Oklahoma Firefighters Pension & Retirement Systems v. Six Flags: Fifth Circuit Opinion Reviving Securities Class Action Creates Tension With Other Circuits On Key Issues

• Jurisdiction: United States,Federal
• Law Firm: Cooley LLP
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Real Estate and Construction, Corporate and Company Law, Class Actions, Construction & Planning, Securities
• Author: Ms Sarah Lightdale, Patrick Hayden and Adam M. Katz
• Published date: 02 February 2023

Introduction

On January 18, 2023, the Fifth Circuit unanimously reversed the Northern District of Texas's dismissal of a securities class action contending that Six Flags and two of its executives misled investors by projecting impossible timelines for opening new theme parks in China, which were anticipated to be highly profitable. In the Fifth Circuit's view, allegations regarding construction setbacks and other challenges-derived in large part from an anonymous former employee responsible for overseeing construction of the parks-were sufficient to state a claim against Six Flags, its former Chairman and CEO, and its former CFO under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. In its opinion, the Fifth Circuit rejected several grounds for dismissal commonly offered by securities class action defendants and departed from-or at minimum, created tension with-the law in other circuits. While the full impact remains to be seen, this plaintiff-friendly opinion may make defending against investor claims in the Fifth Circuit more challenging and, accordingly, warrants close attention from public companies and their securities counsel.

Background

Six Flags is the largest theme park operator in the world.¹ Around 2014, Six Flags embarked on an international licensing strategy: Six Flags would license foreign entities to build theme parks abroad in return for substantial ongoing fees.² In connection with this strategy, Six Flags partnered with Chinese real estate developer Riverside Investment Group ("Riverside") and-between 2015 and 2018-announced that Riverside would develop 11 theme parks in China.³

Between 2018 and 2020, Six Flags made a series of statements concerning progress at the Chinese theme parks. At first, the statements were principally optimistic. In 2018, Six Flags represented that, despite a 1-2 month delay at one park, the parks were "progressing nicely towards their anticipated opening dates."⁴ In early 2019, Six Flags conceded the park openings would be delayed 6-12 months, but maintained that construction was "progressing" and that Riverside was "fully committed to developing and opening" the parks.⁵ During the ensuing months, Six Flags stated that there was "ongoing building" and "no delays" to the projected openings.⁶

Starting in late 2019, Six Flags's representations became gloomier. In October 2019, Six Flags acknowledged that the Chinese parks could suffer further delays and that there was a "very high likelihood.. .that we will see changes in the timing of the park openings."⁷ In January 2020, Six Flags disclosed that Riverside had defaulted on its payment obligations to vendors and that this could cause "the termination of all Six-Flags-branded projects in China."⁸ Finally, in February 2020, Six Flags announced it had terminated its agreement with Riverside.⁹ On February 20, 2020, Six Flags's stock dipped to its lowest trading price in seven years-a 56% drop from its high in June 2018.¹⁰

In early 2020, Oklahoma Firefighters Pension and Retirement System and other investors sued, accusing Six Flags and its top executives of securities fraud in violation of Sections 10(b) and 20(a) of the Exchange Act. As the district court later explained, the complaint relied heavily on information from an "anonymous, midlevel" former employee (the "FE") who was responsible for overseeing construction of the Chinese theme parks.¹¹According to the FE, it was "obvious" the parks could not open on time because Riverside was unable or unwilling to fund the rides, had not procured needed blueprints, and had hardly begun construction.¹² The Northern District of Texas dismissed the case, holding that the complaint failed to plead any actionable misrepresentations, omissions, or inference of intent to defraud (scienter).¹³

The Decision

The Fifth Circuit reversed, holding that plaintiffs adequately alleged both falsity and scienter. In the process, the Fifth Circuit created tension with numerous other circuits on key issues:

Former Employee Allegations. Whereas the district court determined that the FE's allegations should be discounted "generally" and discounted "significantly" with respect to Riverside's financial health-in large part because the FE was responsible for overseeing construction, not internal finances-the Fifth Circuit held that the circumstances merited only a "minimal discount" and that "[d]iscount does not mean unfettered discretion to discard."¹⁴The Fifth Circuit credited the FE's account on grounds that the complaint adequately alleged his title (Director of International Construction and Project Management), responsibilities (overseeing construction of the China parks and reporting internally on progress), and firsthand observations (working onsite at the parks and attending meetings with Riverside).¹⁵ As to scienter, the Fifth Circuit determined that the FE's account of having prepared "weekly presentations" regarding infrastructure and construction to his superiors-one of whom allegedly shared the presentations' content with the CEO and Board-was sufficient, even though "Plaintiff did not allege that FE1 had any contact with the Defendants."¹⁶

Other circuits, however, have been far less willing to credit such FE allegations. For example, whereas the Fifth Circuit credited a Six Flags non-finance employee's account of the finances of a third party (Riverside),¹⁷...