A federal appeals court said Sears Holdings Corp is not liable to former Kmart Holding Corp shareholders who accused that retailer of trying to drive down Kmart's stock price to let executives buy shares cheaply.

Tuesday's ruling by the U.S. Second Circuit Court of Appeals in Manhattan affirmed a lower court's findings in favor of Sears , its billionaire Chairman Edward Lampert, and onetime Kmart Chief Executive Julian Day.

Lampert got a controlling stake in Kmart and became chairman when the retailer emerged from bankruptcy in 2003. Kmart then bought the former Sears Roebuck & Co in 2005 to create Hoffman Estates, Illinois-based Sears Holdings.

In the class-action lawsuit, the plaintiffs alleged that Kmart deliberately understated the value of its real estate assets by several billion dollars, to give Lampert and Day a chance to acquire Kmart shares at less than their true worth.

They said that when Kmart then sold some of the real estate to Home Depot Inc and Sears Roebuck, its shares soared, giving it more ammunition to buy Sears.

The plaintiffs contended that because they were not told what the real estate was really worth, they sold their Kmart shares at artificially low prices.

In Tuesday's ruling, the appeals court said the plaintiffs failed to show that Lampert and Day intended to deceive or defraud them.

It said any desire of the executives to acquire stock at artificially low prices could not have motivated them to understate the value of Kmart real estate, given that they had negotiated the terms of their stock options well in advance.

Lampert and Day's only economically rational motive would have been to disclose any information that might increase the company's stock price, the court said.

The lead plaintiffs in the case are the Plumbers and Pipefitters National Pension Fund, the Mississippi Public Employees' Retirement System, and an individual, Fred Campo.

Jay Eisenhofer, a lawyer for the plaintiffs, was not immediately available for comment. Sears had no immediate comment.

Sears shares fell 42 cents to $108.03 on Nasdaq early Tuesday afternoon.

The case is Campo et al v. Sears Holdings Corp et al, U.S. Court of Appeals for the Second Circuit, No. 09-3589.

(Reporting by Jonathan Stempel; Editing by Richard Chang)