Gaer v. Apollo Group Incorporated et al

Filing 106

ORDER granting 69 Defendants' Motion to Dismiss. IT IS FURTHER ORDERED granting in part and denying in part Defendants' Request for Judicial Notice (Doc. 69-1; Doc. 92) consistent with the terms of this Order. IT IS FURTHER ORDERED gran ting in part and denying in part Plaintiffs'Request for Judicial Notice (Doc. 78) consistent with the terms of this Order. IT IS FURTHER ORDER denying as moot 71 Defendants' Motion to Strike Portions of the Motion to Dismiss. Plaintiffs are granted leave to amend and shall file an amended complaint within thirty days of the date of this Order. If Plaintiffs fail to comply, the Clerk must, enter a judgment of dismissal. Signed by Judge James A Teilborg on 10/27/11.(LSP)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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IN RE APOLLO GROUP,
SECURITIES LITIGATION

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INC.)
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Lead Case No. CV-10-1735-PHX-JAT
Consolidated With:
No. CV-10-2044-PHX-JAT
No. CV-10-2121-PHX-JAT
ORDER

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Pending before the Court are: Defendants’ Motion to Dismiss (Doc. 69), Request for

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Judicial Notice in Support of Defendants’ Motion to Dismiss (Doc. 69-1), Defendants’

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Motion to Strike Portions of the Consolidated Class Action Complaint (Doc. 71), Plaintiffs’

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Request for Judicial Notice (Doc. 78), and Defendant’s Supplemental Request for Judicial

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Notice in Support of Defendants’ Motion to Dismiss (Doc. 92). The Court now rules on

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these motions.

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I.

BACKGROUND

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This is a consolidated class action proceeding. The lead Plaintiffs are: Oregon Public

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Employees Retirement Fund, “a state pension fund for retired public employees of the State

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of Oregon,” Amalgamated Bank, “a New York bank that manages approximately $12 billion

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for institutional investors,” as trustee for the LongView LargeCap 500 Index Fund, the

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LongView LargeCap 500 Index VEBA Fund, the LongView Quantitative LargeCap Fund,

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and the LongView Quantitative LargeCap VEBA Fund, and Mineworkers’ Pension Scheme,

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“a pension fund located in Sheffield, United Kingdom.” (Doc. 45 at ¶¶ 21-23). Defendant

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Apollo Group, Inc. (“Apollo”) is an Arizona based company that owns and operates

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proprietary postsecondary education institutions and is one of the largest private education

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providers in the United States (Doc. 45 at ¶ 24; Doc. 69 at 4). The remaining Defendants are

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various individuals who served as Apollo officers and directors between May 21, 2007 and

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October 13, 2010 (the “Class Period”). Plaintiffs all purchased Apollo stock during the Class

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Period.

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Plaintiffs’ Consolidated Class Action Complaint (Doc. 45) (the “CAC”) contains three

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counts. In Count I, Plaintiffs allege that, during the Class Period, Defendants made false and

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misleading statements of material fact regarding Apollo’s financial condition, business focus,

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ethics, compensation and recruitment practices, and compliance with Title IV of the Higher

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Education Act, 20 U.S.C. §1070, et seq. (“Title IV”)1 and/or failed to disclose material facts

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necessary to make the statements not misleading in violation of § 10(b) of the Securities

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Exchange Act of 1934 (the “Exchange Act”) and Securities and Exchange Commission Rule

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10(b)-5. Plaintiffs further allege that these false and misleading statements and/or omissions

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resulted in artificial inflation of Apollo stock that led Plaintiffs to purchase common stock

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at artificially inflated prices.

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In Count II, Plaintiffs allege that, during the Class Period, Defendants John Sperling,

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Peter Sperling, Joseph D’Amico, Gregory Capelli, Charles Edelstein, Brian Swartz, Brian

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Mueller, and Gregory Iverson violated § 20(a) of the Exchange Act because each was a

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controlling person who had direct and supervisory involvement in day-to-day operations of

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Plaintiffs have included all of these allegations in Count I of the CAC. However,
upon careful reading of the CAC and Plaintiffs’ Opposition to the Motion to Dismiss, the
Court finds that Plaintiffs are actually pleading five separate categories of § 10(b) and Rule
10(b)-5 violations, i.e. misrepresentations regarding Apollo’s: (1) financial condition, (2)
business focus, (3) ethics, (4) compensation and recruitment practices, and (5) compliance
with Title IV of the Higher Education Act. To properly analyze Plaintiffs’ allegations and
determine whether Plaintiffs have stated a claim upon which relief may be granted, the Court
must treat these five categories as if they were five different Counts of the CAC. If Plaintiffs
choose to amend the CAC, they should break each violation into separate Counts or
adequately plead how these five categories amount to only one violation of § 10(b) and Rule
10(b)-5.
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Apollo and, as such, each is jointly and severally liable for the violations of § 10(b) and Rule

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10(b)-5 of the Exchange Act described in Count I.

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In Count III, Plaintiffs allege that, during the Class Period, Defendants John Sperling,

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Peter Sperling, Joseph D’Amico, and William Pepicello sold Apollo stock while in

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possession of material, adverse, non-public information in violation of § 20(a) of the

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Exchange Act.

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Defendants move to dismiss the CAC based on Plaintiffs’ alleged failure to plead a

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plausible theory of fraud as required by FED.R.CIV.P. 8(a), failure to state a claim upon

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which relief can be granted as required by FED.R.CIV.P. 12(b)(6), failure to plead fraud with

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particularity as required by FED.R.CIV.P. 9(b), and for failure to meet the heightened

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pleading requirements of the Private Securities Litigation Reform Act (“PSLRA”).

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II.

LEGAL STANDARD

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A pleading that states a claim for relief must contain “a short and plain statement of

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the claim showing that the pleader is entitled to relief.” FED.R.CIV.P. 8(a)(2). The complaint

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must allege enough facts so that the claim is plausible on its face.

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Twombly, 550 U.S. 544, 570 (2007). Securities fraud actions are also subject to the

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heightened pleading standard of Federal Rule of Civil Procedure 9(b), which requires

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Plaintiffs to “state with particularity the circumstances constituting fraud.” To satisfy this

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standard, the party alleging fraud must include an account of the “time, place, and specific

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content” of any “false representations as well as the identities of the parties to the

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misrepresentation.” Edwards v. Marin Park, Inc., 356 F.3d 1058, 1066 (9th Cir. 2004).

Bell Atl. Corp. v.

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Further, when seeking to enforce federal antifraud securities laws, private plaintiffs

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must meet the higher, more exacting pleading standards contained in the PSLRA. See

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Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313-314 (2007). “The required

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elements of a private securities fraud action are: (1) a material misrepresentation or omission

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of fact, (2) scienter, (3) a connection with the purchase or sale of a security, (4) transaction

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and loss causation, and (5) economic loss.” Metzler Inv. GMBH v. Corinthian Colls., Inc.,

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540 F.3d 1049, 1061 (9th Cir. 2008). To meet the pleading requirements for such an action,
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the PSLRA requires that “the complaint shall, with respect to each act or omission . . . state

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with particularity facts giving rise to a strong inference that the defendant acted with the

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required state of mind.” 15 U.S.C. § 78u-4(b)(2). The “inference of scienter must be more

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than merely plausible or reasonable—it must be cogent and at least as compelling as any

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opposing inference of nonfraudulent intent.” Metzler, 540 F.3d at 1066.

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The PSLRA also requires that “the complaint shall specify each statement alleged to

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have been misleading, the reason or reasons why the statement is misleading, and, if an

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allegation regarding the statement or omission is made on information and belief, the

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complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C.

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§ 78u-4(b)(1). This requirement of specificity “prevents a plaintiff from skirting dismissal

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by filing a complaint laden with vague allegations of deception unaccompanied by

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particularized explanation stating why the defendant’s alleged statements or omissions are

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deceitful.” Metzler, 540 F.3d at 1061.

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In ruling on a 12(b)(6) motion to dismiss in a securities fraud action, the Court must

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accept all factual allegations in the complaint as true. See Tellabs, 551 U.S. at 322. The

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Court must consider the complaint in its entirety, materials incorporated into the complaint

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by reference, and matters of which a court may take judicial notice.2 Id. at 322-23.

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III.

COUNT I

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A.

Defendants’ Alleged Misrepresentations and/or Omissions

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Plaintiffs seek to establish that Defendants violated the Exchange Act when they made

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misleading statements of material fact regarding Apollo’s financial condition, business focus,

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ethics, compensation and recruitment practices, and compliance with Title IV and/or failed

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to disclose material facts necessary to make the statements not misleading. Plaintiffs also

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claim that these allegedly false and misleading statements and/or omissions resulted in

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Both Defendants and Plaintiffs have asked the court to take judicial notice of certain
documents. The Court grants both Plaintiffs’ and Defendants’ Requests for Judicial Notice
to the extent that the documents were referenced in the CAC and denies them in all other
respects.
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artificial inflation of Apollo stock that led Plaintiffs to purchase common stock at artificially

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inflated prices. The Court will briefly summarize Plaintiffs’ theory for each of these five

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categories.

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Statements regarding Recruitment/Marketing Practices

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Plaintiffs allege that Defendants used a number of unethical and deceptive recruiting

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tactics to increase enrollment while publicly attributing their success to enhancing service

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offerings and academic quality. (CAC ¶¶ 6, 15, 53, 69-71, 81-84, 145-150, 165). Plaintiffs

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allege that revisions to Title IV, which allowed for-profit institutions to participate in federal

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student aid funding, motivated Defendants to engage in unethical and deceptive recruiting

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practices in order to increase enrollment, thus gaining access to large amounts of Title IV

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funds. (CAC ¶5). Plaintiffs allege that Defendants’ improper recruiting practices included:

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 recruiting intellectually and/or financially unqualified people (including
those at homeless shelters) (CAC ¶¶ 60-72);
 misleading prospective students about the cost of obtaining an education and
providing false information about the terms of the financial aid the students
received and their obligation to repay loans borrowed through Title IV
programs (CAC ¶¶ 49, 100-102);
 using inappropriate and deceptive sales practices to pressure prospective
students into enrolling (CAC ¶¶ 73-85); and
 incentivizing enrollment personnel to maximize the number of students they
were able to enroll, without regard to the students’ qualifications (CAC ¶¶ 5259).

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(Doc. 76 at 2).

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Plaintiffs allege that they were misled by Defendants’ statements regarding the

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reasons for enrollment increases at Apollo’s campuses, because, rather than disclosing these

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practices, which Plaintiffs allege were the actual cause of the increase of enrollment,

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Defendants claimed Apollo’s success and revenue growth resulted from:

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 “continued investment in enhancing and expanding [UOP] service offerings
and academic quality” (CAC ¶¶ 146-52);
 “a single-minded focus on providing quality education to serve the needs of
working students” (CAC ¶ 153);
 being “intensely focused on student success” and “retention” and “constantly
seeking ways to improve student completion and retention” and putting
“students first” (CAC ¶¶ 162, 164-65); and
 “ensur[ing] that only students who have a reasonable chance to succeed
enroll in our universities” (CAC ¶¶ 165, 168).
(Doc. 76 at 3) (quotation marks in original).
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Plaintiffs claim that their allegations regarding these unethical and deceptive

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recruiting practices are supported by an investigation conducted by the Government

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Accountability Office and an ABC News Hidden Camera Investigation. (CAC ¶¶ 67, 69-71;

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Doc. 76 at 1-2). Plaintiffs further claim that the Senate HELP Committee and “numerous

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States Attorneys General” are currently conducting investigations regarding these practices.

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(CAC ¶¶ 287-88, 291-93; Doc. 76 at 2).

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2.

Statements regarding Compensation Practices

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Plaintiffs allege that “during the Class Period, UOP’s enrollment staff were being

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compensated based on the number of students they were able to enroll, in violation of the

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Higher Education Opportunity Act.” (CAC ¶ 172). Plaintiffs allege that they were misled

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by Defendants’ statements, during the Class Period, that Apollo was in compliance with the

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Higher Education Opportunity Act when, in fact, it was violating the Act. (CAC ¶¶ 170-172).

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In their Motion to Dismiss, Defendants argue that basing compensation on enrollment

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was not a violation of the Higher Education Opportunity Act and thus, statements made by

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Defendants that Apollo was in compliance could not have misled investors because they were

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true. In Response, Plaintiffs appear to acknowledge that the compensation practices they

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allege did not violate DOE regulations:

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Defendants argue that their compensation practices did not violate DOE
regulations. This too is irrelevant. Apollo’s compensation practices fueled its
undisclosed business strategy of increasing enrollment at all costs, regardless
of whether they were illegal.

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(Doc. 76 at 3). It appears to the Court that Plaintiffs are abandoning their theory that
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Defendants made misrepresentations regarding compliance with DOE regulations as stated
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in the CAC. The Court must evaluate the Motion to Dismiss on the basis of what is alleged
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in the CAC. Accordingly, the Court deems Plaintiffs to have withdrawn their allegations
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concerning Defendants’ improper compensation practices for the purposes of the Court ruling
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on the Motion to Dismiss.3

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The Court’s determination that Plaintiffs have withdrawn their argument does not
prohibit Plaintiffs from amending the CAC to possibly state a cognizable claim based on
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3.

Statements regarding Compliance with Title IV

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Plaintiffs allege that, to maintain compliance with Title IV regulations, including a cap

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on the ratio of government loan funds to cash revenue (the “90/10 Rule”) and limits on the

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percentage of student borrowers who default on Title IV loans (the “Cohort Default Rate”),

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Defendants developed an improper accounting practice. (CAC ¶ 7-8).

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Plaintiffs’ theory of this improper accounting practice is as follows: “When a student

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withdrew from classes prior to completing a program or obtaining a degree, Apollo was

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required to return to the lender the unearned portion of the proceeds of that student’s Title

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IV loans.” (CAC ¶ 8). In many cases, instead of returning the unearned proceeds to the

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lender, Apollo “returned the full amount of the Title IV funds, including the portion that had

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been earned and that Apollo was legally entitled to keep, and which students had a legal right

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to have applied to their tuition bills.” (Id.). In many cases, Apollo then sought to collect the

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full amount of tuition from the students themselves, even though these students often “did

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not have the means to pay Apollo once their federal loans were returned.” (Id.). Defendants

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did this “to prevent these students from going into default and increasing Apollo’s Cohort

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Default Rate [and,] [b]y artificially inflating its revenue attributable to withdrawn students[,]

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. . . Apollo also was able to improve its ratio of government loan-based revenue to cash

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revenue, thereby helping to ensure its compliance with the 90/10 Rule.” (CAC ¶ 10).

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Plaintiffs allege that they were misled by Defendants’ disclosure of the negative

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consequences that would flow from violating the Cohort Default Rate and/or the 90/10 Rule

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while concealing the fact that Defendants were using improper practices to maintain

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compliance with those regulations. (CAC ¶¶ 180-183). Plaintiffs further allege that they

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were misled by Defendants’ statements that suggested Defendants only returned a portion

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of the Title IV funds, when the truth was that Apollo was returning the entire amount of the

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Title IV funds. (CAC ¶¶ 173-176).

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Further, Plaintiffs allege that, during the Class Period, Apollo failed to acknowledge

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Defendants’ representations of their compensation practices.
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student withdrawals on a timely basis, which resulted in an untimely return of Title IV Funds.

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(CAC ¶ 173). Prior to the Class Period, the DOE issued an audit report finding that Apollo

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failed to return funds for withdrawn students in a timely manner. (CAC ¶ 173). Plaintiffs

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allege that they were misled when Apollo made representations claiming that it had rectified

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the problem identified in the DOE report, but, in fact, the problem was ongoing. (CAC ¶¶

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173-77).

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Plaintiffs allege that these claims regarding Defendants’ improper practices relating

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to Title IV funds are supported by a program review conducted by the DOE in February

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2009, finding that UOP had failed to timely withdraw students which resulted in the untimely

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return of Title IV funds throughout 2008 (CAC ¶ 173), and a lawsuit (that resulted in a

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confidential settlement) filed by three former UOP students alleging that UOP improperly

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returned the entire amount of their Title IV funds (CAC ¶ 177).

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4.

Statements Regarding Apollo’s Financial Condition

Plaintiffs allege that Defendants violated Generally Accepted Accounting Principals
(“GAAP”) as follows:

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First, Plaintiffs allege that Apollo improperly recognized revenue from students who

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withdrew from school because it billed students for tuition and other charges that post-dated

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their withdrawal even though Apollo did not earn those revenues (because no services were

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provided after the students withdrew). (CAC ¶ 125).

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Second, Plaintiffs allege that:

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as a result of its improper marketing and billing practices, Apollo knew that
the overwhelming majority of withdrawn students would not be able to pay
their tuition bills for the postwithdrawal period, and when Apollo returned
those students’ Title IV loan funds for the pre-withdrawal period, it likewise
knew that it was highly unlikely to recoup that money from the students
directly. Thus, the collectability of revenue from these withdrawn students was
highly ‘doubtful’ and not ‘reasonably assured,’ and under GAAP it should not
have been booked until (if ever) cash was received. Accordingly, when these
students withdrew, Apollo should have immediately reduced its revenue and
deferred revenue – which had been recorded when the Title IV loans were
received - by the amount owed by these students.

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(CAC ¶ 125).
Third, Plaintiffs allege that:
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Defendants violated ASC No. 450 by Apollo’s failure to take immediate and
adequate allowances for the receivables from students who withdrew from
school, including those whose Title IV funds were returned by Apollo, as
Defendants knew from the outset that it was probable that those amounts
would not be collected, and the amount of loss could be reasonably estimated
based on, inter alia, Apollo’s historic collections experience. Instead, the
Company recorded revenue in one period (which it never should have recorded
in the first place under CON No. 5) and then waited until a subsequent period
to record bad debt allowances and bad debt expense for the corresponding
account receivable. This inappropriate accounting allowed Apollo to overstate
revenue dollars and growth rates.
(CAC ¶ 129).

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Finally, Plaintiffs allege that “Apollo artificially increased the amount of tuition it

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could treat as “earned,” thereby inflating its revenue and net income, by improperly delaying

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the effective dates of students’ withdrawals from school.” (CAC ¶ 106).

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Plaintiffs allege that they were misled because Defendants did not disclose these

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practices and instead “repeatedly issued false statements regarding Apollo’s disclosure

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controls and procedures and its internal controls over financial reporting.” (CAC ¶ 237).

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Plaintiffs allege that these false statements include:

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 [after having to issue restatements of 2004 and 2005 financial statements]:
Our President and CFO of the Company have taken responsibility to
implement changes and improvements in the internal control over financial
reporting and remediate the control deficiencies that gave rise to the material
weaknesses. (CAC ¶ 238);
 We believe that we have made substantial progress in remediating these
material weaknesses, and we do not believe they will repeat. (CAC ¶ 239);
 I am very pleased to report that each of the four material weaknesses
identified in last year’s audit were remediated, and we will report no material
weaknesses in internal controls this year. (CAC ¶ 241).

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Plaintiffs allege that these statements “were materially false and misleading because

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they created the false impression that Defendants had actually changed and improved

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Apollo’s internal control[s] [and] remediated control deficiencies” when these deficiencies

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continued to exist throughout the Class Period. (CAC ¶ 242).4

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The CAC alleges that Defendants made various other disclosures with substantially
similar content, which constitute false and misleading statements concerning Apollo’s
disclosure controls and procedures and internal controls over financial reporting. (CAC ¶¶
237-250).
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Business Focus

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Plaintiffs allege that, throughout the Class Period, Defendants made statements that

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attempted to portray Apollo “as an institution focused on providing a quality education to its

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students and dedicated to changing lives through education,” making statements like:

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 Our primary focus is providing the highest-quality educational product and
services for our students in order for them to maximize the benefits through
our educational experience. (CAC ¶ 161);
 Retention continues to be the number one focus at Apollo as it impacts so
many aspects of our results including enrollment, revenue, profit levels, bad
debt and student default rates. (CAC ¶ 162);
 none of this would be possible without always remembering to put our
students first. (CAC ¶ 164);
 We are committed to providing access to high quality education but want to
balance this with our responsibility to ensure that only students who have a
reasonable chance to succeed enroll in our universities. (CAC ¶ 165);
 We remain committed to providing access to high-quality education, while
ensuring that only students who have a reasonable chance to succeed enroll in
our institutions. (CAC ¶ 168).

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Plaintiffs allege that these statements were materially false and misleading because

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“Apollo’s principal focus was on enrolling students in its institutions, regardless of their

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suitability for college or the likelihood for success” and they “created the false impression

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that Apollo was enrolling the types of students who were likely to remain in school and be

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successful, thus providing a strong foundation for Apollo’s future . . . profitability.” (CAC

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¶ 169).

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6.

Ethics

Plaintiffs allege that, during the Class Period, Defendants “repeatedly trumpeted its
commitment to integrity and business ethics” making statements like:
 “the organization is committed to conducting its business ethically and with
integrity.” (CAC ¶ 155);
 “Our employees must act ethically at all times and in accordance with the
policies in our Code of Business Conduct and Ethics.” (CAC ¶ 156);
 “none of this would be possible without always remembering to put our
students first.” (CAC ¶ 164);
 Apollo’s “credibility and reputation depend upon the good judgment, ethical
standards and personal integrity of each director, executive and employee” and
Apollo “expects its directors, executives and employees to conduct themselves
with the highest degree of integrity, ethics and honesty.” CAC ¶ 157

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Plaintiffs allege that these statements were materially false and misleading because
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“neither Apollo nor its management were conducting themselves ethically and with integrity

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during the Class Period, nor were they complying with the applicable rules and regulations

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or providing full, fair and accurate disclosure to investors.” (CAC ¶ 160).

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B.

Corrective Disclosures

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Plaintiffs allege that “Plaintiffs and the Class purchased Apollo Class A stock at prices

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that were artificially inflated because of Defendants’ misrepresentations and concealment of

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material facts, and they suffered losses when the value of that stock declined significantly

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as the true state of affairs was revealed.” (CAC ¶ 286). Plaintiffs allege that this “true state

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of affairs” was revealed “through a series of disclosures during the Class Period,” which

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revealed to investors “that Defendants’ portrayal of Apollo as a stable and growing company

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with strong revenue growth and a promising future was materially misleading.” (CAC ¶

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283). Plaintiffs allege that these disclosures caused a decline in Apollo’s stock price during

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the Class period because “they revealed facts that had previously been misrepresented or

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concealed by Defendants.” (CAC ¶ 285).

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The relevant corrective disclosures and allegations relating to them are as follows:

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March 31, 2009. In a press release announcing its second quarter fiscal 2009
results, Apollo reported increased bad debt expense and a 9% decline in New
Degreed Enrollments from the previous quarter. As a result, Apollo’s stock
price dropped 15.15% ($11.87 per share) overnight. (Doc. 76 at 29-30; CAC
¶ 252).

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October 27, 2009. In an earnings press release, Apollo announced that the SEC
had begun an informal inquiry into the Company’s revenue recognition
policies, and an Associated Press article the next day suggested that the issue
“revolve[d] around how Apollo determines when a student drops out of a class
and how much income Apollo can leave on its balance sheet, and for how
long.” In unusually heavy trading of Apollo shares, the stock price dropped
17.7% ($12.91 per share). (Doc. 76 at 30; CAC ¶¶253-54).

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January 7, 2010. In its earnings press release and Form 10-Q, Apollo
announced its receipt of a preliminary Program Review Report from the DOE.
Although the report was not released, the Company revealed that it contained
“six findings and one concern” regarding the Company’s financial aid
policies.” (Doc. 76 at 31; CAC ¶ 255). Later that day on an earnings
conference call, Defendant Edelstein tried to downplay the DOE’s findings.
(CAC ¶ 256); In response to the disclosures of January 7, 2010, between
January 7 and January 8, Apollo’s stock price dropped by $3.44, or
approximately 5.4%. (CAC ¶ 257).

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June 21, 2010. The Preliminary Program Report was published by the DOE

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providing “details that were not previously known to investors about the
DOE’s findings, such as the DOE’s determination that, despite concerns the
DOE had raised with UOP in March 2008 about the failure to timely recognize
withdrawal of students, ‘throughout 2008, UOP continued to fail to timely
withdraw students who expressed a desire to withdraw, resulting in UOP’s
untimely return of Title IV funds.’” “This negative news was tempered,
however, with assurances that the DOE’s findings had been fully resolved
during the six months since the Company received the preliminary report.
Apollo’s stock price declined only moderately in response to the June 21, 2010
announcement, from a closing price of $48.39 on June 18 (the previous trading
day) to a closing price of $48.01 on June 21.” (CAC ¶ 260).

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August 3 through August 6, 2010. On August 3, 2010, the GAO Report was
leaked to the press. (CAC ¶ 265). It described how fifteen for-profit schools
were investigated, and revealed widespread use of fraudulent and deceptive
marketing practices to attract students. (CAC ¶ 265). At the HELP Committee
hearing on August 4, a GAO official testified that two UOP campuses were
among the fifteen schools described in the Report. (CAC ¶ 269). On August
6, Apollo filed a Form 8-K announcing that the HELP Committee had sought
additional information regarding “a broad spectrum of the Company’s
business.” (CAC ¶ 273). From closing on August 2 to closing on August 4,
Apollo’s stock price fell from $47.14 to $44.76 (CAC ¶ 271), and following
the filing of the 8-K, it dropped to a new low of $41.11 before closing at
$42.49 (CAC ¶ 273). (Doc. 76 at 32).

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August 13, 2010. The DOE released data showing that overall student loan
repayment rates were 36% at for-profit schools compared to 54% at public
universities. (CAC ¶ 274). The repayment rate for UOP students was only
44%, which was below the 45% threshold required by proposed new gainfulemployment rules. As a result of this disclosure, Apollo’s stock price fell 3.8%
between closing on August 12 ($40.47) and closing on August 13 ($38.94).
(CAC ¶ 274). (Doc. 76 at 32).

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October 13, 2010. In a press release, Apollo reported declining enrollment and
slowing revenue growth for its most recent quarter, and announced the
withdrawal of its financial forecast for fiscal 2011, citing increased regulatory
scrutiny and the implementation of new initiatives that would result in further
declining enrollment. (CAC ¶ 277). In its analyst call that day, Apollo further
disclosed a new orientation program during which students could drop out free
of charge, major changes in compensating enrollment counselors, and efforts
to monitor 30,000 of their conversations. (Id.). Defendants further revealed
that Apollo’s percentage of revenue from federal aid had increased over the
past year and was expected to exceed 90% by fiscal year 2012, triggering the
90/10 Rule and risking the loss of Title IV dollars. (CAC ¶ 279). As a result
of these disclosures, Apollo’s stock price dropped 23% during the next day’s
trading. (CAC ¶ 280). (Doc. 76 at 33).

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IV.

ANALYSIS
Defendants argue that Plaintiffs have not met the standard for pleading a securities

fraud violation because they: (1) fail to adequately plead a cogent and compelling theory of
scienter, (2) fail to adequately plead falsity, and (3) fail to satisfy loss causation pleading

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requirements. The Court finds that Plaintiffs have failed to plead a cogent and compelling

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theory of scienter and failed to satisfy loss causation pleading requirements with regard to

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each of the five categories of misrepresentations in Count I.

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A.

Scienter

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When proceeding under the PSLRA, Plaintiffs “can no longer aver intent in general

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terms of mere motive and opportunity or recklessness, but rather, must state specific facts

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indicating no less than a degree of recklessness that strongly suggests actual intent.” Metzler,

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540 F.3d at 1066 (internal quotations omitted). Plaintiffs must state with particularity facts

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giving rise to a strong inference that Defendants acted with the required state of mind. Id.

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For such an inference to qualify as “strong,” it “must be more than merely plausible or

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reasonable—it must be cogent and at least as compelling as an opposing inference of

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nonfraudulent intent.” Id. (quoting Tellabs, 551 U.S. at 324).

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The Court “must engage in a comparative evaluation; it must consider, not only

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inferences urged by plaintiff . . . but also competing inferences rationally drawn from the

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facts alleged.” Tellabs, 551 U.S. at 314. Under this standard, “the Court must consider all

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reasonable inferences to be drawn from the allegations, including references unfavorable to

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the plaintiffs.” Metzler, 540 F.3d at 1061 (quoting Gompper v. VISX, Inc., 298 F.3d 893, 897

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(9th Cir. 2002) (emphasis in original)). Where pleadings are not sufficiently particularized

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or where, taken as a whole, they do not raise a strong inference that misleading statements

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were made to investors knowingly or with deliberate recklessness, a private securities fraud

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complaint is properly dismissed under Rule 12(b)(6).” Ronconi v. Larkin, 253 F.3d 423, 429

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(9th Cir. 2001).

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Plaintiffs have listed fraudulent practices engaged in by Defendants and have

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generally averred Defendants’ knowledge. Plaintiffs have made little attempt to link facts

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indicating actual knowledge on the part of each Defendant to actual fraudulent practices of

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Defendants and, to a great extent, have left it to the Court to try to match up Defendants’

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alleged fraudulent practices with their alleged scienter. It is Plaintiffs’ burden to establish

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a strong inference of scienter. Further, the PSLRA specifically requires the Complaint to
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“state with particularity facts giving rise to a strong inference that the defendant acted with

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the required state of mind” “with respect to each act or omission.” 15 U.S.C. § 78u-4(b)(2)

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(emphasis added).

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The CAC primarily relies on: (1) Defendants’ stock purchases, (2) Confidential
Witness statements, and (3) alleged GAAP violations to establish scienter.5
1.

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Stock Purchases

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Plaintiffs assert that insider trading by Defendants John Sperling, Peter Sperling,

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D’Amico, and Pepicello (the “insider trading Defendants”) supports a strong inference of

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scienter.

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“While suspicious stock sales by corporate insiders may constitute circumstantial

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evidence of scienter,” such sales only give rise to an inference of scienter when they are

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dramatically out of line with prior trading practices at times calculated to maximize the

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personal benefit from undisclosed inside information.” Metzler, 540 F.3d at 1066-1067

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Plaintiffs also rely on other lawsuits filed against Defendants to support their
allegations. (CAC ¶¶ 53, 100, 177). Plaintiffs further state that, if given leave to amend, an
amendment will include a “recently unsealed qui tam case against Apollo in which—contrary
to arguments made in Defendants’ brief—former UOP employees allege that UOP has been
in continual violation of regulations prohibiting compensation of recruiters based on the
number of students they enroll.” (Doc. 76 at 7, n. 9). Defendants argue that allegations from
other complaints are insufficient to satisfy the pleading requirements. The Court agrees that
because allegations from other complaints are unproven and contested, they do not amount
to “facts” sufficient to establish a strong inference of scienter. See In re Connetics Corp.
Secs. Litig., 542 F.Supp.2d 996, 1005 (N.D. Cal. 2008) (“an attorney has a nondelegable
responsibility to personally validate the truth and legal reasonableness of the papers filed and
to conduct a reasonable factual investigation. Given that this responsibility cannot be
delegated to another member of the attorney’s firm, it would make little sense that an
attorney somehow can rely on the analysis of attorneys in different actions and who are
presumably from different law firms.”) (internal quotations omitted); Geinko v. Padda, No.
00C5070, 2002 WL 276236, at *6 (N.D. Ill. 2002) (“if this Court were to accept Plaintiffs’
view of pleading fraud, two plaintiffs could file separate actions each relying on the
allegations in the other’s complaint and both would state a claim for fraud. Clearly, Rule 11’s
requirements do not allow this type of pleading loophole.”). This determination does not
prohibit Plaintiffs from amending the CAC to plead that these “facts” have been
independently verified.
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(internal quotations omitted). “Three factors are relevant to this inquiry: (1) the amount and

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percentage of the shares sold; (2) the timing of the sales; and (3) whether the sales were

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consistent with the insider’s trading history.” Id. at 1067.

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Plaintiffs allege that over the Class Period, Peter Sperling sold 21% of his Class A

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shares, John Sperling sold 14% of his Class A shares, Pepicello sold 34% of his shares, and

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D’Amico sold 26% of his shares. (CAC ¶¶ 305-308).

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Plaintiffs allege that these sales were not consistent with the insider trading

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Defendants’ trading history. Peter Sperling’s sales in December 2004 and July 2005 totaled

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less than 232,000 shares. (CAC ¶ 305). During the Class Period, he sold nearly three million

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shares. (Id.). John Sperling sold shares more than twice the number of shares he had sold

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in any previous month. (CAC ¶ 306). Although Pepicello owned stock or currently

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exercisable stock options since August 31, 2005, his first sale was in January 14, 2008.

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(CAC ¶ 307).

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installments on June 15, 2008 and yet his first sale was January 15, 2009. (CAC ¶ 308).

D’Amico’s stock options became vested and exercisable in annual

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Further, Plaintiffs allege that the timing of the insider trading Defendants’ selling was

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unusual because Peter Sperling sold no shares between July 2005 and October 2007, John

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Sperling sold no shares between January 2004 and July 2009, Pepicello first sold shares on

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January 14, 2008, and D’Amico first sold shares on January 15, 2009. (CAC ¶¶ 305-308).

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Plaintiffs further allege that the stock sales are suspicious because they coincided with

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massive stock repurchases by Apollo. (CAC ¶ 309). Plaintiffs allege that the timing of the

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2009 and 2010 sales coincided with Defendants’ knowledge of material, adverse information.

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(CAC ¶ 315).

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When determining whether Plaintiffs have pleaded a strong inference of scienter, the

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Court “must engage in a comparative evaluation; it must consider, not only inferences urged

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by the plaintiff . . . but also competing inferences rationally drawn from the facts alleged.”

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Tellabs, 551 U.S. at 314. Plaintiffs allege that only four of the nine Defendants engaged in

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suspicious stock sales, even though they allege that all Defendants were involved in a

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fraudulent scheme to defraud investors, and the insider trading Defendants only sold 21%,
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14%, 34%, and 26% of their stock respectively.

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“corroborative sales by other defendants” are required to “allow insider trading to support

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scienter.” Metzler, 540 F.3d at 1067; see Ronconi, 253 F.3d at 436 (“[o]ne insider’s well

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timed sales [of 75.3% of his holdings] do not support the ‘strong inference’ required by the

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statute where the rest of the equally knowledgeable insiders act in a way inconsistent with

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the inference that the favorable characterization of the company’s affairs were known to be

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false when made.”).6 Accordingly, these stock sales do not support a strong inference of

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scienter.
2.

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Typically large sale amounts and

Confidential Witness Statements

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A complaint relying on statements from confidential witnesses to establish scienter

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must meet two elements: (1) the complaint must describe the confidential witnesses with

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sufficiency and particularity to establish their reliability and knowledge, and (2) the

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statements, which are reported by confidential witnesses with sufficient reliability and

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personal knowledge, must themselves be indicative of scienter. Zucco Partners, LLC v.

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Digimarc Corp., 552 F.3d 981, 995 (9th Cir. 2009).7

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Plaintiffs assert that they have established scienter because they have pleaded that
Defendants’ bonuses and restricted stock awards were tied to Apollo’s earnings results,
demonstrating that Defendants had a motive to inflate those earnings results. (CAC ¶ 301;
Doc. 76 at 24). While Plaintiffs are correct that “[a] strong correlation between financial
results and stock options or cash bonuses for individual defendants may occasionally be
compelling enough to support an inference of scienter,” where a complaint makes only a bare
assertion that executive-level bonuses are based in part on financial performance and fails
to provide comparisons with prior year bonuses, such “generalized assertions of motive,
without more, are inadequate to meet the heightened pleading requirements” of the PSLRA.
Zucco, 552 F. 3d at 1004-1005. Accordingly, Plaintiffs have not adequately alleged enough
information about the bonuses and restricted stock awards to support a strong inference of
scienter.
7

To the extent that Plaintiffs rely on anonymous internet postings to establish scienter
(CAC ¶¶ 78, 101, 102), the only appreciable difference that the Court can ascertain between
anonymous internet postings and confidential witness statements is that anonymous internet
postings are less reliable than confidential witness statements. Accordingly, with regard to
anonymous internet postings, it is Plaintiffs’ burden to plead reliability and knowledge that
are indicative of scienter to at least the same extent as it must when pleading scienter with
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Defendants do not challenge Plaintiffs’ description of the confidential witnesses, but

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do argue that: (1) the confidential witnesses lack the requisite personal knowledge because

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“all of the [confidential witnesses] are low-level employees with the possible exception of

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CW 10,” and (2) the statements that the confidential witnesses attest to are not themselves

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indicative of scienter.

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The confidential witnesses, their positions with Apollo, and their allegations in the
CAC are as follows:8
CW1 (an Enrollment Manager employed by UOP from March 2008 through
November 2010): Enrollment Managers were evaluated on a “performance
matrix,” seventy percent of which related to enrollments and retention.
Notably, a student was considered “retained” for purposes of this performance
matrix if the student stayed on through only the second set of classes. Prior to
September 2010, Enrollment Managers were given specific enrollment and
retention numbers that they were required to hit. Employees were threatened
(until 2009) with pay decreases for failing to enroll their target number of
students. (CAC ¶¶ 56-57).
CW2 (an Admissions Manager with UOP from March 2003 through June
2010): Enrollment Counselors were expected to enroll 4.5 students per month,
Senior Enrollment Counselors were expected to enroll 6.5 students per month,
and executives were expected to enroll 8.5 students per month. As an
incentive for his recruiters to “hit the numbers,” Mike Bibbe, Vice President
for the Military Division, was known to tape a fake $500 bill in enrollment
counselors’ offices each time they enrolled a student because, according to
CW2, “every registered student was worth $500 on your review.” Many
enrollment counselors would not talk to students about when they would be
required to pay back financial aid loans, or would tell them the loans only had
to be repaid when a student graduated. Consequently, many students took
several years off from school erroneously thinking that the loans would not
become due until they completed their degrees. CW2 heard enrollment
counselors giving inaccurate information on financial aid to prospective
students “on a daily basis.” (CAC ¶¶ 57 & 65).
CW3 (a Fraud Analyst/Examiner for UOP between 2003 and June 2010):
Apollo had a practice and policy of enrolling students “whatever the cost.”
This policy was communicated from senior executive management down
through the ranks of Enrollment and Finance Counselors. (CAC ¶ 60).
CW4 (a Senior Enrollment Advisor): 66% of your performance-based
compensation was based upon how many students you enroll, whether they are

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regard to confidential witness statements. Because Plaintiffs have not pled such reliability
and knowledge with regard to the anonymous internet postings, they do not support a strong
inference of scienter.
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All confidential witness allegations are quoted directly from the CAC.
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good or bad, can read or write, or whatever. It’s all about the hard number of
how many students you enroll. The culture is all about getting students. It’s not
about getting good, quality students as much as it is the number of students.
You can enroll anybody. If they have a heartbeat and a social security
number you can pretty much enroll them. CW4 estimated that
“conservatively speaking at least 60% of UOP students aren’t capable for or
ready for school for a variety of reasons including not being able to type. They
don’t have computers. They don’t have transportation to and from school, and
other reasons.” However, when CW4 raised concerns about a prospect’s
chances of successfully completing the required coursework, CW4 was
essentially told to mind his/her own business. According to CW4, his/her
supervisors would say, “Who are you to judge and say that they are not going
to make it? You let that person start. It’s not your call. If they fill out that
application and they’re approved for financial aid and they make that decision
that’s on them. You’re not responsible for that.” Enrollment counselors were
trained not to take “no” for an answer if a prospective student indicated that he
or she was not interested in attending UOP. Rather, enrollment counselors
were trained – pursuant to the “Overcoming Objections” program – to “make
the person feel bad for not going to school. They wanted you to make them
cry.” CW4’s immediate supervisor, a Director of Enrollment, told CW4, “If
you don’t make that person cry by the time you get off the phone you haven’t
done your job.” Similarly, CW4 stated that UOP trained its sales force on the
“Drive Theory,” pursuant to which enrollment counselors were trained “about
helping the prospect get to their motivation by making them feel bad about
what they didn’t have and getting them to dream about what they do want.” If
a prospect indicated to an enrollment counselor that he or she was not ready
to enroll, the enrollment counselor would say, “Well then you don’t really
want it that bad if you’re not ready to sign up to go to school right now.”
(CAC ¶¶ 60, 61, 74, & 75).
CW5 (a Senior Enrollment Counselor employed by Apollo from January 2007
through April 2010): CW5 was “encouraged not to discourage” students who
indicated an inability to pay from enrolling. In certain instances, CW5 heard
enrollment counselors touting the benefits of “excess funds” – i.e., the amount
of federal financial aid a student could receive over and above the cost of
tuition. CW5 heard other counselors encouraging students to enroll in UOP
because they would receive this money. CW5 heard counselors say things like,
“You don’t have to worry about it financially because aid will take care of the
entire cost and you will have some extra money that will be sent to you,” and
“You can use the money for a new computer or whatever you need to use it on,
that’s fine, always good to have extra money.” Further, CW5 believes that
many enrollment counselors misled prospective students about their liability
to repay excess money, noting that “a lot” of students would call back and say,
“I was told it was a grant not a loan,” when informed that they were required
to repay this excess money. CW5 believed that approximately 35-40% of
students took excess money and then dropped out of school. (CAC ¶ 64).
CW6 (a Campus Accounting Supervisor working for Apollo subsidiary the
Institute for Professional Development (“IPD”) between 2005 and 2009) CW6
said, “A lot of times students expressed to me that they felt that the Enrollment
Counselors had hustled them into the program. They were brought in so
quickly and they didn’t have a clear understanding of the financial
commitment and investment that was going to be needed on their part.”
Further, CW6 noted that students repeatedly told CW6 that many of the details
concerning their financial aid, from financial aid obligations to how the money
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was to be utilized, were not explained to the students clearly or fully. This,
CW6 observed, was evidenced by IPD’s common practice of allowing students
to enroll and start classes before important financial aid paperwork was filled
out or completed. (CAC ¶ 66).
CW7 (a Senior Director of Product Marketing for UOP from November 2008
through February 2010): UOP’s six Regional Vice Presidents had their
respective bonuses structured based on how many people they enrolled, and
how many of those students attended at least three online classes (known
internally at UOP as “3Y”). CW7 believes the sole enrollment goal was to get
a student to stay for three classes. CW7 had multiple conversations with
people on the “academic side” of the school – including high-ranking
educators in the UOP Business School – who expressed their concern that the
practice of enrolling unqualified students was hurting the school’s reputation.
These individuals told CW7 that they were pressured to give students better
grades and to pass students who were not academically meeting the criteria so
that they would not fail out and so UOP could continue to collect money. Bill
Barry, Associate Dean of the Business School, told CW7 about a study he had
done which showed that UOP MBA graduates had inferior skills in
comparison to state school MBA graduates in all tested areas and had failed
miserably compared to their peers. Mr. Barry told CW7 that either Defendant
Pepicello or UOP Provost Adam Honea (CW7 could not recall which) told him
to “bury” the study. When UOP’s “Right Student Initiative” – a plan
designed to recruit more suitable students – led to a decline in enrollment, Rob
Rubell, Chief Marketing Officer and Head of Products, was told in a private
meeting with Defendant D’Amico “to turn the dial back up” – in other words,
to return to the old marketing models that enrolled more, but less qualified,
students. UOP had “created the perfect storm of achieving high enrollment
rate with poor quality students who tended to drop out. They just need to keep
feeding the lead machine.” UOP was run on a regional basis with six Regional
Vice Presidents. The different campuses would “roll up” to the Regional Vice
Presidents on a regional basis. The regions were: Midwest, Southwest,
Western, Mountain Plains, Southwest and Northeast. (CAC ¶¶ 58, 62-63, &
297).

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CW8 (an Accounting Supervisor employed by UOP at its Greenville, South
Carolina campus from 2003 to October 2010, UOP’s Regional Accounting
manager for the South Region): CW8 reported to corporate accounting at
Apollo, and specifically to Defendant Swartz. CW8 and CW8’s colleagues
prepared weekly reports of the campuses’ financial results that were sent to
Swartz. These weekly reports encompassed all accounting aspects of UOP,
including the general ledger, balance sheet and income statement, as well as
information concerning student enrollments, dropouts, refunds to students of
Title IV funds, return to lender amounts, and accounts receivables from
students who had dropped out. This practice of weekly reporting occurred
across all educational segments of Apollo, including WIU and the Institute for
Professional Development. UOP/Apollo’s corporate accounting policy was
to write off these receivables after 90 days if they were not collected, although
oftentimes these receivables would be kept on UOP’s books for 180 days. It
was widely known at the corporate accounting level, including by the Chief
Financial Officer, that collecting on student accounts receivables was
“impossible” whether the receivables were one day old or 180 days old. (CAC
¶ 297)

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CW9 (an Enrollment Counselor in UOP’s Center City, Philadelphia office

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from August 2007 through July 2009): CW9’s supervisor pressured her to
“harass and constantly call” prospective students, leading the UOP to enroll
“people who couldn’t read and/or were homeless.” (CAC ¶ 82).

16

CW10 (left Apollo in July 2010 after serving as a senior-level executive at
WIU since before the beginning of the Class Period, was a member of a
compensation committee comprised of senior executives of Apollo, Apollo
Global, WIU, UOP and IPD; reported directly to the President of WIU, who
in turn reported to the President of Apollo (Mueller until June 2008, and
thereafter D’Amico)): WIU’s compensation scheme was virtually the same as
UOP’s and consisted of a performance matrix that rewarded Enrollment
Advisors based primarily on the number of students that were enrolled and the
retention rate of students. The compensation packages outlined in the matrix
were issued and approved at the Apollo corporate level, and CW10 indicated
that defendant D’Amico “lent direction to the compensation committee and
approved all performance based compensation packages throughout all of
[Apollo’s] structure from the time he came on as President.” The
compensation program and performance matrix were not changed following
Apollo’s 2004 settlement with the DOE, and Apollo continued to compensate
its Enrollment Advisors primarily based on the number of students enrolled
and the retention rate. It was not until 2010, when the government was
considering new rules to govern for-profit schools, that Apollo began to
change its compensation system, although no new program was implemented
before CW10 left WIU in July 2010. Defendant D’Amico approved the
Company’s compensation system while financial and compliance issues were
handled at the Apollo corporate level by Defendants Edelstein, Cappelli,
D’Amico, and a few other individuals. CW10 characterized Apollo as a “very
tight organization” where “[t]he people who really tell you what to do and are
developing what the company is are confined to a small group and it’s a men’s
club, a close-knit group that works very closely and tightly with each other.”
(CAC ¶¶ 59 & 298).

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The CAC suggests that CW1’s statements regarding the compensation of enrollment

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managers shows that Defendants knew of “clear restrictions on tying compensation to

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enrollment, and despite having been caught and severely penalized for violating those

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restrictions [Apollo] continued to evaluate and compensate its ‘Enrollment Managers’ based

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chiefly on the number of student they were able to enroll.” (CAC ¶ 56). As the Court noted

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above, Plaintiffs appear to have withdrawn their argument that Apollo was violating

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restrictions on tying compensation to enrollment during the Class Period. Accordingly,

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CW1’s statements do not support a strong inference of scienter. To the extent that CW2,

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CW4, and CW10 also discuss compensation practices for enrollment managers, their

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statements likewise do not support a strong inference of scienter.

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CW2 and CW5 also heard enrollment counselors giving inaccurate financial aid

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advice to prospective students. CW6 reports students complaints that they did not clearly
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understand their financial aid obligations. CW9 complains that her supervisor pressured her

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to constantly call and harass prospective students. The Court finds that these statements do

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not support a strong inference of scienter. None of these Confidential Witnesses actually

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indicate any scienter on Defendants’ parts. If Plaintiffs seek to establish scienter through an

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assumption that Defendants knew what their employees knew, this is inadequate. See Zucco,

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552 F.3d at 998 (even conclusory assertions about defendant’s scienter are usually

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insufficient, standing alone, to adequately allege scienter “since they fail to establish that the

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witness reporting them has reliable personal knowledge of the defendant’s mental state.”).

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Similarly, to the extent CW8 suggests that it was widely known at the corporate accounting

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level that “collecting on student accounts receivables was ‘impossible’ whether the

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receivables were one day old or 180 days old,” Plaintiffs assert no basis as to CW8’s

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personal knowledge.

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Because CW3’s assertion that “Apollo had a practice and policy of enrolling students

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‘whatever the cost’” is conclusory, it likewise does not support a strong inference of scienter.

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Only CW7 and CW8 actually allege scienter on the part of Defendants. However,

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CW7’s information, as alleged, seems to be only based on hearsay. “[A] hearsay statement,

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while not automatically precluded from consideration to support allegations of scienter, may

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indicate that a confidential witnesses’ report is not sufficiently reliable, plausible, or coherent

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to warrant further consideration.” Zucco, 552 F.3d at 998. Accordingly, CW7’s statements

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do not support a strong inference of scienter. Because CW8 has personal knowledge of

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Apollo’s corporate accounting policy regarding receivables and CW8 actually alleges

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scienter on the part of Defendants, his statements support an inference of scienter.

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3.

Alleged GAAP Violations

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To allege a strong inference of scienter for a violation of GAAP, Plaintiffs must allege

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that Defendants knowingly and recklessly engaged in improper accounting practices.

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Metzler, 540 F.3d at 1068-69.

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Plaintiffs allege that,

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Defendants violated ASC No. 450 by Apollo’s failure to take immediate and
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adequate allowances for the receivables from students who withdrew from
school, including those whose Title IV funds were returned by Apollo, as
Defendants knew from the outset that it was probable that those amounts
would not be collected, and the amount of loss could be reasonably estimated
based on, inter alia, Apollo’s historic collections experience.

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(CAC ¶ 129). Plaintiffs only provide conclusory assertions that Defendants “knew” they

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would not be able to collect certain amounts. This does not support a strong inference of

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scienter. Moreover, knowledge regarding GAAP violations would not raise a strong

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inference of scienter with regard to the other four categories of misrepresentations that

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Plaintiffs claim Defendants engaged in throughout the Class Period.

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Taking all of Plaintiffs’ allegations of scienter as a whole, the Court finds that

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Plaintiffs have failed to adequately plead the required strong inference of scienter. Although

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the Court can dismiss the CAC based on Plaintiffs’ failure to adequately plead scienter, the

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Ninth Circuit Court of Appeals has instructed that Courts should provide Plaintiffs guidance

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when granting leave to amend. Accordingly, the Court will also analyze whether Plaintiffs

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have adequately pleaded loss causation.

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B.

Loss Causation Pleading

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“To prove loss causation, the plaintiff must demonstrate a causal connection between

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the deceptive acts that form the basis for the claim of securities fraud and the injury suffered

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by the plaintiff.” Ambassador Hotel Co., Ltd. v. Wei-Chuan Inv., 189 F.3d 1017, 1027 (9th

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Cir. 1999). “The complaint must allege that the practices that the plaintiff contends are

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fraudulent were revealed to the market and caused the resulting losses.” Metzler, 540 F.3d

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at 1063.

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The Court notes, at the outset, that Plaintiffs have alleged a series of fraudulent

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practices engaged in by Defendants as described above. Plaintiffs then alleged a series of

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corrective disclosures that allegedly revealed these fraudulent practices to the market.

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However, Plaintiffs have made little to no attempt to link specific fraudulent practices to

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specific corrective disclosures. Instead, Plaintiffs have left it to the Court to puzzle together

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which fraudulent practices were revealed through which corrective disclosures.

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Plaintiffs claim that a series of seven disclosures slowly revealed Defendants’
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fraudulent practices to investors.9 First, Plaintiffs fail to adequately plead loss causation with

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regard to the March 2009 earnings press release because they do not assert the necessary

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causal link between Defendants’ fraudulent practices and those practices becoming generally

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known to the market. Instead, the CAC admits that “these manipulative practices were still

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unknown to investors” at the time of the disclosure. The CAC alleges that the manipulative

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practices themselves caused the financial results that Apollo was reporting.

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To prove loss causation, Plaintiffs must show that the market learned of and reacted

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to the fraudulent practices, not just that the alleged fraudulent practices were manifesting

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themselves in the reports of Defendants’ poor financial health. See Metzler, 540 F.3d at 1063

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(the complaint should show that “the market learned of and reacted to this fraud, as opposed

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to merely reacting to reports of the defendant’s poor financial health generally.”). Although

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Plaintiffs are correct that there is no prohibition against alleging loss causation through a

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series of disclosures, Plaintiffs must still show how each individual disclosure revealed at

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least some fraudulent conduct to the market and caused the resulting loss. The Court finds

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that Plaintiffs have failed to allege loss causation for the March 2009 earnings press release.

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Plaintiffs’ second alleged corrective disclosure is the October 27, 2009 earnings press

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release that revealed that the SEC had begun an informal inquiry into the Company’s revenue

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recognition policies.

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announcement of an SEC investigation, without subsequent events that reveal fraudulent

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practices, is not sufficient to plead loss causation.” (Doc. 89 at 22-23). While there is a split

Defendants argue that “a stock price drop in response to the

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9

Although the CAC implies that these seven disclosures are only “some of the
disclosures and events that have revealed, at least in part, the false and misleading nature of
Defendants’ public statements during the Class Period, and the true nature of the risks facing
Apollo” (CAC ¶ 251), Plaintiffs’ burden to plead loss causation necessarily means that they
must plead all facts upon which they are basing their allegations. Accordingly, the Court will
assume that these seven statements are the only basis for which Plaintiffs can prove loss
causation.
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1

of authority among district courts10 with regard to whether the announcement of an

2

investigation is sufficient to plead loss causation, the Court finds that, at this stage in the

3

litigation, if Plaintiffs were able to adequately allege underlying facts and scienter of

4

misrepresentations or omissions that eventually led to this disclosure, the allegations related

5

to the October 27, 2009 would be sufficient to establish loss causation.

6

More specifically, the October 27, 2009 earnings press release stated that the SEC was

7

conducting an informal inquiry into Apollo’s revenue recognition practices.

This

8

information could signal to a reasonable investor that there were improprieties in Apollo’s

9

revenue recognition practices, leading to a market reaction causing the stock price to drop

10

17.7%. See In re Take–Two, 551 F.Supp.2d 247, 287 (S.D.N.Y. 2008) (finding allegation

11

of 7.5% drop in share price sufficient, stating that “[o]ther courts have found that similar

12

allegations of significant stock drops in response to announced SEC investigations are

13

sufficient to plead loss causation under the framework established by Dura and its progeny”).

14

Plaintiffs have pleaded that improprieties in Apollo’s revenue recognition practices were the

15

result of Defendants’ fraud and the announcement of the SEC inquiry put investors on notice

16

of those improprieties. Accordingly, if Plaintiffs were able to adequately allege underlying

17

facts and scienter of misrepresentations or omissions that eventually led to this disclosure,

18

the allegations related to the October 27, 2009 would be sufficient to establish loss causation.

19
20
21
22
23
24
25
26
27
28

10

Compare In re StockerYale, 453 F.Supp.2d 345, 359 (D.N.H. 2006) (finding that
where Plaintiffs alleged that shares dropped 15% per share on the day SEC announced
investigation into accuracy of press releases and shares dropped $0.84 per share in afterhours trading when public was informed of the SEC investigation by means of a Form 8k,
a causal connection was established between the release of corrective information and the
decline in the price of shares) with In re Maxim Integrated Prods., Inc. Secs. Litig., 639
F.Supp.2d 1038, 1047 (N.D. Cal. 2009) (finding that disclosures regarding compliance with
an SEC investigation, subpoenas from the United States Attorney's office, and the formation
of a Special Committee to investigate options granting practices did not indicate anything
more than a risk or potential that Defendants engaged in widespread fraudulent conduct and
thus could not be considered corrective disclosures for the purpose of pleading loss
causation).
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1

Plaintiffs’ third alleged corrective disclosure is the January 7, 2010 press release

2

revealing that Apollo had received a preliminary Program Report from the Department of

3

Education (“DOE”). The report contained “six findings and one concern regarding the

4

Company’s financial aid policies.” The Court finds that if Plaintiffs were able to adequately

5

allege underlying facts and scienter of misrepresentations or omissions that eventually led

6

to this disclosure, the allegations related to the January 7, 2010 disclosure would be sufficient

7

to establish loss causation. Similar to the disclosure revealing the SEC investigation,

8

findings of the Department of Education that Apollo was improperly carrying out its financial

9

aid policies could lead to a market reaction causing the stock price to drop 5.4%. Plaintiffs

10

have pleaded that Apollo failed to timely return Title IV funds as a result of its delayed

11

recognition of student withdrawals and Defendants made representations stating that they had

12

corrected such problems when they had not. Plaintiffs’ assertion that investors were put on

13

notice of these practices by the announcement of the DOE report sufficiently establishes a

14

plausible causal link. The Court finds that the same analysis applies to the June 21, 2010

15

disclosure and the August 6, 2010 disclosure and thus, if Plaintiffs were able to adequately

16

allege underlying facts and scienter of misrepresentations or omissions that eventually led

17

to those disclosures, the allegations related to those disclosures would be sufficient to

18

establish loss causation.

19

Plaintiffs allege that a series of disclosures from August 3, 2010 through August 4,

20

2010 that revealed an undercover investigation conducted by the Government Accountability

21

Office (“GAO”) revealed Defendants’ fraud with regard to deceptive marketing and

22

recruiting practices.

23

investigated, and revealed widespread use of fraudulent and deceptive marketing practices

24

to attract students. The GAO report did not reveal that any Apollo schools were part of the

25

investigation. To the extent that Plaintiffs rely on the August 3, 2010 leaking of the GAO

26

report, the Court finds that Plaintiffs have failed to establish a causal connection between

27

Defendants’ alleged fraud and any actual loss. Plaintiffs have not sufficiently alleged facts

28

showing how the fact that for-profit schools were being investigated was understood by the

The GAO report revealed that fifteen for-profit schools were

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1

market as realization of fraud being conducted by Defendants at Apollo. See Metzler, 540

2

F.3d 1064 (where Plaintiffs asserted that a disclosure made investors realize that there were

3

fraudulent practices at one of Defendants’ schools, the Court held Plaintiffs had failed to

4

assert enough facts showing that the market was alerted to Defendants’ widespread fraud).

5

Plaintiffs allege that, on August 4, 2010, a GAO official testified that two UOP

6

campuses were among the fifteen schools described in the Report. Plaintiffs fail to allege

7

which specific allegations from the report revealed Defendants’ fraud to the market. Without

8

knowing which allegations Plaintiffs specifically allege caused investors to become aware

9

of Defendants’ fraud, the Court finds it impossible to analyze these statements for a causal

10

connection. If Plaintiffs choose to amend the CAC with these allegations, they should

11

specify both the information revealed to the market and the misrepresentations by Defendants

12

that the information revealed to be fraudulent.

13

Further, Defendants argue that there were significant errors in the GAO report

14

regarding what campus representatives at Apollo actually said. Although the Court must take

15

what Plaintiffs allege in the CAC as true, to adequately assert a causal connection between

16

Defendants’ alleged fraud and that fraud being revealed to the market, Plaintiffs must

17

identify the true fraudulent activities at Apollo that were revealed to the market. If the GAO

18

Report incorrectly revealed fraudulent activities to the market that Defendants were not

19

actually engaged in, those false reports cannot possibly have revealed a real fraud to the

20

investors.

21

Even if Plaintiffs had adequately alleged a causal connection between specific

22

portions of the original GAO Report and Defendants’ fraud, Plaintiffs have failed to

23

adequately explain how the revisions to the report affect the loss causation analysis. Instead

24

of demonstrating to the Court that the revisions to the GAO Report do not change the

25

analysis and citing to the specific statements that would suffice to establish a causal

26

connection between the original release of the GAO Report and Defendants’ alleged fraud,

27

Plaintiffs cite to a GAO spokesman’s statement regarding the revised report that “[n]othing

28

changed with the overall message of the report, and nothing changed with any of our
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1

findings” and a statement by a spokesman for Senator Harkin “that the revisions ‘do not

2

change the substance of the report’ or its conclusions that the for-profit schools at issue ‘used

3

deceptive or fraudulent recruiting techniques to enroll new students.’” (CAC ¶ 272).

4

Plaintiffs fail to assert their own theory as to how the specific statements actually made by

5

Defendants affected the market and how those statements revealed Defendants’ fraud to the

6

market. To adequately allege loss causation, Plaintiffs must link specific acts by Defendants

7

to a specific revelation to the market. The spokesmens’ statements do not aid the Court in

8

determining whether such a link exists. Accordingly, the Court finds that Plaintiffs have

9

failed to establish loss causation for the August 3, 2010 and August 4, 2010 disclosures.

10

Plaintiffs allege that the August 13, 2010 DOE release of data showing that the

11

repayment rates for students at UOP was only at 44%, below the 45% threshold required by

12

proposed gainful-employment rules and the DOE’s announcement that it was increasing its

13

enforcement staff and would be conducting more investigations generally revealed

14

Defendants’ fraud to the market. While it is unclear in the CAC what fraud this revealed to

15

the market, in their Opposition to the Motion to Dismiss, Plaintiffs assert that this revealed

16

to the market that “overly-aggressive and deceptive marketing practices in enrolling students

17

at any cost were rampant throughout the for-profit college industry.” (Doc. 76 at 32-22).

18

The Court finds that Plaintiffs have not sufficiently alleged facts showing how Apollo’s

19

repayment rates or the DOE’s staffing were understood by the market as a realization of

20

fraud being conducted by Defendants. Accordingly, Plaintiffs have failed to establish loss

21

causation for the August 13, 2010 disclosure.

22

Plaintiffs allege that the October 13, 2010 press release reporting declining

23

enrollment, slowing revenue growth, increased regulatory scrutiny, and implementation of

24

new initiatives revealed to the market “previously undisclosed fraudulent and deceptive

25

practices by Apollo and its peers in the for-profit education industry, and the increased

26

regulatory scrutiny that those revelations engendered.” (CAC ¶ 277). The revelation that

27

Plaintiffs point to is a conclusion, not a fact. “[W]hile the court assumes that the facts in a

28

complaint are true, it is not required to indulge unwarranted inferences in order to save a
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1

complaint from dismissal.” Metzler, 540 F.3d at 1064-65. It is Plaintiffs’ burden to link the

2

market reaction to a disclosure with Defendants’ alleged fraudulent behavior revealed in that

3

disclosure. Plaintiffs have failed to meet that burden with regard to the October 13, 2010

4

press release.

5

The practical result of the Court’s loss causation analysis is that, even if Plaintiffs had

6

alleged facts proving scienter, Plaintiffs have only adequately pleaded loss causation with

7

regard to two of the categories of § 10(b) and 10(b)-5 violations asserted in its CAC, i.e.

8

statements regarding Apollo’s financial condition and compliance with Title IV. Plaintiffs

9

have failed to establish loss causation for violations relating to Apollo’s business focus,

10

ethics, and compensation and recruitment practices.

11

Accordingly, because Plaintiffs have failed to adequately plead a strong inference of

12

scienter and have failed to plead loss causation with regard to three categories of 10(b)

13

misrepresentations, the Court finds that Count I of the CAC should be dismissed.

14

V.

COUNT II

15

In Count II, Plaintiffs allege that, during the Class Period, Defendants John Sperling,

16

Peter Sperling, Joseph D’Amico, Gregory Capelli, Charles Edelstein, Brian Swartz, Brian

17

Mueller, and Gregory Iverson violated § 20(a) of the Exchange Act because each was a

18

controlling person who had direct and supervisory involvement in day-to-day operations of

19

Apollo and, as such, each is jointly and severally liable for the violations of § 10(b) and § 10

20

(b)5 of the Exchange Act described in Count I.

21

Pursuant to § 20(a) of the Exchange Act:

22

25

(a) Every person who, directly or indirectly, controls any person liable under
any provision of this title or of any rule or regulation thereunder shall also be
liable jointly and severally with and to the same extent as such controlled
person to any person to whom such controlled person is liable (including to the
Commission in any action brought under paragraph (1) or (3) of section 21(d)),
unless the controlling person acted in good faith and did not directly or
indirectly induce the act or acts constituting the violation or cause of action.

26

Because the Court has found that Plaintiffs have failed to adequately allege violations

27

of 10(b) and § 10(b)5, Plaintiffs have necessarily failed to establish a violation of § 20(a) of

28

the Exchange Act. Accordingly, Count II should be dismissed.

23
24

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1

VI.

COUNT III

2

Pursuant to Rule 20a of the Exchange Act,

3

6

Any person who violates any provision of this chapter or the rules or
regulations thereunder by purchasing or selling a security while in possession
of material, nonpublic information shall be liable in an action in any court of
competent jurisdiction to any person who, contemporaneously with the
purchase or sale of securities that is the subject of such violation, has
purchased (where such violation is based on a sale of securities) or sold (where
such violation is based on a purchase of securities) securities of the same class.

7

When Plaintiffs have failed to allege an independent violation of the Exchange Act, they

8

cannot maintain a claim under § 20a. In re Verifone Securities Litigation, 11 F.3d 865, 872

9

(9th Cir. 1993). Accordingly, Count III should be dismissed.

4
5

10

VII.

LEAVE TO AMEND

11

In the event of dismissal, Plaintiffs have requested leave to amend the CAC. (Doc.

12

76 at 7). In response, Defendants argue that “any amendment ‘would be an exercise in

13

futility.’” (Doc. 89 at 25).

14

The Ninth Circuit has instructed district courts to grant leave to amend, sua sponte,

15

when dismissing a case for failure to state a claim, “unless the court determines that the

16

pleading could not possibly be cured by the allegations of other facts.” Lopez v. Smith, 203

17

F.3d 1122, 1127 (9th Cir. 2000) (quoting Doe v. United States, 58 F.3d 494, 497 (9th Cir.

18

1995)). The Court cannot say that the CAC could not possibly be cured by the allegations

19

of other facts. Therefore, Plaintiffs’ request for leave to amend will be granted.

20

However, in amending the CAC, Plaintiffs should carefully evaluate the allegations

21

therein and be clear and concise in identifying the false statements and articulating the factual

22

allegations supporting an inference that the statement is false or misleading. In addition to

23

the guidance the Court has provided to Plaintiffs throughout this Order, Plaintiffs should

24

streamline their arguments, delete duplicate allegations, and carefully align each alleged false

25

statement with the facts supporting that statement and the corrective disclosures connected

26

to that statement. Further, to the extent that Plaintiffs rely on facts that occurred before and

27

after the start of the Class Period, Plaintiffs should be careful to assert why those facts are

28

relevant to Plaintiffs’ claims for the Class Period as Defendants may only be held liable for
- 29 -

1

statements made during the Class Period. Teamsters Local 617 Pension and Welfare Funds

2

v. Apollo Group, Inc., No. CIV 06-02674-PHX-RCB, 2011 WL 1253250, at *32 (D. Ariz.

3

March 31, 2011) (noting that it is appropriate to strike statements in the Complaint made

4

before or after the Class Period because they are irrelevant and cannot serve as a basis for

5

liability as a matter of law).

6

Accordingly,

7

IT IS ORDERED granting Defendants’ Motion to Dismiss (Doc. 69);

8

IT IS FURTHER ORDERED granting in part and denying in part Defendants’

9
10
11
12
13

Request for Judicial Notice (Doc. 69-1; Doc. 92) consistent with the terms of this Order;
IT IS FURTHER ORDERED granting in part and denying in part Plaintiffs’
Request for Judicial Notice (Doc. 78) consistent with the terms of this Order;
IT IS FURTHER ORDERED denying Defendants’ Motion to Strike Portions of the
Motion to Dismiss (Doc. 71) as moot;

14

IT IS FURTHER ORDERED that Plaintiffs are granted leave to amend and shall

15

file an amended complaint within thirty days of the date of this Order. If Plaintiffs fail to file

16

an amended complaint within thirty days, the Clerk of Court must, without further notice,

17

enter a judgment of dismissal of this action.

18

DATED this 27th day of October, 2011.

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