Pension v. Apollo GROUP INC.

• Decision Date: 31 March 2011
• Docket Number: No. CIV 06-02674-PHX-RCB,CIV 06-02674-PHX-RCB
• Parties: Teamsters Local 617 Pension and Welfare Funds, on behalf of itself and all others similarly situated, Plaintiff v. Apollo Group, Inc., et al. , Defendants.
• Court: U.S. District Court — District of Arizona

Teamsters Local 617 Pension andWelfare Funds, on behalf of itself andall others similarly situated, Plaintiff

v.Apollo Group, Inc., et al. , Defendants.

No. CIV 06-02674-PHX-RCB

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

Filed: March 31, 2011

ORDER

Currently pending before the court in this securities fraud action are motions to dismiss the second amended complaint ("SAC") for failure to state a claim pursuant to Fed.R.Civ.P. 12(b)(6) by defendant Apollo Group, Inc. ("Apollo") (Doc. 122); and by the individual defendants John G. Sperling, Todd S. Nelson, Kenda B. Gonzales, Daniel E. Bachus, John Blair, John R. Norton III, Hedy Govenar, Brian E. Mueller, Dino J. DeConcini, Peter Sperling, and Laura Palmer Noone ("the individuals" or "the individualdefendants")¹ (Doc. 120). If the court denies their motion to dismiss, alternatively, pursuant to FED.R.CIV.P. 12(f), the individual defendants are moving to strike allegations which this court previously dismissed or found insufficient as a matter of law in Teamsters Local 617 Pension & Welfare Funds v. Apollo Group, Inc., 633 F.Supp.2d 763 (D.Ariz. 2009) ("Apollo I").² Oral argument will not aid the court's decisional process, hence the court denies the parties' requests in that regard.³ SeeFed.R.Civ.P. 78(b).

I. Overview of SAC

The SAC sets forth three separate securities fraud claims. The first is for an alleged violation of § 10(b) of the Securities and Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), as amended by the Private Securities Litigation Reform Act of 1995 ("the PSLRA"), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (the "section 10(b) claims"). Whereas the FAC named Apollo and all 11 individuals as defendants in that section 10(b) claim, the SAC now limits those defendants to Apollo and four of the previously named individuals. Those individuals are: (1) John Blair, an Apollo director from September 2000 until his resignation in May 2007, and "Chairman of the Audit Committee" and "a member of the Compensation Committee[;]" (2) Kenda B. Gonzales, Apollo's "CFO, Secretary and Treasurer . . . from October 1998 until" allegedly "she was forced to resign in November 2006 because of her involvement in stock option backdating at Apollo[;]" (3) Todd S. Nelson, who "was until 2006" variously Apollo's "Chairman, CEO and President[;]" and (4) John R. Norton III, an Apollo director duringthe relevant time frame, and "a member of the Audit Committee" and "Chairman of the Compensation Committee[.]" SAC (Doc. 112) at 8:4 and 8:5-6, ¶ 21; 7:18-20, ¶ 19; 7:8, ¶ 18; and at 8:11 and 13, ¶ 22.

After first alleging "defendants' duties with respect to granting and approving stock options[,]" the SAC devotes its next section to "backdated stock option grants at Apollo[.]" Id. at 13:6 (emphasis omitted). The court previously granted defendants' motion "to dismiss as untimely any claims based upon backdating itself with respect to the five option grants" alleged in the FAC. Apollo I, 633 F.Supp.2d at 781. Yet, the SAC includes precisely those same five grant allegations and adds a sixth grant date -October 20, 2003. The next section of the SAC enumerates "defendant's false and misleading statements issued during the class period[.]" Id. at 20:3 (emphasis omitted) (footnote added). Compared to the FAC, the SAC more than doubles the number of those statements, from 26 to 54.

The SAC's second and third claims for relief are not nearly as expansive as its first. In the second, in contrast to the FAC which alleged insider or contemporaneous trading in violation of section 20A of the Exchange Act by all defendants, the SAC names only defendant Blair in this claim. Just like the FAC though, the SAC's third claim for relief alleges "control person" liability against all defendants pursuant to section 20(a) of the Exchange Act.

II. Section 10(b) Claim⁴

"Section 10(b) of the Securities Exchange Act makes it unlawful for any person to 'use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.'" Matrixx Initiatives, Inc. v. Siracusano, ___ S.Ct. ___, 2011 WL 977060, at *7 (U.S. March 22, 2011) (quoting 15 U.S.C. § 78j(b)). "SEC Rule 10b-5 implements this provision by making it unlawful to, among other things, 'make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.'" Id. (quoting 17 CFR § 240.10b-5(b)). The Supreme Court has "implied a private cause of action from the text and purpose of § 10(b)." Id. (citing Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 318, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007)). "'In a typical § 10(b) private action a plaintiff must prove (1) a material misrepresentation or omission by the defendant⁵; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of asecurity; (4) reliance upon the misrepresentation or omission; (5)economic loss; and (6) loss causation.'" In Re Oracle Corp. Sec. Litig., 627 F.3d 376, 387 (9^th Cir. 2010) (quoting Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 156, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008) (citation omitted)).

In arguing that the SAC fails to state a section 10(b) claim, the defendants broadly assert that the SAC does not plead backdating with particularity. Separately analyzing the newly added October 20, 2003 grants, defendants then turn to the sufficiency of all six grants, include the five original grants which the SAC re-alleges. Next, defendants argue that the SAC's "false and misleading statements" do not satisfy the particularity requirements of Rule 9(b) and the PSLRA. Defendants further contend that the SAC does not adequately plead scienter or loss causation. The court will address these issues seriatim.

A. October 20, 2003 Grants

Paragraph 44 of the SAC adds a new grant date - October 20, 2003. More specifically, the SAC alleges that "[d]efendants dated certain of Apollo's 2003 grants on" that date "at $60.90 per share[.]" SAC (Doc. 112) at 19:2-3, ¶ 44. Allegedly that share price was not only the low of the month but also the low for the entire year." Id. at 19:3, ¶ 44. Defendants John Sperling, Nelson, Gonzales, and Noone allegedly received options at that price. The SAC alleges that "Carroll" received 20,000 options dated October 20, 2003, and that he is a defendant. See id. at 19:5-6; and 25, ¶ 44. The record shows that Mr. Carroll filed a Form 4 on October 22, 2003 for 20,000 options at a price of $60.90 per share. Farrell Decl'n (Doc. 124), exh. 8 thereto. Other than this paragraph, Carroll'sname does not appear anywhere else in the SAC. The caption does not list him as a defendant; nor is he including the in SAC's enumeration of "parties."⁶ In any event, of the six identified grants, this is the only one alleging a "2 Day Return[.]" Id. at 19:21-22, ¶ 44.

Defendants argue that there are "insufficient" allegations in the SAC as to that grant date "to raise any reasonable inference that [it] was backdated." Defs.' Mot. (Doc. 120) at 4:20. Defendants offer two reasons as to why a reasonable inference of backdating cannot be drawn as to those October 20^th grants. First, those grants were publicly disclosed by the timely filing of Form 4s with the SEC. Second, despite what the SAC alleges, those grants were not made at "the low for the entire year." See SAC (Doc. 112) at 16:3, ¶ 44. Disagreeing as to the impact of the timely reporting to the SEC, plaintiff maintains that such reporting "simply restricts [the] backdating to two days." Resp. (Doc. 129) at 22:7-8 (citations omitted).

1. Form 4 SEC Filings

Pursuant to section 16(a) of the Exchange Act, "[i]nitial statements of beneficial ownership of equity securities" must be filed with the SEC on a Form 3, whereas "[s]tatements of changes in beneficial ownership" must be filed on a Form 4. See 17 C.F.R. § 240.16a-3(a); see also 15 U.S.C. § 7 8p(a). "On August 2 9, 2 0 02, Congress passed the Sarbanes-Oxley Act [("SOX")], which institutednew reporting requirements for stock option grants." U.S. v. Shanahan, 2008 WL 2225731, at *6 (E.D.Mo. 2008). That Act significantly decreased the filing time for employees who received a stock option grant, making "a company's ability to fraudulently backdate option grants . . . much more difficult." Id. (citation omitted).

Prior to SOX, "an employee who received a stock option grant had to file financial forms with the SEC within forty-five days after the company's fiscal year end." Id. But after SOX, those forms must be filed with the SEC "before the end of the second business day" following the transaction. 15 U.S.C. § 78p(a)(2)(C). Therefore, "[b]ackdaters must now work with the two-day window plus the one or more late days they think will be overlooked." In re Zoran Corp. Derivative Litig., 511 F.Supp.2d 986, 1006 (N.D.Cal. 2007). Or, as the Zoran court colloquially put it, "[t]he Form 4 requirement has cramped [management's] style." Id. "Management no longer has the latitude to backdate as far back." Id.

There is no dispute here that the Form 4s were timely filed as to the October 20, 2003 grant. See Farrell Decl'n (Doc. 124), exhs. 7-13 thereto. Rather, the dispute centers on the impact of those filings upon plaintiff's theory that those particular grants were the product of intentional backdating. Defendants argue that due to the timely filing of the Form 4s, plaintiff has failed to state a section 10(b) claim based upon the October 20, 2003 grants. They reason that any "inference of backdating is entirely undermined by" the timely filing of those Form 4s. Defs'. Mot. (Doc. 120) at 4:21; see also ...