On December 18, 2017, Judge Aleta A. Trauger of the United States District Court for the Middle District of Tennessee denied a motion to dismiss a putative class action under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) filed against CoreCivic—a publicly traded real estate investment trust that operates private prisons—and certain CoreCivic executives. Grae v. Corr. Corp. of Am., No. 3:16-CV-2267, 2017 WL 6442145 (M.D. Tenn. Dec. 18, 2017). Plaintiffs alleged that CoreCivic and the individual defendants made and authorized numerous false and misleading statements concerning the quality of CoreCivic’s operations and how those operations complied with standards set by the U.S. Federal Bureau of Prisons (“BOP”) despite being on notice that their operations failed to so comply in numerous instances, and that defendants’ statements were later contradicted by a United States Department of Justice Office of Inspector General (“OIG”) audit report and a memorandum by then–Deputy Attorney General Sally Q. Yates critical of the private prison industry, causing CoreCivic’s stock price to plummet more than 50% in eight days. In denying defendants’ motion to dismiss, the Court held that the totality of plaintiffs’ allegations sufficiently supported their “central theory of liability.”
The Court held that the core of plaintiffs’ allegations—that CoreCivic and its executives falsely claimed to be providing high quality prison management services at low costs to government clients and in compliance with policies and procedures required by federal and state law—stated a viable claim. See slip op. at 25-26. Rejecting defendants’ argument that their claims of quality were nonactionable “puffery,” the Court held that defendants’ quality claims were “peg[ged] … to something concrete,” i.e., the views of certain government agencies with prescribed standards and rules. Id. at 28. Judge Trauger noted that CoreCivic’s arguments were undermined by its own more recent statements to the SEC, acknowledging that “government clients have concrete, explicit expectations and that violation of those expectations can, if of a significant magnitude, give rise to a disclosure obligation.” Id. at 29.
The Court also rejected defendants’ argument that CoreCivic’s claims regarding its history of meeting government expectations, and forward-looking statements about its ability to win future government contracts, were not material in light of cautionary language about potential shifts in government policy. While noting that a reasonable investor would know that defendants’ statements “presented the version of the truth most favorable to the company,” id. at 34, the Court found plaintiffs’ allegations sufficiently pleaded because they spoke not to what CoreCivic “strove,” “wished,” or “sought” to do, but rather to CoreCivic’s actual history of performance and its clients’ assessments of that performance. Id. at 34-35.
In addition, the Court determined that the collective weight of the allegations sufficiently supported an inference of scienter under the heightened pleading requirements of the Private Securities Litigation Reform Act (“PSLRA”). The Court emphasized that CoreCivic’s own public statements about its quality assurance practices established that it engaged in ongoing monitoring of the quality of its services and that key executives were made aware of the results of that monitoring. Id. at 40-41. While not determinative in all cases, the Court held that in the circumstances presented here—in which many deficiencies had been identified affecting the relationship with the BOP, which made up 11% to 13% of CoreCivic’s annual revenues—the inference that defendants acted knowingly was “at least as strong as any inference that they did not.” Id. at 42.
This case underscores that statements that may often be considered statements of opinion or puffery (like “quality”) can, in circumstances where the statements are objectively testable, be considered statements of fact and, further, that disclosures about executives’ monitoring of certain information can provide a basis for scienter allegations if that information is misstated.
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