Apple reaches US$490m settlement over Tim Cook’s China demand comments

Investors claim Apple CEO Tim Cook overstated demand for Apple’s products in China on a November 2018 earnings call. Photo / AP

Apple has agreed to pay US$490 million ($805.6m) to settle a class action accusing chief executive Tim Cook of misleading investors in 2018 by exaggerating demand for the iPhone in China.

Investors claimed Cook overstated demand for Apple’s products in the country on a November 2018 earnings call, only for the company’s stock to fall almost 10 per cent in January 2019 when it said it would miss its revenue guidance by as much as US$9 billion.

Apple declined to comment on Friday. It has denied violating US securities law.

The settlement still requires approval from the California federal judge overseeing the case. According to data from Deutsche Borse-owned Institutional Shareholder Services, it would mark Apple’s largest US securities fraud class action settlement.

The years-long securities litigation, led by the UK’s Norfolk County Council, came after a rare and unexpected warning Apple issued on Chinese sales in January 2019. It was the first cut to Apple’s revenue forecast in 16 years and sent its shares sliding.

At the time, China’s overall economic growth was slowing amid a trade war with the US administration of Donald Trump. The investors suing Apple claimed that Cook had downplayed concerns about China, citing a “strong” recent quarter in the region.

They further claimed that on the same call Cook overstated the success of new iPhone models, only to start cutting production days later.

The settlement highlights the legal risks companies face when issuing revenue guidance. Since the Covid-19 pandemic, Apple has not offered formal guidance in its quarterly earnings statements, and its overall approach to disclosures has drawn some criticism for a lack of transparency with investors.

Last month two of Apple’s biggest shareholders backed a motion requiring it to disclose more detail about its work in the artificial intelligence space and the risks arising from it. The motion failed to pass.

“Apple has a pattern of increasingly non-transparent disclosure practices, and we rate them worst in class in terms of quality of disclosure among the major tech platforms,” said Nicholas Rodelli at CFRA Research, pointing to Apple’s decision to stop disclosing iPhone unit sales in 2018.

Gene Munster at Deepwater Asset Management said he was surprised by Apple’s decision to settle the case, given companies commonly offer commentary on market trends. Such lawsuits act as a further disincentive for companies like Apple to offer forward-looking guidance, he said: “I think at the end of the day it’s a win for a small number of investors and a loss for the whole market.”

The settlement comes as Apple once again faces uncertainty over iPhone sales in China amid US-China geopolitical tensions and growing smartphone competition from Huawei.

Written by: Michael Acton

© Financial Times