Metzler Investment GMBH v. Corinthian Colleges, Inc.

ORDER

We hereby amend our Opinion filed July 25, 2008 at Slip Opinion 9249 [534 F.3d 1068]. We file the Amended Opinion contemporaneously with this order. We amend as follows:

Delete the paragraph on page 9282 [534 F.3d at 1090] beginning “Second, Corinthian ...” and ending with “regulatory scrutiny.”

Insert a new paragraph reading:

“Second, Corinthian was not required to make an immediate disclosure of the DOE and California AG investigations, at least not on the facts of this case. A comparison to In re Apollo Group, Inc. Securities Litigation, 509 F.Supp.2d 837, 841 (D.Ariz.2007), is instructive. In Apollo the district court denied the parties’ cross-motions for summary judgment based in part on a disputed fact regarding the materiality of a DOE investigation of the Apollo Group. Id. Like Corinthian, Apollo is a large for-profit provider of post-secondary education. Id. at 839. The plaintiffs based their claim on the fact that Apollo failed to reveal a DOE investigation of misconduct that tied recruiters’ compensation to enrollment figures. Id. Defendants failed to disclose a report containing a preliminary DOE finding of non-compliance related to those practices. Id. (“The report, which was issued on February 5, 2004, concluded, among other things, that the [Apollo campus at issue] improperly compensated its enrollment counselors ‘solely based on [the] recruiters’ success in securing enrollments,’ a violation of DOE regulations.”) (second alteration in original). Two weeks after the DOE issued that report, Apollo released a press statement regarding a dismissal in related lawsuits based on allegations of recruiter misconduct and that “the government declined to intervene” in those suits. Id. at 841-42. Although this statement was formally true, the court found a disputed issue of fact as to whether it was “misleading” in light of the DOE report concerning the exact same recruiting practices. 14 Id. at 842; see also In re Apollo Group, Inc. Sec. Litig., 395 F.Supp.2d 906, 920 (D.Ariz.2005) (denying motion to dismiss in same case where CEO misleadingly suggested that no report would issue from DOE). Here, unlike the complaint in Apollo, the TAC does not connect the DOE or California Attorney General investigations to any false or misleading statement — i.e., some affirmative statement or omission by Corinthian that suggested it was not under any regulatory scrutiny.”

OPINION

Due in large part to the enactment of the Private Securities Litigation Reform Act (“PSLRA”) of 1995, Pub.L. No. 104-67, 109 Stat. 737 (1995), plaintiffs in pri *1055 vate securities fraud class actions face formidable pleading requirements to properly state a claim and avoid dismissal under Fed.R.Civ.P. 12(b)(6). Plaintiff Metzler Investment GMBH’s (“Metzler”) Consolidated Third Amended Complaint (“TAC”), despite its lengthy and far-ranging allegations, fails to meet these requirements. We affirm the district court’s dismissal of the TAC, with prejudice.

I. Factual Background 1 and Procedural History

Metzler, an institutional investor, is lead plaintiff in a putative federal securities fraud class action brought pursuant to §§ 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Securities Exchange Commission (“SEC”) Rule 10b-5. Defendanb-Appellee Corinthian Colleges, Inc. (“Corinthian”) is one of the nation’s largest operators of private for-profit vocational colleges. As of June 30, 2004, Corinthian operated 88 such colleges in 22 states. Three individuals who served as officers of Corinthian during the Class Period are also named as Defendants: Dennis Beal, Corinthian’s Chief Financial Officer and Vice President; David Moore, Corinthian’s Chairman and Chief Executive Officer; and Anthony Digiovanni, Corinthian’s President and Chief Operating Officer.

During the Class Period, which extended from August 27, 2003 to July 30, 2004, Metzler purchased 116,000 shares of Corinthian stock. Numerous other plaintiffs also purchased stock during the Class Period and filed their own actions against Corinthian. Eleven separate actions were consolidated with this proceeding and Metzler was appointed lead plaintiff.

A. The TAC’s allegations of fraud and falsity.

Metzler alleges that Corinthian’s colleges are pervaded by fraudulent practices designed to maximize the amount of federal Title IV funding — a major source 2 of Corinthian’s revenue — that those schools receive. The TAC alleges that Corinthian engaged in a variety of false or deceptive schemes: falsifying financial aid applications to obtain federal funds and increase federal award entitlements; encouraging students to falsify federal student aid forms themselves; manipulating student enrollment by counting students not yet enrolled (referred to in the TAC as “false starts”); manipulating or falsifying student grades to maintain federal funding eligibility; exposing the company to bad debt in order to meet regulatory requirements for continued federal funding; delaying notification to federal officials of dropped students and delaying refunds to the federal government after students had dropped; and manipulating job placement data in order to satisfy federal and state regulatory requirements. According to the TAC, the net effect of these practices was that “at numerous Corinthian campuses, as many as 50% to 60% of the people defendants represented to the U.S. government as being qualified, attending ‘students’ were either ‘no shows’ in class or unqualified for admission and federal funds from the outset.” TAC ¶ 4. Thus, according to the TAC, Corinthian’s public face to the market — one of growth and financial suc *1056 cess premised on increasing student enrollment and successful placement rates— masked extensive fraud. The TAC alleges that this fraud resulted in an artificial inflation of Corinthian’s stock price.

The TAC further alleges that Corinthian violated Generally Accepted Accounting Principles (“GAAP”) by improperly recognizing revenue. According to the TAC, at some of its schools Corinthian recognized an entire month’s worth of tuition revenue for a student’s first full month of attendance, regardless of the date during that month on which the student started. Corinthian ultimately changed this practice to recognize tuition for half of a student’s first month of attendance and half of a student’s final month of attendance. As a result, in August 2005, it issued restated financials that reflected a $16.9 million decrease in retained earnings.

These allegations of fraudulent practices are supported principally by statements taken from confidential witnesses (abbreviated in the TAC as “CW”), who are former Corinthian employees that served at numerous campuses in differing capacities. The CW’s identified in the TAC include campus presidents, admissions officials, financial aid officers, and IT and accounting personnel. These CW’s, with varying degrees of specificity, attest to instances of misconduct on their campuses that support the more generalized allegations of fraud contained elsewhere in the TAC.

The TAC also avers to post-Class Period events that serve to confirm the TAC’s allegations of Corinthian’s fraud during the Class Period. In November 2005, Corinthian released restated financials that revealed Corinthian had overstated its revenues during the Class Period. The restatement revealed that revenues were overstated by 10.5% for the quarter ending September 30, 2003, 4.5% for the quarter ending December 21, 2003, and 15% for the quarter ending March 31, 2004. The TAC points to government investigations and private litigation, initiated after the close of the Class Period, that further confirm Corinthian’s fraudulent practices. In November 2005, the Florida Attorney General subpoenaed documents from a Corinthian campus in Florida related to Corinthian’s advertising and admissions practices. In December 2005, three Corinthian campuses in Georgia had their accreditation revoked by the Accrediting Bureau of Health Education Schools (“ABHES”) for failing to meet student completion and placement requirements. Similarly, Corinthian colleges in Michigan and Indiana were ordered by the ABHES to show cause why, because of alleged improper admissions and high attrition, they should not have their accreditation revoked.

Because Corinthian campuses were allegedly pervaded by fraudulent admission practices, the TAC alleges that virtually every Class Period statement discussing Corinthian’s financial status was false. Specifically, the TAC alleges that public statements in regulatory disclosures and related documents regarding the company’s financial performance were rendered false by the fact that Corinthian’s underlying fraudulent practices remained hidden. The TAC states:

All of Corinthian’s stated financial results during the entire Class Period were false and misleading as a result of the Company-wide scheme to inflate enrollment figures in order to misappropriate federal financial aid funding. Likewise, defendants’ statements lauding the Company’s strong financial performance were also false and misleading.... Defendants also made positive statements regarding the Company’s educational services and business practices that were false and misleading in light of the fraudulent means by which a substantial portion of the Company’s business was *1057 gained, in complete disregard for their students’ educational goals and financial well-being____ The totality of defendants’ statements underlined above create the false impression that defendants ran their business with proper financial reporting compliance with student enrollment and federal loan practices which were critical to the viability of the business, and that quality of education was emphasized.

TAC ¶¶ 142-150. The TAC thus alleges that any positive financial statement released by the company created the decidedly false impression among investors that Corinthian’s success was due to “legitimate business means that could be expected to continue,” when in fact its “financial performance was materially driven by fraudulent manipulation of the Title IV funding program and could cease at any time if exposed.” TAC ¶ 147(a).

In addition to these alleged affirmative false statements, the TAC also claims that Corinthian made “omissions to conceal [its] regulatory and accounting problems,” by failing to immediately disclose a Department of Education (“DOE”) investigation at Corinthian’s Bryman College campus in San Jose, California (“Bryman”). TAC ¶ 322. The DOE investigation, commenced in December 2003, concluded that admission officials at Bryman failed to properly verify student information submitted in connection with financial aid applications, and resolved inconsistencies in those applications in a manner favorable to Bryman’s ability to obtain federal funding. As a result of the DOE investigation, the Bryman campus was placed on “reimbursement” status; reimbursement status requires an institution to seek reimbursement for federal funding as opposed to having those funds dispersed up front. The lag time between application and reimbursement may be as long as 45 days. Corinthian did not disclose this investigation or its findings in its fourth quarter 2003 or first quarter 2004 SEC filings. Instead, on June 24, 2004, a Financial Times news article reported on the investigation, stating that, “Inspectors discovered that school officials had helped students manipulate financial aid documents to obtain the maximum possible towards tuition fees — breaching Title IV of the Higher Education Act. They found admission officers assisted students in claiming extra dependants to obtain additional financial aid, according to the legal sources.” 3 Corinthian responded with a press release the same day, confirming the investigation and stating that DOE’s primary finding was that “the school had not properly verified information in students’ financial aid applications.” The following day, on June 25, 2004, a DOE official was quoted in a Financial Times article as stating that the investigation “did not confirm or deny anything about fraud.”

Similarly, the TAC alleges that Corinthian improperly withheld information related to an investigation by the California Attorney General. The California Attorney General had met with Corinthian officials on July 21, 2004, in order for Corinthian to voluntarily provide information related to its admission practices and student satisfaction. Again, Corinthian did not immediately disclose this meeting or its purpose. Instead, a press release issued on August 2, 2004, which also included an adjusted revenue forecast, disclosed the fact of the meeting and Cor *1058 inthian’s voluntary compliance with the California Attorney General’s requests.

B. The TAC’s scienter allegations.

The TAC states that “defendants acted with scienter,” which requires an intent to defraud or deceive, as to their alleged fraudulent practices and false public statements. TAC ¶ 348. The TAC relies on a variety of allegations to support its claim that Corinthian’s practices were intended to deceive investors.

First, the TAC alleges that suspicious stock sales made by Beal and Moore during the Class Period reflect the fact that Corinthian’s purported fraudulent practices were intentional. During the Class Period, Beal and Moore sold over $33 million in stock. These Class Period sales constituted approximately 37% of Moore’s total holdings and 100% of Beal’s holdings. The proceeds from those sales were substantially higher than the proceeds each received from pre-Class Period sales (82% higher for Moore; 252% higher for Beal). Neither Beal nor Moore made any sales after the June 24, 2004 Financial Times story revealing the investigation at the Bryman campus.

Second, the TAC points to Corinthian’s “hands on” management and tracking of student data and information. TAC ¶ 369. According to a 2003 Form 10-K, Corinthian’s senior management exercised close oversight over school performance and “monitor[ed] operating performance and profitability of each college and ha[d] access to operational data through our sophisticated information systems ... [including] lead flow, starts, student population, and other operating results to determine the proper course of action.” TAC ¶ 367 (quoting Corinthian’s 2003 Form 10-K). Several confidential witnesses corroborated the fact that Corinthian management closely monitored performance at each campus, including information regarding student enrollment and retention. This information was also contained in a “sophisticated information management system and database [Corinthian] employed to track everything from student recruitment to job placement.” TAC ¶ 371. The inference plaintiffs draw from the availability of such a wide swath of data is that Corinthian’s management must have known about underlying fraudulent conduct to achieve maximum federal funding at various schools.

Third, the TAC avers to Beal’s knowledge of Corinthian’s early revenue recognition practices — crediting a full month’s worth of tuition regardless of whether a student started at the beginning or end of that particular month — as reflective of knowledge of fraudulent conduct more generally. The TAC also alleges that at a company-wide meeting in Spring 2004, Beal complained to Corinthian corporate officers and campus officials that the company’s numbers needed to improve, and that admissions officers work in “the gray area” when dealing with unqualified students. TAC ¶ 297. Beal also resisted changes to Corinthian’s revenue recognition practices because he was reluctant to take the one quarter “hit” that would result from changing the practice; an end of month revenue recognition would result in a loss to reported revenues for earlier in the month. TAC ¶ 130. When other Corinthian officers raised concerns regarding the practices, Beal allegedly dismissed those concerns as unimportant or insignificant. Again, this revenue recognition practice was ultimately changed in August 2005 after the close of the Class Period.

More generally, the TAC refers to post-Class Period statements that confirm that Corinthian was aware of wrongdoing during the Class Period. The TAC contends that a slide show given at Corinthian’s 2005 Presidents’ meeting demonstrates *1059 that it knew compliance problems were detrimental to the company’s well-being. Those slides stated that “failure to adhere to program requirements impacts students[sic] skill development and may lead to student injury, lack of certification, poor patient care, [and] other end-customer impact.” TAC ¶ 62. The presentation slides also referred to the significance of Corinthian’s regulatory compliance obligations, observing: “As a publicly traded company, we must disclose violations of regulatory non-compliance: Increases administrative burden on the corporation to respond and defend; Impacts public confidence, stock price; Even non-material violations, if detected, are highly scrutinized by investors.” TAC ¶ 141.

C. The TAC’s allegations that Corinthian’s fraud was revealed to the market, causing Metzler’s losses.

The TAC points to two specific disclosures that purportedly revealed Corinthian’s fraudulent student enrollment and financial aid practices to the market: (1) the June 24, 2004 Financial Times story reporting the DOE investigation at the Bryman campus, and (2) an August 2, 2004 press release disclosing reduced earnings and earning projections. According to the TAC, when read in tandem these two disclosures revealed “the truth regarding [Corinthian’s] fraudulent practices and deception,” and precipitated considerable drops in the value of Corinthian stock. TAC at 18.

As described above, the June 24 Financial Times story revealed that the DOE investigated Corinthian’s Bryman campus in December 2003, and as a result that campus had been placed on reimbursement status. The Financial Times story further reported, however, that the DOE review and Bryman’s placement on reimbursement status, “does not affect the status of other Corinthian schools.” Nonetheless, Corinthian stock fell $2.55 on June 24, losing 10% of its value and closing at $22.51. Corinthian’s stock rebounded within three trading days and by June 29, 2004, it rose to $25.11, an amount that exceeded the stock’s value before the June 24 Financial Times story.

The second alleged disclosure occurred on August 2, 2004, when Corinthian issued a press release announcing that it had cut its revenue and earnings projections for the fourth quarter of 2004 and all of fiscal year 2005. That press release also revealed that the company had participated in a meeting with the California Attorney General regarding Corinthian’s business practices. The release announced revised earnings per share (“EPS”) for fiscal year 2004 of 86 to 87 cents, down from earlier projections of 94 cents EPS. The company also lowered guidance for all of fiscal year 2005. CEO Moore attributed the reduced earnings and accompanying projections to a number of factors:

During the fourth quarter [FY 2004] we achieved a remarkable growth rate in student enrollments, although below our expectations. Strong growth, unfortunately, sometimes brings challenges, and there were several during the past quarter that we now believe caused our revenue to fall short of our expectations and earlier guidance. Those factors included changes in lead flow mix among television leads, direct mail leads, newspaper leads and Internet leads; higher than anticipated attrition; negative publicity related to student litigation in Florida; and later than anticipated new branch campus openings.

After the August 2, 2004 earnings miss, Corinthian’s stock dropped 45% to $10.29.

The TAC focuses on a particular passage from the August 2 release: Moore’s reference to “higher than anticipated attrition” at Corinthian schools. The TAC contends that this language is a veiled refer *1060 ence alerting the market to Corinthian’s more extensive fraudulent student enrollment and financial aid practices:

Plaintiff and the Class members purchased Corinthian shares during the Class Period at artificially inflated prices without knowledge of defendants’ fraudulent financial aid and related practices.... [Artificial inflation in Corinthian’s stock price was eliminated on August 2, 2004, when defendants announced the lowered financial results and — for the first time — partially attributed the revenue shortfall to “higher than anticipated attrition”- — a euphemism for an admission that they had enrolled students who should not have been signed up at all, resulting in a 45% stock drop. This precipitous drop in share value is consistent with plaintiffs allegation that as much as 50% to 60% of enrollment at some Corinthian schools were illegitimate “false starts.”

TAC ¶¶ 48^49. Although the TAC contends that the August 2 press release’s reference to attrition alerted the market to inflated student enrollment numbers, that same release reported that Corinthian’s overall enrollment had increased 49.9% for fiscal year 2004. The TAC does not dispute that there was an increase in overall reported enrollment in 2004, nor does it point to information — beyond the Financial Times story and the August 2 press release — that informed the market that Corinthian had engaged in widespread student enrollment and financial aid fraud. But the TAC avers that the cumulative effect of these two disclosures was to peel back the curtain and reveal Corinthian’s “impaired and falsely presented financial condition,” leading to the considerable stock drop that caused Plaintiffs’ claimed damage. TACT 50.

D. The district court’s dismissal of the TAC.

Plaintiffs, with Metzler acting as lead plaintiff, filed the Consolidated Amended Complaint (“CAC”) on February 17, 2005. The Defendants moved to dismiss for failure to state a claim under Fed.R.Civ.P. 12(b)(6); on September 6, 2005, the district court dismissed the CAC without prejudice and granted leave to amend. No written order accompanied the dismissal of the CAC. A Second Consolidated Amended Complaint was filed on October 3, 2005. Again, the Defendants moved to dismiss under Fed.R.Civ.P. 12(b)(6), and again that complaint was dismissed without prejudice via a minute order issued without comment or analysis.

On February 6, 2006, the TAC was filed; Defendants followed course and moved to dismiss. After argument by counsel on Defendants’ motion at an April 24, 2006 hearing, the district court dismissed the TAC, this time with prejudice. The district court offered no reasons for the dismissal at that hearing, other than to comment, “I don’t think you have been able to find anything that goes to the real core of what you allege, and the motion [to dismiss] is granted this time with prejudice.” The Defendants prepared a written dismissal order at the district court’s request. Defendants’ four-page prepared order recounted the various arguments presented in favor of dismissal and concluded: “Defendants’ arguments are well-taken and their motion to dismiss is granted. Plaintiff has failed to allege an actionable securities claim.” The prepared order was signed, unaltered, by the district court on May 1, 2006. 4

This timely appeal followed.

*1061 II. Standard of Review

The court reviews dismissal under Rule 12(b)(6) de novo. See Livid Holdings, Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940, 946 (9th Cir.2005). The court “accept[s] the plaintiffs’ allegations as true and construe[s] them in the light most favorable to plaintiffs.” Gompper v. VISX, Inc., 298 F.3d 893, 895 (9th Cir.2002). Review is limited to the complaint, materials incorporated into the complaint by reference, and matters of which the court may take judicial notice. Tellabs, 127 S.Ct. at 2509.

The required elements of a private securities fraud action are: “(1) a material misrepresentation or omission of fact, (2) scienter, (3) a connection with the purchase or sale of a security, (4) transaction and loss causation, and (5) economic loss.” In re Daou Sys. Inc., 411 F.3d 1006, 1014 (9th Cir.2005) (citing Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005)).

As a putative securities fraud class action, the TAC is also subject to the pleading requirements of the PSLRA. See DSAM Global Value Fund v. Altris Software, Inc., 288 F.3d 385, 388 (9th Cir.2002). In order to state a claim for securities fraud that complies with the dictates of the PSLRA, the complaint must raise a “strong inference” of scienter — i.e., a strong inference that the defendant acted with an intent to deceive, manipulate, or defraud. 15 U.S.C. § 78u-4(b)(2); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). In reviewing a complaint under this standard, “the court must consider all reasonable inferences to be drawn from the allegations, including inferences unfavorable to the plaintiffs.” Gompper, 298 F.3d at 897 (emphasis in original); accord Tellabs, 127 S.Ct. at 2509 (“[I]n determining whether the pleaded facts give rise to a ‘strong’ inference of scienter, the court must take into account plausible opposing inferences.”). This examination requires the court to survey the complaint in its entirety, not to simply scrutinize individual allegations in isolation. See Tellabs, 127 S.Ct. at 2509 (citing Gompper, 298 F.3d at 897).

The PSLRA also requires that “the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(l). By requiring specificity, § 78u-4(b)(l) prevents a plaintiff from skirting dismissal by filing a complaint laden with vague allegations of deception unaccompanied by a particularized explanation stating why the defendant’s alleged statements or omissions are deceitful. See Falkowski v. Imation Corp., 309 F.3d 1123, 1133 (9th Cir.2002).

The district court did not attempt to explain why the TAC or the prior complaints were subject to dismissal. 5 Based *1062 on the thorough dismissal briefing below and the arguments raised on appeal, however, we are able to accurately identify the three contested grounds for dismissal: (1) failure to plead “loss causation,” (2) failure to raise a “strong inference” of scienter, and (3) failure to allege “falsity” with the specificity required by the PSLRA. We agree that the TAC fails on all three bases.

III. Discussion

A. The TAC does not adequately plead “loss causation.”

As explained by the Supreme Court in Dura Pharmaceuticals, loss causation is the “causal connection between the [defendant’s] material misrepresentation and the [plaintiffs] loss.” 544 U.S. at 342, 125 S.Ct. 1627 (citation omitted). A complaint fails to allege loss causation if it does not “provide[ ] [a defendant] with notice of what the relevant economic loss might be or of what the causal connection might be between that loss and the misrepresentation[.]” Id. at 347, 125 S.Ct. 1627. Stated in the affirmative, the complaint must allege that the defendant’s “share price fell significantly after the truth became known.” Id. A plaintiff does not, of course, need to prove loss causation in order to avoid dismissal; but the plaintiff must properly allege it. Id. at 346,125 S.Ct. 1627 (“[N]either the Rules nor the securities statutes impose any special further requirement [beyond Fed.R.Civ.P. 8(a)(2) ] in respect to the pleading of proximate causation or economic loss.”).

The principal Ninth Circuit case applying Dura’s loss causation standards is In re Daou Systems, 411 F.3d 1006. The Daou court explained, “A plaintiff is not required to show ‘that a misrepresentation was the sole reason for the investment’s decline in value’ in order to establish loss causation.” Id. at 1025 (quoting Robbins v. Roger Props., Inc., 116 F.3d 1441, 1447 n. 5 (11th Cir.1997)) (emphasis in original). A plaintiffs complaint must, however, set forth allegations that “if assumed true, are sufficient to provide[the defendant] with some indication that the drop in [defendant’s] stock price was causally related to [the defendant’s] financial misstatement[s].” Id. at 1026; accord Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 989-90 (9th Cir.2008). So, in Daou the court held that the plaintiff had pled loss causation based on allegations that major losses reported in an August 1998 quarterly report were causally connected to the company’s premature recognition of revenue — the practice that served as the basis of the alleged fraud in the plaintiffs complaint. Id. But the court held that the plaintiff had not adequately pled loss causation for the drop in the defendant’s stock that occurred prior to the August 1998 disclosure, because those losses took place “before the revelations began in August 1998, [when] the true *1063 nature of [the defendant’s] financial condition had not yet been disclosed.” Id. at 1027.

Thus, the Daou court’s careful delineation between losses caused after the company’s conduct was revealed, and losses suffered before the revelation, confirm that the complaint must allege that the practices that the plaintiff contends are fraudulent were revealed to the market and caused the resulting losses. In Daou the plaintiffs’ theory of fraud was that the defendant was systematically recognizing revenue on contracts that had not been completed. Id. at 1012-13. Plaintiffs adequately pled loss causation in Daou because their complaint alleged that the market learned of and reacted to this fraud, as opposed to merely reacting to reports of the defendant’s poor financial health generally. Id. at 1026 (“[T]he TAC alleges that ‘Defendants further revealed that the Company’s rapidly escalating work in progress account represented over $10 million in unbilled receivables — the direct result of prematurely recognizing revenue.”) (emphasis in original); see also Teachers’ Ret. Sys. of La. v. Hunter, ATI F.3d 162, 186 (4th Cir.2007) (holding that plaintiffs must plead [loss causation] “with sufficient specificity to enable the court to evaluate whether the necessary causal link exists”); Tricontinental Indus., Ltd. v. PñcewaterhouseCoopers, LLP, 475 F.3d 824, 843 (7th Cir.2007) (holding that to plead loss causation plaintiff had to allege that the defendant’s “material misrepresentation [ ] caused [the plaintiff] to suffer a loss when that material misrepresentation ‘became generally known’ ”).

Here, Metzler relies on the June 24 Financial Times story disclosing the DOE investigation at the Bryman campus and the August 2 earnings announcement. In doing so, Metzler fails to adequately plead loss causation. 6 The TAC does not allege that the June 24 and August 2 announcements disclosed — or even suggested- — -to the market that Corinthian was manipulating student enrollment figures company-wide in order to procure excess federal funding, which is the fraudulent activity that Metzler contends forced down the stock that caused its losses. Neither the June 24 Financial Times story nor the August 2 press release regarding earnings can be reasonably read to reveal widespread financial aid manipulation by Corinthian, and the TAC does not otherwise adequately plead that these releases did so.

As for the Financial Times story, it does reveal a DOE investigation at the Bryman campus and the campus’s placement on reimbursement status as a result of improper financial aid practices; but it simultaneously notes that the investigation there “does not affect the status of other Corinthian schools.” The TAC does not allege that all, or even some appreciable number, of Corinthian’s schools were being investigated or placed on reimbursement status. Only the Bryman campus was subject to that sanction. Indeed, the TAC itself discredits the notion that the June 24 disclosure revealed company-wide manipulation of student enrollment, by describing the June 24 disclosure as revealing to investors “the potential but real ñsk of all 88 colleges being placed on reimbursement status, which would have delayed Title IV funding and increased accounts receivable by up to $135 million company-wide.”

*1064 TAC ¶ 159 (emphases added). But neither Daou nor Dura support the notion that loss causation is-pled where a defendant’s disclosure reveals a “risk” or “potential” for widespread fraudulent conduct. In Daou the defendant disclosed that the company - actually had $10 million in unbilled receivables, not merely that there was some risk it might accrue such receivables. 411 F.3d at 1026. Moreover, as Corinthian notes, its stock recovered very shortly after the modest 10% drop that accompanied the June 24 announcement. 7

The TAC’s characterization of the August 2 earnings announcement similarly fails to allege that the market became aware of, and the resulting stock drop resulted from, widespread enrollment fraud. At best, the TAC contends that the reference in the August 2 announcement to “higher than anticipated attrition” was understood by the market as Corinthian’s “euphemism for an admission that they had enrolled students who should not have been signed up at all, resulting in a 45% stock drop.” TAC ¶ 48. Metzler’s appellate brief asserts that the August 2 disclosure made investors “realize[ ] that Corinthian’s improper manipulation of student and enrollment records was not limited to [the Bryman campus at] San Jose, nor was it immaterial.” But the TAC does not allege facts to suggest that on August 2 the market became aware that Corinthian was manipulating student records company-wide, other than an undocumented assertion that Corinthian’s August 2 stock drop was, by necessity, a result of this market “realization.” 8

Metzler is correct to observe that neither Daou nor Dura require an admission or finding of fraud before loss causation can be properly pled. Dura Pharms., Inc., 544 U.S. at 346, 125 S.Ct. 1627; Daou, 411 F.3d at 1025. But that does not allow a plaintiff to plead loss causation through “euphemism” and thereby avoid alleging the necessary connection between defendant’s fraud and the actual loss. So long as there is a drop in a stock’s price, a plaintiff will always be able to contend that the market “understood” a defendant’s statement precipitating a loss as a coded message revealing the fraud. Enabling a plaintiff to proceed on such a theory would effectively resurrect what Dura discredited — that loss causation is established through an allegation that a stock was purchased at an inflated price. 544 U.S. at 347, 125 S.Ct. 1627. Loss causation requires more. Daou, 411 F.3d at 1026 (plaintiffs complaint quoting an analyst as interpreting defendant’s unbilled receivables as suggesting “they are manufacturing earnings”).

Finally, while the court assumes that the facts in a complaint are true, it is not required to indulge unwarranted infer *1065 enees in order to save a complaint from dismissal. In re Syntex Corp. Sec. Litig., 95 F.3d 922, 926 (9th Cir.1996) (“[CJonclusory allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss for failure to state a claim.”) (emphasis added) (affirming 12(b)(6) dismissal of securities fraud complaint). The TAC’s allegation that the market understood the June 24 and August 2 disclosures as a revelation of Corinthian’s systematic manipulation of student enrollment is not a “fact.” It is an inference that Metzler believes is warranted from the facts that are alleged. But Corinthian persuasively explains why this is not the case. As to the June 24 disclosure, Corinthian points out that its stock quickly recovered from the 10% drop that followed the Financial Times story. Similarly, the August 2 announcement conta