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Fifth Circuit Reverses District Court’s Dismissal Of Putative Securities Fraud Class Action Against Amusement Park Company For Lack Of Standing
04/23/2024On April 18, 2024, the United States Court of Appeals for the Fifth Circuit reversed the dismissal of and reinstated a putative shareholders’ class action against an amusement park company (the Company”) and certain of its executives, asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder. Okla. Firefighters & Pension Ret. Sys. v. Six Flags Entm’t Corp., No. 23-10696 (5th Cir. Apr. 18, 2024). The district court granted the Company’s motion for judgment on the pleadings, holding that plaintiff lacked standing because it purchased Company shares too late to have relied on any actionable misstatements, and therefore dismissed the action with prejudice. Reviewing the district court’s decision de novo, the Court reversed, finding that plaintiffs’ economic loss was fairly traceable to the alleged misconduct because the Company’s alleged fraud had not been fully disclosed when plaintiff purchased the stock. We previously covered the district court’s decision here.
In 2010, the Company allegedly entered into a licensing agreement with a Chinese real estate company to develop theme parks across China. Under the agreement, the Company allegedly received initial fees during the parks’ development, and then licensing and management fees once the parks opened. Plaintiff alleges that, between April 2018 and February 2020, the Company misled investors that: (i) the parks would open as scheduled between 2019 and 2021; (ii) construction of the parks continued to progress; (iii) its partner had sufficient funding to continue to support the project; and (iv) the revenue recognized under the licensing agreement complied with GAAP.
The district court initially dismissed the action for failure to state a claim. As discussed in a prior post, that decision was reversed in part by the Fifth Circuit, which held plaintiff adequately pleaded facts regarding all four categories of alleged misstatements. However, the Court found that the Company had adequately disclosed on October 23, 2019 that there was “a very high likelihood” the parks’ openings would be delayed. Hence, the Court concluded that the Company’s statements made after that corrective disclosure concerning the timing of the parks’ opening dates were inactionable. The Court reinstated the action and remanded to the district court for further proceedings. On remand, the Company moved for judgment on the pleadings, arguing plaintiff lacked standing because it purchased Company stock approximately one week after the October 2019 corrective disclosure. The district court granted that motion and denied a pending motion to intervene by another potential plaintiff that claimed to have purchased Company stock earlier.
On appeal, the Court stated that whether plaintiff has standing to pursue its claims rests upon whether the Company’s alleged fraud had been fully revealed before plaintiff purchased Company stock in October 2019. Citing the alleged facts recounted in its earlier decision, the Court held that each of the four categories of alleged misstatements comprised “different alleged frauds” and that the Company’s October 2019 corrective disclosure tempered only those alleged misstatements of the Company relating to the timing of the parks’ openings. Because the Company’s alleged misstatements concerning the progress of the parks’ construction, the financial condition of the Company’s partner, and the recognition of the initial fees received during the parks’ development still were “in play” at the time plaintiff purchased the Company’s stock, the Court concluded that plaintiff’s injury is fairly traceable to the Company’s alleged overarching fraud. Accordingly, the Court reversed the dismissal and reinstated the action. The Court further granted the motion to intervene, finding that it had been improperly denied based only on the district court’s erroneous standing analysis.
