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Class Action Defense Cases–In re Apollo: Arizona Federal Court Vacates Jury Verdict In Securities Fraud Class Action And Enters Judgment In Favor Of Defendants Because No Proof Of Loss Causation

Defense Motion for Judgment as a Matter of Law Granted because Plaintiff’s Evidence Failed to Establish Loss Causation so Jury Verdict could not Stand Arizona Federal Court Holds

Plaintiffs filed a class action against Apollo Group and certain of its officers and directors the Bank and other defendants alleging violations of federal securities law; the class action complaint asserted that defendants made false or misleading statements concerning a Department of Education (DOE) program review at Apollo Group’s wholly-owned subsidiary, University of Phoenix (UOP). In re Apollo Group, Inc. Securities Litig., ___ F.R.D. ___ (D.Ariz. August 4, 2008) [Slip Opn., at 1]. The class action claims relied on two analyst reports, published in September 2004 (“the Flynn reports”) that allegedly disclosed the truth to the market, id. The Policemen’s Annuity and Benefit Fund of Chicago represented the class; the district court certified the litigation as a class action and the matter proceeded to a jury trial. Id. The jury ruled in favor of the plaintiff, and defense attorneys moved the court for judgment as a matter of law or, alternatively, for a new trial. Id. The district court granted the motion for judgment as a matter of law.

The district court set forth the entirety of the facts relevant to its determination in a single paragraph: “On February 5, 2004, as part of its ongoing program review at the UOP, the DOE sent Apollo a program review report that preliminarily found that the UOP had violated DOE regulations. Apollo was not required to immediately disclose the report, and it chose not to do so. But on six different occasions thereafter, between February 27, 2004 and September 7, 2004, Apollo misrepresented the actual state of affairs surrounding the program review by making public statements at odds with the existence and contents of the DOE report. On September 14 and 15, 2004, the contents of the DOE report were widely disseminated for the first time through various newspapers articles, including articles in The Wall Street Journal, The Arizona Republic, and the Chicago Tribune. The market did not react to the disclosure of this news in any significant way. Five days later, the Flynn reports were issued. These reports downgraded Apollo’s stock for various reasons, some of which PABF argued at trial were necessary to reveal the truth of Apollo’s prior misrepresentations. Apollo’s stock price fell significantly thereafter.” In re Apollo, at 2.

The federal court explained at page 3 that in order to prevail on their securities fraud claims, plaintiff was required to “establish ‘“loss causation,” i.e., a causal connection between the material misrepresentation and the loss.’” (Quoting Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 342 (2005).) One way to meet this burden is to demonstrate “that a corrective disclosure caused the stock price to decline.” In re Apollo, at 3 (footnote omitted) (citations omitted). For these purposes, “A ‘corrective disclosure’ is a disclosure that reveals the fraud, or at least some aspect of the fraud, to the market.” Id. (citations omitted). By contrast, “A disclosure that does not reveal anything new to the market is, by definition, not corrective.” Id. (citation omitted). Here, the jury found that the Flynn reports were “corrective disclosures” sufficient to establish loss causation, id., at 3-4. Defense attorneys argued that the Flynn reports failed to satisfy class action plaintiff’s loss-causation requirement because the reports did not contain any new information. Id., at 5. The federal court agreed.

Based on the district court’s analysis of the evidence presented at trial, the Flynn reports failed to present any information that had not been disclosed previously by the Chicago Tribune, and other information relied upon by plaintiff may have been “new” but it was either factually wrong or not linked to Apollo’s misrepresentations. See In re Apollo, at 5-6. In short, “The evidence at trial undercut all bases on which [plaintiff] claimed the Flynn reports were corrective.” Id., at 6. Accordingly, while plaintiff had established that Apollo “misled the market in various ways concerning the DOE program review,” plaintiff “failed to prove that Apollo’s actions caused investors to suffer any harm.” Id., at 6-7. The district court therefore vacated the jury’s verdict and ordered that judgment be entered in favor of defendants, id., at 10.

NOTE: The district court rejected a defense argument that “a market analyst’s opinion – which is all the Flynn reports were – is not, and never can be, a ‘corrective disclosure.’” See In re Apollo, at 4. The federal court also denied defendants’ motion for new trial. See id., at 7-10.

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