Metzler Inv. GMBH v. Colleges, 540 F.3d 1049 (9th Cir. 2008)

In a settlement agreement that contained no admission of wrongdoing, Apollo agreed to pay $9.8 million to settle the DOE's program review. In re Apollo Group Inc., 509 F.Supp.2d. at 839-40.”

Our factual summary is taken from the TAC, documents incorporated into the TAC by reference, and matters that were properly judicially noticed by the district court. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., - U.S. -, 127 S.Ct. 2499, 2509, 168 L.Ed.2d 179 (2007). For purposes of our review, we accept as true all factual allegations in the TAC. See id.; In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970, 983 (9th Cir.1999).

In 2003, Corinthian derived 82% of its revenue from federal student loan funding.

The Bryman campus was notified by the DOE that it had been returned to standard advance payment status on September 22, 2004. A Corinthian press release explained, “The notification from the DOE stated that the change in status was based, in part, on the school's ability to demonstrate that it can comply with the rules and regulations of the Federal Title IV programs.’’

The dismissal with prejudice was, according to the prepared dismissal order, based on Metzler's "multiple opportunities to amend and [being] unable to cure the defects that required dismissal of [ ] previous complaints.”

The prepared four-page dismissal order signed by the district court provides no meaningful guidance as to why the TAC — 181 pages comprised of 399 paragraphs — was deficient. Fortunately, the parties' briefing below and on appeal accurately identifies and thoroughly analyzes the disputed issues. But good lawyering is not a substitute for clear judging. Dismissal of securities fraud complaints by way of a boilerplate prepared order effectively requires the appeals court to decide the 12(b)(6) motion without any explanation from the district court as to the complaint's defects. Moreover, the parties themselves never receive the benefit of learning the district court’s reason or reasons — whatever they may be — for the dismissal. Although there is no absolute rule requiring a district court to issue a written dismissal for failure to state a claim, the preferred practice is to provide at least some modest explanation for the decision. See Bonanno v. Thomas, 309 F.2d 320, 322 (9th Cir.1962) ("Where a complaint is *1062dismissed on the ground that it fails to state a claim, the order should also inform the plaintiff of the reason for dismissal so that he can make an intelligent choice as to amending.”). A review of published and unpublished decisions in recent securities fraud cases confirms that the truncated manner of dismissal here is the exception that proves the rule, as other district courts appear to routinely issue well-articulated dismissal orders. See, e.g., In re LeapFrog Enters., Inc. Sec. Litig., 527 F.Supp.2d 1033 (N.D.Cal.2007); In re Gilead Scis. Sec. Litig., 2006 WL 1320466 (N.D.Cal. May 12, 2006); Plumbers & Pipefitters Local 572 Pension Fund v. Cisco Sys., Inc., 411 F.Supp.2d 1172, 1178 (N.D.Cal.2005). Based on the extensive record before us, we are nonetheless confident that Metzler was sufficiently well-informed of the deficiencies in the TAC and the prior complaints, and that no harm was suffered as a result of the district court’s failure to provide a reasoned explanation for dismissal. But neither the parties, nor the interests of efficient civil justice, were well-served by the district court in this case.

Despite Corinthian's arguments to the contrary, there is no prohibition against Metzler alleging loss causation through a series of disclosures by the Defendants. Daou, 411 F.3d at 1026. So, the TAC's allegations of loss causation premised on two separate disclosures-one on June 24 and one on August 2 — ture, in theory, a permissible means for alleging loss causation.

Defendants sought judicial notice .for Corinthian's reported stock price history and other publicly available financial documents, including a number of Corinthian’s SEC filings. In its dismissal order, the court granted Defendants’ unopposed requests for judicial notice. Metzler does not contest the propriety of the noticing of these documents on appeal, which in any event was proper. See Dreiling v. Am. Exp. Co., 458 F.3d 942, 946 n. 2 (9th Cir.2006) (SEC filings subject to judicial notice).

Nor do the June 24 and August 2 disclosures become adequate when viewed in tandem. The June 24 Financial Times story discusses impropriety regarding the financial aid practices at one school; the August 2 release contains one reference to attrition. The combined force of these statements does not suggest that the market was alerted to widespread enrollment and admissions fraud at Corinthian schools nationwide. Nor does the TAC allege any genuine causal connection between the August 2 earnings miss and the allegations that Corinthian had manipulated student enrollment in order to receive excess federal funds, or that the earnings miss was caused by slashed federal funding.

Corinthian also argues that Metzler cannot, as a matter of law, establish loss causation because the TAC describes post-Class Period events that indicate that the purported fraud continued beyond the Class Period. Relying on the Seventh Circuit’s decision in Thomas v. Farley, 31 F.3d 557 (7th Cir.1994), Corinthian argues that the allegations of post-Class Period misconduct are fatally inconsistent with the theory that Corinthian's misconduct was revealed through the June 24 and August 2 disclosures. This argument is not supported by the record or the law. The post-Class Period conduct and statements in the TAC do not aver that Corinthian continued to conceal its alleged unlawful enrollment practices after the close of the Class Period. Rather, nearly all of these references in the TAC concern Corinthian’s restatement of revenue that took place later in 2005, an occurrence that does not inexorably lead to the conclusion that Corinthian was continuing to conceal its student enrollment practices. So, while it is correct that loss causation cannot be alleged by referring to a drop in a stock price that occurs prior to the revelation of the alleged truth, Glaser v. Enzo Biochem, Inc., 464 F.3d 474, 479 (4th Cir.2006), Corinthian has not persuasively shown that is what the TAC's references to post-Class Period conduct does. Moreover, the Seventh Circuit's holding in Thomas that a plaintiff can plead "himself out of court” by alleging particulars that contradict the plaintiff’s legal theory is not applicable in this case. 31 F.3d at 559. Thomas is applied in this circuit as support for the rule that precludes a party from avoiding summary judgment by making statements that contradict earlier allegations. See Cline v. Indus. Maint. Eng’g & Contracting Co., 200 F.3d 1223, 1232 (9th Cir.2000) (citing Thomas for proposition that “Appellants could not contradict their earlier allegations in an effort to survive summary judgment.”). Corinthian points to no authority that prevents a securities fraud plaintiff from alleging that the defendant continues to perpetuate the misconduct after it has been revealed to the market. Although such behavior is no longer "fraud” per se — because the misrepresentations have been revealed and reliance is no longer possible — that does not mean that the earlier fraud is- somehow legally negated. Hence, the TAC’s reference to post-Class Period conduct does not defeat loss causation as a matter of law (although, for reasons discussed above, the TAC also does not otherwise establish loss causation).

The Tellabs Court cited with approval this court's decision in Gompper, which articulated a standard for evaluating a securities fraud complaint's scienter allegations similar to the standard ultimately adopted by the Court. 127 S.Ct. at 2509 (citing Gompper, 298 F.3d at 897 ("the court must consider all reasonable inferences to be drawn from the allegations, including references unfavorable to the plaintiffs”) (emphasis in original)). We thus rely on the Ninth Circuit's pre-Tellabs decisions interpreting the PSLRA’s scienter requirement where appropriate here.

As Defendants note, the bulk of Beal’s and Moore’s sales took place according to predetermined 10b5-l trading plans. Sales according to pre-determined plans may "rebut [] an inference of scienter.” Cf. In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1427-28 (9th Cir.1994) (sales based on pre-determined trading plan coupled with small sales amounts rebutted allegations of scienter).

Metzler’s insufficient scienter allegations are not overcome with references to post-Class Period statements. Metzler places special emphasis on a slide show presented at Corinthian’s Presidents’ Meeting in 2005 that summarizes a Corinthian 2004 internal audit and refers to several findings regarding Corinthian’s "Financial Aid” practices. TAC ¶ 13 ("Unresolved Credit Balances ... Missing Documents ... Late Refunds ... Incorrect DOD’s”). Metzler alleges that these slides point to "internal reforms” that raise a "strong inference” of scienter. But plaintiffs fail to allege any corroborating details to indicate that the audit revealed company wide fraud, or that the Defendants were aware of the fraud during the Class Period. Accordingly, these post-Class Period statements do not rectify the lack of scienter pled elsewhere. See No. 84 Employer — Teamster Joint Council Pension Tmst Fund v. Am. W. Holding Corp., 320 F.3d 920, 941-42 n. 20 (9th Cir.2003) (noting that generalized references to internal reports insufficient to provide strong inference of scienter as to particular defendant).

The TAC relies on the statement of CW20, a former Director of Financial Aid at Corinthian's Las Vegas College, who was employed by Corinthian for part of the Class Period and attended the meeting at issue. CW20’s identity and knowledge, as with the other confidential witnesses named in the TAC, are described with sufficient specificity to meet the PSLRA’s standards generally. See Daou, 411 F.3d at 1016 ("Plaintiffs here describe the confidential witnesses with a large degree of specificity.”). The problem for Metzler is not that the confidential witnesses are inadequately identified — the problem is that these witnesses do not convey information sufficient to support the strong inference of scienter that the PSLRA requires.

In a settlement agreement that contained no admission of wrongdoing, Apollo agreed to pay $9.8 million to settle the DOE's program review. In re Apollo Group Inc., 509 F.Supp.2d. at 839-40.”