Private Prison Faces Shareholder Class Action Alleging COVID-19 Securities Fraud

    In what could become a new COVID-19 litigation strategy, a shareholder class action lawsuit was filed recently against a publicly-traded prison and reentry facility management company, Geo Group, claiming violations of the Securities and Exchange Act of 1934. The shareholder plaintiff alleges that Geo Group misled investors about its COVID-19 precautionary measures in Securities and Exchange Commission (SEC) filings and other actions. The class action seeks damages on behalf of Geo Group’s shareholders for harm suffered via stock price drops.

    The Allegations under the Exchange Act

    Plaintiff Steve Hartel, a Colorado resident, alleges that Geo Group violated Section 10(b) of the Exchange Act and Rule 10b-5 with false and misleading statements concerning the measures taken to protect residents in Geo’s facilities. The complaint references numerous statements the company made in SEC filings, earnings calls, and other public statements about the COVID-19 protocols and policies it implemented to prevent the spread of the virus and protect residents.

    Hartel asserts that the company and named defendants made public statements that were false and/or misleading that failed to disclose that Geo Group maintained “woefully ineffective COVID-19 response procedures.” This ineffective response, the complaint claims, is what led to the halfway house residents being exposed to “significant health risks.”

    The complaint also alleges that because of the inadequate COVID response, Geo Group, as a public company, was “vulnerable to significant financial and/or reputational harm.” The plaintiff states, “[h]ad plaintiff and the other members of the Class known the truth, they would not have purchased or otherwise acquired said securities, or would not have purchased or otherwise acquired them at the inflated prices that were paid.”

    Problematic Public Company Statements

    The plaintiff also cites 2019 and 2020 Geo Group company statements and filings on a host of policies and measures the company claims to have implemented before and during the global pandemic. For example, Geo Group reports in a June 1, 2020 statement that “[a]ll of our facilities operate safely and without overcrowded conditions.” It also claims: “ [w]e updated our policies and procedures to include best practices for the prevention, assessment, and management of COVID-19, including the implementation of quarantine and cohorting procedures to isolate confirmed and presumptive cases of COVID-19, including medical isolation and the use of Airborne Infection Isolation Rooms.” These statements, the complaint asserts, were untrue representations of the actual conditions.

    The Intercept’s Bombshell Article

    The crux of Hartel’s complaint is that he and the Class suffered harm when the value of their Geo Group shares declined in a precipitous stock price drop on June 17, 2020. That is the day that news site, The Intercept, published a scathing exposé on the reality of the COVID-19 situation in Geo Group’s halfway house in Leavenworth, Kansas. The complaint states that after The Interceptor article broke, GEO Group’s stock price fell $1.03 per share, or 7.8%, to close at $12.17 per share on June 17.

    The Intercept reported that two female residents of the halfway house, Grossman House—who also worked at a nearby pork processing plant—had been coughing, experiencing cold sweats, and running fevers in mid to late April before the staff sought medical attention. Back at Grossman House, women who tested negative were moved to an area that had been used to quarantine the sick women and another small room where there was no room for social distancing. One woman who was put in these tight quarters tested positive a few days later, commenting “[t]hat it was horrible because it was like a really small area for all four of us.”

    Meanwhile, it wasn’t until April 30, 2020 that the male residents were informed of the COVID-19 outbreak in the residence. The men were moved to a new area in their dorm area to await testing. That same night, two new residents from a federal correctional facility where COVID-19 was present were put into the small area with the other men. The next day, testing showed one of the new residents had COVID-19.

    Although the company outwardly announced they were prepared from the outset to respond to the COVID-19 threat, the article also quotes a resident saying that when he arrived at the Grossman Center in March 2020, Geo Group had done “absolutely nothing” to mitigate the virus, other than restrict residents from visiting family. “So basically regardless of the protocols they try to do outside the unit, inside the unit, they literally have us shoved in on top of each other. So there’s really no way for us to have any type of distancing. It’s impossible.”

    Why this Case is Different

    Most other COVID-19 prison lawsuits have focused on due process claims under the 14th Amendment— governing pretrial detention—and the 8th Amendment—protecting against cruel and unusual punishment. The lawsuits frequently demand judicial intervention to remove inmates from high-risk COVID-19 conditions at prisons and to put pressure on prison management to improve sanitation, availability of personal protective equipment, and more widespread testing.

    Hartel’s suit appears to be the first action brought under the Exchange Act on behalf of shareholders. Here, the issues will center on whether company officials made false and misleading statements while they knew the Grossman Center and other facilities were far from adequately addressing the COVID-19 risks. This class action is a clear departure in prison litigation direction that’s been seen during the pandemic—from defending civil rights concerns to defending monetary interests in a for-profit prison system.

    Experts for Prison Securities Fraud Cases

    Cases like Hartel’s that are brought under the Exchange Act will require several different types of experts. First, a securities law expert will be a crucial resource for the plaintiffs’ counsel. This type of expert will be familiar with the nuances of complex law surrounding the Exchange Act. Stock exchange experts will also likely play a role in helping counsel and the jury understand the alleged link between the June dip in Geo Group’s stock prices and the publication of The Intercept’s article.

    Professionals familiar with the operations of halfway houses can help advise counsel and the jury on the standards for running such a facility. They may also be used to shed light on whether Geo Group did or did not comply with standards, such as those issued by the Centers for Disease Control and Prevention (CDC). Protocols and implementation for testing new arrivals, for example, will surely also be a key issue in the case, as well as the cramped quarters in the Grossman Center during the height of the outbreak.