Oregon Public Employees Retirement Fund v. Apollo Group Inc.

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

OREGON PUBLIC EMPLOYEES No. 12-16624

RETIREMENT FUND; AMALGAMATED

BANK, as Trustee for the LongView D.C. No.

LargeCap 500 Index Fund, the 2:10-cv-01735-

LongView LargeCap 500 Index JAT

VEBA Fund, the LongView

Quantitative LargeCap Fund, and the

LongView Quantitative LargeCap OPINION

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.

Appeal from the United States District Court

for the District of Arizona

James A. Teilborg, District Judge, Presiding

Argued and Submitted

October 10, 2014—Phoenix, Arizona

2 OPERF V. APOLLO GROUP

Filed December 16, 2014

Before: J. Clifford Wallace, Barry G. Silverman,

and Milan D. Smith, Jr., Circuit Judges.

Opinion by Judge Milan D. Smith, Jr.

SUMMARY*

Securities Fraud

The panel affirmed the district court’s dismissal of

investors’ class action under § 10(b) of the Securities

Exchange Act and SEC Rule 10b-5 against Apollo Group,

Inc., a for-profit education company, and Apollo officers and

directors.

The plaintiffs alleged that the defendants made false and

misleading statements of material fact regarding Apollo’s

enrollment and revenue growth, financial condition,

organizational values, and business focus. They also alleged

that, during the class period, certain individual defendants

traded on inside information related to the false and

misleading statements of material fact.

Agreeing with the Fourth Circuit, the panel held that the

heightened pleading standards of Fed. R. Civ. P. 9(b) apply

to all elements of a securities fraud action, including loss

causation.

*

This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

OPERF V. APOLLO GROUP 3

The panel held that the material misrepresentations

alleged in Counts I, III, and IV of the amended complaint

were not objectively false statements, but rather were

examples of lawful “business puffing.” The plaintiffs also

failed adequately to plead scienter or loss causation.

The panel held that, as to Count II, the plaintiffs did not

show how Apollo’s accounting numbers regarding student

revenue were incorrect or misstated.

The panel held that the plaintiffs failed to state a claim for

insider trading because the alleged non-public information to

which the defendants had access was the same information at

issue in Counts I–IV.

The panel held that the plaintiffs also could not establish

control person liability.

COUNSEL

Stuart M. Grant (argued), Grant & Eisenhofer P.A.,

Wilmington, Delaware, for Plaintiffs-Appellants.

Linda T. Coberly (argued), William P. Ferranti, and Benjamin

L. Ellison, Winston & Strawn LLP, Chicago, Illinois; David

B. Rosenbaum, Osborn Maledon, P.A., Phoenix, Arizona, for

Defendants-Appellees.

4 OPERF V. APOLLO GROUP

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 section 10(b) of the Securities and Exchange Act and

SEC Rule 10b-5. According to the Plaintiffs, the Defendants

made false and misleading statements of material fact

regarding Apollo’s enrollment and revenue growth, financial

condition, organizational values, and business focus. The

Plaintiffs also allege that, during the Class Period, certain

individual Defendants traded on inside information related to

the false and misleading statements of material fact. Finally,

the Plaintiffs allege that certain officers and directors of

Apollo are liable as controlling persons for the misstatements

and omissions of their supervisees. The district court

dismissed the Plaintiffs’ Amended Complaint for failure to

state a claim under Federal Rule of Civil Procedure 12(b)(6).

We affirm the decision of the district court for four reasons.

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.

OPERF V. APOLLO GROUP 5

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 subsidiary, the University of Phoenix.

The remaining Defendants are individuals who served as

Apollo officers and directors during the Class Period,

between May 21, 2007 and October 13, 2010. The Plaintiffs

represent a class of investors who purchased Apollo stock

during the Class Period.

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

6 OPERF V. APOLLO GROUP

concerning Apollo’s (1) enrollment and revenue growth,

(2) financial condition, (3) organizational values, and

(4) business focus in violation of section 10(b) of the

Securities and Exchange Act and SEC Rule 10b-5. These

alleged misstatements appeared in Apollo’s filings with the

SEC, press releases, and conference calls and interviews. The

Plaintiffs also allege that the Defendants failed to disclose

material facts necessary to make the statements not

misleading.

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 section

20(a) of the Securities and Exchange Act because each was

a controlling person who had direct and supervisory

involvement in the daily operations of Apollo. As controlling

persons, they would be jointly and severally liable for

violations of section 10(b) of the Securities and Exchange Act

and Rule 10b-5.

After allowing the Plaintiffs to amend their initial

complaint, the district court dismissed the Plaintiffs’

Amended Complaint under Federal Rule of Civil Procedure

12(b)(6) for failure to state a claim. The Plaintiffs

subsequently filed this timely appeal.

OPERF V. APOLLO GROUP 7

JURISDICTION AND STANDARD OF REVIEW

We have subject matter jurisdiction pursuant to Section

27 of the Securities and Exchange Act, 15 U.S.C. § 78aa(a),

and 28 U.S.C. §§ 1331 and 1337(a). We have jurisdiction

over this appeal pursuant to 28 U.S.C. § 1291.

We review de novo the district court’s dismissal of the

Plaintiffs’ Amended Complaint under Federal Rule of Civil

Procedure 12(b)(6) and accept all factual allegations in the

Amended Complaint as true. N.M. State Inv. Council v. Ernst

& Young LLP, 641 F.3d 1089, 1094 (9th Cir. 2011).

DISCUSSION

I. Legal Standard

To plead a claim under section 10(b) and Rule 10b-5, the

Plaintiffs must allege: (1) a material misrepresentation or

omission; (2) scienter; (3) a connection between the

misrepresentation or omission and the purchase or sale of a

security; (4) reliance; (5) economic loss; and (6) loss

causation. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta,

Inc., 552 U.S. 148, 157 (2008).

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 Federal Rule of Civil Procedure 8(a)(2), which

requires that “a complaint [] contain sufficient factual matter,

accepted as true, to ‘state a claim to relief that is plausible on

its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)

(quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570

8 OPERF V. APOLLO GROUP

(2007)). Securities fraud class actions must meet the higher,

exacting pleading standards of Federal Rule of Civil

Procedure 9(b) and the Private Securities Litigation Reform

Act (PSLRA). See Tellabs, Inc. v. Makor Issues & Rights,

Ltd., 551 U.S. 308, 313–14 (2007). Rule 9(b) requires that

“[i]n alleging fraud or mistake, a party must state with

particularity the circumstances constituting fraud or mistake.”

Fed. R. Civ. P. 9(b).

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.” 15 U.S.C. § 78u-4(b)(2)(A).

The PSLRA also requires that “the complaint shall specify

each statement alleged to have been misleading, the reason or

reasons why the statement is misleading, and, if an allegation

regarding the statement or omission is made on information

and belief, the complaint shall state with particularity all facts

on which that belief is formed.” Id. at § 78u-4(b)(1)(B).

B. Pleading Standard for Loss Causation

Although it is clear that Rule 9(b) and the PSLRA apply

to almost all elements of a securities fraud action, the law is

less clear about the pleading standard that applies to the loss

causation element. In Dura Pharmaceuticals, Inc. v. Broudo,

the Supreme Court suggested that Rule 8’s “short and plain

statement” might apply: “we assume, at least for argument’s

sake, that neither the Rules nor the securities statutes impose

any special further requirement in respect to the pleading of

proximate causation or economic loss.” 544 U.S. 336, 346

(2005).

OPERF V. APOLLO GROUP 9

After Dura, we have applied a plausibility standard to loss

causation, which avoids the question of whether the Rule 8(a)

or Rule 9(b) pleading standard applies. See WPP Luxembourg

Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d 1039, 1053

(9th Cir. 2011) (“It is unclear in this Circuit whether Rule

9(b)’s heightened pleading standard or whether Rule 8(a)(2)’s

‘short and plain’ statement applies to allegations of loss

causation.”); In re Gilead Sciences Sec. Litig., 536 F.3d 1049,

1057 (9th Cir. 2008) (“So long as the complaint alleges facts

that, if taken as true, plausibly establish loss causation, a Rule

12(b)(6) dismissal is inappropriate.”). At times, we have

applied both Rule 8(a) and 9(b) standards to allegations of

loss causation, finding that plaintiffs meet both standards. See

Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 989–90

(9th Cir. 2008).

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 Fed. R. Civ. P.

9(b)’s requirement that averments of fraud be pled

with particularity.”); Tricontinental Indus., Ltd. v.

PricewaterhouseCoopers, LLP, 475 F.3d 824, 842 (7th Cir.

2007) (“To plead loss causation, the plaintiff must allege that

it was the very facts about which the defendant lied which

caused its injuries.”). The Second Circuit applies a different,

but heightened, two-part test for loss causation, requiring that

plaintiffs show that the loss was both foreseeable and caused

by the materialization of the risk concealed by the fraudulent

statement. See ATSI Commc’ns, Inc. v. Shaar Fund, Ltd.,

493 F.3d 87, 107 (2d Cir. 2007). At least one district court in

the Sixth Circuit has suggested that heightened pleading

requirements apply to loss causation. See Fla. Carpenters

10 OPERF V. APOLLO GROUP

Reg’l Council Pension Plan v. Eaton Corp., 964 F. Supp. 2d

875, 891 (N.D. Ohio 2013). The First Circuit, like our court,

has only stated that it is unclear whether a plaintiff has to

plead loss causation under Rule 8(a) or 9(b). See Mass. Ret.

Sys. v. CVS Caremark Corp., 716 F.3d 229, 239 n.6 (1st Cir.

2013).

Other circuits have suggested that heightened pleading

standards do not apply to loss causation. The Fifth Circuit has

concluded that Rule 8(a) applies. See Lormand v. US

Unwired, Inc., 565 F.3d 228, 258 (5th Cir. 2009). At least one

court in the Third Circuit agrees with this approach. See Nat’l

Junior Baseball League v. Pharmanet Dev. Grp. Inc., 720 F.

Supp. 2d 517, 558 (D.N.J. 2010).

We are persuaded by the approach adopted in the Fourth

Circuit and hold today that Rule 9(b) applies to all elements

of a securities fraud action, including loss causation. This

approach is appropriate for at least three reasons.

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 § 10(b) and Rule

10b-5 has been based on doctrines with which we, as judges,

are familiar: common-law doctrines of fraud and deceit.”

Basic Inc. v. Levinson, 485 U.S. 224, 253 (1988). The

requirement of loss causation, in particular, is founded on the

common law of fraud and deceit. Dura, 544 U.S. at 343–44

(“the common law has long insisted that a plaintiff in [a fraud

or deceit] case show not only that had he known the truth he

would not have acted but also that he suffered actual

economic loss.”). Since Rule 9(b) applies to all circumstances

of common-law fraud, Salameh v. Tarsadia Hotel, 726 F.3d

1124, 1133 (9th Cir. 2013) cert. denied, 134 S. Ct. 1322

OPERF V. APOLLO GROUP 11

(2014), and since securities fraud is derived from common

law fraud, it makes sense to apply the same pleading standard

to all circumstances of securities fraud.

Second, Rule 9(b) clearly states that “[i]n alleging fraud

or mistake, a party must state with particularity the

circumstances constituting fraud or mistake.” Securities fraud

encompasses six elements, including loss causation. Dura,

544 U.S. at 341–42. Loss causation is part of the

“circumstances” constituting fraud because, without it, a

claim of securities fraud does not exist.

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 Rule 9(b) governs the

Plaintiffs’ Amended Complaint. However, the Plaintiffs’

claims fail even if the less stringent Rule 8(a) standard

applied.

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

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.

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

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. 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 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.”

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.

OPERF V. APOLLO GROUP 15

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

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.

D. Loss Causation

“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.

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

Section 10(b) and Rule 10b-5.

OPERF V. APOLLO GROUP 19

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, 552 U.S. 148, 157–58 (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 (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

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 sections 10(b) and 20A

of the Securities and Exchange Act and SEC Rule 10b-5.

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 section 20(a) of the Exchange

Act because they were controlling persons who had direct and

supervisory involvement in day-to-day operations of Apollo.

As controlling persons, the individual Defendants would be

jointly and severally liable for the institution’s violations of

the Securities and Exchange Act.

We hold that the Plaintiffs cannot establish control person

liability because they have not adequately alleged violations

of section 10(b) and Rule 10b-5.

VI. Conclusion

The district court properly dismissed the Plaintiffs’

Amended Complaint for failure to state a claim. The

22 OPERF V. APOLLO GROUP

Plaintiffs do not state enough specific facts to plausibly allege

that the Defendants violated Securities and Exchange Act

10(b) and SEC Rule 10b-5. We affirm the decision of the

district court. All outstanding motions filed by Plaintiffs-

Appellants and Defendants-Appellees are denied. Each party

shall bear its own costs on appeal.

AFFIRMED.