The Bitter With The Sweet

The Eleventh Circuit has issued an opinion that provides some clear exposition on the issue of loss causation. In Meyer v. Greene, 2013 WL 656500 (11th Cir. Feb. 25, 2013), the court considered whether the plaintiffs had adequately plead loss causation in a securities class action brought against St. Joe Company (a Florida real estate development corporation). The two key disclosures cited by the plaintiffs were (1) a presentation by a prominent short seller, and (2) the company’s announcement of an SEC investigation. The district court found that neither disclosure revealed to the market the supposed falsity of the company’s prior statements and dismissed the complaint.

On appeal, the Eleventh Circuit examined the two key disclosures:

(1) Short Seller Presentation – The court found that the presentation was based (by its own admission) on “publicly available sources.” As a result, it did not provide any new facts to the market that could act as a corrective disclosure. Indeed, the plaintiffs “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.” Having conceded that the market was efficient and St. Joe’s stock price reflected all public information, the plaintiffs “must take the bitter with the sweet.”

Nor could the plaintiffs claim that that the presentation qualified as a corrective disclosure because it provided “expert analysis of the source material.” The court held that “the mere repackaging of already-public information by an analyst or short-seller is simply insufficient” because “the only thing actually disclosed to the market when the opinion is released is the opinion itself, and such opinion, standing alone, cannot reveal to the market the falsity of a company’s prior factual representations.”

(2) SEC Investigation – Although the company’s disclosure of an SEC investigation lead to a decline in its stock price, the court noted that “the SEC never issued any finding of wrongdoing or in any way indicated that the Company had violated the federal securities laws.” Under these circumstances, an “investigation can be seen to portend an added risk of future corrective action” but it does not mean that SEC investigations “in and of themselves, reveal[] to the market that a company’s previous statements were false or fraudulent.”

Holding: Dismissal affirmed.

Quote of Note: “Put another way, though Sec. 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.”