On February 4, 2022, Judge Yvonne Gonzalez Rogers of the United
States District Court for the Northern District of California
granted in part and denied in part a motion for class certification
in a putative class action against a multinational consumer
electronics, software, and online services company (the
“Company”) and two of its executives alleging
violations of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 (the “Exchange Act”). In re Apple
Inc. Securities Litigation, No. 4:19-cv-2033-TGR (N.D. Cal.
Feb. 4, 2022). Plaintiff, who sought to represent purchasers
of the Company's publicly traded securities, alleged that in
late 2018, the Company made misrepresentations about the state of
its business in China, the Company's most important growth
market at the time, which caused the Company's stock price to
fall. After granting in part and denying in part a motion to
dismiss the amended complaint in a decision covered here, the Court granted class
certification except as to the inclusion of option holders in the
class, finding that the option holders' damages could not be
calculated on a classwide basis with the remaining
stockholders.
Plaintiff alleged that the Company, primarily through its CEO, made
material misrepresentations about the state of the Company's
business in China, its most important market, despite being aware
of facts allegedly inconsistent with the statements.
Specifically, plaintiff alleged that, on a November 1, 2018
investor and analyst conference call, the CEO stated that the
Company's “business in China was very strong last
quarter,” despite allegedly knowing several conflicting
facts, including that U.S.-China trade tensions were negatively
impacting sales and demand for the Company's flagship
product, that the Company had already begun experiencing lower
traffic in its China-based retail stores, and that the Company was
reducing orders from its largest suppliers and ramping down
manufacturing of its flagship product ahead of the holiday
season. Following the alleged misrepresentations, several
public reports emerged in November and December that allegedly
indicated that the Company was halting production and implementing
certain “fire drill” responses to poor sales in the
region. On January 2, 2019, the Company preannounced its
first earnings shortfall in over 15 years, citing, among other
things, the significant revenue shortfall that it experienced in
China. Following this disclosure, the Company's stock
price dropped from $157.92 per share on January 2 to $142.19 per
share on January 3.
Although most of the initial complaint's allegations were
stripped away at the motion to dismiss stage, the Court found two
of the allegations pertaining to misstatements made by the
Company's CEO were sufficiently pled. In particular,
plaintiff moved to certify a putative class defined as all persons
and entities who purchased or otherwise acquired the
Company's publicly traded securities from November 2, 2018
through January 2, 2019, and who suffered damages as a result
of the Company's alleged Exchange Act violations. In
opposing class certification, defendants argued that (1) plaintiff
is not an adequate class representative; (2) evidence rebuts the
presumption of classwide reliance; (3) even if a class were to be
certified, it should not include option holders; and (4) the
proposed damages model includes damages that did not result from
the alleged wrongdoing. The Court rejected all but
defendant's third argument.
In arguing against plaintiff's adequacy as class
representative, defendants pointed to numerous alleged errors
plaintiff made (and corrected) in its class certification filing
regarding its stock trading history and alleged losses. In
response, plaintiff contended that some of the errors were clerical
mistakes by counsel and submitted that its records supported the
remaining information related to losses. The Court held that,
absent evidence of bad faith or intent to deceive,
plaintiff's “careless[]” but “minor”
errors did not rise to a level that would preclude a finding of
adequacy. Moreover, the Court held that defendants had not
shown that plaintiff and its counsel “have conflicts or that
plaintiff will not prosecute the action vigorously.”
Accordingly, the Court held plaintiff to be an adequate class
representative.
The Court next considered the issue of predominance of common
questions, focusing initially on the reliance element of Section
10(b). The Court addressed whether all of the class members
could invoke the Basic rebuttable presumption of reliance
that would allow the members to substitute reliance on the
Company's stock price for actual reliance on the
Company's false statement, so long as the Company's
stock traded in an efficient market. Finding that defendants
failed to rebut the Basic presumption by breaking the
causal link between the January 2, 2019 disclosure and the negative
stock price impact, the Court held that predominance was met with
respect to reliance.
Finally, the Court addressed predominance with respect to
damages. Plaintiff proposed the “out-of-pocket”
damages methodology, which measures the difference “between
the amount of stock price inflation at purchase and the amount of
inflation in the stock price at sale or, if held, at the end of the
Class Period[.]” While defendants argued that the
methodology could not be used for the proposed class, the Court
disagreed, holding that plaintiff “proposed a standard method
of calculating damages that is consistent with this theory of
liability and can be applied classwide.”
The Court did, however, agree with defendants that
plaintiff's proposed damages model did not provide any method
for calculating alleged damages of the Company's options
holders, and that plaintiff had not adequately explained how the
options holders' damages could be calculated as part of the
class damages. Specifically, the Court held that “given
the varying characteristics of the 2,282 distinct . . . options
that were available for trading during the relevant period,
[plaintiff] offers nothing in either of his reports to satisfy the
Court that individualized issues pertaining to damages to option
holders will not predominate.” The Court therefore
granted class certification in part but denied without prejudice
class certification as it related to option holders, noting that
“[s]hould plaintiff re-seek certification with respect to
[option holders], it would behoove plaintiff to address the
concerns not only pertaining to its ability to calculate classwide
damages but also the issues raised by defendants regarding market
efficiency for purposes of invoking the Basic assumption
of reliance.”
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