Class-Action Scorecard: A Win for Plaintiffs

There's been a lot of news on the class-action front this week, most of it focused on the Supreme Court, and that musical, magical word: Stoneridge.

The ruling in that landmark case means that Enron plaintiffs probably won't get a day in court against investment banks that served as underwriters to the massive fraud, although those lawyers are still trying. Most often, the action in these cases centers on a complaint, a negotiation and a settlement.

But the rarest of all animals in the class-action world—an actual trial before a jury—came to a conclusion in a Phoenix federal courtroom on Wednesday, with a big win for plaintiffs. The jury found unanimously that Apollo Group, the for-profit public company that owns the University of Phoenix, misled investors about its recruitment policies in 2004. That deception, when revealed, knocked $5.55 a share off the company's stock, destroying about $280 million in market value.

The verdict comes just a couple of months after defense lawyers rolled the dice and convinced a jury to reject class-action claims in a case against JDS Uniphase. Back then, we checked in with the defense team. Now we're doing the same with Stephen R. Basser, lead trial lawyer from the San Diego office of Barrack, Rodos & Bacine, which represented the lead plaintiff, the Policemen's Annuity and Benefit Fund of Chicago.

The case centers on a February 5, 2004, interim report from the Department of Education, which concluded that the University of Phoenix paid enrollment counselors "solely based on recruiters' success in securing enrollments," which is a violation of federal regulations. On September 7, 2004, the University of Phoenix agreed to pay $9.8 million to settle the allegations in the report, without admitting wrongdoing.

Apollo and its officers, however, failed to disclose the report to investors. On September 14, when Arizona Republic broke the news of the report's allegations, Apollo's stock began to tank.

The shares took another hit a week later, after two reports from a Wall Street analyst who cited the contents of the report as cause for "more concerns" about the Apollo's "regulatory risk."

While this might sound like the perfect case for the defense to rush to settle, that did not happen. At one point, there was a confidential mediation, but it went nowhere, says Basser.

"They made it abundantly clear to us that they had every intention of trying this case to verdict," he says. "We had no intention of caving, we would never cave, and we made it abundantly clear we try cases to verdict."

But the case proved tricky to present before a jury, because it is based on the alleged half-truths that Todd S. Nelson, Apollo's former chief executive officer, and Kenda B. Gonzales, the company's chief financial officer, allegedly told investors about the settlement.

"It was a difficult case to present, because basically all of our evidence had to come from hostile witnesses," says Basser, who called both Nelson and Gonzales to the stand. Basser had hoped to call an enrollment counselor, two of whom had filed whistleblower lawsuits against the company. But the defense succeeded in motions keeping them off the witness stand. "The report was really our star witness," says Basser.

Lawyers from Gibson, Dunn & Crutcher, led by Wayne W. Smith, of the firm's litigation department, argued to jurors that the report was "seriously flawed," and therefore the company's failure to disclose its existence to investors was not misleading.

In a bid to get the case dismissed on summary judgment before trial, Gibson Dunn argued that, because the company believed the Department of Education report to be "false" and "unauthorized," it owed no duty to disclose it to shareholders and withheld it to prevent a market overreaction.

District Judge James A. Tielborg of Phoenix was not impressed. "Such paternalism finds no place in the federal securities laws," he noted in a Sept. 11, 2007 decision.

"In my closing argument, I used the phrase, 'a half-truth is a whole lie,'" says Basser. "They were not letting the investing community see the full picture of the investment risks."

In the end, jurors agreed: In a 19-page verdict form, they found defendants "knowingly or recklessly" made false and misleading statements in a press release, four conference calls with analysts, and in a filing to the Securities and Exchange Commission.

The press release, issued on February 19, 2004, touted the fact that the whistleblower lawsuit by two employees had been dismissed, and pointed out that the government had declined to intervene in the lawsuit.

The loss figure of $5.55 per share in the jury's verdict also tracks the plaintiffs' expert testimony. Ironically enough, it was Smith, rather than Basser, who told jurors that would amount to $300 million. "He tried to shock the jury by constantly saying it was a $300 million case," says Basser.

Smith told The Wall Street Journal the verdict was "flat wrong."

According to Risk Metrics, a consulting firm that tracks securities litigation, there have been six class-actions tried to a verdict since Congress passed a 1995 law that changed many of the rules governing securities class-actions. Counting the Apollo verdict, juries have split evenly for plaintiffs and the defense, although one verdict for investors was overturned on appeal.

Basser says he expects an appeal, but adds, "I am confident we will be able to hold onto our verdict."

Does two trials over a couple of months mean a new trend? Probably not. But Basser says it's a good thing to take these cases to trial every once and a while. "It keeps everyone honest. It lets the defendants know that there is a jury out there, which is going to render its decision."

by Karen Donovan