Another recent loss causation decision underscores the continuing importance of this requirement in Section 10(b) cases beginning at the motion dismiss stage and continuing through to trial. In In re Apollo Group Securities Litigation, No. 04-2147, 2008 WL 3072731 (D. Ariz. Aug. 4, 2008), the district court ruled that the jury wrongly concluded that two analyst reports contained corrective disclosures sufficient to establish loss causation. The court granted the defendant’s motion for judgment as a matter of law due to plaintiff’s “fail[ure] to prove that Apollo’s actions caused investors to suffer any harm.” Id. at *4.
The plaintiff in Apollo, the Policeman’s Annuity and Benefit Fund of Chicago, brought suit in 2004 under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. The plaintiff alleged that Apollo did not disclose to the investing public that its subsidiary, the University of Phoenix, had received a report in February 2004 from the Department of Education, which stated its preliminary findings on the University’s violations of the department’s regulations. Instead, Apollo purportedly made public statements “at odds with the existence and contents of the DOE report.” Id. at *1. The plaintiff argued that these statements to the public were false and misleading, and led to investor economic losses. The case proceeded to a jury verdict with the jury ultimately finding for the plaintiff.
The defendant’s motion for judgment as a matter of law turned on whether two analyst reports, called the Flynn Reports, could properly be considered to be corrective disclosures. The court noted that, months prior to the issuance of these Flynn Reports, “the contents of the DOE report were widely disseminated for the first time through various newspapers articles, including articles in The Wall Street Journal, The Arizona Republic, and the Chicago Tribune.” Id. at *1. Yet, “[t]he market did not react to the disclosure of this news in any significant way.” Id.
The court also explained that a “corrective disclosure” for purposes of establishing loss causation “is a disclosure that reveals the fraud, or at least some aspect of the fraud, to the market.” Id. at *2 (citing Lentell v. Merrill Lynch & Co., 396 F.3d 161, 175 n.4 (2d Cir. 2005) (holding that, to be corrective, a disclosure must “reveal to the market the falsity of the prior [representations]”).) Plaintiff’s entire loss causation theory rested on the claim that the Flynn Reports were sufficient corrective disclosures. In re Apollo Group, 2008 WL 3072731 at *2. The court held that, although “analysis of existing facts may sometimes be necessary to reveal a fraud to the market, the Flynn reports were not necessary to reveal the fraud in this case because they did not provide any new, fraud-revealing analysis.” Id. at *3-*4. Indeed, “[t]he evidence at trial undercut all bases on which [plaintiff] claimed the Flynn Reports were corrective.” Id. For this reason, the court held that the plaintiff had failed to prove that Apollo's actions caused investors to suffer any harm as required to recover under Section 10(b). Therefore, Apollo was entitled to judgment on these claims as a matter of law. Id. at *4.