Tarapara v. K12 Inc. et al

Filing 64

ORDER by Judge Hamilton granting in part and denying in part 40 Motion to Dismiss. (pjhlc1, COURT STAFF) (Filed on 8/30/2017)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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BABULAL TARAPARA, et al.,

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v.

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K12 INC., et al.,

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Case No. 16-cv-4069-PJH

Plaintiffs,

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ORDER GRANTING MOTION TO
DISMISS IN PART AND DENYING IT IN
PART

Defendants.

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United States District Court
Northern District of California

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Defendants’ motion to dismiss the above-entitled action pursuant to Federal Rule

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of Civil Procedure for failure to state a claim came on for hearing before this court on

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April 19, 2017. Plaintiffs appeared by their counsel Kevin Ruf and Leanne Solish, and

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defendants appeared by their counsel Allen Makins, Marshall Wallace, Peter Wald, and

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Stephen Barry. Having read the parties’ papers and carefully considered their arguments

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and the relevant legal authority, the court hereby GRANTS the motion.

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BACKGROUND
This is a proposed class action, alleging securities fraud in violation of § 10(b) of

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the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, and

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control-person liability under § 20(a). Defendants are K12 Inc. ("K12"), Ronald J.

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Packard ("Packard"), Nathaniel ("Nate") A. Davis ("Davis"), James J. Rhyu ("Rhyu"), and

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Timothy L. Murray ("Murray"). Plaintiffs allege that they purchased shares of K12 stock

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during the proposed Class Period (October 10, 2013 to October 27, 2015). Consolidated

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Amended Class Action Complaint (“CAC”) ¶¶ 1, 23-24.

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Defendant K12 provides technology-based educational products and solutions to

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public school districts, public schools, virtual (i.e., on-line) charter schools, and families

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(for home schooling). CAC ¶¶ 25, 37. Defendant Packard was the Chief Executive

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Officer ("CEO") of K12 from 2000, when he founded the company, until December 31,

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2013, when he resigned. CAC ¶ 26. He also served as the Executive Chairman of K12

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from 2000 to 2007, and was a director from 2000 to June 13, 2014. CAC ¶ 26.

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Defendant Davis was Chairman and CEO of K12 from January 1, 2014, until he

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relinquished that position on February 8, 2016. CAC ¶ 28. He has also been a K12

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director since July 2009, was named as Chairman in June 2012, and Executive Chairman

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in January 2013. CAC ¶ 28. After relinquishing his role as CEO, he returned to his

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Executive Chairman role in February 2016. CAC ¶ 28.

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Defendant Rhyu is a Certified Public Accountant, and has been Chief Financial
Officer ("CFO") and Executive Vice President of K12 since June 2013. CAC ¶ 30.

United States District Court
Northern District of California

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Defendant Murray joined K12 in April 2012 as its President and Chief Operating

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Officer ("COO"). CAC ¶ 32. He resigned from his position at K12 in September 2015,

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after which he continued to provide "transition services" for a period of up to six months

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pursuant to a consulting agreement. CAC ¶ 32.

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As reflected in its Fiscal Year (“FY”) 2014 Form 10-K, K12 operates through three

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"business segments" – (1) "Managed Public Schools,” described as “turn-key

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management services sold to public schools on a contractual basis;" (2) "Institutional

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Sales,” described as “educational products and services sold à la carte to school districts,

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public schools, and other educational institutional systems that K12 did not manage, such

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as its Fuel Education or 'FuelEd' services;" and (3) "International and Private Pay

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Schools,” described as “private schools for which K12 charged tuition and made direct

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consumer sales." CAC ¶ 38.

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According to plaintiffs, the Managed Public Schools comprised the vast majority of

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K12's revenues during the proposed Class Period – approximately 85%. CAC ¶ 42. In a

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K12 Managed Public School, a local school board contracts with K12 to provide all

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aspects of school management, including creating and implementing the academic plan;

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monitoring academic achievement; recruiting and training teachers; marketing the

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program and enrolling students; recommending compensation for school personnel;
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implementing student support services; providing financial and regulatory support; and

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procuring curriculum, computers, and other required services and equipment. CAC ¶ 43.

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Funding for Managed Public Schools is provided by state governments, generally

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on a per-pupil basis. CAC ¶ 44. In the 2013-2014 school year, K12 operated Managed

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Public Schools in 33 states and the District of Columbia; in the 2014-2015 school year,

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K12 operated "Managed Public Schools" in 32 states and the District of Columbia. CAC

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¶ 43.

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Plaintiffs allege that K12 encountered problems with operating its online schools –

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in particular, the Agora Cyber Charter School ("Agora"), the Tennessee Virtual Academy,
the California Virtual Academies, and the Colorado Virtual Academy (which ended its

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Northern District of California

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relationship with K12 shortly before the start of the proposed Class Period).

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Agora, based in Pennsylvania, has a charter granted by the Pennsylvania

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Department of Education (“PDE”). See CAC ¶¶ 121, 126. Plaintiffs allege that Agora

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was K12’s largest revenue-providing school both before and during the proposed Class

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Period. CAC ¶ 120. In K12’s FY 2010, the Agora contract allegedly accounted for more

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than 10% of K12’s revenues; in FY 2011 through FY 2015, Agora allegedly accounted for

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approximately 13-14% of K12’s revenues; and in its Form 10-K for FY 2013 and FY 2014,

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K12 indicated that a change in its contract with Agora could adversely affect the

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Company’s business, financial condition, and results of operation. CAC ¶ 120.

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In May 2006, Agora’s founder signed a management contract with K12, pursuant

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to which K12 would receive 15% of Agora’s qualified gross revenues in exchange for

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managing the school. CAC ¶ 122. In the spring of 2009, after receiving complaints from

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parents of Agora students, the PDE conducted an audit of Agora, and subsequently

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informed Agora that it would no longer pay any funds into the school’s operating account,

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and further advised Agora that it had violated its charter and bylaws. CAC ¶ 123. In

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June 2009, the PDE issued a notice of revocation of Agora’s charter. CAC ¶ 123.

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At some point litigation ensued between Agora’s founder and the Agora Board (not

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entirely clear from the allegations in the CAC), and following that litigation, “it was agreed
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that a replacement Agora Board would be appointed.” CAC ¶ 124; see also CAC ¶¶ 123,

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125. The new Board submitted a charter renewal application. CAC ¶ 135. K12 entered

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into a new management agreement with Agora on November 12, 2009, following the

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PDE’s approval of the renewal application. See CAC ¶ 135.
This agreement, which took effect on July 1, 2010, provided for automatic renewal

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on June 30, 2015 unless either party notified the other no later than 18 months prior to

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that date (or no later than January 1, 2014). See CAC ¶ 136; Exh. A to Declaration of

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Steven Barry in Support of Motion to Dismiss ("Barry Decl."), ¶ 5.1 (“This Agreement . . .

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will terminate on June 30, 2015 (“Initial Term”) unless sooner terminated under Section
12 of this Agreement.”); id. ¶ 5.2 (“Following the Initial Term, this Agreement will

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Northern District of California

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automatically extend for successive additional periods of three (3) year(s) . . . , unless (a)

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either party provides the other with written notice of non-renewal at least eighteen (18)

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months before the expiration of the then-current Initial Term or Renewal Term (as

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applicable); or (b) the Agreement is sooner terminated under Section 12.”).
Three years before the notice deadline, the Agora Board sent K12 a “notice of

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non-renewal” dated June 28, 2012, advising that it was “invoking the notice clause

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[¶ 5.2]” and giving “Notice of Non-Renewal.” CAC ¶¶ 136-137; Exh. B to Barry Decl.

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K12 did not publicly report at that time that it had received the notice of non-renewal from

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Agora.1 The parties allegedly continued to negotiate the terms of a future relationship,

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with the possibility that K12 would provide unbundled educational content and support

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services while Agora itself assumed management duties. See CAC ¶¶ 144-150.
K12 used Scantron Performance Series® Tests (“Scantron tests”) to measure

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student learning and the performance of schools it managed, claiming that it was a

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In their motion to dismiss, defendants allege that on November 8, 2012, the Agora
Board sent K12 a second letter to “clarify” that its prior “letter was not intended to suggest
that Agora . . . intend[ed] to disassociate itself from K12,” but “simply to fulfill the notice
requirement contained in the [existing] Education[] Services Agreement.” Exh. C to Barry
Decl. However, defendants assert, the Agora Board also indicated its interest in
“begin[ning] negotiations with K12 regarding the provision of educational services after
the expiration of the current [contract].” Id. These allegations do not appear in the CAC,
and the court does not take them into account in considering the facts as pled.
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common measuring tool for a student’s academic growth in a school year across states.

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CAC ¶ 59. Math and reading tests were administered at the start and end of each school

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year “to provide a common measure of academic achievement across all K12-managed

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public schools, since testing varies from state to state.” CAC ¶¶ 59, 66. K12 also

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compared its aggregate results to the mean “gains” of Scantron’s national norm group –

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approximately 600,000 students. CAC ¶¶ 59-66. The results of the Scantron tests were

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reported to investors and the public in K12’s “Academic Reports.” CAC ¶¶ 60-61, 65-67.

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In February 2013, K12 issued its first annual Academic Report, reporting results
from the 2011-2012 school year. CAC ¶ 60. In a press release published on February 7,

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2013, K12 announced the results of the 2013 Academic Report, calling the results for the

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Northern District of California

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2011-2012 school year “solid,” and highlighting K12’s investment in improving academic

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outcomes, asserting that “[t]o date, K12 has invested more than $330 million in innovative

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curriculum, technology, learning systems, and teacher training and support[.]” CAC ¶ 61.

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On March 20, 2014, K12 released its 2014 Academic Report, highlighting

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academic results for the 2012-13 school year. In the accompanying press release, Davis

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stated “that by publishing this Academic Report K12 is continuing its commitment to

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accountability and transparency.” CAC ¶ 63. K12’s Chief Academic Officer was quoted

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as stating that “the results of the Scantron tests and many of the state-adopted growth

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measure assessments show a more positive picture on student learning.” CAC ¶ 65.

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The 2014 Academic Report claimed that Scantron provided a more accurate

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measure of student progress and academic growth than state tests administered to all

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students. CAC ¶ 65. It also included an analysis of student performance on the

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Scantron tests in reading and mathematics, administered to students in grades 3-8 in the

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fall and spring of the 2012-13 school year, and indicated that in the 2012-13 school year,

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K12 Managed Public Schools achieved a 125% norm group gain in reading and a 102%

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norm group gain in mathematics across all grades. CAC ¶ 66.

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K12 noted that the percentage of participation in Scantron tests for both fall and
spring administration was 86% for reading and 87% for mathematics. CAC ¶ 67.
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However, plaintiffs allege, the remaining 13-14% of students were more academically at-

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risk; and in addition, because results included only students who were present in both the

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fall and the following spring, it excluded the most mobile students, who, according to K12,

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generally performed worse academically. CAC ¶ 67.

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Plaintiffs claim that during a February 4, 2014 earnings call, Davis gave misleading

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answers to questions about Agora. CAC ¶¶ 203, 205. Davis was asked for a general

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update on state issues, including legislation, and for an update on “Pennsylvania.” CAC

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¶ 203. Plaintiffs assert that there was an “issue” in Pennsylvania at that time, as the

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Agora Board had informed K12 in mid-2012 that it did not intend on renewing its contract
with K12. CAC ¶ 203. However, instead of mentioning Agora, Davis discussed

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Northern District of California

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"Pennsylvania" legislation in general terms – i.e., stating that “[i]t’s always difficult to

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predict what a legislature is going to do and what’s going to happen. Of course the

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Pennsylvania legislation has some proposals in it that would affect us negatively. . . . So

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I can’t handicap it and tell you that in fact it’s going to happen or isn’t going to happen.”

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See CAC ¶ 203.

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In April 2014, the National Collegiate Athletic Association ("NCAA"), which

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regulates eligibility to play in NCAA Division I or II sports in college, in part based on

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coursework to ensure that students are actually learning, announced that it would no

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longer be accepting coursework previously completed by prospective student-athletes at

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24 K12-operated schools, including 14 schools in California, and also including Agora.

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CAC ¶ 151. Plaintiffs assert that K12’s response was to blame the NCAA for changing its

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rules to require student-teacher interaction, while failing to provide any standard by which

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student-teacher interaction could be measured. CAC ¶ 152.

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In an earnings conference call on April 29, 2014, held to discuss K12’s quarterly

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financial results, defendants were asked to “spend a minute on Pennsylvania as we move

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into the potential renewal on that contract.” CAC ¶ 205. Davis responded,

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[W]e will file this year and next year in 2015, and then we will
seek an approval for our Agora school. That approval is
something we continue to work on. We negotiate a new

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service contract and then they will get a charter renewal
process going in the state of Pennsylvania. . . .
We watch what others are doing as they go through the
process and make sure that our service contracts will be
compliant with everything that the state wants. I think we are a
good partner for Agora, and I think they are happy with what
we have done.

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CAC ¶ 207. Davis did not mention that the Agora Board had informed K12 almost two

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years earlier that it intended not to renew the management contract. CAC ¶ 208.

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On June 24, 2014, the Agora Board issued a request for proposals (“RFP”) for

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online education services and materials, and invited vendors (including K12) to submit

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bids. CAC ¶ 147. Two days later, after the market closed on June 26, 2014, K12 issued
a press release reporting the Agora RFP, noting that K12 was looking forward to

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Northern District of California

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“providing robust submissions for the provision of educational services, products, and

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curriculum.” CAC ¶ 154. K12 implied that the RFP process was necessary for the

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school’s charter renewal. CAC ¶ 154 ("We are confident that this process will lead to an

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even stronger application to the PDE for the renewal of the school's charter.").

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This June 26, 2014, announcement "partially revealed that the Agora Board was

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considering different arrangements for the services and products required to run Agora

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for the 2015-2016 and later school years, and thus that there was a chance of K12 losing

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a significant amount of revenue in the future.” CAC ¶ 275. It appears that as of this date,

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K12 still had not fully disclosed to investors that Agora had sent the notice of non-renewal

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in June 2012. On June 27, 2014, K12's stock price fell approximately 5% to close at

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$24.32. CAC ¶ 274.

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On August 14, 2014, in a conference call with investors and Wall Street analysts,

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held to discuss K12's quarterly and fiscal year financial results for the year ended June

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30, 2014, Davis responded to a request for an “update on Agora.” CAC ¶¶ 155-156. He

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stated that "Agora did have one Board meeting where they made some decisions and

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indicated a clear interest to be a self-managed organization." CAC ¶ 156. There is no

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indication, however, that he disclosed that Agora had advised K12 of its intention to

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terminate the management contract, or that it would no longer contract for management
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services from K12 or any other vendor.
During the same conference call, Davis addressed an issue with the operation of

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the Tennessee Virtual Academy ("TNVA"), which had been established as a K12 partner

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school in 2011. CAC ¶¶ 90, 98, 155. Following the 2013-14 school year, purportedly

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based on the school’s academic performance, Tennessee’s education commissioner

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capped the number of students permitted to enroll at TNVA. CAC ¶¶ 96-97. During the

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conference call, Davis acknowledged that TNVA’s 2013-14 state test scores “were low,”

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but noted that students “who persisted in the school for two or more years performed at a

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reasonable level.” CAC ¶¶ 97-98, 155; Exh. D to Barry Decl. K12’s stock price dropped

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Northern District of California

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13% the same day, to close at $19.42. CAC ¶ 279.
At its September 22, 2014, meeting, the Agora Board approved K12 as its online

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curriculum content provider through the 2017-2018 school year. CAC ¶ 149. At the

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October 6, 2014 meeting of the Agora Board, the Board President announced that Agora

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had completed the process to self-manage Agora Cyber Charter School, which it had

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begun "early in 2014[,]" and that it had agreed to “simultaneously continue using K12

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curriculum and begin the process of building our own and offering it to parents and

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students as an option.” CAC ¶ 150.

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Three days later, on October 9, 2014, K12 reported in a press release that the

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Agora Board had decided to "absorb the school's general administrative services and

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certain human resources functions as well as name vendors for select services which are

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currently provided by K12" but added that it had also reached a new three-year contract

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with K12 to provide "academic curriculum" for Agora starting in the 2015-2016 school

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year. CAC ¶ 157. K12 stated that, using FY 2014 enrollment volumes and reported

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financial results, it believed this new contract "would have delivered approximately 25%

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of the revenue and 50% of the internal financial contribution” – defining “internal

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contribution” as “revenue less direct costs for delivering the contracted services” – “when

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compared to K12's current contact with the Agora Board." CAC ¶ 157.

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Later that same day (October 9, 2014), in an earnings call, K12 provided student
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enrollment figures for FY 2015 after the October enrollment count date. CAC ¶ 157.

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Plaintiffs assert that rather than simply reporting student enrollments in managed schools

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as it had in previous years, K12 for the first time reported enrollments in Public School

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Programs, which included both managed and non-managed programs. CAC ¶ 158.

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Davis explained that the reduction in managed schools was due to a "new market

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dynamic" in which some schools decided to self-manage and also due to the recent

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Tennessee enrollment cap. CAC ¶ 159. Rhyu also acknowledged, however, that as a

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result of Agora switching from a managed to a non-managed program beginning in

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FY2016, "you are going to see, obviously, I think, a fairly significant decline in revenue."

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CAC ¶ 160. K12’s stock price declined 7% that day, to close at $14.87. CAC ¶ 287.

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Northern District of California

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On October 30, 2014, K12 released its financial results for the quarter ending

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September 30, 2014. CAC ¶ 162. During an earnings call held that same day, K12

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disclosed that it had a lower gross margin percentage compared to the percentage for the

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same quarter in the previous year. Rhyu explained that this decrease was due to K12

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“continu[ing] to invest in teachers and academic programs” and that “some of the rate

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increases that contributed to our managed program revenue growth relate to programs

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where K12 incurs significant costs.” CAC ¶ 163. Nevertheless, Rhyu assured investors

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that K12’s Nonmanaged Programs had higher margins than the Managed Programs, and

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as the “non-managed piece of the business grows faster than the managed piece” the

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impact of the higher margins may “become more material.” CAC ¶ 163.

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K12 published its Academic Report for the 2013-14 school year on May 4, 2015.

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CAC ¶ 68. An accompanying press release noted that K12-managed schools overall had

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outperformed the Scantron norm group’s mean gain in both reading and math. CAC

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¶¶ 69-70. K12 acknowledged a “disconnect” between “positive Scantron results and the

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scores on state tests[,]” adding,

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We hypothesize that the disconnect reflects how, in high
school, the content expectations of the Scantron tests diverge
from those of state tests. Scantron assesses a broad range of
skills. In high school, however, whether states administer
end-of-course exams or high school graduation tests, testing
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is more narrowly focused on the specific skills and knowledge
articulated in each state’s standards on topics in algebra,
geometry, probability and statistics, etc.

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CAC ¶ 71.
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On October 27, 2015, the last day of the proposed Class Period, the National
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Study of Online Charter Schools ("Online Charter School Study") published a
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comprehensive study of online charter schools operating in the United States, which
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included separate analyses by three independent research institutions – Mathematica

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Policy Research, the Center on Reinventing Public Education at the University of
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Washington ("CRPE"), and Stanford's Center for Research on Education Outcomes
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("CREDO"). CAC ¶ 166.
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The CRPE study, see CAC ¶¶ 170-172, specifically mentioned K12. CRPE
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referred to K12's provision of curriculum to Agora with nearly 10,000 students, noting that
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"a program that is lacking in quality may affect many thousands of students with one
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school and even more nationwide, especially if it is permitted to operate year after year
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with no accountability." CAC ¶ 172.
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CREDO published a press release, stating that the results in its report showed that
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"the majority of online charter students had far weaker academic growth in both math and
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reading compared to their traditional public school peers[,]" which shortfall it equated to
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"a student losing 72 days of learning in reading and 180 days of learning in math, based
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on a 180-day school year." CAC ¶ 176.
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Also on October 27, 2015, K12 issued a press release, entitled “K12 Inc. Reports

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First Quarter Fiscal 2016 With Revenue of $221.2 Million,” in which it reported
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disappointing financial results for its 1Q16. CAC ¶ 180. Among the highlights were
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“[r]evenues of $221.2 million, compared to $236.7 million in the first quarter of FY 2015.”

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K12 explained this decline as being "largely due to the Agora Cyber School shifting from
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a Managed to a Non-Managed program." CAC ¶ 180. K12 also reported an “[o]perating

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loss of $20.5 million, compared to an operating loss of $13.2 million in the first quarter of
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FY 2015[;]” and a "[n]et loss attributable to common stockholders of $12.8 million,

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compared to a net loss of $6.8 million in the first quarter of FY 2015[.]" CAC ¶ 180.

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K12’s stock price fell $1.93 per share, or 15.8%, to close at $10.25 per share on October

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27, 2015.
Later that day, defendants held an earnings conference call to discuss the

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quarterly financial results. Davis asserted that "[e]xcluding the impact of the Agora

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transition from a managed to a non-managed program, revenue grew 3.9% from the first

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quarter of last year." CAC ¶ 181. Rhyu also discussed K12's financial results, as well as

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the underlying trends for K12's business, but did so "excluding the impact of Agora,"

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explaining that "[w]e believe this way of looking at our results provide you with a clearer

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picture of the underlying trends." CAC ¶ 181.
After the market closed on October 27, 2015, K12 filed its Form 10-Q with the SEC

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Northern District of California

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for the quarter ending September 30, 2015. In that filing, K12 disclosed that it had

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received a subpoena from the Attorney General of the State of California (“California

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AG”), Bureau of Children’s Justice, in connection with an investigation styled “In the

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Matter of the Investigation of: For-Profit Virtual Schools.” CAC ¶ 183.2 Although the

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market did not immediately react to the disclosure of the subpoena – plaintiffs claim it

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was "buried" in K12's Form 10-Q, CAC ¶ 183 – plaintiffs assert that the Company's stock

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price slid a cumulative $0.54 per share, or 5.2%, over three days from a close of $10.25

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per share on October 27, 2015 (the last day of the proposed Class Period), to a close of

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$9.71 per share on October 30, 2015.
On July 8, 2016, the California AG filed a complaint asserting that K12 and 14

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CAVA schools it operated had used deceptive advertising to mislead families about

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students' academic progress, parents' satisfaction with the program and their graduates'

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eligibility for University of California and the California State University admission. CAC

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¶ 186. The parties also submitted a joint final judgment which was entered by the court

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Plaintiffs allege that K12 currently operates ten different California Virtual Academies
or "CAVAs" in the state, and that it received the AG's investigative subpoena in
September 2015. CAC ¶ 14.
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that day. CAC ¶ 186. K12 agreed to pay $6 million to the AG to defray costs of the

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action and the investigation, and to expunge $160 million in balanced budget credits

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accrued by CAVA schools and characterized by the AG as "debt relief to the non-profit

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schools [K12] managed." CAC ¶ 186.

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K12 also agreed to take action to ensure the accuracy of its advertisements, to

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train teachers to prevent improper attendance claims, and to reform the way it contracted

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with CAVA schools. CAC ¶ 187. It further agreed to eliminate incentive compensation for

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its enrollment staff, to provide all students with functional computers, and to give families

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a subsidy of $20 a month to cover the cost of high-speed Internet access; and to seek
approval for at least two courses that satisfied UC's lab science and visual and

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performing arts course requirements. CAC ¶ 188.

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Lastly, the judgment required K12 to include a corrected version of the Scantron

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results from school year 2013-2014 in its 2016 Annual Academic Report; to include a

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statement in the first quarterly earnings call following entry of the judgment correcting the

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prior statement regarding Scantron results made in the 1Q15 earnings call on October

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30, 2014; and to remove the 2015 Annual Academic Report from its website, include the

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corrected 2013-2014 Scantron data in the 2016 Annual Academic Report, include a

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statement on the front of the 2016 Report highlighting the revision, and correct the

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"Academic Results" page on its website. CAC ¶ 190(a), (b), (d), (e).

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In an August 9, 2016, investor call, K12’s then-CEO, Stuart Udell, stated that in

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aggregating student results, K12 had erroneously omitted students whose gains from the

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fall to spring examinations were statistically insignificant. CAC ¶¶ 193, 198-199. He

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further explained that when this error in the statistical methodology used to tally results

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for the 2013-2014 school year was corrected, K12 students’ mean gains still exceeded

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the norm group’s averages in both subjects, and outstripped the mean group’s gains in

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every grade for math, and in all but two grades for reading. CAC ¶¶ 193, 198. K12’s

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stock price did not meaningfully react to the report of the Scantron error, and plaintiffs do

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not allege that K12 made any corrective disclosures concerning this issue during the
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proposed Class Period.
K12 released its 2016 Academic Report on November 16, 2016, in which it

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included the required statements and corrections. CAC ¶ 195-198. With regard to the

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results for reading and math, plaintiffs assert that the impact of the changes was

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significant. "Whereas K12 had reported in its 2015 Academic Report that in grades 3-10

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for the 2013-2014 school year the Scantron reading percentage of norm group mean gain

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was 161%, the figure was revised down to 109%. Mathematics was similarly revised

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downward from 145% to 104%." CAC ¶ 199.
In the CAC, plaintiffs allege that throughout the proposed Class Period,

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defendants made materially false and/or misleading statements and failed to disclose

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Northern District of California

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material adverse facts about K12's business, operations, and prospects, including that

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K12 was publishing misleading advertisements about students’ academic progress,

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parent satisfaction, their eligibility for UC and CSU admission, class sizes, the

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individualized and flexible nature of K12’s instruction, hidden costs, and the quality of the

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materials provided to students.

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These allegations are divided among three "general categories” of actionable

17

statements (or omissions) made during the proposed Class Period. These include false

18

and misleading statements and/or omissions regarding Agora, false and misleading

19

statements and/or omissions regarding students’ academic and Scantron test results,

20

and false and misleading statements and/or omissions concerning the quality and

21

effectiveness of K12’s academic services and offerings. See CAC ¶ 201.

22

Plaintiffs assert that the “truth” emerged at various points during the proposed

23

Class Period, through (1) the June 26, 2014 announcement of Agora’s RFP process,

24

CAC ¶ 273; (2) the August 14, 2014 disclosure of the TNVA enrollment cap and Agora’s

25

interest in self-management, CAC ¶¶ 277-278; (3) K12’s October 9, 2014 report

26

confirming that Agora would assume responsibility for its own management, CAC ¶ 284;

27

(4) Davis’s suggestion on October 30, 2014 that regulators were “just beginning . . . to

28

understand the dynamics of an online school program,” CAC ¶ 291; and (5) the
13

1

publication of the Online Charter School Study and K12’s disclosure of the California

2

AG’s industry-wide inquiry on October 27, 2015, CAC ¶¶ 296, 306; see also CAC ¶ 18.
Plaintiffs filed the present action on July 20, 2016, and filed the CAC on December

3
4

2, 2016. Defendants seek an order dismissing the claims asserted against them, for

5

failure to state a claim.
DISCUSSION

6
7
8
9

A.

Legal Standards
A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests the legal

sufficiency of the claims asserted in a complaint. Navarro v. Block, 250 F.3d 729, 732
(9th Cir. 2001). A pleading must contain a "short and plain statement of the claim

11
United States District Court
Northern District of California

10

showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). While a complaint

12

does not need detailed factual allegations, "a plaintiff's obligation to provide the ‘grounds'

13

of his ‘entitlement to relief’ requires more than labels and conclusions, and a formulaic

14

recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v. Twombly,

15

550 U.S. 544, 555 (2007).

16

A complaint “must contain sufficient factual matter . . . to state a claim to relief that

17

is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). A claim is facially

18

plausible when it “allows the court to draw the reasonable inference that the defendant is

19

liable for the misconduct alleged.” Id. “[F]actual allegations must be enough to raise a

20

right to relief above the speculative level.” Twombly, 550 U.S. at 555.

21

In considering whether the complaint states a claim, the court accepts as true all of

22

the factual allegations contained in the complaint. Iqbal, 556 U.S. at 1949; see also

23

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007). However, legal

24

conclusions are "not entitled to the assumption of truth." Twombly, 550 U.S. at 555. Nor

25

is the court required to “accept as true allegations that contradict matters properly subject

26

to judicial notice or by exhibit” or “allegations that are merely conclusory, unwarranted

27

deductions of fact, or unreasonable inferences.” In re Gilead Scis. Sec. Litig., 536 F.3d

28

1049, 1055 (9th Cir. 2008) (quotations and citations omitted).
14

To state a claim for securities fraud under § 10(b) of the Securities Exchange Act

1
2

of 1934, and Securities Exchange Commission Rule 10b-5 promulgated thereunder, a

3

plaintiff must allege particularized facts showing (1) a material misrepresentation or

4

omission of fact; (2) made with scienter; (3) a connection with the purchase or sale of a

5

security; (4) reliance or “transaction causation;” (5) economic loss; and (6) loss causation

6

(causal connection between the material misrepresentation and the loss). Dura Pharms.,

7

Inc. v. Broudo, 544 U.S. 336, 341-42 (2005); see also Matrixx Initiatives, Inc. v.

8

Siracusano, 563 U.S. 27, 37-38 (2011).
In addition, a complaint alleging claims under § 10(b) and Rule 10b-5 must satisfy

9

the pleading requirements of both Federal Rule of Civil Procedure 9(b) and the Private

11
United States District Court
Northern District of California

10

Securities Litigation Reform Act (“PSLRA”). In re VeriFone Holdings, Inc. Sec. Litig., 704

12

F.3d 694, 701 (9th Cir. 2012). Under Rule 9(b), claims alleging fraud are subject to a

13

heightened pleading requirement – that a party "state with particularity the circumstances

14

constituting fraud or mistake." Fed. R. Civ. P. 9(b). And since 1995, all private securities

15

fraud complaints are subject to the "more exacting pleading requirements" of the PSLRA,

16

which require that both falsity and scienter be pled with particularity. Zucco Partners,

17

LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009).

18

B.

19

Defendants' Motion
Defendants argue that the CAC fails to state a claim because it amounts to

20

improper “puzzle pleading;” because it fails to allege an actionable misstatement or

21

omission; because the allegations do not support a strong inference of scienter; because

22

it fails to allege facts showing loss causation; and because it does not state a claim

23

against the individual defendants under § 20(a).
Improper “puzzle pleading”

24

1.

25

As an initial matter, defendants assert that the CAC amounts to "puzzle pleading,"

26

which violates the requirement that the complaint contain “a short and plain statement of

27

the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2).

28

In the securities fraud context, the term “puzzle pleading” refers to a pleading that
15

1

requires the defendant(s) and the court to "match up" the allegedly false and misleading

2

statements that form the basis of the plaintiff's claims with the reasons those statements

3

are misleading. See, e.g., In re Cisco Sys. Inc. Sec. Litig., 2013 WL 1402788 at *5 (N.D.

4

Cal. Mar. 29, 2013); see also In re Splash Tech. Holdings, Inc. Sec. Litig., 160 F.Supp.

5

2d 1059, 1073 (N.D. Cal. 2001) (finding that structure of complaint rendered it

6

“exceedingly difficult to discern precisely which statements are alleged to be misleading”).

7

Here, defendants assert, the CAC block-quotes extensive passages from public

8

statements, and then repeats for each passage a series of supposedly contrary "facts,"

9

without specifying the portion of each statement alleged to be false, alleging why it is
false, or alleging what contrary information the defendants had. Defendants do

11
United States District Court
Northern District of California

10

acknowledge that in certain sections of the CAC, plaintiffs have bolded portions of block

12

quotes and appear to be limiting their objections to the specific statements in bold.

13

However, they assert, these are "limited instances."

14

In the court’s experience, a securities fraud complaint that employs a true puzzle-

15

style pleading format will recite lengthy statements attributed to the defendants, followed

16

by a generalized list of reasons that the statements may have been false or misleading or

17

a generalized list of omissions that were required to make the statements not misleading.

18

Here, by contrast, plaintiffs have explained why they believe each such statement (or

19

compilation of statements) is false and misleading, but because the CAC is so long,

20

confusing, and meandering, it is difficult to locate the main points within it.

21

Nevertheless, the length and breadth of the CAC does not create the type of

22

“puzzle-like” complaint that warrants dismissal on that basis alone. See In re

23

Cornerstone Propane Partners, L.P., 355 F.Supp.2d 1069, 1081 (N.D. Cal. 2005) (finding

24

that puzzle-pleadings “abuse the principles of Rule 8 not because they are not short” but

25

“because they are not plain”). That is, the problem with the CAC is not so much that it is

26

a "puzzle-style" complaint, but rather that it is unwieldy and about 50 pages too long. In

27

In re GlenFed, Inc., Sec. Litig., 42 F.3d 1541 (9th Cir. 1994) (a pre-PSLRA case) the

28

Ninth Circuit found that the plaintiffs’ 113-page complaint – which the court described as
16

1

“rambl[ing] through long stretches of material quoted from defendants’ public statements

2

. . . unpunctuated by any specific ‘reasons for falsity[,]’” as clearly suffering from “poor

3

draftsmanship,” and as being “cumbersome almost to the point of abusiveness” –

4

nevertheless adequately pleaded facts sufficient to satisfy the requirements of Rule 9(b).

5

Id. at 1553-54.

6

2.

7

Section 10(b) of the Securities Exchange Act of 1934 makes it unlawful “[t]o use or

Misstatements or omissions under § 10(b) and Rule 10b-5

8

employ, in connection with the purchase or sale of any security . . . any manipulative or

9

deceptive device or contrivance in contravention of such rules and regulations as the
Commission may prescribe.” 15 U.S.C. § 78j(b). Pursuant to this section, the SEC

11
United States District Court
Northern District of California

10

promulgated Rule 10b-5, which makes it unlawful, among other things, “[t]o make any

12

untrue statement of a material fact or to omit to state a material fact necessary in order to

13

make the statements made, in the light of the circumstances under which they were

14

made, not misleading.” 17 C.F.R. § 240.10b–5(b).

15

Defendants argue that the CAC fails to allege any actionable misstatement or

16

omission. To prevail on a § 10(b) claim of false or misleading statements, a plaintiff must

17

show that the defendant made a statement that was “misleading as to a material fact.”

18

Basic, Inc. v. Levinson, 485 U.S. 224, 238 (1988). In general, the materiality requirement

19

is satisfied when the plaintiff alleges facts showing “‘a substantial likelihood that the

20

disclosure of the omitted fact would have been viewed by the reasonable investor as

21

having significantly altered the “total mix” of information made available.’” Id. at 231-32

22

(quoting TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).

23

To sufficiently allege a material misstatement for a § 10(b) claim, the plaintiff must

24

specify each statement alleged to have been misleading and the reason(s) why that

25

statement is misleading; if those allegations are made on information and belief, the

26

plaintiff must also allege all facts on which that belief is formed. Daou, 411 F.3d at 1014;

27

see also 15 U.S.C. § 78u-4(b)(1).

28

“To be actionable under the securities laws, an omission must be misleading.”
17

1

Brody v. Transitional Hospitals Corp., 280 F.3d 997, 1006 (9th Cir. 2002). “Silence,

2

absent a duty to disclose, is not misleading under Rule 10b-5.” Basic, 485 U.S. at 239

3

n.17. “An omission is not misleading unless it ‘affirmatively creates an impression of a

4

state of affairs that differs in a material way from the one that actually exists.’” Brody, 280

5

F.3d at 1006 (citation omitted). A duty to disclose exists only “to . . . make statements in

6

light of the circumstances under which they were made not misleading.” 17 C.F.R.

7

§ 240.10b–5(b).

8
9

Defendants contend that the CAC fails to allege any actionable misleading
statement or omission, asserting that many of the challenged statements are forwardlooking and protected by the PSLRA's statutory “safe harbor;” that many of the

11
United States District Court
Northern District of California

10

challenged statements are "puffing" statements which are not actionable as a matter of

12

law; and that plaintiffs allege no facts showing that any statement of present or historical

13

fact was false or misleading when made.

14

a.

Forward-looking statements

15

Defendants assert that “many” of the allegedly misleading statements are not

16

actionable under the PSLRA because they are “forward-looking statements” that fall

17

within its “safe-harbor” provision. A false or misleading statement may be shielded from

18

liability under the “safe harbor” provision of the PSLRA, even where the plaintiff has

19

adequately alleged the elements of a § 10(b) violation. See In re Quality Sys., Inc. Sec.

20

Litig., __ F.3d __, 2017 WL 3203558 at *7 (9th Cir. July 28, 2017).

21

A forward-looking statement is, e.g., “a statement containing a projection of

22

revenues, income (including income loss), earnings (including earnings loss) per share,

23

capital expenditures, dividends, capital structure, or other financial items;” a statement of

24

“the plans and objectives of management for future operations, including plans or

25

objectives relating to the products or services of the issuer;” or a “statement of future

26

economic performance[.]” 15 U.S.C. § 78u-5(i)(1).

27
28

Under this provision, defendants are not liable “with respect to any forward-looking
statement, whether written or oral, if and to the extent that” the statement is identified as
18

1

forward-looking and accompanied by meaningful cautionary statements, or if the plaintiff

2

fails to plead facts supporting a strong inference that the defendant made the statement

3

with “‘actual knowledge’ that it was ‘false or misleading’ at the time made.” See 15

4

U.S.C. § 78u-5(c)(1); see also In re Cutera Sec. Litig., 610 F.3d 1103, 1111-13 (9th Cir.

5

2010). The “cautionary language” and “actual knowledge” safe harbor prongs are

6

disjunctive. In re Quality Sys., __ F.3d __, 2017 WL 3203558 at *13. That is, even if a

7

forward-looking statement is not accompanied by adequate cautionary language, it is

8

protected by PSLRA's safe harbor if the speaker did not have “actual knowledge” that the

9

statement was false or misleading. Id.
Defendants begin this portion of their motion by listing four statements they claim

10

United States District Court
Northern District of California

11

are protected forward-looking statements.3
• “It’s always difficult to predict what a legislature is going to do and what’s going to

12
13

happen. . . . Pennsylvania . . . has some proposals in it that would affect us negatively. I

14

don’t know if that legislation will go through or won’t go through.” CAC ¶ 203 (citing

15

statement in February 4, 2014 earnings call).
• “[A]s everybody knows, . . . . we will file this year and next year in 2015, and then

16
17

we will seek an approval for our Agora school. . . .We negotiate a new service contract,

18

and then they will get a charter renewal process going in . . . Pennsylvania. . . . " CAC

19

¶ 205 (citing statement in April 29, 2014, earnings call).

20

• “K12 Inc. . . . looks forward to providing robust submissions for the provision of

21

educational services, products, and curriculum [at Agora].” CAC ¶ 207 (citing June 26,

22

2014 K12 press release).
• “I don’t think the number [of special education students] is going to decline in

23
24

percent. I think you may see it actually go up a little bit or stay flat.” CAC ¶ 247 (citing

25

statement in April 29, 2014 earnings call).

26
27
28

3

Defendants also cite generally to the Appendix attached to their motion, apparently
intending that the court search through those additional 38 pages to locate any
statements that might be labeled “forward-looking.”
19

1

Defendants claim that in these statements, plaintiffs "challenge several projections

2

regarding K12’s relationship with Agora, its operational prospects in Pennsylvania, and its

3

future business plans and priorities" – in particular, alleging that the statements regarding

4

K12’s future prospects with Agora were misleading because the Agora Board had

5

informed K12 that it did not intend on renewing its management contract with K12. See

6

CAC ¶ 208. Defendants assert however, that each of these statements is protected by

7

meaningful cautionary language, as K12 warned explicitly of the risk that its management

8

agreement with Agora would expire in June 2015, and might not be renewed.

9

Defendants point to the allegation that K12 filed the Agora/K12 contract as an
exhibit to its Form 10-Q for the quarter ending March 31, 2013, and to its 2013 and 2014

11
United States District Court
Northern District of California

10

10-Ks. CAC ¶ 202. They also note the statements under “Risk Factors” in K12’s 2013

12

and 2014 10-Ks that there was a risk of “failure to . . . renew existing contracts with our

13

schools.” They argue that the contract “disclosed” that it would expire in June 2015 and

14

that either party could decide not to renew it, and that such “disclosure,” combined with

15

the statements in the “Risk Factors” sections of the 10-Ks, constituted meaningful

16

cautionary language such that they cannot be liable for the forward-looking statements

17

relating to future prospects of K12 and Agora.

18

Defendants assert that “[t]he same holds true” for other statements that

19

defendants have identified as forward-looking, including “statements concerning K12

20

partner schools’ potential decision – like Agora – to become self-managed but continue

21

using the K12 curriculum (citing CAC ¶¶ 218, 220), which plaintiffs allege were

22

misleading because while Agora had “entered into a three-year contract with K12 for

23

curriculum,” Agora “had expressed disappointment with K12’s curriculum and was

24

developing its own . . . to eventually replace K12” (citing CAC ¶ 224). Defendants

25

contend that K12 specifically cautioned in public filings that the “independent boards of

26

the schools or school districts we serve [could] subsequently shift their priorities or

27

change objectives, and as a result reduce the scope [of] or terminate their relationship

28

with us” (citing K12’s 2013 10-K)).
20

Finally, defendants contend that statements about the expected “impact” of the

1
2

NCAA’s credit recognition decision (citing CAC ¶ 249) cannot support a claim for the

3

same reason. They again point to K12’s 2013 10-K, which cautioned that K12’s

4

“curriculum and approach to instruction may not achieve widespread acceptance, which

5

would limit [K12’s] growth,” and asserted that some “academics and educators . . . may

6

favor less formalistic methods.”
In opposition, plaintiffs assert that defendants are not saved by the PSLRA's "safe

7

harbor" under either prong of the test. They argue that the statements alleged to be

9

forward-looking were made in response to analysts' questions about present situations

10

involving Agora and the NCAA, and that K12's "cautionary language" failed to disclose

11
United States District Court
Northern District of California

8

that the "risk" of contract non-renewal had "already transpired."
“[E]xamined as a whole,” see Cutera, 610 F.3d at 1111-12, the four statements

12
13

initially listed in defendants’ motion and the additional statements referenced in the body

14

of the argument appear to have been made in response to questions about future events,

15

although they are also somewhat vague and imprecise. Nevertheless, while K12 did

16

disclose to investors that renewal of the Agora contract was not a certainty, it is not clear

17

that the challenged statements were "accompanied by" meaningful cautionary

18

statements, as the cautionary statements cited by defendants appear in K12's Form 10-

19

Ks filed August 29, 2013 and August 15, 2014, and the challenged statements were

20

made on February 4, April 29, June 26, 2014, and October 30, 2014, and January 29,

21

2015.

22

Moreover, it appears clear from the allegations that while Agora advised K12 in

23

mid-2012 that it would not be renewing the management agreement when it terminated

24

on June 30, 2015, K12 did not unambiguously inform investors of that fact until October

25

9, 2014. It is true that K12 informed investors on June 26, 2014, that it had been

26

“working with the Board” with regard to possible “provision of educational services,

27

products, and curriculum,” in response to Agora’s RFP, but there is no indication in any of

28

the cited SEC filings or public statements that K12 had revealed to investors that its
21

1

largest revenue-producing school had sent a “notice of non-renewal” in mid-2012.
It is that omission that forms the basis of plaintiffs’ claims with regard to Agora,

2
3

and the court finds, for purposes of the present motion, that defendants have not

4

established that any statement concerning K12’s future relationship with Agora was a

5

forward-looking statement, identified as such, which was “accompanied by” meaningful

6

cautionary language.
b.

7

Defendants argue that many of the challenged statements are inactionable

8
9

"Puffing" statements

"puffing" statements. Statements of mere corporate puffery – “vague statements of
optimism like ‘good,’ ‘well-regarded,’ or other feel good monikers” – are not actionable

11
United States District Court
Northern District of California

10

because “professional investors, and most amateur investors as well, know how to

12

devalue the optimism of corporate executives.” Police Ret. Sys. of St. Louis v. Intuitive

13

Surgical, Inc., 759 F.3d 1051, 1060 (9th Cir. 2014) (quoting In re Cutera, 610 F.3d at

14

1111).
Defendants assert that the CAC challenges “several” non-actionable puffing

15
16

statements,4 specifically referring to
• a statement during the April 29, 2014, earnings call, describing K12 as a “good

17
18

partner for Agora,” and a statement in a June 26, 2014 press release discussing “the

19

value K12 has brought . . . to the students of Agora,” CAC ¶¶ 205, 207;
• a statement in the April 29, 2014, earnings call, indicating that K12 was “working

20
21

very, very hard” to resolve the NCAA issues, CAC ¶ 249;
• statements in K12’s 2014 and 2015 Form 10-Ks noting the ability of its “learning

22
23

systems” to “effectively address the educational needs of . . . special education students,”

24

CAC ¶¶ 253, 267;
• a statement in a May 4, 2015, press release, referencing K12’s aim to “provide

25
26

the finest education to our students,” CAC ¶ 235; and

27
4

28

As with the argument regarding forward-looking statements, defendants again cite
generally to their 38-page Appendix.
22

• statements during the August 14, 2014, earnings call, describing K12’s

1
2

curriculum as “[t]he strength of our program” and “one of the great assets we have,” CAC

3

¶ 251.
The court finds that at least as to the statements cited by defendants in their

4

moving papers, those statements do qualify as corporate "puffery," or at a minimum, are

6

so vague as to be inactionable. Optimistic, subjective assessments such as statements

7

that K12 brought "good value" to Agora, or that K12 was "working very very hard" to

8

resolve its differences with the NCAA, or that K12's learning systems "effectively

9

address[ed] the educational needs of . . . special education students" are not affirmative

10

representations of fact that can be proven to be false (or even statements that create a

11
United States District Court
Northern District of California

5

clearly false impression), which would be material to an investor's decision to invest in the

12

company. See Retail Wholesale & Dep’t Store Union Local 338 Retirement Fund v.

13

Hewlett-Packard Co., 845 F.3d 1268, 1275-76 (9th Cir. 2017).
c.

14

Statements of present or historical fact

Defendants assert that plaintiffs allege no facts showing that the statements of

15
16

present or historical fact were false or misleading when made. Here, defendants

17

separately address the three categories of challenged statements – the “Agora

18

statements," the “Scantron statements," and the “quality and effectiveness statements."
i.

19

Agora statements

20

According to defendants, the CAC challenges 18 statements regarding the Agora

21

contract process and K12’s Pennsylvania operations generally (the “Agora Statements”).

22

See CAC ¶¶ 202-224. These statements include:
• a statement by Davis during a February 4, 2014 investor call: “[T]he

23
24

Pennsylvania legislation has some proposals in it that would affect us negatively. I don’t

25

know if that legislation will go through or won’t go through. We monitor it closely.” CAC

26

¶ 203.

27
28

• statements in a June 26, 2014 press release: “[T]his Fall, [Agora] must submit
an application for the renewal of its charter agreement with the Pennsylvania Department
23

1

of Education (PDE), to continue operations for the 2015-2016 school year and beyond.

2

The Agora Board has elected to use an RFP process for the services and products

3

required to operate the school. Proposals are due to the Agora Board on July 25, 2014.

4

K12 Inc. has been working with the Board and looks forward to providing robust

5

submissions for the provision of educational services, products, and curriculum.” CAC

6

¶ 207.
• a statement in K12’s 2014 10-K: In FY 2014, Agora elected to use a request for

7
8

proposal process for the services and products required to operate the school for the

9

2015-2016 school year in connection with its charter renewal application.” CAC ¶ 213.

10

• a statement in K12’s 1Q15 Form 10-Q (repeated in substance in an October 9,

United States District Court
Northern District of California

11

2014 press release): “On October 9, 2014, the Company entered into a three-year

12

contract to provide academic curriculum to Agora for a reduced scope of services that will

13

include the academic curriculum beginning in the 2015-16 school year.” CAC ¶¶ 216,

14

219.

15

Plaintiffs contend these and other “Agora Statements” were materially false or

16

misleading because they omitted to state either that K12’s contract with Agora would not

17

be renewed or that the nature of the contract would materially change; and that Agora

18

had “expressed disappointment with K12’s curriculum and was developing its own” which

19

could “be provided as an option to Agora students as soon as possible” and “eventually

20

replace” K12’s. CAC ¶¶ 145, 202, 204, 206, 208, 214, 217.

21

Defendants argue that plaintiffs allege no facts showing that the statements

22

regarding Agora’s RFP in advance of the school's charter renewal were false or

23

misleading, as Agora did in fact opt to use an RFP process in preparing its October 2014

24

charter renewal application, and that is exactly what K12 told investors. Defendants

25

assert that plaintiffs must do more than simply allege that a statement was false and

26

misleading – they must plead specific facts showing why and how that is so.

27
28

Nor, defendants assert, was it false and misleading for K12 in October 2014 to
announce its three-year curriculum contract with Agora. Defendants claim that plaintiffs
24

1

admit such statements were factually true, yet assert the statements were “misleading”

2

given Agora’s alleged plan to “eventually” develop its own curriculum. Defendants

3

contend that accurate statements of historical fact are not materially misleading, and that

4

allegations that are not necessarily inconsistent with the allegedly false statement do not

5

establish falsity.

6

Regardless, defendants argue, even if Agora did aspire to create an in-house

7

curriculum, the challenged statements did “not convey an implicit prediction” that K12’s

8

Agora relationship would “continue into the future." Defendants contend that because

9

they did not give an impression differing materially from the true state of affairs, the

10

United States District Court
Northern District of California

11

challenged statements cannot support a claim.
In opposition, plaintiffs assert that Agora's June 28, 2012, non-renewal notice –

12

which K12 apparently received on July 16, 2012 – was highly material to investors, given

13

the importance of K12's relationship with (and financial dependence on) Agora. Plaintiffs

14

contend that defendants provided no indication that K12 had received this notice from

15

Agora until June 26, 2014, when it announced Agora’s RFP, thus obliquely suggesting

16

that Agora would not be renewing the management contract. This was almost two years

17

after the Agora Board sent the notice, and plaintiffs assert that in the interim, investors

18

were led to believe that the Agora/K12 management contract would automatically renew

19

upon the contract's June 30, 2015, expiration. Plaintiffs contend that defendants’ failure

20

to disclose the non-renewal notice constitutes a material omission.

21

In addition, plaintiffs assert, between June 26 and October 9, 2014, defendants

22

continued to fail to disclose the receipt of the notice of non-renewal, and instead couched

23

the negotiation process as part of a perfunctory RFP process necessary for Agora’s

24

charter renewal, and that they feigned ignorance as to the true nature of the negotiations

25

with K12. Plaintiffs argue that defendants’ statements were materially misleading both

26

because defendants omitted to disclose the non-renewal notice and because they

27

misleadingly created an impression that the negotiations with Agora resulted from its

28

charter renewal.
25

Finally, plaintiffs assert, after K12 announced on October 9, 2014, that it would be

1
2

awarded a three-year curriculum contract with Agora, and up until the close of the

3

proposed Class Period (October 27, 2015), defendants periodically mentioned this

4

“awarded contract.” See CAC ¶¶ 218-223. However, plaintiffs argue, what these

5

statements omitted to say was that Agora was actively creating its own in-house

6

curriculum that would, once approved, be immediately offered to Agora students, largely

7

reducing the scope of students, and thus the revenue K12 would receive over those three

8

years, which was already reduced because K12 was no longer managing Agora.
The court finds that plaintiffs have adequately alleged that defendants made false

9

or misleading statements with regard to the Agora contract. It is undisputed that Agora

11
United States District Court
Northern District of California

10

sent K12 its notice of intent not to renew the management contract in June 2012, and that

12

for the next 2+ years, Agora was apparently negotiating a "non-management" contract for

13

provision of curriculum services. However, the facts as pled support the reasonable

14

inference that defendants knew as of June 2012 that there would be no management

15

contract after June 2015. Nevertheless, K12 did not disclose this fact to investors during

16

the entire period of the “negotiation,” until they announced that Agora would be

17

implementing the RFP process, which appeared to preclude a management contract.

18

In view of the allegation that a substantial portion of K12’s revenue was derived

19

from the management contracts, the court finds that plaintiffs have adequately alleged

20

materially false/misleading statements with regard to Agora and the failure to disclose the

21

notification of the projected termination of the contract. A statement is materially

22

misleading when it “affirmatively created an impression of a state of affairs that differed in

23

a material way from the one that actually exists.” See Reese v. Malone, 747 F.3d 557,

24

570 (9th Cir. 2014). The disclosure required by the securities laws is measured not by

25

literal truth, but by the ability of the material to accurately inform rather than mislead. See

26

In re Convergent Tech. Sec. Litig., 948 F.2d 507, 512 (9th Cir. 1991); Brody, 280 F.3d at

27

1006.

28

In addition, more often than not, materiality is a question of fact. See S.E.C. v.
26

1

Todd, 642 F.3d 1207, 1220 (9th Cir. 2011); see also Fecht v. Price Co., 70 F.3d 1078,

2

1081 (9th Cir. 1995) (“whether a public statement is misleading, or whether adverse facts

3

were adequately disclosed is a mixed question to be decided by the trier of fact”);

4

Durning v. First Boston Corp., 815 F.2d 1265, 1268 (9th Cir. 1987) (adequacy of

5

disclosure is normally a jury question). Resolving an issue as a matter of law is only

6

appropriate when the adequacy of the disclosure is “so obvious that reasonable minds

7

[could] not differ.” Durning, 815 F.2d at 1268; accord TSC Indus., 426 U.S. at 450.

8
9

ii.

Scantron statements

The CAC challenges 11 statements regarding K12’s Scantron results and the
utility of Scantron testing generally (the “Scantron Statements”). See CAC ¶¶ 225-242.

11
United States District Court
Northern District of California

10

These statements include:

12

• a statement by Packard during a November 7, 2013 investor call: “To ascertain

13

that the students were performing adequately, we adopted an adaptive test from

14

Scantron that was designed to measure student learning gains and it showed that our

15

students were learning at [national] norm levels.” CAC ¶ 225.

16

• a statement by Packard during the same investor call: “[W]e felt and still believe

17

the gains from the adaptive tests designed to measure gains are far better than state

18

tests that impute gains from non-scaled CRT tests that were not designed to measure

19

gains. . . ." CAC ¶ 225.

20

• a statement in a March 20, 2014 press release: “In the 2012-2013 school year,

21

on Scantron assessments K12-managed public schools achieved 125 percent norm

22

group gain in Reading across all grades and 102 percent norm group gain in

23

Mathematics across all grades.” CAC ¶ 229.

24

• a statement by Davis during the October 30, 2014, earnings call: “Because

25

state-administered tests vary widely in their standards, students in K12-managed virtual

26

academies also take Scantron performance series tests in reading and mathematics,

27

because we want a national comparison on gain.” CAC ¶ 234.

28

• statements in K12’s 2015 Academic Report and in the May 4, 2015 press release
27

1

linked to that Report: “In the 2013-2014 school year, in grades 3-10, students in K12-

2

managed public schools exceeded the Scantron national norm group mean gain both in

3

Reading and Mathematics.” CAC ¶¶ 238, 239.

4

Plaintiffs assert that these and other “Scantron Statements” were materially false
or misleading because in 2016, K12 determined that its 2013-2014 Scantron analysis had

6

erroneously omitted certain scores, and also adopted Scantron’s methodology for

7

excluding “outlier” scores (which K12 had previously omitted from its calculation); and

8

because K12 noted in the 2016 Academic Report that because of new state tests tied to

9

Common Core standards, K12 could, in the majority of states, not provide a year-over-

10

year view of student performance, even though it continued in 2016 to report results on

11
United States District Court
Northern District of California

5

norm-referenced Scantron tests as a uniform benchmark for student and school

12

performance nationwide. See CAC ¶¶ 226, 228, 233, 234, 236, 237, 241, 242.

13

Defendants argue that plaintiffs have not pled facts showing that defendants'

14

earlier statements regarding the Scantron results were materially false or misleading. For

15

example, with regard to statements related to K12's 2012-2013 Scantron results,

16

defendants assert that the "isolated error" in K12's analytical methodology for 2013-2014

17

had "zero bearing on – and cannot demonstrate the falsity of – statements related to the

18

prior year's testing results,” and defendants claim that plaintiffs allege no facts

19

establishing that it did.

20

Wwith regard to the November 2013 statement by Packard that Scantron testing

21

then “showed that [K12] students were learning at national norm levels,” CAC ¶ 225,

22

defendants argue that K12’s Scantron analysis relating to the 2013-14 school year had

23

only just begun at the time of Packard’s comments. They contend that K12 did not

24

calculate its 2013-14 results until May 2015 – which was 18 months after the challenged

25

statement – and they argue that those results supported Packard’s remarks.

26

In addition, defendants assert, in 2016, even after recalculating its 2013-14 gains,

27

K12 determined that its students still outperformed the Scantron norm group’s mean gain

28

in both math and reading (even if by a smaller margin), as reported. For the same
28

1

reason, defendants argue, even if K12’s recalculation required revision of the original

2

figures, plaintiffs have not alleged facts materially contradicting statements about K12

3

students’ overall performance relative to the national average. They contend that a

4

reasonable investor’s decision could not conceivably have been affected by the precise

5

numerical change in K12’s reported scores.

6

In opposition, plaintiffs complain that defendants are attempting to "minimize the
significance" of the misleading nature of the Scantron-related statements by focusing on

8

the statement that the California AG specifically required K12 to publicly retract. But,

9

plaintiffs assert, the CAC alleges that K12 was also mandated to “correct the ‘Academic

10

Results’ page on K12’s website,” CAC ¶ 190(e), and that in response, K12 removed both

11
United States District Court
Northern District of California

7

the Academic Report containing the Scantron results for the 2012-13 school year and the

12

entire “Academic Results” page from its website, as well as removing the Academic

13

Report for the 2013-14 school year. See CAC ¶ 192.

14

In addition, plaintiffs assert, when K12 published the 2016 Academic Report, the

15

Scantron results for the 2013-14 school year were revised downwards. CAC ¶ 198.

16

They claim that the lower results culminated from K12 properly aligning its methodology

17

with Scantron’s calculation method of the national norm group; K12 also admitted that the

18

“methodology used in previous reports” was similar to the CA AG-admonished method for

19

the 2013-14 school year. CAC ¶ 198.

20

Finally, plaintiffs argue that the significance of K12's calculation errors is a fact-

21

intensive question not appropriate for a motion to dismiss, and contend that defendants’

22

choice to disclose this otherwise, nonpublic information undermines their contention of

23

immateriality.

24

The court finds that the CAC fails to state a claim as to the Scantron statements.

25

Plaintiffs appear to emphasize two issues – the 2013-14 calculation error, which resulted

26

from mistakenly omitting individual student scores falling within Scantron’s “standard

27

error of measurement” when aggregating overall results for that year; and K12’s

28

unrelated decision in 2016 to revise its methodology for identifying “outlier” test results.
29

1

On the first issue, plaintiffs have alleged no facts showing that K12’s isolated

2

computation error in a single school year rendered any challenged statement materially

3

false or misleading. To the contrary, the representation that K12 students “outperformed”

4

national averages remained undisputedly true. See CAC ¶¶ 69, 199. Here, plaintiffs

5

contend that while K12 students still surpassed the Scantron norm group’s gains in every

6

grade level for math, they fell short of the national mean in two grades for reading.

7

However, a reasonable investor is not likely to have viewed such incremental

8

changes in K12’s (still positive) testing results for one school year as having significantly

9

altered the “total mix” of information made available for the purpose of decisionmaking by
stockholders concerning their investments. See Retail Wholesale, 845 F.3d at 1274

11
United States District Court
Northern District of California

10

(quotations and citations omitted). Indeed, plaintiffs concede in their opposition that

12

K12’s stock price showed no “statistically significant movement” when the error in

13

calculating the Scantron results was disclosed.

14

On the second issue, plaintiffs have not alleged with particularity that K12’s pre-

15

2016 methodology for identifying outlier test scores was improper, let alone that it

16

rendered statements about students’ academic performance materially false or

17

misleading. “[M]ere disagreements over statistical methodology . . . are insufficient to

18

allege a materially false statement.” In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869,

19

877-78 (9th Cir. 2012). Furthermore, applying the new outlier standard retroactively to

20

K12’s 2013-14 results, after also accounting separately for the correction in the standard

21

error of measurement, confirms that K12 students outperformed the national averages in

22

both math and reading for that year, as initially reported (though not by nearly as much).

23

The main question here is whether defendants can be liable for providing

24

inaccurately calculated Scantron results for K12, for a single school year. Given that

25

defendants subsequently posted corrected results, it is undisputed that the original

26

results were inaccurate. Defendants claim it was a mistake in calculation. Plaintiffs

27

plead no facts showing that it was other than a simple mistake. The court finds that

28

plaintiffs cannot state a claim of securities fraud with regard to the Scantron results. At
30

1

most, it appears to have been simple negligence.
iii.

2
3

Quality and effectiveness statements

Third, the CAC challenges an assortment of 13 statements broadly related to the

4

nature and quality of “K12’s academic services and offerings” (the “quality and

5

effectiveness statements”). See CAC ¶¶ 243-268. These statements include:

6

• a statement in the March 20, 2014 press release, announcing the release of

7

K12's 2014 Academic Report and the "key findings” of the Report: “Persistence makes a

8

difference. Data confirm that students perform better on state proficiency tests the longer

9

they stay with the K12 program.” CAC ¶ 243.
• a statement by Davis during the August 14, 2014 earnings call, that “[t]he

11
United States District Court
Northern District of California

10

strength of our program is in our curriculum. We think that’s one of the great assets we

12

have.” CAC ¶ 251.

13

• statements in K12’s 2014 and 2015 Form 10-Ks: “We believe that our learning

14

systems are able to effectively address the educational needs of both advanced and

15

special education students because they employ flexible teaching methods and students

16

can use them at their own pace.” CAC ¶¶ 253, 267.

17

• a statement in the September 18, 2014, K12 press release entitled "University of

18

California Grants A-G Approval of 95 Fuel Education Courses:" K12 "today announced

19

that the University of California "a-g" review board approved 95 of [K12's] online and

20

blended courses, more approved courses than those of any other online and blended

21

provider[,]" and that this includes required courses in all 15 areas, including lab science

22

and visual/performing arts. CAC ¶ 255.

23

• a statement by Davis during an October 30, 2014, earnings call: “When you

24

have a high percentage of students who traditionally underperform in their schools before

25

joining K12, our average static test scores are bound to be lower than traditional schools.

26

But even with these high percentage of students who are often considered at risk, in

27

many instances our academic performance is now better than school districts with light

28

characteristics.” CAC ¶ 257.
31

1

• a statement by Murray during the same earnings call: “[W]e gained approval for

2

95 courses from the University of California which audits course requirements to ensure

3

that students have attained a body of general knowledge that will provide the breadth and

4

perspective to enable success for more advanced study in the California university

5

system.” CAC ¶ 259.

6

Plaintiffs claim that these and other such statements were materially false or
misleading in light of the following: the findings of the Online Charter School Study and

8

the CREDO report in October 2015; “complaints” by and “concerns” among unnamed

9

school personnel regarding aspects of the K12 program, including the curriculum; K12’s

10

2016 agreement with the California AG to adopt specified conduct measures, including in

11
United States District Court
Northern District of California

7

the area of special education; and the fact that K12 did not offer any approved courses to

12

satisfy UC's lab science and visual and performing arts course requirements to be eligible

13

for admission to UC or CSU schools systems. See CAC ¶¶ 243-245, 252, 254, 257-258,

14

260-261, 263, 268.

15

Defendants argue that none of the quality and effectiveness statements

16

constitutes an actionable false and misleading statement. For example, they assert that

17

plaintiffs plead no facts showing the falsity of the statement in the March 20, 2014, press

18

release announcing the issuance of the 2014 Academic Report, that a “key finding” of the

19

Report that students improved academically “the longer they stay[ed] with the K12

20

program.” Defendants note that the "reasons" plaintiff claim this statement was false

21

were that students on average persist with an online charter school for two years, and

22

that online charter school students living in poverty experienced a more negative overall

23

effect on academic growth than traditional public school students living in poverty. See

24

CAC ¶ 244.

25

Defendants assert, however, that these “reasons” were derived from the findings

26

of the CREDO study (part of the Online School Study), an “industry-wide” study which

27

was published in October 27, 2015, more than a year and a half after the issuance of the

28

2014 Academic Report. Moreover, they argue, the CREDO report largely supports
32

1

defendants’ statements, as, for example, it found that “stayers” at online schools “had

2

stronger growth in their second year than in their first year.”

3

As another example, defendants point to the statements concerning K12’s ability

4

to effectively serve students with special needs. See CAC ¶¶ 247, 253, 267. Plaintiffs

5

allege that these statements were false and misleading because one of the reasons

6

Agora opted not to renew its management contract with K12 was “due to issues with the

7

way K12 handled special education students,” and because of complaints of teachers in

8

California and the provision in K12’s settlement with the California AG that required that

9

K12 take actions to come into compliance with the Americans With Disabilities Act. CAC

10

United States District Court
Northern District of California

11

¶¶ 248, 254, 268.
Defendants assert, however, that plaintiffs have simply pointed to alleged outside

12

criticisms and isolated complaints – including from unspecified “teachers” – that, at most,

13

reflect subjective concerns. They argue that such allegations do not constitute contrary

14

“facts,” and fail to render any challenged statement false or misleading. See In re Netflix,

15

Inc., Sec. Litig., 2005 WL 1562858, at *7 (N.D. Cal. June 28, 2005) (existence of

16

complaints does not establish the falsity of statements about company services); Curry v.

17

Yelp Inc., 2015 WL 1849037, at *8 (N.D. Cal. Apr. 21, 2015) (customer complaints

18

alleging state of affairs contrary to defendant’s representations cannot “independently

19

suffice to establish the falsity of those representations”).

20

Likewise, defendants argue, K12’s voluntary agreement with the California AG to

21

implement various special education measures does not establish the falsity of any prior

22

statement. They assert that contrary to plaintiffs’ suggestion, the AG nowhere stated that

23

K12 or any California partner school was not in compliance with their special education

24

obligations.

25

Defendants contend that rather than requiring “actions to come into compliance

26

with the Americans with Disabilities Act,” as plaintiffs allege, the California settlement

27

noted K12’s “existing initiative to ensure an accessible learning environment,” and

28

required implementation of further measures only following “the adoption of final web
33

1

accessibility rules implementing Section 508 of the Rehabilitation Act of 1974 and the

2

Americans with Disabilities Act” by the U.S. Department of Justice, – a regulatory effort

3

defendants claim is still ongoing. Defendants assert that a company’s voluntary

4

“improvements” or operational changes do not establish that prior positive statements

5

were false when made.

6

Finally, defendants point to the statements regarding UC's approval of K12

7

courses pursuant to its “A-G” certification program. See CAC ¶ 255. Plaintiffs allege that

8

all such statements were “materially misleading” because K12 “did not offer any

9

approved courses to satisfy” the “laboratory science and visual and performing arts”
components of the A-G program. CAC ¶ 256. Defendants contend that to the contrary,

11
United States District Court
Northern District of California

10

K12 – in a challenged press release, for example – identified the exact subject areas of

12

its approved courses (without mentioning laboratory science or visual and performing

13

arts), and provided links to a “complete list” of those courses (citing Sept. 18, 2014 K12

14

press release).

15

Thus, defendants argue, even if they did not provide all the information they

16

possessed about UC’s policy towards laboratory science and visual and performing arts

17

courses in the online setting, the information K12 did provide – and the reasonable

18

inferences one could draw from that information – were entirely consistent with the more

19

detailed explanation of the A-G program that plaintiffs argue the challenged statements

20

should have included.” See Brody, 280 F.3d at 1007. Defendants conclude (citing their

21

Appendix) that because plaintiffs have not pled particularized facts demonstrating that

22

any challenged statement was materially false or misleading when made, they cannot

23

state a claim.

24

In opposition, plaintiffs assert that the statements in this category all purported to

25

illustrate K12’s successful efforts in improving student academic outcomes, but that once

26

defendants chose to tout K12’s academic successes and services, they were bound to do

27

so in a manner that wouldn’t mislead investors. See Schueneman v. Arena Pharm., Inc.,

28

840 F.3d 698, 707-08 (9th Cir. 2016) (quoting Berson v. Applied Signal Tech., Inc., 527
34

1
2

F.3d 982, 987 (9th Cir. 2008)).
Plaintiffs contend that defendants frequently reported figures regarding the

3

benefits of "persistence" at K12 schools and the academic performance of low-income

4

and “at risk” K12 students, but that while K12 executives may have had access to

5

accurate information, investors did not.

6

Plaintiffs argue that K12’s seemingly positive results, such as its claim that “[d]ata

7

confirm that students perform better on state proficiency tests the longer they stay with

8

the K12 program” and “[s]tudents enrolled three or more years in K12-managed public

9

schools achieve higher percentages at or above proficiency compared to students
enrolled less than one year,” sounds optimistic; but that the picture changes when the

11
United States District Court
Northern District of California

10

claim is qualified with information from the October 2015 Online Charter School Study,

12

such as that “[o]n average, online charter school students are enrolled in these schools

13

for two years, and there was a decreasing percentage of students remaining in online

14

charter schools for a second year.” See e.g., CAC ¶¶ 175, 243-244. Plaintiffs assert that

15

defendants' "trumpeted statistics" may have been "factually true," but argue that their

16

"manner of presentation" served to mislead investors.

17

Similarly, plaintiffs assert, Davis and K12 discussed K12's focus on the special

18

education market, highlighting the services provided to special education students. See

19

CAC ¶¶ 247, 253, 267. Plaintiffs contend that defendants admit that they had

20

contemporaneous facts available that contradicted their statements, but in their motion

21

simply dismiss these facts as isolated customer complaints. Plaintiffs argue, however,

22

that these “complaints” document K12’s failure to provide the services to students of

23

special needs that K12 claimed to provide.

24

For example, plaintiffs compare the allegations in CAC ¶ 118 (February 2015

25

report by organization “In the Public Interest” quoted unidentified special education

26

teachers in California who stated that K12-operated CAVA schools failed to provide

27

needed services to their students) and CAC ¶ 143 (unidentified member of Agora Board

28

stated that K12 failed to provide “individualized education plans”) with those in CAC
35

1

¶ 253 (statement in Agora’s 2014 Form 10-K that “[w]e believe that our learning systems

2

are able to effectively address the educational needs of both advanced and special

3

education students”) and CAC ¶ 267 (same statement in K12’s 2015 Form 10-K).

4

Plaintiffs cite Robb v. Fitbit Inc., 216 F. Supp. 3d 1017, 1028-29 (N.D. Cal. 2016),

5

where the court found the allegations sufficient because the “plaintiffs have alleged not

6

that users have difficulty using the product but that the product itself does not do the thing

7

that it claims to do.” They argue that just as in the Robb case, where the product at issue

8

was a fitness tracker, the alleged complaints in this case are sufficient to show that K12

9

misrepresented the nature and quality of its academic services and offerings.

10

Finally, with regard to the allegations of misleading statements announcing

United States District Court
Northern District of California

11

approval of 95 K12 courses by the UC pursuant to its pre-enrollment “A-G” certification

12

program, plaintiffs assert that these announcements created the impression that K12

13

provided courses in all required subject matters (the “A-G” subject matters), when in fact,

14

K12 did not offer approved courses in two of the seven total subject matters.

15

Plaintiffs argue that defendants could have easily announced the approval of their

16

95 courses without reference to “A-G,” which has specific meaning, but that because they

17

made the statements in a press release, they were obliged to make fully accurate

18

disclosures. Plaintiffs argue that investors are not required to scour links provided in a

19

press release and compare the subject matter of all 95 approved courses with the seven

20

“A-G” subject matters. They contend that under federal securities law, an investor is not

21

required to undertake extensive research, but is presumed to know that which a

22

reasonable investor would know.

23

It may be that plaintiffs can state a claim as to the quality and effectiveness

24

statements, but the court finds that they have largely failed to do so here. First, some of

25

the statements regarding academic success of K12 students or about the "quality and

26

effectiveness" of K12's offerings are vague and imprecise. For example, the statement

27

that “[t]he strength of our program is in our curriculum. We think that’s one of the great

28

assets we have[;] and the statement that “even with these high percentages of students
36

1

who are often considered at risk, in many instances our academic performance is now

2

better than school districts with light characteristics” are not sufficiently specific and

3

concrete to constitute an actionable misstatement of fact.

4

Moreover, plaintiffs' citation to isolated “complaints” by anonymous teachers and
parents does not show that defendants “had contemporaneous facts available that

6

contradicted their” generalized statements concerning special education, because the

7

mere existence of customer complaints – without more – does not render statements

8

about a company’s service false. See In re Netflix, Inc. Sec. Litig., 2005 WL 1562858, at

9

*7 (N.D. Cal. June 28, 2005). In any event, the “complaints” alleged in the CAC – e.g., of

10

“a lot of problems with Agora’s special education programs,” CAC ¶ 143 – lack specificity

11
United States District Court
Northern District of California

5

and fail to show that any challenged statement was false when made.

12

A second problem is that in some instances, plaintiffs have not pled facts clearly

13

showing that the alleged misstatements were false. For example, plaintiffs rely on the

14

October 2015 study of online charter schools to suggest that K12's prior statements

15

about the “quality and effectiveness” of its educational offerings were misleading.

16

However, the CAC pleads no facts showing that any such industry-wide findings, which

17

were not specific to K12, in fact contradicted any of the statements plaintiffs claim were

18

misleading, and no facts showing how defendants’ “manner of presentation” was

19

misleading, as plaintiffs claim.

20

Finally, the statement regarding K12’s “A-G” course approvals (the courses

21

supposedly certified by UC pursuant to its A-G program) appears to have been false, in

22

that K12 UC’s approval “includes required courses in all 15 areas, including lab science

23

and visual arts,” CAC ¶ 255, which arguably created the impression that it provided

24

courses in all subject matters required under the “A-G” program. Nevertheless, the court

25

finds that allegation unclear, largely for the same reasons the entire CAC is unclear.

26

Plaintiffs further refer in CAC ¶ 255 to CAC ¶ 119, where plaintiffs allege (based

27

on statements in the “In the Public Interest” report) that the UC system does not accept

28

any of CAVA’s laboratory science classes. However, the alleged false statements at
37

1

issue in this case are those relating to Agora (and Scantron and “quality and

2

effectiveness”) – not CAVA, at least as far as the court can tell. Plaintiffs also refer in

3

¶ 255 to ¶ 188 – another paragraph that relates to CAVA. The complaint is so

4

disorganized that the court has found it nearly impossible to structure a chronology, to

5

organize the claims into any semblance of logical order, or to make sense of allegations

6

that require flipping back and forth repeatedly in an attempt to comprehend what claims

7

plaintiffs are asserting.

8
9

The court finds that the quality and effectiveness allegations fail to state a claim,
but will allow plaintiffs to amend the complaint to attempt to state a claim They must
specify which statements they are claiming were false at the time they were made, and

11
United States District Court
Northern District of California

10

why they were false when made, and must organize the allegations into a more

12

comprehensible structure so that both defendants and the court can determine exactly

13

what plaintiffs are alleging.

14

3.

15

Defendants argue that the allegations in the CAC do not support a strong

16

inference of scienter. The PSLRA imposes strict requirements for pleading scienter in

17

actions brought pursuant to § 10(b) and Rule 10b-5, requiring that the complaint “state

18

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

19

required state of mind.” 15 U.S.C. § 78u-4(b)(2).

20

Scienter

In determining whether a complaint adequately pleads scienter, a court must

21

consider “whether the totality of plaintiffs' allegations, even though individually lacking,

22

are sufficient to create a strong inference that defendants acted with deliberate or

23

conscious recklessness.” Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380

24

F.3d 1226, 1230 (9th Cir. 2004) (quoting No. 84 Emp'r- Teamster Jt. Council Pension

25

Trust Fund v. Am. W. Holding Corp., 320 F.3d 920, 938 (9th Cir. 2003)).

26

The court must consider all reasonable inferences, whether or not favorable to the

27

plaintiff – that is, it must take into account plausible opposing inferences. Telllabs, 551

28

U.S. at 322-24. While “the court's job is not to scrutinize each allegation in isolation but
38

1

to assess all the allegations holistically[,]” id. at 326, the inference of scienter must

2

ultimately be more than merely "reasonable" or "permissible" – it must be "cogent and

3

compelling, thus strong in light of other explanations[,]" id. at 324.

4

Defendants assert that plaintiffs allege no facts showing a motive to defraud, and

5

no facts showing actual knowledge of any material omission, or supporting a strong

6

inference of conscious disregard or deliberate recklessness. In addition, they contend

7

that plaintiffs have plead no facts showing scienter as to each defendant and as to each

8

alleged misstatement.

9
10

a.

Agora statements

With regard to the Agora statements, defendants assert that plaintiffs’ scienter

United States District Court
Northern District of California

11

allegations hinge on the faulty premise that defendants knew with certainty – and

12

represented otherwise – that the Agora Board’s 2012 non-renewal notice foreclosed the

13

possibility of an ongoing relationship between the parties. They claim that the CAC itself

14

negates that theory.

15

Relying on the November 8, 2012, letter, see above at 4 n.1, defendants argue

16

that the Agora Board disclaimed any intention of inhibiting negotiations with K12, and that

17

it actively pursued discussions throughout 2014, which in fact led to a new contract that

18

year (for provision of educational content and support services). Defendants assert that

19

because the notice of non-renewal did not preclude a continuing relationship between

20

K12 and Agora, defendants’ alleged knowledge of the notice does not support an

21

inference that they knowingly misled investors through their comments.

22

In addition, defendants point to the allegations regarding the statements by four

23

confidential witnesses (whom they refer to as “CWs”), former Agora Board members

24

whom plaintiffs label “BM1,” “BM2,” “BM3,” and “BM4.” See CAC ¶¶ 137-147 & n.4.

25

Defendants claim that these witnesses purport to explain the “various concerns” that

26

“motivated” Agora to end its turnkey management relationship with K12 (citing CAC

27

¶¶ 137-142). Defendants assert, however, that these vague “concerns” – even if known

28

to defendants – do not contradict statements about a possible continuing business
39

1

relationship, and provide no evidence of a knowing misstatement by the individual

2

defendants.

3

Defendants also contend that where a plaintiff cites to evidence from confidential

4

witnesses, the complaint must include particularized allegations showing that each

5

defendant had reason to know about the improprieties identified by the CWs. See In re

6

U.S. Aggregates, Inc. Sec. Litig., 235 F. Supp. 2d 1063, 1075 (N.D. Cal. 2002) (requiring

7

particularized allegations showing each defendant “had reason to know about the

8

improprieties identified by the [CWs]”)). Defendants claim that plaintiffs’ allegations thus

9

offer no basis from which to infer scienter as to the claims involving the Agora

10

United States District Court
Northern District of California

11

statements.
In opposition, plaintiffs argue that the CAC adequately alleges that defendants

12

acted with scienter. They note that defendants do not claim that they did not know about

13

the June 2012 notice of non-renewal from K12’s largest single source of revenue. They

14

assert that such knowledge satisfies the "required state of mind." They also contend that

15

the CAC extensively details the Agora Board’s disenchantment with K12 during the Class

16

Period (citing CAC ¶¶ 128-148; 150). They claim that these accounts indicate the Agora

17

Board’s clear intent to disassociate from K12.

18

The court finds that plaintiffs have adequately alleged scienter as to the Agora

19

statements (or at least as to the failure to disclose that the management contract was

20

being terminated). Courts in the Ninth Circuit have imputed scienter where the matters at

21

issue relate to the “core operations” of the company. See South Ferry LP, No. 2 v.

22

Killinger¸ 542 F.3d 776, 784-86 (9th Cir. 2008); In re Rocket Fuel, Inc. Sec. Litig., 2015

23

WL 9311921, at *10 (N.D. Cal. Dec. 23, 2015) (“core operations” theory supports

24

inference of scienter).

25

Here, given the individual defendants’ roles at K12, as alleged in the CAC, the

26

court finds it entirely plausible that defendants knew about the Agora non-renewal notice,

27

the Agora Board’s intent to disassociate from K12, and the academic outcomes and

28

services K12 provided. See Reece, 747 F3d at 575 (scienter alleged when “the nature of
40

1

the relevant fact is of such prominence that it would be ‘absurd’ to suggest that

2

management was without knowledge of the matter”).

3
4

b.

Scantron statements

With regard to the Scantron statements, the court has already found (as explained

5

above) that plaintiffs cannot state a claim. Thus, because the court must consider the

6

complaint in its entirety in order to determine whether the plaintiffs have adequately

7

alleged scienter, see Zucco, 552 F.3d at 991 (citing Tellabs, 551 U.S. at 322-23), the

8

court need not address scienter.

9

In addition, however, the court wishes to emphasize that taking “nonculpable
explanations” into account, Tellabs, 551 U.S. at 323-24, the most plausible inference is

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United States District Court
Northern District of California

10

that K12 made an isolated mistake in its statistical analysis for a single school year and

12

timely corrected that mistake upon discovery. Such “allegations of negligence are

13

insufficient to establish a strong inference of deliberate recklessness.” See DSAM Global

14

Value Fund v. Altris Software, Inc., 288 F.3d 385, 390 (9th Cir. 2002). Moreover,

15

plaintiffs have not alleged any facts showing that any of the defendants knowingly misled

16

investors, or were reckless in issuing the false data for that one school year.

17
18

c.

Quality and effectiveness statements

With regard to the quality and effectiveness statements, defendants assert that the

19

CAC catalogs criticisms involving K12, and then alleges that statements bearing what

20

defendants describe as "marginal (if any) relation" to those criticisms must have been

21

knowingly false when made. Defendants argue, however, that nowhere in the lengthy

22

complaint do plaintiffs allege any concrete information contradicting any challenged

23

statement – let alone particularized facts demonstrating that defendants were aware of

24

(or deliberately disregarded) that contradictory information at the time of their statements.

25

In particular, defendants point to plaintiffs' references to the “concerns” of the

26

Agora Board which Agora’s self-management transition in late-2014, as well as the

27

references to the Online Charter School Study and the California AG settlement in 2016

28

(citing CAC ¶¶ 250, 262, 268). They argue, however, that plaintiffs allege no factual
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1

basis to support their implicit assertion that defendants received or possessed

2

information that was at odds with the statements they are alleged to have made publicly.

3

Defendants contend that to the extent any negative inferences can be drawn, the

4

“innocent inferences cognizable from the facts pled” are dispositive in defendants’ favor.

5

See Zucco, 552 F.3d at 991.

6

Defendants point to defendants' “affirmative steps . . . to discredit specific public

7

criticisms” and purported efforts to “create[] an overly friendly environment for

8

themselves” as “weigh[ing] in favor of finding scienter.” However, defendants assert, “[i]f

9

scienter could be pleaded merely by alleging that officers and directors possess[ed]
motive and opportunity to enhance a company’s business, virtually every company in the

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United States District Court
Northern District of California

10

United States that experiences a downturn in stock price could be forced to defend

12

securities fraud actions.” See Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1038 (9th

13

Cir. 2002)).

14

As indicated above, it is a little unclear from the CAC exactly which statements fall

15

into the category of quality and effectiveness statements, and why they are alleged to be

16

false, so the court is unable to determine whether scienter is adequately pled.

17

4.

Loss causation

18

In their fourth main argument, which appears in a series of footnotes, defendants

19

assert that the CAC does not adequately allege loss causation. To allege loss causation,

20

a plaintiff need only allege facts showing "a causal connection between the deceptive

21

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

22

plaintiff." In re Daou Sys., Inc., 411 F.3d 1006, 1025 (9th Cir. 2005); see also Dura

23

Pharms., 544 U.S. at 342. Loss causation is a "context-dependent" inquiry. Lloyd v.

24

CVB Fin. Corp., 811 F.3d 1200, 1210 (9th Cir. 2016). Liability attaches for the loss the

25

purchaser sustains “after the truth became known” regarding defendant's material

26

misrepresentation. Dura Pharms., 544 U.S. at 344.

27
28

The burden of pleading loss causation is typically satisfied by allegations that the
defendant revealed the truth through "corrective disclosures" which "caused the
42

1

company's stock price to drop and investors to lose money." See Halliburton Co. v. Erica

2

P. John Fund, Inc., 134 S. Ct. 2398, 2406 (2014). The alleged misrepresentation need

3

not be the “the sole reason for the investment's decline in value,” but plaintiff's allegations

4

must provide “some indication that the drop in [defendant's] stock price was causally

5

related to [the defendant's] financial misstatement[s].” Metzler Investment GMBH v.

6

Corinthian Colleges, Inc., 540 F.3d 1049, 1062 (9th Cir. 2008) (alterations in original)

7

(citation omitted).
Further, loss causation “is a matter of proof at trial and not to be decided on a Rule

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9

12(b)(6) motion to dismiss.” In re Gilead, 536 F.3d at 1057. “So long as the complaint
alleges facts that, if taken as true, plausibly establish loss causation, a Rule 12(b)(6)

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United States District Court
Northern District of California

10

dismissal is inappropriate.” Id. “This is not a probability requirement . . . it simply calls for

12

enough facts to raise a reasonable expectation that discovery will reveal evidence of loss

13

causation.” Id. (citation and quotation omitted).
Defendants’ arguments regarding loss causation appear in three footnotes. First,

14
15

in footnote 21, defendants contend that the CAC fails to allege a causal connection

16

between the Scantron statements and plaintiffs' claimed losses, as the Scantron results

17

were not corrected until August 2016, ten months after the close of the Class Period. As

18

the court finds that plaintiffs have not stated a claim with regard to the Scantron

19

statements (and cannot), the court does not address this argument here.
Second, in footnote 22, defendants assert that the October 27, 2015, Online

20
21

Charter School Study did not "correct" any prior misstatements, and thus did not

22

constitute a viable "corrective disclosure" capable of supporting the loss causation

23

element of plaintiffs' claim. The footnote containing this argument appears in the section

24

of defendants’ brief in which they argue that plaintiffs failed to plead facts showing that

25

any of the quality and effectiveness statements was materially false and misleading when

26

made.

27
28

Third, in footnote 24, defendants argue that K12's disclosure of the California AG's
subpoena, and subsequent settlement, cannot support loss causation because "the
43

1

announcement of an investigation, without more, is insufficient to establish loss

2

causation." See Loos v. Immersion Corp., 762 F3d 880, 890 (9th Cir. 2014). Rather,

3

they assert, a plaintiff must plead facts showing that "investors understood" the

4

announcement to be a "partial disclosure" of a prior "inaccuracy." Lloyd, 811 F.3d at

5

1210. Here, defendants contend, plaintiffs allege no facts indicating that the market

6

understood K12's announcement to indicate fraud; moreover, K12's stock price did not

7

react negatively in the trading day after the disclosure (citing CAC ¶ 311).

8
9

In opposition, plaintiffs contend that the CAC alleges a series of events
constituting partial corrective measures and/or partial materializations of concealed risks
on or about June 26, 2014, August 14, 2014, October 9, 2014, October 30, 2014, and

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United States District Court
Northern District of California

10

October 27, 2015. See CAC ¶ 271.

12

As alleged, these disclosures are as follows: The June 26, 2014 "disclosure" was

13

the announcement by K12 that the Agora Board had elected to use an RFP process for

14

the self-management of the Agora Cyber Charter School starting in the 2015-2016 school

15

year. CAC ¶ 273. On this news, the price of K12 stock fell more than 5%, or $1.30 per

16

share, to close at $24.32 per share on June 27, 2014. CAC ¶ 274. Plaintiffs assert that

17

this announcement partially disclosed that the Agora Board was considering different

18

arrangements for the services and products it required to run Agora, but failed to disclose

19

that the Agora Board had provided K12 with notice that it did not intend to renew the

20

Agora/K12 management contract. See CAC ¶ 275.

21

The August 14, 2014 "disclosure" was the announcement that the Agora Board

22

was interested in being a "self-managed organization." CAC ¶¶ 277-278, 281-282. On

23

this news, the price of K12 stock fell 13.3%, or $2.98 a share, to close at $19.42 per

24

share on August 14, 2014. CAC ¶ 279.

25

The October 9, 2014 "disclosure" was the press release announcing that K12 had

26

been awarded a three-year contract to provide the academic curriculum for Agora, and

27

that the Agora Board would assume management duties. See CAC ¶ 284. During the

28

subsequent earnings call, K12 disclosed that as a result of this change, K12 would
44

1

experience a significant decline in revenue. CAC ¶ 285. On this news, the price of K12

2

stock fell 7%, or $1.12 a share, to close at $14.87 per share, and fell further the following

3

day, to $13.82 per share. CAC ¶ 287.

4

The October 30, 2014 "disclosure" was K12's announcement, in a press release,

5

that revenue and enrollments for the quarter ending September 30, 2014 were in line with

6

the October 9, 2014 preview, K12 had experienced "disappointing' operating results.

7

CAC ¶ 290.

8
9

Later that day K12 held an earnings call with investors and analysts, where it
repeated its financial results for the quarter, and Rhyu explained that the decrease in
"lower gross margin" ("difference between revenue and instructional costs and services

11
United States District Court
Northern District of California

10

divided by revenue") was due to K12's "continuing to invest in teachers and academic

12

programs," with "some of the rate increases that contributed to our managed program

13

revenue growth relate to programs where K12 incurs significant costs." CAC ¶ 290. On

14

this news, the price of K12 stock fell more than 14%, or $2.17 per share, to close at

15

$12.98 per share. CAC ¶ 293.

16

Plaintiffs allege that the question-and-answer portion of the October 30, 2014,

17

earnings call partially revealed that although K12 was supposedly continuing to invest

18

more in academic results, the relevant authorities were not impressed with K12's efforts

19

to improve academic performance and that the cost to continue and magnify those

20

improvements would further impact K12's margins, which they claim constituted a "partial

21

materialization of the risks concealed by" defendants false and misleading statements.

22

CAC ¶ 294.

23

Finally, plaintiffs describe some of the findings of the October 27, 2015, Online

24

Charter School Study, which disclosed various problems with online charter schools like

25

K12. See CAC ¶¶ 296-305. They assert that K12's October 27, 2015 press release, in

26

which it announced its financial results for 1Q16 (quarter ending September 30, 2015),

27

and the earnings call held that same day, further disclosed the impact that the loss of the

28

Agora contract had and continued to have on K12's financial results, which they claim
45

1

constituted a "partial materialization of the risks concealed by [d]efendants' false and

2

misleading statements. CAC ¶¶ 306-308.

3

Plaintiffs concede that the market did not immediately react to the disclosure of the

4

subpoena from the California AG, which K12 made in an SEC filing after the market

5

closed on October 27, 2015. See CAC ¶ 310. However, they assert that the share price

6

"slid a cumulative $0.54 per share" over a three-day period, from October 27, 2015, to

7

close at $9.71 per share on October 30, 2017, CAC ¶ 311 (which was, of course, after

8

the close of the proposed Class Period).

9

The court finds that for purposes of the present motion, the CAC adequately
alleges loss causation as to the Agora statements. K12 released the true information in

11
United States District Court
Northern District of California

10

bits and pieces – a bit in June 2014, a bit in August 2014, and a bit in October 2014.

12

Plaintiffs allege that the price of K12's stock dropped 5% on June 27, 2014; dropped

13

13.3% on August 2014; and dropped 7% on October 10, 2014, and fell slightly further the

14

following day.

15

The court does not address loss causation as to the Scantron statements. As for

16

the quality and effectiveness statements, there is no clear loss causation alleged (as with

17

the other elements), and this must be corrected in any amended complaint.

18

5.

Control-person liability under § 20(a)

19

Finally, defendants assert (again, in a footnote) that the CAC fails to state a claim

20

for § 20(a) control person liability, "[b]ecause [p]laintiffs have not established a primary

21

violation of the federal securities laws[.]" Plaintiffs’ only response to defendants’

22

argument is that they have stated a claim under § 20(a) because they have stated a

23

claim of primary liability under § 10(b) and Rule 10b-5.

24

In order to establish a prima facie case under § 20(a), a plaintiff must show (1) a

25

primary violation of federal securities laws, and (2) that the defendant exercised actual

26

power or control over the primary violator. Howard v. Everex Sys., Inc., 228 F.3d 1057,

27

1065 (9th Cir. 2000). In general, whether the defendant is a controlling person is a

28

factual question, “involving scrutiny of the defendant's participation in the day-to-day
46

1

affairs of the corporation and the defendant's power to control corporate actions.” Id.

2

(quoting Kaplan v. Rose, 49 F.3d 1363, 1382 (9th Cir.1994)). Thus, the § 20(a) claim is

3

derivative – if there is no primary claim stated, there can be no control-person claim.

4

Here, while the court finds that plaintiffs have stated a claim of primary liability

5

based on the “Agora statements,” neither side has addressed the elements of a § 20(a)

6

claim, arguing only that there is or is not a § 20(a) claim based on their view as to

7

whether there is or is not a viable claim of primary liability.

8

While it appears likely from the allegations at CAC ¶¶ 26-33, 36, 340-342 that
plaintiffs may have stated a claim under § 20(a), defendants did not adequately address

10

this issue in their motion, as they did little more than raise it in a footnote, and the court

11
United States District Court
Northern District of California

9

declines to analyze the issue or rule on it in this order.
CONCLUSION

12
13

In accordance with the foregoing, defendants’ motion is GRANTED in part and

14

DENIED in part. With regard to falsity, scienter, and loss causation, the court finds that

15

plaintiffs have stated a claim with regard to the Agora statements (or at least with regard

16

to the failure to disclose the non-renewal of the contract), have not stated a claim with

17

regard to the Scantron statements (and cannot), and have not stated a claim with regard

18

to the quality and effectiveness statements (but might be able to do so in an amended

19

complaint).

20

Thus, the motion to dismiss the CAC as it pertains to the Agora statements is

21

DENIED. The motion to dismiss the CAC as it pertains to the Scantron statements is

22

GRANTED. The dismissal is WITH PREJUDICE. The motion to dismiss the CAC as it

23

pertains to the quality and effectiveness Statements is GRANTED, with LEAVE TO

24

AMEND.

25

Any amended complaint shall be filed no later than October 2, 2017. No new

26

parties or claims shall be added without leave of court. In addition, apart from the above

27

ruling, plaintiffs should focus on shortening the complaint by eliminating allegations that

28

are not essential or relevant to their securities fraud claim. In the court’s view, when each
47

1

side finds it necessary to submit a lengthy “Appendix” – 38 pages for defendants and 53

2

pages for plaintiffs – in connection with a motion to dismiss, that in itself is a sure

3

indication that the complaint is overly long and convoluted.
The CAC includes numerous lengthy passages which appear to have as their sole

4

purpose to criticize the quality of the educational services provided by K12. But many of

6

those passages are of only marginal relevance to the § 10(b) claims because none of the

7

alleged false statements or omissions directly relate to those particular allegations.

8

Plaintiffs have also included numerous allegations relating to events that occurred before

9

and after the proposed Class Period, without clarifying what – if any – connection there

10

may be between those events and the events alleged to have occurred during the Class

11
United States District Court
Northern District of California

5

Period.

12

Thus, while the CAC may not be a true "puzzle-style" complaint, taken as a whole

13

it is far from being a complaint that complies with Rule 8(b)'s requirement that the plaintiff

14

provide "a short and plain statement of the claim showing that the pleader is entitled to

15

relief."

16

In particular, the court notes that the CAC includes numerous details relating to

17

events that occurred before and after the Class Period, as well as details of events that

18

do not seem to have any bearing on the claims asserted in the complaint other than to

19

emphasize plaintiffs' underlying contention that K12 was offering a mediocre product

20

which it was touting as a premier product.

21

This includes most of the references to the Colorado Virtual Academy, CAC ¶¶ 11,

22

81-89; the references to the Tennessee Virtual Academy, CAC ¶¶ 90-99; the references

23

to the California Virtual Academies, CAC ¶¶ 100-119; the lengthy summary of the Online

24

Schools report published October 27, 2015 (last day of the Class Period), CAC ¶¶ 16,

25

166-179; and the description of the settlement of the case filed against K12 by the

26

California AG and the provisions of the July 2016 judgment, CAC ¶¶ 15,186-191.

27
28

If it is plaintiffs’ belief that some of these seemingly irrelevant allegations do in fact
support the elements of the claims of alleged false statements or omissions, they must
48

1

make that connection clear in the amended complaint. If no connection can be made,

2

such allegations should be omitted.

3
4

IT IS SO ORDERED.

5

Dated: August 30, 2017

6
7

__________________________________
PHYLLIS J. HAMILTON
United States District Judge

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United States District Court
Northern District of California

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