St. Joe Co. Investors Lose Appeal of a Fraud Lawsuit

In October 2010, the hedge fund manager David Einhorn took the stage at an investor conference and announced a large bet against the St. Joe Company, a large owner of Florida real estate. He walked the audience through a presentation titled “Field of Schemes: If You Build It, They Won’t Come,” in which he laid out his case that St. Joe vastly overvalued its property holdings. The company’s stock promptly plummeted 20 percent.

Aggrieved shareholders sued the company, saying they were blindsided by the assessment. They accused St. Joe’s of securities fraud based on the revelations in Mr. Einhorn’s critique.

On Monday, the United States Court of Appeals for the 11th Circuit in Atlanta threw out the case, ruling that the shareholders could not rely on Mr. Einhorn’s report in bringing a fraud claim against the company. The court said tat his presentation merely repackaged information that was already public.

“Einhorn was a maven of Wall Street,” said Judge Charles R. Wilson, who wrote the opinion for the three-judge 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.”

Mr. Einhorn, who runs the hedge fund Greenlight Capital, has made a name for himself with his aggressive bets against companies, including Lehman Brothers before the bank collapsed, and Green Mountain Coffee Roasters. As he has gained acclaim, so has his ability to move stock prices.

He is part of a ! generation of stock pickers that has taken an increasingly activist stance, using investor conferences, or the cable television airwaves, to publicize their views about companies. The investor William A. Ackman has recently made waves claiming that Herbalife, the supplements marketer, is a fraud.

The latest appeals court ruling will most likely make it harder for shareholders to base fraud claims on an analyst’s report or a short-seller’s opinion.

“The court got it exactly right,” said Sharon Nelles, a lawyer at Sullivan & Cromwell who represented St. Joe. “The opinion of a short-seller that he has made a good bet is not a basis for a shareholder fraud complaint.”

Mr. Einhorn made headlines last week after winning an unrelated court ruling against Apple that was part of his campaign to get the tech giant to distribute more of its ash to investors. (Mr. Einhorn owns Apple shares outright, so he is hoping that the stock, which is down about 37 percent from its 52-week highs, will rise in value).

In the case of St. Joe, Mr. Einhorn spoke at the Value Investing Congress in Manhattan in 2010 and said that the company had vastly overstated the worth of its real estate holdings, which included about 570,000 acres of land, much of it in the Florida panhandle. His 139-page slide presentation showed empty lots, half-built houses and vacant storefronts.

“This is a ghost town,” he said of one abandoned development at the time.

A few months after Mr. Einhorn’s presentation, St. Joe disclosed in a public filing that the Securities and Exchange Commission had initiated an inquiry into St! . Joe’s! valuation policies.

St. Joe shareholders, led by the City of Southfield Fire and Police Retirement System in Michigan, sued the company. They claimed that the information in Mr. Einhorn’s report and the disclosure about the S.E.C. inquiry should have been previously revealed. The trial court threw out the lawsuit, and the appeals court affirmed that action on Monday.

The court said that “Einhorn’s opinion revealed no fact to the market” and nothing suggested that St. Joe “obfuscated or concealed the information on which Einhorn relied.”

As for the disclosure of the S.E.C. inquiry, the court said that it alone was not an actionable securities fraud claim. “The announcement of an investigation reveals just that â€" an investigation â€" and nothing more,” the court said.

Although St. Joe disputed Mr. Einhorn’s claims, it eventually wrote down the value of some of its assets. The S.E.C. never brought any action against the company, whose share price has recovered to abut where it was on the day of Mr. Einhorn’s presentation.