IN RE APPLE INC. SECURITIES LITIGATION

Background

Lead plaintiff Norfolk County Council, acting as administering authority of the Norfolk Pension Fund, brought a securities class action against Apple Inc., Apple Chief Executive Officer Timothy D. Cook, and Apple Chief Financial Officer Luca Maestri. Norfolk asserted two claims: a claim under Section 10(b) of the Securities Exchange Act and Rule 10b-5, alleging misleading statements or omissions in connection with securities trading; and a Section 20(a) claim against the individual defendants based on alleged control-person liability.

The challenged statements were made during an investor and analyst call on November 1, 2018. Cook said that he would not place China among the emerging markets where Apple was experiencing pressure and said that the iPhone XS and XS Max had gotten off to a “really great start.” Norfolk alleged that Apple soon cut iPhone production, later disclosed that it would miss its revenue guidance by up to $9 billion, and attributed most of the shortfall to economic conditions and lower-than-expected iPhone revenue in Greater China. Apple’s stock price declined after the January 2, 2019 disclosure.

Defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint adequately states a legal claim, and under the heightened pleading requirements of the Private Securities Litigation Reform Act. They argued that the challenged statements were not false or misleading, that Norfolk had not adequately alleged the required fraudulent state of mind, and that the Section 20(a) claim failed because there was no primary violation and Maestri did not control Cook’s statements.

Court’s Analysis

The court considered the full shareholder-call transcript, a Nikkei Asian Review article, Cook’s investor letter, and Apple’s Form 10-Q. It concluded that the documents were either incorporated into the complaint or appropriate for judicial notice.

For the China-related statements, the court held that the complaint plausibly alleged falsity. The context of the analyst’s question and Cook’s answer supported an interpretation that Cook was discussing Apple’s current business conditions, not only the prior quarter. Norfolk also alleged facts suggesting that Apple was already seeing pressure in China when Cook made the statement, including later statements by Cook, production cuts soon afterward, and reports about Apple’s sales and marketing operations.

The court also found that Norfolk adequately alleged the required state of mind, known as scienter, which includes an intent to deceive or deliberate recklessness. The court considered Apple’s and Cook’s knowledge of China’s importance to Apple, the importance of the iPhone to Apple’s business, the reported economic slowdown and trade tensions, Cook’s later statements about troubling signs during the quarter, the timing of production cuts, and Apple’s later $9 billion guidance reduction. Considered together, those allegations supported a strong inference that Apple had information about pressure in China and that Cook’s statement could have misled investors.

The court reached a different conclusion about the statement that the iPhone XS and XS Max had gotten off to a “really great start.” It found that Norfolk had not adequately alleged that statement was false or misleading. The XS and XS Max launched in September, while the allegations about weak sales and production cuts concerned a later period and primarily the iPhone XR. The court characterized the XS and XS Max statement as vague optimism, or “puffery,” that did not necessarily communicate a specific condition that investors could reasonably evaluate.

For the Section 20(a) claim, the court did not dismiss the claim against Maestri. It reasoned that the complaint identified Apple, rather than Cook personally, as the primary violator. Norfolk alleged that Maestri co-hosted the November 1 call, spoke for Apple as its chief financial officer, and could have corrected or supplemented Apple’s statements about problems in China. Those allegations were sufficient at the pleading stage to support an inference that Maestri plausibly controlled Apple’s statements.

Disposition

Judge Roger granted defendants’ motion to dismiss as to the iPhone XS and XS Max statement. The court denied the motion as to the China statements and the Section 20(a) violation. Apple was ordered to answer the complaint within 14 days, and the court set a case-management conference for December 14 at 2:00 p.m. The order terminated Docket Number 118.