On November 6, 2016, Judge Michael A. Anello of the United States District Court for the Southern District of California denied defendants’ motion for summary judgment in a securities class action against a theme park and entertainment company (“defendant” or the “Company”), certain members of its management, and its largest shareholder. Baker v. SeaWorld Entm’t, Inc., No. 14CV2129-MMA (AGS), 2019 WL 6118448 (S.D. Cal. Nov. 18, 2019). Plaintiffs alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making materially misleading misstatements and omissions about the effect of Blackfish, a documentary film concerning killer whales in captivity, on attendance at the theme park and its earnings. The Court denied defendants’ motion for summary judgment on the basis that there were genuine issues of material fact with respect to each element of a securities fraud claim.

Plaintiffs alleged that the Company made materially misleading statements and omissions between the third quarter of 2013 and first quarter of 2014 regarding the reasons for the declining attendance at the theme park. Specifically, plaintiffs alleged that it was false and misleading when the Company asserted that it saw “no noticeable impact” on its business from the film Blackfish and instead cited poor weather and management strategies as reasons for the waning attendance at the theme park. Plaintiffs alleged that they suffered losses when the stock price declined 33% following the Company’s 2014 Q2 earnings announcement that partially attributed the decline in attendance to “recent media attention surrounding proposed legislation,” and that this statement was widely understood to be a reference to the negative impact on the business caused by publicity related to Blackfish. The Court ruled that when all reasonable inferences were drawn in favor of plaintiffs, there were triable issues of fact with respect to each element of plaintiffs’ securities fraud claims.

Loss causation: The Court first rejected defendants’ argument that plaintiffs could not prove loss causation, because the alleged corrective disclosure in the second quarter of 2014 did not “relate back” to the prior quarters during which the alleged misstatements and omissions were made. According to the Court, the relevant analysis should focus on whether the subject of the disclosure relates back to the alleged misrepresentation and not whether a specific time period is referenced. The Court then found that a reasonable jury could find that the statement about the proposed legislation related back to the alleged misstatements and omissions regarding the lack of impact from Blackfish, and that this conclusion was supported by market commentary attributing the stock decline to the film.

Falsity: The Court also disagreed with defendants’ argument that there was no evidence that the alleged misstatements and omissions were false or misleading when made. Examining each of the alleged misstatements and omissions in turn, the Court found that when drawing all reasonable inferences in favor of plaintiffs, there were triable issues of fact including based on, among other things: (a) testimony from the Company’s vice president of communications who stated that he did not believe that the statements that there was no impact from Blackfish were true when made; (b) record evidence of consumers writing to the Company that they would never visit its theme parks after having watched Blackfish; (c) defendants’ failure to conduct any analysis regarding the impact of the documentary film on attendance at the theme parks despite its statements that there was no impact; and (d) evidence suggesting that corporate partnerships were being canceled because of reputational impact from Blackfish.

Materiality: The Court rejected defendants’ argument that any decline in attendance resulting from Blackfish was immaterial, characterizing their argument as “miss[ing] the mark”, because “materiality is not limited to a percentage of a company’s total profits” and that “even quantitatively small amounts can still present a materially misleading picture of a company’s health.”

Scienter: With respect to defendants’ arguments that plaintiffs failed to establish scienter, the Court noted that summary judgment on the question of scienter is appropriate only in limited instances where there is no rational basis in the record for concluding that any of the challenged statements were made with scienter. While defendants cited to the officers’ retention of Company stock as negating scienter, plaintiffs cited to internal communications regarding negative publicity resulting from the documentary as evidence of scienter. Because “[c]onflicting inferences [of scienter] result in a case for the jury,” the Court found that summary judgment was inappropriate.

Damages: Lastly, the Court rejected defendants’ argument that plaintiffs offered no admissible evidence of damages, finding that defendants’ disagreement with plaintiffs’ expert’s approaches and conclusion was not a basis for summary judgment.

After denying defendants’ motion for summary judgment on plaintiffs’ Section 10(b) claim, the Court also rejected defendants’ argument that the individual defendants and the Company’s largest shareholder were not “controlling persons” within the meaning of Section 20(a). With respect to the large shareholder, defendants argued that the shareholder could not be a control person because it did not hold a majority of the board seats during the class period and because it reduced its holdings during the class period from 42.8% to 22.6%. The Court rejected these arguments, stating that the shareholder’s three board seats and large shareholdings throughout the class period raised triable issues of facts about whether the entity exercised control throughout the class period.

Baker v. SeaWorld Entm’t, Inc.