Pension Trust Fund for Operating Engineers v. DeVry Education Group, Inc. et al
Filing
80
MEMORANDUM Opinion and Order. The Court grants defendant's motion to dismiss 58 . The complaint is dismissed without prejudice. Plaintiff may file an amended complaint by January 15, 2018. Signed by the Honorable Jorge L. Alonso on 12/6/2017. Notices mailed by judge's staff(ntf, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
PENSION TRUST FUND FOR
)
OPERATING ENGINEERS, individually
)
and on behalf of all others similarly situated, )
)
Plaintiff,
)
)
v.
)
)
DEVRY EDUCATION GROUP, INC.,
)
DANIEL HAMBURGER, RICHARD M.
)
GUNST, PATRICK J. UNZICKER, AND
)
TIMOTHY J. WIGGINS,
)
)
Defendants.
)
No. 16 C 5198
Judge Jorge L. Alonso
MEMORANDUM OPINION AND ORDER
Lead plaintiff, the Utah Retirement Systems 1 (“plaintiff”), has filed a Second Amended
Class Action Complaint For Violations of the Federal Securities Laws, asserting violations of
sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 of the Securities
Exchange Commission.
Defendants, DeVry Education Group, Inc. (“DeVry”), Daniel
Hamburger, Richard M. Gunst, Patrick J. Unzicker, and Timothy J. Wiggins, move to dismiss
the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim
under Rule 8, Rule 9(b), and the heightened pleading requirements of the Private Securities
Litigation Reform Act of 1995 (“PSLRA”). For the following reasons, the motion is granted.
1
This suit was initially brought by a different institutional investor, the above-captioned Pension Trust
Fund for Operating Engineers, which moved for appointment as lead counsel. However, the Utah
Retirement Systems filed a competing motion, and, recognizing that the Utah Retirement Systems had a
larger financial interest in the litigation, the Pension Trust Fund for Operating Engineers did not oppose
the competing motion. Accordingly, this Court appointed the Utah Retirement Systems as lead plaintiff.
(Aug. 24, 2016 Minute Entry, ECF No. 36.)
BACKGROUND
This lawsuit centers on defendants’ public statements concerning the job placement
statistics for graduates of a DeVry subsidiary, DeVry University. DeVry University (“DVU”) is
a for-profit post-secondary educational institution offering undergraduate and graduate degrees
in programs including healthcare, business, technology, accounting, finance, and law. (2d Am.
Compl. ¶ 2, ECF No. 51.)
In recent years, DVU has accounted for between forty and fifty
percent of DeVry’s revenue. (Id.) For years, DVU has marketed itself to prospective students—
and defendants have marketed it to investors—by claiming, in one form or another, that
approximately 90% of DVU graduates obtain employment in their field of study within six
months of graduation at average yearly salaries of approximately $40,000 or more (“the 90%
Statement”). (Id. ¶ 3.) Not only did the 90% Statement appear in DVU advertising and
marketing materials for years, but defendants repeatedly made some version of the 90%
Statement in documents filed with the Securities and Exchange Commission (“SEC”) and in
public statements to investors and analysts, including press releases, quarterly earnings
conference calls, and presentations at securities analyst conferences. (See, e.g., id. ¶¶ 42, 46, 55,
59, 74, 100.)
DeVry’s use of the 90% Statement and other similar statements in its marketing and
advertising attracted the notice of federal regulators. In January 2014, DeVry received a civil
investigative demand (“CID”) from the Federal Trade Commission (“FTC”), requesting
information “relating to the advertising, marketing or sale of secondary or postsecondary
educational products or services” in order to determine whether DeVry had violated Section 5 of
the FTC Act, 15 U.S.C. § 45, which prohibits “[u]nfair methods of competition in or affecting
commerce, and unfair or deceptive acts or practices in or affecting commerce,” including false or
2
deceptive advertising. 2 (Geraci Decl., Ex. E, Annual Report on SEC Form 10-K at 124, ECF
No. 60-5; see 2d Am. Compl. ¶ 28.)
The FTC Action
On January 27, 2016, after a two-year investigation in which the FTC allegedly
“reviewed well over 2 million pages of documents and responses from DeVry to approximately
64 comprehensive interrogatories, and voluminous materials from third parties” (2d Am. Compl.
¶ 205, see id. ¶ 215), the FTC filed a lawsuit against DeVry and DVU (“the DeVry entities”) in
the Central District of California. The lawsuit alleged that their advertising contained “false and
unsubstantiated” representations concerning the degree to which “obtaining a degree from DVU
is highly likely to result in obtaining a desirable job soon after graduating—a well-paying,
career-oriented job in the student’s chosen field of study.” (Geraci Decl., Ex. A, FTC Compl., ¶¶
16-17.)
Specifically, the FTC alleged that the DeVry entities made two types of
misrepresentations in their marketing and advertising.
The first type consisted of various
versions of the 90% Statement, or what the FTC called “the 90% claims,” which consisted of
misrepresentations to the effect that “as a result of obtaining a DVU degree, 90% of DVU
graduates who were actively seeking employment landed or obtained new jobs in their field of
study within six months of graduation”:
In some instances when Defendants make this representation, they claim this
statistic applies to DVU graduates from a recent year, while in other instances,
Defendants claim this statistic applies to all graduates since 1975, or “for more
than 30 years.” In its advertising and in its presentations to prospective students,
Defendants present this 90% “employment rate” as evidence of the likelihood that
obtaining a DeVry degree leads to finding a job. While Defendants’
2
See generally Kraft, Inc. v. FTC., 970 F.2d 311, 314 (7th Cir. 1992); FTC. v. QT, Inc., 448 F. Supp. 2d
908, 957 (N.D. Ill. 2006).
3
advertisements and sales pitches most commonly express DVU’s employment
rate for recent graduates as exactly 90%, in some instances, during certain limited
time periods, Defendants have stated a percentage that is slightly less or more
than 90% (e.g., 87% or 92%). . . . [T]hese representations . . . are false and
unsubstantiated.
(Id. ¶ 17.) The second type of misrepresentation was the DeVry entities’ “higher-income claim.”
(Id. ¶ 18.) The FTC alleged that the DeVry entities misrepresented that DVU graduates “obtain
jobs that pay significantly more than jobs that graduates of other colleges and universities
obtain.” (Id.) For example, according to the FTC, the DeVry entities falsely represented in their
marketing and advertising materials that “one year after graduation, DVU graduates with
bachelor’s degrees earned 15% more than graduates with bachelor’s degrees from all other
colleges and universities.” (Id.)
The FTC alleged that its investigation had shown that the DeVry entities were unable to
substantiate these claims. To calculate the statistics it used in its advertising, DVU relied on files
composed of mostly student-reported information maintained by its career services department,
but, according to the FTC, DVU counted graduates as working in their field of study even if they
were performing work most people “would not reasonably consider to be” in their field of study
at all. (Id. ¶¶ 44-45.) For example, DVU allegedly classified as working “in field” such
graduates as a rural mail carrier with a degree in technical management; a server at a Cheesecake
Factory with a degree in business administration; a secretary at a prison with a degree in business
administration; and salespeople and customer service representatives with various degrees. (Id.)
Further, the DeVry entities counted graduates as having obtained employment in their field of
study even if they had not obtained a new job as a result of earning a DVU degree, but had
merely continued with the same job they had already had, which happened to be in their field of
study. (Id.)
4
Additionally, the FTC alleged that DVU “exclude[d] certain students from the calculation
who were actively seeking employment,” but had not succeeded within six months of graduation.
For example, they classified as inactive a 2012 graduate who had
viewed 177 jobs leads in DVU’s jobs database; had at least six job interviews in
the previous two months (including two interviews eleven days before DVU
classified him as inactive); sent an email to DVU’s Career Services department,
two weeks before being classified as inactive, in which he stated that he “wanted
to let you know I’ve been getting more response now that I am much more
actively applying to positions,” and that he “had two face to face interviews a
while back and now 2 Skype interviews”; attended a DVU “Career Fair” the
following day; and then sent the Career Services department an email informing
them that, after attending the career fair, he sent three thank you notes to
companies whose representatives he had spoken to at the fair.
(Id. ¶ 46.) Ultimately, the FTC alleged, “the actual percentage of DVU graduates who, at or near
the time they graduated, found jobs that could reasonably be considered ‘in their field’ is
significantly smaller than 90%.” (Id. ¶ 47.)
As for the higher-income claim, the FTC alleged that the DeVry entities relied on a thirdparty report that DVU had reason to believe was unreliable because it was based on a flawed
sampling and surveying methodology. (Id. ¶¶ 48-49.) According to the FTC, DVU personnel
internally expressed misgivings about whether the data genuinely supported DVU’s higherincome claim. (Id. ¶ 49.) In fact, the third party’s statistics differed from data in DVU’s own
files and in the public record. (Id. ¶¶ 49-50.)
On December 15, 2016, the FTC issued a press release announcing that it had settled the
case with the DeVry entities. (2d Am. Compl. ¶ 233.) Under the terms of the settlement, DeVry
was to set up a $49.4 fund million to distribute to qualifying students who were harmed by the
deceptive ads, as well as $50.6 million in debt relief. (Id. ¶ 234.) Additionally, DeVry was to
discontinue the challenged advertising, implement certain reforms to allow it to keep track of
data to support any representations it might make about graduate employment outcomes, and
5
confirm its compliance with those reforms for a period of ten years, among other conditions. (Id.
¶¶ 234-41.)
The DOE Action
On the same day that the FTC filed its complaint, January 27, 2016, the Department of
Education (“DOE”) publicly issued to DVU a Notice of Intent to impose limitations on DVU’s
participation in programs authorized pursuant to Title IV of the Higher Education Act, 20 U.S.C.
§ 1070 et seq. (2d Am. Compl. ¶ 217.) According to the DOE’s Notice of Intent, the DOE had
sent DVU an August 28, 2015 letter, seeking information about DVU’s representations in
marketing and promotional materials that approximately 90% of DVU graduates since 1975 held
positions in their fields of study within six months of graduation. (Geraci Decl., Ex. H, Notice of
Intent, at 2, ECF No. 60-8.) During the ensuing investigation, DVU was “unable to locate”
student-by-student career services data for the period between 1975 and 1980, and it was able to
locate only “certain student-by-student” records for the period between 1980 and 1990. (Id. at
3.) Although DVU was able to produce certain historical summary reports and data from legacy
databases, the DOE concluded that, nevertheless, DVU did not have sufficient data to
substantiate its “since 1975” representation.
(Id. at 7-9.)
Based on the findings of its
investigation, the DOE decided to impose 3 certain conditions on DVU’s receipt of Title IV
funds, including, among other things, requiring DVU to cease making any representations based
3
The DOE gave DVU approximately three weeks to request a hearing or submit “written material
indicating why the limitation should not be imposed.” (Notice of Intent at 12.) DVU chose to contest the
Notice of Intent in an administrative proceeding, and the parties ultimately settled the matter on October
13, 2016, with DVU agreeing to cease making the “since 1975” representation, to maintain graduatespecific data to substantiate any graduate employment statistics it advertised or publicly communicated,
and to post on its website a notice that it had agreed to cease making the “since 1975” representation
because it lacked sufficient records from the years 1975-1983 to substantiate the representation. (2d Am.
Compl. ¶¶ 224-26.)
6
on graduate employment statistics, particularly the “since 1975” representation, unless and until
it is able to substantiate them with graduate-specific information. (Id. at 9-12.)
Confidential Witnesses
Plaintiff alleges that it has received confidential statements from at least seven former
employees of the DeVry entities, who describe how DVU compiled, used, or communicated
graduate employment statistics. (2d Am. Compl. ¶ 242.) A number of these “Confidential
Witnesses” suspected, sometimes based on complaints they heard from recent graduates, that the
graduate employment statistics—and specific marketing language touting them—that they were
required to use in advertising and recruiting efforts were false, misleading, or provided an
incomplete picture of graduates’ typical employment prospects. (Id. ¶¶ 243-59.) Although they
do not claim to have discussed graduate employment statistics and related marketing efforts with
the individual defendants themselves, some of these witnesses believe that the requirement that
they use the approved statistics and language came from the upper levels of the corporate
leadership. (See, e.g., id. ¶¶ 247, 256, 258.)
One Confidential Witness, identified as “CW3,” served as Associate Director of Career
Services at DVU’s Fresno and Bakersfield, California campuses from January 2013 to January
2014, and, because his job required him to assist graduates in obtaining jobs, he was familiar
with DVU’s process for determining which students were sufficiently actively job-seeking to be
included in its graduate employment statistics. (Id. ¶ 248.) In order to receive the assistance of
the Career Services department, graduates had to participate in a burdensome process that
required them to make certain job-search efforts outlined by the Career Services staff and to stay
in regular contact with the staff. (Id. ¶¶ 249-50.) If graduates did not timely perform the jobsearch tasks prescribed by Career Services or respond to calls and emails from the Career
7
Services staff, then DVU could consider them to have waived Career Services’ support and
classify them as “non-job-seeking,” which meant that they were not counted in DVU’s graduate
employment statistics. (Id. ¶ 249.) But the list of tasks graduates were required to perform and
calls or emails they were required to return was extensive, and DVU’s determination of whether
a student was sufficiently complying with his or her job-search obligations was “subjective,”
although it required the approval of the campus president. (Id.) Additionally, many graduates
were so overwhelmed by the barrage of phone calls and emails from DVU’s Career Services
staff and the burdensome obligations the Career Services department placed on them in return for
its support that they opted to sign a form expressly waiving Career Services’ support, rather than
comply with its onerous job-search requirements, and those graduates were also excluded from
DVU’s graduate employment statistics. (Id. ¶ 250.)
CW3 estimated that if DVU had included in its graduate employment statistics all of the
students who had waived Career Services’ support, either by submitting the waiver form or
failing to participate in the job-search process sufficiently actively, the job placement rate at his
campuses would have been 60% to 70%. (Id. ¶ 252.) Further, in CW3’s experience, graduates
were unlikely to make more than $30,000 in their first year after graduation—a fact, he
discovered, that was often upsetting and disappointing to graduates who expected, based on
DVU’s marketing, to make more than $40,000. (Id. ¶ 255.) According to CW3, “a few highly
paid graduates and graduates working in cities with higher wages could skew the averages
higher,” but in his area, wages remained relatively low. (Id.)
DeVry’s Stock Price Drops
On January 27, 2016, the day the FTC filed its lawsuit against the DeVry entities and the
DOE disclosed that it had notified DVU of its intent to impose limitations, the market price of
8
DeVry’s publicly traded common stock dropped $3.65 per share on extraordinarily high trading
volume. (Id. ¶ 338.) The price dropped a further $0.72 per share the following day, an 18%
decline from the January 26, 2016 closing price. Plaintiff alleges that defendants’ false and
misleading representations to investors concerning graduate employment statistics over several
years between August 2011 and January 2016 artificially inflated DeVry’s stock price, and the
news of the FTC lawsuit and DOE action on January 27, 2016, caused the stock value to fall, to
the detriment of plaintiff and other investors, and in violation of the Securities Exchange Act and
Rule 10b-5 of the SEC. Additionally, plaintiff claims that the individual defendants are liable as
“controlling persons” of DeVry under § 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t.
Defendants have moved to dismiss for failure to state a claim under Federal Rule of Procedure
12(b)(6).
ANALYSIS
Section 10(b) of the Securities Exchange Act prohibits the use “in connection with the
purchase or sale of any security . . . [of] any manipulative or deceptive device or contrivance in
contravention of such rules and regulations as the [Securities and Exchange] Commission may
prescribe.” 15 U.S.C. § 78j. Under SEC Rule 10b-5, it is unlawful for any person:
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material
fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would
operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5. Thus, under § 10(b) and Rule 10b-5, “a plaintiff can obtain damages if
she can prove (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
9
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) (“Tellabs
I”), vacated and remanded on other grounds by Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551
U.S. 308 (2007). The required scienter is “an intent to deceive, demonstrated by knowledge of
the statement’s falsity or reckless disregard of a substantial risk that the statement is false.”
Higginbotham v. Baxter Int’l, Inc., 495 F.3d 753, 756 (7th Cir. 2007).
“A motion [to dismiss] under Rule 12(b)(6) tests whether the complaint states a claim on
which relief may be granted.” Richards v. Mitcheff, 696 F.3d 635, 637 (7th Cir. 2012). Under
Rule 8(a)(2), a complaint must include “a short and plain statement of the claim showing that the
pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). The short and plain statement under Rule
8(a)(2) must “‘give the defendant fair notice of what the claim is and the grounds upon which it
rests.’” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355
U.S. 41, 47 (1957) (ellipsis omitted)).
Under federal notice-pleading standards, a complaint’s “[f]actual allegations must be
enough to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555. Stated
differently, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim
to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting
Twombly, 550 U.S. at 570). “A claim has facial plausibility when the plaintiff pleads factual
content that allows the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.” Id. (citing Twombly, 550 U.S. at 556). “In reviewing the sufficiency of a
complaint under the plausibility standard, [courts must] accept the well-pleaded facts in the
complaint as true, but [they] ‘need[ ] not accept as true legal conclusions, or threadbare recitals
of the elements of a cause of action, supported by mere conclusory statements.’” Alam v. Miller
10
Brewing Co., 709 F.3d 662, 665-66 (7th Cir. 2013) (quoting Brooks v. Ross, 578 F.3d 574, 581
(7th Cir. 2009)).
Additionally, any claims of or including acts of fraud must comply with Federal Rule of
Civil Procedure 9(b), which requires the pleading party to “state with particularity the
circumstances constituting fraud.” U.S. ex rel. Presser v. Acacia Mental Health Clinic, LLC, 836
F.3d 770, 775 (7th Cir. 2016).
Although fraudulent or deceptive intent “may be alleged
generally,” Rule 9(b) requires a plaintiff to describe the “circumstances” of the alleged
fraudulent activity with “particularity” by including such information as “the identity of the
person who made the misrepresentation, the time, place and content of the misrepresentation, and
the method by which the misrepresentation was communicated,” Windy City Metal Fabricators
& Supply, Inc. v. CIT Tech. Fin. Servs., Inc., 536 F.3d 663, 668 (7th Cir. 2008), or, to put it
differently, by providing the “who, what, where, when and how” of the alleged fraudulent
conduct. See Bank of Am., Nat’l Ass’n, v. Knight, 725 F.3d 815, 818 (7th Cir. 2013).
The Private Securities Litigation Reform Act (“PSLRA”) imposes heightened pleading
requirements on private, class action claims of securities fraud under § 10(b) and Rule 10b-5:
(b) Requirements for securities fraud actions
(1) Misleading statements and omissions
In any private action arising under this chapter in which the plaintiff alleges that
the defendant—
(A) made an untrue statement of a material fact; or
(B) omitted to state a material fact necessary in order to make the statements
made, in the light of the circumstances in which they were made, not
misleading;
the complaint shall specify each statement alleged to have been misleading, the
reason or reasons why the statement is misleading, and, if an allegation
regarding the statement or omission is made on information and belief, the
complaint shall state with particularity all facts on which that belief is formed.
(2) Required state of mind
(A) In general
Except as provided in subparagraph (B), in any private action arising under
this chapter in which the plaintiff may recover money damages only on proof
11
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. § 78u-4 (italicized emphasis added). Thus, under the PSLRA, private securities fraud
plaintiffs not only must plead with particularity the factual circumstances constituting fraud,
including by specifying the alleged misrepresentations and the basis for any allegations made on
information and belief, but they must also plead with particularity sufficient facts to give rise to a
“strong inference” that the defendant acted with scienter. See Tellabs I, 437 F.3d at 594 (“[T]he
PSLRA essentially returns the class of cases it covers [i.e., private securities fraud class actions]
to a very specific version of fact pleading—one that exceeds even the particularity requirement
of . . . Rule . . . 9(b).”). A “strong inference,” the United States Supreme Court has explained, is
an inference that is “more than merely plausible or reasonable—it must be cogent and at least as
compelling as any opposing inference of nonfraudulent intent.” Tellabs, 551 U.S. at 314.
In support of their motion to dismiss, defendants principally argue 4 that (1) plaintiff does
not meet its burden to plead falsity and (2) plaintiff’s complaint fails to raise a strong inference
of scienter.
I.
MATERIAL FALSITY
Under the PSLRA, a complaint containing a Rule 10b-5 claim must “specify each
statement that is allegedly misleading, the reasons why it is so, and, if based on information and
belief, what specific facts support that information and belief.” Tellabs I, 437 F.3d at 595 (citing
4
Defendants make additional arguments in their opening brief concerning such issues as loss causation
and control person liability under § 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t(a), but they
appear to have abandoned them by failing to press them in their reply brief, so the Court does not address
them. See Blair v. Graham Corr. Ctr., 4 F.3d 996 (7th Cir. 1993) (unpublished table decision), CarterKuehner v. Astrue, No. CIV. 1:08-CV-291-TS, 2009 WL 5031338, at *13 n.5 (N.D. Ind. Dec. 15, 2009).
In addition, the Court need not reach those issues because it agrees with defendants that plaintiff’s
allegations are not sufficient to create a strong inference of scienter, which is a sufficient basis to grant
defendants’ motion.
12
15 U.S.C. § 78u–4(b)(1)). That does not mean that a complaint “automatically survives” if it
states all the known facts that might support an inference of falsity, nor that it fails if it “leaves
out a redundant detail.” Tellabs I, 437 F.3d at 595.
“[T]he relevant question is ‘whether the
facts alleged are sufficient to support a reasonable belief as to the misleading nature of the
statement or omission.’” Id. (quoting Novak v. Kasaks, 216 F.3d 300, 314 n.1 (2d Cir. 2000)).
“A litany of alleged false statements, unaccompanied by the pleading of specific facts indicating
why those statements were false, does not meet” the standard set by the PSLRA. Metzler Inv.
GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1070 (9th Cir. 2008).
Plaintiff lists all the materially false and misleading statements and omissions defendants
are alleged to have made in a thirty-seven-page, fifty-seven-paragraph section of its Second
Amended Complaint. (2d Am. Compl. ¶¶ 278-335; see also id. ¶¶ 46-182.) Plaintiff argues that,
in these numerous statements made to investors between 2011 and 2016, defendants made some
version of the 90% Statement, touting job placement and/or salary statistics that were materially
false or misleading, as shown by the allegations of the FTC, the DOE and the statements of the
Confidential Witnesses who previously worked for DeVry or DVU. (Resp. Br. at 11-18, ECF
No. 61.) Defendants argue that plaintiff has failed to plead with the requisite particularity why
these statements were materially false because the allegations of falsity rest only on the unproven
allegations of government regulators and the statements of anonymous confidential witnesses.
There is considerable force in defendants’ argument. Plaintiff relies most heavily on the
FTC’s allegations in its January 27, 2016 complaint against the DeVry entities (hereinafter, “the
FTC Complaint”). The FTC, in turn, relied on information it had allegedly discovered in DVU’s
Career Services files indicating that DVU had misclassified certain employed graduates as
working in their fields of study, when in fact they were not, and certain unemployed graduates as
13
not proactively seeking a job, when in fact they were. (Geraci Decl., Ex. A, FTC Compl., ¶¶ 4447.) 5 But the FTC did not specifically identify the information that it allegedly discovered other
than to give a few examples of graduates who were misclassified. The Court agrees with
defendants that the fact that even a dozen or so DVU graduates were misclassified as either
working in their field of study or non-job-seeking does not strongly indicate by way of “specific
facts,” Metzler, 540 F.3d at 1070, that the 90% Statement, which purports to be based on the
employment history of thousands of graduates, is false. See, e.g., Karam v. Corinthian Colleges,
Inc., No. 10-CV-6523, 2012 WL 8499135, at *10 (C.D. Cal. Aug. 20, 2012) (“Plaintiffs have
failed to allege particularized facts to show how many students and faculty members were
involved in these alleged practices. Thus, we are unable to determine whether the alleged
problems were of a sufficient magnitude to render misleading Defendants’ statements.”); In re
ITT Educ. Servs., Inc. Sec. & S’holder Derivatives Litig., 859 F. Supp. 2d 572, 581 (S.D.N.Y.
2012) (“Plaintiff must particularly and specifically establish widespread problems of
noncompliance throughout ESI’s many campuses and programs. Plaintiff’s allegations of
specific instances of unethical or fraudulent practices do not render Defendants’ broad statements
regarding compliance misleading.”); In re Career Educ. Corp., No. 03 C 8884, 2007 WL
1029092, at *6 (N.D. Ill. Mar. 29, 2007), vacated pursuant to settlement 2008 WL 8666579
(allegations that some graduates were improperly included in job placement statistics, although
5
Plaintiff also argues in its response brief that the third-party report described in the FTC Complaint
supports its allegations that the more-than-$40,000 element of the 90% Statement is false. (See Resp. Br.
at 15-17; Geraci Decl., Ex. A, FTC Compl., ¶¶ 48-50.) But this argument is meritless. Based on the facts
plaintiff has pleaded, there is no apparent connection between the third-party report and any element of
the 90% Statement, nor did the FTC allege otherwise in the FTC Complaint; it cited the third-party report
merely in connection with its claim that DVU’s higher-income claim, i.e., its claims that its graduates
obtain jobs paying higher salaries than graduates of other institutions, was false. (Geraci Decl., Ex. A,
FTC Compl., ¶¶ 48-50.) Defendants did not make that claim in their disclosures to their investors; rather,
the statements they made to investors that plaintiff challenges in this lawsuit were all versions of the 90%
Statement, and plaintiff appears to concede as much (Resp. Br. at 17-18).
14
their jobs were not related to their course of study, “do not explain why this made reported
placement percentages false,” and allegations that placement rate was lower than advertised at
some campuses, but not nationwide, did not demonstrate “that any contemporaneous statement to
the market was thereby rendered false”); In re Career Educ. Corp. Sec. Litig., No. 03 C 8884,
2006 WL 999988, at *8 (N.D. Ill. Mar. 28, 2006) (allegations concerning six schools, when
defendant operated “seventy-eight campuses world-wide,” did not “raise an inference of fraud on
a nation-wide level such that [defendant’s] statements and omissions regarding its starts, student
population, and job placement numbers nationally were false or misleading”).
The statements of the Confidential Witnesses do not cure this deficiency in plaintiff’s
allegations. Even taking them at face value, 6 only CW3 provides particularized details that
meaningfully corroborate the FTC’s allegations of misclassification problems with the graduate
employment statistics. But his experience was limited to two campuses in central California, and
his statement does little to broaden the scope of the complaint’s allegations to support the
inference that the misclassification problems were so widespread and pervasive as to affect the
accuracy of nationwide graduate employment statistics. Indeed, according to the complaint,
CW3 recognizes that results at other campuses with which he is unfamiliar might “skew the
averages higher.” (2d Am. Compl. ¶ 255.)
But, while the Court must ensure that “the grounds for the plaintiff’s suspicions . . . make
the allegations plausible,” it must also “remain sensitive to information asymmetries that may
6
The value of allegations based on information from anonymous sources must be “discounted,”
Higginbotham, 495 F.3d at 757, but it need not be discounted to zero, particularly if the accounts of the
confidential witnesses are set forth in “convincing detail” and the witnesses provide enough information
about their jobs to demonstrate that they “were in a position to know at first hand the facts to which they
are prepared to testify.” Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d 702, 711-12 (7th Cir. 2008)
(“Tellabs II”) on remand from Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007).
Generally, the Confidential Witnesses’ accounts, particularly CW3’s, are rendered in sufficient detail to
afford them a degree of reliability.
15
prevent [plaintiff] from offering more detail” based only on its pre-complaint inquiry, which it
conducts without the benefit of discovery. See Pirelli Armstrong Tire Corp. Retiree Med.
Benefits Tr. v. Walgreen Co., 631 F.3d 436, 443 (7th Cir. 2011). Plaintiff’s claim is based to
some degree on the suggestion in the FTC Complaint and in other materials filed in the FTC case
in the Central District of California, such as the parties’ Joint Rule 26(f) Report, that DeVry has
internal information that contradicts the 90% Statement. (See, e.g., 2d Am. Compl. ¶ 215.)
Whether plaintiff identifies this information with sufficient particularity to survive
defendants’ motion to dismiss is a close question. See Yourish v. Cal. Amplifier, 191 F.3d 983,
995-96 (9th Cir. 1999) (“When one of the circumstances indicating falseness is the alleged
existence of contemporaneous information inconsistent with a particular statement that was
allegedly known only to the defendants, some detail about the alleged information, other than
that its substance contradicted the substance of the identified statement, must be provided.”)
(citing Arazie v. Mullane, 2 F.3d 1456, 1466-67 (7th Cir. 1993)). The Joint Rule 26(f) Report
identifies the evidence that the FTC intends to rely on only in broad categories of documents
described only in vague terms, without any particulars about what information the documents
contain other than that these documents support the FTC’s allegation that the 90% Statement is
false. (2d Am. Compl. ¶ 215.) But considering that the report appears to describe documents
containing information that the DeVry entities alone possess and that the FTC was only able to
obtain based on its Civil Investigative Demand, the Court “does not see how [plaintiff] would
have been able to plead more facts pertaining” to the graduate employment statistics. See
Presser, 836 F.3d at 778. Plaintiff has an articulable reason (namely, the allegations in the FTC
Complaint combined with the disclosures made in the Joint Rule 26(f) Report in the FTC action)
to suspect that the information showing the falsity of the 90% Statement exists in readily
16
available form, but unlike the FTC, plaintiff did not have any pre-complaint means of acquiring
it. See In re First Merchants Acceptance Corp. Sec. Litig., No. 97 C 2715, 1998 WL 781118, at
*7 n.3 (N.D. Ill. Nov. 4, 1998) (“The fact that Plaintiffs do not have all of the specific documents
to support their claims at this time is not fatal to their complaint [because] ‘[t]he actual contents
of the books and records . . . are peculiarly within the Movants’ knowledge and control’”)
(quoting STI Classic Fund v. Bollinger Indus., Inc., No. 96-cv-823, 1996 WL 885802, at *2
(N.D. Tex. 1996)).
In the FTC action in the Central District of California, the DeVry entities moved to
dismiss, and the court denied the motion. Although that was a significantly different legal and
factual context, the following aspect of that court’s reasoning is nevertheless persuasive in this
case:
It is true that the FTC was able to conduct substantial pre-filing discovery and is
likely able to include additional factual information in the Complaint. But no
authority requires the FTC to provide more specificity than is necessary under
Rule 9(b). . . . By alleging why the actual employment rate is “significantly
smaller than 90%” (Complaint ¶¶ 45-46), the FTC has done all that Rule 9(b)
requires: it enabled Defendants to defend this action. Defendants can now go back
to their records and recalculate the employment rate by (1) excluding graduates
who continued with the jobs they had prior to attending DeVry University; (2)
excluding graduates who were not employed in their field of study; and (3)
including graduates who at least arguably were actively seeking post-graduation
employment. If the calculation produces a number that is only marginally smaller
than 90 percent, then Defendants could promptly move for summary judgment.
FTC v. DeVry Educ. Grp., Inc., No. CV-16-00579, 2016 WL 6821112, at *6 (C.D. Cal. May 9,
2016); Bankers Tr. Co. v. Old Republic Ins. Co., 959 F.2d 677, 683 (7th Cir. 1992) (under Rule
9(b), plaintiff need not “plead facts showing that the representation is indeed false”). Similarly,
this Court concludes that plaintiff has done just enough, by making the most diligent precomplaint inquiry within its power and stating enough facts to “raise a reasonable expectation
that discovery will reveal” additional evidence of falsity, see Bell Atl. Corp. v. Twombly, 550
17
U.S. 544, 556 (2007), or alternatively, to permit defendants to quickly marshal evidence
disproving plaintiff’s allegations, to survive defendants’ motion to dismiss for failure to allege
material falsity. 7 See Adams v. Kinder-Morgan, Inc., 340 F.3d 1083, 1102 (10th Cir. 2003)
(“The level of factual specificity required to meet [the PSLRA pleading] standard may put
defendants on notice of precisely what they are alleged to have done wrong and permit them to
defend against the charge.”); id. at 1105 (“Although based on information and belief, [the
complaint] alleges sufficient ‘facts on which that belief is formed’ to satisfy the pleading
requirement of § 78u–4(b)(1) [because it] adequately puts the defendants on notice of the
substance of the plaintiffs’ claims, and the range, sources, and level of detail of the facts alleged
demonstrate that this complaint is not frivolous or conclusory and deserves to proceed to the next
stage of litigation.”); In re Cabletron Sys., Inc., 311 F.3d 11, 33 (1st Cir. 2002) (“[T]he rigorous
standards for pleading securities fraud do not require a plaintiff to plead evidence[, and]
Defendants’ argument that even more detail be required, before there is any discovery, . . .
amounts to requiring plaintiffs to plead evidence.”).
II.
SCIENTER
Plaintiff does not make allegations of direct evidence demonstrating that defendants
actually knew that the 90% Statement was false, or knew of a substantial risk that it was false, at
7
This Court recognizes that the California court’s decision to deny the motion to dismiss the FTC
Complaint—like several other decisions this Court has cited in Part I of this Opinion, including Pirelli,
Presser, and Arazie—was based on the Rule 9(b) pleading standard, not the heightened PSLRA standard.
However, both standards require pleading factual circumstances with “particularity” in order to permit a
reasonable inference of fraud or deception. Compare Rule 9(b) (“In alleging fraud or mistake, a party
must state with particularity the circumstances constituting fraud or mistake.”) and U.S. ex rel. Grenadyor
v. Ukrainian Vill. Pharmacy, Inc., 772 F.3d 1102, 1106 (7th Cir. 2014) (“The requirement of pleading
fraud with particularity includes pleading facts that make the allegation of fraud plausible.”) with 15
U.S.C. § 78u-4(b)(1)(B) (“[I]f 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.”) and
Tellabs I, 437 F.3d at 595 (“[T]he relevant question is whether the facts alleged are sufficient to support a
reasonable belief as to the misleading nature of the statement or omission.” (internal quotation marks
omitted)). The standards are similar enough for cases decided under Rule 9(b) to be persuasive in
determining whether plaintiff has sufficiently alleged the falsity of the challenged statements in this case.
18
the time they were making it to investors.
Rather, plaintiff alleges that various facts
circumstantially demonstrate that defendants must have either known that the 90% Statement
was false, or recklessly disregarded a substantial risk that it was false.
Plaintiff divides its scienter allegations into four categories, which can be summarized as
follows: (1) based on the results of the FTC investigation as the FTC described them in the
complaint it filed in the Central District of California, there were “obvious red flags” (2d Am.
Compl. ¶ 261) warning of a substantial risk that the 90% Statement was false, which defendants
were at least reckless in disregarding during the class period (id. ¶¶ 261-67); (2) the statements of
the Confidential Witnesses support a strong inference that defendants recklessly disregarded a
substantial risk that the 90% Statement was false or misleading (id. ¶¶ 268-74); (3) the
magnitude and duration of defendants’ repetition of the 90% Statement support an inference of
scienter because the Statement concerned a matter of critical importance to DVU’s commercial
viability, and defendants’ use of the Statement resulted in a massive $100 million settlement with
the FTC that required defendants to change their marketing tactics (id. ¶¶ 275-76); and (4) the
initiation of the FTC’s investigation approximately two years before the filing of the FTC
Complaint supports an inference that defendants should have known of a substantial risk that the
90% Statement was false, at least after the investigation began (id. ¶ 277).
As a threshold matter, defendants argue that plaintiff has engaged in improper “group
pleading” by failing to distinguish among the various defendants in its allegations of scienter, as
if its allegations need only create a strong inference of scienter against any one of the defendants.
As defendants argue, the Seventh Circuit has rejected the “group pleading doctrine, which is a
judicial presumption that statements in group-published documents including annual reports and
press releases are attributable to officers and directors who have day-to-day control or
19
involvement in regular company operations,” Tellabs II, 513 F.3d at 710 (internal alterations
omitted).
Thus, plaintiff “must create a strong inference of scienter with respect to each
individual defendant.” Pugh v. Tribune Co., 521 F.3d 686, 693 (7th Cir. 2008). Plaintiff
responds that, while it is true that the Seventh Circuit has rejected group pleading, its allegations
nevertheless create a strong inference of defendants’ scienter based not only on their job titles
but also on their particular “positions, experience, and knowledge about DVU’s employment
statistics,” which were central to DVU’s commercial viability and therefore a matter with which
DVU executives were likely to concern themselves. See Tellabs II, 513 F.3d at 711 (CEO must
have been knowledgeable about demand for his company’s two major products). The Court will
assume that plaintiff is correct that executives of the individual defendants’ level had reason to
make themselves at least generally knowledgeable about graduate employment statistics, and
consider whether plaintiff’s allegations of (a) the FTC investigation and matters described in the
resulting FTC Complaint, (b) the issues described by the Confidential Witnesses, and (c) the
magnitude and duration of defendants’ alleged misrepresentations, taken together, are sufficient
to support a strong inference that defendants knew of a substantial risk that the 90% Statement
was false and recklessly disregarded it with intent to deceive. See Higginbotham, 495 F.3d at
756.
A. “Obvious Red Flags” in FTC Complaint and FTC Investigation
Plaintiff alleges that, based on the allegations of the FTC Complaint, there were “obvious
red flags that cast doubt on the advertised statistics,” and the individual defendants’ failure to
investigate “reflects a gross indifference to the truthfulness” of the 90% Statement. (2d Am.
Compl. ¶ 261.) Plaintiff reiterates the allegations of the FTC Complaint (id. ¶¶ 262-66), and
alleges that, in the parties’ Rule 26(f) report in the FTC action, defendant Gunst and David
20
Pauldine, who reported directly to defendant Hamburger (who made most of the challenged
misrepresentations to investors personally), were listed as percipient witnesses (id. ¶ 267).
Plaintiff alleges that defendants should have become aware of these red flags, at the latest, at
some point during the FTC investigation, particularly considering that the magnitude of the
substantial settlement underscores the seriousness of the matter. (Id. ¶ 277.)
First, the mere fact of the FTC investigation is not enough to put defendants on notice of
the potential falsity of the 90% Statement. In Pugh, the Seventh Circuit took a dim view of the
argument that a lawsuit and accompanying investigation provided defendants in a securities
fraud case with sufficiently reliable notice of the likelihood that their statements were false or
misleading:
The plaintiffs . . . contend that, whatever the Tribune individual defendants knew
prior to February 2004, the lawsuits filed . . . that month demonstrate actual
knowledge of the fraud. This argument completely misses the boat. After the
lawsuits were filed, the defendants had actual knowledge of accusations of
fraud, not fraud itself. . . . As we explained in Higginbotham, “[t]aking the time
necessary to get things right is both proper and lawful. Managers cannot tell
lies but are entitled to investigate for a reasonable time, until they have a full
story to reveal.” [495 F.3d] at 761. . . . [T]he complaint as a whole does not
establish a strong inference of scienter as to the . . . individual defendants.
521 F.3d at 695 (emphasis added). At most, the FTC investigation put defendants on notice of
“accusations” of falsity, not falsity itself, and the complaint contains no particularized allegations
about when defendants learned of a substantial likelihood that the accusations were meritorious. 8
As for the settlement, it came long after the class period had ended, so it provides no help
to plaintiff with respect to notice of a risk of falsity that might support a strong inference of
8
It is not even clear when defendants learned precisely what the accusations were. According to the
complaint, DeVry disclosed on February 4, 2014, that it had recently received “a compulsory request
from the FTC to provide documents and information relating to the advertising, marketing, or sale of
secondary or postsecondary educational products” (2d Am. Compl. ¶ 129), but it is not clear whether
defendants knew precisely what the FTC considered objectionable about its advertising or marketing
practices, other than that they might be unfair or deceptive in violation of Section 5 of the FTC Act, or
when they learned it.
21
scienter. Further, even if it had come before the end of the class period, the settlement did not
contain an admission of wrongdoing, so even the settlement provides no insight into when or
whether defendants learned enough to know that there was a serious risk that the 90% Statement
was false. Indeed, although at this stage the Court assumes that the 90% Statement is false, there
is little or no factual detail in the complaint weighing against an inference that, to this very day,
defendants do not believe it. Cf. Last Atlantis Capital LLC v. AGS Specialist Partners, 533 F.
Supp. 2d 828, 831-34 (N.D. Ill. 2008) (inference of scienter was at least as compelling and
cogent as competing inferences against certain defendants who had settled regulatory matter by
consenting to findings that they had violated certain SEC rules and related regulations, but not
against other defendants against whom there were no consent orders or any other “specific
regulatory findings” of wrongdoing). For all the particularized allegations of the complaint
show, it is as likely that defendants settled the FTC action for “public relations” purposes as
anything else. 9 See Higginbotham, 495 F.3d at 760 (“For all the complaint reveals, improving
the financial controls . . . has been undertaken only as a public-relations measure, or to forestall
future litigation, the cost of which easily can exceed the losses attributable to fraud.”). Also, as
the Seventh Circuit explained in Higginbotham, it is inappropriate to draw inferences against
defendants based on “subsequent remedial measures” defendants may have taken, and the
settlement with the FTC, with its conditions including reforming the way defendants keep track
of data to support representations they might make about graduate employment outcomes, falls
into that category. See 495 F.3d at 760 (citing Fed. R. Evid. 407); see also Pugh, 521 F.3d at
695 (citing Higginbotham).
9
Alternatively, even assuming that defendants settled the FTC action because they had come to believe
that the FTC’s lawsuit was potentially meritorious, there were other issues involved in the FTC action
besides the 90% Statement. For all the complaint shows, defendants could have decided to settle the FTC
action because they worried about the potential falsity of DVU’s higher-income claims, for example,
rather than the 90% claims.
22
As for the substance of the investigation based on the allegations of the FTC Complaint,
the Court fails to see which allegations revealed that that there were “obvious red flags”
defendants should have noticed. What the FTC alleged, in relevant part, 10 was that, although
defendants advertised that approximately 90% of graduates actively seeking employment
obtained jobs in their fields of study within six months of graduation at a salary of approximately
$40,000 or more, specific examples of misclassification showed that DVU was manipulating
those statistics by (a) including graduates who should have been excluded because they were
working outside their fields of study and (b) excluding graduates for not actively seeking
employment, when in fact those graduates were diligently (if unsuccessfully) job-seeking. At
most, the FTC alleged a few specific examples of misclassified graduates and suggested that it
would later be able to prove there were enough other such graduates to render the 90% Statement
false or misleading.
While these allegations were enough to survive the defendants’ motion to dismiss the
FTC Complaint in the Central District of California, they are not enough to “state with
particularity facts giving rise to a strong inference” of scienter. 15 U.S.C. § 78u-4(b)(2)(A). The
FTC Complaint did not make any attempt to quantify the number of graduates who were
misclassified. See supra at 14-15. Without any allegations of the precise or even approximate
scope of the misclassification problems, the Court cannot infer that there must have been
“obvious red flags” in DVU’s process for tracking graduate employment data and calculating
statistics that would have warned of nationwide problems, which distinguishes this case from
10
Again, plaintiff relies in part on the FTC allegations concerning the unreliable third-party report on how
DVU graduates’ incomes compared to those of other institutions, but as the Court explained above in note
5, plaintiff has not alleged facts connecting the third-party report to the 90% Statement and suggesting
that defendants knew it was false; the FTC itself only alleged that the third-party report showed the falsity
of DVU’s higher-income claims, which, unlike the 90% claims, plaintiff does not allege defendants to
have repeated to investors.
23
some of the cases plaintiff cites in support of its position. Cf., e.g., Rehm v. Eagle Fin. Corp.,
954 F. Supp. 1246, 1256 (N.D. Ill. 1997) (inferring that defendants’ false statements about
company’s 1995 financial results were made with scienter in part because the company’s restated
1995 earnings were 91% lower than originally reported). Nor did the FTC Complaint contain
any allegations of specific facts indicating that knowledge of any likelihood of widespread
manipulation of the employment statistics had filtered up to the individual defendants or spread
throughout the company. This was no defect in the FTC Complaint because Rule 9(b) permits
intent to be alleged generally—but under the heightened PSLRA pleading standard, scienter
must be alleged with particularity.
The Supreme Court has directed courts evaluating whether a PSLRA plaintiff’s
allegations “give rise to a strong inference of scienter” to “take into account plausible opposing
inferences” because “[t]he strength of an inference cannot be decided in a vacuum,” and “[t]he
inquiry is inherently comparative.” Tellabs, 551 U.S. at 323 (internal quotation marks omitted);
see Tellabs II, 513 F.3d at 711 (“The plausibility of an explanation depends on the plausibility of
the alternative explanations.”). In this case, the allegations of the FTC Complaint do not support
a “strong” inference that defendants had scienter when they made the alleged misrepresentations
to investors because, unlike in Tellabs, it is not “very hard to credit” the competing inference that
defendants made the misrepresentations without intent to deceive or knowledge of a substantial
risk of their falsity. See Tellabs II, 513 F.3d at 709; see also id. at 706-07 (summarizing facts of
Tellabs). There are no particularized allegations shedding light on when, if ever, defendants
should have known that the 90% Statement was or might be false, nor do the circumstances
make the inference that defendants never drew that conclusion particularly implausible. The
specific misconduct alleged (the misclassification of graduates as either employed-in-field or
24
non-job-seeking) is “diffuse,” and while job placement may be a “vital” component of
defendants’ business, that is not sufficient to “create a strong inference that the defendants knew
whether or how often its [Career Services employees] crossed the line” in misclassifying
graduates. See Boca Raton Firefighters’ & Police Pension Fund v. DeVry Inc., No. 10 C 7031,
2012 WL 1030474, at *10 (N.D. Ill. Mar. 27, 2012) (internal quotation marks omitted) (declining
to infer that DeVry’s executives knew that its recruiters were being overly “aggressive” and
sometimes “resort[ing] to deception” in order to meet management’s enrollment expectations).
This case is like Boca Raton, not Tellabs, in which the plaintiff alleged that the
company’s biggest customer had significantly reduced its orders prior to the start of the class
period and it was “exceedingly unlikely” that news of that potentially catastrophic development
had not reached the CEO of the company. See Tellabs II, 513 F.3d at 709. The Court fails to see
why it is particularly unlikely, in this case, that defendants never received information
demonstrating how widespread the misclassification problems were, and therefore never knew
that the 90% Statement was false. The Second Amended Complaint does not identify specific
facts that should have put defendants on notice of misclassification problems so dire as to affect
nationwide statistics. At most, the complaint gestures in vague terms at internal information to
that effect, without describing it in sufficient detail to permit the Court to determine whether it
supports a strong inference that defendants would have been able to put the puzzle pieces
together. Based on such vague allegations, the Court cannot conclude that it is particularly
unlikely that, despite the FTC’s accusations to the contrary, defendants believed that the 90%
Statement was true in reliance on the work of subordinates, without any knowledge of a
substantial risk that the subordinates who collected the data or calculated the statistics were
25
doing their work improperly. Cf. id; see Boca Raton, 2012 WL 1030474, at *10 (distinguishing
Tellabs II on similar grounds).
None of this is to say that the inference that defendants knew of a substantial risk that the
90% Statement is false is implausible or unreasonable—but the PSLRA requires more than
plausibility or reasonableness.
See Tellabs, 551 U.S. at 323-24 (“[A] court must consider
plausible, nonculpable explanations for the defendant’s conduct . . . [and] the inference of
scienter must be more than merely ‘reasonable’ or ‘permissible’—it must be cogent and
compelling, thus strong in light of other explanations.”). In Tellabs II, the Seventh Circuit
offered the following hypothetical to explain its reasoning:
Suppose a person woke up one morning with a sharp pain in his abdomen. He
thought it was due to a recent operation to remove his gall bladder, but realized
it could equally well have been due to any number of other things. The
inference that it was due to the operation could not be thought cogent. But
suppose he went to a doctor who performed tests that ruled out any cause other
than the operation or a duodenal ulcer and told the patient that he was 99 percent
certain that it was the operation. . . . Because in our abdominal-pain example all
other inferences had been ruled out except the 1 percent one, the inference that the
pain was due to the operation would be cogent. This case is similar. Because the
alternative hypotheses—either a cascade of innocent mistakes, or acts of
subordinate employees, either or both resulting in a series of false statements—are
far less likely than the hypothesis of scienter at the corporate level at which the
statements were approved, the latter hypothesis must be considered cogent.
513 F.3d at 710-11 (emphasis added). This case is closer to the Seventh Circuit’s hypothetical
than to the circumstances of Tellabs. An inference that defendants made misrepresentations to
investors knowingly or recklessly might be plausible, but because plaintiff makes no specific
factual allegations that provide a basis for concluding that that particular characterization of their
misrepresentations is more or less likely to be correct than an innocent one, inferring that
defendants made the misrepresentations with scienter requires a degree of speculation that the
26
PSLRA does not tolerate.
Under these particular circumstances, the inference cannot “be
thought cogent,” rather than merely plausible. See id.
B. Confidential Witness Allegations
Plaintiff argues that its allegations based on the statements of the Confidential Witnesses
strengthen the inference of scienter by corroborating the allegations based on the FTC
Complaint. But even taking the Confidential Witnesses’ allegations at face value, 11 they do not
support a strong inference of scienter. Some of the Confidential Witnesses vaguely allege that
they had the sense that the practice of using graduate employment statistics in marketing and
recruitment came from high levels of management (2d Am. Compl. ¶ 269), or that campusspecific job placement rates were “reported up the chain of command” (id. ¶ 273), or that
graduate job placement data was available to defendants via internal databases such as
“HireDeVry” (id.), but none of these allegations qualifies as “stat[ing] with particularity facts
giving rise to a strong inference that the defendant acted” with knowledge of a substantial risk
that the statistics were false. 15 U.S.C. § 78u-4(b)(2)(A) (emphasis added). The Confidential
Witnesses may have “believed” that defendants were aware of certain data, or that they “had to
be monitoring [the data] because the numbers were so important” to them and to the business,
but an inference of scienter based on such allegations is “weak” at best, see Boca Raton, 2012
WL 1030474, at *10-11, at least where, as here, there are no circumstances making a competing
inference “exceedingly unlikely,” Tellabs II, 513 F.3d at 709. Additionally, “there is a big
difference between knowing about the [statistics] and knowing that the [statistics] are false.” See
Higginbotham, 495 F.3d at 758; Pugh, 521 F.3d at 694 (citing Higginbotham); Boca Raton, 2012
WL 1030474, at *11 (“As for the . . . figures themselves, there is no indication in the complaint
11
See supra n.6.
27
that they would raise a red flag about how they were generated.”) (citing Pugh and
Higginbotham).
No Confidential Witness makes particularized factual allegations supporting an inference
that evidence of widespread misclassifications of graduates either as employed-in-field or nonjob-seeking rose so far up the corporate chain of command as to reach defendants. Nor do the
Confidential Witnesses’ particularized, rather than merely vague or generalized, factual
allegations add up to a sufficient basis for a strong inference that the misclassification problem
was so pervasive and widespread, and that such a high volume of graduates were being
misclassified, that defendants, as corporate executives, must have had knowledge of at least a
substantial risk that the 90% Statement was false or misleading.
A reasonable competing
inference is that any complaints, data, or other information defendants received that might
suggest that the employment statistics were misleading was too “diffuse” or, alternatively, too
isolated to particular campuses (only CW3 provides specific allegations of misclassification), for
any of the alleged problems to be apparent at the corporate level. See Boca Raton, 2012 WL
1030474, at *10-11. Even combining the allegations of the Confidential Witnesses with the
allegations of the FTC Complaint, the inference that defendants knew of a substantial risk that
the 90% Statement was false is not “cogent and compelling, thus strong in light of other
explanations.” Tellabs, 551 U.S. at 324.
C. Magnitude and Duration of Misrepresentations
Plaintiff argues that given the magnitude and duration of defendants’ repetition of the
90% Statement, which was a central feature of their marketing going to the core of their
operations, and which defendants repeated to investors dozens of times during the class period, it
is highly unlikely that they were unaware of its falsity or at least a substantial risk of its falsity.
28
Plaintiff emphasizes both that the FTC alleged in its lawsuit that the number of employed
graduates working in their field of study was “significantly,” not slightly, “smaller than 90%,”
and the size of the settlement (over $100 million, with numerous other conditions attached)
supports that allegation. “The more serious the error,” plaintiff argues, “the less believable are
defendants[’] protests that they were completely unaware [that their statements were false] and
the stronger is the inference that defendants must have known about the discrepancy.” See
Rehm, 954 F. Supp. at 1256.
But as the Court has already explained above in Part II.A, unlike in Rehm and like cases,
the allegations of the Second Amended Complaint do not establish the magnitude of defendants’
misrepresentations with any degree of specificity. Although the FTC Complaint vaguely alleged
that the number of graduates working in their field of study was “significantly” smaller than the
approximately 90% that defendants claimed, there were no particularized allegations there or
here to shed any light on how large the discrepancy actually was—unlike in Rehm, when the
defendant company restated its financial results to the tune of a 91% drop in earnings. Plaintiff’s
best case in this regard is Ross v. Career Education Corp., No. 12 C 276, 2012 WL 5363431, at
*8-9 (N.D. Ill. Oct. 30, 2012), but the Court agrees with defendants that Ross, “by comparison,
underscores the weakness of plaintiff’s own scienter allegations.” (Reply Br. at 6, ECF No. 64.)
Ross is broadly factually analogous, as it involved allegations of misrepresentations with respect
to a for-profit educational institution’s job placement rates, but there were stronger allegations of
genuinely “widespread and pervasive” inflation of job placement rates, which were not only
common knowledge throughout the company but had reached the notice of the CEO, who was
even alleged to have complimented employees on it.
See id.
Additionally, in Ross, the
company’s “history of non-compliance” with respect to job placement reporting requirements,
29
the CEO’s hiring specifically to remedy the problem, and his resignation just as results of an
investigation into job placement statistics were to be announced all provided additional support
for the inference of scienter that this case lacks. See id. at *9-11. Plaintiff’s argument that its
allegations create a strong inference of scienter based on the magnitude of the alleged
misrepresentations is unpersuasive.
As for duration, the fact that defendants made the 90% Statement many times over a
period of several years provides no support for any inference of scienter if they never had reason
to suspect that it was false, and as the Court has explained above, the allegations do not support a
strong inference that defendants must have known of a substantial risk that the 90% Statement
was false.
CONCLUSION
For the reasons set forth above, the Court grants defendant’s motion to dismiss [58]. The
complaint is dismissed without prejudice. Plaintiff may file an amended complaint by January
15, 2018.
SO ORDERED.
ENTERED: December 6, 2017
______________________
HON. JORGE L. ALONSO
United States District Judge
30
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