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Lawsuit Levied Against Apple Could Change Conference Call Commentary Forever

By James Brumley – Jun 11, 2020 at 7:50AM

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Court trials not only become case law, but also clarify how judges and juries view publicly-traded corporations.

CEOs may be a little less reckless with their words in the future, if they're watching the progress of a class action lawsuit brought against Apple (AAPL 0.23%). Last week, a federal judge granted permission to pursue the case, which claims CEO Tim Cook misled shareholders with a comment made during a conference call in late 2018. The plaintiffs' attorneys argue that the price of their clients' shares of Apple fell because Cook painted a relatively rosy picture of iPhone demand, even though the company reportedly cut orders for the smartphone just a few weeks later, which would suggest that demand was actually lackluster.

It's not a particularly strong case. Cook's verbiage was vague and relative, and the statement was made before Apple appears to have dialed back its expectations for iPhone sales. The complaint further ignores that Apple stock has risen nearly 60% from its price before the call in question took place, and has surged 148% from the low made a couple of months following Cook's comment. Both are better than the S&P 500's performance for the same timeframe.

But the strength or weakness of the plaintiffs' claim isn't quite the point. No other CEO wants to be in the same position Tim Cook et al. are in now. They may avoid offering any meaningful details or color about their businesses in the future, just to avoid landing in the same hot seat.

What he said, then did

Tim Cook made the comment that is the crux of the legal argument during Apple's fiscal fourth-quarter 2018 conference call held on Nov. 1 of that year. Cook answered a question specifically about the prospect of waning demand in overseas markets by saying, "... I would not put China in that category. Our business in China was very strong last quarter. We grew 16%, which we're very happy with. iPhone in particular was very strong. Very strong double-digit growth there."

Sales trends in China matter for one simple reason: China alone accounted for nearly one-fifth of Apple's revenue in fiscal 2018.

During the same call, Apple forecast that revenue for the quarter under way at that time would be between $89 billion and $93 billion, up from the year-earlier figure of $88.3 billion, reflecting optimism related to the then-new iPhone XR and XS.

Lawsuit documents lying on a table, with a pen and glasses.

Image source: Getty Images.

Then, something happened. Reports from multiple suppliers of iPhone technologies indicating that Apple had cut orders started to surface in the middle of the same November. That wave of red flags was followed by a second wave of similar reports later in November suggesting Apple had cut orders even further.

Apple neither confirmed nor denied the rumors swirling at the time. But, on Jan. 2, 2019, Tim Cook penned a letter to Apple shareholders informing them that the top line for the quarter that ended just four days earlier would only be around $84 billion. iPhone sales in China were particularly weak.

End result? Between Nov. 1, 2018 and Jan. 3, 2019, Apple shares lost 36% of their value. Attorneys representing Roseville Employees' Retirement System and other Apple shareholders say this could have been avoided if Tim Cook had simply come clean about iPhone demand.

Apple will certainly argue that at the time of the conference call it didn't know about the headwind that would eventually lead to the disappointing quarter. Yet the federal judge overseeing the case isn't convinced of this. That judge, Yvonne Gonzalez Rogers, commented when she gave the case the go-ahead for a trial: "Absent some natural disaster or other intervening reason, it is simply implausible that Cook would not have known that iPhone demand in China was falling mere days before cutting production lines."

Given how the impending trial's chief overseer has already made a key assumption, the deck seems stacked against Apple. 

Paving the way to the new norm

Again, the plaintiff's lawyers don't yet appear to have proof that the company knew a headwind was blowing before the conference call took place. The attorneys leading the class action also never explicitly reference any actual, realized financial loss suffered by the Roseville Employees' Retirement System in the complaint. The argument simply suggests that the fund's managers feel like they overpaid for their Apple shares, given what happened after they bought their stake.

Courtroom theatrics may still connect the dots well enough to convince a jury, with victimization stories glossing over the fact that Apple shares have outperformed the broad market both before and since November of 2018. (It's also possible that the case will be settled out of court first.) Having Cook or another executive on the witness stand would also be risky in and of itself, as it seems to suggest wrongdoing even if there was none. It isn't hard to imagine Cook or any other Apple executive doing whatever it takes to avoid this rigmarole in the future, even if that means saying less to investors.

It's not just Apple's or Tim Cook's typical conference call rhetoric that could be reeled in going forward, however. This litigation could prompt other companies' executives to choose to not add color or answer questions at all, fearing such comments might be misinterpreted, inadvertently inaccurate, or willfully twisted. It's better to say nothing than be sucked into a courtroom drama, even if the drama is founded on a flimsy idea.

James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.

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