Apple Agrees to Nearly Half-Billion-Dollar Settlement Over Misleading Statements to Investors on iPhone Demand in China

Apple CEO Tim Cook speaks during the opening ceremony of the 4th World Internet Conference in Wuzhen in eastern China's Zhejiang Province, on Dec. 3, 2017. AFP via Getty Images

In a massive proposed legal settlement, Apple Inc. has agreed to a $490 million settlement over allegations that CEO Tim Cook misled shareholders by concealing a decline in iPhone demand in China.

This settlement is the result of a class-action lawsuit spearheaded by Norfolk County Council as Administering Authority of the Norfolk Pension Fund in Norwich, England.

The preliminary settlement was filed on Friday with the U.S. District Court in Oakland, California, and is still subject to approval by U.S. District Judge Yvonne Gonzalez Rogers.

The proposed settlement documents explain that if approved, it would represent the third-largest securities class action recovery in the U.S. District’s history.

“As set forth below, the Settlement is the product of good-faith, arm’s-length negotiations between experienced counsel, under the supervision of the Hon. Layn R. Phillips (Ret.) of Phillips ADR (“Judge Phillips”), a highly respected mediator with extensive experience in complex securities litigation,” the settlement agreement reads. “Lead Plaintiff reached the Settlement only after it had a thorough appreciation of the strengths and weaknesses of the case. The Settlement is a tremendous result for the Class.”

The Lawsuit

The initial complaint, filed by the City of Roseville Employees’ Retirement System on April 16, 2019, accused Apple and its executives of violating federal securities laws.

The lawsuit specifically targeted statements made by Apple CEO Tim Cook which allegedly downplayed the decreasing demand for iPhones in China, misleading investors about the company’s financial health.

“The Complaint alleged … that on Nov. 1, 2018, Defendants made materially false and misleading statements and omissions about demand for the newly released iPhones and Apple’s business in China, in violation of … the Securities Exchange Act of 1934,” the settlement stated. “The Complaint further alleged that the false and misleading statements and omissions caused Apple’s stock to trade at artificially inflated prices, and that, when the true facts were disclosed, Apple’s stock price declined.”

The initial allegations gained momentum following Apple’s announcement on Jan. 2, 2019, months after Mr. Cook’s alleged comments, that it would significantly lower its quarterly revenue forecast by up to $9 billion, citing U.S.-China trade tensions as a contributing factor.

This disclosure led to a drastic 10 percent drop in Apple shares, erasing approximately $74 billion of the company’s market value—the first such forecast cut since the iPhone’s inception in 2007, according to Reuters.

Apple and its lawyers did not immediately respond to requests for comment to Reuters on the ruling.

Settlement Details

After years of contentious litigation and extensive negotiation processes, including mediation sessions, the parties reached a settlement agreement.

This included three meetings to come to a settlement agreement with Judge Phillips which failed, before Mr. Phillips proposed a settlement agreement in February which the parties agreed to on March 1. The first $120 million was already deposited into an escrow account earlier this week, with the rest to be deposited within 15 days of approval of the settlement.

Apple, while denying any wrongdoing or liability, opted for settlement to avoid further litigation costs and distractions.

“Defendants have denied any wrongdoing, and would have presented a multi-pronged defense to Lead Plaintiff’s claims at trial and in subsequent appeals,” the settlement stated. “Although Defendants’ arguments regarding falsity ... were rejected by the Court at summary judgment, Defendants would undoubtedly raise them again before the jury, creating a risk that a lesser recovery—or no recovery at all—would be obtained at trial. Settlement is favored where, as here, the case is “‘complex and likely to be expensive and lengthy to try,’” and presents numerous risks beyond the “‘inherent risks of litigation.”

The settlement amount of $490 million, pending judicial approval, is designated for investors who purchased Apple shares between Nov. 1, 2018, and Jan. 2, 2019. This period covers the time between Cook’s allegedly misleading statements and the subsequent revenue forecast revision.

The settlement not only resolves the lawsuit but also prevents any further claims against Apple related to this matter.

The City of Roseville Employees’ Retirement System, alongside other plaintiffs like the Norfolk County Council and the Employees’ Retirement System of the State of Rhode Island, played a crucial role in representing the class of affected investors.

Implications

This settlement underscores the critical importance of corporate transparency and accountability, especially in a volatile global market environment.

By agreeing to this substantial settlement, Apple has not admitted to any of the allegations of wrongdoing. However, the case serves as a potent reminder to corporations about the consequences of not fully disclosing material information to investors.

Moreover, the case highlights the role of class-action lawsuits in corporate America as a mechanism for investors to collectively address grievances against corporate behemoths, although Reuters notes the settlement is equal to only about two days of income for the trillion-dollar company.

The settlement not only represents a victory for the plaintiffs but also serves as a cautionary tale for corporations about the paramount importance of transparent communication with investors.