Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_15-cv-00408/USCOURTS-casd-3_15-cv-00408-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 28:1331 Fed. Question

---

1

15-CV-408 JLS (DHB)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

NELDA ZAMIR, Individually and on 

Behalf of All Others Similarly Situated,

Plaintiff,

v.

BRIDGEPOINT EDUCATION, INC.; 

ANDREW S. CLARK; DANIEL J. 

DEVINE; PATRICK T. HACKETT; 

ADARSH SARMA; WARBURG 

PINCUS & CO.; WARBURG PINCUS 

PARTNERS LLC; WARBURG PINCUS 

PRIVATE EQUITY VIII, L.P.,

Defendants.

Case No.: 15-CV-408 JLS (DHB)

ORDER: (1) GRANTING THE 

BRIDGEPOINT DEFENDANTS’ 

REQUEST FOR JUDICIAL NOTICE, 

(2) DENYING LEAD PLAINTIFFS’ 

MOTION TO STRIKE, 

(3) GRANTING THE BRIDGEPOINT 

MOTION TO DISMISS, AND 

(4) GRANTING THE WARBURG 

MOTION TO DISMISS

(ECF Nos. 28, 30, 37)

Presently before the Court are Defendants Bridgepoint Education, Inc.; Andrew S. 

Clark; Daniel J. Devine; Patrick T. Hackett; and Adarsh Sarma’s (collectively, the 

Bridgepoint Defendants) Motion to Dismiss Plaintiffs’ Amended Class Action Complaint 

(the Bridgepoint MTD, ECF No. 28) and Request for Judicial Notice (RJN, ECF No. 28-

3); Defendants Warburg Pincus Private Equity VIII, L.P., Warburg Pincus LLC; Warburg 

Pincus Partners L.P. (successor-in-interest to Warburg Pincus Partners LLC); and Warburg 

Pincus & Co.’s (collectively, the Warburg Defendants) Motion to Dismiss Amended Class 

Action Complaint for Violations of the Federal Securities Laws (the Warburg MTD, ECF 

Case 3:15-cv-00408-JLS-AGS Document 53 Filed 07/25/16 PageID.<pageID> Page 1 of 23
2

15-CV-408 JLS (DHB)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

No. 30); and Lead Plaintiffs’ Nelda Zamir and Thomas G. Prosch’s Motion to Strike and 

Objection to Defendants’ Request for Judicial Notice (Mot. to Strike, ECF No. 37). Also 

before the Court are the parties’ Oppositions to (ECF Nos. 36, 37) and Replies in Support 

of (ECF Nos. 41, 42, 43) the various motions, as well as two Notices of Supplemental 

Authority filed by Lead Plaintiffs (ECF Nos. 44, 46). The Court vacated the hearing and 

took these matters under submission without oral argument pursuant to Civil Local Rule 

7.1(d)(1). (ECF No. 45.) Having considered the parties’ arguments and the law, the Court 

GRANTS the Bridgepoint Defendants’ RJN (ECF No. 28-3), DENIES Lead Plaintiffs’ 

Motion to Strike (ECF No. 37), GRANTS the Bridgepoint MTD (ECF No. 28), and 

GRANTS the Warburg MTD (ECF No. 30).

BACKGROUND

I. The Defendants

Defendant Bridgepoint provides for-profit higher education through two whollyowned subsidiaries, Ashford University and the University of the Rockies. (Am. Class 

Action Compl. (AC) ¶¶ 3, 22, ECF No. 17; see also id. at ¶ 40.) Its common stock is 

publicly traded on the New York Stock Exchange. (Id. at ¶ 22; see also id. at ¶ 40.)

Defendant Warburg Pincus Private Equity VIII, L.P. (Warburg VIII) is Defendant 

Bridgepoint’s controlling shareholder. (Id. at ¶ 34.) As of October 31, 2013, Defendant 

Warburg VIII owned approximately 63.4% of Defendant Bridgepoint’s outstanding stock. 

(Id.) Defendant Warburg Pincus & Co. (Warburg Co.) is a managing member of Defendant 

Warburg Pincus Partners LLC (Warburg LLC) (id. at ¶ 31), which is the sole general 

partner of Defendant Warburg VIII (id. at ¶ 33).

Defendant Clark is a co-founder of Defendant Bridgepoint, as well as its Chief 

Executive Officer, President, and a director. (Id. at ¶ 23.) Defendant Devine has served as 

Defendant Bridgepoint’s Chief Financial Officer since January 2004 and its Executive Vice 

President since January 2011. (Id. at ¶ 25.) Defendant Hackett has served as a director of 

Defendant Bridgepoint since March 2008 and as Chairman of the Board since February 

2009. (Id. at ¶ 27.) He is also a managing director at Defendant Warburg LLC and a 

Case 3:15-cv-00408-JLS-AGS Document 53 Filed 07/25/16 PageID.<pageID> Page 2 of 23
3

15-CV-408 JLS (DHB)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

general partner of Defendant Warburg Co. (Id.) Defendant Sarma has served as a director 

of Defendant Bridgepoint since July 2005 and is also Chair of its Nominating and 

Governance Committee of the Board and a member of the Defendant Bridgepoint’s 

Compensation and Strategic Oversight Committee of the Board. (Id. at ¶ 29.) He is also a 

managing director at Defendant Warburg LLC. (Id.) Defendants Clark, Devine, Hackett, 

and Sarma are collectively referred to as the Individual Defendants.

II. Factual Background

Defendant Bridgepoint’s primary source of revenue is tuition and related fees. (Id.

at ¶ 40.) The vast majority of this tuition is paid via federal financial aid. (Id. at ¶ 41.) In 

2012 and 2013, over 85% of Ashford University’s and University of the Rockies’ revenues 

came from Title IV federal student loan programs. (Id.; see also id. at ¶ 64.)

In mid-2012, Defendant Bridgepoint experienced technical issues during an annual 

upgrade of its student management system. (Id. at ¶¶ 5, 42.) These technical issues resulted 

in delays in packaging students for financial aid qualification in between financial aid 

award years. (Id. at ¶ 5.) As a result, a significant number of students were not packaged 

prior to leaving Defendant Bridgepoint’s institutions and were consequently not eligible 

for financial aid funding. (Id.) These students were therefore required to pay outstanding 

balances without the assistance of financial aid. (Id.)

On March 12, 2013, Defendant Bridgepoint reported an increase over historic levels 

in its bad debt expense for the fourth quarter of 2012 and the 2012 fiscal year. (Id. at ¶ 6.) 

Defendants Clark and Devine explained to investors and analysts on an earnings 

conference call that Defendant Bridgepoint’s technical issues were to blame, but that they 

did not expect the issue to repeat in 2013. (Id. at ¶¶ 6, 42.) On May 17, 2013, Defendant 

Bridgepoint issued an amended Form 10-K for the 2012 fiscal year to reissue its financial 

statements. (Id. at ¶ 45.) 

Despite Defendant Bridgepoint’s assurances to the contrary, the 2012 technical 

issues caused a backlog in packaging financial aid throughout 2013. (Id. at ¶ 7; see also 

id. at ¶ 43.) Consequently, Defendant Bridgepoint continued to report higher than normal 

Case 3:15-cv-00408-JLS-AGS Document 53 Filed 07/25/16 PageID.<pageID> Page 3 of 23
4

15-CV-408 JLS (DHB)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

bad debt expenses as a percentage of revenues. (Id. at ¶ 48.) 

On November 13, 2013, Defendant Bridgepoint issued a Form SC TO-I, announcing 

that a special committee of its board of directors had approved a plan to purchase up to 

10,250,000 shares of its common stock through a tender offer at a purchase price of $19.50 

per share. (Id. at ¶¶ 103, 140.) The special committee consisted of three independent 

directors: Dale Crandall, Marye Anne Fox, and Robert Harman. (Decl. of Teodora E. 

Manolova (Manolova Decl.) Ex. A at 7, ECF No. 28-2 at 10.1) The high and low sales 

price per share reported by the NYSE in the fourth quarter 2013 through November 12, 

2013 were $20.33 and $15.64, respectively. (Manolova Decl. Ex. H at 21, ECF No. 28-2 

at 56.) The $19.50 per share tender offer price thus represented a 4.2% discount to the 

stock price two weeks before the announcement. (Bridgepoint MTD Mem. 21 & n.20 

(citing Manolova Decl. Ex. H at 21, ECF No. 28-2 at 56); see also MTD Opp’n 26 n.13, 

ECF No. 36; Bridgepoint MTD Reply 16 n.10, ECF No. 41.) The Form SC TO-I and press 

release noted that the Warburg Defendants and Defendant Bridgepoint’s officers and 

directors, including the Individual Defendants, planned to participate in the tender offer. 

(AC ¶ 140, ECF No. 17.) 

The Warburg Defendants ultimately sold back 6,878,646 shares to Defendant 

Bridgepoint, or nearly 20% of the shares the Warburg Defendants held prior to the tender 

offer. (Id. at ¶ 142.) Defendant Clark disposed of 254,114 (12.8%) of his shares, Defendant 

Devine 114,136 (22%), and Defendants Hackett and Sarma 2004 (10%) each. (Id.) 

Excluding transactions executed to satisfy tax withholding obligations, Defendant Clark 

sold 185,326 shares (see Manolova Decl. Ex. K at 75, ECF No. 28-2 at 88), Defendant 

Devine 42,519 (see Manolova Decl. Ex. L at 86, ECF No. 28-2 at 100), and Defendants

Hackett and Sarma 925 each (see Manolova Decl. Ex. M at 93, ECF No. 28-2 at 108; 

Manolova Decl. Ex. N at 101, ECF No. 28-2 at 117.). Defendants Clark and Devine 

 

1 Pin citations to docketed materials refer to the CM/ECF page numbers electronically stamped at the top 

of each page.

Case 3:15-cv-00408-JLS-AGS Document 53 Filed 07/25/16 PageID.<pageID> Page 4 of 23
5

15-CV-408 JLS (DHB)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

retained approximately 94% and 87% of their respective stock holdings in Defendant 

Bridgepoint during the class period, while Defendants Hackett and Sarma—excluding 

shares held by Warburg—each increased their holdings. (See Manolova Decl. Ex. F at 36, 

ECF No. 28-2 at 44; Manolova Decl. Ex. G at 40, ECF No. 28-2 at 49.)

On December 11, 2013, the United States Securities and Exchange Commission 

(SEC) contacted Defendant Devine with comments and questions regarding Defendant 

Bridgepoint’s declining enrollments but increased revenue for the 2012 fiscal year. (AC

¶¶ 58, 60, ECF No. 17.) The SEC also asked Defendant Devine how Defendant 

Bridgepoint’s internal processing issues with financial aid packages had affected its bad 

debt percentage. (Id. at ¶ 60.) Defendant Devine’s January 10, 2014 response detailed 

Defendant Bridgepoint’s 2012 technical issues and the backlog affecting financial aid 

packaging through 2013. (Id. at ¶ 62.) In response to the SEC’s inquiry regarding 

Defendant Bridgepoint’s determination that collectability is reasonably assured, Defendant 

Devine noted that because “approximately 85 percent of [Defendant Bridgepoint’s]

students pay for tuition and fees via Title IV funding . . . , [Defendant Bridgepoint]

conclude[s its] collectability assessment based on the government’s ability to pay as 

opposed to a student’s ability to pay.” (Id. at ¶ 64 (emphasis omitted).)

Defendant Devine’s response prompted the SEC to ask for additional information 

on February 12, 2014, including “why it is appropriate to base your collectability 

assessment on the government’s ability to pay.” (Id. at ¶ 66.) Defendant Devine replied 

on February 28, 2014 and a number of additional communications with the SEC followed, 

including two telephone conversations in May 2014 and an additional letter on June 3, 

2014. (Id. at ¶ 67.) 

On March 11, 2014, Defendant Bridgepoint preliminarily announced its fourth 

quarter and 2013 fiscal year financial results in a press release. (Id. at ¶ 116.) Later that 

day, Defendants held an earnings call, at which the Individual Defendants fielded questions 

relating to Defendant Bridgepoint’s increase bad debt percentage for the quarter. (Id. at 

¶ 117.) Following this news, the price of Defendant Bridgepoint’s stock fell 15.73%, or 

Case 3:15-cv-00408-JLS-AGS Document 53 Filed 07/25/16 PageID.<pageID> Page 5 of 23
6

15-CV-408 JLS (DHB)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

$2.99 per share, closing at $16.02 per share following unusually heavy trading volume. 

(Id. at ¶ 118.) 

On May 12, 2014, Defendants announced in a press release attached to a Form 8-K

that Defendant Bridgepoint would be unable to file its Form 10-Q for the first quarter of 

2014 on time because “[t]he Company is working to quantify the impact of an outstanding 

comment the Company received from the [SEC].” (Id. at ¶¶ 50, 120.) Defendants also 

explained that Defendant Bridgepoint was evaluating whether to restate its financial results 

for the periods from January 1, 2011 through December 31, 2013. (Id.) Defendants Clark 

and Devine held an earnings conference call later that day, during which Defendant Devine 

admitted that Defendant Bridgepoint’s prior revenue recognition policy was incorrect. (Id.

at ¶ 121.) Consequently, the price of Defendant Bridgepoint’s shares declined nearly 9%, 

closing at $14.51 per share after unusually heavy trading volume. (Id. at ¶ 123.)

The following day, Defendant Devine filed a notification of late filing for the first 

quarter of 2014 on Form 12b-25 with the SEC. (Id. at ¶ 122.) This resulted in an additional 

decline of 3.17% in Defendant Bridgepoint’s share price, which closed at $14.05 per share. 

(Id. at ¶ 123.)

On May 30, 2014, Defendants announced that they were restating Defendant 

Bridgepoint’s financial results for the fiscal year ending December 31, 2013 and each of 

the three quarterly financial results during the year, as well as revising the financial 

statements for the fiscal years ending in December 31, 2012 and 2011. (Id. at ¶¶ 52, 124–

25.) On June 2, 2014, the first trading day following the press release, the price of 

Defendant Bridgepoint’s shares declined by 1.31%, or $0.17 per share, closing at $12.98. 

(Id. at ¶ 126.) Defendant Bridgepoint issued its restated 2013 financials on August 4, 2014. 

(Id.)

As a result of the restatement, Defendant Bridgepoint saw a decrease in revenues, 

but a corresponding decrease in its bad debt expense and increase in net income:

/ / /

/ / /

Case 3:15-cv-00408-JLS-AGS Document 53 Filed 07/25/16 PageID.<pageID> Page 6 of 23
7

15-CV-408 JLS (DHB)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Financial 

Period

Original 

Revenue 

(millions)

Restated 

Revenue 

(millions)

Difference 

in Revenue

Original 

Bad Debt 

Expense 

(millions)

Restated 

Bad Debt 

Expense 

(millions)

Original 

Bad 

Debt/

Revenue

Restated 

Bad 

Debt/

Revenue

Original 

Net 

Income 

(millions)

Restated 

Net 

Income/

Loss

(millions)

Difference 

in Net 

Income/

Loss

FY 2012 $968.2 $943.4 (2.6%) $73.7 $52.8 7.6% 5.6% $123.4 $121.1 (1.9%)

1Q 2013 $222.0 $213.0 (4.1%) $18.3 $13.0 8.2% 6.1% $27.0 $24.7 (8.5%)

2Q 2013 $197.6 $193.4 (2.1%) $18.6 $11.4 9.4% 5.9% $10.4 $12.1 16.3%

3Q 2013 $185.6 $182.8 (1.5%) $16.8 $7.3 9.0% 4.0% $10.1 $14.2 40.6%

4Q 2013 $163.5 $162.2 (0.8%) $18.7 $15.4 11.4% 9.5% ($6.5) ($5.1) (21.5%)

FY 2013 $768.6 $751.4 (2.2%) $72.3 $47.1 9.4% 6.3% $41.0 $45.9 12.0%

(Id. at ¶ 57; Bridgepoint MTD Mem. 16–17, ECF No. 28-1; Manolova Decl. Ex. E at 32–

33, ECF No. 28-2 at 39–40.)

On June 20, 2014, the SEC sent another letter to Defendant Bridgepoint indicating 

the SEC’s belief that “the errors relating to revenue recognition and restricted cash were 

material to all periods presented” and requesting that Defendant Bridgepoint “please restate 

2011 and 2012 in addition to 2013.” (AC ¶ 68, ECF No. 17 (emphasis omitted).) The SEC 

added that “a reassessment of the collectability criterion should be performed when you 

have new information that would affect a student’s ability to pay” and asked Defendant 

Bridgepoint to “please provide us with your corrected revenue recognition policy 

disclosures.” (Id. (emphasis omitted).) 

On July 22, 2014, the SEC sent Defendant Bridgepoint a subpoena “relating to 

certain of the Company’s accounting practices, including revenue recognition” and 

requesting documents and information dating back to July 1, 2009. (Id. at ¶¶ 71, 139.) 

III. Procedural Background

Lead Plaintiff Zamir filed an initial complaint on February 24, 2015, alleging two 

causes of action for violation of Section 10(b) of the Exchange Act and Rule 10b-5 and 

violation of Section 20(a) of the Exchange Act. (See generally ECF No. 1.) Lead Plaintiffs 

moved for appointment as lead plaintiffs and approval of choice of counsel on April 27, 

2015. (See ECF No. 3.) Because the motion was unopposed (see ECF No. 13), the Court 

granted Lead Plaintiffs’ motion (see ECF No. 14).

On September 18, 2015, Lead Plaintiffs filed the AC, asserting the same causes of 

action as in the original complaint. (See ECF No. 17.) The Bridgepoint and Warburg 

Case 3:15-cv-00408-JLS-AGS Document 53 Filed 07/25/16 PageID.<pageID> Page 7 of 23
8

15-CV-408 JLS (DHB)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

MTDs were filed on November 24, 2015. (See ECF Nos. 28, 30.) On January 11, 2016, 

Lead Plaintiffs filed the instant Motion to Strike. (See ECF No. 37.)

THE BRIDGEPOINT DEFENDANTS’ REQUEST FOR JUDICIAL NOTICE & 

LEAD PLAINTIFFS’ MOTION TO STRIKE

The Bridgepoint Defendants ask the Court to take judicial notice of seventeen 

documents. (See generally RJN, ECF No. 28-3.) Exhibits A through H and K through O 

consist of documents filed with the SEC (see id. at 2–4), while Exhibits I and J provide 

historical stock prices for Defendant Bridgepoint and the U.S. For-Profit Education Index, 

respectively (see id. at 4–5). Lead Plaintiffs do not object to the Court taking judicial notice 

of these documents. (See generally Mot. to Strike, ECF No. 37; see also RJN Reply 2, 

ECF No. 42.) Indeed, Ninth Circuit precedent establishes that the Court may judicially 

notice both SEC filings and historic stock prices. See, e.g., Metzler Inv. GMBH v. 

Corinthian Colls., Inc., 540 F.3d 1049, 1064 n.7 (9th Cir. 2008).

The Bridgepoint Defendants also ask the Court to take judicial notice of two analyst 

reports, Exhibits P and Q (see RJN 5–6, ECF No. 28-3), which are cited in one footnote of 

the Bridgepoint MTD memorandum (see Bridgepoint MTD Mem. 28 n.31, ECF No. 28-

1). Lead Plaintiffs object to these exhibits and ask that both the exhibits and any references 

to them in the Bridgepoint MTD memorandum be stricken pursuant to Rule 12(f). (Mot. 

to Strike 6, ECF No. 37.) As the Bridgepoint Defendants note (see RJN 5, ECF No. 28-3), 

“[h]owever, courts routinely take judicial notice of analyst reports, not in order to take 

notice of the truth of the matters asserted therein, but in order to determine what may or 

may not have been disclosed to the public.” In re Century Aluminum Co. Sec. Litig., No. 

C 09-1001 SI, 2011 WL 830174, at *9 (N.D. Cal. Mar. 3, 2011), aff’d, 704 F.3d 1119; 729 

F.3d 1104 (9th Cir. 2013). Moreover, “[t]he []AC quotes from . . . analyst reports . . . . 

While the competing analyst reports proffered by [the Bridgepoint] Defendants may not be 

considered ‘for the truth of their contents’ . . . , the Court may properly look to those reports 

to understand the ‘total mix’ of information available to investors over the class period.” 

Reinschmidt v. Zillow, Inc., No. C12-2084 RSM, 2014 WL 5343668, at *3 (W.D. Wash. 

Case 3:15-cv-00408-JLS-AGS Document 53 Filed 07/25/16 PageID.<pageID> Page 8 of 23
9

15-CV-408 JLS (DHB)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Oct. 20, 2014) (citations omitted). 

Accordingly, the Court GRANTS the Bridgepoint Defendants’ RJN in its entirety 

(ECF No. 28-3) and DENIES Lead Plaintiffs’ Motion to Strike (ECF No. 37). The Court 

will “mind its Ps and Qs,” however, considering Exhibits P and Q only “for the limited 

purpose of considering what information was disclosed to the market and at what point 

during the class period.” Reinschmidt, 2014 WL 5343668, at *3.

THE BRIDGEPOINT AND WARBURG MOTIONS TO DISMISS

I. Legal Standard

Rule 12(b)(6) permits a party to raise by motion the defense that the complaint 

“fail[s] to state a claim upon which relief can be granted,” generally referred to as a motion 

to dismiss. The Court evaluates whether a complaint states a cognizable legal theory and 

sufficient facts in light of Federal Rule of Civil Procedure 8(a), which requires a “short and 

plain statement of the claim showing that the pleader is entitled to relief.” Although Rule 

8 “does not require ‘detailed factual allegations,’ . . . it demands more than an unadorned, 

the-defendant-unlawfully-harmed-me accusation.” Ashcroft v. Iqbal, 556 U.S. 662, 678 

(2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). In other words, “a 

plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more 

than labels and conclusions, and a formulaic recitation of a cause of action’s elements will 

not do.” Twombly, 550 U.S. at 555 (alteration in original). “Nor does a complaint suffice 

if it tenders ‘naked assertion[s]’ devoid of ‘further factual enhancement.’” Iqbal, 556 U.S. 

at 678 (alteration in original) (quoting Twombly, 550 U.S. at 557).

“To survive a motion to dismiss, a complaint must contain sufficient factual matter, 

accepted as true, to ‘state a claim to relief that is plausible on its face.’” Id. (quoting 

Twombly, 550 U.S. at 570); see also Fed. R. Civ. P. 12(b)(6). A claim is facially plausible 

when the facts pled “allow[] the court to draw the reasonable inference that the defendant 

is liable for the misconduct alleged.” Id. (citing Twombly, 550 U.S. at 556). That is not to 

say that the claim must be probable, but there must be “more than a sheer possibility that a 

defendant has acted unlawfully.” Id. (citing Twombly, 550 U.S. at 556). “[F]acts that are 

Case 3:15-cv-00408-JLS-AGS Document 53 Filed 07/25/16 PageID.<pageID> Page 9 of 23
10

15-CV-408 JLS (DHB)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

‘merely consistent with’ a defendant’s liability” fall short of a plausible entitlement to 

relief. Id. (quoting Twombly, 550 U.S. at 557). Further, the Court need not accept as true 

“legal conclusions” contained in the complaint. Id. at 678–79 (citing Twombly, 550 U.S. 

at 555). This review requires “context-specific” analysis involving the Court’s “judicial 

experience and common sense.” Id. at 679. “[W]here the well-pleaded facts do not permit 

the court to infer more than the mere possibility of misconduct, the complaint has alleged—

but it has not ‘show[n]’—‘that the pleader is entitled to relief.’” Id. (quoting Fed. R. Civ. 

P. 8(a)(2)). The Court will grant leave to amend unless it determines that no modified 

contention “consistent with the challenged pleading . . . [will] cure the deficiency.” DeSoto 

v. Yellow Freight Sys., Inc., 957 F.2d 655, 658 (9th Cir. 1992) (quoting Schriber Distrib. 

Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986)).

“Claims brought under Rule 10b-5 . . . must meet Federal Rule of Civil Procedure 

9(b)’s particularity requirement that ‘[i]n all averments of fraud or mistake, the 

circumstances constituting fraud or mistake shall be stated with particularity.’” In re Dura 

Pharm., Inc. Sec. Litig., 452 F. Supp. 2d 1005, 1016 (S.D. Cal. 2006) (alteration in original) 

(quoting Fed. R. Civ. P. 9(b)) (citing In re Daou Sys., Inc. Sec. Litig., 411 F.3d 1006, 1014 

(9th Cir. 2005), cert. denied 546 U.S. 1172 (2006); Yourish v. Cal. Amplifier, 191 F.3d 

983, 993 (9th Cir. 1999)). “In addition, in 1995, Congress enacted the Private Securities 

Litigation Record Act of 1995 (PSLRA) and altered the pleading requirements in private 

securities fraud litigation by requiring a complaint plead with particularity both falsity and 

scienter.” Id. at 1016–17 (quoting Daou Sys., 411 F.3d at 1014) (internal quotation marks 

omitted). 

II. Analysis

Lead Plaintiffs assert two causes of action: (1) violation of Section 10(b) of the 

Exchange Act and Rule 10b-5 against the Bridgepoint Defendants, and (2) violation of 

Section 20(a) of the Exchange Act against the Individual and Warburg Defendants. (See 

generally AC, ECF No. 17.) Defendants ask the Court to dismiss Lead Plaintiffs’ AC with 

prejudice. (See Bridgepoint MTD Mem. 32, ECF No. 28-1; see also Warburg MTD Mem. 

Case 3:15-cv-00408-JLS-AGS Document 53 Filed 07/25/16 PageID.<pageID> Page 10 of

 23
11

15-CV-408 JLS (DHB)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

4, ECF No. 30-1 (joining in the Bridgepoint MTD).)

A. Section 10(b) and Rule 10b-5

“Section 10(b) of the Securities Exchange Act of 1934 forbids (1) the ‘use or 

employ[ment] . . . of any . . . deceptive device,’ (2) ‘in connection with the purchase or sale 

of any security,’ and (3) ‘in contravention of’ Securities and Exchange Commission ‘rules 

and regulations.’” Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341 (2005) (quoting 15 

U.S.C. § 78j(b)). “Commission Rule 10b-5 forbids, among other things, the making of any 

‘untrue statement of a material fact’ or the omission of any material fact ‘necessary in order 

to make the statements made . . . not misleading.’” Id. (quoting 17 CFR § 240.10b-5 

(2004)). “The basic elements of a Rule 10b-5 claim, therefore, are: (1) a material 

misrepresentation or omission of fact, (2) scienter, (3) a connection with the purchase or 

sale of a security, (4) transaction and loss causation, and (5) economic loss.” Daou Sys., 

411 F.3d at 1014 (citing Dura Pharms., 544 U.S. at 341–42). The Bridgepoint Defendants 

challenge the adequacy of Lead Plaintiffs’ allegations concerning only the second and 

fourth elements. (See generally Bridgepoint MTD Mem. 14–28, ECF No. 28-1; see also 

MTD Opp’n 16, ECF No. 36; Bridgepoint MTD Reply 9–23, ECF No. 41.)

1. Scienter

A private securities plaintiff 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. § 78u4(b)(2). The “required state of mind” is “scienter,” i.e., “a mental state embracing intent 

to deceive, manipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 

(1976); In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 975 (9th Cir. 1999), abrogated 

on other grounds by S. Ferry LP, No. 2 v. Killinger, 542 F.3d 776 (9th Cir. 2008); In re 

Peerless Sys., Corp. Sec. Litig., 182 F. Supp. 2d 982, 987–88 (S.D. Cal. 2002). “[T]he 

PSLRA requires plaintiffs to plead, at a minimum, particular facts giving rise to a strong 

inference of deliberate or conscious recklessness.” Silicon Graphics, 183 F.3d at 979; In 

re Wet Seal, Inc. Sec. Litig., 518 F. Supp. 2d 1148, 1157 (C.D. Cal. 2007). Recklessness 

amounts to “‘an extreme departure from the standards of ordinary care, and . . . presents a 

Case 3:15-cv-00408-JLS-AGS Document 53 Filed 07/25/16 PageID.<pageID> Page 11 of

 23
12

15-CV-408 JLS (DHB)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

danger of misleading buyers and sellers that is either known to the defendant or is so 

obvious that the actor must have been aware of it.’” DSAM Global Value Fund v. Altris 

Software, Inc., 288 F.3d 385, 389 (9th Cir. 2002) (quoting Hollinger v. Titan Cap. Corp.,

914 F.2d 1564, 1569 (9th Cir. 1990)). To satisfy this pleading requirement, “the complaint 

must contain allegations of specific contemporaneous statements or conditions that 

demonstrate the defendants knew or were deliberately reckless of the false or misleading 

nature of the statements when made.” Ronconi v. Larkin, 253 F.3d 423, 432 (9th Cir. 

2001); In re Levi Strauss & Co. Sec. Litig., 527 F. Supp. 2d 965, 988 (N.D. Cal. 2007). 

The Court must consider competing inferences that could be drawn in favor of plaintiffs or 

defendants and determine whether plaintiffs have pled a “strong inference” of scienter 

which is “cogent and at least as compelling as any opposing inference of nonfraudulent 

intent.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007). 

The Bridgepoint Defendants argue that Lead Plaintiffs fail to meet their burden both 

because “the alleged scheme makes no sense” and “there is barely any mention of the 

Individual Defendants other than the CFO, Mr. Devine, and, even as to him, the AC only 

succeeds in making the case that the accounting treatment for the independent paying 

students involved a reasonable disagreement over the application of relevant accounting 

principles.” (Bridgepoint MTD Mem. 14–15, ECF No. 28-1.) The Court agrees.2

a. GAAP Violations and Restatement

The Bridgepoint Defendants first argue that Lead Plaintiffs’ alleged scheme lacks 

economic rationality—and therefore cannot be “cogent and compelling”—because “[t]here 

is no plausible story to tell where someone supposedly commits securities fraud just to 

report a paltry one to two percent revenue gain, and in so doing deliberately forgoes 

reporting approximately forty percent better net income and EPS than one would have been 

 

2 Although the Court addresses a number of Lead Plaintiffs’ allegations individually, “it is cognizant of 

the duty to conduct a holistic analysis of Plaintiffs’ scienter allegations. The flaws of the various 

allegations must be exposed as part of the Court’s holistic analysis.” Westley v. Oclaro, Inc., No. C-11-

2448 EMC, 2013 WL 2384244, at *5 (N.D. Cal. May 30, 2013). 

Case 3:15-cv-00408-JLS-AGS Document 53 Filed 07/25/16 PageID.<pageID> Page 12 of

 23
13

15-CV-408 JLS (DHB)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

legally entitled to report.” (Bridgepoint MTD Mem. 17, ECF No. 28-1.) Specifically, 

restated fiscal year 2013 revenues were reduced by $17.2 million, or 2.2%, whereas new

income and earnings per share for the same period improved by approximately 12% overall 

and by approximately 40% in the third quarter of 2013, the quarter immediately preceding 

the tender offer. (Bridgepoint MTD Reply 10, ECF No. 41.) 

Lead Plaintiffs counter that “Defendants consistently significantly violated GAAP.” 

(MTD Opp’n 20, ECF No. 36.) Specifically, “Defendants violated SAB No. 101 and 

Accounting Standards Codification Topic 605-10 by recognizing tuition revenue prior to 

it being recognizable by failing to determine if the collectability was reasonably assured, 

even when . . . Defendants knew that the government would not be paying the tuitions for 

a significant number of students.” (Id.) “Moreover, . . . these revenue recognitions 

guidelines are basic accounting principles. In no way are they new, obscure, or overly 

complicated.” (Id. at 21 (footnote omitted).)

But “GAAP is not the lucid or encyclopedic set of pre-existing rules that [Lead 

Plaintiffs] might perceive it to be.” Shalala v. Guernsey Mem’l Hosp., 514 U.S. 87, 101

(1995). “There are 19 different GAAP sources, any number of which might present 

conflicting treatments of a particular accounting question.” Id. (citing Robert S. Kay & D. 

Gerald Searfoss, Handbook of Accounting and Auditing: 1994 Update With Cumulative 

Index, ch. 5, at 6–7 (2d ed. 1993)). Consequently, GAAP “tolerate a range of ‘reasonable’ 

treatments, leaving the choice among alternatives to management.” Thor Power Tool Co. 

v. Comm’r of Internal Revenue, 439 U.S. 522, 544 (1979). The Ninth Circuit therefore 

recognizes that “the mere publication of inaccurate accounting figures, or a failure to 

follow GAAP, without more, does not establish scienter.” DSAM, 288 F.3d at 390 (quoting 

In re Software Toolworks, Inc., 50 F.3d 615, 627 (9th Cir. 1994)). Violations of GAAP,

“even significant ones or ones requiring large or multiple restatements, must be augmented 

by other specific allegations that defendants possessed the requisite mental state.” In re 

Int’l Rectifier Corp. Sec. Litig., No. CV07-02544-JFWVBKX, 2008 WL 4555794, at *13 

(C.D. Cal. May 23, 2008) (collecting cases). In other words:

Case 3:15-cv-00408-JLS-AGS Document 53 Filed 07/25/16 PageID.<pageID> Page 13 of

 23
14

15-CV-408 JLS (DHB)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

At the very least, the plaintiff must present facts demonstrating 

that the defendant was aware of the relevant GAAP principle and 

that this defendant knew how that principal was being 

interpreted. The plaintiff must then plead facts explaining how 

the defendant’s incorrect interpretation was so unreasonable or 

obviously wrong that it should give rise to an inference of 

deliberate wrongdoing.” 

In re Medicis Pharm. Corp. Sec. Litig., No. CV-08-1821-PHX-GMS, 2010 WL 3154863, 

at *5 (D. Ariz. Aug. 9, 2010) (citing Medicis, 689 F. Supp. 2d 1192, 1204 (2009)).

Such allegations are missing here. The crux of Lead Plaintiffs’ GAAP allegations 

is that Defendants “knew or recklessly disregarded the necessity to reassess whether 

collectability was reasonably assured on a student-by-student basis when recognizing 

revenue subsequent to a student’s initial enrollment with Bridgepoint’s institutions upon a 

change in facts or circumstances that would affect a student’s ability to pay, in violation of 

GAAP.” (AC ¶ 90, ECF No. 17.) But “[t]he []AC does not allege that [Bridgepoint]’s 

external auditors counseled against the practice or that [any of the Individual Defendants]

admitted or was aware it was improper.” Metzler, 540 F.3d at 1069. Instead, Lead 

Plaintiffs emphasize the obviousness of the violations:

It was only until the SEC probe that [Bridgepoint] Defendants 

even considered reassessing collectability . . . . This is not a 

matter of a difference of opinion: common sense dictates that 

where student tuition would not be paid by the government, due 

to Bridgepoint’s own errors, collecting this tuition from the 

government was not reasonably assured. In fact it was 

impossible.

(MTD Opp’n 20–21, ECF No. 36 (emphasis in original).) But “[a] plaintiff . . . cannot 

merely point at a GAAP principle and contend that a correct interpretation was simple or 

obvious.” Medicis Pharm., 2010 WL 3154863, at *5. As in Metzler, “[a]lthough the []AC 

does draw its own legal conclusion that the practice was improper, . . . the []AC’s factual 

allegations point only to disagreement and questioning . . . about the practice.” See 540 

F.3d at 1069. The Bridgepoint Defendants make several persuasive points, including that 

“the non-accountants, non-audit committee members would [not] have had any reason to 

Case 3:15-cv-00408-JLS-AGS Document 53 Filed 07/25/16 PageID.<pageID> Page 14 of

 23
15

15-CV-408 JLS (DHB)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

believe that dealing with [the independent paying students] as presenting a bad debt issue 

was erroneous under GAAP, much less fraudulent” (Bridgepoint MTD Reply 12, ECF No. 

41) and that Defendant Devine’s “dialog [with the SEC] over the relevant accounting issues 

that spanned seven months . . . suggest[s] that there was at least some room for debate, 

even if Bridgepoint did ultimately come to the conclusion that it should restate” (id. at 13). 

In short, Lead Plaintiffs’ allegations concerning the GAAP violations do not lead to an 

inference of scienter more compelling than the inference raised by the Bridgepoint 

Defendants.

With regard to restatements, “[i]n general, the mere publication of a restatement is 

not enough to create a strong inference of scienter.” Zucco Partners, LLC v. Digimarc 

Corp., 552 F.3d 981, 1000 (9th Cir. 2009), as amended (Feb. 10, 2009). The Ninth Circuit 

does recognize two “narrow” exceptions to this general rule, however. Id. (citing S. Ferry, 

542 F.3d at 785). 

The first exception permits general allegations about 

“management’s role in a corporate structure and the importance 

of the corporate information about which management made 

false or misleading statements” to create a strong inference of 

scienter when these allegations are buttressed with “detailed and 

specific allegations about management’s exposure to factual 

information within the company.”

Id. (quoting S. Ferry, 542 F.3d at 785). “The second exception . . . permits an inference of 

scienter where the information misrepresented is readily apparent to the defendant 

corporation’s senior management,” i.e., “where the falsity is patently obvious—where the 

facts [are] prominent enough that it would be absurd to suggest that top management was 

unaware of them.” Id. at 1001 (quoting Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 

989 (9th Cir. 2008)) (internal quotation marks omitted). 

Lead Plaintiffs’ allegations satisfy neither of these exceptions for many of the same 

reasons discussed above. Moreover, the restated revenue for fiscal year 2013 differed by 

only 2.2%. (See AC ¶ 57, ECF No. 17; see also Bridgepoint MTD Mem. 16, ECF No. 28-

1.) “When restatements have been considered evidence of scienter, the restatements were 

Case 3:15-cv-00408-JLS-AGS Document 53 Filed 07/25/16 PageID.<pageID> Page 15 of

 23
16

15-CV-408 JLS (DHB)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

of considerably greater magnitude than those here.” See In re Aspeon, Inc. Sec. Litig., 168 

F. App’x 836, 839 (9th Cir. 2006) (affirming district court’s dismissal of § 10(b) claim 

where restatement “only demonstrated a revenue reduction of 1.57%” and therefore failed 

to “give rise to a strong inference the original statements were issued with deliberate or 

conscious recklessness”).

Accordingly, Lead Plaintiffs’ allegations concerning Defendants’ GAAP violations 

and restatement of Defendant Bridgepoint’s financials fail to establish a strong inference 

of scienter.

b. Tender Offer

The Bridgepoint Defendants contend that “the alleged amounts traded via the 

Individual Defendants’ participation in Bridgepoint’s self-tender offer—which was open 

to all shareholders on equal terms—are non-suspicious under a long line of Ninth Circuit 

case law.” (Bridgepoint MTD Reply 15, ECF No. 41.) Additionally, “two of the Individual 

Defendants retained an overwhelming percentage of their Bridgepoint stock holdings, and 

the other two Individual Defendants actually increased their Bridgepoint stock holdings 

during the class period, thereby affirmatively negating any strong inference of scienter.” 

(Id. (emphasis in original).) Regarding the timing of the tender offer, the Bridgepoint 

Defendants note that “under Plaintiffs’ irrational fraud theory, Defendants intentionally 

and substantially understated net income and earnings per share in th[e] very quarter [that 

the self-tender was announced], as well as the two quarters immediately preceding the 

announcement.” (Id. at 15–16 (emphasis in original).) Moreover, “the tender offer price 

was set at an amount consistent with the Company’s then-current stock prices” and “none 

of the Individual Defendants served on the special committee that determined the selftender was a legitimate use of corporate resources.” (Id. at 16 (emphasis in original).)

Lead Plaintiffs rejoin that “it is obvious that Defendants were the true beneficiaries 

of this transaction: it was anticipated that up to 8.6 million shares held by Warburg and up 

to 4.2 million shares held by Bridgepoint’s officers and directors would be accepted in the 

self-tender – totaling 12.8 million shares – greater than the number of shares Bridgepoint 

Case 3:15-cv-00408-JLS-AGS Document 53 Filed 07/25/16 PageID.<pageID> Page 16 of

 23
17

15-CV-408 JLS (DHB)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

planned to even repurchase.” (MTD Opp’n 25–26, ECF No. 36.) Moreover, “the dollar 

amount that Defendants took home, over $141 million – almost one-third of the Company’s 

cash at hand at the time and 24% of Bridgepoint’s market-cap at the end of the Class Period 

– renders it suspicious.” (Id. at 27 (citing Nursing Home Pension Fund, Local 144 v. 

Oracle Corp., 380 F.3d 1226, 1232 (9th Cir. 2004)).) Finally, “[t]he $19.50 price per share 

offered in the self-tender offer . . . was higher than average closing price for Bridgepoint’s 

stock for the year.” (Id. at 26 (citing AC ¶ 140, ECF No. 17).) Consequently, “it makes 

no sense that Bridgepoint did not go to the open market to repurchase shares when the 

market price was below the $19.50 self-tender price.” (Id.) 

Under Ninth Circuit precedent, “insider trading is suspicious only when it is 

‘dramatically out of line with prior trading practices at times calculated to maximize the 

personal benefit from undisclosed inside information.’” Silicon Graphics, 183 F.3d at 986

(quoting In re Apple Computer Sec. Litig., 886 F.2d 1109, 1117 (9th Cir. 1989)), as 

amended (Aug. 4, 1999), abrogated on other grounds by S. Ferry, 542 F.3d 776). “Among 

the relevant factors to consider are: (1) the amount and percentage of shares sold by 

insiders; (2) the timing of the sales; and (3) whether the sales were consistent with the 

insider’s prior trading history.” Id. (citing Provenz v. Miller, 102 F.3d 1478, 1491 (9th Cir. 

1996)). 

None of these factors supports a strong inference of scienter. With respect to the 

amount and percentage of shares sold, Lead Plaintiffs allege that Defendants each sold 

between 10% and 22% of their Bridgepoint shares in the tender offer. (AC ¶ 142, ECF No. 

17.) “The Ninth Circuit has held, however, that to support scienter, sales amounts larger 

than 37% of a defendant’s holdings ordinarily are required.” In re Immersion Corp. Sec. 

Litig., No. C 09-4073 MMC, 2011 WL 6303389, at *9 (N.D. Cal. Dec. 16, 2011) (citing 

Metzler, 540 F.3d at 1067), aff’d, 762 F.3d 880. None of Defendants’ sales approached 

this percentage, especially when transactions executed to satisfy tax withholding 

obligations are deducted. (See Bridgepoint MTD Mem. 20 & n.16, ECF No. 28-1.) 

Moreover, the Bridgepoint Defendants correctly note that—once total stock holdings for 

Case 3:15-cv-00408-JLS-AGS Document 53 Filed 07/25/16 PageID.<pageID> Page 17 of

 23
18

15-CV-408 JLS (DHB)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

the class period are analyzed—Defendants Clark and Devine retained approximately 94% 

and 87% of their holdings, respectively, while Defendants Hackett and Sarma each 

increased their stock holdings during the class period. (Id. at 20 & nn. 16–18.) That 

Defendants Hackett and Sarma increased their holdings “giv[es] rise to an inference of 

good faith,” not scienter. See Zack v. Allied Waste Indus., Inc., No. CIV04-

1640PHXMHM, 2005 WL 3501414, at *14 (D. Ariz. Dec. 15, 2005) (citing In re Allergan 

Inc. Sec. Litig., No. SACV 89-643 AHS (RWR), 1993 WL 623321, at *23 (C.D. Cal. Nov. 

29, 1993)), aff’d, 275 F. App’x 722 (9th Cir. 2008); see also Aspeon, 168 F. App’x at 840

(“[A] stock purchase may indicate that the corporate insider knew or believed that the 

issued statements were accurate.”) (citing Gompper v. VISX, Inc., 298 F.3d 893, 897 (9th 

Cir. 2002)).

Regarding the timing of the sales, Lead Plaintiffs argue that the “announcement [of 

the self-tender] was in the middle of the fourth quarter of 2013, the quarter with the highest 

reported Bad Debt Percentage . . . .” (MTD Opp’n 25, ECF No. 36.) Consequently, 

however, Defendants overstated their net loss for that quarter and understated their net 

profit for the two quarters prior. (See Bridgepoint MTD Reply 15–16, ECF No. 41.) Lead 

Plaintiffs’ allegations concerning timing are therefore also insufficient to raise a strong 

inference of scienter. See Immersion Corp., 2011 WL 6303389, at *9 (“As defendants 

point out, however, the allegations in the ACC, once all relevant accounting adjustments 

are taken into consideration, show net income was understated . . . . Consequently, . . . the 

timing of defendants’ stock sales . . . is [not] sufficient to raise a strong inference of 

scienter.”).

None of Lead Plaintiffs’ additional arguments compels a different conclusion. The 

$19.50 per share tender offer price may have been “higher than average closing price for 

Bridgepoint’s stock for the year” (see MTD Opp’n 26, ECF No. 36 (citing AC ¶ 140, ECF 

No. 17)), but it was also a 4.2% discount to the stock price two weeks prior to the 

announcement (see Bridgepoint MTD Mem. 21 n.20, ECF No. 28-1 (citing Manolova Decl. 

Ex. H at 21, ECF No. 28-2 at 56)). Moreover, it is telling that none of the Individual 

Case 3:15-cv-00408-JLS-AGS Document 53 Filed 07/25/16 PageID.<pageID> Page 18 of

 23
19

15-CV-408 JLS (DHB)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Defendants served on the special committee that approved the self-tender offer. (See id. at 

21 & n.21 (citing Manolova Decl. Ex. A at 7, ECF No. 28-2 at 10); see also Bridgepoint 

MTD Reply 16, ECF No. 41.) Lead Plaintiffs’ failure to allege that any of the Individual 

Defendants was connected to the authorization of the tender offer proves especially 

damning to Lead Plaintiff’s insistence that Defendants were motivated to commit the 

alleged fraud “in order to undertake an enormous tender offer.” (See, e.g., AC ¶ 14, ECF 

No. 17.)

Lead Plaintiffs’ allegations concerning the tender offer therefore fail to establish a 

strong inference of scienter.

c. Sarbanes-Oxley Certifications and Internal Control Deficiencies

The Bridgepoint Defendants assert that Lead “Plaintiffs’ allegations regarding 

ineffective internal controls . . . which supposedly rendered false Defendants’ SarbanesOxley certifications . . . also fail to state a ‘cogent and compelling’ set of facts establishing 

scienter.” (Bridgepoint MTD Mem. 22, ECF No. 28-1 (citing AC ¶¶ 109–11, 137–38, ECF 

No. 17.) The parties do not dispute that control deficiencies—standing alone—are 

insufficient to raise a strong inference of scienter. (Compare MTD Opp’n 22, ECF No. 36, 

with Bridgepoint MTD Reply 18, ECF No. 41.) Consequently, the Court considers those 

allegations as part of its holistic analysis. See infra Part II.A.1.e. 

With respect to the false Sarbanes-Oxley certifications, “Sarbanes-Oxley 

certifications are not sufficient, without more, to raise a strong inference of scienter.” Zucco 

Partners, 552 F.3d at 1004 (quoting Glazer Capital Mgmt., LP v. Magistri, 549 F.3d 736, 

747–48 (9th Cir. 2008)). Moreover, “required certifications under Sarbanes-Oxley . . . add 

nothing substantial to the scienter calculus . . . and do not make . . . otherwise insufficient 

allegations more compelling by their presence in the same complaint.” Id. at 1003–04. 

The Court therefore gives no weight to Lead Plaintiffs’ allegations concerning Defendants’ 

false Sarbanes-Oxley certifications either individually or in the Court’s holistic analysis. 

See infra Part II.A.1.e.

/ / /

Case 3:15-cv-00408-JLS-AGS Document 53 Filed 07/25/16 PageID.<pageID> Page 19 of

 23
20

15-CV-408 JLS (DHB)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

d. SEC Investigation

Lead Plaintiffs argue that “[t]he SEC’s subpoena and regulatory position as to the 

Company’s accounting practices . . . further bolster the allegations of scienter, as they are 

‘one piece of the puzzle when taking a ‘holistic’ view of the purported facts as they relate 

to scienter.’” (Bridgepoint MTD Opp’n 27, ECF No. 36 (quoting In re Gentiva Sec. Litig., 

932 F. Supp. 2d 352, 380 (E.D.N.Y. 2013).) The Court therefore considers Lead Plaintiffs’ 

allegations concerning the SEC investigation as part of the Court’s holistic analysis. See 

infra Part II.A.1.e.

e. Holistic Analysis

Although none of Lead Plaintiffs’ individual allegations concerning Defendants’ 

scienter is availing, the Court must also “review ‘all the allegations holistically.’” See 

Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 48 (2011) (citing Tellabs, 551 U.S. at 

326). “The inquiry . . . is whether all of the facts alleged, taken collectively, give rise to a 

strong inference of scienter.” Tellabs, 551 U.S. at 322–23 (emphasis in original).

Even viewed holistically, however, Lead Plaintiffs’ allegations do not give rise to a 

strong inference of scienter that is at least as compelling as an inference of nonfraudulent 

conduct. Simply put, the AC does not support an inference of scienter “that is greater than 

the sum of its parts.” Rubke v. Capitol Bancorp Ltd, 551 F.3d 1156, 1165 (9th Cir. 2009) 

(citing S. Ferry, 542 F.3d at 784; Metzler, 540 F.3d at 1049). The Court therefore

GRANTS the Bridgepoint MTD (ECF No. 28) and DISMISSES WITHOUT 

PREJUDICE Lead Plaintiffs’ first cause of action.

2. Loss Causation

To demonstrate loss causation, a plaintiff must allege “a causal connection between 

the material misrepresentation and the loss.” 15 U.S.C. § 78u-4(b) (4); Dura Pharm., Inc. 

v. Broudo, 544 U.S. 336, 342 (2005). In other words, “the complaint must allege that the 

practices that the plaintiff contends are fraudulent were revealed to the market and caused 

the resulting losses.” Metzler, 540 F.3d at 1061. A corrective disclosure must reveal some 

aspect of the alleged fraud to the market. See Lentell v. Merrill Lynch & Co., 396 F.3d 

Case 3:15-cv-00408-JLS-AGS Document 53 Filed 07/25/16 PageID.<pageID> Page 20 of

 23
21

15-CV-408 JLS (DHB)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

161, 175 (2d Cir. 2005). Additionally, a plaintiff’s allegations must reveal that “the 

defendant’s ‘share price fell significantly after the truth became known.’” Metzler, 540 

F.3d at 1062 (quoting Dura Pharm., 544 U.S. at 347). The Ninth Circuit has recently 

clarified that the plaintiff must only allege “facts that, if taken as true, plausibly establish 

loss causation,” In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1057 (9th Cir. 2008), 

“suggesting that loss causation is a fact-intensive inquiry better suited for determination at 

trial than at the pleading stage,” Rudolph v. UTStarcom, No. C 07-04578 SI, 2008 WL 

4002855, at *4 (N.D. Cal. Aug. 21, 2008) (citing McCabe v. Ernst & Young, LLP, 494 F.3d 

418, 427 n.4 (3rd Cir. 2007); Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc.,

343 F.3d 189, 197 (2d Cir. 2003)). Rule 9(b)’s heightened pleading standard applies to 

allegations of loss causation. Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 

605 (9th Cir. 2014).

Lead Plaintiffs point to the following partial corrective disclosures to argue that the 

alleged fraud was revealed to the market: (1) the March 11, 2014 press release preliminarily 

announcing Defendant Bridgepoint’s fourth quarter and 2013 fiscal year results and 

subsequent earnings call (AC ¶¶ 116–19, ECF No. 17); (2) the May 12, 2014 press release 

disclosing, among other things, the SEC’s inquiry and Defendant Bridgepoint’s evaluation 

of whether a restatement of its 2011 through 2013 financial results was necessary, as well 

as the earnings conference call held that same day (id. at ¶¶ 120–23); and (3) the May 30, 

2014 8-K revealing Defendant Bridgepoint’s conclusion that there were material 

misstatements of revenue and bad debt expense as well as material weaknesses over 

financial reporting, and also providing an estimate of the restated revenue and expenses for 

the 2013 fiscal year (id. at ¶¶ 124–26). The Bridgepoint Defendants contend that none of 

these three partial disclosures “constitutes a corrective disclosure sufficient to plead loss 

causation under Ninth Circuit law.” (Bridgepoint MTD Mem. 25, ECF No. 28-1.) 

Upon review of these corrective disclosures, the Court concludes that Lead 

Plaintiffs’ allegations could plausibly establish loss causation. See Gilead Scis., 536 F.3d 

at 1057; see also Lloyd v. CVB Fin. Corp., 811 F.3d 1200, 1210 (9th Cir. 2016) (reversing 

Case 3:15-cv-00408-JLS-AGS Document 53 Filed 07/25/16 PageID.<pageID> Page 21 of

 23
22

15-CV-408 JLS (DHB)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

district court’s holding that plaintiff had not adequately pled loss causation where 

defendant’s stock price dropped over 20% following announcement of SEC subpoena but 

“the market reacted hardly at all” to later disclosure revealing falsity of previous 

representations). Accordingly, the Court declines to grant the Bridgepoint Defendants’ 

MTD on this alternative ground at this time.

B. Section 20(a)

“Section 20(a) of the Act makes certain ‘controlling’ individuals also liable for 

violations of section 10(b) and its underlying regulations.” Zucco Partners, 552 F.3d at

990. Specifically, Section 20(a) provides:

Every person who, directly or indirectly, controls any person 

liable under any provision of this chapter or of any rule or 

regulation thereunder shall also be liable jointly and severally 

with and to the same extent as such controlled person to any 

person to whom such controlled person is liable (including to the 

Commission in any action brought under paragraph (1) or (3) of 

section 78u(d) of this title), unless the controlling person acted in 

good faith and did not directly or indirectly induce the act or acts 

constituting the violation or cause of action.

15 U.S.C. § 78t(a). “Thus, a defendant employee of a corporation who has violated the 

securities laws will be jointly and severally liable to the plaintiff, as long as the plaintiff 

demonstrates ‘a primary violation of federal securities law’ and that ‘the defendant 

exercised actual power or control over the primary violator.’” Zucco Partners, 552 F.3d 

at 990 (quoting No. 84 Employer-Teamster Joint Council Pension Trust Fund v. Am. W. 

Holding Corp., 320 F.3d 920, 945 (9th Cir. 2003)) (citing Paracor Fin., Inc. v. Gen. Elec. 

Capital Corp., 96 F.3d 1151, 1161 (9th Cir. 1996)). “Section 20(a) claims may be 

dismissed summarily . . . if a plaintiff fails to adequately plead a primary violation of 

section 10(b).” Id. (citing In re VeriFone Sec. Litig., 11 F.3d 865, 872 (9th Cir. 1993); In 

re Metawave Commc’ns Corp. Sec. Litig., 298 F. Supp. 2d 1056, 1087 (W.D. Wash. 2003)). 

Because the Court has dismissed Lead Plaintiffs’ cause of action predicated upon 

violations of Section 10(b), see supra Part II.A, the Court GRANTS both the Bridgepoint 

Case 3:15-cv-00408-JLS-AGS Document 53 Filed 07/25/16 PageID.<pageID> Page 22 of

 23
23

15-CV-408 JLS (DHB)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

(ECF No. 28) and Warburg (ECF No. 30) MTDs and DISMISSES WITHOUT 

PREJUDICE Lead Plaintiffs’ second cause of action against the Individual Defendants 

and the Warburg Defendants for violations of Section 20(a).

CONCLUSION

In light of the foregoing, the Court GRANTS the Bridgepoint Defendants’ RJN 

(ECF No. 28-3), DENIES Lead Plaintiffs’ Motion to Strike (ECF No. 37), GRANTS the 

Bridgepoint MTD (ECF No. 28), and GRANTS the Warburg MTD (ECF No. 30). 

Accordingly, the Court DISMISSES WITHOUT PREJUDICE Lead Plaintiffs’ AC. 

(ECF No. 17.) Lead Plaintiffs MAY FILE a second amended complaint (SAC) within 

thirty (30) days of the date on which this Order is electronically docketed. Failure to file 

a SAC by this date may result in dismissal of this action with prejudice.

IT IS SO ORDERED.

Dated: July 25, 2016

Case 3:15-cv-00408-JLS-AGS Document 53 Filed 07/25/16 PageID.<pageID> Page 23 of

 23