Opinion ID: 3046029
Heading Depth: 2
Heading Rank: 2

Heading: The SEC Investigations

Text: 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 21 Case: 12-11488 Date Filed: 02/25/2013 Page: 22 of 25 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 22 Case: 12-11488 Date Filed: 02/25/2013 Page: 23 of 25 443461, at  (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  (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 23 Case: 12-11488 Date Filed: 02/25/2013 Page: 24 of 25 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. 24 Case: 12-11488 Date Filed: 02/25/2013 Page: 25 of 25 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