BR&B acted as lead counsel for lead plaintiff the Policemen’s Annuity and Benefit Fund of Chicago (“PABF”) in In re Apollo Group, Inc. Securities Litigation, one of the rare securities class actions to be successfully tried to a jury verdict.
Apollo Group, Inc., best known as the parent company of the University of Phoenix (“UOP”), is the largest for-profit institution of higher education in the United States. Historically, Apollo derived the majority of its revenues from tuition paid from federally-guaranteed student loans. In providing those loans to students, federal law prohibited Apollo from giving to its enrollment recruiters “any commission, bonus or other incentive payment based directly or indirectly on success in securing enrollments.” A February 2004 report by the Department of Education (“DOE”), however, found widespread violations of the enrollment compensation ban at UOP, including assertions that UOP’s director of enrollment told recruiters that Apollo’s compensation plan was a “smokescreen” designed to allow UOP to “fly under the radar of the DOE.” The DOE report found that Apollo’s compensation was designed to “camouflage what was in reality a commissionable compensation scheme based on enrollments.” The findings of the DOE report threatened Apollo’s ability to participate in the federal student loan programs.
On September 7, 2004, Apollo announced an agreement with the DOE to resolve the issues raised by the report. Apollo agreed to pay a $9.8 million fine and to adopt changes to its enrollment recruiter compensation plan. In announcing this settlement, Apollo assured the investment community that neither the agreement nor the fine would have a material impact on the growth of the company or its financial performance. Immediately after Apollo’s announcement, several analysts issued favorable reports about the company, asserting that the settlement was a positive development for Apollo. And an analyst with UBS suggested that the settlement “may reduce [Apollo’s] near term risk.” Apollo’s September 7 announcement did not, however, disclose the contents or the detailed findings of the DOE’s report. Indeed, the analysts who issued reports following the company’s disclosure had done so without reading the report.
On September 14 and 15, 2004, The Wall Street Journal and the Arizona Republic published limited excerpts of the DOE’s negative findings about Apollo’s compensation practices, coupled with assurances by Apollo’s CEO Todd Nelson that the DOE’s report was “very, very unfair” and “totally false.” The news reports did not mention that Apollo was making material changes to its enrollment recruiter compensation practices in response to the DOE report, nor did the media report that Apollo faced heightened operating risks as a result of those changes.
Then, on Monday, September 20, 2004, a UBS analyst issued two reports about Apollo, noting that “the contents of the [DOE report] may cause more concerns about [Apollo’s] regulatory risk” and that its enrollment growth could be hurt by, among other things, “increasing enrollment advisor turnover.” The analyst noted that current and former recruiters told her that “internal enrollment targets were getting harder to hit” and that recruiter turnover had increased since the introduction of a new compensation plan in June 2004. Following the issuance of these reports, Apollo’s stock suffered a series of declines, falling from its closing price $78.35 on Friday, September 17, 2004 to close at $75.82 on September 20, 2004 and then closing at $72.00 on September 21, 2004.
In the wake of the revelations, several class action securities fraud complaints were filed in the United States District Court for the District of Arizona against Apollo, CEO Todd Nelson and CFO Kenda Gonzales. After full briefing and oral argument on various motions for appointment as lead plaintiff, the court appointed the PABF to serve as lead plaintiff and approved the PABF’s selection of BR&B as lead counsel.
Thereafter, BR&B filed a consolidated complaint on behalf of the PABF and investors who purchased their Apollo stock during the period from February 27, 2004 through September 14, 2004 (the “class period”). The complaint alleged that Apollo, Nelson and Gonzales made a series of false and misleading public statements regarding the existence and significance of the DOE’s report. The complaint alleged that on March 12, 2004, when asked about the ongoing DOE review and when “any type of report will be issued,” Nelson did not disclose that he had actually received a copy of the DOE’s report on February 4, instead saying “[w]ell, it’s, you know, again, tough to say.” The complaint alleged that the defendants did not disclose the contents of the DOE report and its adverse findings at any point during the class period.
Apollo and the individual defendants moved to dismiss our detailed consolidated complaint. After briefing and oral argument, the court denied the motions. Over the next two years, the parties engaged in extensive discovery: Apollo and others produced almost a million pages of documents and the parties conducted more than 50 fact and expert depositions.
Following the discovery phase of the litigation, including the depositions of experts, Apollo and the individual defendants filed a motion for summary judgment, seeking to terminate the case without a trial. After reviewing our response to the motion and oral argument, the court denied the motion, clearing the way for the case to be presented to a jury. Before the trial, the court ruled on more than 20 motions the defendants had filed seeking to limit the evidence PABF could present at trial. Jury selection began in November 2007, and the trial began on November 14, 2007. The trial of the action lasted 22 days over two months.
In addition to battling over whether Apollo and the individual defendants had made materially false statements, or concealed material, adverse information from investors, both sides offered the testimony of expert witnesses, who gave diametrically opposing opinions about the issue of “loss causation,” i.e., whether the false or misleading statements were the factual and legal cause of investor losses. The issue of loss causation in securities fraud class actions was highlighted following the Supreme Court’s April, 2005 decision in Dura Pharmaceuticals, Inc. v. Brudo. In Dura, the Supreme Court created a strong standard for the pleading of loss causation, requiring that plaintiffs allege that class period stock prices were inflated as a result of defendant’s false statements and misrepresentations. The pleading of loss causation pursuant to Dura has since become a central aspect of the litigation of securities class actions.
At the trial, we offered expert testimony that the price of Apollo’s common stock had declined $5.55 per share in response to the disclosures beginning on September 14, 2004, and culminating in the September 20, 2004, UBS reports. Apollo’s expert responded by testifying that only the decline on September 21 was significant, but that decline was not in response to the disclosure of information previously concealed. Rather, according to Apollo’s expert, the decline was due to “random chance.” The trial also included the testimony of nineteen fact witnesses, including several enrollment recruiters, enrollment managers, several senior Apollo executives, defendants Nelson and Gonzales and even the testimony from lawyers working on Apollo’s behalf regarding the company’s communications with the DOE. During the testimony of these fact and expert witnesses, more than 350 exhibits were introduced into evidence.
On January 16, 2008, following six hours of closing arguments and two days of deliberations, the jury rendered a unanimous verdict, finding in favor of PABF and the class on every claim and awarding the full amount of damages sought, $5.55 per share for every share purchased during, and held through, the class period.
The Appeals and Case Resolution
Apollo and the individual defendants refused to accept the jury’s verdict, filing several post-trial motions, including a motion for judgment as a matter of law, a procedural mechanism by which a judge can vacate a jury verdict. On August 8, 2008, the court granted Apollo’s motion for judgment as a matter of law, ruling that there was insufficient evidence to support the jury’s finding of loss causation.
BR&B thereafter filed a notice of appeal with the United States District Court for the Ninth Circuit. In March 2010, after extensive briefing and oral argument, the Ninth Circuit reversed the district court decision and ordered the district court to reinstate the jury verdict in favor of PABF and the class. Not willing to accept the Ninth Circuit’s judgment, Apollo sought an en banc review of the Ninth Circuit’s decision, which would have required that the appeal be reargued before a panel of eleven judges of the Ninth Circuit Court of Appeals. Apollo’s request was denied.
Apollo then sought review by the United States Supreme Court, filing a petition for a writ of certiorari. Because this case marked the first instance that the issue of loss causation had been tried to a jury since the Supreme Court’s seminal decision in Dura, it was possible that the Supreme Court would grant Apollo’s petition and address the issue of how to prove loss causation at the trial of a federal securities fraud case.
Instead, on March 7, 2011, after thorough briefing by the parties, the Supreme Court denied Apollo’s petition, effectively reinstating the jury’s verdict in favor of PABF and the class. Instead of capitulating, Apollo even then sought to raise a host of additional issues, including the calculation of damages and individual determinations as to whether members of the class “relied” on the statements that were found to be false when they made their investment decision. Apollo described the resolution of these issues as the “Phase II Trial” – the resolution of which was likely to stretch on for several years.
It was at this point that the parties, assisted by a mediator, entered into serious discussions regarding resolution of the action. After lengthy negotiations between the parties, Apollo agreed to pay $145 million to resolve the claims of PABF and the class. That payment in resolution of the case was approved by the trial court on April 20, 2012.
BR&B’s aggressive and unrelenting litigation of the action, through its many substantial hurdles, was lauded by the trial judge who, after trial, noted counsel’s “professionalism and the civility … and the integrity that you have all demonstrated and exuded throughout the handling of this case, it has just, I think, been very, very refreshing and rewarding to see that.” The trial judge further noted that:
[trial counsel] brought to this courtroom just extraordinary talent and preparation… The technical preparation, the preparation for your examination and cross-examination of witnesses has been evident in every single instance. The preparation for evidentiary objections and responses to those objections have been thorough and foresighted. The arguments that have been made in every instance have been well-prepared and well-presented throughout the case.… [W]hat I have seen has just been truly exemplary.
Indeed, in approving the ultimate resolution of the action, the court complimented BR&B again, noting that “it was extremely risky for class counsel to pursue this case through seven years of litigation.” The trial court further noted that:
[b]ased on this procedural history and the seven years of diligence in representing the Class, Class Counsel achieved an exceptional result for the Class. Such a result is unique in such securities cases and could not have been achieved without Class Counsel’s willingness to pursue this risky case throughout trial and beyond.
BR&B’s recovery of $145 million on behalf of PABF and the class of investors it represented stands as the largest post-trial recovery in a securities class action since the passage of the Private Securities Litigation Reform Act of 1995.