by Matt Clarke
On March 26, 2019, a federal district court in Tennessee granted class-action certification in a shareholder lawsuit brought against CoreCivic, formerly Corrections Corporation of America, that alleged the company made statements misrepresenting the quality and value of its services, resulting in losses to stockholders.
The suit was filed in August 2016 against defendants CoreCivic and four of its executives – CEO Damon T. Hininger, CFO David M. Garfinkle, Todd J. Mullenger and board member and former federal Bureau of Prisons director Harley G. Lappin.
Amalgamated Bank, as Trustee for the LongView Collective Investment Fund, sought to represent a class of investors who bought and sold CoreCivic stock between February 27, 2012 and August 17, 2016, including “at least 783 major institutions” and numerous minor institutions and private parties who owned the company’s stock during that period.
Amalgamated alleged it alone lost $1.2 million when CoreCivic’s stock price fell sharply after an August 18, 2016 memorandum by then-Deputy U.S. Attorney General Sally Q. Yates directed the federal Bureau of Prisons (BOP) to phase out private prison contracts – a directive later reversed by the Trump administration. [See: PLN, Oct. 2018, p.30; Oct. 2016, p.22].
The bank’s lawsuit essentially claims that CoreCivic officials made numerous statements about how well the company was fulfilling its contracts with the federal government and how happy their clients were with CoreCivic’s performance when, in fact, the company’s facilities were receiving poor marks on audits and its executives were exchanging emails about how bad the situation was and how the contracts were in danger.
“CoreCivic and its executives, as might be expected, typically portrayed its services in a positive light to shareholders,” the district court wrote. “The statements at issue here, however, frequently went beyond generic puffery to claims that their services were of a high quality, specifically, in the eyes of their government clients.”
CoreCivic’s defense was that an August 11, 2016 report by the Department of Justice’s Office of the Inspector General (OIG) laid bare the problems in privately-operated federal prisons. But the court agreed with Amalgamated that the OIG report did not address the scope of the problems. In reaching this conclusion, U.S. District Court Judge Aleta A. Trauger quoted emails in which CoreCivic executives expressed concerns about the pending report, then surprise and pleasure that it did not dwell on some of the more serious deficiencies at private prisons – such as continuous understaffing – and was directed more at problems with the BOP’s oversight role. Judge Trauger found there was “a strong case to be made that CoreCivic got off easy” with respect to the OIG report.
The district court held that Amalgamated was entitled to the rebuttable presumption that it relied on the company’s material public statements when making stock purchases. The fact that CoreCivic’s stock eventually recovered was no defense to its alleged use of false statements and failure to disclose adverse information. The court wrote that the fundamental question was, “Did a statement matter?” A successful plaintiff must show the misleading statements or failure to disclose was material to a negative stock price impact that caused the loss, but those were issues for trial, not for certifying a class.
The district court found that Amalgamated had met the requirements of numerosity, commonality, typicality and adequacy of representation for class certification. Therefore, class-action status was granted. See: Grae v. Corrections Corporation of America, U.S.D.C. (M.D. Tenn.), Case No. 3:16-cv-02267; 2019 U.S. Dist. LEXIS 50444.
PLN managing editor Alex Friedmann, who owns a small amount of CoreCivic stock as an activist investor, mainly for the purpose of filing shareholder resolutions, has filed a separate derivative suit against CoreCivic that was stayed pending developments in the Grae case, which remains pending.
Additional sources: usnews.com, tennessean.com
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Related legal case
Grae v. Corrections Corporation of America
|Cite||U.S.D.C. (M.D. Tenn.), Case No. 3:16-cv-02267; 2019 U.S. Dist. LEXIS 50444|