Plumbers Local 200 Pension Fund v. Washington Post Company ( 2013 )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
PLUMBERS LOCAL #200 PENSION
FUND, individually and on behalf of all
others similarly situated,
Plaintiff, Civil Action No. 10-01835 (BJR)
v. MEMORANDUM OPINION
GRANTING DEFENDANTS’ MOTION
WASHINGTON POST COMPANY, TO DISMISS
DONALD E. GRAHAM, and
HAL. S. JONES,
Defendants.
This matter is before the court on Defendants’ Motion to Dismiss the Amended
Consolidated Class Action Complaint [Docket No. 37; Filed May 11, 2012] (“Motion to
Dismiss”). Plaintiff filed an Opposition to the Motion to Dismiss on June 25, 2012 [Docket No.
39], and Defendants filed a Reply on August 9, 2012 [Docket No. 41]. Having considered the
parties’ arguments, case pleadings, and relevant case law, the court finds that oral argument is
unnecessary. Accordingly, for the reasons set forth below,
IT IS HEREBY ORDERED that the Motion to Dismiss [#37] is GRANTED.
I. BACKGROUND
This matter involves allegations that Defendants committed securities fraud. On
December 23, 2011, the court granted Defendants’ first motion to dismiss on the grounds that the
amended complaint pending at that time failed to plead a strong inference of scienter, a crucial
element in securities fraud jurisprudence. Order [#29] at 22. However, the court agreed to
permit Plaintiff to amend its complaint to attempt to cure the deficiency. Order [#34] at 3. The
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Amended Complaint [Docket No. 35], which is the operative pleading for resolving the Motion
to Dismiss, was filed on March 13, 2012.
As set forth in the court’s prior Order, Plaintiff is the lead plaintiff in a class action
lawsuit against Defendants Washington Post (“WPO”), Donald E. Graham, the Chairman of the
Board and CEO of WPO, and Hal S. Jones, the Senior Vice President and CFO of WPO.
Plaintiff claims that defendants violated §§ 10(b) and 20(a) of the Securities Exchange Act and
Securities Exchange Commission Rule 10b-5. WPO is the parent company of Kaplan, Inc.
(“Kaplan”). Among Kaplan’s holdings is Kaplan Higher Education Corp. (“KHE”), a private,
for-profit college with approximately seventy campuses nationwide. The lawsuit addresses
dramatic decreases in the value of WPO stock in temporal proximity to revelations that the
Department of Education (“DOE”) and elected officials were investigating admissions and
financial aid fraud throughout the for-profit college industry. Order [#29] at 2.
During the Class Period, which is pled as July 31, 2009 through August 13, 2010,
Plaintiff alleges that Defendants “oversaw a for-profit education company built and dependent
upon defrauding students and the federal government.” Plaintiff’s Opposition [#39] at 3. More
specifically, Plaintiff contends that the individually named Defendants misled the market by
“failing to disclose that WPO’s ‘strong enrollment growth’ was driven not by affirmative efforts
to operate within the law, but almost exclusively by predatory enrollment practices, illegal
compensation policies, and [other] violations . . . .” Id.
As noted above, the court’s prior dismissal Order focused on the lack of allegations that
gave rise to the strong inference that Defendants knowingly misled the market about the value of
KHE and the business practices that contributed to that value. The court’s analysis centered on
the conduct of and information attributable to Defendants Graham and Jones, who were the
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WPO designees to communicate with the market. See United States v. Philip Morris USA Inc.,
566 F.3d 1095, 1118-23 (D.C. Cir. 2009) (noting that “to determine whether a corporation made
a false or misleading statement with specific intent to defraud, [the court looks] to the state of
mind of the individual corporate officers and employees who made, ordered, or approved the
[market] statement[s]” at issue). Specifically, the court focused on seven allegations and
omissions from the prior complaint that spoke to the issue of scienter of the individual
Defendants. Order [#29] at 5-6. Because the inference that gives rise to a strong showing of
scienter may be shown by a combination of information, the court considers the prior
information alongside the new allegations contained in the Amended Complaint.
II. STANDARD OF REVIEW
To state a private securities fraud claim, a complaint must sufficiently plead that: (1)
there was a material misstatement or omission; (2) made with scienter, i.e., an intent to defraud;
(3) in connection with the sale or purchase of security; (4) that was relied upon by plaintiffs; (5)
which resulted in economic loss; and (6) that loss was caused by the material misstatement or
omission. Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005). To curb potentially
abusive lawsuits, motions to dismiss claims related to securities fraud are reviewed under the
standard prescribed by the Private Securities Litigation Reform Act (“PSLRA”). Metzler Inv.
GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049, 1054-55 (9th Cir. 2008). This heightened
pleading standard exceeds those set forth in Fed. R. Civ. P. 8 & 9. See Tellabs, Inc. v. Makor
Issues & Rights, Ltd., 551 U.S. 308, 313, 317 (2007). In particular, a pleading must “specify
each statement alleged to have been misleading [and] the reason or reasons why the statement is
misleading” and must “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(b)(1), (2).
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In performing the relevant analysis, the court must accept all factual allegations in the
complaint as true. Tellabs, 551 U.S. at 322. The court must also “consider the complaint in its
entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6)
motions to dismiss, in particular, documents incorporated into the complaint by reference, and
matters of which a court may take judicial notice.” 1 Id. In relation to scienter, “[t]he inquiry . . .
is whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter.”
Id. at 323 (emphasis added). This consideration necessarily requires the court to consider all
inferences, both for and against plaintiffs’ claims. Id. at 323-24. “A complaint will survive . . .
only if a reasonable person would deem the inference of scienter cogent and at least as
compelling as any opposing inference one could draw from the facts alleged.” Id. at 324.
III. ANALYSIS
Sufficient allegations of scienter are necessary to plead securities fraud. Scienter requires
a showing that Defendants intended “to deceive, manipulate, or defraud.” Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 188 (1976). The D.C. Circuit has defined scienter as “[e]ither
intentional wrongdoing or ‘extreme recklessness.’” Liberty Prop. Trust v. Republic Props.
Corp., 577 F.3d 335, 342 (D.C. Cir. 2009) (citation omitted). While extreme recklessness is a
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Both parties move for the court to take judicial notice of certain information and documents.
Defendants’ Motion to Take Judicial Notice [Docket No. 38; Filed May 11, 2012]; Plaintiff’s Motion
to Take Judicial Notice [Docket No. 44; Filed August 28, 2012]. These motions are opposed at least
in part. See Plaintiff’s Opposition [Docket No. 40]; Defendants’ Opposition [Docket No. 45]. To the
extent that disputes exist regarding the type of information the court may consider, while the court
may technically take judicial notice of some of the materials put forth by the parties, the court finds it
unnecessary to consider the areas of contention. None of the material advances the allegations
contained in the Amended Complaint in any appreciable way as they relate to the issue of scienter.
For example, Plaintiff asks the court to take judicial notice of a United States Senate staff committee
report. Plaintiff’s Motion [#44] at 3. However, this report speaks only to what may have been known
by individuals at KHE, and does not supply a sufficient link to individuals at WPO. Accordingly, the
Motions are denied as moot.
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lesser form of intent, it is not a “‘should have known’ standard.” Dolphin & Bradbury, Inc. v.
SEC, 512 F.3d 634, 639 (D.C. Cir. 2008) (citation omitted). Rather, extreme recklessness can
only be shown where there is an “extreme departure from the standards of ordinary care, . . .
which presents a danger of misleading buyers or sellers that is either known to the defendant or
is so obvious that the actor must have been aware of it.” SEC v. Steadman, 967 F.2d 636, 641
(D.C. Cir. 1992) (citation omitted). Stated another way, scienter can only be shown where “the
danger was so obvious that the actor was aware of it and consciously disregarded it.” Dolphin,
512 F.3d at 639.
To determine whether a “strong inference of scienter” exists, the court “engage[s] in a
comparative evaluation; it must consider, not only inferences urged by the plaintiff . . . but also
competing inferences rationally drawn from the facts alleged.” Tellabs, 551 U.S. at 314. To this
end, “[a]n inference of fraudulent intent may be plausible, yet less cogent than other,
nonculpable explanations for the defendant’s conduct.” Id. In such a case, the allegations fail to
satisfy the stringent pleading requirements of the PSLRA.
As noted above, the court previously addressed seven core allegations relevant to the
issue of scienter in relation to the prior complaint. Specifically, the court considered allegations
related to (1) twenty-two confidential witnesses discussing abusive and/or improper recruiting
and financial aid practices, mandatory quotas, and employee compensation; (2) the individual
Defendants’ attendance at executive meetings where these practices may have been discussed;
(3) WPO’s monitoring of data related to enrollment, financial aid, and anonymous employee
complaints regarding enrollment practices at KHE; (4) public statements made about KHE’s
business by the individual Defendants attributing growth to sound, as opposed to fraudulent,
business practices; (5) the core business theory, i.e., the value of KHE to WPO’s bottom line;
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and (6) the remedial post-class-period conduct of the individual Defendants, including the
creation of a program deferring payment of tuition. In addition, the court considered the absence
of allegations that the individual Defendants profited from their alleged market fraud.
Of the seven areas referenced above, the court found that only two plausibly raised an
inference of scienter and that neither alone, nor collectively, did these allegations raise a strong
inference. Order [#29] at 12-13, 17 (attendance at executive meetings where the alleged fraud
may have been discussed and statements made as market designees which either hinted at or hid
the alleged fraudulent practices). By contrast, the court discredited Plaintiff’s reliance on the
confidential witness statements, WPO’s data monitoring of KHE’s business, the core business
theory, and post-class-period conduct. Id. at 10, 14, 18-21. Moreover, the court noted the
absence of any lucrative stock sales by the individual Defendants. Id. at 6, 21. While not
conclusive, the lack of these allegations was significant and required Plaintiff to provide
allegations of scienter of a “correspondingly greater” degree. Id. (quoting ECA v. JP Morgan
Chase Co., 553 F.3d 187, 198-99 (2d Cir. 2009) (citation omitted)). Plaintiff was unable to
satisfy this burden.
The Amended Complaint attempts to nuance and expand allegations which speak to
several of the prior categories addressed and rejected by the court. The Amended Complaint also
raises new allegations which fall within previously unaddressed categories of information. In
total, Plaintiff asks the court to consider approximately fourteen allegations relevant to the
scienter inquiry. See Plaintiff’s Opposition [#39] at 14-15. For ease of resolution, the court
determines that these allegations fall within the following categories: participation in executive
meetings; data monitoring; public statements; core business; lobbying efforts; and whistleblower
lawsuits.
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A. Case Precedent and the Absence of Motive
Prior to addressing the allegations raised in the Amended Complaint, the court notes that
alleged securities fraud at for-profit education institutions has been a frequent subject of recent
litigation. These cases have been overwhelmingly unsuccessful. As the court noted in its prior
Order, the analysis set forth by the Ninth Circuit in Metzler is particularly relevant. That case
also dealt with allegations of securities fraud allegedly committed by executives of a for-profit
college. There, the court found that despite several witnesses’ interactions with the individual
defendants and their attribution of knowledge to them based on that specific interaction, a strong
inference of scienter was not pled. Metzler, 540 F.3d at 1067-69. This holding is compelling for
two primary reasons. First, the allegations in Metzler created a closer link between the witnesses
and the individual Defendants. Second, the executives in Metzler were actually employed by the
college and were far more involved in the day-to-day operations of the company than has been
alleged here.
The court also notes persuasive holdings regarding similar allegations in cases involving
the for-profit college industry. See, e.g., Oklahoma Firefighters Pension & Retirement Sys. v.
Capella Educ. Co., 873 F. Supp. 2d 1070, 1083-84 (D. Minn. 2012) (rejecting speculative theory
that management’s desire to increase enrollment, coupled with knowledge of high attrition,
equated to scienter of the alleged fraudulent scheme); In re Apollo Group, Inc. Sec. Litig., Nos.
CV-10-1735, 2012 WL 2376378, at *5-7 (D. Ariz. June 22, 2012) (rejecting a finding of scienter
based on theories of rampant fraud, core business, data monitoring, attendance at executive
meetings, and receipt of complaints from DOE); Boca Raton Firefighters’ & Police Pension
Fund v. DeVry Inc., No. 10 C 7031, 2012 WL 1030474, at *10-12 (N.D. Ill. Mar. 27, 2012)
(rejecting witnesses’ statements that they were motivated to employ fraudulent practices by
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pressure from management, where few reported to management, and dismissing allegations that
management monitored data, even where stock sales during the class period had been made);
Karam v. Corinthian Colleges, Inc., No. CV 10- 6523, slip op. at 14-15 (C.D. Cal. Jan. 30, 2012)
(rejecting the rehashing of allegations dismissed in previous complaint, including that senior-
level officials must have been aware of fraud because of their positions, and rejecting vague
statements of witnesses who did not communicate directly with defendants); cf. Ross v. Career
Educ. Corp., No. 10 C 276, 2012 WL 5363431, at *9-11 (N.D. Ill. Oct. 30, 2012) (finding a
strong inference where allegations showed that one defendant was made aware of the fraud from
multiple sources and participated in suspicious activities, but rejecting allegations against second
defendant based merely on his position, SEC filings, and data monitoring).
The above case law is persuasive and represents a compelling hurdle for Plaintiff to
overcome. First, many of the rejected pleadings raise strikingly similar allegations to those
contained in the Amended Complaint. Second, the court notes that several pleadings were
authored by the same counsel representing Plaintiff here. See, e.g., Boca Raton, 2012 WL
1030474; Karam, No. CV 10-6523, slip op. Third, the court notes that the unsuccessful cases
cited above address alleged fraud occurring at the company where the individual defendants
were employed. None address a situation like the one present here, where the alleged fraud
occurred at a subsidiary two levels below that of the parent and where neither individual
Defendant is alleged to have ever worked. See generally Pugh v. Tribune Co., 521 F.3d 686, 694
(7th Cir. 2008) (citation omitted) (recognizing difficulty of establishing scienter of parent
company for conduct occurring at subsidiary).
Finally, the court notes the lack of suspicious stock sales attributed to the individual
Defendants. Plaintiff contends that the lack of suspicious stock sales is not dispositive to the
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question of whether, considering all of the other allegations, there is a strong inference of
scienter. Plaintiff’s Opposition [#39] at 20-21. By contrast, Defendants argue that the lack of
stock sales cannot be ignored and makes the heightened burden borne by Plaintiff even more
difficult to meet. Defendants’ Reply [#41] at 7-8.
Both arguments contain an element of persuasion. While the lack of stock sales during
the class period is not dispositive, as other courts have noted, the lack of these allegations
requires that the strength of pro-scienter allegations be “correspondingly greater.” ECA, 553
F.3d at 198-99 (citation omitted). In other words, where there are no suspicious stock sales, the
more plausible inference from that fact is “that there was no insider information from which to
benefit.” Metzler, 540 F.3d at 1067. Here, “[t]he lack of any tangible, personal benefit [from
suspicious stock sales] . . . weighs against the Officer Defendants having scienter.” In re Wet
Seal, Inc. Sec. Litig., 518 F. Supp. 2d 1148, 1178 (C.D. Cal. 2007).
The court is mindful of the presence of compelling case law, much of which rejects a
finding of scienter involving similar, but no less voluminous, allegations. The court is also
mindful of the fact that the alleged fraud at issue here is said to have occurred at a second-level
subsidiary. Lastly, the absence of an identifiable motive by the individual Defendants is also
noteworthy. As such, Plaintiff must provide information that not only persuades the court that
scienter should be inferred, but also which results in a strong inference of scienter in comparison
to the significant precedent, facts, and inferences to the contrary.
B. Executive meetings
Plaintiff contends that new information from an additional confidential witnesses
provides the missing detail about the substance of information covered at executive meetings.
Plaintiff also proffers allegations about Defendant Graham’s attendance at meetings where
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Kaplan’s compensation practices were discussed. Plaintiff’s Opposition [#39] at 14-15.
Defendants counter that the allegations, old and new, suffer from the same shortcomings as
recognized in the court’s prior Order. Defendants’ Motion [#37] at 10-11.
As a preliminary matter, the court previously considered the allegations regarding
Defendant Graham’s attendance at meetings addressing compensation issues. Order [#29] at 11-
12. The court held that absent allegations that the compensation issues related to the alleged
fraud, the allegations were not enough. Id.Further, as before, see id. at 9-13, allegations that the individual Defendants attended
meetings where alleged wrongful practices may have been discussed do not sufficiently raise an
inference that these men were tipped off to the fraud alleged here. See In re Fed. Nat’l Mortg.
Ass’n Sec., Deriv. & ERISA Litig., 503 F. Supp. 2d 25, 40-41 (D.D.C. 2007) (requiring the
witness to clearly articulate what defendant was told, by whom, and how he responded to it).
This is especially true absent an allegation that the fraud was actually discussed and understood
as such by the individual Defendants. For example, although Confidential Witness #23 contends
that the individual Defendants attended meetings “where ‘concerns’ about Kaplan’s extreme
growth, hiring, and acquisition practices were discussed,” Amended Complaint [#35] at 81, this
generalized statement does not indicate that financial aid abuses and illegal recruiting and
compensation practices were indicated to be the cause for concern. It is simply insufficient to
provide general, nonspecific allegations regarding what the individual Defendants were told and
how they interpreted it. 2 See Order [#29] at 12-13 (citation omitted); see also In re Apollo
2
In addition to Confidential Witness #23, the Amended Complaint provides information from a
24th confidential witness. Although Defendants invite the court to consider information about the
credibility of the witness statements, the court makes it clear that it has not done so. Consideration of this
information in relation to a motion to dismiss is improper. See Bell Atl. Corp. v. Twombly, 550 U.S. 544,
572 (2007) (noting that court must accept allegations of complaint as true in resolution of a motion to
dismiss). Regardless, the court remains unpersuaded that the new witnesses offer the type of information
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Group, 2012 WL 2376378, at *6-7 (rejecting that similar generalized statements said to be the
topic at executive meetings raised an inference of scienter).
To be clear, the statements of the twenty-four confidential witnesses contained in the
Amended Complaint provide information which, if true, evidences the existence of abusive or
unethical admissions and financial aid practices. However, the witness statements speak only to
an alleged predatory scheme known to or encouraged by KHE and Kaplan. Apart from innuendo
and conjecture, the Amended Complaint fails to provide significant allegations attributing these
questionable practices to WPO or the individual Defendants. Even if the information provided in
relation to executive meetings and witness statements raises some inference of scienter, these
allegations are not enough to convince the court that the comparative balance of inferences
“give[s] rise to a strong inference of scienter.” Tellabs, 551 U.S. at 323 (emphasis added).
C. Data Monitoring
Plaintiff contends that data systems maintained at the WPO level tracked enrollment and
financial aid payments. Plaintiff’s Opposition [#39] at 17. Plaintiff also contends that on an
intra-company website, employees repeatedly questioned whether KHE’s enrollment practices
were legal. Id. at 15. Defendants note that this information does not differ or expand upon
allegations contained in the prior complaint. Defendants’ Reply [#41] at 12.
sufficient to raise a strong inference of scienter. For example, Confidential Witness #24 worked for KHE
and Kaplan in a treasury function and cannot speak to the knowledge of the individual Defendants in
relation to any alleged fraudulent financial scheme. See Amended Complaint [#35] at 23-24. As was also
a shortcoming of the prior 22 confidential witnesses, neither witness is alleged to report directly to the
individual Defendants. Malin v. XL Capital Ltd., 499 F. Supp. 2d 117, 141-42 (D. Conn. 2007)
(recognizing difficulty of finding scienter when no witness can attest to defendants actual knowledge).
Furthermore, neither witness directly attributes knowledge of the alleged fraud to them. In re Apollo
Group, Inc. Sec. Litig., No. CV-10-1735, 2011 WL 5101787, at *15 (D. Ariz. Oct. 27, 2011) (holding that
where “[n]one of [the] witnesses actually indicate scienter on Defendants’ part,” despite the volume of
their statements, scienter is not shown). Assuming the witness statements are true, they are insufficient
either alone, or in combination with other allegations, to raise a strong inference of scienter.
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Evidence that WPO regularly received detailed KHE financial reports and anonymous
complaints neither suggests that the individual Defendants received them nor that they
comprehended any fraud as their foundation. Metzler, 540 F.3d at 1068 (finding that “corporate
management’s general awareness of the day-to-day workings of the company’s business does not
establish scienter – at least absent some additional allegation of specific information conveyed to
management and related to the fraud.”); see also Order [#29] at 13-14 (rejecting similar
allegations relating to data monitoring at the parent generally which did not speak to the
individual Defendants’ access to the data specifically). Simply, “there is a big difference
between knowing about the reports from [a subsidiary] and knowing the reports are false” or
indicative of fraud. Pugh, 521 F.3d at 694 (alteration in original) (citation omitted); DeVry, 2012
WL 1030474, at *11 (rejecting that frequent monitoring of the admissions process could be said
to have alerted corporate designees of alleged fraud). As in Metzler, the “more ‘cogent’”
inference is that the company “maintained its information tracking system for the necessary and
legitimate purpose of running its business.” Metzler, 540 F.3d at 1068.
D. Public Statements
Plaintiff contends that the individual Defendants were the WPO designees to speak to the
market. Plaintiff’s Opposition [#39] at 15-16. By extension, Plaintiff essentially argues that the
public statements attributed to these executives signifies their knowledge with the underlying
interworkings at Kaplan and KHE, which would include the alleged fraud being committed
there. Defendants contend that these allegations were raised and rejected in relation to the prior
complaint. Defendants’ Reply [#41] at 15.
Indeed, the court previously noted that the individual Defendants’ statements regarding
students’ difficulty in repaying loans and the concern this implicated did not raise a strong
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inference that Defendants were aware of the predatory practices that allegedly attributed to this
situation. Order [#29] at 17. Essentially, Plaintiff asks the court to infer scienter based on
assertions of what the individual Defendants should have known. This is simply inadequate.
Dolphin, 512 F.3d at 639; Order [#29] at 6-7 (rejecting assertion that an individual’s significance
to the company supplies an inference of scienter); see also In re Advanta Corp. Sec. Litig., 180
F.3d 525, 539 (3d Cir. 1999) (“[A]llegations that a securities fraud defendant, because of his
position within the company, ‘must have known’ a statement was false or misleading are
‘precisely the types of inferences which [courts], on numerous occasions, have determined to be
inadequate . . . .” (citation omitted)).
In regard to the present allegations (which do not deviate significantly from those already
rejected), while Defendant Graham’s statement to stockholders that he was concerned about low
repayment rates of financial aid in the for-profit college industry continues to be one of
Plaintiff’s more compelling allegations of scienter, “[v]iewing the [Complaint] in its totality, . . .
this statement does not raise a ‘strong inference’ of scienter.” Metzler, 540 F.3d at 1069(recognizing that heightened PSLRA standard cannot be met by one statement that is “not so
indicative of fraudulent intent that it carries the weight of the entire 181-page complaint for
purposes of establishing a ‘strong inference’ of scienter”). Moreover, the court rejects Plaintiff’s
contention that because the individual Defendants spoke “thoroughly and intelligently” about
KHE to the market, Plaintiff’s Opposition [#39] at 15, this leads to the strong inference that they
must have known more than they let on. In re Apollo Group, 2012 WL 2376378, at *7.
“[T]hese allegations are generally conclusory in that they rely on the assertion of what
Defendants ‘must have known.’ This is not enough to establish a strong inference of scienter or
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to link such an inference to Defendants’ knowledge at the time the allegedly false or misleading
statements were made.” Id.E. Core business
Plaintiff explains that during the Class Period, large sums of money were transferred
between KHE/Kaplan and WPO. Plaintiff’s Opposition [#39] at 17, 19. Plaintiff contends, in
part, that WPO transferred money to Kaplan when there were shortfalls of mandatory cash on
hand as required by federal regulations. Id. Finally, Plaintiff provides allegations related to
Defendant Jones’ prior employment by Kaplan as evidence that he must have been aware of the
money transferring between KHE/Kaplan and WPO and the fraudulent purposes it served. Id. at
14. Defendants counter that Plaintiff’s allegations do not evidence fraud but, rather, innocuous
business practices. Defendants’ Reply [#41] at 13. Moreover, there is no evidence that the
individual Defendants were aware of such practices or that they, or anyone else at WPO, viewed
it as fraudulent. Defendants’ Motion [#37] at 14.
As a preliminary matter, the court categorizes the above allegations as a variation of the
core business theory raised in Plaintiff’s prior complaint because the allegations seek to show
that the businesses of KHE/Kaplan and WPO were so intermingled that the individual
Defendants were unquestionably aware of the fraud occurring at KHE. In this regard, evidence
regarding the employment status of Defendant Jones, none of which pertains to employment at
KHE, does not raise any inference that he had knowledge during the Class Period of alleged
wrongdoing at KHE. See Metzler, 540 F.3d at 1067-69 (rejecting more compelling allegations
where individuals alleged to have scienter were direct employees of the company actually
alleged to have participated in the wrongful conduct). Likewise, allegations that because of
Defendant Jones’ previous employment by Kaplan and other non-KHE Kaplan subsidiaries prior
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to the class period he “undoubtedly became aware of, supervised, and/or facilitated” in fraud
related to KHE, without any supporting factual averments or attribution, Amended Complaint
[#35] at 9-10, 72-73, 138, are simply inadequate.
Moreover, allegations that WPO or Kaplan operated as a repository for KHE funds,
including Title IV funds, do not sufficiently raise an inference of scienter. Rather, these
allegations (assuming they speak to company-wide fraud) 3 attempt to impose liability against
WPO based on a complicated and confusing monetary scheme where there is no evidence that
the individual Defendants knew about the scheme or that it was improper. This is insufficient.
For example, allegations that employees at Kaplan were involved in attempts to hide cash
shortages at KHE in violation of federal regulations by securing the money from WPO are
insufficient because the individual Defendants are not alleged to have any knowledge of such
practices. See, e.g., Amended Complaint [#35] at 71-74. Likewise, an allegation that an
improper accounting practice “was well known amongst Kaplan executives,” id. at 65, 71-72,
does not raise a sufficient inference that such practices were well known to significant
individuals at WPO “absent some additional allegation of specific information conveyed to
management and related to the fraud.” Metzler, 540 F.3d at 1068. Simply, given what has been
pled in the Amended Complaint, conclusory allegations that “WPO’s management knew that
Kaplan was not in material compliance with existing regulations,” do nothing to advance an
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Defendants contend that the allegations about money transfers do not raise an inference of
scienter because they do not relate to any fraudulent activity. They cite, in part, the holding of another
court which reviewed similar allegations and found that they did not sufficiently explain that such actions
were in violation of federal regulations. See United States ex rel. Diaz v. Kaplan Univ., No. 09-20756-
CIV, 2011 WL 3627285, at *6 (S.D. Fla. Aug. 17, 2011). Although this case and Defendants’ other
arguments arguably impact the plausibility of the allegations and, consequently, the court’s requirement
to assume that they are true, Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); see also In re Gilead Scis. Sec.
Litig., 536 F.3d 1049, 1055 (9th Cir. 2008); Aldana v. Del Montoe Fresh Produce, N.A., Inc., 416 F.3d
1242, 1246-48 (11th Cir. 2005), the court need not reach this issue because the allegations are insufficient
to raise an inference of scienter.
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inference that the individual Defendants were aware of any fraud and misled the market. 4
Plaintiff’s Opposition [#39] at 19; cf Amended Complaint [#35] at 74 (describing one WPO
employee’s involvement in the transfers and failing to supply sufficient information to equate
that involvement to WPO’s knowledge of any fraud).
To the extent that Plaintiff attempts to rehabilitate these allegations with evidence that
KHE was a core business of WPO, it is insufficient. See generally Stevens v. InPhonic, 662 F.
Supp. 2d 105, 121 n.8 (D.D.C. 2009) (rejecting applicability of a core business inference). As
before, the court continues to find that despite the specificity and detail of these allegations, they
are insufficient to raise an inference of scienter on behalf of WPO or the individual Defendants,
either in isolation or in consideration of other allegations. See Order [#29] at 19 (holding that
“where, as here, Plaintiff’s allegations rest on convincing the court that WPO executives were
aware of [alleged fraud] occurring on the ground at a subsidiary of a subsidiary, it is not enough
to contend that those executives should have known what was happening based merely on the
value of KHE to Kaplan and, in turn, Kaplan to the ultimate parent” (citation omitted)).
F. Lobbying efforts
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Plaintiff’s attempt to show scienter on behalf of WPO based on knowledge of individuals other
than the individual Defendants does not sufficiently persuade the court that lower-level employees’
knowledge of discrete activities should be attributed to WPO or that these individuals understood that
such actions were fraudulent. See Plaintiff’s Opposition [#39] at 18. In this Circuit, the court primarily
looks “to the state of mind of the individual corporate officers and employees who made, ordered, or
approved the [market] statement[s]” at issue. Philip Morris, 566 F.3d at 1118. While a corporation could
be found to possess its own scienter absent a finding of scienter of the individuals who spoke to the
market, this occurs in rare situations where the underlying evidence of corporate-wide knowledge is so
dramatic that collective knowledge may be inferred. See, e.g., Makor Issues & Rights, Ltd. v. Tellabs,
Inc., 513 F.3d 702, 710 (7th Cir. 2008); cf. Philip Morris, 566 F.3d at 1122 (citation omitted) (noting that
“the legal soundness of the ‘collective intent’ theory” is “dubious”). Such allegations are not present
here.
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Plaintiff contends that Defendant Graham’s increased lobbying efforts during the Class
Period convey knowledge of his familiarity with Kaplan’s operations and, thus, the alleged fraud
committed by individuals at KHE. Plaintiff’s Opposition [#39] at 14, 16. Specifically, Plaintiff
contends that lobbying efforts aimed at staving off changes that would make it less profitable to
operate for-profit colleges evidence WPO’s knowledge of the underlying fraudulent practices at
KHE. Id. at 19. By contrast, Defendants argue that Mr. Graham’s lobbying efforts indicate only
“that he knew – as the market knew – that KHE operated in a highly regulated sector, and that
changes to regulations could potentially impact its business.” Defendants’ Motion [#37] at 17.
Evidence of Defendant Graham’s lobbying efforts on behalf of KHE sheds no light on
whether Mr. Graham was aware of any alleged fraud and made public statements to hide it.
Arguably, the more plausible inference emanating from this activity is that, if improper conduct
was occurring, Mr. Graham was unaware of it. As noted by Defendants, “Plaintiff’s attempt to
infer scienter from Mr. Graham’s conversations with lawmakers is like its attempt to infer
scienter from the fact that he spoke to the market about the company.” Id. What remains lacking
is “any corroborating details to indicate that [either activity] revealed company wide fraud, or
that Defendants were aware of the fraud during the Class Period.” Metzler, 540 F.3d at 1068
n.12. Moreover, given that Mr. Graham’s lobbying efforts came during a time when government
regulators were publicly considering additional constraints on the business of for-profit colleges,
the court infers nothing illicit from his attempt to ensure that KHE had a voice in the discussion.
G. Whistleblower lawsuits
In the Amended Complaint, Plaintiff alleges that federal whistleblower actions regarding
misconduct at Kaplan alerted the individual Defendants to the fraud at issue here. Plaintiff’s
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Opposition [#39] at 14. Defendants do not directly address the whistleblower lawsuits in their
pleadings.
The suits alleged that fraudulent admissions and compensation practices were being
employed by advisors at KHE and named KHE or Kaplan as defendants. Amended Complaint
[#35] at 75-76. Neither WPO nor the individual Defendants appear to be named as parties, nor is
it alleged that they are pled as instigators or accessories in the alleged fraudulent conduct. See
id. However, the court notes that the suits were listed in WPO’s 2009 10-K, which also indicated
that WPO would be defending its subsidiaries. Id. Even assuming that the individual
Defendants were apprised of the details of these complaints, the mere fact of their existence does
not supply a strong inference of scienter, absent other persuasive allegations. See generally
Zaluski v. United Am. Healthcare Corp., 527 F.3d 564, 576-577 (6th Cir. 2008) (refusing to
equate knowledge of fraud to corporation based, in part, on a whistleblower’s suit). Moreover,
the fact that WPO chose to defend against such lawsuits suggests that the more plausible
inference is that neither WPO nor the individual Defendants believed that the lawsuits had
substance.
IV. Conclusion
Considering the allegations collectively, and the increased burden on Plaintiff at the
outset, the court finds that any inference of scienter fails when compared with opposing
inferences. See Tellabs, 551 U.S. at 325. Despite Plaintiff’s attempts to distinguish compelling
decisions reached by other courts who have addressed scienter in relation to alleged securities
fraud in the for-profit education industry, the court is not persuaded that these facts warrant
different treatment. Read in its totality, the Amended Complaint does not sufficiently allege that
the individual Defendants knowingly or recklessly misled the market. Therefore, the court
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concludes that Plaintiff has failed to allege sufficient facts to hold Defendants culpable. Because
the court finds that the lack of a strong inference of scienter is dispositive, the court need not
consider Defendants’ remaining bases for dismissal. See In re XM Satellite Radio Holdings Sec.
Litig., 479 F. Supp. 2d 165, 178 n.10 (D.D.C. 2007). Therefore, Plaintiff’s securities fraud claim
must be dismissed. See, e.g., id. at 187.
Moreover, this holding necessarily means that Plaintiff’s control-person claim against the
individual Defendants likewise fails. See SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1472 (2d
Cir. 1996); Shapiro v. UJB Fin. Corp., 964 F.2d 272, 279 (3d Cir. 1992); see also Fannie Mae II,
503 F. Supp. 2d at 43-46 (noting that to state a control-person claim “plaintiffs must adequately
plead ‘culpable participation,’” i.e., that the individual defendants acted with a sufficient state of
mind). Accordingly,
IT IS HEREBY ORDERED as follows:
(1) Defendants’ Motion to Dismiss [#37] is GRANTED and the case is DISMISSED
with prejudice; 5
5
Given that this is Plaintiff’s second unsuccessful attempt to survive a motion to dismiss, the
court finds that dismissal with prejudice is appropriate. “[D]ismissal with prejudice is warranted only
when a trial court determines that the allegation of other facts consistent with the challenged pleading
could not possibly cure the deficiency.’” Belizan v. Hershon, 434 F.3d 579, 583 (D.C. Cir. 2006)
(quoting Firestone v. Firestone, 76 F.3d 1205, 1209 (D.C. Cir. 1996)). Here, the court notes that the
Amended Complaint at issue is Plaintiff’s third pleading and is comprised of 150 pages and more than
375 paragraphs, much of which was derived from the testimony of at least 24 witnesses. Given the
shortcomings of this voluminous and detailed pleading, the court is convinced that Plaintiff “could not
possibly cure the deficiency” as it relates to scienter. Firestone, 76 F.3d at 1209; see also Fannon v.
Guidant Corp., 583 F.3d 995, 1002 (7th Cir. 2009) (“The district court was entitled to view this case as
one in which the plaintiffs had, as a practical matter, a number of opportunities to craft a complaint within
the standards of the PSLRA. It was therefore entitled to bring this litigation to a close with a dismissal
with prejudice.”).
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(2) Defendants’ Motion to Take Judicial Notice [#38] is DENIED as moot; and
(3) Plaintiff’s Motion to Take Judicial Notice [#44] is DENIED as moot.
Dated: March 19, 2013
__________________________________________
BARBARA J. ROTHSTEIN
UNITED STATES DISTRICT JUDGE
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