Not So Suspicious

The Apollo Group, a large private education provider, has been a magnet for securities litigation. In the most recent securities class action brought against Apollo, investors allege that from May 2007 to October 2010 the company made false and misleading statements about its financial condition, business focus, ethics, compensation and recruitment practices, and compliance with federal student loan regulations. In a recent decision – In re Apollo Group, Inc. Sec. Litig., 2011 WL 5101787 (D. Ariz. Oct. 27, 2011) – the court dismissed the claims. The decision has a few interesting holdings:

(1) Internet Postings – The complaint cited certain anonymous internet postings. The court noted that “the only appreciable difference between anonymous internet postings and confidential witness statements is that anonymous internet postings are less reliable.” As a result, “with regard to anonymous internet postings, it is Plaintiffs’ burden to plead reliability and knowledge that are indicative of scienter to at least the same extent as it must when pleading scienter with regard to confidential witness statements.”

(2) Suspicious Stock Trading – There were nine individual defendants in the case. The plaintiffs alleged that four of those defendants sold Apollo stock during the class period (21%, 15%, 34%, and 26% of their holdings respectively). The court found that these stock sales did not support a strong inference of scienter because (a) they were not “large sales amounts,” and (b) there were no “corroborative sales” by the other individual defendants.

(3) SEC Investigation – There is a district court split regarding whether the announcement of an SEC investigation is sufficient to establish loss causation (presuming that the announcement does not otherwise disclose any information about the alleged fraud). In Apollo’s case, the relevant press release stated that the SEC was conducting an informal investigation into the company’s revenue recognition practices. The court found that this disclosure had a sufficient nexus to the alleged fraud, because it could have signaled to a “reasonable investor that there were improprieties in Apollo’s revenue recognition policies.”

Holding: Motion to dismiss granted based on failure to adequately plead scienter.

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