Prison Biz Blasts Suit Over Virus-Linked Stock Drop

By Rachel O'Brien
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Law360 (August 13, 2020, 3:29 PM EDT) -- A private prison operator urged a Florida federal judge Wednesday to toss a proposed class action alleging it misled investors about its response to the COVID-19 pandemic and caused the company's stock price to drop, calling the suit a text-book example of a baseless "strike suit."

Investor Steve Hartel omitted the numerous disclosures that The GEO Group included in its regulatory filings and in public statements when he filed his suit alleging the company hid that COVID-19 had spread in one of its facilities, the company said in its motion to dismiss Wednesday.

"Plaintiff's bare-bone allegations of securities fraud are facially defective and amount to nothing more than a thinly-veiled effort to extort a settlement predicated entirely on a decline in the GEO Group's share price in the midst of an unprecedented global pandemic," the company said.

The GEO Group owns, leases and manages secure facilities, processing centers and reentry facilities in the U.S., Australia, South Africa and the U.K., with 95,000 beds at 129 facilities.

Hartel, a Colorado resident, filed suit in July against the Boca Raton-based company, CEO George C. Zoley and Chief Financial Officer Brian R. Evans on behalf of a proposed class of people who bought GEO Group securities between Feb. 27, 2020, and June 16, 2020.

Alleging the company misled investors about its response to the pandemic, Hartel cited a June 17 article by The Intercept titled "GEO Group's Blundering Response to the Pandemic Helped Spread Coronavirus in Halfway Houses."

Hartel alleges the article's details caused GEO Group's stock price to fall $1.03 per share, or 7.8%, to close at $12.17 per share on June 17.

The article said there was a COVID-19 outbreak at halfway house Grossman Center in Leavenworth, Kansas, a facility that "was for weeks the hardest hit federal halfway house in the country."

The news outlet quoted a resident as saying the facility had done "absolutely nothing" to mitigate the spread of the virus other than not providing passes for residents to visit family, under orders from the U.S. Bureau of Prisons, according to the complaint.

Hartel claimed this contrasted with The GEO Group's statements in filings with the U.S. Securities and Exchange Commission, statements made during an April 30 earnings call and a June 1 press release saying the company was taking "comprehensive steps to address and mitigate the risks of COVID-19."

In the motion to dismiss, The GEO Group claims Hartel "cherry-pick[ed]" statements to make his case, attempting to "capitalize" on the drop in stock prices.

The company said it followed the Centers for Disease Control and Prevention's recommendation when it issued guidance to its facilities on how to prevent the spread of COVID-19.

The theory advanced in the complaint — that GEO Group misled the public about its response to the pandemic — "is premised on a gross distortion of the impact on the GEO Group's stock price of that one article focused on one facility," the motion said.

"The import of that article is overstated by plaintiff to fit his narrative. There was no 'truth' revealed by this article," the filing said.

The GEO Group argued it was widely known between March and June that there were virus outbreaks at correctional facilities, including an earlier outbreak at the same halfway house.

The company notes that the same day the article was published, its competitor in the private correctional facility industry, CoreCivic Inc., announced it would suspend its quarterly dividend while evaluating its corporate structure and capital allocation.

GEO Group cited news articles that attribute GEO's stock drop to investors reacting to the CoreCivic announcement.

"Plaintiff completely ignores this announcement (as well as prior news stories about the specific halfway house discussed in the article), and completely ignores the likelihood that the GEO Group's stock drop was in response to that industry news –– because it does not fit his contrived narrative," the motion said.

The company said it didn't mislead the public about the state of its facilities during the pandemic but "each of the challenged statements are factually accurate and well-founded when placed in the proper context of the GEO Group's public statements."

Instead, GEO Group argued, the investor ignored risk disclosures and cautionary statements in the company's SEC filings.

The disclosures explicitly cautioned shareholders that the company was unable to predict how the COVID-19 pandemic will impact its finances, the motion said.

The company also said the filings disclosed that there was transmission of COVID-19 at some facilities in the second quarter of 2020 and that if it wasn't able to mitigate the transmission, its finances and operations would be hurt, according to the motion.

Counsel for the parties didn't immediately respond to requests for comment Thursday.

Hartel is represented by Jayne A. Goldstein of Shepherd Finkelman Miller & Shah LLP, James M. LoPiano of Pomerantz LLP and Peretz Bronstein of Bronstein Gewirtz & Grossman LLC.

The GEO Group is represented by Brian P. Miller and Samantha J. Kavanaugh of Akerman LLP.

Zoley and Evans are represented by William K. Hill, George S. LeMieux and Ernest "EJ" A. Cox IV of Gunster Yoakley & Stewart PA.

The case is Hartel v. The Geo Group Inc. et al., case number 9:20-cv-81063, in the U.S. District Court for the Southern District of Florida.

--Additional reporting by Nathan Hale. Editing by Alyssa Miller.

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