Last week, the Fifth Circuit reversed a decision from the
Background
The complaint stemmed from Six Flags announcing its plans to open multiple theme parks in
The majority of the allegations in the complaint came from information provided by a confidential witness, the former Director of
The district court granted the defendants' motion to dismiss, holding that the complaint did not make adequate allegations of material misrepresentations or omissions or allege a strong inference of scienter. Notably, the district court gave little weight to the information provided by the anonymous former employee. After the plaintiffs' motions to set aside the judgment and to amend the complaint were denied, they appealed to the Fifth Circuit.
The Fifth Circuit's Decision
Weight of Confidential Witness Allegations
The court began its analysis by evaluating the allegations based on the assertions of the anonymous former employee. Rather than "significantly discounting" these allegations like the district court, the Fifth Circuit held the employee's allegations should be only minimally discounted because of the witness's anonymity, but otherwise could be relied upon.
The court explained that there is reason to credit a confidential informant's reliability when their information is coupled with a particularized description of their job, and when that job puts them in a position to know the facts they assert firsthand. In the court's view, the plaintiffs satisfied that requirement. The complaint alleged that the former employee was responsible for overseeing the construction of the
Forward Looking Statements
The court next evaluated whether Six Flags' statements regarding anticipated completion of the
The only statements that the court considered forward-looking were certain 2018 statements regarding plans to open the parks with no commentary about present construction progress. However, the court held that even those did not warrant safe harbor because they were not accompanied by meaningful cautionary language. The defendants' claimed cautionary language - e.g., "[international deals] sometimes take a long time to come to fruition" - did not qualify, as they came in response to different analysts' questions, were not offered unprompted, and did not address the actual risk of the
The court then turned to whether the statements contained material misrepresentations or omissions. In holding that they did, the court rejected the defendants' argument that the plaintiffs were required to plead specific facts demonstrating that the disclosed opening dates were "impossible." The court held that requiring the plaintiffs to make a plausible allegation that Six Flags' stated timelines were totally impossible would require investigation into industry-specific factual questions that were inappropriate at the pleadings stage.
Puffery
The court separately addressed whether the challenged statements constituted mere puffery, as the district court had held. Although the court agreed that certain statements such as "we will not be stopping at 10 parks" and "I think 20 parks is possible" were vague and optimistic generalizations, other statements regarding the timing of park openings were too specific to constitute puffery. For example, the court held that the statement "the parks are progressing nicely" was not puffery because it confirmed projections previously provided by the defendants. It also noted that the district court's conception of puffery was "too broad."
Scienter
The court's analysis of whether the plaintiffs sufficiently pled a strong inference of scienter focused on the collective weight of numerous allegations included in the complaint. For the defendants' 2018 statements, the court considered the potential for the defendants to receive significant bonus awards if the company hit a target EBITDA, which was unlikely to occur if the
The court also held that the plaintiffs had alleged a strong inference of scienter as to the defendants' statements in 2019, which recognized that there would be delays in the parks' openings but construction was progressing. The court acknowledged that by 2019, there was no longer a financial motive, as the defendants had already lost the opportunity to receive the bonuses that they would have earned had the parks opened on time. However, the court held that they still could have a motive to "save face" regarding the parks. Coupled with "circumstantial allegations" from the former employee regarding Defendants' receipt of regular reports on construction progress and the fact that the
Implications
The Six Flags decision does not overwhelmingly alter the standards by which federal securities lawsuits are evaluated. However, the Fifth Circuit's at times sharp rebuke of the lower court's decision may affect how district courts review allegations at the pleadings stage - especially with respect to information provided by confidential witnesses. The Fifth Circuit was significantly more willing than the district court to give substantial weight to the former employee's allegations, but only because their role and responsibilities were described in detail. Because the former employee's allegations were the crux of the plaintiffs' case, once the Fifth Circuit determined that they should be "minimally discounted," the entire complaint stood on much stronger ground. Notably, the court's view does not seem very different from the framework for evaluating confidential witness allegations that is already in place in other circuits, including - as the Six Flags opinion pointed out - the Third and the Fourth Circuits. Thus, by bringing the Fifth Circuit in line with other jurisdictions, securities plaintiffs who have obtained information from former employees have another forum in which to file their complaints.
Fifth Circuit Revives Securities Class Action Against Six Flags
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