by David M. Reutter

On June 21, 2022, the federal court for the Southern District of Florida significantly trimmed a class-action lawsuit alleging that private prison operator The GEO Group misled investors in its stock, causing them to suffer losses.

For the last three decades, GEO Group has contracted with the Federal Bureau of Prisons, U.S. Immigration and Customs Enforcement (ICE) and the U.S. Marshals Service, as well as prison systems in ten states where it owns and/or operates prisons. Though founded in 1984, the company was restructured as a real estate investment trust in 2013, allowing it to retain only 10% of its income each year — forcing it to rely on capital markets to fund growth investments.

In 2018, the U.S. Department of Homeland Security’s Office of Inspector General reported that several GEO Group detention centers had substandard conditions, inadequate medical care and overcrowding. [See: PLN, July 2018, p.40.] By the following year, the firm had lost some of its contracts to manage immigration detention centers, which then came under even more scrutiny after the Trump administration announced a “zero-tolerance policy” on immigration, separating migrant parents and children. [See: PLN, Jan. 21, 2019, online.] As a result, multiple banks announced in 2019 they would stop doing business with private prison operators, leading to a decline in GEO Group’s stock price.

The company was also named as a defendant in several conditions-of-confinement lawsuits. But it insisted repeatedly to investors and lenders that it did not expect any pending claims to materially affect its financial condition; nor did it consider a loss probable, it said, having adequately accounted for known legal cases in its guidance for 2019.

But on July 17, 2019, “reputable news sources” reported communications with ICE in which GEO Group characterized the lawsuits as a “potentially catastrophic risk” that exposed it to “tens of millions” in potential damages and up to $20 million in legal expenses. It asked ICE to help cover the costs of litigation, which it couldn’t bear on its own. Over the next two days, the firm’s stock price fell 7.9%.

Then the COVID-19 pandemic hit, and courts ordered the firm to follow social-distancing guidelines from the federal Centers for Disease Control. That lowered population levels at some of its lockups, resulting in an announcement on August 6, 2020, that GEO Group would reduce its quarterly dividend by nearly 30%. The stock price then fell another 7%.

Lead Plaintiff Steve Hartel, later joined by James DeLoach and Edward Oketola, filed suit in the Court alleging that GEO Group was aware — or was at least severely reckless in not knowing — that the firm’s operational deficiencies and contractual and legal violations would impair its access to capital, especially after its financial partners bailed out and multiple government contracts were terminated, slowing its revenue stream. Their amended complaint accused GEO Group of making false and misleading statements about its business.

On September 23, 2021, the Court dismissed all claims except those based on statements about pending lawsuits made during a Class Period defined as November 7, 2018, through August 5, 2020. See: Hartel v. Geo Grp., Inc., 2021 U.S. Dist. LEXIS 182485 (S.D. Fla.)

After the Class filed a Second Amended Complaint, GEO Group moved to dismiss any statements about pending lawsuits made after the news reports that tanked its stock price a second time on July 17, 2019. The Court agreed, finding the Class “failed to plead loss causation as to any statements made after” that date. It dismissed Plaintiff’s argument that the suit should extend to the company’s press release on August 6, 2020, since that made no mention of pending litigation. As a result, the class period was shortened to end in July 2019.

Since then, efforts at mediation have not been successful, leaving the case on track for a trial in July 2024. Plaintiffs are represented by attorney Jayne A. Goldstein of Shepherd, Finkelman, Miller & Shah, LLP in Fort Lauderdale. See: Hartel v. GEO Group, Inc., USDC (S.D. Fla.), Case No. 9:20-cv-81063.