Opinion ID: 2761260
Heading Depth: 3
Heading Rank: 1

Heading: Misstatement and Omission

Text: The Plaintiffs do not allege a misstatement related to Apollo’s accounting of Title IV funds. Businesses have some discretion in making accounting estimates. “Generally accepted accounting principles [] tolerate a range of reasonable treatments, leaving the choice among alternatives to management.” Thor Power Tool Co. v. C. I. R., 439 U.S. 522, 544 (1979) (internal quotation marks omitted). “The case law indicates, therefore, that although overstatement of revenues in violation of GAAP may support a plaintiff's claim of fraud, the plaintiff must show with particularity how the adjustments affected the company's financial statements and whether they were material in light of the company’s overall financial position.” In re Daou Sys., Inc., 411 F.3d 1006, 1018 (9th Cir. 2005). On the one hand, the Plaintiffs do show that many of Apollo’s students were funded by Title IV of the Higher Education Act and that, when students left the University, Apollo was required by law to return to the federal government Title IV funds. However, Apollo retained discretion to set its refund policy and made no fraudulent 20 OPERF V. APOLLO GROUP representations regarding its accounting. See United States Department of Education and Federal Student Aid Handbook, Vol. 5, at 5–3 (2012) (“The Return of Title IV Funds (Return) regulations do not dictate an institutional refund policy.”). Although students may not have been able to pay the remainder of their tuition out-of-pocket, under the federal guidelines in place at the time, Apollo could charge for the remaining tuition owed by the student. Id. Apollo, in turn, could use the expected tuition revenue from withdrawn students as part of its accounting. Apollo did not make a misrepresentation by including this revenue in its public filings. The Plaintiffs’ allegations also do not establish an omission theory. Apollo disclosed to its investors the difficulty of collecting tuition from withdrawn students. In 2006, Apollo publicly stated that “[m]anagement is committed to remediating the control deficiencies that constitute the material weaknesses described herein by implementing changes to our internal control over financial reporting.” Apollo’s financial statements for the Class Period included increasing amounts of bad debt reserves to take into account the challenges of collecting revenue from withdrawn students. Apollo disclosed that increases in its bad debt expense were partially attributable to uncollectible student tuition. The Plaintiffs’ Amended Complaint admits that “Apollo eventually recorded allowances for doubtful accounts with respect to its receivables from withdrawn students.” Accordingly, the Plaintiffs do not adequately allege the specific errors made by the Defendants in accounting, and therefore, the district court correctly dismissed this claim. OPERF V. APOLLO GROUP 21