Washtenaw County Employees' Retirement System v. The Princeton Review, Inc. et al

Filing 30

Judge Richard G. Stearns: MEMORANDUM AND ORDER ON DEFENDANTS' MOTIONS TO DISMISS THE AMENDED COMPLAINT, ENTERED. granting 21 Motion to Dismiss; granting 25 Motion to Dismiss "...The Clerk will enter judgment for defendants and close the case." (Flaherty, Elaine)

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
CIVIL ACTION NO. 11-11359-RGS
WASHTENAW COUNTY EMPLOYEES’ RETIREMENT SYSTEM,
on Behalf of Itself and All Others Similarly Situated
v.
THE PRINCETON REVIEW, INC., MICHAEL PERIK, STEPHEN C.
RICHARDS, SUSAN RAO, DAVID LOWENSTEIN, JEFFREY R. CRISAN,
ROBERT E. EVANSON, CHRISTIAN G. KASPER, RICHARD KATZMAN,
MICHAEL A. KRUPKA, LINDA WHITLOCK, and ROTH CAPITAL
PARTNERS, LLC
MEMORANDUM AND ORDER ON
DEFENDANTS’ MOTIONS TO DISMISS
THE AMENDED COMPLAINT
March 6, 2012
STEARNS, D.J.
This federal securities class action was brought on behalf of purchasers of
common stock of The Princeton Review, Inc. (TPR), in or traceable to TPR’s offering
of securities on April 15, 2010 (the Offering) under sections 11, 12(a)(2), and 15 of the
Securities Act of 1933. TPR, the individual defendants,1 and Roth Capital Partners,

1

At times relevant to this action, Stephen C. Richards was TPR’s COO and
CFO; Christian G. Kasper was also TPR’s COO and CFO; Susan Rao was TPR’s
Executive Vice President of Finance, and Treasurer; and David Lowenstein, Jeffrey R.
Crisan, Robert E. Evanson, Richard Katzman, Michael A. Krupka, and Linda Whitlock
served as directors. Am. Compl. ¶¶ 9-17, 73.

LLC (Roth Capital), have moved to dismiss the Amended Complaint filed by lead
plaintiff Washtenaw County Employees’ Retirement System (WCERS) for failure to
state a claim upon which relief can be granted pursuant to Fed. R. Civ. P. 12(b)(6).2
For the reasons to be stated, defendants’ motion to dismiss will be granted.
Background
TPR was founded in 1981 to provide classroom-based and online test
preparation courses for post-secondary and graduate admissions tests. Am. Compl. ¶
26. At the time of the Offering, TPR operated through three divisions: (1) the Test
Preparation Services division (“Test Prep”), which provided live and online test
preparation courses, as well as individual and small group tutoring; (2) the Penn Foster
division, acquired in December of 2009, which provided accredited, career-focused
online degree and vocational programs; and (3) the Supplemental Educational Services
(“SES”) division, which provided tutoring and other services under the No Child Left
Behind Act of 2001. See id. ¶¶ 27-30. TPR’s competitors in the Test Prep market
were (and are) Kaplan, Revolution Prep, and other local providers. Id. ¶ 62,
By 2007, TPR’s business was anemic. Id. ¶ 33. TPR was facing high costs and
shrinking gross margins, falling from 71% in 2003 to less than 64% by 2007. Id.

2

Roth Capital filed a separate motion to dismiss, but relies on the same grounds
stated in the memorandum of law filed by TPR and the individual defendants.
2

Michael Perik was hired as CEO to restructure and rescue the ailing company. Id. ¶¶
34-35. The restructuring and turn-around plan was to be implemented in two phases.
Id. ¶ 35. The first phase would focus on cutting costs, reducing and rationalizing
staffing, and taking TPR back to its core competencies (Test Prep and SES), in an
effort to lift profit margins. Id. The second phase would be dedicated to growth – TPR
would leverage acquired franchises, develop new products related to core offerings,
enter new markets, and build a compelling online product offering. Id. ¶ 36. By early
2009, TPR was poised to enter the growth phase of the turn-around plan. Id.
In 2009, TPR’s financial results reflected an improved all-around performance.
In March of 2009, for the year ending December 31, 2008, TPR reported a net profit
from continuing operations of $1.3 million, up from a loss of $31.4 million in 2007,
with an increase in gross revenues of 25.5% over 2007 to $138.8 million. Id. ¶ 38. In
May of 2009, TPR reported that first quarter revenues had increased 25.5% to $44.8
million from $35.7 million during the same period in 2008, with a net profit from
continuing operations of $2.2 million as compared to $0.3 million during the same
period in 2008. Id. ¶ 41. In August of 2009, for the first six months of 2009, TPR
reported a 9.3% increase in gross revenues to $76.3 million as compared to $69.8
million for the same period in 2008. Id. ¶ 44. In November of 2009, for the third
quarter, TPR reported gross revenues of $34.3 million as compared to $34.7 million for
3

the same period in 2008. Id. ¶ 49. TPR released its full year 2009 results in March of
2010, reporting that its revenue increased 3.4% over 2008, to $143.5 million as
compared to $138.8 million. Id. ¶ 52. In press releases and earnings calls in 2009 and
early 2010 (prior to the Offering), Perik touted the success of TPR’s turn-around effort,
and TPR’s optimistic outlook over its position in the Test Prep marketplace. See id.
¶¶ 38-39, 41-42, 44-45, 49-54.
On September 24, 2009, TPR filed a Registration Statement with the SEC for
an Offering of up to $75 million of securities. Id. ¶ 31. On October 19, 2009, TPR
announced the $170 million cash acquisition of Penn Foster. Id. ¶ 48. In January of
2010, TPR announced that it had partnered with the National Labor College to provide
career development courses to AFL-CIO members and their families. Id. ¶ 63. In
March of 2010, TPR announced a joint venture with Bristol Community College to
create an Allied Health Care Initiative with a degree program in health science, medical
information coding, and other medical areas. Id.
On April 15, 2010, TPR issued 14 million shares of common stock at $3 a share.
Id. ¶ 32. The Offering was made pursuant to the September 24, 2009 Registration
statement and a Prospectus and Prospectus Supplement filed with the SEC on April 15,
2011 (collectively the Offering Materials). Id. ¶¶ 31-32. The Offering Materials
incorporated specific SEC filings by reference, including TPR’s Annual Reports on
4

Form 10-K for 2009 and 2008; TPR’s Quarterly Reports on Form 10-Q for the periods
ending in March 31, 2009, and June 30, 2009; and TPR’s Current Reports on Form 8-K
filed on March 18, 2009, March 31, 2009, April 20, 2009, and the Amended Current
Report on Form 8K/A filed on March 30, 2009. Roth Capital served as the underwriter
for the Offering, and exercised the overallotment option to purchase an additional 2.1
million shares. Id. ¶¶ 19, 32. In total, TPR sold 16.10 million shares, and raised $48.3
million. Id. ¶ 32.
Following the Offering, for the first quarter of 2010, TPR reported a 2% decline
in Test Prep revenue. See TPR 5/7/10 Form 10-Q at 18. For the second quarter of
2010, TPR announced an increase of Test Prep revenue by $1.4 million, or 5%, over
the same period in 2009. See TPR 8/6/2010 Form10-Q at 22. The price of TPR stock
gradually declined from the date of the Offering, from $3.42 a share on April 15, 2010,
to $1.70 a share on November 4, 2011.
On November 5, 2010, TPR announced financial results for the third quarter of
2010 that fell below Wall Street expectations. Am. Compl. ¶ 74. TPR reported total
revenues of $54.4 million compared with estimates of $63.5 million (14.3% below the
forecast), an adjusted net loss of $8.83 million compared with a projected loss of $4.48
million (86.2% below estimates), and adjusted losses of $0.17 per share compared with
an expected loss of $0.12 per share (38.2% below estimates). Id. Kasper, who had
5

replaced Richards as TPR’s COO and CFO in June of 2010, explained in an earnings
call that TPR’s lower performance was “primarily due to a $2.6 million or 13%
decrease in retail test prep revenue . . . [which] was primarily due to customers opting
for our lower price SAT prep offerings, partially offset by increased enrollment.” Id.
¶ 75. During the same call, CEO Perik agreed that the lower performance was
attributable to “customers choosing cheaper offerings.” Id. ¶ 76.
As a result of the reported financial results, TPR’s stock fell 8.82% to close at
$1.55 a share. Id. ¶ 77. It fell another 23.23% on the next trading day (November 8,
2010) to close at $1.19 a share. Id. By March 8, 2011, TPR stock had fallen to $0.87
a share.
Perik resigned on March 8, 2011, and John M. Connolly was appointed Interim
President and CEO. Id. ¶ 79. The following day, TPR released its year-end results
for 2010, which showed a loss from continuing operations of $50.4 million, compared
to a loss of $13.9 million in 2009, and lower than expected gross revenues, particularly
in Test Prep. Id. ¶ 80. During an associated earnings call, Connolly cited “the product
mix shift” and “the dynamic competitive marketplace” as the primary reasons for
disappointing Test Prep results in 2010 . Id. ¶ 81. COO Kasper also repeated the
explanation that Test Prep revenues had diminished despite increased enrollments
because “customers opted for lower-priced product offerings.” Id. ¶ 82. Following
6

publication of the year-end results, TPR’s stock fell 37.80% to $0.51 a share on March
10, 2011, and by another 25.53% to $0.39 a share on March 11. Id. ¶ 83.
WCERS filed this lawsuit on July 29, 2011. WCERS alleges that the Offering
Materials misrepresented or failed to disclose five categories of then-existing material
adverse facts:
(a) Princeton Review was not executing well on the growth phase of its
turnaround plan;
(b) the Test Prep business was in decline and there was a major shift by
customers away from more expensive to less expensive product offerings;

(c) increases in the number of enrollments were not sufficient to counter
the major shift by customers into less expensive offerings;
(d) the Company’s revenues and earnings were negatively impacted by
increased competition in its marketplace, including from companies with
lower cost offerings; [and]
(e) Princeton Review’s management neglected to improve the Company’s
core Test Prep and Penn Foster businesses in pursuit of unproven side
projects to the detriment of its business, financial performance and
prospects.
Id. ¶ 65. WCERS also alleges that because student-consumers make enrollment
decisions months in advance, at the time of the Offering TPR knew the impact that a
shift in product choices would have on its third quarter of 2010 Test Prep revenues,
id. ¶¶ 59-61, but “failed to warn investors that, at the time of the Offering, . . . revenues

7

for Test Prep would be lower during the third quarter of 2010 and beyond than
previously forecasted.” Id. ¶ 72.
Defendants have moved to dismiss WCERS’s Amended Complaint, arguing that
TPR either did not have a duty to disclose the alleged misleading or omitted facts, or
that the facts were sufficiently disclosed in the Offering Materials. Defendants also
maintain that WCERS cannot show loss causation.3 The court heard oral argument on
February 22, 2012.
Discussion
To survive a motion to dismiss pursuant to Rule 12(b)(6), the factual allegations
of the complaint must “possess enough heft” to set forth “a plausible entitlement to
relief.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557, 559 (2007); Thomas v. Rhode
Island, 542 F.3d 944, 948 (1st Cir. 2008). As the Supreme Court has emphasized, this
standard “demands more than an unadorned, the-defendant-unlawfully-harmed-me
accusation. A pleading that offers labels and conclusions or a formulaic recitation of
the elements of a cause of action will not do. Nor does a complaint suffice if it tenders
naked assertion[s] devoid of further factual enhancement.” Ashcroft v. Iqbal, 129 S.
Ct. 1937, 1949 (2009) (internal citations and quotation marks omitted).

3

TPR and the individual defendants make the separate argument that they are not
“sellers” under section 12(a)(2) of the Securities Act of 1933.
8

Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 impose liability for
material misrepresentations or omissions in a registration statement related to a security
offering. Section 11 provides that every signer, director, and underwriter may be held
liable for a registration statement which “includes untrue statements of material facts
or fails to state material facts necessary to make the statements therein not misleading.”
Ernst & Ernst v. Hochfelder, 425 U.S. 185, 208 (1976). To survive a motion to
dismiss the section 11 claim, WCERS must successfully allege “(1) that [TPR’s]
prospectus contained an omission [or misrepresentation]; (2) that the omission [or
misrepresentation] was material; (3) that defendants were under a duty to disclose the
omitted information; and (4) that such omitted information existed at the time the
prospectus became effective.” Cooperman v. Individual, Inc., 171 F.3d 43, 47 (1st
Cir. 1999).
Section 12(a)(2) provides that any person who “offers or sells” a security by
means of a prospectus or oral communication containing a materially false statement
or that “omits to state a material fact necessary in order to make the statements, in the
light of the circumstances under which they were made, not misleading,” shall be liable
to any “person purchasing such security from him.” 15 U.S.C. § 77l(a)(2). Section 15
of the Act provides for the joint and several liability of persons who “control” those
who have committed a primary violation of section 11 or section 12. 15 U.S.C. § 77o.
9

The parties agree that only statements or omissions in TPR’s Offering Materials and
the documents that they incorporate by reference are actionable under sections 11 and
12(a)(2).4 See 15 U.S.C. § 77k(a); In re Bank of Boston Corp. Sec. Litig., 762 F.
Supp. 1525, 1538-1539 (D. Mass. 1991). WCERS has identified the five previously
listed categories of allegedly actionable statements or omissions in TPR’s Offering
Materials. I will address each category in its logical progression.
TPR’s Failure to Forewarn of Q3 2010 Results Based on Advanced Bookings
This dispute is not over the materiality of the omitted information, but over the
duty to disclose it. Defendants argue that TPR’s alleged failure to warn investors about
lower third quarter of 2010 Test Prep revenues is not an actionable omission because
“federal securities laws impose no obligation upon an issuer to disclose forwardlooking information such as internal projections, estimates of future performance,
forecasts, budgets, and similar data.” Shaw v. Digital Equip. Corp., 82 F.3d 1194,
1209 (1st Cir. 1996). WCERS maintains that TPR had a duty to disclose the omitted
information because the advanced bookings were tangible information that TPR
possessed at the time of the Offering, and therefore subject to disclosure under Items

4

Although section 12(a)(2) refers to “oral communications,” these are limited to
oral communications concerning a prospectus. Gustafson v. Alloyd Co., Inc., 513 U.S.
561, 567-568 (1995). WCERS has not alleged any actionable oral communications.
10

303 and 503 of Form 3-S, the Registration Statement form.5
Defendants, however, are correct that TPR was not obligated to disclose its
internally-tracked advanced booking information. “‘[T]he mere possession of material
nonpublic information does not create a duty to disclose it.’” Cooperman, 171 F.3d
at 47, quoting Shaw, 82 F.3d at 1202. “The issue, rather, is whether the securities law
imposes on defendants a ‘specific obligation’ to disclose the information of the type
that plaintiffs claim was omitted.” Cooperman, 171 F.3d at 49-50. There is only a
duty to disclose if (i) a statute or regulation requires it, or (ii) a company has made
inaccurate, incomplete or misleading prior disclosures. See id. at 50.
WCERS has not alleged any inaccurate, incomplete, or misleading disclosures
in the Offering Materials regarding TPR’s performance in the third quarter of 2010.
Indeed, the Offering Materials disclosed that TPR’s business was subject to seasonal
fluctuations, and that “quarterly operational results are not indicative of future
5

Item 303(a) requires disclosure of “any and all material changes . . . which have
occurred since the end of the latest fiscal year . . . and which have not been described
in a report on Form 10-Q or Form 10-K.” Instructions to Form S-3. This in turn has
been interpreted by the SEC to mean that a “disclosure duty exists where a trend,
demand, commitment, event or uncertainty is both presently known to management and
reasonably likely to have material effects on the registrant’s financial condition or
results of operation.” Mgmt.’s Discussion and Analysis of Fin. Condition and Results
of Operations; Certain Inv. Co. Disclosures, S.E.C. Release No. 6835, 1989 WL
1092885, at *4 (May 18, 1989). Item 503 of Form S-3 further requires a “discussion
of the most significant factors that make the offering risky or speculative.” 17 C.F.R.
§ 229.503.
11

performance and are difficult to forecast” because of, inter alia, customers’ spending
patterns and variations in product mix. TPR 3/15/10 Form 10-K at 19.
Moreover, the statutes and regulations did not impose a duty on TPR to disclose
its advanced bookings at the time of the Offering. “[F]ederal securities laws focus on
the mandatory disclosure of backward-looking hard information, not forecasts.”
Glassman v. Computervision Corp., 90 F.3d 617, 631 (1st Cir. 1996). In Glassman,
the Court affirmed the district court’s denial of a motion to file a second amended
complaint for failure to state claims under sections 11, 12(a)(2), and 15, which satisfied
Rule 12(b)(6) pleading standards. Id. at 623. In so holding, the Court found that
Computervision did not have a duty to disclose that its internally-tracked software sale
bookings, seven weeks into the then-in-progress quarter, amounted to only 24% of the
company’s internal forecasts for those weeks and were significantly lower than the
bookings at comparable points in the five previous quarters. Id. at 630-632. The Court
rejected an argument that Computervision had a duty, under Item 303, to disclose the
then-existing hard information of its internal domestic bookings because such
information was “not particularly predictive,” and was “remote in time and causation
from the ultimate event of which it supposedly forewarns.” Id. at 632.
In the instant case, the omitted information was even more remote, whether
measured in time or causation, from the ultimately disappointing third quarter results
12

than were the seven-week bookings in Glassman. The Offering took place on April 15,
2010, four and one-half months before the third quarter started, and even more months
before the financial results of the third quarter would become finalized. Indeed, at the
time of the Offering, even the first quarter of 2010 results were not yet known. Given
the extended period of time – seven months – between the Offering and the final
recognition of the complained-of third quarter results, “a nondisclosure claim becomes
‘indistinguishable from a claim that the issuer should have divulged its internal
predictions about what would come of the undisclosed information.’” Id., quoting
Shaw, 82 F.3d at 1210.
Moreover, WCERS has not alleged that TPR possessed hard information that
would guarantee a disappointing third quarter. That TPR’s third quarter of 2010 results
disappointed does not support the inference that TPR had hard information at the time
of the Offering – seven months prior – that would have predicted a material departure
from a result based on known trends and risks. See Glassman, 90 F.3d at 632 (“That
quarterly results for the third quarter of 1992 did in fact turn out to be lower than
expected is not enough to produce the inference that as of the offering date
Computervision had hard mid-quarter results that would have predicted a material
departure in the end-of-quarter results.”).
Finally, the decline in Test Prep revenues in the third quarter of 2010 was
13

primarily attributable to a shift in customer purchasing preferences from higher- to
lower-priced products, a shift that was not fully offset by increased enrollment. This
particular trend and risk (as discussed below) was adequately disclosed in the Offering
Materials, as were the seasonal revenue fluctuations and inherent difficulties in
forecasting future performance. Therefore, third quarter of 2010 results cannot be said
to have significantly departed from known trends and risks such that TPR would have
had a duty to prematurely disclose an unfavorable forecast. Because TPR had no duty
to disclose its internally-tracked advanced bookings for the third quarter of 2010 at the
time of the Offering, the omission of this information is not actionable under sections
11 and 12(a)(2), and therefore not actionable under section 15.
Customers’ Shift from Higher- to Lower-Priced Offerings Not Fully Offset
by Increased Enrollment
Defendants do not challenge the materiality of this information or that TPR had
a duty to disclose it. Rather, defendants argue that the Offering Materials disclosed the
allegedly omitted information. Defendants point to TPR’s 3/15/2010 Form 10-K,
reporting on TPR’s full year 2009 results, which was explicitly incorporated into the
Offering Materials by reference.6 In this Form 10-K, TPR disclosed that the $2 million
increase in Test Prep revenues in 2009 was

6

The Prospectus specifically directs the investor to this Form 10-K for a
discussion of the risks of investing in TPR. Prospectus at 1.
14

further offset by a decrease of $6.7 million due primarily to lower
classroom-based and tutoring revenues during the year ended December
31, 2009. Increases in classroom-based enrollment were offset by lower
prices charged for our classroom-based courses and a higher percentage
of enrollments from lower-priced services. Organic tutoring revenues
declined due to lower enrollments and a shift toward lower priced tutoring
packages. We expect these pricing and enrollment trends to continue
through 2010.
TPR 3/15/2010 Form 10-K at 32-33.
WCERS argues that TPR’s disclosure misrepresented the negative trends in Test
Prep by representing that “the shift of customers to lower priced offerings was offset
by increases in total enrollments, such that the increase in enrollments reduced or
eliminated the negative impact of the shift towards lower priced services.” WCERS
Opp’n at 23. This, however, is not a fair reading of the disclosure. Indeed, the
disclosure said exactly the opposite – that the positive impact of increased enrollment
was offset by the negative impact of the shift in customer preference. In other words,
the preference for lower-priced offerings erased the gains from higher enrollments. The
reasonable conclusion, then, is that the trend in Test Prep was negative.
WCERS argues that TPR’s disclosure was “boilerplate” and insufficient because
the disclosure remained the same over the several quarters prior to the Offering despite
TPR’s “stabilized” results over 2009 and early 2010. At the hearing, WCERS relied
on Slayton v. Am. Express Co., 604 F.3d 758 (2d Cir. 2010), in support of its argument.
In Slayton, the Court held that the cautionary language that “potential deterioration in
15

the high-yield sector . . . could result in further losses in [American Express]’s
investment portfolio” was not sufficiently substantive for American Express to avail
itself of the safe harbor provision for forward-looking statements under section 27a.
Id. at 772-773. In so holding, the Court found that the language at issue was vague, did
not warn of the actual risk that actually materialized (rising defaults on the bonds
underlying American Express’s investment-grade CDOs), and “remained the same even
while the problem changed.” Id.
Slayton is inapposite. Here, TPR’s disclosure was specific enough about the
negative trends (lower prices, and a customer preference for lower-priced products that
was not offset by higher enrollment) to “bespeak caution” to the investor. Cf. In re
Evergreen Ultra Short Opportunities Fund Sec. Litig., 705 F. Supp. 2d 86, 93 (D.
Mass. 2010). TPR’s disclosure warned of the exact trend that was a primary cause of
TPR’s disappointing third quarter of 2010 results.7
Finally, WCERS argues that the sudden drop in TPR’s stock price after the
announcement of TPR’s third quarter of 2010 results reveals that TPR had not
adequately disclosed the negative Test Prep trends to the public. However, WCERS

7

WCERS argues that the trend could not have been as consistent as TPR
claimed in its disclosure because TPR’s results showed stabilization and improvement
in 2009, and early 2010. However, short term results do not negate the existence of a
deeper trend, as daily weather forecasts do not negate long-term trends in the global
climate.
16

ignores the fact that TPR stock had steadily fallen – from $3.42 on the day of the
Offering to $1.70 on the day before the release of the third-quarter results. That TPR’s
stock had fallen more than 50% prior to any corrective disclosure from TPR bespeaks
of other significant factors that influenced the stock price. Because TPR adequately
disclosed a customer preference for lower-priced products that was not fully offset by
increased enrollments, there is no actionable omission or misrepresentation under
sections 11, 12(a)(2), or 15.
Negative Impact on Revenues from Intense Competition in the Market
Defendants assert that this is another category of information that is fully and
accurately disclosed in the Offering Materials. Indeed, TPR specifically disclosed that
“[w]e face intense competition that could adversely affect our revenue, profitability and
market share.” TPR 3/15/10 Form 10-K at 18. TPR further disclosed that “[t]he
markets for our products and services are highly competitive, and we expect increased
competition in the future that could adversely affect our revenue, profitability and
market share . . . . We may not be able to maintain our competitive position or
otherwise compete effectively with current or future competitors, especially those with
significantly greater resources.” Id. at 18-19. TPR also specifically described the
competitive landscape for each division of its business, identifying Kaplan and other
local and regional companies as its competitors in Test Prep. Id. at 13.
17

WCERS agrees that TPR adequately disclosed the stiff competition in the
marketplace, but argues that
[t]he issue is not that Defendants hid the existence of competitors and
investments in side-projects from investors. Rather, Plaintiff alleges that
the Registration Statement failed to disclose that management was
distracted by these side projects and failed to focus adequate attention on
the Company’s core business. Further, the Registration Statement failed
to disclose that this heavy focus on side-projects negatively impacted the
Company’s competitive position in the marketplace.
WCERS Opp’n at 19 (emphasis in original). However, where a defendant like TPR
has disclosed the relevant material facts regarding the competition it faces in the
marketplace and its “side projects” (see discussion below), there is no requirement that
it pejoratively characterize its endeavors “in the bleakest possible terms in order to
make its disclosures complete and not misleading.” In re Stone & Webster, Inc., Sec.
Litig., 253 F. Supp. 2d 102, 126 (D. Mass. 2003). Because TPR did not hide and did
adequately disclose the existence of and risk from competition in the marketplace, this
category of information is not actionable under sections 11, 12(a)(2), or 15.
TPR’s Management was Distracted by the Pursuit of Side Projects
Defendants assert that this is another category of information where TPR fully
disclosed the relevant material facts. Defendants point to the Offering Materials in
which TPR discussed its strategy to diversify its business beyond Test Prep and
disclosed its acquisition of Penn Foster and its partnership with the National Labor
18

College.8 See TPR 3/15/2010 Form 10-K at 4. TPR also disclosed that the risks
associated with its diversification strategy included “difficulties in assimilating acquired
operations, technologies or products” and “[d]iversion of management attention and
transaction cost associated with negotiating and closing the transaction.” Id. at 22.
WCERS does not allege that there was any material “side project” that was
omitted or misrepresented in the Offering Materials. As noted above, WCERS argues
that the crux of its claim is that TPR’s management was distracted by the pursuit of
these side projects. However, where TPR had adequately disclosed these projects and
their attendant risks, it had no additional duty to denigrate the ability of its management
to oversee its business. Indeed, “mismanagement” is not a cognizable claim under the
securities laws. See Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 479-480 (1977).
Because TPR adequately disclosed its diversification strategy and the attendant risks,
this category of information is not actionable under sections 11, 12(a)(b), and 15.
TPR was not Executing Well on the Growth Phase of Its Turn-Around Plan
Defendants assert that this final category of information is yet another instance
where TPR adequately disclosed the relevant material facts. First, defendants note that
TPR made no representations as to the turn-around strategy or its execution in the

8

TPR had also publicly disclosed its partnership with the Bristol Community
College prior to the Offering, in its 3/11/10 8-K.
19

Offering Materials. Second, defendants argue that the Offering Materials provided an
accurate and measured view of TPR’s performance. For example, the Offering
Materials disclosed that TPR’s net loss in 2009 was approximately $12.4 million, as
opposed to its net loss of $8.7 million in 2008. TPR 3/15/2012 Form 10-K at 32.
Third, defendants argue that the Offering Materials fully disclosed the risks inherent in
TPR’s ongoing efforts to improve its performance. For instance, the Offering Materials
disclosed TPR’s “history of significant operating losses” and the risk that TPR might
“not be able to achieve sustained profitability if [it is] unable to increase revenue from
[its] newer products and services and successfully implement a number of new
initiatives[.]” Id. at 15. This Risk Factor disclosed that TPR had “incurred net losses
of approximately $12.4 million, $8.7 million and $28.7 million for the years ended
December 31, 2009, 2008 and 2007, respectively.” Id. at 15-16. TPR also explained
that “[i]n order to achieve sustained profitability” it must “continue to implement
changes to existing business processes, significantly reduce overhead expense and drive
profitable revenue growth.” Id. at 16.
WCERS has not identified any statements in the Offering Materials regarding
TPR’s execution of the turn-around strategy that could be characterized as false or
misleading. WCERS also has not alleged that any of the many facts cited by TPR
regarding its performance record was misrepresented, or that any particular material
20

fact was omitted from the Offering Materials. Rather, WCERS bases its claim on
numerous statements outside of the Offering Materials in which former CEO Perik
expressed optimism regarding TPR’s execution of its turn-around strategy.
WCERS does not dispute, however, that liability under sections 11, 12(a)(b) and
15 must be premised upon a material misrepresentation or omission in a registration
statement or prospectus, or in the documents they incorporate by reference. Because
WCERS has not identified any material omissions or misrepresentations in the Offering
Materials, this category of information is also not actionable under sections 11, 12(a),
and 15. Because I find that WCERS has not alleged any actionable material omissions
or misrepresentations in TPR’s Offering Materials, there is no need to address
defendants’ remaining arguments.
ORDER
For the foregoing reasons, defendants’ motions to dismiss are ALLOWED with
prejudice. The Clerk will enter judgment for defendants and close the case.
SO ORDERED.
/s/ Richard G. Stearns
_______________________________
UNITED STATES DISTRICT JUDGE

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