Boca Raton Firefighters and Police Pension Fund v. DEVRY, Inc. et al
Filing
138
MEMORANDUM OPINION Signed by the Honorable John F. Grady on 5/8/2014. Mailed notice(cdh, )
10-7031.131-RSK
May 8, 2014
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
BOCA RATON FIREFIGHTERS’ AND
POLICE PENSION FUND and WEST
PALM BEACH FIREFIGHTERS PENSION
FUND, individually and on behalf
of all others similarly situated,
Plaintiffs,
v.
DEVRY INC., DANIEL HAMBURGER, and
RICHARD M. GUNST,
Defendants.
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No. 10 C 7031
MEMORANDUM OPINION
The court makes the following findings pursuant to the Private
Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. § 78u-4.
BACKGROUND
We will assume that the reader is familiar with our opinions
dismissing Boca Raton Firefighters’ and Police Pension Fund’s
(“Boca Raton”) first amended complaint (“FAC”) and second amended
complaint (“SAC”). See Boca Raton Firefighters' and Police Pension
Fund v. DeVry Inc., No. 10 C 7031, 2012 WL 1030474 (N.D. Ill. Mar.
27, 2012) (“Boca Raton I”); Boca Raton Firefighters’ and Police
Pension Fund v. DeVry Inc., No. 10 C 7031, 2013 WL 1286700 (N.D.
Ill. Mar. 27, 2013) (“Boca Raton II”).
Nevertheless, it will be
helpful to briefly discuss this lawsuit’s procedural history.
On
November 1, 2010, Robbins Geller Rudman & Dowd LLP (“Robbins
- 2 -
Geller”), as counsel for Boca Raton, filed its original securitiesfraud complaint against Devry, Inc., Daniel Hamburger, Richard M.
Gunst, and David Pauldine.
The parties filed a joint scheduling
stipulation before their first court appearance.
The stipulation,
which we entered, allowed Boca Raton to file a “consolidated
complaint”
plaintiff.”
60
days
after
an
order
designating
it
as
(See Order re Joint Scheduling Stip., Dkt. 18.)
“lead
The
defendants would then have 60 days to answer the “consolidated
complaint,” or if the plaintiffs did not file one, 60 days to
answer the original complaint.
(Id.)
On January 3, 2011, Boca
Raton moved for an order designating it as lead plaintiff, Robbins
Geller as lead counsel, and Wexler Wallace LLP as liaison counsel.
We granted that motion without any objection from the defendants.
At the hearing on the motion, defense counsel inquired whether Boca
Raton intended to file an amended complaint.
Hearing, dated Jan. 5, 2011, Dkt. 28, at 5.)
(See Trans. of
Plaintiff’s counsel,
David J. George, responded that he intended to amend the complaint
and requested 60 days to do so (consistent with the scheduling
stipulation).
(Id.)
We asked counsel why he needed such a long
time, and he explained that Boca Raton’s fact investigation was
“ongoing” and that it needed to bolster the complaint’s allegations
to satisfy the PSLRA’s heightened pleading requirements.
5-6.)
(Id. at
We then asked counsel whether he believed that his current
complaint satisfied the PSLRA:
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The Court: You think your
insufficient to pass muster?
present
complaint
is
Mr. George: Your Honor, from -- yes. The complaint as it
stands now would not be one that I would stand on under
the standards under the Private Securities Litigation
Reform Act, and as a matter of pattern and practice in
these cases, once lead plaintiff is appointed, because up
until this point there has not been one, a new complaint
is filed that incorporates all of the materials that we
gathered in the course of the factual investigation. And,
in fact, 60 days — they have actually agreed to it — it’s
a reasonable and customary amount of time in these cases.
(Id. at 6.)
So, without objection from the defendants, we gave
Boca Raton 60 days to file an amended complaint, and gave the
defendants 60 days to answer or otherwise plead:
THE COURT: Well, then, Mr. Salpeter, I think you can
assume that there will be an amended complaint, so you
should hold your fire until you see what it looks like.
MR. SALPETER: I agree. So I guess the order that your
Honor previously put into effect where they get 60 days
to amend their complaint and then we get 60 days
thereafter to attack the complaint stands. Is that fair?
THE COURT: Do you think you will need 60?
MR. SALPETER: I'd like 60.
THE COURT: All right. We will let that stand.
MR. SALPETER: Okay.
(Id. at 7.)
Boca Raton filed its amended complaint, entitled “Consolidated
Class Action Complaint,”1 on March 7, 2011,
(See FAC, Dkt. 27.)
The FAC did not name Pauldine as a defendant, but in a footnote
1/
The PSLRA contemplates consolidated class actions, see 15 U.S.C. § 78u4(a)(3)(B)(ii), but no other actions were consolidated with this case.
- 4 -
Boca Raton continued to allege that he had engaged in insider
trading. (See id. at ¶ 41, n.1.)
Many of the FAC’s allegations
were based upon counsel’s interviews with confidential witnesses
(students and DeVry employees).
(See id. at ¶¶ 38-72.)
The
thrust of the FAC was that Devry had a “predatory” business model
that put profits ahead of education2 — a curious basis for a
securities-fraud lawsuit.
The FAC contained many loosely related
anecdotes from students and front-line employees at Devry’s various
campuses.3
We concluded that these allegations did not support an
inference of widespread fraud impugning the company’s positive
statements concerning its operations during the class period.
The
FAC’s strongest (but still deficient) allegations concerned Devry’s
recruiter-compensation practices. The Higher Education Act (“HEA”)
prohibits schools from providing “any commission, bonus, or other
incentive payment based directly or indirectly on success in
securing enrollments or financial aid to any persons or entities
engaged in any student recruiting or admission activities or in
making
decisions
assistance.”
regarding
the
award
20 U.S.C. § 1094(20).
of
student
financial
But for most of the class
2/
(See, e.g., FAC at ¶ 3 (Alleging that DeVry created “a systemically
predatory business model designed for one purpose and one purpose alone – to
identify, target and exploit ‘sales leads’ (or students, as they are referred to
by most institutions of higher learning) in order to close as many ‘sales’ (or
student enrollments, as they are referred to by most institutions of higher
learning) as possible and then use its students to effectuate a cash grab by
cannibalizing federal student financial aid monies.”).)
3/
A statement attributed to "CW 20" gives a flavor of those allegations:
"I took a lower paying job because I couldn't stay at a job that was evil. DeVry
was the most evil place I ever worked." (FAC at ¶ 122.)
- 5 -
period, the regulation implementing this restriction contained a
“safe harbor” that gave schools substantial leeway to reward
recruiters for enrolling students:
(b) By entering into a program participation agreement,
an institution agrees that —
(22)(i) It will not provide any commission, bonus, or
other incentive payment based directly or indirectly upon
success in securing enrollments or financial aid to any
person or entity engaged in any student recruiting or
admission activities . . . .
(ii) Activities and arrangements that an institution may
carry out without violating the provisions of paragraph
(b)(22)(i) of this section include, but are not limited
to:
(A) The payment of fixed compensation, such as a fixed
annual salary or a fixed hourly wage, as long as that
compensation is not adjusted up or down more than twice
during any twelve month period, and any adjustment is not
based solely on the number of students recruited,
admitted, enrolled, or awarded financial aid. For this
purpose, an increase in fixed compensation resulting from
a cost of living increase that is paid to all or
substantially all full-time employees is not considered
an adjustment.
34 C.F.R. § 668.14(b)(22) (effective until July 1, 2011) (emphasis
added).
One confidential witness alleged that he/she received a
“variable bonus” tied to enrollment success, a clear HEA violation.
(See FAC at ¶ 169.)
But we concluded that this allegation,
supported by only one confidential witness, was insufficient to
establish that the defendants’ class-period statements were false.
See Boca Raton I,
allegations
were
2012 WL 1030474, *7.
also
deficient.
None
Boca Raton’s scienter
of
the
plaintiff’s
confidential witnesses held positions within the company that would
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have enabled them to make allegations about what DeVry’s senior
executives knew about the company’s practices.
See id. at *10-12.
We noted that the nature of the recruiter-compensation allegations
might support an inference that the defendants must have known
about the alleged HEA violations. See id. at *11 (“[I]f DeVry paid
recruiters ‘variable bonuses’ tied to enrollment, is it likely that
the defendants did not know that when they specifically told
investors
otherwise?”).
But
again,
those
allegations
were
insufficient to support the allegation that the defendants had
misrepresented their recruiter-compensation policy. See id. (“[W]e
have already held that the plaintiffs have not sufficiently alleged
that [the defendants’ compliance statements] were false. Therefore,
it is unnecessary to decide now whether the plaintiffs could plead
scienter as to those alleged misrepresentations.”).
held
that
the
plaintiff
had
not
sufficiently
Finally, we
alleged
loss
causation. Boca Raton relied upon public documents that criticized
the for-profit education industry in general, but did not accuse
DeVry of any wrongdoing.
See id. at *13-18; cf. Tricontinental
Indus., Ltd. v. PricewaterhouseCoopers, LLP, 475 F.3d 824, 843 (7th
Cir. 2007). Moreover, none of the documents that the plaintiffs
cited mentioned recruiter compensation (at DeVry or elsewhere).
See Boca Raton I, 2012 WL 1030474, *19 (“[T]he Fund has not
identified
any
disclosure
even
touching
upon
recruiter
compensation, the complaint’s strongest (although still deficient)
- 7 -
allegations.”).
So, the market never learned what the defendants
had allegedly concealed.
We gave Boca Raton leave to amend its
complaint, but noted that it faced an “uphill climb.”
Id.
Boca Raton completely overhauled its theory of the case in the
SAC.
Instead of attacking DeVry’s entire business model, the SAC
focused narrowly on the company’s allegedly illegal recruitercompensation policy.
See Boca Raton II, 2013 WL 1286700,
*2.
Boca Raton alleged that the market learned about DeVry’s illegal
practices in August 2011 — approximately 10 months after it filed
its original complaint.
See id.
The defendants moved to dismiss,
arguing — among other things — that Boca Raton lacked standing to
challenge statements that the defendants made after Boca Raton last
purchased DeVry stock.
See id.
We gave Boca Raton leave to amend
the complaint to add a co-plaintiff (West Palm Beach Firefighters’
Pension Fund) that had purchased stock after the last allegedly
false statement alleged in the SAC.
See id.
This cured the
standing problem, but still, the SAC failed to satisfy the PSLRA’s
heightened pleading requirements.
The plaintiffs sufficiently
alleged that the defendants made several false statements during
the class period, see id. at *5-6, but they did not sufficiently
allege that the defendants made those statements with the required
state of mind.
See id. at *9-12.
causation theory was deficient.
Also, Boca Raton’s new lossEffective July 1, 2011, the
Department of Education (“DOE”) repealed the recruiter-compensation
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“safe harbor,” making it illegal to base compensation, in any part,
on enrollment success.
See 34 CFR § 668.14 (b)(22).
In August
2011, Devry announced that new undergraduate employment fell at
Devry University, and Hamburger attributed the decline to the need
to comply with the new recruiter-compensation regulations (among
other things).
According to the plaintiffs, “the new regulations
caused DeVry to impose HEA-compliant policies ‘for the first time,’
[SAC at ¶ 5], and therefore the impact of the new regulations
implicitly revealed the illegality of DeVry's practices under the
old regulations.”
Id. at *12.
We held that this strained theory
did not allege a sufficiently clear connection between the alleged
fraud and the defendants’ disclosure.
Id.
Because the plaintiff
had failed to sufficiently allege scienter and loss causation, we
dismissed the complaint, this time with prejudice.
Id. at *13.
DISCUSSION
A.
Legal Standard
The PSLRA requires a court, “upon final adjudication of the
action,” to make “specific findings regarding the compliance by
each party and each attorney representing any party with each
requirement of Rule 11(b) of the Federal Rules of Civil Procedure
as to any complaint, responsive pleading, or dispositive motion.”
15 U.S.C. § 78u-4(c)(1); see also City of Livonia Employees'
Retirement System and Local 295/Local 851 v. Boeing Co., 711 F.3d
754, 761 (7th Cir. 2013) (the district court has a “duty” to make
- 9 -
the
findings
required
by
§
78u-4(c)(1)
prevailing party asks for sanctions).
whether
or
not
the
Because § 78u-4 applies to
“any” complaint, “when a plaintiff files multiple complaints, each
must be scrutinized.”
Thompson v. RelationServe Media, Inc., 610
F.3d 628, 664 (11th Cir. 2010).
“The PSLRA does not grant a
get-out-of-jail-free card — one nonfrivolous complaint does not
immunize the earlier filing of frivolous complaints.”
conclude
that
any
party
and/or
attorney
has
Id.
violated
If we
any
requirement of Rule 11(b), we must impose sanctions. See 15 U.S.C.
§ 78u-4 (c)(2) (“Mandatory sanctions”).
The presumed sanction for
the “substantial failure of any complaint” to comply with Rule
11(b)
is
“an
award
to
the
opposing
party
of
the
reasonable
attorneys’ fees and other expenses incurred in the action.” Id. at
§ 78u-4(3)(A) (emphasis added).
The party opposing sanctions may
rebut this presumption only upon proof that (1) “the award of
attorneys’ fees and other expenses will impose an unreasonable
burden on that party or attorney and would be unjust, and the
failure to make such an award would not impose a greater burden on
the party in whose favor sanctions are to be imposed;” or (2) “the
violation of Rule 11(b) of the Federal Rules of Civil Procedure was
de minimis.”
Id. at § 78u-4(3)(B) (i) and (ii).
If the opposing
party successfully rebuts the presumption, then the court “shall
award the sanctions that the court deems appropriate pursuant to
Rule 11 of the Federal Rules of Civil Procedure.”
4(3)(C).
Id. at § 78u-
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“Representations in a filing in a federal district court that
are not grounded in an ‘inquiry reasonable under the circumstances’
or
that
are
unlikely
to
‘have
evidentiary
support
after
a
reasonable opportunity for further investigation or discovery’
violate Rules 11(b) and 11(b)(3).’” Boeing, 711 F.3d at 762. “[A]
court may impose sanctions on a party for making arguments or
filing claims that are frivolous, legally unreasonable, without
factual
foundation,
or
asserted
for
an
improper
purpose.
In
particular, a frivolous argument or claim is one that is “‘baseless
and made without a reasonable and competent inquiry.’”
Fries v.
Helsper, 146 F.3d 452, 458 (7th Cir. 1998) (quoting Townsend v.
Holman Consulting Corp., 929 F.2d 1358, 1362 (9th Cir.1990) (en
banc)).
B.
Boca Raton’s Original Complaint
We previously expressed our view that Boca Raton filed its
original
complaint
inquiry.
See Boca Raton I, 2012 WL 1030474, *1; Boca Raton II,
2013 WL 1286700, *13.
without
conducting
a
reasonable
pre-suit
The attorneys responsible for Boca Raton’s
investigation, Mr. George and Robert J. Robbins, state that they
reviewed publically available information about DeVry, and about
the for-profit education industry in general, before filing the
complaint.
(See George Decl., attached as Ex. 1 to Pl.’s Resp., ¶
7 (a)-(v); Robbins Decl., attached as Ex. 2 to Pl.’s Resp., ¶ 5(a)(v).)
These declarations only establish that Mr. George and Mr.
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Robbins
conducted
a
pre-suit
investigation,
“reasonable under the circumstances.”
not
that
it
was
Cf. Fed. R. Civ. P. 11(b).4
The section of the original complaint entitled “Defendants’ False
and Misleading Statements Issued During the Class Period” mostly
consists of statements regarding DeVry’s financial performance.
(See Orig. Compl. ¶¶ 26, 28, 29-33, 36, 38, 40-42, 44-46, 48, 51,
57, 69.)
Boca Raton did not allege in its original complaint, nor
did it ever allege in any of its subsequent filings, that the
defendants
misstated
apparently
truthful
its
financial
statements
results.
aside,
the
Setting
original
these
complaint
alleged only two conceivably actionable public statements.
First, in May 2008, Hamburger reassured investors in a press
release that the company complied with recruiter-compensation
regulations:
“‘As part of our long-standing commitment to quality and
integrity, we believe that DeVry’s recruiter compensation
is structured in accordance with all governing rules and
regulations,’” said Daniel Hamburger, president and chief
executive officer of DeVry.”
(Orig. Compl. ¶ 34.)
We infer from Mr. George’s and Mr. Robbins’s
declarations that they believed that this statement was false based
upon: (1) a qui tam suit was filed by a DeVry employee who
allegedly worked for the company between January 2002 and November
2003, approximately four years before the start of the class period
4/
Boca Raton retained an expert to state that Robbins Geller did conduct
a reasonable pre-suit investigation. (See Decl. of Geoffrey C. Hazard, Jr.,
attached as Ex. 3 to Pl.’s Resp., ¶ 9.) For the reasons we are about to explain,
we disagree with that assessment.
- 12 -
in this case; and (2) another qui tam action filed against a
different for-profit education company.
& (s); Robbins Decl. ¶ 5(r) & (s).)
(See George Decl. ¶ 7(r)
According to counsel, the
latter is relevant here because the suit “included a reference to
Dean Dunbar, who formerly worked in DeVry University’s student
enrollments program.”
(See George Decl. ¶ 7(r) & (s).)
This is a
flimsy basis to accuse the defendants of defrauding investors.
best,
these
lawsuits
investigation.
suggest
a
potential
avenue
for
At
further
But according Mr. George and Mr. Robbins, they did
not speak with any witnesses before filing the original complaint.
(See George Decl. ¶ 7 (a)-(v); Robbins Decl. ¶ 5(a)-(v).)
That
investigation only occurred after Boca Raton filed suit.
Second, in April 2010, Hamburger made the following statement
shortly before DeVry’s common stock reached its class-period high:
“We continue to achieve favorable enrollment trends
during this quarter, as students were attracted by the
value proposition of our educational offerings, which
includes high quality programs and services and a strong
track record of academic outcomes for students . . . .
We remain committed to investing in quality and providing
the access and capacity we needed to educate our
country’s workforce to compete in the midst of a tough
economy.”
(Orig. Compl. ¶ 55.)
Our best guess is that the plaintiffs
believed that this statement was false because it did not disclose
that DeVry “had engaged in improper and deceptive recruiting and
financial aid lending practices . . . .”
(Id. at ¶ 74(a).)
But
the complaint does not describe any “improper and deceptive”
- 13 -
practices.
(Id.; see also id. at ¶ 74(b) (generically alleging
that DeVry “failed to maintain proper internal controls”).)
is not merely a technical pleading error.
This
During the course of
this lawsuit, we reviewed many of the public documents that counsel
say they reviewed before filing suit.
Those materials do not
establish a reasonable basis to accuse DeVry of “improper and
deceptive” practices.
Although we did not scour the company’s
public filings, we presume that it did not accuse itself of
wrongdoing in its own SEC filings and press releases.
Decl. ¶ 7(a), (b), (c), and (d).)
(See George
Other materials describe
problems in the for-profit education industry generally, but not at
DeVry specifically.
(See id. at ¶ 7(g), (h), (i), (j), (k), (l),
(m), (n), (o), (p), (q), (u), (v).)
This leaves categories of
documents — e.g., “news, media reports and Internet searches,” (id.
at ¶ 7(e)) — that are too generic to support the conclusion that
Boca
Raton
had
misrepresentation.
a
good
faith
basis
for
accusing
DeVry
of
(See also id. at ¶ 7(f) (“market analyst
reports”); (t) (“complaints regarding DeVry University posted on
the website, www.complaintsboard.com”).)
The original complaint’s allegations with respect to the other
elements of a securities-fraud claim are perfunctory. The scienter
allegations are cursory and circular:
As set forth elsewhere in detail, defendants, by virtue
of their receipt of information reflecting the true facts
regarding DeVry, their control over, and /or receipt
and/or modification of DeVry allegedly materially
- 14 -
misleading misstatements and/or their associations with
the Company which made them privy to confidential
proprietary information concerning DeVry, participated in
the fraudulent scheme alleged herein.
(Orig. Compl. ¶ 76.)
There is no “detail” elsewhere in the
complaint that would give these allegations any hope of satisfying
the PSLRA.
The original complaint’s loss-causation allegations
fare no better.
Boca Raton alleged that the “truth” about Devry
was revealed on August 13, 2010 when the DOE released data showing
that “loan repayment rates at DeVry’s schools were just 38%.” (Id.
at ¶ 77.)
The thrust of this allegation was that, based upon the
38% repayment rate, DeVry might lose financial-aid eligibility in
the future based upon proposed regulations that had not yet gone
into effect.
(See Orig. Compl. ¶ 72); see also Boca Raton I, 2012
WL 1030474, *18.
Moreover, the DOE data revealed nothing about
DeVry’s
other
(or
any
company’s)
compliance
with
recruiter-
compensation regulations.
Boca Raton argues that it would be inappropriate to impose
sanctions based upon Mr. George’s statement at the January 5, 2011
status conference.
According to Mr. George, his statement was
“poorly phrased and created an impression that was never intended.”
(See George Decl. ¶ 17.)
We rather think that Mr. George candidly
acknowledged what was obvious on the face of the complaint: no
reasonable
lawyer
could
believe
that
the
original
complaint
satisfied the PSLRA. In any event, counsel is not being sanctioned
for anything he said in open court.
Rule 11 sanctions are
- 15 -
appropriate because the original complaint was frivolous.
In sum,
Boca Raton filed the original complaint without conducting a
reasonable pre-suit inquiry, its securities-fraud claim was not
warranted by existing law, and its factual contentions lacked
evidentiary support.
The court finds that Boca Raton and Robbins
Geller violated Rule 11(b).
C.
Boca Raton’s FAC
The FAC contained allegations based, in part, on counsel’s
interviews with 33 confidential witnesses.
See Boca Raton I, 2012
WL 1030474, *1 (After filing its original complaint, Boca Raton
“conduct[ed] an investigation that it should have conducted before
filing this lawsuit.”).
Many of the statements in the amended
complaint attributed to confidential witnesses were irrelevant,
vague, and/or ambiguous.
(See id. at *3-4.)
But Boca Raton did
find a confidential witness who supported its allegation that DeVry
did not comply with recruiter-compensation regulations.
(See id.
at *6-7 (“CW 20" alleged that he/she received a “variable bonus”
tied to student enrollment).)
We held that this uncorroborated
statement from a single confidential witness was insufficient to
allege that the defendants had misrepresented their compliance with
HEA regulations.
(Id.)
But the level of corroboration needed to
state a claim under PSLRA using confidential witnesses is not set
in stone.
See Makor Issues & Rights, Ltd. v. Tellabs Inc., 513
F.3d 702, 711-12 (7th Cir. 2008); Higginbotham v. Baxter Int’l
- 16 -
Inc., 495 F.3d 753, 757 (7th Cir. 2007). This allegation, although
deficient, was not frivolous.
Raton’s
attorneys
confidential
have
witnesses,
The defendants complain that Boca
refused
and
to
have
their
divulge
not
the
reliance
the
court
any
the
on
of
the
given
names
witnesses’
information
substantiating
statements.
As the defendants point out, Robbins Geller has been
admonished for its practices concerning confidential witnesses in
other cases.
firm’s
See Boeing, 711 F.3d at 761-62 (criticizing the
conduct
reprimanded).
and
citing
other
cases
where
it
has
been
But we have no basis to suspect that the witnesses
in this particular case did not make the statements attributed to
them, or that plaintiff’s counsel had reasons to suspect their
trustworthiness.
We will not require an investigation based only
on speculation that it might produce evidence relevant to our Rule
11 inquiry.
We considered it a “close call” whether Boca Raton had
adequately alleged that the defendants’ HEA compliance statements
were false.
Boca Raton I, 2012 WL 1030474, *7.
only one element of a securities-fraud claim.
But falsity is
At the pleading
stage, the plaintiff must also “provide a defendant with some
indication of . . . the causal connection” between the defendant’s
misstatement
or
omission
and
the
plaintiff’s
loss.
Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 347 (2005).
Dura
Boca
Raton alleged that the market learned about Devry’s “predatory”
- 17 -
practices in a series of partial disclosures about the for-profit
education industry in general.
We held that this theory was
inconsistent with our Court of Appeals’s ruling in Tricontinental.
See Boca Raton I, 2012 WL 1030474, *13-18.
Tricontinental
alleged
that
the
The plaintiffs in
defendant
made
material
misrepresentations in a 1997 audit statement that induced the
plaintiff to purchase stock in Anicom, Inc. Tricontinental, 475
F.3d at 842. In 2000, Anicom’s stock price fell after it disclosed
misstatements in its 1998 and 1999 financial statements. Id. at
842–43. The district court dismissed the plaintiffs’ complaint
because Anicom’s disclosures about the 1998 and 1999 financial
statements did not disclose problems with the 1997 statements. Id.
at 842.
On appeal, the plaintiffs argued that “[n]owhere in Dura
does the Supreme Court require that the precise fraud that resulted
in the underlying transaction be the subject of a later corrective
disclosure in order to satisfy loss causation.” Id. at 843. Our
Court of Appeals rejected this argument and affirmed dismissal. See
id. (“We cannot accept this rendition of Dura 's requirements.”).
Anicom's
revelations
concerning
its
1998
and
1999
financial
statements did not make the problems with the 1997 audit “generally
known,” (id.), notwithstanding the plaintiffs’ argument that the
disclosed problems were part of the same “on-going scheme to
overrepresent revenue and that the 1998 audit relied in part on
historic information.” Id. at 842.
- 18 -
In
light
of
Tricontinental,
the
FAC’s
loss-causation
allegations cross the line between merely flawed and outright
frivolous.
is
Tricontinental
controlling
authority
in
this
district and the defendants cited it in their opening brief.
In
response, Boca Raton did not attempt to distinguish — did not even
cite — Tricontinental. See Gross v. Town of Cicero, Ill., 619 F.3d
697, 703 (7th Cir. 2010) (“Failing to cite adverse controlling
authority makes an argument frivolous. Not only that, but it is
imprudent and unprofessional.”). Instead, it relied on non-binding
authority from this district and from other jurisdictions to
attempt to establish a more liberal interpretation of the pleading
standard
announced
in
Dura.
Not
only
did
Transcontinental
explicitly reject the interpretation that Boca Raton advocated, it
did so in a case alleging a much more plausible loss-causation
theory. Anicom disclosed misstatements in its financial statements
for
1998
and
1999,
and
the
plaintiff
alleged
that
those
misstatements were part of an on-going scheme that included the
company’s 1997 financial statements.
Nevertheless, our Court of
Appeals held that the link between the 1997 financial statements,
on the one hand, and the 1998 and 1999 statements on the other, was
too
tenuous
to
Tricontinental’s
adequately
holding,
it
plead
was
loss
causation.
unreasonable
to
argue
Given
that
disclosures about other schools, and about the industry in general,
disclosed fraud by DeVry.
- 19 -
Boca Raton’s frivolous loss-causation theory should also be
viewed within the context of the lawsuit as a whole.
Boca Raton
had no reasonable basis to accuse the defendants of securities
fraud when it originally filed suit.
After the fact, it attempted
to “reverse engineer” a securities-fraud claim, to borrow the
defendants’
phrase.
Its
belated
investigation
produced
a
hodgepodge of anecdotal allegations without any plausible link to
the
defendants’
public
statements
and/or
the
fund’s
losses.
Essentially, the FAC prolonged a strike suit. We conclude that the
amended complaint, like the original complaint, violated Rule
11(b).
D.
Boca Raton’s SAC
Boca Raton’s revamped SAC was stronger than its first two
complaints.
It was unable to bolster its allegation that the
defendants paid illegal bonuses based upon enrollment success. Cf.
Boca Raton II, 2013 WL 1286700, *4.
that,
in
practice,
compensation
policy
the
company’s
violated
HEA
But it adequately alleged
facially
compliant
regulations.
The
fixedcompany
purported to pay fixed compensation based upon enrollment and socalled “TEACH” values. Boca Raton alleged that, in fact, the TEACH
values were pretextual and that fixed compensation was based
“solely” on enrollment.
Id. at *5-6.
The plaintiffs also alleged
that the defendants made misleading statements about the likely
impact of new regulations.
Id. at *6-8.
We held that these
- 20 -
allegations did not satisfy the PSLRA, but they were not frivolous.
Likewise, Boca Raton made a non-frivolous argument that senior
DeVry executives must have known that the true facts belied their
confident
statements
regulations.
about
the
company’s
compliance
with
HEA
Id. at *9-12.
Boca Raton’s loss-causation allegations are a somewhat closer
call.
In August 2011, the company disclosed that enrollment was
down at DeVry University — one of several schools owned and
operated by DeVry, Inc.5 — and that the company attributed the
decline, in part, to the new recruiter-compensation regulations.
See id. at *12.6
Boca Raton’s theory that this disclosed DeVry’s
violations of the old regulations, while less far-fetched than its
earlier theory, is still clearly inconsistent with Tricontinental.
See id.
On the other hand, the case would look different if we had
held that the Boca Raton’s non-frivolous allegations about the
impact of the new regulations had satisfied the PSLRA.
supra.)
(See
According to Boca Raton’s confidential witnesses, DeVry
established pilot programs applying new recruiting policies that
5/
When the defendants pointed out that enrollment figures pertained to
DeVry University, and not DeVry, Inc. as a whole, the plaintiffs narrowed their
claim in their reply brief. (See Defs.’ Resp. at 3 n.5.)
6/
The fact that the alleged disclosure occurred long after the original
complaint was filed tends to underscore the fact that Boca Raton was, all along,
groping in the dark for a theory that would permit it to recover its losses under
the securities laws.
But we gave Boca Raton an opportunity to amend its
complaint, and it endeavored to tailor its claims to address the strengths and
weaknesses we had identified in the FAC. So, we disagree with the defendants’
argument that Rule 11 required Boca Raton to abandon the lawsuit after Boca Raton
I. (Cf. Defs.’ Mem. at 14.)
- 21 -
complied
with
the
proposed
regulations.
Id.
at
*8.
Those
witnesses stated that student enrollment fell significantly at
schools that applied the new policies.
We held that the
Id.
witnesses’ statements were too vague and confusing to satisfy the
PSLRA, see id., but the allegations based upon those statements
were not frivolous. On that theory of the case, Boca Raton’s losscausation allegations have arguable merit.
Hamburger publically
downplayed the anticipated impact of the new regulations on the
company.
See id. at *7-8.
Arguably, that risk — decreased
enrollment under the new regulations — materialized in August 2011
when the company announced that student enrollment had dropped
25.6% at DeVry University.
See id. at *12.
This is purely
hypothetical because Boca Raton did not adequately allege that
Hamburger’s statements were false.
Nevertheless, it tends to show
that the SAC, although unsuccessful, was not frivolous.
The defendants have also raised several specific objections to
the SAC, which we address below.
1.
The Effective Date of the New Incentive-Compensation
Regulations
The defendants argue that Boca Raton strategically avoided
alleging that the new incentive-compensation regulations became
effective
on
July
1,
2011.
The
purpose
of
this
deception,
according to the defendants, was to create the impression that the
defendants quietly changed their illegal compensation policies in
response to increased regulatory scrutiny and not to comply with
- 22 -
the new regulations.
There is really only one allegation in the
complaint that arguably supports the defendants’ interpretation:
As the Class Period progressed, the Company, unbeknownst
to the market and while under the pressure of the federal
government’s
increased
scrutiny
of
its
business
practices, fundamentally changed its compensation
practices. Starting with a partial roll-out in 2010, the
Company switched to a non-enrollment-based compensation
framework. By eliminating any and all illegal incentive
compensation tied to enrollments, the Company, for the
first time during the Class Period, became compliant with
the HEA.
(See SAC ¶ 5.)
This allegation could be read to suggest that it
was always illegal to base compensation on enrollment, even in
part.
This was not true for most of the class period.
But as a
whole, we think it is reasonably clear from the SAC that there were
two relevant regulatory standards. The SAC alleged that DeVry paid
“fixed compensation” based “solely” on enrollment success, taking
the company’s policy outside the “safe harbor” that was in effect
for most of the class period.
made
the
defendants’
That allegation, accepted as true,
compliance
statements
false.
It
also
undermined the defendants’ optimistic predictions about the impact
of the new regulations.
DeVry was not simply eliminating one
factor (enrollment) from a multi-factor fixed-compensation policy.
It was completely reversing its policy. Cf. Boca Raton II, 2013 WL
1286700,
*11
(Hamburger
told
analysts
that
the
company
was
considering changes to its compensation policy, but that the
changes “were nothing that would be significant or that would
- 23 -
affect your model.”).
In short, we do not believe that Boca Raton
attempted to deceive the court.
2.
Robbins Geller’s Failure to Name a Proper Plaintiff
The SAC challenged statements that the defendants made after
the last date on which Boca Raton purchased stock.
After the
defendants pointed out that Boca Raton lacked standing to challenge
those statements, Robbins Geller amended the SAC to add West Palm
Beach Firefighters’ Pension Fund as co-plaintiff.
Boca Raton
should have identified the issue before it filed the SAC, but it
promptly addressed the problem when it was called to its attention.
Its error was harmless.
3.
Allegations Against Gunst and Pauldine
In their sanctions brief, the defendants argued that “Gunst
was never alleged to have made any untrue statement.”
Brief at 18-19.)
This statement was untrue, and they withdrew it
before the plaintiffs filed their response.
Sheet at 2.)
(See Defs.’
(See Defs.’ Errata
They stand on their argument that Boca Raton’s
allegations against Pauldine were groundless.
As we discussed
before, the original complaint naming Pauldine as a defendant was
frivolous in its entirety.
Boca Raton dropped Pauldine as a
defendant in the FAC, but continued to allege that he had engaged
in insider trading.
(See FAC at ¶ 41 n.1; see also SAC at ¶ 25
n.3.) Boca Raton weakly argues that the allegation was appropriate
because it is undisputed that Pauldine sold stock during the class
- 24 -
period, and this type of evidence is sometimes used to support
scienter allegations.
(See Pl.’s Resp. at 19.)
But there is no
basis for Boca Raton’s allegation that the stock sales constituted
“insider trading.”
On the other hand, this stray allegation was
confined to a footnote in the FAC and SAC, and by that time
Pauldine was already out of the case.
If the defendants believed
that the allegation damaged Mr. Pauldine’s reputation, they could
have filed a motion to strike.
We conclude that this allegation,
while groundless, is not an independent Rule 11(b) violation.
CONCLUSION
Robbins Geller ultimately filed a securities-fraud complaint
with arguable merit.
complaints.
But that does not excuse its prior frivolous
We conclude that Robbins Geller and Boca Raton
violated Rule 11(b). This triggers the presumption under 15 U.S.C.
§ 78u-4(3)(A) that the defendants are entitled to their reasonable
attorneys’ fees and other expenses for the entire action.
Whether
the plaintiff and counsel can rebut that presumption will depend,
in part, on the amount of the defendants’ fees.
See id. at § 78u-
4(3)(B)(i) (the party opposing sanctions may rebut the presumption
by showing that the award of attorneys’ fees and other expenses
would impose an unreasonable burden).
So, by May 30, 2014, the
defendants shall submit a fee petition, with billing records,
establishing their fees for the entire action.
By June 20, 2014,
Boca Raton and Robbins Geller may file a response attempting to
- 25 -
rebut the presumption that the defendants are entitled to those
fees.
The defendants may file a reply by July 9, 2014.
DATE:
May 8, 2014
ENTER:
___________________________________________
John F. Grady, United States District Judge
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