On March 7, 2011, in the latest development in a
long-running securities suit that is among the few securities class action
lawsuits to go to trial and that had previously resulted in a $277.5 verdict in
plaintiffs' favor, the U.S. Supreme Court denied
Apollo Group's petition for writ of certiorari. As a result, the ruling of
the Ninth Circuit reinstating the jury's verdict will now stand. In addition,
as a result of the decision to decline taking up the case, the interesting and
arguably important issues the cert petition raised will now not be reviewed by
the Supreme Court.
As detailed in greater length here,
plaintiffs filed the suit after the company's share price declined following
the disclosure of a U.S. Department of Education report alleging that the
company had violated DOE rules. On September 7, 2004, the company agreed to pay
$9.8 million to settle the allegations. News of the settlement first became
public on September 14, 2004, but the company's share price did not actually
decline until September 21, 2004, when a securities analyst issued a report
expressing concern about the company's possible exposure to future regulatory
issues.
On January 16, 2008, a civil jury entered a verdict in
favor of the plaintiff class on all counts, awarding damages of $277.5 million.
Under the verdict, Apollo is responsible for 60 percent of the plaintiffs'
losses, former Apollo CEO Tony Nelson is responsible for 30 percent, and former
CFO Kenda Gonzales is responsible for 10 percent. The jury verdict is discussed
at greater length here.
As discussed in greater length here,
on August 4, 2008, Judge James Teilborg of the United States District Court for
the District of Arizona entered an order (here) granting
the defendants' motion for judgment as a matter of law, based on his finding
that the trial testimony did not support the jury's finding of loss causation.
Judge Teilborg's order vacated the judgment and entered judgment in defendants'
favor.
In its post-trial motion, Apollo argued that the evidence
at trial was insufficient to support a finding that the analyst reports
represented "corrective disclosure," because they did not contain any
new fraud-revealing information. Judge Teilborg found that "the evidence
at trial undercut all bases on which [the plaintiff] claimed the (analyst)
reports were corrective."
Accordingly, the court concluded that although the
plaintiff "demonstrated that Apollo misled the markets in various ways
concerning the DoE program review," the plaintiff "failed to prove
that Apollo's actions caused investors to suffer harm." The court
therefore concluded that "Apollo is entitled to judgment as a matter of
law."
In a June 23, 2010 opinion (here), a
three-judge panel of the Ninth Circuit held that the district court "erred
in granting Apollo judgment as a matter of law." The opinion states that
"the jury could have reasonably found that the (analyst) reports following
various newspaper articles were 'corrective disclosures' providing additional
or more authoritative fraud-related information that deflated the stock
price."
The Ninth Circuit further held that Apollo is not
entitled to a new trial and that there is no basis for remittitur (reduction of the
verdict). The Ninth Circuit reversed and remanded the case with
"instructions that the district court enter judgment in accordance with
the jury's verdict." The company filed a petition for writ of certiorari
to the U.S. Supreme Court.
The basis for the company's cert petition was basically
that if the efficient market hypothesis means anything, then the information
about the DoE investigation was fully incorporated into the company's share
price when the news first hit the market on September 14. Either the market did
not efficiently incorporate this information, in which case the market for the
company's stock is not efficient and the plaintiffs ought not to be able to
rely on the fraud on the market theory to establish reliance, or the market is
efficient and the company's share price simply did not decline at the time of
the corrective disclosure.
In a June 28, 2010 guest post on this blog (here),
noted securities litigation defense attorney Tower Snow of the Howard
Rice law firm articulated the inherent tension between these two positions as
follows:
The courts can't rely on the efficient market theory for
purposes of creating a rebuttable presumption of reliance for purposes of class
certification and then ignore its underpinnings for purposes of evaluating loss
causation. Either one embraces the theory or one does not. If one embraces it,
then once it is established that the prior disclosures revealed the truth about
the allegedly misstated or omitted information, there is nothing left for the
jury to decide. The later disclosure, by definition, cannot be corrective, as
the market already had absorbed the information. Here, the
"corrective" disclosure came out seven days after the information had
been previously released. Seven days is an eternity in the financial markets.
As discussed in March 2011 memo from the Jones Day law
firm discussing the U.S. Supreme Court's cert denial in the Apollo Group case (here), the Circuits
are split on the question of how soon after a corrective disclosure a stock
price decline must occur in order for the loss causation requirement to be
satisfied. At least two Circuits - the Second and the Third - have held that
the claimant must show that the market immediately reacted. At least three
Circuits - the Fifth, Sixth and Ninth - have head that the price decline may
occur weeks or even months after the initial corrective disclosure.
In light of the Supreme Court's refusal to take up the Apollo
Group case, this split in the Circuits will remain unresolved. Moreover, the
relatively plaintiff friendly standard articulated by the Ninth Circuit remains
standing in that Circuit, where so many securities class action lawsuits are
filed.
Finally, the Supreme Court's cert denial means that the
Ninth Circuit's ruling in the Apollo Group case stands. The Ninth Circuit had
remanded the case for "entry of judgment in accordance with the jury's
verdict." In other words, the Supreme Court's cert denial means that the
plaintiffs' verdict in one of the very rare securities cases to go to trial
will stand.
The Supreme Court's cert denial was disclosed with little
fanfare, as part of a long list of other rulings at the same time. Looking at
the Apollo Group cert denial among the list of rulings might convey the
impression that this is no big deal. But actually it is a little surprising.
The U.S. Supreme Court has shown an active willingness to take up securities
cases, having taken numerous cases up in each of the last few terms. And part
of the willingness to take up these cases seemed to involve persistent
hostility against securities suits in general. The opportunity to trim a
plaintiffs' victory and to resolve a circuit split certainly seemed to suggest
the possibility that the Supreme Court might well grant the cert petition.
In any event, with the cert petition denial, the
plaintiffs' trial victory in this case appears as if it will stand. Even with
the recent
dramatic narrowing of the plaintiffs' class in the Vivendi case, the
plaintiffs overall are on a bit of a roll when it comes to securities lawsuit
trials. The last three securities cases to go to trial (the Homestore case,
refer here;
the BankAtlantic case, refer here;
and the Vivendi case, refer here)
have all resulted in plaintiffs' verdicts.
Trials in these cases are extremely rare, and these
recent developments involve a very small percentage of all securities cases.
Nevertheless, the plaintiffs' bar undoubtedly will find this sequence of
events, including the cert petition denial in the Apollo Group, to represent
heartening developments. Even with the cert denial in the Apollo Group
case, however, there are still a couple of securities cases still pending
before the court this term -- the Matrixx Initiative case (refer here)
and the Janus Capital Group case (refer here)
-- and it remains to be seen how plaintiffs will fare in those cases.
Read
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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