Why Roseville, MI, sued Apple for securities fraud

The city’s employee retirement fund put money into Apple shortly before Tim Cook’s Jan. 2 guidance warning. Ouch.

From Reuters “Apple accused in U.S. lawsuit of securities fraud over iPhone sales in China“:

Apple Inc was accused in a new lawsuit of securities fraud for concealing a slump in demand for iPhones, particularly in China, leading to a $74 billion (£57 billion) one-day slide in its market value once the truth became known…

The complaint said iPhone demand was falling because of U.S.-China trade tensions and customers’ growing preference to replace batteries in older iPhones, prompting Apple to slash orders from suppliers for new iPhones and cut prices to reduce inventory.

But none of this was disclosed when it should have been, the complaint said, in part because of Apple’s Nov. 1, 2018 decision to stop disclosing unit sales for iPhones.

Asked during a conference call that day about Apple’s performance in emerging markets, Cook cited downward pressures on sales in Brazil and India, but said “I would not put China in that category,” the complaint said.

The case is City of Roseville Employees’ Retirement System v Apple Inc et al, U.S. District Court, Northern District of California, No. 19-02033.

My take: I tend give suits like this wide berth. But in this case, I think Roseville may have a point.

See also: Four things I learned from Apple’s guidance warning

18 Comments

  1. Dan Scropos said:

    Were they investing or trading? I have to believe this is simply an opportunistic attempt at a cash grab by lawyers. No one has a right to not be disappointed and stocks come with risk. Apple’s pricing, orders and inventories lead me to believe they did *not* know this was going to happen. This will be yet another case where only the lawyers win. The case is, at best, a long shot.

    2
    April 18, 2019
    • David Emery said:

      Yeah, I just don’t see the argument linking ‘dropping iPhone numbers’ to ‘stock crashed’.

      1
      April 18, 2019
  2. Robert Harris said:

    And had the held onto it they would have made money.

    0
    April 18, 2019
  3. Patrick Beyrouti said:

    My concern is why Apple did not use buybacks to minimize the damage. There is now evidence that they did not and will look really strange to report on the 30th a large buyback in Jan-March …

    0
    April 18, 2019
    • Aaron Belich said:

      I thought there was concern that they couldn’t do that for an SEC reason.

      0
      April 18, 2019
    • Robert Paul Leitao said:

      Patrick:

      One can’t stop the forces driving a low tide by throwing buckets of water back on the beach. Share repurchases, even in large numbers, can not compensate for falling net income. Net income growth and anticipated net income growth are the primary drivers of Apple’s share price appreciation.

      Buybacks alone will not move Apple’s share price higher or compensate for declining revenue and net income.

      1
      April 18, 2019
  4. Fred Stein said:

    How much did Apple know on Nov 1 about softness in China? Sales tend to increase later in the quarter. Huawei’s CFO was arrested on Dec 6.

    That said, Apple knew long before Jan 2. It seem tike the market knew as well. The price decline in AAPL, starting in Nov. shows this.

    We should note that companies miss guidance sometimes. This is rare with Apple. So the market over-reacted. Based on what analysts are predicting, Apple progress on services supports Apple’s statements on Nov 1. Is it OK for investors to sue by picking one error which caused a market over-reaction. So far, it seems re-pricing the XR addressed the problem.

    2
    April 18, 2019
  5. Robert Paul Leitao said:

    Apple is now trading at prices first seen last November and is trading 43% above the January lows. All investments come with risks. If the retirement fund invested in Apple just before the guidance warning and held the shares there would be no losses to be realized. Quite the contrary. The fund would have realized a very attractive gain in less than six months.

    3
    April 18, 2019
  6. Jerry W Doyle said:

    Cities, counties, States and other large bureaucratic entities usually “invest” members’ contributions, not use members’ contributions for stock “trading.”

    It depends at what point of entry the City of Roseville Employees’ Retirement System bought Apple. Apple reached a 52 week-high of $233.47 around October 3. The share price stayed above the $200 range going into November. Apple subsequently dropped to a 52 week-low of $142 around Christmas. It trades today at around $203.

    During this period there was much media news reports of suppliers lamenting over slowing iPhone parts and slowing iPhone sales. Subsequently, Apple incurred about a 40 percent dropped in share price. I assume attorneys representing retirees of the City of Roseville and retirees too, are questioning if Apple was cognizant fully of what many in the media were reporting.

    If Apple was cognizant of a slow down in iPhone demand due to US-China trade tensions, of customers’ growing preference to replace batteries in older iPhones resulting in Apple having to slash orders from suppliers for new iPhones, cutting prices to reduce inventory and Apple was holding that information back purposely during the conference call, then the City of Rosedale retirees may have a legitimate complaint.

    I would take this legal suit seriously. I also would take seriously the potential ramifications of additional legal suits, if the City of Rosedale prevails in court.

    0
    April 18, 2019
    • Jerry W Doyle said:

      Let me add a caveat or an explanation to prevent misinterpretation why this suit may have merit and why this suit (by retirees living on limited incomes) should be taken seriously.

      Apple is “touted” as having one of the top supply chains. Apple may be the “best” in Supply Chains. Apple got there because of Tim Cook. If you read why Steve Jobs hired Tim Cook, then you know the hiring was all about improving Apple’s supply chain.

      A stalwart and robust legal team will use this information to underpin and anchor their case with targeted questions on how is it that the media and so many others who follow Apple’s supply chain discussed the slowdown and had information on reported sizable drops in orders from Apple to suppliers for new iPhones, the cutting of prices to reduce inventory and the recognized chief guru of Apple’s Supply Chain lacked similar information?

      1
      April 18, 2019
      • Fred Stein said:

        Good questions. I suggest you look at Joe Bland’s points.

        Just my opinion, we want quarterly updates only and only rarely break this. Otherwise, every rumor or completely baseless tweet, creates the expectation of a response.

        The lawsuit, if successful, could set a precedent that every negative or positive impact has to be disclosed as soon as it is known. Then we would have public releases that are rushed and a distraction for management. That’s bad.

        Thinking further, what really happened from Nov 1 to today? Trade war rhetoric and concerns ramped up. Apple’s net price for the XR in China was wrong and subsequently fixed. Apple’s transition to services is proving out today, but many TV talking heads portrayed the transition to services as “desperate attempt to address a stalled iPhone business”.

        0
        April 19, 2019
    • David Emery said:

      IANAL, but at what point is a company obligated to speak to changes in expectations? When they suspect there might be a problem? When they have the actual numbers? It sure seems this question is at the heart of the (validity of the) lawsuit.

      1
      April 18, 2019
  7. Fred Stein said:

    Sorry, one more point:

    iPhone XR pre-orders start on October 26. Apple had only one week’s worth of orders to gauge demand. Likely Apple enthusiasts in China jumped on it in the first week.

    0
    April 19, 2019

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