Norfolk Pension Fund takes Apple to court over losses

The Norfolk Pension Fund reportedly lost around $1m (£740,000) in Apple shares when its stock price dropped in 2019, and has been in legal dispute with the company for more than two years.

Apple is charged with misrepresenting the state of its business in greater China in 2018, when chairman Tim Cook told investors concerned about deceleration in emerging markets that the company did not see the problem affecting its development prospects in what was, at the time, its most important growth market.

He told investors at the time: “In relation to China specifically, I would not put China in that category. Our business in China was very strong last quarter. We grew 16 per cent, which we’re very happy with. iPhone, in particular, was very strong double-digit growth there.

None of the issues defendants raise persuade the court that plaintiff would be unable to adequately serve as class representative

Northern District of California

“Our other products category was also stronger, in fact, a bit stronger than even the [...] overall company number.”

However, the class action claims that Apple was aware at the time that tensions between the US and China were negatively impacting sales and demand in China, and was planning to, or had perhaps already, cut iPhone production at multiple manufacturers, and reduced orders from its largest suppliers.

As detailed in court documents from the Northern District of California, shortly after the alleged misrepresentations were made, reports were published suggesting Apple had instructed smartphone assemblers to “halt plans for additional production lines” for the iPhone XR. 

Later, on November 12, Wells Fargo estimated that Apple had reduced smartphone production by as much as 30 per cent. Bloomberg subsequently reported that the company had conducted a “fire drill” response to poor iPhone sales.

In January 2019, Apple pre-announced its first earnings shortfall in 15 years, Cook telling investors that the cause was indeed trouble in emerging markets, including China. Apple’s share price subsequently dropped from $157.92 to $142.19.

The plaintiffs, now led by Norfolk County Council as administering authority of the Norfolk Pension Fund, asked the court to certify as a class all persons and entities who purchased, or otherwise acquired, the publicly traded securities of Apple during the period from November 2 2018 through to January 2 2019, and who suffered damages by the company’s alleged violations of the Exchange Act.

Apple disputed certification on the grounds that the plaintiff was “not an adequate class representative”, that “evidence rebuts the presumption of class-wide reliance”, and because the proposed model would include damages that did not result from the alleged wrongdoing, it said.

According to documents filed on February 4, the court dismissed Apple’s arguments against Norfolk’s certification as “peripheral to the suit, irrelevant to the predicate of the class’s claims”, adding that they “may themselves be in error”.

"None of the issues defendants raise persuade the court that plaintiff would be unable to adequately serve as class representative," it said.

Although Norfolk County Council was unable to comment on ongoing legal proceedings, Pensions Expert understands that the council is fully indemnified against costs arising from the case, and there is no exposure for Norfolk taxpayers.

Apple’s arguments fail

Much of the decision hinged on whether the alleged misrepresentations had a price impact, with Apple attempting to argue that they did not. Were this true, Norfolk’s case “completely collapses, rendering class certification inappropriate”, it said.

Court documents explained that the price impact could be observed on the “front-end”, that is “misstatements causing or maintaining inflation”, or on the “back-end”, such as a decline in price caused by corrective disclosures.

Apple focused its argument on the back-end price impact, dealing with the decline in Apple’s share price following the January 2 disclosure date. Specifically, it attempted to divorce alleged misrepresentation about the launch of its then-new iPhones from disclosures about reduced iPhone demand.

It made five arguments, four of which the court found had misconstrued Norfolk’s theory.

The court claimed that the disclosures of January 2 were about reduced iPhone production, not its overall business in China, and so they could not have produced a back-end price impact because they were not actually corrective.

It then argued that the disclosures around reduced iPhone production could not have affected Apple’s stock price because the market was already appraised of its slowing iPhone business in China, correcting the alleged misrepresentation that its business in China was thriving, and thereby proving that the back-end price drop could not be attributed to fraud.

The court’s third contention was that a resulting price effect could not be inferred from Cook’s statements because the information about its deteriorating business prospects did not exist at the time the statements were made.

Fourth, it argued that Cook’s qualitative statement about not putting China in the same category as other emerging markets did not match the later quantitative disclosure about Apple’s missed earnings targets.

Finally, it said that the plaintiff had not accounted for other information that could have impacted the stock price. 

The court found against each of these arguments, and likewise Apple’s attempts to dispute the damages model proposed by Norfolk, except with respect to options holders.

While the court is satisfied that the damages model proposed “adequately demonstrates that damages to Apple stockholders are capable of being calculated on a class-wide basis, the same cannot be said with respect to Apple option holders”, the court documents stated.

The court therefore granted in part the motion, though ruled against the inclusion of option holders in the class. Norfolk Pension Fund is now the class representative, and the court has set a compliance deadline of March 4.