* Greenlight manager was short-seller of St Joe stock
* Securities fraud claim not supported by Einhorn criticism
By Jonathan Stempel
Feb 25 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
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 (229,457 hectares) of land,
mainly in northwest Florida. The SEC has not issued any finding
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
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.