 F.3d at 1447).
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 other
possible explanations for this price drop, so that the factfinder can
infer that it is more probable than not that it was the corrective
disclosure—as opposed to other possible depressive factors—that
caused at least a “substantial” amount of the price drop.
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FindWhat, 658 F.3d at 1311–12 (footnote omitted).8 “To be corrective, [a]
disclosure need not precisely mirror the earlier misrepresentation, but it must at
least relate back to the misrepresentation and not to some other negative
information about the company.” In re Williams Sec. Litig.—WCG Subclass, 558
F.3d 1130, 1140 (10th Cir. 2009). Further, a plaintiff need not rely on a single,
complete corrective disclosure; rather, it is possible to show that the truth gradually
leaked out into the marketplace “through a series of partial disclosures.” Lormand
v. US Unwired, Inc., 565 F.3d 228, 261 (5th Cir. 2009); see Katyle v. Penn Nat.
Gaming, Inc., 637 F.3d 462, 472 (4th Cir.), cert. denied, 132 S. Ct. 115 (2011).
Regardless of the theory upon which it is based, “loss causation analysis in a fraud-
on-the-market case focuses on the following question: even if the plaintiffs paid an
inflated price for the stock as a result of the fraud (i.e., even if the plaintiffs relied),
did the relevant truth eventually come out and thereby cause the plaintiffs to suffer
losses?” FindWhat, 658 F.3d at 1312; see Lentell v. Merrill Lynch & Co., 396 F.3d
161, 175 n.4 (2d Cir. 2005) (explaining that loss causation can be established by a
8
Some courts have permitted a plaintiff to show loss causation by demonstrating that the
defendant fraudulently concealed a risk that, once it materialized, caused a decline in the
security’s price. See In re Omnicom Grp., Inc. Sec. Litig., 597 F.3d 501, 513 (2d Cir. 2010)
(explaining the materialization-of-concealed-risk theory); Ray v. Citigroup Global Mkts., Inc.,
482 F.3d 991, 995 (7th Cir. 2007); see also Hubbard, 688 F.3d at 726 n.25 (assuming without
deciding that the materialization-of-concealed-risk theory is valid). The Investors in the present
case, however, rely solely on the corrective-disclosure theory of loss causation, so we have no
occasion to consider any alternative theory.
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corrective disclosure that “reveal[s] to the market the falsity” of a previous
representation).
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
securities 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
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the price of a security. “A corollary 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 facts to the market that are
new, that is, publicly revealed for the first time.” Katyle, 637 F.3d at 473; see
FindWhat, 658 F.3d at 1311 n.28 (explaining that a corrective disclosure
“obviously must disclose new information”).
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
9
Insofar as the Investors argue that the Einhorn Presentation was not based on public
information because some information in the presentation came from Freedom of Information
Act requests, meeting minutes of the Airport Authority of Panama City, aerial photographs, and
information gleaned from conversations with members of the Airport Authority of Panama City,
that suggestion—even if it were true—would not alter our result. First of all, none of the
allegations in the Investors’ complaint have anything at all to do with the Company’s real-estate
developments in and around the Panama City Airport. The complaint alleges that St. Joe’s
properties at Rivertown, WaterSound, SummerCamp Beach, WindMark Beach, Victoria Park,
Seven Shores, and SouthWood were overvalued. Obviously, if the complaint does not allege any
fraud relating to the Company’s development near the Panama City Airport, any information
about that development would quite literally be unable to “reveal[] to the market the pertinent
truth that was previously concealed or obscured by the company’s fraud.” FindWhat, 658 F.3d
at 1311. The Investors’ attempt to bootstrap these immaterial portions of the presentation in
order to render the actual portions of the presentation at issue nonpublic therefore falls wide of
the mark.
Moreover, and even were that not so, the only part of the Einhorn Presentation that relied
on the information above was the part in which Einhorn sought to refute the “bull case” for St.
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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 alleged misstatements in making a given
purchase of stock. See Basic, 485 U.S. at 247, 108 S. Ct. at 991. The efficient
market theory, however, is a Delphic sword: it cuts both ways. The Investors
cannot contend that the market is efficient for purposes of reliance and then cast
the theory aside when it no longer suits their needs for purposes of loss causation.
Joe, which involved the theory that the Company’s holdings in and around Panama City were
worth so much money that, by buying St. Joe stock, one would “be getting the [Company’s]
other 500,000 acres ‘for free.’” In other words, not only is that portion of the Einhorn
Presentation wholly immaterial to the Investors’ claims, it is also not revelatory of any fraud.
Finally, and to the extent that the Investors’ rest their claim on the argument that county property
appraiser’s sales lists are nonpublic, we simply disagree. In a case about the value of land, in
which the public disclosures at issue were released over time, the efficient market would easily
digest the information contained in these sales lists without the need for Einhorn to regurgitate it
first. While we might be willing to countenance some lag in the market’s processing of the
information contained in these public sources, we reject the idea that they were not yet public on
the day of the Einhorn Presentation, which is the relevant time for our purposes here.
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Either the market is efficient or it is not. A plaintiff in the Investors’ situation must
take the bitter with the sweet, and if he chooses to embrace the efficient market
theory for purposes of proving one element of a § 10(b) claim, he cannot then turn
around and contend that the market is not efficient for purposes of proving another
element of the very same claim.
The Investors next venture an alternative argument: they contend 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 previously
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
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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 causation. Dura, 544 U.S. at 343, 125 S. Ct. at 1632. 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 § 10(b) using an analyst’s negative analysis of
public filings as a corrective disclosure. That cannot be—nor is it—the law.11 See
id. at 347–48, 125 S. Ct. at 1634.
10
We need not reach the question of whether an analyst or short-seller’s opinion can ever
constitute a corrective disclosure. Just as black swans may exist, there may theoretically be
some form of opinion that is factual or revelatory in nature such that it qualifies as a corrective
disclosure. But at the very least, such an opinion would need to reveal to the market something
previously hidden or actively concealed. That is not this case, and we need not delve into that
metaphysical question here. Einhorn’s opinion reveals no fact to the market. Nothing suggests
that the Company obfuscated or concealed the information on which Einhorn relied. We need
not go further. We merely note that if they do exist, such opinions—like black swans—will be
the exception, not the rule. Cf. In re Winstar Commc’ns, No. 01 CV 3014, 2006 WL 473885, at
*15 (S.D.N.Y. Feb. 27, 2006) (finding that a short-seller’s report could qualify as a corrective
disclosure where it revealed information new to the market—namely, that the company had
insufficient cash flow to funds its operations and, contrary to statements made by the defendants,
would likely default on its credit obligations).
11
Insofar as the Investors argue that not every analyst opinion, but only those that are in
depth or well researched (in other words, only the good analyst opinions), should qualify as
corrective disclosures, that argument proves far too much. The point is that the factual
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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 predicting 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, 125 S. Ct. at
1632 (explaining the “tangle of factors” that affect stock price but do not qualify
for purposes of loss causation).
information upon which the opinion is based was already available to the market, which—being
an efficient market—has already digested it into the security’s price. The quality or
exhaustiveness of the report, in other words, is simply beside the point.
12
By way of example, when Einhorn revealed that he was short the stock of Green
Mountain Coffee Roasters (GMCR), the maker of Keurig K-Cups, at the Value Investing
Conference the very next year, the price of GMCR’s stock declined from $91.66 to $69.80 per
share over the three days of trading that followed.
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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
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value of St. Joe’s real-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 into St. Joe’s policies and
practices concerning impairment of investment in real estate assets,” it also made
clear that “[t]he notification from the SEC does not indicate any allegations of
wrongdoing, and an inquiry is not an indication of any violations of federal
securities laws.” The July disclosure noted that the SEC had issued a “related
private order of investigation” that “cover[ed] a variety of matters for the period
beginning January 1, 2007,” including the Company’s compliance with the “the
antifraud provisions of the Federal securities laws” and the Company’s financial
statements. Though St. Joe’s stock dropped 7% on the date the informal SEC
investigation was announced and 9% on the date the order of private investigation
was disclosed, the SEC never issued any finding of wrongdoing or in any way
indicated that the Company had violated the federal securities laws.
In our view, the commencement of an SEC investigation, without more, is
insufficient to constitute a corrective disclosure for purposes of § 10(b). The
announcement of an investigation reveals just that—an investigation—and nothing
more. See In re Almost Family, Inc. Sec. Litig., No. 3:10-CV-00520-H, 2012 WL
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443461, at *13 (W.D. Ky. Feb. 10, 2012) (“Numerous federal district courts have
held that a disclosure of an investigation, absent an actual revelation of fraud, is
not a corrective disclosure.”); see also Durham v. Whitney Info. Network, Inc., No.
06-CV-00687, 2009 WL 3783375, at *21 (M.D. Fla. Nov. 10, 2009); In re Dell
Inc., Sec. Litig., 591 F. Supp. 2d 877, 910 (W.D. Tex. 2008); Rudolph v.
UTStarcom, 560 F. Supp. 2d 880, 888 (N.D. Cal. 2008). To be sure, stock prices
may fall upon the announcement of an SEC investigation, but 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. See In re Maxim
Integrated Prods., Inc. Sec. Litig., 639 F. Supp. 2d 1038, 1047 (N.D. Cal. 2009)
(explaining that disclosures of SEC investigations may be “indicators of risk
because they reveal the potential existence of future corrective information,” but
they are not corrective disclosures for purposes of loss causation). Therefore, the
Company’s disclosures of the two SEC investigations do not qualify as corrective
disclosures. 13
13
That is not to say that an SEC investigation could never form the basis for a corrective
disclosure. We merely hold that the disclosure of an SEC investigation, standing alone and
without any subsequent disclosure of actual wrongdoing, does not “reveal[] to the market the
pertinent truth” of anything, and therefore does not qualify as a corrective disclosure. See
FindWhat, 658 F.3d at 1311. It is, after all, impossible to say that an SEC investigation was the
moment when the “relevant truth beg[an] to leak out” if the truth never actually leaked out. See
Dura, 544 U.S. at 342, 125 S. Ct. at 1631. It may be possible, in a different case, for the
disclosure of an SEC investigation to qualify as a partial corrective disclosure for purposes of
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In sum, the complaint as framed by the Investors fails to adequately allege
loss causation—that is, a “causal connection between the misrepresentation and the
investment’s subsequent decline in value.” Robbins, 116 F.3d at 1448. The
district court was therefore correct to dismiss the Investors’ complaint for failure to
state a claim. 14 The Investors rest their showing of loss causation on three
purported corrective disclosures: the disclosures of two SEC investigations and the
Einhorn Presentation. As we have said, the disclosures of the SEC investigations,
without more, are insufficient as a matter of law to constitute corrective
disclosures. And with regard to the Einhorn Presentation, the Investors’ claim of
loss causation is doomed by the very dogma they invoked to forego the reliance
requirement: the efficient market theory. In the financial markets, not every bit of
bad news that has a negative effect on the price of a security necessarily has a
corrective effect for purposes of loss causation. And though we appreciate the
opening the class period when the investigation is coupled with a later finding of fraud or
wrongdoing. See, e.g., In re Take-Two Interactive Sec. Litig., 551 F. Supp. 2d 247, 287–90
(S.D.N.Y. 2008) (holding that the disclosure of an SEC investigation was a partial corrective
disclosure when it was followed by a corporate officer’s plea of guilty to charges of backdating
options); In re IMAX Sec. Litig., 587 F. Supp. 2d 471, 485 (S.D.N.Y. 2008) (finding that SEC
inquiry could constitute a partial corrective disclosure where it “culminated in the restatement of
[the company’s] earnings and revenues for fiscal years 2002 through 2005”). But where, as here,
there is no later finding of wrongdoing, that theory is obviously inapplicable. Therefore, our
unremarkable holding—that an SEC investigation, standing alone, is insufficient to qualify as a
corrective disclosure—is dispositive of the case before us.
14
Though we affirm the district court’s judgment specifically on the basis of loss
causation, we note incidentally, and without need for further discussion, that we find no merit in
the Investors’ arguments as to actionable misrepresentation or scienter, and we discern no abuse
of discretion in the denial of their motion to alter or amend.
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importance of private securities fraud actions in deterring fraud and promoting
confidence in the marketplace, we are equally mindful that their purpose is “not to
provide investors with broad insurance against market losses, but to protect them
against those economic losses that misrepresentations actually cause.” Dura, 544
U.S. at 345, 125 S. Ct. at 1633. Our decision today ensures that loss causation
remains a key sentinel in striking that delicate balance.
AFFIRMED.
25