Fifth Circuit Provides New Guidance on Evaluating Confidential Witnesses
Last month, the Fifth Circuit Court of Appeals reversed the lower court’s March 2021 dismissal in Oklahoma Firefighters Pension and Retirement System v. Six Flags Entertainment Corporation. In the now-revived class action, investors sued Six Flags in relation to 11 Chinese theme parks that Six Flags licensed to a local company for construction and operation, which were expected to be a major driver of Six Flags’ revenue growth – before construction stalled and the licenses were ultimately cancelled in February 2020, these Chinese parks were expected to contribute up to $60 million in pre-tax profits to Six Flags. In the Fifth Circuit’s opinion, the Court ruled that the lower court had excessively discounted the Complaint’s factual allegations, and that the Complaint did, in fact, sufficiently allege material misstatements and scienter.
The Lower Court Applied Too Heavy a Discount to Confidential Witness Testimony
The Complaint was primarily based on testimony from a confidential witness: an employee who oversaw construction of the Chinese parks, on Six Flags’ behalf. The lower court’s opinion heavily discounted this witness’ testimony throughout its analysis, on account of his confidentiality. However, while the Fifth Circuit acknowledged that confidential witness testimony should be discounted in some fashion, it also chastised the lower court that applying a “discount” to witness testimony “does not mean unfettered discretion to discard” that testimony.
Instead, the Fifth Circuit explained that “[t]he degree of discounting depends on the circumstances involved.” It went on to explain that the circumstances here support only a “minimal” discount, because it was plainly alleged that the confidential witness was in such a position as to have direct knowledge supporting his offered testimony. For example, the Complaint described the confidential witness as:
- a Six Flags employee, holding the title of “International Director of International Construction and Project Management”;
- having responsibility for “overseeing the construction of the China parks and reporting internally on their progress”;
- working onsite at certain China park locations, and performing inspections of the construction’s progress (or lack of progress); and
- attending meetings with management from Six Flags and its Chinese construction partners, including meetings where the Chinese partners discussed construction delays and problems.
In fact, given these myriad allegations and the witness’ high-ranking position at Six Flags, the Fifth Circuit went so far as to “wonder just how unknown”—i.e., how “confidential”—the witness really is to each of the parties.
Moreover, as described in the Complaint, the witness was so engrained in the Chinese parks’ construction that he even possessed insight into the Chinese construction partner’s finances. In this regard, the Complaint alleges that representatives of the Chinese partner told the witness that the partner wasn’t paying vendors, couldn’t afford construction blueprints, was forcing staff to resign, and owed three months of back-pay to its employees. And the witness’ allegations were further supported by aerial photos showing a lack of construction progress, and contrasting images of (a) a barren Chinese Six Flags location (Zhejiang), taken 19 months before its scheduled opening, with (b) progress at a Chinese Disneyland location (Shanghai), taken 24 months before its opening:
|(a) Six Flags (Zhejiang)||(b) Disneyland (Shanghai)|