On July 23, 2012, the Eleventh Circuit affirmed the Southern District of Florida’s decision granting the defendants’ post-trial motion for judgment as a matter of law in a securities fraud action alleging that BankAtlantic Bancorp, Inc. (“Bancorp”) and its management “had misrepresented the level of risk associated with commercial real estate loans held by its subsidiary, BankAtlantic.” Hubbard v. BankAtlantic Bancorp, Inc., 2012 WL 2985112, at *1 (11th Cir. July 23, 2012) (Tjoflat, J.). The Eleventh Circuit concluded that “the evidence was insufficient to support a finding of loss causation, an element required to make out a securities fraud claim under Rule 10b–5.” Id.


State-Boston Retirement System (“State-Boston”), a shareholder and the lead plaintiff, alleged that “Bancorp [had] fraudulently misled the public about the deteriorating credit quality of BankAtlantic’s commercial real estate portfolio.” Id. “That portfolio comprised land acquisition and development loans; land acquisition, development, and construction loans; and builder bank loans (‘BLB loans’).” Id.  

On April 25, 2007, Bancorp “partially disclosed its concern about [its] commercial real estate portfolio” in an 8–K reporting financial results for the first quarter of 2007. The 8–K also stated that “[t]he current environment for residential land acquisition and development loans is a concern, particularly in Florida” and noted that Bancorp could “experience further deterioration in [its] portfolio over the next several quarters as the market attempts to absorb an oversupply of available lot inventory.” Id. at *3.  

On April 26, 2007, Bancorp’s former CEO “warned that the Florida housing market was slowing and that, as a result, the risk associated with the BLB portfolio could worsen.” Id. He explained that “[b]ecause of market conditions, … homebuilders were becoming more reluctant to buy lots on the land that secured the BLB loans.” Id. “That day, Bancorp’s stock price dropped from $10.55 per share to $9.99.” Id.  

Over the course of the next several months, “Bancorp’s public statements continued to note the risk associated with BankAtlantic’s BLB loans but minimize the risk associated with the non-BLB portion of the commercial real estate portfolio.” Id. However, “[o]n October 25, 2007, Bancorp released an 8–K that, according to State-Boston, brought the fraud to an end.” Id. at *4. The October 25, 2007 8–K made it clear that BankAtlantic faced credit issues across its entire commercial real estate loan portfolio, not simply with its BLB loans. “By the time the 8–K was released, Bancorp’s stock price had already fallen gradually over the class period, from $12.66 per share to $7.65.” Id. “On October 26, 2007, it fell by another $2.93, or 38 percent, to $4.72.” Id.  

Three days later, State-Boston brought a class action suit under Section 10(b). The case went to trial, and the jury returned a verdict in State-Boston’s favor. The defendants then filed a post-trial motion for judgment as a matter of law, which the Southern District of Florida granted on April 25, 2011.3 The district court found, inter alia, that State-Boston “had not presented evidence sufficient to support a finding that the statements found by the jury to violate [Section] 10(b) had caused their losses … .” Id. at *6. State-Boston appealed.  

The Eleventh Circuit Affirms the District Court’s Ruling Based on State-Boston’s Failure to Establish Loss Causation

The Eleventh Circuit explained that “when an investor buys stock at an artificially inflated price and resells at a lower price, the price decline, and the investor’s consequent loss, may result in part from factors other than the dissipation of fraud-induced inflation.” Id. at *7. The lower price “‘may reflect, not the earlier misrepresentation, but changed economic circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions, or other events, which taken separately or together account for some or all of that lower price.’” Id. (quoting Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 343 (2005)). “Thus, to succeed in a fraud-on-the-market case, it is not enough to point to a decline in the security’s price after the truth of the misrepresented matter was revealed to the public.” Id. at *8. “The plaintiff must also offer evidence sufficient to allow the jury to separate portions of the price decline attributable to causes unrelated to the fraud[.]” Id.  

Here, State-Boston claimed that “class members [had] purchased Bancorp stock at prices that were artificially inflated because Bancorp [had] fraudulently concealed the poor credit quality of BankAtlantic’s commercial real estate portfolio, and that those shares lost value when the portfolio’s deterioration was revealed to the market.” Id. at *9. State-Boston’s loss causation expert testified that the entire 38% decline in the value of Bancorp’s share price on October 26, 2007 resulted from “the materialization of a [concealed] risk … that [Bancorp’s] commercial real estate portfolio would deteriorate[.]” Id.  

The expert “attempted to isolate the effect of company-specific factors from the effect of general market trends by comparing the change in Bancorp’s stock to the change in the S&P 500.” Id. “She also attempted to separate the effect of company-specific factors from industry-wide trends by comparing Bancorp stock to the NASDAQ Bank Index, an index of the stock prices of hundreds of banks and bank holding companies traded on the NASDAQ.” Id. However, the Eleventh Circuit determined that State- Boston’s expert “failed … to account for the effects of the collapse of the Florida real estate market.” Id. at *10.  

The court explained that Florida “benefited more than most states from the real estate boom of the previous years” and was consequently “hit harder than most [in 2007] by the ensuing bust.” Id. Moreover, “Florida financial institutions … made up only a small percentage of the NASDAQ Bank Index.” Id. The Eleventh Circuit found that the NASDAQ Bank Index was therefore “inappropriate for the task of filtering out the effects of industry-wide factors that might affect the stock price of a bank … whose assets were concentrated in loans tied to Florida real estate in 2007.” Id.  

In this case, “BankAtlantic and Bancorp were particularly susceptible to any deterioration in the Florida real estate market” because “BankAtlantic’s assets were concentrated in loans tied to Florida real estate.” Id. “To support a finding that Bancorp’s misstatements were a substantial factor in bringing about its losses,” State-Boston “had to present evidence that would give a jury some indication, however rough, of how much of the decline in Bancorp’s stock price resulted not from the fraud but from the general downturn in the Florida real estate market—the risk of which Bancorp is not alleged to have concealed.” Id. The Eleventh Circuit found that “State Boston failed to do so.” Id. “None of its evidence excluded the possibility that class members’ losses resulted not from anything specific about BankAtlantic’s commercial real estate portfolio that Bancorp hid from the public, but from market forces that it had warned of—and that would likely have caused significant losses for an investor in any bank with a significant credit portfolio in commercial real estate in Florida in 2007.” Id. The Eleventh Circuit held that “Bancorp [was] therefore entitled to judgment as a matter of law.” Id.