Eleventh Circuit Conflates Requirements of “Loss Causation” and “Misrepresentation” in Meyer v. Greene (St. Joe Company)
In Meyer v. Greene, No. 12-11488, 2013 WL 656500 (11th Cir. Feb. 25, 2013), the Eleventh Circuit Court of Appeals recently affirmed the dismissal of a securities fraud class action against St. Joe Company.
St. Joe is a paper company that in recent years has profited nicely from real estate developments within its vast holdings of current or former timberland near the Florida coast. After the housing crash, a prominent hedge fund manager (who specializes in short-selling overvalued companies) made a presentation arguing that St. Joe had overstated the value of its real estate developments in view of the poor housing market and that it needed to write down the values for many of its holdings. In the two business days following that presentation, St. Joe stock fell 20%.
A few months later, the SEC announced its informal inquiry “into St. Joe’s policies and practices concerning impairment of investment in real estate assets,” and the stock fell another 7%. Six months later, the SEC announced a formal investigation regarding St. Joe’s compliance with federal securities antifraud laws, and the stock fell yet another 9%.
The case alleged a violation of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, which requires proof, among other things, of “loss causation,” i.e., that the plaintiff’s losses were caused by the defendant’s fraud, as opposed to other market conditions. The plaintiff sued, and the district court dismissed the complaint. On appeal, the Eleventh Circuit affirmed, concluding that the facts as alleged did not suggest “loss causation.”
The logic of the opinion is a bit difficult to square both with traditional jurisprudence defining “loss causation” and recent Supreme Court authority. In short, the court concluded that the hedge fund manager’s analysis was akin to that of any other stock analyst giving an opinion about a stock. The court, however, glosses over the fact that this analysis was about the veracity of statements already made by a company, not about a company’s future prospects.
The court then concludes that the SEC’s announcements of its investigations cannot support an allegation of loss causation because an investigation is just that – an investigation and not a finding of fraud. But this conclusion conflates proof (or an allegation, since this decision was made on a motion to dismiss before the plaintiff even had the ability to conduct discovery) that a misrepresentation was made with proof (allegation) that the investor’s loss is properly attributable to that alleged misrepresentation. The SEC was not investigating how St. Joe might value its properties in the future. Rather, the SEC’s informal and formal investigations were to determine whether St. Joe had lied when it had reported its balance sheet to the market and to the SEC. The stock prices fell because the market grew concerned that the value of St. Joe’s reported assets was less than St. Joe had represented. That is the very definition of loss causation, as it has been viewed since 1934.
It is difficult to understand the court’s reasoning that the sudden drops in the trading price of St. Joe stock that immediately followed the questioning, both by an analyst and the SEC, of St. Joe’s state asset valuations did not reflect a loss “caused” by (i.e., relating to) St. Joe’s alleged overstatement of those same property values. It is equally difficult to comprehend how an analyst’s conclusion that a company had lied about the value of its assets, followed by a drop in the price of the stock, does not suggest that the stock drop was caused by fears that the asset values, were, in fact, overstated.
Of course, it should ultimately be up to the plaintiff to prove at trial that St. Joe should have written down some of its properties’ values to a material degree, and that its prior representations as to those values was therefore misleading (not to mention that the misstatement did not reflect an honest disagreement as to valuation, but instead was intended to mislead). But the Eleventh Circuit did not give the plaintiff that opportunity.
It remains to be seen whether the plaintiff seeks rehearing of this decision, and if so, whether the court agrees to rehearing. If rehearing is not granted, the Supreme Court should grant certiorari to clarify just what “loss causation” means. Indeed, this opinion seems in conflict with the Supreme Court’s recent decisions in Halliburton and Dura, which reflect a very different understanding of what “loss causation” means.