On November 4, 2020, 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 to dismiss claims
asserted under the Securities Exchange Act of 1934 against a
technology company and certain of its executives. In
re Apple Inc. Sec. Litig., No. 19-cv-02033-YGR, slip. op.
(N.D. Cal. Nov. 4, 2020), ECF No. 118. Plaintiffs alleged
that the company and its CEO made material misstatements relating
to the company's earnings guidance, which the company
ultimately did not meet. Slip. op. at 4. The Court
dismissed claims based on certain of the alleged misstatements,
which it held were not false or misleading, but determined that
falsity and scienter were sufficiently alleged as to other alleged
The Court held that a statement by the company's CEO that sales of certain product models “got off to a really great start” was not sufficiently alleged to be false when made. Id. at 10. The Court explained that the models in question launched in September 2018, but that plaintiffs alleged only that sales were slow in October and November. Id. at 11. Moreover, while plaintiffs argued that the CEO's subsequent statement that the company was not seeing evidence in sales data that sales for previously released products were being hurt by customers waiting for the release of a new product, the Court explained that this statement was “not inconsistent” with sales of the new product declining for other reasons, and emphasized that the CEO had also stated that he had “very, very little data” regarding the launch of the new product. Id. The Court concluded that these statements were “vague, hedging, hyper-specific statements that are not likely to give investors an impression of a state of affairs one way or the other,” and therefore amounted to mere puffery. Id.
The Court, however, upheld plaintiffs' claims based on statements by the CEO that, while “we're seeing pressure” in certain markets, “I would not put China in that category,” as “business in China was very strong last quarter” and growth for the company's main product “was very strong.” Id. at 3. Rejecting defendants' argument that such statements referred only to past performance, the Court explained that the CEO was responding to a question about how he “saw” “the trajectory of business” in emerging markets, and that when the CEO stated he “would not put China in that category” of markets for which “we're seeing pressure,” that was phrased in the present tense. Id. The Court also rejected the argument that the statement was not false when made, determining that the CEO's subsequent statement that the company saw the impact of reduced economic performance in China “as the quarter went on,” could plausibly be understood to mean that the company had known about such issues before the second month of the quarter. Id. at 9. The Court found the inference of falsity was further supported at the pleading stage by allegations that the Company made production cuts days after the CEO's statements, and reallocated staff to sales shortly before the statements were made. Id. at 9-10.
The Court further determined that plaintiffs sufficiently alleged scienter with respect to these statements. The Court first explained that, under the “core operations” doctrine in the Ninth Circuit, courts may infer that facts critical to a business's core operations are known to a company's key officers. Id. at 13. While the Court did not find that the “core operations” doctrine alone was sufficient to establish scienter based on plaintiffs' allegations, the Court observed that plaintiffs' allegations regarding the importance of the China market to the company, wide reporting regarding that market's decline, and the CEO's frequent travel there sufficiently alleged that the China business was a “core operation” of the company and “makes an inference of scienter … more likely.” Id. at 13. The Court concluded that these allegations did not themselves raise a strong inference that the CEO knew his statements were false, but they did “raise a strong inference that [the CEO] knew about the risk” of economic pressure in China to the company's business when he made the challenged statements, which “as part of the holistic analysis raises a cogent and compelling inference that [the CEO] did not act innocently or with mere negligence.” Id. at 14.
The Court also determined that the CEO's statements after the earnings guidance concerning what the company “saw” constituted an admission that bolstered the inference the company knew it faced economic pressure in China at the time the statements were made. Id. In particular, the Court pointed to the CEO's use of the word “saw” as suggesting that the CEO had contemporaneous knowledge at the time the statements were made of the economic pressure that the China market was experiencing. Id. at 15.
In addition, the Court held that the close “temporal proximity” between the CEO's statements and company actions allegedly inconsistent with those statements, such as production line cuts, “bolster an inference of scienter.” Id. at 16. In contrast, the Court determined that a potential competing inference that the company had decided to cut production lines spontaneously or based on only limited data obtained over the short period, was implausible. Id. The Court also emphasized that the company announced it would miss its earnings guidance by $9 billion, or 10% of the overall guidance; because the Court observed that it would take time to lose that amount of revenue, it held it was therefore plausible that the company had data suggesting the decline was taking place by the time of the challenged statements. Id. at 17.
Based on a holistic review, the Court concluded that plaintiffs' allegations raised a strong inference of scienter under a “deliberate recklessness” theory, and that they also suggested an “extreme departure from standards of ordinary care” because the China market and the products in question represented “core operations” for the company. Id. at 18-19. While the company argued that it did not profit from the alleged misstatements and conducted a stock buyback during the same period (therefore paying too much if the stock price had been inflated, as plaintiffs alleged), the Court concluded that plaintiffs were not required to plead a specific motive at the pleading stage. Id. at 19-20. Moreover, while the Court noted that stock buybacks can potentially undermine an inference of scienter, the Court did not find that dispositive, particularly as buybacks use company money and could benefit high-ranking executives whose shares are sold to the company. Id. at 21. Therefore, while the Court found that the competing inference of “innocence and negligence” was compelling, the Court held that the strong inference of scienter raised by plaintiffs was “as compelling” and therefore sufficient at the pleading stage. Id. at 21.
The Court also addressed plaintiffs' Section 20(a) control person claims asserted against the company's CFO. The Court explained that the viability of these claims turned on whether the primary violator is deemed to be the CEO—whose statements the CFO did not control—or the company itself. Id. at 22. The Court noted, however, that the complaint itself resolved that issue by alleging that the company was the primary violator. Id. The Court held that plaintiffs adequately alleged that the CFO plausibly controlled the company's statements, given that he allegedly co-hosted the analyst call on which the challenged statements were made and “could have corrected the record, disclosed omitted facts, and explained that [the company] faced issues in China that may undermine its earnings.” Id. Because the CFO did not do so, the Court concluded that he could be liable “as the executive charged with delivering the company's financial information who understood it to have made misleading statements.” Id
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