Opinion ID: 2761260
Heading Depth: 2
Heading Rank: 2

Heading: Counts I, III, and IV

Text: We first address Counts I, III, and IV of the Amended Complaint.1 The Plaintiffs allege that the Defendants made false and misleading statements concerning Apollo’s enrollment, revenue growth, business model, and recruitment 1 The Plaintiffs’ allegations in Counts I, III, and IV of the Amended Complaint allege similar legal theories and cover the same factual matter. This Opinion treats the allegations together. For example, the Plaintiffs’ business ethics claim, Count IV, alleges misstatements concerning Apollo’s “student recruitment practice” and its organizational values. Count I also contains allegations related to Apollo’s business and recruitment model. 12 OPERF V. APOLLO GROUP of students. The Plaintiffs allege that Apollo grew largely as a result of unethical recruitment of unqualified students, in contrast to Apollo’s disclosures and public filings, and did not disclose their unsavory practices to investors.
The Plaintiffs fail to state a claim because the material misrepresentations the Plaintiffs allege are not objectively false statements. We distinguish “puffing” from misrepresentation. “Puffing” concerns expressions of opinion, as opposed to knowingly false statements of fact: “When valuing corporations,[] investors do not rely on vague statements of optimism like ‘good,’ ‘well-regarded,’ or other feel good monikers. This mildly optimistic, subjective assessment hardly amounts to a securities violation.” In re Cutera Sec. Litig., 610 F.3d 1103, 1111 (9th Cir. 2010). Statements by a company that are capable of objective verification are not “puffery” and can constitute material misrepresentations. See SEC v. Todd, 642 F.3d 1207, 1216–17 (9th Cir. 2011) (finding that a defendant’s accounting calculation of the financial impact of a transaction was objective and a material misrepresentation). The statements the Plaintiffs allege Apollo made are inherently subjective “puffing” and would not induce the reliance of a reasonable investor. The Plaintiffs’ Amended Complaint cites several alleged statements made by Apollo, but we analyze a few illustrative examples here. In each of its Form 10-K filings between 2006 and 2008, Apollo stated that “[w]e believe that our track record for enrollment and revenue growth is attributable to our offering comprehensive services combining quality educational content, teaching resources and customer service with formats that are accessible and OPERF V. APOLLO GROUP 13 easy to use for students as well as our corporate clients. ” In several of its 10-K and 10-Q filings between 2006 and 2008, Apollo described enrollment and revenue growth as “significant events.” These statements are vague and do not set out with specificity the reasons for its enrollment and revenue growth. We concluded that the statement “all the advantages only the nation’s largest wireless company can provide” was vague and provided nothing concrete upon which a plaintiff could reasonably rely. Shroyer v. New Cingular Wireless Servs., Inc., 622 F.3d 1035, 1042–43 (9th Cir. 2010). Much like the defendant in New Cingular, who only used the general term “advantages” in its description, Apollo’s use of general terms like “educational content” and “teaching resources” “provided nothing concrete upon which [the Plaintiffs] could rely.” Id. at 1043. See also Glen Holly Entm’t, Inc. v. Tektronix, Inc., 343 F.3d 1000, 1015 (9th Cir. 2003) (affirming dismissal of fraud claim that was based on defendants’ alleged promise that development was a “high priority”). The cases cited by the Plaintiffs are inapposite because they consider statements that can be true or false on an objective standard, rather than business puffery or opinion. In SEC v. Todd, we considered an objective misstatement, where a defendant publicly reported an incorrect amount for the accounting impact of a transaction. 642 F.3d at 1217–18. In Freudenberg v. ETrade Financial Corporation, the Southern District of New York considered financial statements that clearly understated net income and loss reserves as well as the quality of mortgage loans. 712 F. Supp. 2d 171, 178, 182 (S.D.N.Y. 2010). In re Van der Moolen Holding N.V. Securities Litigation dealt with a company that did not disclose that its revenue had been generated by unlawful trading practices, even though it had knowledge that its 14 OPERF V. APOLLO GROUP employees were violating rules of the New York Stock Exchange. 405 F. Supp. 2d 388, 400–401 (S.D.N.Y. 2005). Unlike accounting calculations or ignorance of rule violations, the statements by Apollo were subjective and preceded by qualifiers, such as “We believe.”
According to the Plaintiffs, Apollo failed to disclose to investors that it recruited flawed students, who were ultimately unable to pay tuition. Apollo also allegedly hid the fact that it had created an incentive system for recruiters that made misconduct inevitable because the recruiters were focused on getting as many students as possible. The Plaintiffs’ omissions theory fails to state a claim because the Defendants clearly disclosed material information to investors. See Desai v. Deutsche Bank Secs. Ltd., 573 F.3d 931, 939 (9th Cir. 2009) (“As for omissions, the term generally refers to the failure to disclose material information about a company, as opposed to affirmative manipulation.”). Investors knew that they were investing in Apollo and its University of Phoenix program, an institution whose business model relied on recruiting students for profit. Public filings, readily available to Apollo’s investors, revealed that Apollo was spending money every year on marketing, which was used to advertise to and recruit students for the University of Phoenix. Apollo’s public filings made clear that it targeted individuals unable to attend traditional colleges and universities. Apollo also disclosed its enrollment numbers and withdrawal rates. OPERF V. APOLLO GROUP 15
We can affirm the dismissal of Plaintiffs’ claims in Count I, III, and IV of the Amended Complaint based solely on the Plaintiffs’ failure to allege specific facts to show a material misstatement or omission. Even if the Plaintiffs had adequately alleged a claim on misstatement or omission grounds, however, they did not adequately plead scienter. This is an independent basis on which to affirm the district court’s decision. A defendant who makes misrepresentations or omissions “either intentionally or with deliberate recklessness” acts with scienter. In re Daou Sys., Inc., 411 F.3d 1006, 1015 (9th Cir. 2005). Under Tellabs and Ninth Circuit law, we conduct a two-part inquiry to determine whether scienter has been adequately pled: first, we determine whether any of the allegations, standing alone, are sufficient to create a strong inference of scienter; second, if no individual allegation is sufficient, we conduct a ‘holistic’ review of the same allegations to determine whether the insufficient allegations combine to create a strong inference of intentional conduct or deliberate recklessness. N.M. State Inv. Council v. Ernst & Young LLP, 641 F.3d 1089, 1095 (9th Cir. 2011) (internal citations omitted). Where, as here, the Plaintiffs seek to hold individuals and a company liable on a securities fraud theory, we require that 16 OPERF V. APOLLO GROUP the Plaintiffs allege scienter with respect to each of the individual defendants. See Glazer Capital Mgmt., LP v. Magistri, 549 F.3d 736, 743–44 (9th Cir. 2008). We may, however, impute scienter to individual defendants in some situations, for example, where we find that “a company’s public statements [are] so important and so dramatically false that they would create a strong inference that at least some corporate officials knew of the falsity upon publication.” Id. at 744. Employing a holistic review, we conclude that the Plaintiffs do not allege sufficient facts to establish a claim that the Defendants either did not know or were consciously reckless of their deceptive recruitment practices. The Plaintiffs rely on statements by various anonymous employees and executives who suggest that they personally witnessed faulty recruiting or attended meetings where Apollo representatives discussed marketing to unfit students. The Plaintiffs do not provide specificity about these meetings and do not discuss what made students unfit. Instead, the Plaintiffs rely on generalizations about groups of people, such as the homeless or veterans, who were supposedly unreliable students. At best, the Plaintiffs’ allegations reveal isolated instances of faulty recruitment, rather than widespread deception, which would be necessary to establish fraudulent intent or reckless ignorance based on a holistic analysis. See N.M. State, 641 F.3d at 1095. The Plaintiffs’ statements also do not sufficiently allege the individual Defendants acted with scienter.
“To prove loss causation, [the Plaintiffs] must demonstrate a causal connection between the deceptive acts OPERF V. APOLLO GROUP 17 that form the basis for the claim of securities fraud and the injury suffered by the [Plaintiffs].” Ambassador Hotel Co., Ltd. v. Wei-Chuan Inv., 189 F.3d 1017, 1027 (9th Cir. 1999). The Plaintiffs’ Amended Complaint fails, whether we apply Rule 8(a) or Rule 9(b). The Plaintiffs do not allege specific statements made by the Defendants that were made untrue or called into question by subsequent public disclosures. Although the Plaintiffs point to several public disclosures, we analyze a few illustrative examples below. On January 7, 2010, Apollo disclosed in a press release that a review by the Department of Education had “expressed a concern that some students enroll and begin attending classes before completely understanding the implications of enrollment, including their eligibility for student financial aid.” It is unclear what claims made by the Defendants were invalidated by this statement. An expression of concern, moreover, does not constitute a corrective disclosure and a public admission of Apollo’s alleged fraud. In similar circumstances, we recently held that a company’s announcement of an internal investigation, by itself, does not “reveal fraudulent practices to the market” and therefore is insufficient to establish loss causation. See Loos v. Immersion Corp., 762 F.3d 880, 890 (9th Cir. 2014). Similarly, the Plaintiffs claim that, in the beginning of August 2010, the Government Accountability Office issued a report that discussed for-profit education and conduct by Apollo schools. The GAO report purportedly “revealed a systemic practice of manipulative and deceptive recruitment practices within Apollo’s industry.” This report focused on the for-profit education industry as a whole, rather than Apollo and the University of Phoenix. The Plaintiffs do not specify which of the Defendants’ statements were made 18 OPERF V. APOLLO GROUP untrue by the GAO report. As a result, the Plaintiffs have not adequately alleged that there was a causal connection between the public information contained in the GAO Report and subsequent market activity. While their appeal was pending, the Plaintiffs submitted a First Circuit case, Massachusetts Retirement System v. CVS Caremark Corporation, as supplementary authority for their loss causation claim. 716 F.3d 229 (1st Cir. 2013). In CVS Caremark, investors on a conference call with a high-level CVS executive asked him about the integration of CVS and Caremark after a merger. The executive disclosed that the company had lost a major contract as a result of “service issues” and that the company was facing challenges after the merger. Id. at 235. The First Circuit concluded that the disclosure by the executive was sufficient to establish loss causation, especially where analysts had already expressed concerns about CVS’ ability to integrate Caremark. Unlike the present case, CVS Caremark involved a specific statement made by a high-level executive about the exact fact that had been misrepresented in the past, the successful integration of the two companies. CVS Caremark does not help the Plaintiffs plead a loss causation claim.