Boca Raton Firefighters and Police Pension Fund v. DEVRY, Inc. et al
Filing
71
MEMORANDUM Opinion Signed by the Honorable John F. Grady on March 27, 2012. Mailed notice(cdh, )
10-7031.121-RSK
March 27, 2012
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
BOCA RATON FIREFIGHTERS’ AND
POLICE PENSION FUND, individually
and on behalf of all others
similarly situated,
Plaintiff,
v.
DEVRY INC., DANIEL HAMBURGER, and
RICHARD M. GUNST,
Defendants.
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No. 10 C 7031
MEMORANDUM OPINION
Before the court is the motion to dismiss of defendants DeVry,
Inc. (“DeVry”), Daniel Hamburger, and Richard M. Gunst.
For the
reasons explained below, we grant the defendants’ motion.
BACKGROUND
Illinois-based
DeVry
owns
and
operates
for-profit
undergraduate and graduate schools.
(Consolidated Class Action
Compl. (hereinafter, “Compl.”) ¶ 22.)1
Daniel Hamburger is DeVry’s
president and CEO; Richard Gunst is its CFO and treasurer.
¶¶ 24-25.)
(Id. at
Plaintiff Boca Raton Firefighters’ and Police Pension
Fund (“the Fund”) purchased DeVry common stock during the putative
class period, October 25, 2007 through August 13, 2010.
(Id. at ¶¶
1/
Although styled a “consolidated” complaint, this case has not been
consolidated with any other action.
- 2 -
1, 21; see also Cert. of Named Pl., attached as Ex. 1 to Pl.’s
Original Compl.) The Fund filed its original complaint on November
1, 2010, alleging in a conclusory fashion that the defendants had
engaged in “abusive and fraudulent recruiting and financial aid
lending practices.”
(Original Compl. ¶ 7.)
We entered the
parties’ proposed scheduling order on November 18, 2010, which gave
the Fund sixty days to file an amended complaint.
It appears that
the Fund used that time to conduct an investigation that it should
have conducted before filing this lawsuit.2 The Fund now cites
statements from 33 confidential witnesses (“CW’s”) to support its
allegation that the defendants employed a “systematically predatory
business model” to increase student enrollment.
According
to
the
Fund,
the
defendants
made
(Compl. ¶ 3.)3
numerous
public
statements during the class period about DeVry’s business practices
and financial performance that were inconsistent with the way that
it actually conducted its business.
(Id. at ¶¶ 194-384.)
These
misleading statements caused DeVry’s stock to become “artificially
inflated,” until a series of newspaper articles and governmentagency reports disclosed the “truth” about the company, causing its
stock price to fall.
(Id. at ¶¶ 357, 361-62, 364-65, 370, 372-73,
2/
At the hearing on the parties’ proposed scheduling order, the Fund
effectively conceded that it had not even tried to comply with the heightened
pleading standard governing this putative securities class action. (See Trans.
of Proceedings, dated Jan. 5, 2011, at 6); see also Private Securities Litigation
Act of 1995 ("PSLRA"), 15 U.S.C.A. § 78u-4.
3/
The Fund also dropped David Pauldine, a senior DeVry executive, as a
defendant.
- 3 -
385-87.)
The
Fund’s
two-count
complaint
alleges
that
the
defendants violated Rule 10b-5 (Count I), and separately asserts
control-person liability against Hamburger and Gunst (Count II).
The defendants have moved to dismiss the complaint in its entirety.
A.
Standard of Review
To prevail on its Rule 10b-5 claim, the Fund must establish
the following:
“(1)
the
defendant
made
a false
statement
or
omission (2) of material fact (3) with scienter (4) in connection
with
the
purchase
or
sale
of
securities
(5)
upon
which
the
plaintiff justifiably relied and (6) that the false statement
proximately caused the plaintiff damages.”
Makor Issues & Rights,
Ltd. v. Tellabs, Inc., 437 F.3d 588, 595 (7th Cir. 2006) (rev’d on
other grounds by Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551
U.S. 308 (2007)) (hereinafter, “Tellabs I”).
The defendants argue
that the Fund has not adequately alleged facts supporting elements
(1), (2), (3), and (6).
(See Defs.’ Mem. at 15-16.)
Because this
is a putative securities class action, the first three elements are
subject
to
the
PSLRA’s
“[e]xacting
pleading
requirements.”
Tellabs, 551 U.S. at 313; see 15 U.S.C. § 78u-4(a)(1).
We discuss
those requirements in greater detail below. The parties agree (see
Pl.’s Resp. at 41-42, Defs.’ Reply at 26) that this heightened
pleading standard does not apply to the Fund’s proximate cause (socalled “loss causation”) allegations.
See, e.g., Ong ex rel. Ong
v. Sears, Roebuck & Co., 459 F.Supp.2d 729, 742-43 (N.D. Ill. 2006)
- 4 -
(concluding that loss-causation allegations are governed by Fed. R.
Civ. P. 8(a)(2)) (collecting cases).
When assessing the Fund’s
complaint we “must, as with any motion to dismiss for failure to
plead a claim on which relief can be granted, accept all factual
allegations in the complaint as true.”
B.
Tellabs, 551 U.S. at 322.
The Defendants’ Class-Period Statements4
The Fund, in citing nearly 50 allegedly false or misleading
statements, “mistakes quantity for quality.”
Metzler Inv. GMBH v.
Corinthian Colleges, Inc., 540 F.3d 1049, 1070 (9th Cir. 2006). So
far as we can tell from the complaint, DeVry actually experienced
the increased enrollment and revenues that it reported to investors
during the class period.
(See Compl. ¶¶ 194, 200, 207, 215, 220,
227, 232, 238, 244, 249, 257, 264, 271, 279, 287, 292, 295, 311,
320, 329, 342, 350, 375, and 380.) These statements would still be
true even if the Fund adequately alleged and proved widespread
student-recruiting abuses by the company.
See In re Advanta Corp.
Securities Litigation, 180 F.3d 525, 538 (3d Cir. 1999) (abrogated
on other grounds by Tellabs, 551 U.S. at 325 as recognized in
Institutional Investors Group v. Avaya, Inc., 564 F.3d 242, 277 (3d
Cir. 2009)) (“Factual recitations of past earnings, so long as they
4/
We reject the defendants’ invitation to summarily dismiss the complaint
as improper “puzzle pleading.” (See Defs.’ Mem. at 16-17.) The complaint’s
format — setting forth the alleged scheme in one section and the defendants'
alleged misstatements and omissions in another — creates repetition. But not,
we think, to the point where the complaint is too difficult to understand.
As
we are about to discuss, the complaint’s problems are substantive, not
structural.
- 5 -
are accurate, do not create liability under Section 10(b).”); see
also FindWhat Investor Group v. FindWhat.com, 658 F.3d 1282, 1306
(11th Cir. 2011) (“No reasonable investor would believe that a
conclusory, but apparently accurate, report of company-wide revenue
growth naturally implied that all was well within every component
of the company that could possibly affect revenue in the future.”).
The Ninth Circuit’s opinion in Metzler, which also involved a forprofit school, is persuasive and on point.
plaintiffs
alleged
that
the
defendant’s
In that case, the
financial
disclosures
misled investors to believe that the company had complied with
regulations governing for-profit schools. See Metzler, 540 F.3d at
1070. The Metzler court concluded that this general allegation,
which the plaintiffs used to impugn “virtually every statement made
by [the defendant] during the Class Period related to the company’s
financial health or performance,” was too vague to satisfy the
PSLRA.
Id.
allegation
at
1070.
throughout
The
its
Fund
makes
complaint
revenues and enrollment figures.
essentially
about
DeVry’s
the
same
historical
(See Compl. ¶¶ 200, 207, 215,
220, 227, 232, 238, 244, 249, 257, 264, 271, 279, 287, 292, 295,
311, 320, 329, 342, 350, 375, and 380.)
However, the Fund does cite potentially actionable statements
concerning: (1) student recruiting and enrollment practices (see,
e.g., Compl. ¶¶ 339, 367 (indicating that the company accurately
disclosed program costs and financial-aid obligations to students);
- 6 -
(2) the company’s recruiter-compensation policies (see, e.g., id.
¶ 291 (“[O]ur recruiter compensation system has been and continues
to be fully compliant”); and (3) graduate employment statistics
(see, e.g., id. at ¶ 211 (“The most recent three terms, 92.6% of
our graduates obtained employment in their field of study within
six
months
$42,805").
of
graduation
at
an
average
starting
salary
of
See, e.g., Lapin v. Goldman Sachs Group, Inc., 506
F.Supp.2d 221, 240 (S.D.N.Y. 2009) (the defendant’s statements
about its “unbiased” and “independent” securities analysts created
a duty to disclose conflicts of interest).
In addition, we will
assume for purposes of this motion that the defendants’ statements
about the reasons for its success are actionable. (See, e.g.,
Compl. ¶ 281 (attributing the company’s success to legitimate
business factors other than its “predatory” practices).)5
C.
Whether Plaintiffs Have Sufficiently Pled That the Defendants’
Class-Period Statements Were Materially False
The Fund’s complaint must “specify each statement alleged to
have been misleading, the reason or reasons why the statement is
5/
See Freudenberg v. E*Trade Financial Corp., 712 F.Supp.2d 171, 180
(S.D.N.Y. 2010) (A defendant may have a duty to disclose wrongdoing if it “puts
the topic of the cause of its financial success at issue.”) (citation and
internal quotation marks omitted); see also Steiner v. MedQuist Inc., Civil No.
04-5487 (JBS), 2006 WL 2827740, *14-16 (D.N.J. Sept. 29, 2006) ("[I]n a number
of public filings reporting revenue, MedQuist failed to disclose its billing
scheme, instead attributing its revenues to legitimate business factors such as
‘increased sales to existing customers, sales to new customers and additional
revenue from acquisitions.’”); but see In re Citigroup, Inc. Securities
Litigation, 330 F.Supp.2d 367, 377 (S.D.N.Y. 2004) ("Plaintiff's allegation that
Citigroup's failure to disclose that its revenues were derived from
‘unsustainable and illegitimate sources' violated section 10(b) is likewise
unavailing, for the federal securities laws do not require a company to accuse
itself of wrongdoing.”).
- 7 -
misleading, and, if an allegation regarding the statement or
omission is made on information and belief, the complaint shall
state with particularity all facts on which that belief is formed.”
15 U.S.C. § 78u-4(b)(1).
to
allegations
including
outside
allegations
confidential witnesses.
This “particularity” requirement applies
the
based
plaintiff’s
upon
personal
counsel’s
knowledge,
interviews
with
See Taubenfeld v. Career Educ. Corp., No.
03 C 8884, 2005 WL 350339, *8 (N.D. Ill. Feb. 11, 2005).
Applying
this standard, we ask “whether the facts alleged are sufficient to
support a reasonable belief as to the misleading nature of the
statement or omission.”
Tellabs I, 437 F.3d at 595 (citation and
internal quotation marks omitted).
The Fund identifies 33 confidential witnesses as the primary
source for its allegations.6
(See Compl. ¶¶ 39-72.)
The Fund can
satisfy the PSLRA’s particularity requirement without disclosing
the identity of these witnesses, but it must “describe [its]
sources with sufficient detail to support the probability that a
6/
The Fund has also attached to its complaint portions of two PowerPoint
presentations. (See “Atlanta Metro Review 2006,” attached as Ex. A to the Compl.
(presentation purportedly showing pressure on student advisors to increase
enrollment); “Georgia Metro GSP Conference Call,” dated September 11, 2008,
attached as Ex. B to the Compl. (purporting to show that some graduates were
having difficulty finding employment).) Exhibit A was apparently created before
the class period, and Exhibit B does not appear to support the proposition the
Fund cites it for. Under the heading “Challenges,” the document states that
“[e]mployers looking for more experience than recent graduates can offer.” (Ex.
B at 2.) The Fund contends that this document supports its allegation that
Pauldine (the senior DeVry executive) knew that admissions advisors were
downplaying the qualifications for obtaining a criminal justice degree, even
though DeVry’s course catalog stated that students needed one year of law
enforcement experience to enroll. (Compl. ¶ 135.) The document does not mention
DeVry’s criminal-justice program, and even if it did, there is no indication that
Pauldine reviewed this document or attended the conference call.
- 8 -
person in the position occupied by the source would possess the
information alleged, or in the alternative provide other evidence
to
support
[its]
allegations.”
Tellabs
I,
437
(citation and internal quotation marks omitted).
F.3d
at
596
The complaint
largely satisfies this requirement, providing details about where,
when, and in what capacity the confidential witnesses worked while
employed by DeVry.
defendants
that
(See Compl. ¶¶ 39-72.)
the
complaint
is
But we agree with the
often
vague
—
perhaps
strategically so — about the source for particular allegations.
Paragraph 133 is typical:
The Career Services department at DeVry’s Federal Way,
Washington campus was required to report that 85 percent
of graduates were successfully placed in a job in their
field of study within six months of graduation. In
reality, the Federal Way campus job placement rate was
around 50%. In order to keep DeVry’s employment
statistics artificially inflated, DeVry’s Pleasant Hill
campus listed students as participating in externships
when those students already should have graduated.
Indeed, the Pleasant Hill campus reported students with
500 hours of externships when most externships were 45
hours to 150 hours in length, and those students were
listed as still participating in externships 200 days
after they should have graduated. Prospective DeVry
students could not know that DeVry was manipulating its
employment statistics, and, according to CW 20, DeVry
counted on the fact that prospective students would not
ask questions about job placement or average salaries
within their field, but instead take the information
provided by DeVry at face value.
(Compl. ¶ 133.)
knowledge
Presumably the Fund does not have first-hand
about the
graduate-employment
reporting
DeVry’s Federal Way and Pleasant Hill campuses.
the
source
of
this
allegation?
One
might
policies
at
So who or what is
infer
from
the
- 9 -
allegations’s context that the Fund is paraphrasing something CW 20
said, but CW 20 worked as a “Student Financial Advisor” in a call
center in Wood Dale, Illinois.
(Id. at ¶ 59.)
Here is another
example:
The Company provided employees with a list ranking each
employee’s performance every Friday afternoon via email.
According to CW 2, it was very much a competition: “it
was all about beating people.” She/he recalled that the
list would “call out” the star performers and that the
Company was very big on referring to the best performers
as “stars.” In violation of HEA [Higher Education Act],
DeVry provided its “star” advisors with additional types
of compensation for hitting or exceeding their quotas.
These included expensive dinners, cash gifts, and days
off from work. Perhaps the most extravagant reward was an
invitation to an all-expense paid trip held over a long
weekend for employees who consistently met or exceeded
their numbers. The invitation only event was called the
Pride Retreat and included an awards ceremony for the
Company’s top salespeople. Every employee invited to
Pride (approximately 400-500 in any given year) was
allowed to bring a guest and got free airfare, lodging at
a fancy hotel, and a per diem. Recent locations for the
yearly Pride Retreat included Las Vegas, Boca Raton,
Florida and Puerto Rico.
(Id. at ¶ 170.)
Our best guess is that CW 2 is the source for the
information in the first sentence, and it stands to reason that
he/she would know that information.
(See id. at ¶ 41.)
But is CW
2 the source for the alleged HEA violations described in the rest
of the paragraph?
We agree with the Fund that the PSLRA does not
require it to identify a source for every allegation in the
complaint, insofar as one or more deficient allegations will not
doom the complaint if it is otherwise sufficient.
But its claims
stand or fall based upon the allegations that comply with the
PSLRA.
Cf. In re Career Educ. Corp., No. 03 C 8884, 2007 WL
- 10 -
1029092, *3 (N.D. Ill. Mar. 29, 2007) (“CEC II”) (“[T]he court
cannot draw any inferences from allegations that are not themselves
well pleaded; zero plus zero is zero.”).7
With respect to those allegations that are clearly attributed
to a confidential witness or another source, there are two general
problems: (1) vagueness; and (2) an apparent lack of company-wide
knowledge.8
General and/or vague allegations about the company’s
practices are insufficient because we cannot adequately assess
their reliability. See Taubenfeld, 2005 WL 350339, *12 (“Plaintiff
. . . relies on vague verbiage, such as ‘many of the accounts,’ or
simply ‘students’ or ‘accounts.’”).
Even concrete allegations of
wrongdoing may be deficient if they do not allege a problem of
sufficient magnitude to undermine the defendants’ public statements
about DeVry’s policies and practices. See In re Career Educ. Corp.
Securities Litigation, No. 03 C 8884, 2006 WL 999988, *5 n.4 (N.D.
Ill.
Mar.
28,
2006)
(“CEC
I”)
(concluding
that
anecdotal
allegations concerning three unqualified students established, at
most, that those particular students were admitted, not that the
7/
As the parties point out, the CEC II court’s orders dismissing the case
with prejudice and entering judgment in the defendants’ favor were later vacated
pursuant to the parties’ settlement agreement. (See Prelim. Approval Order,
attached as Ex. 1 to Defs.’ Unopposed Second Mot. to Submit Add’l Auth. at Ex.
1, at ¶ 23.) Nevertheless, the court’s reasoning remains persuasive.
8/
The Fund accuses the defendants of exceeding the page limitations that
we imposed by attaching a chart summarizing their objections to each of the
confidential witness statements in the complaint. We denied the Fund’s motion
to strike the chart, but indicated that we would give it an opportunity to
respond to the chart if we relied on it in reaching our decision. We agree with
the Fund that “the chart does not offer anything substantive beyond the argument
already raised in the” defendants’ memorandum.
(Pl.’s Resp. at 20 n.6.)
Therefore, no further response is necessary.
- 11 -
defendants’ general statements about the company were false); see
also Order, Karam v. Corinthian Colleges, Inc., CV 10-6523-GHK, at
7 (C.D. Cal. Jan. 30, 2012) (“Logic dictates that the alleged
improper practices would have to be widespread to render false any
statement attributing the company’s growth to legitimate business
practices.”).9
We
agree
with
the
Fund
that
serious
and/or
pervasive illegal conduct is material, see, e.g., Roeder v. Alpha
Industries, Inc., 814 F.2d 22, 24-26 (1st Cir. 1987) (concluding
that allegations that the defendant’s president and vice-president
paid bribes to obtain a government contract were material), and
would contradict one or more of the defendants’ class-period
statements.
(See, e.g., Compl. ¶ 400 (From DeVry’s Code of
Business Conduct and Ethics: “[w]e strive to achieve the highest
business and
compliance
personal
with
business.”).)
the
standards of
laws
and
conduct,
regulation
as well
that
apply
as
to
full
our
The question is whether it has adequately alleged
such conduct with the particularity that the PSLRA requires.
(1) DeVry’s “Sales”-Driven Corporate Culture
The Fund’s pejorative descriptions of DeVry’s “sales”-driven
culture are insufficient to support a Rule 10b-5 claim.
It could
not have come as a surprise to investors (including the Fund) that
DeVry, a for-profit corporation, wanted to make as many “sales” as
possible.
9/
(See, e.g., Compl. ¶¶ 96-98, 102-113, 116.)
The fact
A copy of the Karam court’s order is attached as Exhibit A to the
defendants’ motion for leave to file additional authority (DKT #64).
- 12 -
that the Fund — for purposes of this litigation, anyway — believes
that this culture is distasteful is not a basis for finding a Rule
10b-5 violation. See Roeder, 814 F.2d at 26 (“Management cannot be
expected to disclose information that some may find distasteful but
that does not alter ‘the “total mix” of information made available’
to the investor.”) (quoting TSC Indus., Inc. v. Northway, Inc., 426
U.S. 438, 449 (1976)). DeVry is not required to “direct conclusory
accusations
at
itself
pejorative manner.”
or
to
characterize
its
behavior
in
a
Ballan v. Wilfred American Educational Corp.,
720 F.Supp. 241, 249 (S.D.N.Y. 1989).
It would be “silly” and
“unworkable” (id. (internal quotation marks omitted)) to require
DeVry to tell investors that “its bottom-line is not the education
of its students but the generation of monies to bloat its coffers.”
(Compl. ¶ 95; see also id. at ¶ 401 (“Contrary to statements made
by the Defendants during the Class Period, neither DeVry nor its
management were acting ethically or with integrity.”).)
As for DeVry’s alleged sales tactics, the Fund does not
provide
sufficient
allegations.
or
factual
context
to
assess
to
standards
requiring
prospective
DeVry
students
and
to
convey
prohibiting
applying “undue pressure” during the recruiting process.
¶ 94.)
its
It purports to quote (without providing a citation)
accreditation
information
legal
accurate
it
from
(Id. at
It then describes certain “high pressure” sales tactics.
(See Compl. ¶¶ 118 (“Profile Interest Evaluations”); 120 (the
- 13 -
Socratic Method); 121 (“spin-selling”);
122 (“second-voicing”).)
It is unclear whether any of these alleged tactics, short of
outright deception, ran afoul of accreditation standards. The Fund
does not allege, for instance, that any DeVry school actually lost
accreditation during the lengthy class period.
(2) Deceptive Enrollment Practices
The Fund asks us to infer that DeVry employees improperly
padded the company’s enrollment figures by: (1) taking entrance
exams
for
prospective
students;
(2)
forging
application
information; and (3) enrolling students with low chances for
success.
Some
of
the
allegations are vague.
witness
statements
supporting
these
(See Compl. ¶¶ 113 (CW 10 states that "a
lot of advisors" would take the entrance exam for prospective
students);
114
(CW
16
states
that
he
is
aware
of
"several
instances" where advisors forged student signatures to finalize
incomplete applications); id. (CW 18 states that "at least one or
two
[advisors]
weeks.").)
forged
documents
at
least
once
every
eight
Others are more concrete, but do not support an
inference of wide-spread fraud.
(See, e.g., Compl. ¶ 173 ("CW 14
had a call with one woman who literally could not turn on a
computer, let alone figure out how to register and attend online
courses."); ¶ 174 (CW 22 recalling two incidents involving homeless
DeVry students); ¶ 175 (CW 15 recounting an incident involving a
schizophrenic student, and another involving a student suffering
- 14 -
from a “learning disability and paranoia”).) We accept as true the
Fund’s allegations that these specific incidents occurred. See CEC
I, 2006 WL 999988, *5.
But they do not support a reasonable belief
that the defendants’ class-period statements were false.
Id.
The Fund also alleges that DeVry employees misled students
about financial-aid obligations and tuition.
Again, some of these
statements are vague,10 or based on second-hand information.11
CW
1 states more concretely that admissions advisers misled students
about the time it would take to obtain their degrees.
150.)
(Id. at ¶
According to the complaint, DeVry told students that they
could obtain a business degree in two years and eight months for
$68,000.
(Id.)
In order to graduate in this amount of time,
students were required to take on “a full course-load of 12 or more
credit hours per term.”
(Id.)
The complaint then states that
“federal financial aid benefits usually only covered six to nine
credits per term.” (Id.) This allegation is vague (“usually”) and
there is no citation to any rule or regulation limiting student aid
in this fashion.
As far as we can tell from the complaint, a
student might obtain the federal aid necessary to cover the extra
10/
(See Compl. ¶ 138 (“According to CW 14, advisors frequently gave
students incorrect or misleading information about financial aid, but the Company
never investigated student complaints or held advisors accountable.”).)
11/
(See Compl. ¶ 138 (“According to CW 20, one of the most common
complaints that students made about financial aid was ‘my advisor told me that
this was free money, I didn’t realize it was a loan I had to pay back
someday.’”).) The complaint’s general allegations that students did not, or
(more dubiously) could not, understand their loan obligations likewise fail to
support a reasonable belief that the defendants’ class-period statements were
misleading. (Compl. ¶¶ 139-40.)
- 15 -
three credits to graduate on an accelerated schedule.12
The Fund
alleges only one instance where a student was “prevented” from
graduating within three years, in that case because the student (CW
27) was working full-time.
(Id. at ¶ 152; see also id. (alleging
that some unidentified person “promised” CW 27 that he/she could
take 12 credits per term).)
In the same section of the complaint,
the Fund alleges that CW 30's academic adviser told him/her that
he/she had enough credits to graduate, only to learn later that
he/she needed another class.
(See Compl. ¶ 159.)
In a similar
vein, CW 26 “was told” (the complaint does not say by whom) that
his/her out-of-pocket expenses would be $1,200, payable in two $600
installments.
(Id. at ¶ 144.)
But “the Company" later told CW 26
that he/she had to pay $600 per month.
(Id.)
The defendants
state, without contradiction, that DeVry operates more than 90
campuses.
(See Defs.’ Mem. at 6 (citing DeVry’s 2010 Form 10-K);
see also Compl. ¶ 22 (DeVry is “one of the largest for-profit
schools.”).)
The loosely connected experiences of a few students
do not undermine the defendants’ class-period statements.
(See,
e.g., id. at ¶ 339 (Hamburger: students “should definitely have
access to” information about costs, debt, and average salaries).)
12/
The complaint also alleges that “most” students took six years to
obtain their degrees. (Id. at ¶ 151.) But the Fund does not allege that DeVry
employees told prospective students that most students graduated sooner.
Instead, it alleges that “the scripts provided no information about how unlikely
and difficult it was” to graduate within three years.
(Id.)
It is not
misleading to fail to mention the obvious possibility that students may not
graduate on an accelerated schedule.
- 16 -
(3)
Recruiter Compensation
The Fund’s recruiter-compensation allegations are stronger,
but still deficient. The 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 regarding the award of
student financial assistance.”
34 C.F.R. § 668.14(b)(22)(i).
20 U.S.C.A. § 1094 (20); see also
However, the regulation that was in
effect for most of the class period permitted:
[t]he 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)(ii)(A) (emphasis added).
alleges
that
DeVry’s
admissions
evaluated “at least twice a year.”
and
financial
The complaint
advisors
(Compl. ¶ 166.)
were
The company
purported to grade those employees based on enrollment performance
(60%) and non-enrollment factors such as “behavior and timeliness”
(40%). (Id. at ¶ 167.) Instead, the Fund alleges that compensation
“was solely based on an advisor’s sales numbers.”
(Id.; see also
id. at ¶ 168 (CW 1 stating that the “behavioral” component of
- 17 -
employee evaluations was pretextual).)
Some of the confidential
witness statements supporting this allegation are conclusory,13 as
is the Fund’s assertion that CW 23's compensation was based solely
on defendants’ “illegal incentive compensation policy.”
171.)
(Id. at ¶
CW 9, on the other hand, specifically alleges that he/she
received between 40% and 60% of his/her compensation as a “variable
bonus” tied to enrollment.
(Id. at ¶ 169.)
CW 9 also received a
salary, but “that could only increase by a few percentage points
each year.” (Id.)
HEA violation.
This allegation, if proven, would establish an
And unlike some of the Fund’s other allegations, we
think it is reasonable to extrapolate DeVry’s compensation policy
from the experiences of “front line” employees.14
But we are
reluctant to permit a securities class action to proceed based on
statements from a single anonymous employee.
In Higginbotham v.
Baxter Int’l Inc., 495 F.3d 753, 757 (7th Cir. 2007), our Court of
Appeals indicated that allegations from confidential witnesses
should be “steep[ly]” discounted.
The Court seemed generally less
skeptical of such allegations in Makor Issues & Rights, Ltd. v.
Tellabs Inc., 513 F.3d 702, 711-12 (7th Cir. 2008) (hereinafter,
“Tellabs II”), decided a year after Higginbotham. But there, “[t]he
information that the confidential informants are reported to have
13/
(See Compl. ¶ 168 (CW 4: “[i]t was completely numbers;” CW 5: “if you
are successful at admissions, it was really a numbers game.”).)
14/
The defendants’ confident public statements that DeVry complied with
recruiter-compensation laws supports the view that the company’s recruiters were
all subject to the same policy.
- 18 -
obtained [was] set forth in convincing detail, with some of the
information, moreover, corroborated by multiple sources.”
Id. at
712; see also In re Cabletron Systems, Inc., 311 F.3d 11, 29-30 (1st
Cir. 2002) (courts should evaluate confidential-witness allegations
taking into account such factors as “the level of detail provided
by the confidential sources, the corroborative nature of the other
facts alleged (including from other sources), the coherence and
plausibility
of
the
allegations,
the
number
of
sources,
reliability of the sources, and similar indicia.”).15
the
The Fund
alleges that eight confidential witnesses provided information
concerning DeVry’s compensation policy, (see Compl. ¶ 171), but only
one witness provides information with the particularity that the
PSLRA requires.
The Fund contends that its recruiter-compensation allegations
are corroborated by other sources, citing a False Claims Act lawsuit
challenging DeVry’s recruiter-compensation practices and a related
DOJ investigation.
22, 40.)
(See Compl. ¶¶ 239, 243, 291; Pl.’s Resp. at 9,
As the defendants point out, the qui tam suit was filed
by a DeVry employee who allegedly worked for the company between
January 2002 and November 2003, long before the start of the class
period in this case.
See Schultz v. Devry Inc., No. 07 C 5425, 2009
WL 562286, *1 (N.D. Ill. Mar. 4, 2009).
And assuming that it is
15/
Both Higginbotham and Tellabs II addressed the scienter element of a
Rule 10b-5 claim, rather than falsity, but we do not understand the Court’s
discussion of confidential witnesses to be limited to that element.
- 19 -
admissible, (cf. Fed. R. Evid. 408), the fact that DeVry settled the
lawsuit on appeal of a dismissal in its favor is equivocal evidence
at best, even taking into account the alleged size of the settlement
($4.9 million).
(See Compl. ¶ 243.)
The DOJ declined to intervene
in the qui tam action after conducting its own investigation into
DeVry’s recruiter-compensation practices, apparently without any
findings of wrongdoing.
(See id. at ¶¶ 231, 243.)
Although we
consider it a close call, we conclude that the Fund has not alleged
facts
supporting
representations
a
reasonable
about
its
belief
that
the
recruiter-compensation
defendants’
policies
were
false.
(4)
Graduate Employment Statistics
During the class period the defendants repeatedly emphasized
that approximately 90% of DeVry graduates were employed in their
field of study within six months after graduation and making on
average $40,000 per year.
(See, e.g., id. at ¶ 194; see also id.
at ¶ 223 (Hamburger: “The DeVry University value proposition centers
around what we call the 90/40, that is at least 90% of our graduates
are employed in their field of study within six months at an average
starting salary of $40,000.”).
Some of the Fund’s allegations do
not support the view that DeVry’s job-placement statistics were
misleading.
For
example,
the
complaint
alleges
(without
attribution) that DeVry counted students as employed in their field
of study if they retained a position they held prior to graduation.
- 20 -
(Id. at ¶ 132.)
And CW 21 indicates that DeVry counted graduates
as employed in their field of study “even if [they] only held the
job for one day.”
(Id.)
But the defendants did not represent that
the graduates included in these statistics: (1) were unemployed, or
employed in other fields, at graduation; and (2) held the relevant
position for any particular length of time.
Nor do we think it is
implied. See CEC II, 2007 WL 1029092, *6 (“Plaintiffs complain that
CEC included placements that the student had achieved without CEC’s
assistance in its numbers, but do not explain why this made reported
placement percentages false.”).
The Fund is on firmer ground when it alleges that the phrase
“employed in their field of study” is misleading.
CW 1 indicates
that “if a student graduated with a computer networking degree, but
was only able to find employment at Wal-Mart as a teller who
sometimes used a computerized cash register, DeVry would claim that
the student was employed within their field.”
(Id. at ¶ 130; see
also id. at ¶ 131 (CW 21: "DeVry would count students who graduated
with IT-related degrees who found jobs as accountants as placed in
their field of study if the graduates were working on general ledger
entries;” CW 33: “two Health and Information Technology (HIT)
graduates were employed in customer service jobs at a health-related
company and were counted by DeVry as employed in their field”). But
the Fund has not given us enough context to say whether DeVry’s
“creative” definition of “field of study” materially impacted the
- 21 -
statistics that DeVry reported to investors.
See CEC I, 2006 WL
999988, *8 (“Plaintiff’s burden . . . was to raise an inference of
fraud
on
omissions
a
nation-wide
regarding
level
its
such
starts,
that
student
CEC’s
statements
population,
placement numbers nationally were false or misleading.”).
and
and
job
CW 1 and
CW 21 provide two hypothetical examples of the kinds of things DeVry
“would” do to bolster its job-placement statistics.
CW 33 provides
a concrete example, but it only involves two graduates.
These
allegations are insufficient to support the inference that DeVry’s
job-placement statistics were materially false.
(5)
Eligibility Requirements for Federal Aid
If DeVry graduates exceed certain “cohort default rates”16 on
their student loans DeVry will become ineligible to receive further
federal financial-aid monies.
See 34 C.F.R. § 668.187 (a school
will lose access to financial-aid funds if its most recent cohort
default rate exceeds 40%, or its three most recent cohort default
rates each exceed 25%).
On September 10, 2010 — outside the class
period — DeVry announced that its 2008 two-year cohort default rate
exceeded 10%.
(Compl. ¶ 390-91.)
This caused a delay in federal-
aid disbursements to students at DeVry University and Carrington
College California, another DeVry school.
(Id.; see also id. at ¶¶
22, 89); 20 U.S.C. § 1078-7 (schools must delay disbursements to
16/
The “cohort default rate” is the percentage of borrowers who begin
repaying student loans during a particular fiscal year and who default prior to
the end of a specified period. See 34 CFR § 668.183.
- 22 -
first-year students for 30 days after the student begins school, but
“exempt[ing]” schools with default rates below 10% for each of the
previous three fiscal years).
The Fund vaguely alleges that
“advisors [who?] were instructed [by whom?] to tell students who
inquired as to why there was a delay in receiving their funds that
the disbursement rules were always that way, and to conceal that
this was in fact a change due to DeVry’s high default rate.”
at ¶ 391.)
(Id.
This allegation is untethered to any statement that the
defendants made during the class period.17
Indeed, the press
release announcing DeVry’s cohort default rates — which were still
substantially
below
the
maximum
default
rates
for
Title
IV
eligibility (25% for three consecutive years, or 40% in one year)
— disclosed the fact that disbursements would be delayed.
(Id. at
¶ 390.) The Fund does allege that DeVry’s actual default rates were
higher than reported (again, after the class period), but the
allegation does not satisfy the PSLRA.
CW 15, who “oversaw a team
of eight to ten Student Finance Advisors,” claims that the default
rates she reported for his/her “portfolio of students” were not
reflected in the “quarterly numbers that DeVry circulated.”
at ¶ 392.)18
(Id.
This allegation appears to be based on the fact that
17/
Indeed, we are not sure that it is even misleading: all schools must
delay the first installment of loan proceeds to first-year students, unless they
maintain default rates below 10%. See 20 U.S.C. § 1078-7.
18/
The phrase “quarterly numbers” appears to refer to default numbers that
were reported quarterly to DeVry's Board of Directors, rather than to investors.
(See Compl. ¶ 393 ("According to CW 15, the Title IV default numbers were
reported quarterly to . . . Devry's Board of Directors.”).)
- 23 -
CW 15 reported to his/her supervisor higher cohort default rates for
his/her students than DeVry reported for all DeVry University
students.
(See id. at ¶ 392 (“For her/his portfolio of students,
CW 15 calculated the two-year cohort default rate and provided the
data to her/his director — ‘I guarantee it was not 10.2 percent, it
was 13 or 14 percent.’”).)
Even if CW 15's “portfolio of students”
was representative — and the Fund has not provided enough context
to determine whether it was — it is unclear what the alleged
discrepancy signifies.
As the defendants point out, the Department
of Education (“DOE”) calculates cohort-default
individual schools.
rates, not the
See 34 C.F.R. § 668.183(a).
And as we
understand the regulations, the schools are not the source for the
underlying data about the loans.
See 34 CFR § 668.185
(indicating
that the information is compiled by “data managers”); 34 CFR §
668.182(b) (“data manager” means the DOE, a guaranty agency, or a
loan servicer, depending on the type of the loan).
The Fund also cites what is known as the “90/10" rule: a DeVry
school will become ineligible to participate in Title IV programs
if, for any two consecutive fiscal years, it derives more than 90%
of its cash basis revenue, as defined in the rule, from Title IV
programs. (Id. at ¶¶ 90-91.)
But the Fund does not allege that any
DeVry school violated the 90/10 rule during the class period, or
that the company misrepresented the percentage of its revenues
derived from Title IV programs. (Cf. id. at ¶ 12 (“During the Class
- 24 -
Period, DeVry derived between 70% and 77% of its revenue from Title
IV funding.”).)
In sum, the complaint’s properly-pled allegations
do not support the inference of widespread illegality that the Fund
asks us to draw.
Consequently, it has failed to adequately allege
that the defendants’ class-period statements were false.
D.
Whether the Fund Has Sufficiently Pled Scienter
With an exception that does not apply here, the PSLRA provides,
[I]n any private action arising under this chapter in
which the plaintiff may recover money damages only on
proof that the defendant acted with a particular state of
mind, the complaint shall, with respect to each act or
omission alleged to violate this chapter, state with
particularity facts giving rise to a strong inference
that the defendant acted with the required state of mind.
15 U.S.C.A. § 78u-4(b)(2)(A).
A complaint satisfies this standard
only “if a reasonable person would deem the inference of scienter
cogent and at least as compelling as any opposing inference one
could draw from the facts alleged.”
Tellabs, 551 U.S. at 324.
In
their opening brief, the defendants argued that a plaintiff cannot
satisfy this standard by alleging that the defendants “must have
known” the truth.
(Defs.’ Mem. at 38-39.)
But they failed to cite
and distinguish Tellabs II, which found a strong inference of
scienter
premised
on
a
similar
theory.
In
that
case,
the
plaintiffs alleged that the defendants (the corporate defendant and
its CEO) misled investors about the demand for their most important
products.
See
Tellabs
II,
513
F.3d
at
706-07.
The
Court
considered it “extremely unlikely” that the defendants would not
- 25 -
have known that their public statements were false, notwithstanding
the apparent lack of any allegations directly establishing that the
individual defendant (or any other senior executive) knew facts
contradicting those statements. See id. at 711 (“Is it conceivable
that [the individual defendant] was unaware of the problems of his
company’s two major products and merely repeating lies fed to him
by other executives of the company? It is conceivable, yes, but it
is exceedingly unlikely.”).
That said, the fraud allegations in Tellabs II were much
stronger than the allegations here.
can amend
its
complaint
to
clear
Even assuming that the Fund
the
first
hurdle
(material
falsity), the fraud alleged — with the exception of the complaint’s
recruiter-compensation allegations — is diffuse.
According to the
complaint, DeVry’s recruiters were generally too aggressive and
sometimes resorted to deception to meet management’s enrollment
expectations.
The fact that enrollments were vital to DeVry’s
business does not create a “strong inference” that the defendants
knew whether or how often its recruiters crossed the line.19
Fund’s other relevant allegations are weak.
The
A handful of the
Fund’s confidential witnesses state that they had some interaction
19/
The complaint refers to recruiting scripts, suggesting that DeVry’s
“abusive” practices were formal company policy. But with one exception, the
complaint does not indicate what the scripts said. (See Compl. ¶ 151 (“The
scripts that Admissions Advisors used with prospective students emphasized the
ability to graduate in two years and eight months, but the scripts provided no
information about how unlikely and difficult it was to do that.”).) Even if the
complaint had supplied more detail, there are no allegations indicating that
senior management knew about the scripts’ content.
- 26 -
with DeVry’s senior management while they worked for the company.
CW 19, who was the Dean of Academics at DeVry’s Irving, Texas
campus during the class period, “believes” that Hamburger and
Pauldine (see supra n.3) met with school presidents “once per
quarter.”
(Compl. ¶¶ 58, 98.)
CW 32, a “Metro President” who
“oversaw operations” at three DeVry campuses, describes monthly
conference calls led by Pauldine in which participants discussed
“corporate-level and/or system-wide issues, including enrollment,
retention, career placement and financial aid.”
(Id. at ¶ 99.)
CW
32 also describes a pre-class-period performance review conducted
by Pauldine, Hamburger, and others.
(Id. at ¶¶ 100-103.)
These
individuals told CW 32 that they were “very concerned” about
enrollment numbers at the Federal Way Campus.
states
that
he/she
was
effectively
(Id. at 102.)
demoted
for
not
CW 32
meeting
management’s enrollment expectations. (Id. at 302.) The Fund also
alleges, without specifically citing any source, that defendants
monitored
enrollment
numbers
“very
carefully”
through
“Daily
Activity Reports,” which summarized the performance of DeVry’s
Admissions Advisors.
(Id. at 104.)
CW 22 “believed” that DeVry’s
Director of Career Services compiled graduate employment reports
and distributed them to school presidents, and that Hamburger and
Pauldine also reviewed them.
(Id. at ¶ 136.)
The pressure that these witnesses describe to meet enrollment
expectations
or
“sales
quotas”
is
not
inconsistent
with
the
- 27 -
defendant’ public statements.
See CEC II, 2007 WL 1029092, *5
(“Pressure to meet performance goals, no matter how tough or
unreasonable it might have been, is not evidence that CEC employees
engaged in misconduct or fraud in order to meet those goals.”); see
also Friedman v. Rayovac Corp., 295 F.Supp.2d 957, 995-96 (W.D.
Wis. 2003) (“[P]ushing for more sales is hardly grounds for a fraud
claim. It would be more surprising if officers did not put sales
demands on their employees.
Regardless, doing so does not create
a strong inference of scienter.”).
Moreover, the recruiter-
compensation regulation does not prohibit schools from firing or
demoting
employees
expectations.
who
do
meet
management’s
enrollment
See United States v. Corinthinan Colleges, 655 F.3d
984, 992-93 (9th Cir. 2011).
incentive
not
compensation.
It merely prohibits certain forms of
Id.
As
for
the
enrollment figures
themselves, there is no indication in the complaint that they would
raise a red flag about how they were generated.
Even assuming that
the
Activity
individual
defendants
read
the
“Daily
Reports”
tracking the performance of DeVry’s admissions advisors, (Compl. ¶
104), the Fund does not explain how that data would reveal (for
example) that some advisors were taking the entrance exam for
prospective students.
See Pugh v. Tribune Co., 521 F.3d 686, 694
(7th Cir. 2008) (distinguishing between the defendants’ knowledge
of a subsidiary’s circulation figures and knowledge that the
circulation figures were false); see also Higginbotham, 495 F.3d at
- 28 -
758 (“[T]here is a big difference between knowing about the reports
from [the defendant’s Brazilian subsidiary] and knowing that the
reports are false.”).
Finally, even if the defendants’ graduate-
employment statistics were misleading (cf. supra Part C.(4).), the
allegations that the defendants knew they were misleading are weak.
CW 33, who held several “Career Services” positions at DeVry’s
Houston, Texas campus, states that the defendants “had to be
monitoring the placement numbers because the numbers – placement,
enrollment, and retention – were so important and were discussed at
weekly local ‘executive team’ meetings (all Directors from the
campus) and on conference calls and meetings with other Career
Services directors (possibly monthly).”
(Compl. ¶¶ 72, 99.)
The
Fund does not describe the contents of these meetings, and even if
it had, it does not indicate how the individual defendants would
know what was discussed.
(See also Compl. ¶ 136 (CW 22 states that
she made career-placement presentations to Hamburger and Pauldine
“in the 2006-2007 timeframe and possibly in 2008,” but does not
describe the contents of those presentations).)
There are no allegations linking Hamburger, Gunst, or any
other senior DeVry executive to facts contradicting the company’s
statements about its recruiter-compensation policies.
could
be
made
for
applying
Tellabs
II’s
reasoning
But a case
to
those
statements: if DeVry paid recruiters “variable bonuses” tied to
enrollment, is it likely that the defendants did not know that when
- 29 -
they specifically told investors otherwise?
(See Compl. ¶ 377
(Hamburger: “[c]onsistent with current regulations, we don’t pay
commissions or bonuses based on enrollment.”); see also id. at ¶¶
286
(Hamburger:
consistent
with
the
safe-harbor
provision,
admissions advisors “have a base salary and their salary can be
adjusted twice a year up or down”); 291 (Gunst: “our recruiter
compensation
compliant”).)
system
has
been
and
continues
to
be
fully
However, we have already held that the plaintiffs
have not sufficiently alleged that those statements were false.
(See supra Part C.(3).) Therefore, it is unnecessary to decide now
whether the plaintiffs could plead scienter as to those alleged
misrepresentations.
The
Fund’s
motive
allegations
deficient scienter allegations.
do
little
to
bolster
its
The Fund alleges that Hamburger
(but not Gunst) sold shares on four separate occasions during the
class period. (Compl. ¶¶ 406-07.) “[B]ecause executives sell stock
all the time, stock sales must generally be unusual or suspicious
to constitute circumstantial evidence of scienter.” Pugh, 521 F.3d
at 695; see also Ronconi v. Larkin, 253 F.3d 423, 435 (9th Cir.
2001)
(“[I]nsider
trading
is
suspicious
only
when
it
is
dramatically out of line with prior trading practices at times
calculated to maximize the personal benefit from undisclosed inside
information.”) (citation and internal quotation marks omitted).
The Fund argues that Hamburger’s sales were suspicious because he
- 30 -
sold shares within days of making public statements about the
company’s performance, and because he did not sell any shares
during
the
two
years
prior
to
the
class
period.
However,
Hamburger’s stock sales did not correspond to major changes in the
stock price, which undercuts the inference that the Fund is asking
us to draw from the sales.
The complaint alleges that on October
26, 2007, the second day of the class period, DeVry’s stock rose
37.62% to $55.09.
(Compl. ¶ 198.)
Hamburger did not make his
first alleged stock sale for another seven months, selling stock on
April 25, 2008 at prices “between $55.44 per share and $57.46 per
share.”
(Id. at ¶ 226.)
He sold shares on three other occasions
during the class period at comparable prices well below the class
period high of $74.25 on April 10, 2010.
(See id. at ¶¶ 263
(February 3, 2009: $57.50); 304 (October 15, 2009: $57.52), 319
(December 9, 2009 through December 14, 2009: between $57.50 and
$57.78); see also id. at ¶ 10 (class period high).)
Indeed, the
last alleged sale occurred approximately four months before the
stock price peaked and approximately six months before the truth
allegedly began to leak into the market.
(See id. at ¶¶ 319, 361);
see also In re AFC Enterprises, Inc. Securities Litigation, 348
F.Supp.2d 1363, 1373-74 (N.D. Ga. 2004) (sales below the classperiod high, and months before the truth reaches the market, are
not suspicious); In re Party City Securities Litigation, 147
F.Supp.2d 282, 313 (D.N.J. 2001) (similar).
Gunst, for his part,
- 31 -
actually increased his stock ownership during the class period
without making any corresponding sales.
Pl.’s
Resp.
at
38.)
The
Fund
(See Defs.’ Mem. at 41;
argues
that
the
individual
defendants’ stock purchases do not undercut the inference that they
were motivated to commit fraud because they exercised options to
purchase the additional stock at strike prices below market value.
(Pl.’s Resp. at 38.)
But it does not cite any authority for this
proposition, which in any event strikes us as dubious as applied to
Gunst, at least: Gunst retained all the stock he purchased during
the class period.
See Pugh, 521 F.3d at 695 (“[T]he fact that the
defendants are not alleged to have sold the stock at the inflated
prices meant that they stood to lose a lot of money if the value of
Tribune’s stock fell.”).
Gunst
received
Finally, the fact that Hamburger and
substantial
bonuses
tied
to
the
company’s
performance (see Compl. ¶ 408) does not support any inference of
scienter.
See,
e.g.,
In
re
Bally
Total
Fitness
Securities
Litigation, Nos. 04 C 3530 et al., 2006 WL 3714708, *9 (N.D. Ill.
July 12, 2006) (“Regarding the motive to earn bonuses and awards,
we agree with the view of numerous courts that these allegations
are
too
common
among
corporations
and
their
officers
to
be
considered evidence of scienter.”).
E.
Whether the Fund Has Sufficiently Alleged Loss Causation
At the pleading stage, the plaintiff must “provide a defendant
with some indication of . . . the causal connection” between the
- 32 -
defendant’s misstatement or omission and the plaintiff’s loss.
Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 347 (2005).
The Fund is pursuing a “fraud-on-the-market” loss-causation theory:
“[u]nder
that
theory,
plaintiffs
must
show
both
that
the
defendants’ alleged misrepresentations artificially inflated the
price of the stock and that the value of the stock declined once
the market learned of the deception.”
Ray v. Citigroup Global
Markets, Inc., 482 F.3d 991, 995 (7th Cir. 2007).
The truth may
emerge from a source other than the defendant, and in a series of
“partial or indirect disclosures” rather than all at once.
See,
e.g., Lormand v. US Unwired, Inc., 565 F.3d 228, 264 (5th Cir.
2009).
But it must emerge somehow to state a Rule 10b-5 claim on
a fraud-on-the-market theory. See Transcontinental Indus., Ltd. v.
PricewaterhouseCoopers, LLP, 475 F.3d 824, 843 (7th Cir. 2007).
The plaintiffs in Transcontinental alleged that the defendant made
material misrepresentations in a 1997 audit statement that induced
the plaintiff to purchase stock in Anicom, Inc.
Id. 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
- 33 -
underlying
transaction
be
the
subject
of
a
later
disclosure in order to satisfy loss causation.”
corrective
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.”
The
Fund,
Id. at 842.
without
distinguishing
or
even
citing
Transcontinental, cites district court cases for the proposition
that so-called “corrective disclosures” need not explicitly reveal
the fraud alleged in the complaint. See In re Motorola Securities
Litigation, 505 F.Supp.2d 501, 546 (N.D. Ill. 2007) (rejecting a
“fact-for-fact” disclosure requirement); see also In re Bradley
Pharmaceuticals, Inc. Securities Litigation, 421 F.Supp.2d 822, 829
(D.N.J. 2006) (similar).
Arguably, dicta in In re Motorola could
be read to permit a plaintiff to state a Rule 10b-5 claim by
alleging: (1) a disclosure seemingly unrelated to the alleged
fraud; (2) a roughly contemporaneous drop in the stock price; and
(3) a conclusory statement to the effect that the market must have
learned truth.
See In re Motorola, 505 F.Supp.2d at 536, 538, 540.
The plaintiff could then try to establish through discovery that,
- 34 -
although
the
disclosure
said
understood it to say another.
one
thing,
the
market
really
That approach is inconsistent with
Transcontinental: even at the motion-to-dismiss stage, we must
scrutinize
the
content
of
the
Transcontinental, 475 F.3d at 842.
alleged
disclosure.
See
If the Fund has not alleged a
plausible link between the disclosures and the alleged fraud, then
we must dismiss its complaint.20
According to the Fund, DeVry’s stock price declined because
the truth about its “predatory business model” leaked into the
market in a series of partial disclosures: (1) a June 24, 2010
Health, Education, Labor and Pensions (“HELP”) Committee report
(Compl. ¶¶ 357, 362); (2) a July 1, 2010 Chicago Tribune article
(id. at ¶ 364); (3) a July 15, 2010 SEC filing disclosing DeVry’s
responses to the HELP Committee’s questions (id. at ¶¶ 365-67); (4)
an August 3, 2010 New York Times article (id. at ¶ 370); (5) an
August 4, 2010 Government Accountability Office (“GAO”) report (id.
at ¶ 372); (6) DeVry’s announcement on August 6, 2010 that it had
received a request for information from the HELP Committee (id. at
¶ 373); and (7) an August 13, 2010 DOE report disclosing student-
20/
Cf. Dura, 544 U.S. at 347-48 (“[A]llowing a plaintiff to forgo giving
any indication of the economic loss and proximate cause that the plaintiff has
in mind would bring about harm of the very sort the statutes seek to avoid. It
would permit a plaintiff with a largely groundless claim to simply take up the
time of a number of other people, with the right to do so representing an in
terrorem increment of the settlement value, rather than a reasonably founded hope
that the [discovery] process will reveal relevant evidence. Such a rule would
tend to transform a private securities action into a partial downside insurance
policy.”) (citations and internal quotation marks omitted).
- 35 -
loan repayment rates at for-profit schools (id. at ¶¶ 385-87).
(See Pl.’s Resp. at 42-43.)21
1.
On
The HELP Committee Report
June
24,
2010
the
HELP
Committee
released
a
report
“draw[ing] on publicly available information to shed light on the
scope of the Federal investment in for-profit schools and how these
schools are using taxpayer dollars.”
(See “Emerging Risk?: An
Overview of Growth, Spending, Student Debt and Unanswered Questions
in
For-Profit
Higher
Education”
(hereinafter,
“HELP
Committee
Report”), dated June 24, 2010, attached as Ex. Q to the Decl. of A.
Salpeter in Supp. of Defs.’ Reply Mem., at 1-2.)22 The report cited
publically available statistics indicating that for-profit schools
were receiving increasing amounts of federal money in the form of
student
financial
aid.
(Id.
at
2-4.)
The
schools
devoted
significant portions of this revenue to advertising, rather than to
education, to further increase enrollment.
id.
at
5
(“Because
Title
IV
aid
is
(Id. at 5-6; see also
technically
provided
to
students, the Federal government places no restrictions on how
revenue from Title IV student aid may be used by schools.”).)
While profits at for-profit schools were rising, so too were
21/
The Fund has abandoned its assertion (see Compl. ¶ 419) that the April
22, 2010 graduation-rate announcement was a corrective disclosure. (See Pl.’s
Resp. at 43 n.11.)
22/
The complaint indicates that the HELP Committee conducted a public
hearing on the same day that it released the report, but does not allege any
details about the hearing. (Compl. ¶ 361.)
- 36 -
student-loan defaults.
(Id. at 5, 8-10.)
This “bleak” trend led
the Committee to question whether the students were receiving an
education adequate to obtain the types of jobs that would enable
them to pay down their debts.
(Id. at 8-9.)
The Committee also
noted that the disclosure requirements applying to for-profit
schools were insufficient to provide a detailed picture of the
industry, citing “numerous gaps in available data on for-profit
colleges.”
(Id. at 10; see also id. at 11 (“Congress should seek
to fill those gaps to allow for an informed discussion and debate
over
the
significant
federal
investment
in
for-profit
institutions.”).)
This
report
does
not
disclose
defendants allegedly concealed.
any
information
that
the
First, the HELP Committee Report
does not specifically identify DeVry, or any other school for that
matter.
Indeed, the Report explicitly disclaimed making any
pronouncements about particular schools.
(Id. at 11 (In a section
entitled “Scope and Methodology,” the report states that “[i]t is
not meant to suggest that any one company or school is the focus of
this report . . . .”).)
So, while the report referred generically
to “abusive recruiting,”23 it did not reveal any information about
DeVry specifically.
23/
(Id. at 1.)
Second, the references to
(See also id. at 6 (“[N]umerous accounts detail marketing and
recruiting practices that are sometimes overzealous or misleading") (citing
National Association for College Admission Counseling, "Higher Education Act
Fraud Alert,” May 11, 2010); id. at 11 (referring to "mounting reports of
questionable practices and poor student outcome").)
- 37 -
improper recruiting were clearly secondary to the report’s real
thrust: for-profit schools (and their shareholders) were profiting
from
Title
IV
programs,
but
it
was
at
best
taxpayers were getting their money’s worth.
cites
—
increasing
revenues
from
unclear
whether
The trends the report
federal
aid,
low
student
retention, and high student-loan default rates — were apparent in
information that was publically available to investors.
The real
news was that the HELP Committee was dissatisfied with those
trends.
2.
Chicago Tribune Article
The Fund also cites a July 1, 2010 article entitled “Senator
critical of for-profit colleges; Durbin seeks more regulation for
some school [sic].”
(Compl. ¶ 364.)24
“Sen. Dick Durbin said
Wednesday that legislation to strengthen regulation of for-profit
schools was ahead, complaining that some of the schools leave
students with whopping levels of debt and ‘worthless diplomas’”
Skiba, supra n. 24.
According to the complaint, “[t]he article
described how Senator Durbin specifically cited to large for-profit
schools, including the University of Phoenix, Kaplan University and
DeVry University.”
24/
(Compl. ¶ 364.)
The Fund embellishes this
The defendants have attached to their reply memorandum a copy of a June
30, 2010 article entitled “Senator slams for-profit colleges.” See Katherine
Skiba, Senator Slams For-Profit Colleges, Chi. Trib., June 30, 2010,
http://articles.chicagotribune.com/2010-06-30/news/ct-met-durbin-criticizes-fo
r-profit-c20100630_1_default-rate-for-profit-devry-university, attached as Ex.
R to Decl. of A. Salpeter in Supp. of Defs.’ Reply.
This appears to be the
online version of the article that the Fund cites as it includes, verbatim, the
language that the Fund attributes to the July 1, 2010 article.
- 38 -
allegation in its opposition brief, stating that the article
disclosed that DeVry was a “target” for regulation.
(Pl.’s Resp.
at 9, 42, 47; see also Pl.’s Resp. to Defs.’ Mot. for Leave to File
Add’l Authority (Apollo) at 8-9.)
Here is the actual quote, from
the online version at least: “Durbin, in remarks at the National
Press Club, named the large chains — the University of Phoenix,
Kaplan University and the Illinois-based DeVry University — but did
not single any out for bad practices.”
(emphasis added).
Skiba, supra n. 24
Virtually all of the specific criticisms that
the article attributes to Senator Durbin were based on publicly
available information about the schools.
So, for example, Senator
Durbin indicated during his remarks that “[t]he schools heavily
rely on federal grants and loans, some for almost 90 percent of
their revenues.”
Id.
This was hardly new information, and it was
permitted by the regulations in effect at that time.
The closest
the article comes to touching on the complaint’s subject matter is
the
following:
“[t]he
schools,
using
aggressive
marketing
campaigns, tend to enroll women, many of them single parents,
minorities, poor and first-generation college students.
personnel and veterans are increasingly admitted.”
Id.
Military
It is a
stretch to say that this disclosure alleges fraud at all: a
marketing campaign can be “aggressive” without being deceptive, and
it would be news only if for-profit schools tended not to enroll
women and minorities.
In any event, the article does not disclose
- 39 -
any fraud allegedly committed by the defendants.
We conclude that
the Chicago Tribune article was not a corrective disclosure.
3.
DeVry’s Answers to the HELP Committee’s Questions
On July 15, 2010, DeVry published a detailed response to
questions that members of Congress had posed during the HELP
Committee’s hearing on June 24, 2010.
(See Compl. ¶ 365; see also
“Questions for the Record for Sharon Thomas Parrott,” attached as
Ex. N. to Compl.)
The Fund alleges in its complaint that DeVry’s
responses contained false statements and/or material omissions.
(Compl. ¶¶ 365-67.)
In its opposition brief, the Fund cites this
document as one of the partial disclosures revealing DeVry’s fraud.
(Pl.’s Resp. at 42-43.)
It might contain both “old lies” and “new
truths,” to borrow the defendants’ phrase, but the Fund does not
attempt to explain how this document revealed information about
DeVry’s alleged conduct.
See Nelson v. Napolitano, 657 F.3d 586,
590 (7th Cir. 2011) (“Neither the district court nor this court are
obliged to research and construct legal arguments for parties,
especially when they are represented by counsel.”).
4.
New York Times Article & GAO Report
On August 3, 2010, a New York Times article disclosed details
of an undercover GAO investigation of 15 for-profit colleges.
(Compl. ¶ 370.)
colleges
The article stated that recruiters at 4 of the 15
encouraged
applicants
to
lie
on
financial-aid
applications, and that “all 15 misled potential students about
- 40 -
their programs’ cost, quality and duration, or the average salary
of graduates . . . .”
(Id.)
The article cited some behavior that
is more egregious than anything that the Fund’s confidential
witnesses report.
(See, e.g., id. (“At one college in Texas, a
recruiter encouraged the undercover investigator not to report
$250,000
in
savings,
business.’”).)
saying
it
was
‘not
the
government’s
But other findings in the report are in line with
the complaint’s allegations: overstating the value of particular
programs, requiring students to pay an application fee before
receiving financial-aid information, and assisting prospective
students with the entrance exam.
(Id.)
The article also stated
that “in some instances, the report said, the applicants were given
accurate and helpful information, about likely salaries and not
taking out more loans than they needed.”
(Id.)
The GAO released
its report the following day, August 4, 2010, disclosing findings
consistent with what the New York Times had reported.
(Id. at ¶
372; see also “Undercover Testing Finds Colleges Encouraged Fraud
and Engaged in Deceptive and Questionable Marketing Practices”
(hereinafter, “GAO Report”), attached as Ex. I to Defs.’ Mem.)
The GAO Report is more relevant to the complaint’s subject
matter than the other disclosures we have discussed so far.
question
is
whether
conduct
at
15
other,
The
“nonrepresentative”
- 41 -
schools discloses anything about DeVry.25 The Fund relies primarily
on the Fifth Circuit’s decision in Lormand to support its argument
that revelations about a third party may disclose the truth about
the defendant.
(Pl.’s Resp. at 46.)
The corporate defendant in
Lormand, US Unwired, Inc., operated as an affiliate of Sprint
Corporation.
Lormand, 565 F.3d at 233.
Sprint forced US Unwired
and other Sprint affiliates to participate in a nationwide program
designed to increase Sprint’s market share by eliminating deposit
requirements for customers with poor credit.
Id. at 234-35.
As
documented in internal communications between US Unwired’s senior
executives, “the defendants knew, from previous experience, this
business strategy would be financially disastrous for US Unwired,
given the demographics of its designated network areas.”
235, 237.
Id. at
Despite this knowledge, the defendants issued public
statements touting the new program.
Id. at 236.
The plaintiffs
alleged that the truth about the no-deposit initiative’s poor
performance “leaked out” in a series of public disclosures. Id. at
259.
The first such disclosure was a “warning issued by AirGate
PCS,
another
Sprint
affiliate,
that
it
would
not
meet
its
subscriber growth forecast due to the reinstatement of the deposit
25/
(See GAO Report at 2 ("To determine whether for-profit college
representatives engaged in fraudulent, deceptive, or otherwise questionable sales
and marketing practices, we investigated a nonrepresentative selection of 15
for-profit colleges located in Arizona, California, Florida, Illinois,
Pennsylvania, Texas, and Washington D.C.”); Trans. of HELP Committee Proceedings,
dated Aug. 4, 2010, attached as Ex. H to Defs.’ Mem. (testimony by the author of
the GAO Report identifying the schools that the GAO investigated, not including
DeVry).)
- 42 -
requirement
Subsequent
for
its
disclosures
ClearPay
[no-deposit]
confirmed
that
the
customers.”
problems
Id.
affected
Sprint’s “entire network system,” id. at 261, culminating in US
Unwired’s disclosure that it was suffering the same financial
consequences.
Id. (“These final disclosures squarely aligned US
Unwired with previous disclosures concerning the severe negative
effect of the sub-prime credit class programs on similarly situated
sister Sprint affiliate companies and the entire Sprint network.”).
Lormand is distinguishable in at least two key respects.
First,
the
Fifth
Circuit
emphasized
that
the
other
Sprint
affiliate’s experience was highly relevant and probative:
Plausibly, the series of disclosures here began with the
revelation that AirGate, a sister Sprint affiliate in
substantially
the
same
business,
a
company
in
substantially the same business as US Unwired [sic], and
having substantially the same relationship with Sprint as
US Unwired, had been seriously damaged by the same
sub-prime customer programs implemented by US Unwired and
consequently had been forced to terminate those programs
and reinstate the deposit requirement for its ClearPay or
sub-prime credit class customers.
Id. at 261.
Devry and the schools that the GAO investigated are
not “affiliated:” they are merely in the same industry.
See In re
Apollo Group, Inc. Securities Litigation, Nos. CV–10–1735–PHX–JAT
et al., 2011 WL 5101787, *18 (D. Ariz. Oct. 27, 2011) (“Plaintiffs
have not sufficiently alleged facts showing how the fact that
for-profit schools were being investigated was understood by the
market as realization of fraud being conducted by Defendants at
Apollo.”); cf. Metzler, 540 F.3d at 1063-64 (concluding that DOE
- 43 -
sanctions at one of the defendant’s schools did not disclose the
widespread enrollment fraud alleged the plaintiff’s complaint).26
Second, the plausible inference that the Fifth Circuit drew from
AirGate’s experience was confirmed by US Unwired’s later disclosure
that it suffered similar consequences from Sprint’s no-deposit
initiative.
Id.
at 261-62.
The entire
sequence
“plausibly
reveal[ed], as a whole, the leaking out of the truth underlying US
Unwired’s
prior
consequences.
misrepresentations”
about
Id. at 262 (emphasis added).
the
initiative’s
Like the courts in In
re Motorola and In re Bradley, the Lormand court was working
backwards from an unequivocal disclosure to find evidence that the
information
had
leaked
into
the
market
earlier.
See
In
re
Motorola, 505 F.Supp.2d at 542 (distinguishing Transcontinental on
the ground that the plaintiff in that case “failed to allege that
truth about the misrepresentation upon which it relied ever made
its way into the marketplace”) (emphasis in original); In re
Bradley, 421 F.Supp.2d at 829 (concluding that the information
contained in the defendants’ earnings restatement was partially
26/
The Fund attempts to distinguish Metzler on the grounds that "the loss
causation disclosure there involved a limited investigation at one of the
company's 88 campuses where the stock price rebounded within 3 days.” (Pl.'s
Resp. at 46 n.12.)
The fact that the investigation involved one of the
defendant's schools strengthens (rather than weakens) the case for applying
Metzler's reasoning here. In Metzler, at least, investors might infer that the
defendant exercised some oversight at the campus where the DOE found the
violations. DeVry has no control over its competitor's recruiting practices.
It is true that the Metzler defendant's stock quickly rebounded after the
disclosure, but that detail only buttressed the court’s conclusion that the
market did not adopt the plaintiff’s strained interpretation of the article. See
Metzler, 540 F.3d at 1064. There is no indication in the court's opinion that
it would have reached a different conclusion if the stock had not rebounded.
- 44 -
disclosed earlier when it announced that it was being investigated
by the SEC and would delay its earnings announcement).27
As we
discuss below, the “truth” that the defendants allegedly concealed
was not revealed in any subsequent disclosure.
5.
DeVry’s Announcement that it Received a Request for
Information from the HELP Committee
DeVry announced on August 6, 2010 that it had received a
request for information from the HELP Committee on a host of
subjects including DeVry’s recruiting practices.
373.)28
(See Compl. ¶
The Fund argues that this is a corrective disclosure,
citing cases holding that the market may learn about fraud through
the announcement of an SEC investigation.
(Pl.’s Resp. at 45.)
27/
See also In re Take-Two Interactive Securities Litigation, 551
F.Supp.2d 247, 258 (S.D.N.Y. 2008) (SEC filed and settled charges of stock-option
backdating confirming that the earlier announcement of the SEC investigation
disclosed the “truth”); In re IMAX Securities Litigation, 587 F.Supp.2d 471, 485
(S.D.N.Y. 2008) ("The SEC inquiry related directly to the misrepresentations
alleged in this case—the application of multiple element accounting to theater
system revenue—and culminated in the restatement of IMAX's earnings and revenues
for fiscal years 2002 through 2005.”) (citation and internal quotation marks
omitted).
28/
“On August 6, 2010, DeVry Inc. announced that it had received a request
for information from the U.S. Senate Committee on Health, Education, Labor and
Pensions relating to the Committee's ongoing hearings relating to private-sector
colleges receiving Title IV financial aid. The request seeks information to more
accurately understand how DeVry’s institutions use Federal resources, including
how they recruit and enroll students, set program price or tuition, determine
financial aid including private or institutional loans, track attendance, handle
withdrawal of students and return of Title IV dollars and manage compliance with
the requirement that no more than 90% of revenues come from Title IV dollars. The
request also seeks an understanding of the number of students who complete or
graduate from programs offered by DeVry’s institutions, how many of those
students find new work in their educational area, the debt levels of students
enrolling and completing programs and how DeVry tracks and manages the number of
students who risk default within the cohort default rate window.” DeVry Form 8K, dated August 6, 2010, available at http://www.sec.gov/Archives/edgar/
data/730464/000115752310004880/a6389364.htm (last visited Feb. 13, 2012).
- 45 -
There is a split of authority among district courts about whether
the
announcement
disclosure.
of
an
SEC
Compare
In
re
investigation
Maxim
is
Integrated
a
corrective
Products,
Inc.
Securities Litigation, 639 F.Supp.2d 1038, 1047 (N.D. Cal. 2009)
(the announcement of an SEC investigation is not a corrective
disclosure because it only reveals the “potential” for fraud); with
In
re
Take-Two,
551
F.Supp.2d
at
286
(concluding
that
the
announcement of an SEC investigation may constitute a corrective
disclosure).
But even applying the more inclusive standard, we do
not believe that the August 6, 2010 announcement is a corrective
disclosure.
In In re Take-Two, the defendant announced that the
SEC was investigating “certain stock option grants,” and that the
company was conducting its own internal investigation. In re TakeTwo,
551
F.Supp.2d
at
286.
The
court
concluded
that
the
plaintiff’s complaint alleged a sufficient connection between that
disclosure and the defendant’s alleged misrepresentations.
288.
Id. at
In doing so, it distinguished In re Avista Corp. Securities
Litigation, 415 F.Supp.2d 1214, 1220 (E.D. Wash. 2005), which held
that the announcement of a Federal Energy Regulatory Commission
(“FERC”) investigation was not a corrective disclosure.
See In re
Take-Two, 551 F.Supp.2d at 287-88; see also In re Avista Corp., 415
F.Supp.2d at 1220 (“The Court determines that Plaintiffs fail to
allege loss causation because the two FERC orders do not contain
factual information that reveals any of these misrepresentations or
- 46 -
reveals any fraud by Avista”).
“[T]he announcement of a [FERC]
investigation does not immediately call into question a company’s
prior representations and securities sales in the same manner as
does an investigation carried out by the SEC.”
F.Supp.2d at 287-88.
Committee
had
any
In re Take-Two, 551
There is no indication here that the HELP
authority
to
sanction
DeVry
for
Title
IV
violations, or that its broad request for information was a first
step in that direction.
Indeed, the FERC orders in In re Avista,
which the court concluded did not reveal the defendant’s alleged
fraud,
were
much
more
pointed
than
the
general
request
for
information that DeVry received from the HELP Committee. See In re
Avista, 415 F.Supp.2d at 1219 (“The Show Cause Order and the
Initiating Order disclosed to investors that the FERC believed
Avista had not cooperated in its investigation, that it might have
manipulated the energy market, and that the FERC intended to
investigate the matter.”).
We conclude that the August 10, 2010
announcement was not a corrective disclosure.29
6.
The August 13, 2010 DOE Report
On July 26, 2010, the DOE proposed “gainful employment”
regulations that would condition a program’s Title IV eligibility
29/
We acknowledge that the District Court of Arizona reached a different
conclusion with respect to a HELP Committee request directed to another forprofit school. See In re Apollo Group, 2011 WL 5101787, *17. The court appeared
to reason that the request for information was comparable to the specific finding
of wrongdoing that the DOE had made earlier with respect to the defendant in that
case. Id. We respectfully disagree with that analysis. A specific finding of
wrongdoing consistent with the plaintiff’s fraud allegations is the paradigmatic
corrective disclosure.
A broad request for information from a government
committee with no apparent enforcement authority is equivocal, at best.
- 47 -
on maintaining certain student repayment rates and debt-to-income
ratios.
See Program Integrity: Gainful Employment, 75 Fed. Reg.
43,616, 43,618 (proposed July 26, 2010).30
DOE
released
“data
and
technical
On August 13, 2010, the
documentation
behind
the
Department’s estimates of the impact of the proposed regulation.”
(“Release of Data and Technical Documentation for NPRM on Gainful
Employment,” dated Aug. 13, 2010 (hereinafter, “DOE Release”),
attached as Ex. D to Decl. of A. Salpeter in Supp. of Defs.’ Mot.
to Dismiss, at 1; see also Compl. ¶ 385.)
The DOE presented the
data
basis,
on
an
“institution-by-institution”
and
showed
a
repayment rate of 38% at Devry University for fiscal year 2009.
(See id. at 1; see also Estimated Repayment Rates by Institution FY 2009, attached as Ex. D to Decl. of A. Salpeter in Supp. of
Defs.’ Mot. to Dismiss, at 1; Compl. ¶ 386.)31
proposed
rule,
“[p]rograms
whose
former
Pursuant to the
students
have
loan
repayment rates below 45 percent but at least 35 percent may be
placed on restricted status.”
75 Fed. Reg. at 43,618.
The DOE
cautioned, however, that “it is not possible to use these data to
determine
the impact
of
the
proposed rule
on
any
particular
institution,” emphasizing in particular that the debt-to-income
30/
The “repayment rate” was a new metric, distinct from the cohort-default
rate. (See DOE “Frequently Asked Questions,” dated Aug. 24, 2010, attached as Ex.
E to Defs.’ Mem., at 2-3; see also id. at 4-5 (explaining why “the repayment
rates show many more students struggling to repay their loans than default rates
do.”).)
31/
Other DeVry “institutions” reported higher or lower repayment rates.
(See, e.g., Estimated Repayment Rates by Institution - FY 2009 at 1 (DeVry
University - Chicago Loop: 57%; DeVry University - Decatur: 25%).)
- 48 -
ratios had not been calculated.
(DOE Release at 1.) Shortly after
announcing the repayment-rate data, the DOE released a statement
again
emphasizing
that
debt-to-income
ratios
had
not
been
calculated, and estimating that when they were taken into account
“two-thirds of the programs with repayment rates below 35% would
remain fully eligible . . . .”
(See DOE “Frequently Asked
Questions,” dated Aug. 24, 2010, attached as Ex. E to Decl. of A.
Salpeter in Supp. of Defs.’ Mot. to Dismiss, at 2.)
The Fund alleges that the repayment-rate data that the DOE
released on August 13, 2010 revealed the “ultimate truth” that the
defendants had been hiding.
(Compl. ¶ 385.)
“Based on the
proposed regulations, many of DeVry’s programs are in jeopardy of
losing their financial aid status.”
(Id. (emphasis added).)
The
Fund has not explained (or even attempted to explain) how a future
risk of losing financial-aid eligibility based upon newly proposed
regulations undermines any of the defendants’ previous statements.
We conclude that the August 13, 2010 DOE report did not disclose
the defendants’ alleged fraud.
See Apollo, 2011 WL 5101787, *19
(“The Court finds that Plaintiffs have not sufficiently alleged
facts showing how Apollo’s repayment rates or the DOE’s staffing
were understood by the market as a realization of fraud being
conducted by Defendants.”).
In sum, the Fund’s theory — that the
market learned about DeVry’s fraud even though no fraud was ever
disclosed — does not “hold together.”
See Swanson v. Citibank,
- 49 -
N.A., 614 F.3d 400, 404 (7th Cir. 2010).
alleged loss causation.
F.
It has not adequately
See Transcontinental, 475 F.3d at 843.
The Fund’s Control Person Claim
Because the Fund has failed to adequately allege a primary
securities law violation, its control-person claim likewise fails.
See, e.g., In re Allscripts, Inc. Securities Litigation, No. 00 C
6796, 2001 WL 743411, *12 (N.D. Ill. June
29, 2001) (“If a
Complaint does not adequately allege an underlying violation of the
securities laws . . . the district court must dismiss the section
20(a) claim.”).
G.
Dismissal is Without Prejudice
The defendants ask us to dismiss the Fund’s complaint with
prejudice.
Given
our
conclusions
about
its
loss-causation
allegations, the Fund faces an uphill battle. Indeed, the Fund has
not
identified
any
disclosure
even
touching
upon
recruiter
compensation, the complaint’s strongest (although still deficient)
allegations.
But we cannot say with certainty that it cannot
correct the problems we have identified in the complaint.
We will
give the Fund a second (and likely final) opportunity to amend it.
CONCLUSION
Defendants’ motion to dismiss plaintiff’s complaint [33] is
granted.
Plaintiff is given leave to file a second amended
complaint by May 4, 2012 that cures the deficiencies we have
identified with its claims, if it can do so.
If plaintiff chooses
- 50 -
not to file a second amended complaint by that date, we will
dismiss this case with prejudice.
A status hearing is set for May
16, 2012.
DATE:
March 27, 2012
ENTER:
___________________________________________
John F. Grady, United States District Judge
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