On The Case

$650 million securities class action trial v. CoreCivic set to start in May

Securities class action trials are a rarity. Not quite so rare as, say, a global pandemic (thank goodness!) or even as unusual as a once-every-17-years cicada invasion.

But of the thousands of shareholder fraud class actions filed since Congress tightened the rules for private securities suits in 1995, fewer than 25 cases have been tried to a jury, according to the D&O Diary. The odds of a securities class action making it to a jury trial are way less than 1 in 100.

A class action against the private prison company CoreCivic Inc has beaten those odds. On Tuesday, U.S. District Judge Aleta Trauger of Nashville denied the company’s motion for summary judgment on shareholder allegations that it misrepresented conditions at its facilities and the health of its relationship with the federal Bureau of Prisons, a major CoreCivic client.

The judge held that investors can proceed with the essential theory of their five-year-old case: that CoreCivic failed adequately to warn the market of the true risk that the federal government, which accounted for more than 10% of the company’s revenue, would terminate its contracts. Trauger’s ruling means that investors, led by Amalgamated Bank as trustee for the LongView Collective Investment Fund and represented by Robbins Geller Rudman & Dowd, are headed for a May 10 trial date. (Defense lawyers at Latham & Watkins had been pushing for a delay until August, citing the company’s annual meeting in May.) Trauger said in a March 19 order that the trial will last two weeks.

This is potentially a very big case. The class alleges that CoreCivic’s share price was artificially inflated by the company’s false assurances for a period of more than four years – from February 2012 until August 17, 2016, the day before then-deputy attorney general Sally Yates issued a memo calling for the federal government to phase out the use of private prisons. CoreCivic’s share price fell by more than 35% in the wake of the Yates memo, although it rebounded in 2017 when the Trump administration reversed that policy.

An expert witness for the plaintiffs has pegged damages at between $4.50 and $6.94 per share, depending on when investors bought CoreCivic stock. Shareholders' expert did not submit a classwide estimate of damages, but at a hearing last week, one of CoreCivic's lawyers said the total potential exposure, based on plaintiffs' per-share assertion, was $650 million.

CoreCivic counsel Sarah Tomkowiak of Latham declined to provide a statement in response to my emails requesting comment on the upcoming trial or CoreCivic’s exposure. Christopher Wood of Robbins Geller also declined to provide a statement.

The news from Tuesday’s ruling was not all bad for CoreCivic. Trauger granted summary judgment to the company on shareholders’ claims that it deceived investors when it claimed that its facilities offered cost advantages to the government.

The judge also refused to grant summary judgment to shareholders on the price impact of CoreCivic’s alleged misrepresentations, holding that the company can try to convince jurors that its supposed deceptions did not affect its share price. The company contends, among other things, that if investors had relied on its rosy statements about the quality of its facilities and the strength of its relationship with the government, then the share price would have fallen, before the Yates memo, in response to negative news coverage, including the Bureau of Prisons’ decision not to renew the contract for one of the five federal facilities CoreCivic operated.

The price impact issue has been a rollercoaster ride in this case. When shareholders first moved for class certification, Trauger denied the motion, concluding that investors were not entitled to the presumption that they relied on the company’s misstatements because CoreCivic’s expert cast sufficient doubt on the price impact of the allegedly false representations. But when shareholders moved for reconsideration, the judge reversed herself and certified the class.

CoreCivic asked the 6th U.S. Circuit Court of Appeals to undo Trauger’s class certification decision, arguing that the trial judge should have applied a more rigorous standard for price impact because shareholders alleged a so-called price maintenance theory that corporate misrepresentations artificially propped up the share price. The 6th Circuit, however, ruled in 2019 that Trauger used the right framework and that the appeals court would not overturn her certification of the class.

It’s certainly not going to be easy for CoreCivic’s lawyers to explain to a jury why its experts’ event studies refute shareholders’ price impact evidence – and why that means the company isn’t liable to its investors. But unless this case settles in the next seven weeks, it looks like they’re going to have to try.

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