ST. CLAIR COUNTY EMPLOYEES' RETIREMENT SYSTEM, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. ACADIA HEALTHCARE COMPANY, INC., et al., Defendants Case No. 3:18-cv-00988 United States District Court, M.D. Tennessee, Nashville Division Filed March 28, 2024 Counsel Christopher M. Wood, Robbins Geller Rudman & Dowd LLP, Jerry E. Martin, Barrett Johnston Martin & Garrison, LLC, Nashville, TN, Danielle S. Myers, David C. Walton, Robbins Geller Rudman & Dowd LLP, San Diego, CA, Thomas C. Michaud, Vanoverbeke, Michaud & Timmony, P.C., Detroit, MI, for Plaintiff. Brandon R. Keel, Jessica Perry Corley, Lisa R. Bugni, Ronni D. Solomon, King & Spalding LLP, Atlanta, GA, Elizabeth O. Gonser, Milton S. McGee, III, Steven Allen Riley, Riley & Jacobson, PLC, Nashville, TN, for Defendants. Newbern, Alistair E., United States Magistrate Judge MEMORANDUM ORDER *1 This Memorandum Order addresses a motion by Defendants Acadia Healthcare Company, Inc., Brent Turner, David Duckworth, and Deborah H. Jacobs (collectively, Defendants) to compel nonparties Castalian Value Fund and Castalian Partners (collectively, Castalian) to produce certain discovery in response to Defendants' subpoenas. (Doc. No. 193.) Castalian has responded in opposition to Defendants' motion to compel. (Doc. No. 213.) Lead Plaintiffs and Class Representatives Chicago & Vicinity Laborers' District Council Pension Fund and New York Hotel Trades Council & Hotel Association of New York City, Inc., Pension Fund (collectively, Plaintiffs) oppose Defendants' motion to compel and have moved for a protective order to prevent the requested discovery. (Doc. No. 212.) Nonparty Aurelius, identified as “an anonymous internet user who writes an online blog about investments,” has also moved for a protective order “prohibiting any discovery into [Aurelius's] identity” in response to the subpoenas. (Doc. No. 210.) Defendants filed a consolidated response in opposition to the motions for protective orders filed by Plaintiffs and Aurelius and in support of their own motion to compel. (Doc. No. 216.) Plaintiffs and Aurelius have filed replies in support of their motions. (Doc. Nos. 222, 223.) I. Background Acadia Healthcare Company provides for-profit healthcare services by operating “inpatient psychiatric facilities, residential treatment centers, group homes, substance abuse facilities, and facilities providing outpatient behavioral healthcare services in the United States, the United Kingdom (“U.K.”) and Puerto Rico.” (Doc. No. 39.) Plaintiffs bring claims on behalf of a class of investors who purchased Acadia securities between April 30, 2014, and November 15, 2018, under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S. C. §§ 78j(b), 78t(a), and Securities and Exchange Commission Rule 10b–5, 17 CFR § 240.10b–5. The Court previously summarized Plaintiffs' claims as follows: Plaintiffs allege that Defendants falsely represented that Acadia provided high-quality services, adequately staffed its facilities, and complied with applicable laws and regulations. It was quality care, Defendants repeatedly emphasized, that drove new patients to Acadia facilities, created the demand necessary to grow its existing facilities, and was key to improving the performance and operations at the facilities Acadia acquired to fuel its growth. In reality, Acadia achieved growth by inadequately staffing facilities and cutting costs to extract higher profits at the expense of patient care and safety, and ran facilities rife with violence, sexual assault, and counter-therapeutic policies and practices. Additionally, Plaintiffs allege Defendants falsely represented that Acadia's $2.2 billion acquisition of The Priory Group, the U.K.'s largest chain of behavioral health centers, would contribute to positive financial growth. Defendants repeatedly assured investors throughout 2017 that Acadia was on track to meet its financial targets and that the Company would experience margin improvement in the U.K. when, in fact, Acadia was not on track to meet[ ] its U.K. financial targets because of weakened patient census and increased labor costs that Defendants concealed. *2 Defendants' fraud was revealed through a series of partial disclosures. The first occurred on October 24, 2017, when Acadia revealed that deteriorating performance in the U.K. had caused the Company to miss its 3Q17 revenue and earnings targets and substantially reduce its guidance for the remainder of the year, causing Acadia's stock price to drop 30%. The second occurred on October 11, 20o18, when Aurelius Value published a report and released a video documenting systemic patient abuse and neglect at dozens of Acadia facilities caused primarily by understaffing. The report included an analysis of Centers of Medicare and Medicaid Services inspection reports from 2013 to 2018 for 31 of the 40 acute inpatient U.S. Hospitals listed on Acadia's website. The analysis found that federal inspectors uncovered staffing deficiencies at over 90% of these 31 Acadia hospitals, including repeated violations for insufficient nurses or qualified practitioners on hand. Of these 28 hospitals with staffing deficiencies, 89% of those facilities were also cited by inspectors for patient care and safety deficiencies. Following this news, Acadia's stock price declined by more than 11%. Finally, on November 16, 2018, Seeking Alpha published an article entitled, “Acadia Healthcare: Very Scary Findings From A 14-Month Investigation,” which revealed that the Company's rapid growth, as well as its revenue and margin increases, were attributed to cost-cutting and “reducing the quality of care.” The article highlighted severe problems at seven of Acadia's facilities (facilities that were also featured in the October 2018 Aurelius Value report) and reported that, “due to the number of suicides at some of their facilities, Acadia's ability to accept certain patients has been restricted by state-level governments.” On this news, Acadia's stock price declined by 26%. (Doc. No. 54 (internal citations omitted).) Castalian “conducts fundamental research to identify mispriced publicly traded securities.” (Doc. No. 213.) Castalian states that, while it “is often a long-term investor in businesses it finds attractive, it also engages in the short sale of securities of companies that it believes are overvalued or led by dishonest managers.” (Id.) “Neither Castalian entity is a party in the underlying action,” and Castalian has “no alleged ties to any party” and “no involvement in the litigation until Defendants served [it] with subpoenas.” (Id.) Defendants issued the four subject subpoenas to Castalian on October 7, 2022, seeking document production and deposition testimony. (Doc. Nos. 194-9–194-12.) The Document Subpoenas request production of: 1. Documents sufficient to reflect all of your trading in Acadia securities. 2. Documents sufficient to reflect any profits or losses resulting from your trading in Acadia securities. 3. All documents and communications concerning your trading in Acadia securities, including but not limited to all documents concerning or reflecting any research or analysis you undertook and all documents you considered, reviewed, received, or relied upon in connection with any purchase, sale, retention, or holding of Acadia securities. 4. All documents and communications concerning the Aurelius Value Article or the Seeking Alpha Articles. 5. All communications with Aurelius Value concerning Acadia. 6. All communications with Lead Plaintiffs' Counsel regarding the Aurelius Value Article, the Seeking Alpha Articles, or Acadia. 7. All communications with Lead Plaintiffs regarding the Aurelius Value Article, the Seeking Alpha Articles, or Acadia. 8. All communications with Penn Little concerning the Seeking Alpha Articles, the Aurelius Value Article, or Acadia. 9. All communications with Seeking Alpha concerning the Seeking Alpha Articles, the Aurelius Value Article, or Acadia. 10. All documents and communications regarding the individual Defendants, including, but not limited to, documents underlying references to the Individual Defendants in the Aurelius Value Article. 11. All documents and communications considered, reviewed, relied upon, or examined in drafting, editing, and publishing the Aurelius Value Article. This includes, but is not limited to, any documents cited or referenced in the Aurelius Value Article. *3 (Doc. Nos. 194-10, 194-12.) The Deposition Subpoenas seek testimony on the following topics: 1. Your trading or contemplated trading in [Acadia] securities, including, but not limited to, any purchases, sales, retention, holding, short positions, or hedge positions with respect to Acadia securities. 2. Your investments or contemplated investments in funds that invested in Acadia securities, including, but not limited to, any purchases, sales, retention, holding, short positions, or hedge positions with respect to Acadia securities. 3. Any profits or losses resulting from your trading or investments in funds that traded in Acadia securities. 4. Any research or analysis you undertook and all documents you considered, reviewed, received, or relied upon in connection with any purchase, sale, retention, holding, short position, hedge, or investment with respect to Acadia securities. 5. The October 11, 2018 article published by Aurelius Value titled “Acadia Healthcare: Destructive Greed” (the “Aurelius Value Article”), including, but not limited to, the drafting, editing, and publishing of the Aurelius Value Article, as well as the individuals involved in such drafting, editing, and publishing, and the documents and information relied upon for the Aurelius Value Article, 6. The November 16, 2018 article published by Seeking Alpha titled “Acadia Healthcare: Very Scary Findings From A 14-Month Investigation” and the March 19, 2019 article published by Seeking Alpha titled “Summary Update: Very Scary Findings From A Now 18-Month Investigation Into Acadia Healthcare” (together, the “Seeking Alpha Articles”). 7. Any communications with Lead Plaintiffs' counsel Robbins, Geller, Rudman & Dowd, LLP, and/or Barrett, Johnston, Martin & Garrison, LLP regarding the Aurelius Value Article, the Seeking Alpha Articles, or Acadia. 8. Any communications with Lead Plaintiffs Chicago & Vicinity Laborers' District Counsel Pension Fund and/or New York Hotel Trades Council & Hotel Association of New York City, Inc. Pension Fund, regarding the Aurelius Value Article, the Seeking Alpha Articles, or Acadia. 9. Any communications with Penn Little concerning the Seeking Alpha Articles, the Aurelius Value Article, or Acadia. 10. Any communications with Aurelius Value concerning the Seeking Alpha Articles, the Aurelius Value Article, or Acadia. 11. The identity of Aurelius Value (as that name is used in the Aurelius Value Article), including the individuals or entities acting on its behalf or under the name Aurelius Value. 12. Your production of documents made in response to the Rule 45 subpoena for the production of documents served on you in connection with the action for which this deposition is being noticed. (Doc. Nos. 194-9, 194-11.) II. Legal Standard “[T]he scope of discovery is within the sound discretion of the trial court[.]” S.S. v. E. Ky. Univ., 532 F.3d 445, 451 (6th Cir. 2008) (first alteration in original) (quoting Chrysler Corp. v. Fedders Corp., 643 F.2d 1229, 1240 (6th Cir. 1981)). Discovery may be obtained from non-parties, including through the use of a subpoena to produce documents under Rule 45. Fed. R. Civ. P. 45(a)(1)–(3). Rule 45(d)(2)(B) provides that “[a] person commanded to produce documents ... may serve on the party or attorney designated in the subpoena a written objection to ... copying ... any or all of the materials” and that such objection “must be served before the earlier of the time specified for compliance or 14 days after the subpoena is served.” Fed. R. Civ. P. 45(d)(2)(B). “If an objection is made,” the party serving the subpoena may, “[a]t any time, on notice to the commanded person, ... move the court for the district where compliance is required for an order compelling production ....” Fed. R. Civ. P. 45(d)(2)(B)(i). Rule 37(a)(1) also provides that “a party may move for an order compelling ... discovery,” including an order compelling discovery from a nonparty. Fed. R. Civ. P. 37(a)(1). *4 While Rule 45 does not list irrelevance or overbreadth as grounds for quashing a subpoena, courts have found that the scope of discovery under a subpoena is the same as the scope of discovery under Rule 26. See, e.g., Hendricks v. Total Quality Logistics, LLC, 275 F.R.D. 251, 253 (S.D. Ohio 2011). Generally, Federal Rule of Civil Procedure 26 allows discovery of “any nonprivileged matter that is relevant to any party's claim or defense and proportional to the needs of the case[.]” Fed. R. Civ. P. 26(b)(1). Relevant evidence in this context is that which “ ‘has any tendency to make a fact more or less probable than it would be without the evidence,’ if ‘the fact is of consequence in determining the action.’ ” Grae v. Corr. Corp. of Am., 326 F.R.D. 482, 485 (M.D. Tenn. 2018) (quoting Fed. R. Evid. 401). When discovery is sought from a nonparty via a Rule 45 subpoena, the issuing party “must take reasonable steps to avoid imposing undue burden or expense” on the subpoena recipient. Fed. R. Civ. P. 45(d)(1). And the court itself “must protect a non-party subject to a subpoena if it ‘requires disclosure of privileged or other protected matter’ or the subpoena ‘subjects a person to undue burden.’ ” United States v. Tennessee Walking Horse Breeders' & Exhibitors' Ass'n, 727 F. App'x 119, 123 (6th Cir. 2018) (quoting Fed. R. Civ. P. 45(d)(3)(A)(iii), (iv)). The Sixth Circuit has “instructed district courts to evaluate undue burden in a ‘case-specific manner’ by ‘considering “such factors as relevance, the need of the party for the documents, the breadth of the document request, the time period covered by it, the particularity with which the documents are described and the burden imposed.’ ” Lyons v. My Pillow, Inc., No. 23-1308, 2023 WL 8450724, at *2 (6th Cir. Dec. 6, 2023) (quoting In re Modern Plastics Corp., 890 F.3d 244, 251 (6th Cir. 2018)). “Thus, the district court has a relatively active role in subpoenas issued pursuant to Rule 45.” Id. “Ordinarily a party has no standing to seek to quash a subpoena issued to someone who is not a party to the action, unless the objecting party claims some personal right or privilege with regard to the documents sought.” Wright & Miller, 9A Fed. Prac. & Proc. Civ. § 2459 (3d ed.). But, where a party's standing may fall short to quash a subpoena under Rule 45, Rule 26(c) provides the ability to move for a protective order to “a party or [to] the person from whom discovery is sought.” Fed. R. Civ. P. 26(c); Morrow, 2017 WL 2989374 at *2. The meaning of “a party” in this context has been interpreted to provide standing for a party to contest discovery sought from third parties. See Fleet Business Credit Corp. v. Hill City Oil Co., Inc., 2002 WL 1483879, *2 (W. D. Tenn., June 26, 2002) (“Many district court have acknowledged this aspect of the rule which allows a party to file a Motion for Protective Order on behalf of a non-party”). Rule 26(c)(1) provides that a “court may, for good cause, issue an order to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense,” including forbidding the discovery of certain information. Fed. R. Civ. P. 26(c)(1). The party seeking the protective order bears the burden to show good cause “with a particular and specific demonstration of fact, as distinguished from stereotyped and conclusory statements.” Serrano v. Cintas Corp., 699 F.3d 884, 901 (6th Cir. 2012) (quoting Nemir v. Mitsubishi Motors Corp., 381 F.3d 540, 550 (6th Cir. 2004)). Trial courts have “broad discretion ... to decide when a protective order is appropriate and what degree of protection is required.” Seattle Times Co. v. Rhinehart, 467 U.S. 20, 36 (1984). III. Analysis *5 A plaintiff claiming securities fraud under the Exchange Act and Rule 10b–5(b) must establish “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” In re Omnicare, Inc., Sec. Litig., 769 F.3d, 469 (6th Cir. 2014). Here, Plaintiffs alleged that the Aurelius Value and Seeking Alpha articles functioned as “corrective disclosures”—publications that, by providing truthful information about Acadia's corporate health in the marketplace, revealed Defendants' earlier market representations to be false and triggered a drop in Acadia's stock price. (Doc. No. 39.) A. Defendants' Motion to Compel Castalian's Response to Their Subpoenas (Doc. No. 193) Defendants articulate the following theory of relevance for the documents and testimony they seeks from Castalian: “Whether the Aurelius Value Article revealed the ‘truth’ [of Defendants' statements regarding Acadia]” is “clearly relevant to this action”; “Defendants have reason to believe that Castalian is the one who authored [the Aurelius Value Article,]” which “Castalian has never denied”; and information from Castalian “would be relevant to know on what information the allegations in those articles were based and whether the author fabricated or exaggerated the allegations.” (Doc. No. 194.) Defendants further argue that the requested information is relevant to class certification “because if the author based the Aurelius Value Article solely on information that was already in the public domain, that information would have been previously incorporated into Acadia's stock price” and “would have had no price impact on Acadia's stock.” (Id.) Finally, Defendants argue that Castalian's history of trading Acadia stock is relevant to determine if “the author ... had a short position in Acadia stock at the time, meaning that the author had a financial motivation to drive the stock price down by fabricating information concerning Acadia.” (Id.) Castalian responds that this case addresses “alleged misrepresentations and omissions by Defendants, not how and when Castalian made its investment decisions (if any) relating to Acadia's stock.” (Doc. No. 213.) Castalian points out that the Aurelius Value Article's author “clearly indicates in the blog post itself that they held a short position in Acadia's stock” and, regardless, that whether the author had an incentive to drive down Acadia's stock price by publishing false information is irrelevant to whether Defendants' alleged misrepresentations caused Plaintiffs' economic loss. (Id.) Castalian also provides the declaration of Castalian Partners Value Fund LP's principal and manager, James Gibson, to address the confidential nature of its work and the burden of responding to Defendants' subpoenas on the companies. (Doc. No. 213-1.) Gibson states that Castalian's investment process, “including [its] research, analysis, communications, strategy, and transactions, constitute highly coveted trade secrets.” (Id.) He also states that Castalian “is a small business that has less than three (3) employees that are all vital to day-to-day business operations” and that the burden of responding to Defendants' subpoenas “could be equivalent to forcing the company to cease its normal day-to-day business operations and instead engage in document collection and deposition preparation.” (Id.) Considering the factors by which the Sixth Circuit instructs trial courts to evaluate nonparty discovery, Lyons, 2023 WL 8450724, at *2, many of Defendants' document requests and deposition topics are easily set aside. A “party claiming that a request is important to resolve the issues should be able to explain the ways in which the underlying information bears on the issues as that party understands them.” Fed. R. Civ. P. 26(b)(1) advisory committee's note to 2015 amendment (further noting that a party claiming undue burden “ordinarily has far better information—perhaps the only information—with respect to that part of the determination”). Defendants have not provided such explanation for the majority of the subpoenaed discovery.[1] *6 Defendants' theory of the relevance of “all documents and communications” reflecting Castalian's “research or analysis ... and all documents [it] considered, reviewed, received, or relied upon in connection with any purchase, sale, retention, or holding of Acadia securities,” and documents “sufficient to reflect all of” Castalian's trading in Acadia securities and resulting profits and losses requires the Court first to accept Defendants' assertion that Castalian is the author of the Aurelius Value article. But Defendants state only that they “have reason to believe that Castalian is the one who authored the article” without any further identification of that reason. And Defendants' assumption is further weakened by the fact that Aurelius now has appeared as an entity separate from Castalian to seek a protective order against the disclosure of its identity. (Doc. Nos. 211, 223.) Castalian, in turn, has provided Gibson's declaration to establish the proprietary and confidential nature of Castalian's research and trading activity, which Defendants have not addressed. Because such information is presumptively protected by Rule 45, and because Defendants' theory of relevance is too attenuated to overcome that protection, the Court will not compel Castalian to respond to Document Subpoena Topics 1, 2, or 3 and Deposition Subpoena Topics 1, 2, 3, and 4. Defendants have made no argument and offered no theory of relevance to support their requests addressing the Seeking Alpha Articles or communications with Seeking Alpha, Plaintiffs' Lead Counsel, Lead Plaintiffs, or Penn Little regarding the Aurelius Value Article or Acadia. Because Defendants have not addressed the relevance of that information, the Court will not compel Castalian to respond to Document Subpoena Topics 6, 7, 8, or 9; Document Subpoena Topic 4 and Deposition Subpoena Topic 10 to the extent that they address the Seeking Alpha Articles; and Deposition Subpoena Topics 6, 7, 8, or 9. Defendants have made no argument and offer no theory of relevance to support their requests for “[a]ll documents and communications regarding the individual Defendants ....” The Court will not compel Castalian to respond to Document Subpoena Topic 10. Finally, Defendants have made no argument to support their request for testimony as to the identity of Aurelius Value “including the individuals or entities acting on its behalf or under the name Aurelius Value.” The Court will not compel Castalian to respond to Deposition Subpoena Topic 11. This leaves the subpoena topics that address the Aurelius Value Article directly. While Defendants have articulated a theory of relevance as to this discovery, that theory is too attenuated to justify the burden to Castalian of producing the requested discovery established by Gibson's declaration. First, the basis of Defendants' relevance theory—that Castalian is the author of the Aurelius Value Article—is entirely speculative. Second, Defendants' argument that they must discover Castalian's communications regarding the Aurelius Value article to determine if the article's author had a financial interest in damaging Acadia's share price by publishing false allegations ignores the fact that the Article begins with a statement that “Aurelius and possibly any companies affiliated with him and their members, partners, employees, consultants, clients and/or investors ... have a short position in the stock” and therefore “stand to realize significant gains in the event that the prices of either equity or debt securities of Acadia Healthcare decline.” (Doc. No. 194-1.) Third, to the extent Defendants argue that they need Castalian's communications to determine whether the Aurelius Value Article's claims were false, Defendants are “already in a position to prove all of that”—“if those statements were false, [Defendants] can prove their falsity from [their] own records.” In re Biovail Corp. Sec. Litig., 247 F.R.D. 72, 74 (S.D.N.Y. 2007). Thus, Defendants “[do] not need discovery from [this] non-party to prove whether or not the [Aurelius Value Article is] false. Either [it is] or [it isn't] ... [T]he burden of production far outweighs any probative value.” Id. Defendants cite no examples of cases in which challenged requests for similar third-party discovery has been permitted. Accordingly, the Court will deny Defendants' motion as to Document Subpoena Topic 4 regarding the Aurelius Value Article, Document Subpoena Topics 5 and 11, Deposition Subpoena Topic 5, and Deposition Subpoena Topic 10 as it relates to the Aurelius Value Article. *7 Thus, Defendants' motion to compel will be denied as to all topics listed in the Document Subpoenas and Deposition Subpoenas. B. Aurelius's Motion for a Protective Order (Doc. No. 210) and Plaintiffs' Motion for a Protective Order (Doc. No. 212) Because the Court will deny Defendants' motion to compel Castalian's production of documents and deposition testimony in full, Aurelius's motion and Plaintiffs' motion for protective orders will be found moot. IV. Conclusion For the reasons stated in this Memorandum Opinion, Defendants' motion to compel (Doc. No. 193) is DENIED. Aurelius's motion for a protective order (Doc. No. 210) and Plaintiffs' motion for a protective order (Doc. No. 212) are TERMINATED AS MOOT. It is so ORDERED. Footnotes [1] Defendants argue that the Court already found much of the requested discovery to be relevant in its order granting Defendants' leave to depose the Seeking Alpha Articles' author Williamson Penn Little, who is incarcerated (Doc. No. 206). That order is distinguishable for several reasons: First, Defendants' motion for leave to depose Little was made under Federal Rule of Civil Procedure 30(a)(2)(B), which directs that “the court must grant leave” for a requested deposition of a person in cu “to the extent consistent with Rule 26(b)(1) and (2).” Fed. R. Civ. P. 30(a)(2)(B). As Defendants argued in their motion for leave to depose Little, such leave “should be granted ‘freely, as long as the deposition can be conducted without undue imposition on prison authorities.’ ” (Doc. No. 164 (quoting El Camino Res., Ltd. v. Huntington Nat. Bank, No. 1:07-cv-598, 2009 WL 1228680, at *1 (W.D. Mich. Apr. 30, 2009).) Second, Little did not oppose Defendants' motion for leave to depose him. And third, there is no question that Little authored the Seeking Alpha Articles.