In OPERF v. Apollo Group, Inc. (2014 U.S. App. LEXIS 23677) the Ninth Circuit affirmed dismissal of a securities fraud class action for multiple pleading deficiencies. The Court also held that the heightened pleading standard under Fed. R. Civ. P. 9(b) and the PSLRA, applies to all securities fraud elements, including loss causation. Defendant Apollo Group is a private education provider who owns the University of Phoenix – an online, for-profit, higher education institution. During the class period, the plaintiffs alleged that the defendants made false and misleading statements regarding Apollo’s enrollment, revenue growth, business model, and student recruitment. In Form 10-K filings, Apollo made statements expressing their belief for growth and describing enrollment and revenue growth as “significant events.” The plaintiffs also claimed Apollo failed to disclose its recruitment of students unable to pay – a fraudulent omission according to the plaintiffs. In addition to the Section 10(b) and Rule 10b-5 claims, Plaintiffs alleged claims for insider trading and control person liability.
The Court set out the elements for securities fraud and noted the variance of pleading standards in the federal circuits, particularly toward loss causation. After explaining the connection to common law fraud, Rule 9(b) language, and need for consistency, the Ninth Circuit held that pleading particularity applies to all elements of securities fraud.
Here the plaintiff’s claims failed under both standards. Apollo’s statements were puffery, subjective optimism that would not induce a reasonable investor’s reliance. In regards to the omission claim, Apollo disclosed information material to negate any fraud. The plaintiffs also failed to allege scienter. Finally, the allegedly fraudulent statements were neither untrue nor called into question by subsequent disclosures – they failed to demonstrate loss causation completely. Because the remaining claims rested on the same facts, the Court also dismissed them.