On January 16, 2008, a civil jury in the Apollo Group securities lawsuit in the United States District Court for the District of Arizona entered a verdict in favor of the plaintiff class on all counts, awarding damages of $5.55 per share, an amount that according to Bloomberg (here) could reach as much as $277.5 million. The Bloomberg report also states that Apollo is responsible for 60 percent of the plaintiffs’ losses, former Apollo CEO Tony Nelson is responsible for 30 percent, and former CFO Kenda Gonzales is responsible for 10 percent. The company’s statement about the verdict can be found here. The plaintiff’s counsel’s statement about the verdict can be found here.


Apollo Group is the parent of the University of Phoenix (UOP), the largest for-profit provider of higher education in the United States. According to the plaintiff’s amended complaint (here), in 2003, two former UOP employees filed a False Claims Act action against UOP alleging that UOP received U.S. Department of Education funding in violation of laws specifying the way company educational recruiters may be compensated. Background regarding the False Claims Act case can be found here.

The Department of Education initiated an investigation of the issues raised in the False Claims Act action, and on February 5, 2004, a Department of Education employee issued a "Program Review Report" that accused UOP of violating the Department of Education rules with respect to education employees’ compensation. The plaintiff in the securities case alleges that the violations in the report could have resulted in the limitation or termination of Department of Education funding to UOP.

On September 7, 2004, Apollo agreed to pay the Department of Education $9.8 million to settle the program review. The settlement agreement (a copy of which can be found here) specified that Apollo’s entry into the agreement did not constitute an admission of wrongdoing or liability. News of the allegations in the Department of Education report first became public on September 14, 2004. The price of Apollo’s stock fell significantly on September 21, 2004, when a securities analyst issued a report expressing concern about the company’s possible exposure to future regulatory issues.

The Lawsuit

The lead plaintiff in the case is the Policemen’s Annuity and Benefit Fund of Chicago, on behalf of a class of persons who purchased Apollo stock between February 27, 2004 and September 14, 2004. The case was pending before Judge James A. Teilborg.

In a September 11. 2007 order (here), Judge Teilborg denied the parties cross-motions for summary judgment. The defendants had sought summary judgment arguing that they had no duty to disclose an interim regulatory report (which they believed to be both unauthorized and false). The court found that while the defendants "may not have an affirmative duty to disclose the interim regulatory findings they do have ‘a duty to disclose material facts that are necessary to make disclosed statements…not misleading.’" Judge Teilborg found that there was a jury issue as to whether any of the defendants’ statements between the February delivery of the report and the September disclosure were misleading. Judge Teilborg also found that there were jury issues on the question whether the interim report was material and whether the defendants’ acted with scienter in withholding information about the report.

In a particularly interesting holding, Judge Teilborg also found that there was a jury issue on the question of loss causation. The defendants argued that that there was no jury issue because the company’s stock price did not react to the September 14 disclosure of the settlement. But the plaintiffs argued that the corrective disclosure was actually a cumulative process that included the analyst’s September 21 report. Judge Teilborg said he could not conclude as a matter of law that the analyst report was not part of the corrective disclosure. The judge said it was a jury question whether or not the corrective information was fully absorbed into the marketplace before the analyst’s report issued. (This mattered because there was no significant stock price drop until the report came out.)

Trial commenced on November 14, 2007. During the trial the plaintiff called both Nelson and Gonzalez to the stand to testify as hostile witnesses for the plaintiff. (Calling adverse parties as hostile witnesses is an unusual move, but it has the advantage of allowing the examining attorney to use leading questions and other techniques of cross-examination, which would otherwise not be allowed on direct examination.) According to news reports (here), Gonzalez testified that the company withheld the report from investors to avoid news coverage about the allegations. The news reports quote Gonzalez as having said that "when we received the program review report, we felt very strongly we did not want it basically tried in the press." The news reports also state that Nelson testified that the company’s lawyers advised the company against disclosing the report, and that he thought disclosing it would have caused the company’s stock price to drop.

The jury began deliberation on January 10, 2008 and returned a verdict on January 16. The jury found for the plaintiff on all counts. In its statement on the verdict (here), the company said that the case was premised on the company’s "supposed failure to disclose unsubstantiated allegations from a preliminary government report." The company’s counsel is quoted in the statement as saying that the "law does not require the disclosure of preliminary or unproven damages." The statement also says that "the ultimate disclosure of the report’s contents caused no statistically significant movement in Apollo’s stock price."


According to the Securities Litigation Watch blog (here), 19 securities lawsuits have gone to trial since 1996. Of these, six cases (including the Apollo Group case) involving post-PSLRA conduct have reached a jury verdict, with three verdicts going in favor of the plaintiffs and three going in favor of the defendants. The Ninth Circuit recently reversed one of the three defense verdicts, as noted further below. Among the six verdicts is also the November 27, 2007 defense verdict in the JDS Uniphase trial (about which refer here).

It is important to keep in mind that this case is not over – indeed, it may have a long way yet to go. The defendants undoubtedly will pursue an appeal to the Ninth Circuit if their post-trial motions are unsuccessful. On appeal, both parties will look with interest (and in the defendants’ case, concern) on the Ninth Circuit’s November 26, 2007 opinion in the Thane International case (here), in which the Ninth Circuit reversed and remanded a trial verdict that had been entered on behalf of the defendants in that case. (Refer here for my prior discussion of the Thane International case). While the ultimate outcome of any appeal in the Apollo Group case remains to be seen, there may well be significant issues on appeal, particularly with respect to the defendants’ obligation to disclose the report; scienter; and loss causation. (Of course, the parties always have the opportunity of entering into a post-trial settlement, as well…)

It is worth asking why all of a sudden securities cases are going to trial. It is not clear why the Apollo Group case did not, like most of these cases, settle. The parties may simply have been unable to reach a mutually acceptable compromise. The Apollo Group case does seem like an odd case for the plaintiff to have pushed to trial since there were no insider trading allegations or other suggestions that the individual defendants personally benefited – although the jury verdict obviously validates the decision (to the extent there was an active decision) to try the case, and the absence of individual benefit clearly did not influence the ultimate outcome.

There is at least potentially an interesting insurance coverage question, which is whether the jury verdict represents an adjudication of fraud sufficient to trigger the fraud exclusion that typically is found in directors and officers liability insurance policies. I have not been able to obtain a copy of the questionnaire the jury used to see what specific factual findings the jury made, but to the extent the jury found knowing misrepresentations, the verdict could preclude coverage, although the possibility of an appeal could also affect this issue. (The possibility of a jury verdict triggering the fraud exclusion is one reason why so few securities cases go to trial.) It should also be noted that the amount of damages could exceed any amounts of insurance that are available. (I want to emphasize in making these insurance observations that I have no knowledge of any kind about the particulars of Apollo Group’s insurance, and so I am merely speculating not expressing any insurance opinions.)

With the Supreme Court decision in the Stoneridge case coming out yesterday and the verdict in the Apollo Group case today, this certainly has been an eventful couple of days in the world of securities litigation.
Special thanks to the several readers who sent me copies of news reports about the verdict.