Among the very, very latest trends in securities class
action lawsuit filings are suits against for-profit educational companies. Just
since the middle of last week, at least five companies in this sector have been
tagged with new lawsuits, four of which were securities class actions.
These lawsuits have been accumulating in the wake of an
August 3, 2010 Government Accountability Office report (here) which
alleged that several companies in the for-profit education industry encouraged
fraud and engaged in deceptive advertising. The report was prepared in
connection with the August 4, 2010 hearing before the Senate Committee on
Health, Education, Labor and Pensions.
The GAO report said that undercover tests revealed that
at least four schools encouraged fraudulent practices and all 15 tested made
deceptive or questionable statements to the GAO's undercover applicants. The
fraud involved encouraging falsified financial aid applications. A summary of
the report can be found here. A statement of the report's highlights can be found here.
Though no specific companies are named in the report (or
perhaps because no specific companies are named in the report), the share prices
of many of the publicly traded for-profit education companies fell after the
news about the GAO report circulated. And, perhaps inevitably, the lawsuits
started coming in.
As far as I am aware, at least four for-profit education
companies have been named in securities class action lawsuits just since the
end of last week. These companies include the following:
Education Management Corp., against
which the first suit was filed on August 11, 2010. A copy of the complaint
filed in the Western District of Pennsylvania can be found here.
American Public Education,
against which the first suit was filed on August 12, 2010. A copy of the
complaint filed in the Northern District of West Virginia can be found here.
Lincoln Educational Services,
against which the first suit apparently was filed on August 13, 2010. A copy of
the complaint can be found here.
Apollo Group, Inc.,
against which the first suit apparently was filed on or about August 16, 2010.
A copy of complaint can be found here.
In addition to these securities class action lawsuits, a
separate class action lawsuit against Alta Colleges, Inc. (parent of Westwood
College) and related entities and persons was filed on August 11, 2010 in the
District of Colorado alleging violations of the Colorado Consumer Protection
Act. A copy of the Alta/Westwood complaint can be found here.
With five suits in already, it seems safe to predict that
other publicly-traded for-profit education companies could also get hit with
one of these suits. This seems to be one of those classic contagion events that
produces an epidemic of similar lawsuits that comes up every now and then. Last
year it was ETFs (refer here); this year it seems to be for-profit educational
The name Apollo Group may be familiar to many readers, as
the company was the target of a prior
securities class action lawsuit that has achieved a certain amount of
notoriety because it is one of the few securities cases that has actually gone
to trial. The trial resulted in a plaintiffs' verdict, although the presiding judge later set the verdict aside in a
response to a post-trial motion. More recently, the Ninth Circuit reversed the trial court's ruling and remanded the case to
the district court for further proceedings, a development that has sparked
significant interest and discussion.
Unfortunately for Apollo Group, all of the long-running
drama in the prior case was no shield against another case being filed.
It remains to be seen how these cases will fare. But this
industry-specific litigation outbreak is a reminder of the many odd and
circumstance-specific events that can drive securities class action lawsuit
filings. Many things determine filing levels, many of which cannot be captured
or predicted in historical filing data. As a result, it can be misleading to
try to generalize from short term trends about future filing levels. Simply
put, the numbers vary over time, because, for example, contagion events and
industry epidemics happen.
New Securities Suit Based on FCPA-Related
Allegations: Regular readers know that I have frequently commented that one result of increased Foreign
Corrupt Practices Act enforcement has been the growth in the number of
follow-on private civil lawsuits based on the underlying corruption
The latest example of this phenomenon is the lawsuit
filed against SciClone Pharmaceuticals and certain of its directors and officers.
According to the plaintiffs' lawyers' August 16, 2010 press release (here), the complaint they filed in the Northern District of
California alleges that:
defendants were engaged in illegal and improper sales and
marketing activities in China and abroad regarding its products. This
ultimately caused the Company to become the focus of a joint investigation by
the Securities and Exchange Commission ("SEC") and the Department of
Justice ("DOJ") for possible violations of the Foreign Corrupt
Practices Act ("FCPA"). It was only at the end of the Class Period,
however, that investors ultimately learned the truth about the Company's
operations after it was reported that the SEC and DOJ were investigating the
Company for violations of the FCPA. At that time, shares of the Company
declined almost 40% in the single trading day.
This case presents further support for the proposition
that increased anticorruption enforcement activity represents a growing area of
liability exposure for company executives.
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.