Elec. Workers Pension Fund v. Six Flags Entm't Corp.

• Decision Date: 03 March 2021
• Docket Number: Civil Action No. 4:20-cv-00201-P
• Citation: 524 F.Supp.3d 501
• Parties: ELECTRICAL WORKERS PENSION FUND, LOCAL 103, I.B.E.W., on behalf of itself and all others similarly situated, Plaintiff, v. SIX FLAGS ENTERTAINMENT CORPORATION, James Reid-Anderson, and Marshall Barber, Defendants.
• Court: U.S. District Court — Northern District of Texas

524 F.Supp.3d 501

ELECTRICAL WORKERS PENSION FUND, LOCAL 103, I.B.E.W., on behalf of itself and all others similarly situated, Plaintiff,

v.SIX FLAGS ENTERTAINMENT CORPORATION, James Reid-Anderson, and Marshall Barber, Defendants.

Civil Action No. 4:20-cv-00201-P

United States District Court, N.D. Texas, Fort Worth Division.

Signed March 3, 2021

Lewis T. LeClair, McKool Smith, Dallas, TX, Abraham Alexander, Pro Hac Vice, Christopher Ryan Miles, Pro Hac Vice, John J. Rizio-Hamilton, Pro Hac Vice, Katherine M. Sinderson, Pro Hac Vice, Adam Hollander, Pro Hac Vice, Avi Josefson, Pro Hac Vice, Hannah Ross, Pro Hac Vice, Michael D. Blatchley, Pro Hac Vice, Bernstein Litowitz Berger & Grossmann LLP, New York, NY, for Plaintiff.

Jeremy A. Fielding, Kirkland & Ellis, Dallas, TX, Daniel R. Cellucci, Pro Hac Vice, Sandra C. Goldstein, Pro Hac Vice, Stefan Atkinson, Pro Hac Vice, Kirkland & Ellis LLP, New York, NY, for Defendants.

OPINION AND ORDER

Mark T. Pittman, UNITED STATES DISTRICT JUDGE

This contentious lawsuit arises out of alleged misstatements and omissions pertaining to Six Flags's international park developments in China, the vitality of Riverside (Six Flags's partner in China), the parks’ construction progress, projected park openings and future parks, and revenue recognition. Ultimately, the China parks failed to materialize as projected and Six Flags terminated its partnership with Riverside. Basing their claims on these circumstances and allegations of two anonymous, midlevel former Six Flags employees, Plaintiffs bring this securities fraud action alleging that Defendants made misstatements and omitted information which mislead Plaintiffs (investors) and resulted in massive losses to Plaintiffs from stock price declines.

Now before the Court is Defendants’ Motion to Dismiss. ECF No. 51. Having considered the Motion, briefing, applicable caselaw, and docket entries, the Court finds that the motion should be and is hereby GRANTED .

FACTUAL BACKGROUND

A. Six Flags and Its International Projects

Founded in 1961, Six Flags ("Six Flags" or the "Company") is the world's largest regional theme park operator, with more than two dozen parks across North America. Am. Compl. at ¶ 33. Throughout its nearly 60-year history, Six Flags has primarily expanded through the acquisition of pre-existing regional parks. Id. Six Flags's focus has historically been the North American market, with only a short-lived expansion into Europe through the acquisition of several European parks in 1998. Id. The vast majority of the Company's revenue—97% in both 2018 and 2019—is derived from parks it owns and operates in North America. Motion at 2; Am. Compl. at ¶ 244.

Throughout the 2000s, the Company experienced a significant decline in revenue and amassed over $1 billion in debt. Id. at ¶ 33. The Company sought to address its debt and decline by selling off parks throughout the 2000s, including the European parks in 2004. Id. Despite the sell-offs and changes to management throughout the decade, the Company was unable to reverse course, and the Company filed for Chapter 11 bankruptcy in 2009. Id. The Company exited bankruptcy on May 3, 2010, and reissued stock on the NYSE in June 2010. Id.

As part of its restructuring process, the Company put into place a series of strategic incentive plans, which entitled its top executives to significant equity awards if the Company met its earnings before interest, taxes, depreciation, and amortization ("EBITDA") goals. Id. at ¶ 34. The incentive plan in place during the Putative Class Period¹ was called "Project 600," which would provide Defendants James Reid-Anderson (CEO) and Marshall Barber (CFO) equity compensation if the Company achieved approximately $600 million in "modified" EBITDA by year-end 2018. Id. at ¶ 3.

B. Six Flags Pursues International Licensing Agreements in China

A component of the Company's business is its international licensing agreements, through which Six Flags-branded parks were to be developed and operated by third parties, with revenue being paid to the Company based on certain performance obligations. Motion at 2–3. The Company had three separate performance obligations under its international licensing agreements: brand licensing, project services, and management services. Id. at 3. The Company distinguished between "pre-opening services such as brand licensing, design and development of parks, management services, and post-opening sales and usage-based royalty payments." Id. (quoting Motion Appx. 55, ECF No. 52).

In 2014, the Company announced a partnership with Riverside Investment Group Co., Ltd. ("Riverside"), a Chinese real estate developer, to develop Six Flags-branded parks in China. Am. Compl. at ¶¶ 2, 43. Riverside, also known as Shanshui Wenyuan Investment Group Co., Ltd. or LVC Group, is a Chinese real-estate investment, development, and management company founded in 1986. Id. at ¶ 32. Riverside is led by its chairman and majority shareholder, Li Qi, or "Chairman Li" as referred to by the parties. Id. Under the agreement between the Company and Riverside, Riverside would pay the Company tens of millions of dollars in initial licensing fees for each agreed-upon park, and then more substantial licensing and management fees after the parks opened. Id. at ¶ 2. Six Flags expected to recognize high profit margins on the international revenue, with 80%–90% of the fees going to the Company's EBITDA. Id.

In January 2016, the Company announced that Riverside was breaking ground on a branded theme park, water park, and kid's park in Zhejiang, China, which were part of a larger mixed-use development project undertaken by Riverside. Id. at ¶¶ 47–49. At the beginning of the Putative Class Period, the Zhejiang water park was projected to open "towards the end of 2019," with the remaining parks expected in 2020. Motion at 3 (citing Motion Appx. at 32). In 2017, the Company and Riverside announced plans for parks in Chongqing, which were projected to open in 2020. Am. Compl. at ¶¶ 52–53. And on April 24, 2018—the first day of the Putative Class Period—additional planned parks in Nanjing were announced with projected openings in 2021. Id. at ¶¶ 54, 56. There were eleven parks planned in those three cities with each site having different financial arrangements and requiring approval from separate local governments. Id. at ¶ 177; Motion at 3 (citing Motion Appx. at 141).

Throughout 2019, Defendants kept investors apprised of the difficulties facing the China parks’ development and Riverside while expressing optimistic opinions. In February 2019, the Company announced a negative revenue adjustment of $15 million caused by delays in the expected opening dates of certain parks in China. Am. Compl. at ¶ 109. These delays were attributed to macroeconomic issues in China, including lower gross domestic product growth, new government policies making it more difficult for Riverside—a real estate developer—to liquidate real estate assets or obtain loans, and turnover of government officials requiring re-approval of plans for the Chongqing and Nanjing parks. Motion at 4–5; Am. Compl. at ¶ 272. In April 2019, Defendants disclosed that the parks in Chongqing and Nanjing were still waiting on government re-approval so were not generating revenue, and cautioned that "it does feel like conditions are improving, but we'll know as time goes on ." Motion at 5 (quoting Motion Appx. at 212). Reid-Anderson optimistically opined that Riverside had traditionally been "very successful[ ] navigating the political and regulatory environment, and we're optimistic they'll continue to do so," but he warned that it was "possible that international revenue will remain lumpy going forward[, e]specially if the timing of the park openings changes or broader macroeconomic issues persist ." Motion at 5; Am. Compl. at ¶ 126.

The Company informed investors in October 2019 that the Chinese market continued to be very challenging for Riverside and it was "unrealistic to think " that the timeline for the development of parks in China would remain the same. Am. Compl. at ¶ 138. Then on January 10, 2020, the Company disclosed that Riverside continued to face severe challenges causing Riverside to default on its payment obligations to the Company, and that the Company had issued formal notices of default to Riverside. Id. at ¶ 147. The Company announced on February 20, 2020, that it formally terminated its development agreements with Riverside. Id. at ¶ 153.

On March 7, 2019, the Company announced Reid-Anderson would retire from position as CEO by February 28, 2020, and that the Company would undergo a process to evaluate candidates for the position of Chairman of the Board following Reid-Anderson's retirement. Id. at ¶ 258. However, the Company then announced that Reid-Anderson would step down as Chairman and CEO as of November 18, 2019. Id. The Company announced February 20, 2020, that Barber would be retiring from his position as CFO on February 24, 2020, and would retire from the Company entirely on August 31, 2020. Id. at ¶ 259.

C. Former Employee Allegations

Plaintiffs’ securities fraud claims rest on the allegations of two confidential former Six Flags employees. Former Employee 1 ("FE1") was the Director of International Construction and Project Management for the Company beginning in May 2018. Id. at ¶ 8. In this position, FE1 was responsible for overseeing the construction of the China parks and reporting on their progress internally at the Company. Id. FE1 worked onsite at Zhejiang, but also traveled to the Chongqing site to perform site inspections and check its progress and met often with the Company and Riverside personnel in Beijing. Id. at ¶ 83. FE1 also prepared weekly presentations and periodic reports on the progress of construction at the Company's China parks for David McKillips—the former Senior Vice President of International Park Operations and President of Six Flags International until January 2020—who Plain...