OREGON PUBLIC EMPLOYEES RETIREMENT FUND; Amalgamated Bank, as Trustee for the LongView LargeCap 500 Index Fund, the LongView LargeCap 500 Index Veba Fund, the LongView Quantitative LargeCap Fund, and the LongView Quantitative LargeCap Veba Fund; Mineworkers’ Pension Scheme, Plaintiffs-Appellants, v. APOLLO GROUP INCORPORATED; John Sperling; Gregory W. Cappelli; Charles B. Edelstein; Gregory J. Iverson; Joseph I. D’Amico; Brian L. Swartz; Brian E. Mueller; Peter V. Sperling; William J. Pepicello, Defendants-Appellees.
No. 12-16624.
United States Court of Appeals, Ninth Circuit.
December 16, 2014.
774 F.3d 598
Argued and Submitted Oct. 10, 2014.
Second, in other contexts, courts have considered actions to be “pending” until the expiration of the time to file an appeal. See Burnett, 380 U.S. at 435, 85 S.Ct. at 1058 (Federal Employer‘s Liability Act); Knights of the Ku Klux Klan Realm of La. v. E. Baton Rouge Parish Sch. Bd., 679 F.2d 64, 67-68 (5th Cir. Unit A 1982) (Equal Access to Justice Act); Perzinski v. Chevron Chem. Co., 503 F.2d 654, 657-58 (7th Cir.1974) (Wisconsin evidence rules).
Third, legislative history supports the Treasury‘s reading of
The taxpayer may contest the determination of the appellate officer in Tax Court by filing a petition within 30 days of the date of the determination. The IRS may not take any collection action pursuant to the determination during such 30-day period or while the taxpayer‘s contest is pending in Tax Court.
H.R.Rep. No. 105-599, at 264 (1998) (Conf. Rep.). True, this report only addresses the period during which collection by levy—and not the ten-year statute of limitations—is suspended. But,
In fine, the regulation‘s method of illuminating the somewhat tenebrous language of
CONCLUSION
The Treasury Department‘s issuance of
AFFIRMED.
Linda T. Coberly (argued), William P. Ferranti, and Benjamin L. Ellison, Winston & Strawn LLP, Chicago, IL; David B. Rosenbaum, Osborn Maledon, P.A., Phoenix, AZ, for Defendants-Appellees.
Before: J. CLIFFORD WALLACE, BARRY G. SILVERMAN, and MILAN D. SMITH, JR., Circuit Judges.
OPINION
M. SMITH, Circuit Judge:
In this consolidated class action, the Plaintiffs-Appellants (Plaintiffs) represent a class of investors that purchased stock in Apollo Group Inc., between May 21, 2007 and October 13, 2010 (the Class Period). The Plaintiffs allege that the Defendants-Appellees (Defendants), Apollo, a for-profit education company, and Apollo officers and directors, violated
First, the material misrepresentations the Plaintiffs alleged in Counts I, III, and IV of the Amended Complaint are not objectively false misstatements, but are examples of lawful “business puffing.” Even if the Plaintiffs adequately alleged a misstatement or omission, they did not adequately plead scienter or loss causation, both of which are independent bases on which to affirm the district court‘s decision.
Second, Count II contains largely conclusory allegations that Apollo improperly recorded student revenue. The Plaintiffs do not show how Apollo‘s accounting numbers were incorrect or misstated. Apollo also disclosed to its investors information concerning the collection of revenue and tuition, which negates the Plaintiffs’ misstatement and omission theory.
Third, the Plaintiffs’ allegations that the Defendants are guilty of insider trading fail to state a claim because the alleged non-public information to which the Defendants had access is the same information at issue in Counts I, II, III, and IV of the Amended Complaint.
Fourth, the Plaintiffs cannot establish control person liability because their control person claim relies on the faulty allegations made in the other counts.
FACTUAL AND PROCEDURAL BACKGROUND
Defendant Apollo Group Inc. is an Arizona-based company that owns and operates postsecondary education institutions, and is one of the largest private education providers in the United States. The majority of Apollo‘s revenue comes from its
Counts I, II, III, and IV of the Plaintiffs’ Amended Complaint allege that, during the Class Period, the Defendants made materially false and misleading statements concerning Apollo‘s (1) enrollment and revenue growth, (2) financial condition, (3) organizational values, and (4) business focus in violation of
In Counts V and VII of their Amended Complaint, the Plaintiffs allege that individual Defendants John Sperling, Peter Sperling, Joseph D‘Amico, and William Pepicello committed insider trading by trading on non-public information related to the allegedly false and misleading disclosures that Apollo made to its investors.
Finally, in Count VI, the Plaintiffs allege that, during the Class Period, Defendants John Sperling, Peter Sperling, Joseph D‘Amico, Gregory Capelli, Charles Edelstein, Brian Swartz, Brian Mueller, and Gregory Iverson violated
After allowing the Plaintiffs to amend their initial complaint, the district court dismissed the Plaintiffs’ Amended Complaint under
JURISDICTION AND STANDARD OF REVIEW
We have subject matter jurisdiction pursuant to
We review de novo the district court‘s dismissal of the Plaintiffs’ Amended Complaint under
DISCUSSION
I. Legal Standard
To plead a claim under
A. PSLRA and Rule 9(b)
The Plaintiffs incorrectly argue that each of the six elements of their 10(b) claims is subject to the pleading standards of
The PSLRA requires that “the complaint shall, with respect to each act or omission ..., state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.”
B. Pleading Standard for Loss Causation
Although it is clear that
After Dura, we have applied a plausibility standard to loss causation, which avoids the question of whether the
Some of our sister circuits have suggested that heightened pleading standards apply to loss causation. See Katyle v. Penn Nat‘l Gaming, Inc., 637 F.3d 462, 471 (4th Cir.2011) (“We review allegations of loss causation for ‘sufficient specificity,’ a standard largely consonant with
Other circuits have suggested that heightened pleading standards do not apply to loss causation. The Fifth Circuit has concluded that
We are persuaded by the approach adopted in the Fourth Circuit and hold today that
First, the law on securities fraud is derived from common-law fraud. As the Supreme Court has noted, “the case law developed in this Court with respect to
Second,
Third, our approach creates a consistent standard through which to assess pleadings in 10(b) actions, rather than the piecemeal standard adopted by some courts.
Accordingly, we hold that
II. Counts I, III, and IV
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
A. Material Misstatement
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 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. E*Trade 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
B. Omission
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.
C. Scienter
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 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 corpo-
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.
D. Loss Causation
“To prove loss causation, [the Plaintiffs] must demonstrate a causal connection between the deceptive acts 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
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 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
III. Count II
In Count II of the Amended Complaint, the Plaintiffs allege the Defendants made misstatements and omissions about Apollo‘s financial condition and overstated tuition revenues and receivables attributable to students. The Plaintiffs allege that, by publicly counting tuition expected from Title IV students as part of its revenue, Apollo made fraudulent misstatements and omissions in violation of
Because the Plaintiffs’ allegations do not plausibly establish a misstatement or omission, we hold that the district court correctly dismissed Count II of the Amended Complaint. See Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157-58, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008). The Plaintiffs’ allegations in Count II also do not establish scienter and loss causation, which are independent bases on which to dismiss the Plaintiffs’ claims. We do not address those requirements here because the factual analysis is similar to that contained in Part II of this opinion.
A. Misstatement and Omission
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, 99 S.Ct. 773, 58 L.Ed.2d 785 (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 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 misrep-
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.
IV. Counts V and VII
The Plaintiffs also argue that certain individual Defendants sold Apollo stock while in possession of material, non-public information in violation of
The alleged material, non-public information is the same information at issue in the Exchange Act claims, namely that Apollo‘s public filings contained statements that were false and misleading. We hold that the Plaintiffs have not adequately alleged that the Defendants made misstatements or omissions. Therefore, the Plaintiffs have not adequately alleged that the Defendants were in possession of material, non-public information.
V. Count VI
Count VI of the Amended Complaint alleges that certain individual Defendants violated
We hold that the Plaintiffs cannot establish control person liability because they have not adequately alleged violations of
VI. Conclusion
The district court properly dismissed the Plaintiffs’ Amended Complaint for failure to state a claim. The Plaintiffs do not state enough specific facts to plausibly allege that the Defendants violated Securities and Exchange Act
AFFIRMED.