Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_15-cv-00408/USCOURTS-casd-3_15-cv-00408-2/pdf.json

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

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

NELDA ZAMIR, Individually and on 

Behalf of All Others Similarly Situated,

Plaintiff,

v.

BRIDGEPOINT EDUCATION, INC., et 

al.,

Defendants.

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

ORDER: (1) GRANTING 

DEFENDANTS’ MOTION TO 

DISMISS; AND

(2) DISMISSING WITH PREJUDICE 

PLAINTIFFS’ THIRD AMENDED 

COMPLAINT

(ECF No. 70)

Presently before the Court is Defendants Bridgepoint Education, Inc. and Daniel J. 

Devine’s (collectively, “Defendants”) Motion to Dismiss Plaintiffs’ Third Amended Class 

Action Complaint, (“MTD,” ECF No. 70). Also before the Court are Plaintiffs’ Response 

in Opposition to, (“Opp’n,” ECF No. 71), and Defendants’ Reply in Support of, (“Reply,” 

ECF No. 73), Defendants’ Motion to Dismiss. Additionally, Plaintiffs filed a Request for 

Judicial Notice, (“RJN,” ECF No. 72), and Defendants’ filed a Response to the Request for 

Judicial Notice, (ECF No. 74). The Court vacated the hearing and took this matter under 

submission without oral argument pursuant to Civil Local Rule 7.1(d)(1). (ECF No. 75.) 

Having considered the parties’ arguments and the law, the Court GRANTS Defendants’ 

Motion to Dismiss, (ECF No. 70).

/ / /

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BACKGROUND

I. The Parties

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

Class Action Compl. (“TAC”), ECF No. 66, ¶¶ 3, 24.) Its common stock is publicly traded 

on the New York Stock Exchange. (Id. ¶ 25.)

Defendant Devine served as Defendant Bridgepoint’s Chief Financial Officer since

January 2004 and its Executive Vice President since January 2011, resigning both positions 

on October 1, 2015.

1

(Id. ¶ 26.) 

Plaintiffs Nelda Zamir and Thomas G. Prosch both purchased Bridgepoint common 

stock and options during the proposed Class Period between March 12, 2013 and May 30, 

2014. (Id. ¶¶ 1, 23–24.) Plaintiffs seek to bring a class action on behalf of all other 

similarly situated purchasers of Bridgepoint securities. (Id. ¶ 1.)

II. Factual Background

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

¶ 3.) Without federal financial aid, many of Defendant Bridgepoint’s students would not 

choose to attend Bridgepoint’s institutions, nor could they pay the tuition these institutions 

charge. (Id. ¶ 33.)

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

its student management system. (Id. ¶ 67.) These technical issues resulted in delays in 

packaging students for financial aid qualification in between financial aid award years.

(Id.) As a result, a significant number of students were not packaged prior to departing

Bridgepoint’s institutions and were consequently not eligible for financial aid funding. (Id.

¶ 69.) These students were therefore required to pay outstanding balances without the 

assistance of financial aid. (Id.)

 

1 The Parties filed a Joint Motion to dismiss, now former defendant, Defendant Andrew S. Clark from the 

action, which the Court granted, (ECF No. 65).

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On March 12, 2013, Bridgepoint reported an increase in its bad debt expense for the 

fourth quarter of 2012 and the 2012 fiscal year. (See id. ¶ 115.) Defendant Devine 

explained to investors and analysts on an earnings conference call that Bridgepoint’s

technical issues were to blame, but that he did not expect the issue to repeat in 2013. (Id.

¶ 68.) On May 17, 2013, Bridgepoint issued an amended Form 10-K for the 2012 fiscal 

year to reissue its financial statements (“2012 Restatement”). (Id. ¶ 72.) 

Despite Defendant Devine’s assurances to the contrary, the 2012 technical issues 

caused a backlog in packaging financial aid throughout 2013. (Id. ¶ 70.) Consequently, 

Bridgepoint continued to report higher than normal bad debt expenses as a percentage of 

revenues. (Id. ¶ 13.) 

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

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

Bridgepoint’s declining enrollments but increased revenue for the 2012 fiscal year.2 (See

Second Am. Compl. (“SAC”), ECF No. 57, ¶¶ 47, 65.) The SEC also asked Defendant 

Devine how Bridgepoint’s internal processing issues with financial aid packages had 

affected its bad debt percentage. (Id. ¶ 65.) Defendant Devine’s January 10, 2014 response 

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

packaging through 2013. (TAC ¶ 65.) In response to the SEC’s inquiry regarding

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

noted that Bridgepoint “conclude[s its] collectability assessment based on the 

government’s ability to pay as opposed to a student’s ability to pay.” (Id. ¶ 48.) 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. ¶ 50 (emphasis omitted).) 

On March 11, 2014, Bridgepoint announced its preliminary fourth quarter and 2013 

 

2 Plaintiffs appear to omit this factual allegation from their TAC, but the Court references their SAC for 

the purpose of providing full background context.

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fiscal year financial results in a press release. (Id. ¶ 131.) Later that day, Defendants held 

an earnings call, during which Defendant Devine fielded questions relating to 

Bridgepoint’s increased bad debt percentage for the quarter. (Id.) Following this news, 

the price of Bridgepoint’s stock fell 15.73%, or $2.99 per share, closing at $16.02 per share 

following unusually heavy trading volume. (Id. ¶ 145.) 

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

that Bridgepoint would be unable to timely file its Form 10-Q for the first quarter of 2014 

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

Company received from the [SEC].” (Id. ¶ 147.) Defendants also explained that 

Bridgepoint was evaluating whether to restate its financial results for the periods from 

January 1, 2011 through December 31, 2013. (Id.) Defendant Devine held an earnings 

conference call later that day, during which Defendant Devine admitted that Bridgepoint’s 

prior revenue recognition policy was incorrect. (Id. ¶ 148.) Specifically, Defendant Devine 

explained that 

[u]nder previous revenue recognition, revenues recognized subsequent to a

student losing financial aid eligibility, and ultimately not collected, were

included in our bad debt expense. Going forward, our policy will exclude

these revenues and will result in a corresponding decrease in our bad debt

expense that will be realized over subsequent quarters.

(Id.) Consequently, the price of Bridgepoint’s shares declined nearly 9%, closing at $14.51 

per share after unusually heavy trading volume. (Id. ¶ 150.)

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. ¶ 149.) This resulted in an additional 

decline of 3.17% in Bridgepoint’s share price, which closed at $14.05 per share. (Id. ¶ 150.)

On May 30, 2014, Defendants announced that they were restating 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. ¶ 152.) On June 2, 2014, the 

first trading day following the press release, the price of Bridgepoint’s shares declined by 

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1.31%, or $0.17 per share, closing at $12.82. (Id. ¶ 153.) Bridgepoint issued its restated 

2013 financials on August 4, 2014 (“2014 Restatement”). (Id. ¶¶ 4, 36.)

As a result of the 2014 Restatement, Bridgepoint saw a decrease in revenues, but a 

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

Financial 

Period

Original 

Revenue 

(millions)

Restated 

Revenue 

(millions)

Difference 

in Revenue

Original 

Net 

Accounts 

Receivable

(millions)

Restated 

Net 

Accounts 

Receivable

(millions)

Difference 

in Net 

Accounts 

Receivable

4Q 2012 $209.4 $206.5 (1.5%) $83.1 $69.5 (19.6%)

FY 2012 $968.2 $943.4 (2.6%) $83.1 $69.5 (19.6%)

1Q 2013 $222.0 $213.0 (4.1%) $83.9 $66.5 (26.2%)

2Q 2013 $197.6 $193.4 (2.1%) $73.2 $57.7 (26.9%)

3Q 2013 $185.6 $182.8 (1.5%) $63.1 $55.5 (13.7%)

4Q 2013 $163.5 $162.2 (0.8%) $41.4 $35.8 (15.6%)

FY 2013 $768.6 $751.4 (2.2%) $41.4 $35.8 (15.6%)

(Id. ¶ 38.)

On July 25, 2014, Bridgepoint disclosed that the SEC was investigating its 

accounting practices, including revenue recognition and receivables. (Id. ¶ 162.) The SEC 

also issued a subpoena for the revised and restated time periods, and documents and 

information dating back to July 1, 2009 to the present. (Id.) On July 12, 2016, via a Form 

8-K filed with the SEC, Bridgepoint announced that the Department of Education would 

commence a review of Ashford’s administration of federal student financial aid programs 

for certain students identified in the 2009–2012 calendar year. (Id. ¶ 164.) In this same 

Form 8-K, Bridgepoint also announced that the U.S. Department of Justice was conducting

an “investigation concerning allegations that the Company may have misstated Title IV 

refund revenue or overstated revenue associated with private secondary loan programs and 

thereby misrepresented its compliance with the 90/10 rule of the Higher Education Act.”

(Id. ¶ 165.)

Since their Second Amended Complaint, Plaintiffs state that the SEC released to 

them, pursuant to a Freedom of Information Act request, two letters not previously 

available. (See id. ¶ 46 n.6.) The first letter, dated February 28, 2014, from Defendant 

Devine to the SEC, detailed Bridgepoint’s revenue process. This letter was sent before 

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Defendants’ 2014 Restatement. Defendant Devine stated:

When a student decides to attend one of the Company’s 

institutions, the Company enters into an agreement with the 

student to provide educational services. The student is the 

responsible party under such agreement. The student has the 

ability to seek other sources of funding (e.g., Title IV loans, 

military benefits, or corporate funding) for the student’s payment

obligations under the agreement, but the ultimate responsibility 

for payment remains with the student. The Company believes 

that it is important to emphasize that the contractual relationship 

is between the Company and the student. The Company records 

revenue by student and the accounts receivable is with each 

student in the Company’s student management system.

(Id. at 46 (footnote omitted); see also id., Ex. A, ECF No. 66-1.) The second letter, dated 

June 3, 2014, again from Defendant Devine to the SEC, summarized that “the Company 

has determined that the failure to reassess collectibility upon certain changes in

circumstances [when recognizing revenue] has caused its financial statements for prior

periods to be materially misstated.” (TAC ¶ 92; see also Ex. B., ECF No. 66-2.) In a 

memo attached to the letter, Defendants admitted, “[w]hile judgment is involved in such 

assessment, the measurement of the revenue that should have been recognized is capable 

of precise measurement.” (TAC ¶ 92.)

III. Procedural Background

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.) 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

Plaintiffs’ motion, (see ECF No. 14).

On September 18, 2015, Plaintiffs filed the First Amended Complaint, asserting the 

same causes of action as in the original complaint. (See ECF No. 17.) Several Defendants 

filed motions to dismiss on November 24, 2015, (see ECF Nos. 28, 30), and on January 11, 

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2016, Plaintiffs filed a Motion to Strike, (see ECF No. 37). The Court granted Defendants’ 

motions to dismiss, and denied Plaintiffs’ Motion to Strike. (“First MTD Order,” ECF No. 

53.) Thereafter Plaintiffs dismissed several named Defendants. (ECF Nos. 56, 59.)

Plaintiffs filed their Second Amended Complaint on September 9, 2016. (ECF No. 57.) 

Defendants filed a motion to dismiss on October 24, 2016. (ECF No. 58.) The Court again 

granted Defendants’ motion to dismiss. (“Second MTD Order,” ECF No. 64.) Plaintiffs’ 

Third Amended Complaint and Defendants’ Motion to Dismiss are now pending before 

the Court.

LEGAL STANDARD

Federal Rule of Civil Procedure 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 [does] demand more than an unadorned, the-defendant-unlawfullyharmed-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 the elements of a cause of action will not do.” 

Twombly, 550 U.S. at 555 (citing Papasan v. Allain, 478 U.S. 265, 286 (1986)). A 

complaint will not suffice “if it tenders ‘naked assertion[s]’ devoid of ‘further factual 

enhancement.’” Iqbal, 556 U.S. at 677 (citing Twombly, 550 U.S. at 557).

In order 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.” Iqbal, 556 U.S. at 677 (citing Twombly, 550 U.S. at 

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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. Facts “‘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. This review requires context-specific analysis involving 

the Court’s “judicial experience and common sense.” Id. at 678 (citation omitted). 

“[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.

Where a complaint does not survive 12(b)(6) analysis, 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 

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

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

1006, 1014 (9th Cir. 2005), cert. denied, 546 U.S. 1172 (2006); and 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 (internal quotation marks omitted) 

(quoting Daou Sys., 411 F.3d at 1014). 

ANALYSIS

As before, Plaintiffs assert two causes of action: (1) violation of Section 10(b) of the 

Exchange Act and Rule 10b-5 against all Defendants, and (2) violation of Section 20(a) of 

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the Exchange Act against Defendant Devine. (See TAC ¶¶ 181–95.) Defendants ask the 

Court to dismiss Plaintiffs’ Third Amended Complaint with prejudice. (See MTD 10.)

I. 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 Pharms., 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). Defendants challenge the 

adequacy of Plaintiffs’ allegations concerning only the second element—scienter. (See

MTD 5 n.1, 11; see also Opp’n 11.)

A. 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 

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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 intentional or the deliberately reckless 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). 

Defendants argue that Plaintiffs fail to adequately plead scienter. (MTD 11–25.) 

Plaintiffs’ Opposition brief advances three primary arguments to address the scienter 

requirement. First, Bridgepoint’s collectability assessment was unreasonable; second, 

Bridgepoint’s competitor’s assessed collectability at the time it was recorded; and third, 

additional scienter allegations support Plaintiffs’ argument. The Court addresses each in 

turn.

3

1. Whether Defendants’ GAAP4 Violation Was Unreasonable

Plaintiffs begin by arguing that Defendants knew Bridgepoint’s collectability 

assessment violated GAAP. (Opp’n 13.) This argument remains unchanged from the 

Second Amended Complaint. In its prior Order, the Court agreed with Plaintiffs’ 

 

3 Although the Court addresses Plaintiffs’ three primary 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). Therefore, the Court also discusses the holistic 

analysis at the conclusion of the Scienter section.

4 Generally Accepted Accounting Principles (“GAAP”). See, e.g., Metzler Inv. GMBH v. Corinthian 

Colls., Inc., 540 F.3d 1049, 1056 (9th Cir. 2008).

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awareness argument. Specifically, the Court concluded that

[a]t 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 princip[le] 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.

(First MTD Order 13–14 (quoting In re Medicis Pharm. Corp. Sec. Litig., No. CV-08-

1821-PHX-GMS, 2010 WL 3154863, at *5 (D. Ariz. Aug. 9, 2010) (“Medicis Pharm.”); 

and citing In re Medicis Pharm. Corp. Sec. Litig., 689 F. Supp. 2d 1192, 1204 (D. Ariz. 

2009)); see also Second MTD Order 10 (same).) In its prior order, this Court determined 

that Plaintiffs plausibly demonstrated that “Defendant Devine was ‘aware of the relevant 

GAAP principle and that this defendant knew how that princip[le] was being interpreted.” 

(Second MTD Order 11 (quoting In re Medicis Pharm. Corp. Sec. Litig., 2010 WL 

3154863, at *5).) 

The Court then found that Plaintiffs failed to plead sufficient factual allegations, as 

to the second element in Medicis, explaining how Defendants’ “incorrect interpretation 

was so unreasonable or obviously wrong that it should give rise to an inference of deliberate 

wrongdoing.” (Id. at 12 (quoting Medicis Pharm., 2010 WL 3154863, at *5). Specifically, 

Plaintiffs allegations in both their First and Second Amended Complaints were based on 

“obviousness of the violations” rather than external auditors counseling against the practice 

or that Defendants admitted or were aware the practice was improper. (Id. at 14 (citations 

omitted).) This Court found such allegations insufficient because Plaintiffs only identified 

a GAAP violation and argued that a “correct interpretation was simple or obvious.” (Id.

(quoting Medicis Pharm., 2010 WL 3154863, at *5).)

Plaintiffs argue the two previously unavailable letters from Defendants to the SEC, 

attached as exhibits to their Third Amended Complaint, meet the Court’s previous concern

that Defendants’ GAAP violation was so unreasonable or obviously wrong. (Opp’n 14.) 

According to Plaintiffs, the new allegations satisfy the second prong of Medicis 

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Pharmaceutical: that Defendants’ interpretation of its revenue collectability assessment, in 

which they assumed that all revenue would be paid by the government, rather than actually 

performing a collectability assessment, is on its face both unreasonable and obviously 

wrong, and thus rises to an inference of deliberate wrongdoing. (Id.) Plaintiffs advance 

four arguments in support of their thesis: (1) Defendants admitted there was no actual 

revenue collectability assessment at the time revenue was recorded, (id.); (2) Defendant 

Bridgepoint violated its professed accounting policies, (id. at 16); (3) Defendant 

Bridgepoint’s design of its accounts receivable system violated additional GAAP guidance, 

(id. at 17); and (4) Defendants knew that students without financial aid had lower 

collectability rates, (id. at 18). The Court discusses each in turn.

a. Whether Defendants Conducted a Revenue Collectability Assessment

Plaintiffs argue that Defendant Devine admitted to the SEC that Bridgepoint made 

no revenue collectability assessment at the time revenue was recorded. (Id. at 14 (citing, 

e.g., TAC ¶ 52 (“[T]he Company has not done a formal analysis to separate collection rates 

of students with and without financial aid funding.”).) Instead, Plaintiffs suggest that 

Defendants “immediately recognized . . . as revenue” tuition owed but not paid; “increased 

accounts receivable; waited 121 days to ‘assess’ revenue collectibility; and, at 121 days,

robotically reserved any revenue still owed at rates of 60% and 85%. (Id. at 14–15 (citing 

TAC ¶¶ 63–64).) 

Defendants argue that Plaintiffs’ Third Amended Complaint and the two new letters 

undermine Plaintiff’s argument because the cited paragraphs reveal, at most, that 

Defendants had a revenue collectability assessment, but could have designed a better 

accounts receivable system. (MTD 13.) For example, Plaintiffs describe a stratification of 

accounts receivable into different “age” categories: accounts open 120 days or less and 

accounts open more than 120 days. (Reply 7.) Plaintiffs also describe further stratification

of those accounts “older” than 120 days between two types: active—reserved at 60%—and

inactive—reserved at 85%. (Id. (citing Opp’n 14).) Thus, Defendants argue it was not the 

case that they did nothing when it came to assessing revenue collectability; instead, they 

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suggest that their assessment system was a “convenient proxy” for whether tuition would 

be collected. (Id. (quoting Opp’n 19).)

The parties also debate the significance of the Ninth Circuit’s decision in City of 

Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d 605 (9th 

Cir. 2017). Defendants contend the facts in Align support their position. In Align, the 

plaintiffs alleged that defendants knowingly misreported the company’s goodwill in 

violation of GAAP principles. (MTD 17.) Not only did the plaintiffs in Align allege the 

misreporting of goodwill, but they could also point to statement of confidential witnesses 

and considerable insider selling as evidence of the defendants’ scienter. (Id.) The Ninth 

Circuit rejected the plaintiffs’ arguments and held that, at most, the defendants failed to 

follow GAAP, but did not have requisite scienter. (Id.) Defendants here suggest that 

Plaintiffs’ argument is even farther afield because Plaintiffs’ lack confidential witnesses 

and insider selling. (Id.)

Plaintiffs believe Defendants’ reliance on Align is misplaced. Plaintiffs cite Align

for the proposition that “[t]o plead an inference of scienter in th[e] context of [GAAP 

violations], a plaintiff must allege additional facts that call into question the manner in 

which the corporation conducted its [collectability] analysis.” (Opp’n 15 (alterations in 

original) (quoting Align Tech., 856 F.3d at 621).) Plaintiffs contend that their allegations 

go beyond the manner in which Bridgepoint conducted its analysis and show that 

Bridgepoint’s “collectibility analysis at the time revenue is recorded was actually a 

falsehood.” (Id. (citing Alaska Elec. Pension Fund v. Adecco S.A., 371 F. Supp. 2d 1203, 

1213 (S.D. Cal. 2005)).)

The Court cited the following standards in its prior order, but these principles 

describe what GAAP requires in the scienter context. The “GAAP is not the lucid or 

encyclopedic set of pre-existing rules that [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 

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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). 

Plaintiffs allege that Bridgepoint conducted no revenue collectability assessment at 

the time revenue was recorded. (Opp’n 14 (citing TAC ¶¶ 52, 63–64).) This statement 

sweeps too broadly. Bridgepoint’s February 28, 2014 letter to the SEC is instructive as to 

its revenue collectability assessment. Bridgepoint disclosed:

The Company has not done a formal analysis to separate 

collection rates of students with and without financial aid 

funding. The Company’s accounts receivable system does not 

separate or categorize students with and without financial aid 

funding. The Company has historically collected approximately 

93% of revenue in cash each year since 2010. The Company’s 

historical collection rates from students have been sufficient for 

us to assert that collectability is reasonably assured.

(TAC, Ex. A, at 11.) The letter went on to state: 

Historically, the Company has evaluated allowance for doubtful 

accounts needs using a breakdown of students as active, currently 

attending class, or inactive, meaning no longer enrolled in 

courses or graduated, and their relative aging bucket. The 

company monitors its accounts receivable aging by 30-day aging 

buckets, however, for ease of presentation, the Company has 

summarized its accounts receivable analysis into categories of 

active and inactive, as well as agings of less than and greater than 

120 days, which is the date at which the collection risk profile 

increases as financial aid funding should have been received 

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prior to this time and, in turn, the Company considers an account

receivable to be delinquent.

(Id. at 12.) The import of Defendants’ revenue collectability assessment is that Bridgepoint 

did not have a formal assessment to separate students with and without financial aid. 

Instead, Bridgepoint used a proxy assessment: the company assessed the age of its accounts 

receivable at the 120-day mark because, historically, the company knew that 120 days was 

the latest point in time the federal government granted financial aid.

Far from presenting a situation where Defendants’ prior collectability assessment 

was a falsehood or so unreasonable, this situation represents a “misapplication of 

accounting principles.” In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1426 (9th Cir. 

1994). Both parties rely on Align Technology to support their positions. The Align court 

reaffirmed the Ninth Circuit’s holding that “a failure to follow GAAP, without more, does 

not establish scienter.” 856 F.3d at 621 (quoting In re Worlds of Wonder Sec. Litig., 35 

F.3d at 1426). The parties’ positions on Align are not mutually exclusive: both agree that 

Plaintiffs need something more than a GAAP violation. The only issue is whether Plaintiffs 

allege sufficient additional facts to show something more. See id. (“To plead an inference 

of scienter . . . , a plaintiff must allege additional facts that call into question the manner in 

which the corporation conducted its [collectability assessment].”). 

Here, Plaintiffs demonstrate that Bridgepoint’s collectability analysis violated 

GAAP, but the factual allegations in the Third Amended Complaint are not as “cogent and 

at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs, 551 

U.S. at 314. Instead, the more compelling inference from Plaintiffs’ allegations is that 

Defendants made a good faith but mistaken attempt to account for students with and 

without financial aid. Bridgepoint did so by using the 120-day mark as a proxy for students 

with or without federal financial aid. The Court finds that Defendants’ revenue 

collectability assessment was not so unreasonable as required to support an inference of 

scienter.

/ / /

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b. Whether Defendant Bridgepoint Violated Its Professed Accounting 

Policies

Plaintiffs argues that Bridgepoint’s policy was that each student was responsible for 

tuition payment. (Opp’n 16.) Defendant Devine’s February 28, 2014 letter to the SEC 

confirmed the policy. (Id. (quoting TAC ¶ 46 (“The student is the responsible party under 

such an agreement.”).) According to Plaintiffs, Bridgepoint considered the individual 

student as the unit of account. (Id.) From this premise, Plaintiffs contend Bridgepoint 

violated its internal policies when it came time assess revenue collectability. (Id. (citing 

Provenz v. Miller, 102 F.3d 1478, 1490 (9th Cir. 1996) (GAAP errors that violate an 

internal accounting policy also raise an inference of scienter); and In re Scholastic Corp. 

Sec. Litig., 252 F.3d 63, 77 (2d Cir. 2001) (“[D]efendants’ asserted actions contrary to 

expressed policy. . . . can form the basis for proof of recklessness.”)).) The violation 

occurred because “Bridgepoint’s accounts receivable system was premised on the 

unrealistic assumption that every student who owned tuition and fees . . . was just waiting 

for federal financial aid.” (Id. (citing TAC ¶¶ 54, 63–64, 79).)

Defendants counter that Plaintiffs are factually incorrect; the Third Amended 

Complaint does not allege that Bridgepoint violated its own accounting policies, but rather 

that Bridgepoint followed its policies and those policies turned out to be incorrect under 

GAAP. (Reply 7 (citing TAC ¶¶ 50–54, 57–59, 61–66, 78–80).) Defendants also contend 

that Plaintiffs’ cited legal precedent, Provenz, is not on point because it is both pre-PSLRA 

pleading standard and reviewing a summary judgment as opposed to a motion to dismiss. 

To wit, a motion to dismiss pleading has a higher scienter requirement than summary 

judgment, (id. at 7–8 (citing, e.g., Reiger v. Price Waterhouse Coopers LLP, 117 F. Supp. 

2d 1003, 1011 (S.D. Cal. 2000))), and the Ninth Circuit has indicated that Provenz’s 

“reasonable inference” standard has been statutorily overruled, (id. (citing, e.g., In re 

Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 979 (9th Cir. 1999)).)

The Court agrees with Defendants that the Third Amended Complaint does not 

allege Bridgepoint violated its own policies, but only alleges that those policies were 

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incorrect. For example, Plaintiffs allege that Defendant Devine admitted the “Company 

has not done a formal analysis to separate collection rates of students with and without 

financial aid funding[, and the] Company’s accounts receivable system does not separate 

or categorize students with and without financial aid funding.” (TAC ¶ 52.) That quote 

summarizes the error in Bridgepoint’s accounting policy. There was no formal analysis of 

students with or without financial aid. But, Bridgepoint did assess student collectability 

using a proxy assessment. Further, students could provide other sources of funding besides 

federal financial aid. Thus, Bridgepoint followed its policy, and admitted as much to the 

SEC; however, the policy was incorrect.

Additionally, there is misalignment between the internal policy and the GAAP 

violation. Plaintiffs suggest that the accounting policy was that the “student is the 

responsible party” and that “the ultimate responsibility for payment remains with the 

student.” (Opp’n 16 (quoting TAC ¶ 46).) Yet, this policy does not provide specific 

accounting guidance. Plaintiffs conflate Bridgepoint’s general policy emphasizing its 

contractual relationship with its students with the specific accounting policy at issue. Thus, 

even if Defendants did not follow the spirit of holding the students as the responsible party 

this does not lead to the inevitable conclusion that they should have assessed revenue 

collectability on a student-by-student basis.

The Court finds that Provenz is not directly on point here. The precise concern 

motivating the Provenz court could support an inference of scienter in similar cases, i.e., 

whether Bridgepoint violated its own internal policy for recognizing revenue. See 102 F.3d 

at 1490 (citation omitted). Yet, an internal policy violation did not occur here and Provenz

is not controlling. Defendants faithfully followed their internal accounting policy until an 

internal processing error occurred, the SEC inquired into Defendants’ policies, Defendants 

recognized their error, issued two restatements, and modified their policy to conform to 

GAAP. Therefore, the Court finds that Defendants did not violate an internal accounting 

policy.

/ / /

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c. Whether Defendant Bridgepoint’s Design of Its Accounts Receivable 

System Violated GAAP Guidance

Next, Plaintiffs point out that GAAP guides companies on how to conduct a 

collectability assurance assessment. (Opp’n 17.) GAAP requires companies to keep track 

of smaller groups of homogeneous customers when information is available to reasonably 

estimate collectability. When information is not available or uncertain, GAAP provides 

that some other method of recognizing revenue, like cash basis, should be used. (See id.) 

Plaintiffs contend that Defendants are liable because they knew of the GAAP principles 

and failed to separate students by financial aid status. (Id.) Further, when Defendants first 

reviewed their accounts receivable and came up with a remediation plan to improve internal 

controls relating to accounts receivable they were no longer ignorant of their failure to 

separate students by financial aid funding source. (Id. at 17–18 (citing In re Medicis 

Pharm. Corp. Sec. Litig., 2010 WL 3154863, at *6–7; and Reese v. Malone, 747 F.3d 557, 

571 (9th Cir. 2014), overruled on other grounds by Align Tech., 856 F.3d at 616; and Gelfer 

v. Pegasystems, Inc., 96 F. Supp. 2d 10, 15–16 (D. Mass. 2000)).) 

Defendants counter that they never were ignorant of GAAP principles; instead, 

Defendants admit that they applied those principles incorrectly as those principles 

pertained to student collectability assessments. (Reply 8.) Defendants also contend that 

Plaintiffs’ precedent is lacking. Gelfer is an out-of-circuit, pre-Tellabs case that applied a 

mere recklessness standard to the scienter analysis. (Id. at 8 n.17.) Defendants distinguish 

Reese because that case had specific falsehoods by the defendant that “bridged the 

[scienter] gap” and no such allegations are present here. (Id. (citing Reese, 747 F.3d at 

572).)

The Court addresses Plaintiffs’ two contentions. First, Plaintiffs argue GAAP 

requires identifying the smallest group of homogenous consumers and Defendants did not 

do this for students with and without financial aid. Yet, Bridgepoint did stratify accounts 

receivable based on active and inactive status and the age of the account. As discussed 

elsewhere in this Order, see, e.g., supra p.15, this system was a proxy to separate students 

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based on whether they received federal financial aid. This information allowed 

Bridgepoint to reasonably estimate collectability. Additionally, GAAP violations must be 

augmented by other specific allegations. See Int’l Rectifier, 2008 WL 4555794, at *13. 

Thus, Defendants used a proxy for the GAAP principle and, even though the principle itself 

may have been violated, that alone is not enough for scienter.

Second, Plaintiffs allege it was “extremely unlikely” Defendants were ignorant 

following the 2012 Restatement. (Opp’n 17.) Bridgepoint’s internal analysis conducted 

prior to issuing the 2012 Restatement is not conclusive. In Reese, the defendant made a 

detailed factual statement that contradicted important data to which she had access. See

747 F.3d at 572. Here, Plaintiffs point to Defendant Devine’s statement made during a 

May 6, 2013 earnings calls where he said: 

We did a deeper analysis. The issue that kind of caused the 

spike so to speak is that, in our underlying data we use to build 

our models, those models that certain credits applied to them 

from when a student would leave the institution or receive a 

credit for another reason. That created one version of kind of our 

aging buckets, and then we made the decision that it may be more 

appropriate if we kind of suppressed those credits and that 

created another view of the aging buckets which we feel is more

appropriate.

(TAC ¶ 76.)

Defendant Devine’s statement is not a model of clarity to assess whether Bridgepoint 

conclusively should or should not have been on notice to change its policy to assess 

collectability on a student-by-student basis. Indeed, Defendants had an historical 93% 

tuition collection rate in cash each year since 2010. (Id. ¶ 51.) Then, Defendants did a 

deeper analysis and changed the way they analyzed students when they left an institution. 

There are no particularized allegations that Defendants were on notice of the specific 

problem of evaluating collectability on a student-by-student basis. Plaintiffs’ allegations 

demonstrate Defendant recognized issues and attempted to correct them. Thus, Plaintiffs 

have not established that Bridgepoint’s design of its accounts receivable system raises an

inference of scienter.

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d. Whether Defendant Knew Students Without Financial Aid Had Lower 

Collectability Rates

Finally, Plaintiffs argue that Defendant Devine acknowledged students without 

financial aid have lower collection rates, but Bridgepoint never bothered to track those 

rates. (Opp’n 18 (citing TAC ¶¶ 65–66).) Bridgepoint knew how to determine which 

students had financial aid and also knew the rate at which to reserve revenue from students 

without financial aid. (Id.) Plaintiffs summarize that Defendants’ knew

GAAP required separation of students with and without financial 

aid; that Bridgepoint did not separate these students; that students 

without financial aid are considerably less likely to pay financial

aid; and that the increase in the Bad Debt Percentage was due to 

a spike in the number of students without financial aid, it was 

unreasonable for Defendants to have continued with the status 

quo, robotic recognition of all revenue.

(Id. at 19.) Plaintiffs also point to an internal memo, included in the February 28, 2014 

letter, that purportedly acknowledges the reason why revenue was not reasonably 

collectable was due to lack of financial aid. The memo stated: 

In Q2 2013 it was determined that the tuition related to the 

second or greater retake of a course is not reasonably collectible 

due to financial aid shortfalls and, therefore, revenue is 

recognized on a cash basis (~$0.8 million reversed, and not 

recognized as revenue, in Q3 2013, $2.5 million 2013 YTD). As 

such, related bad debt will not exist going forward.

(Id. (emphasis omitted) (quoting TAC ¶ 83).) 

Defendants counter that they knew students without financial aid had lower 

collectability rates and they accordingly raised their Bad Debt levels. (Reply 9.) The 

“internal memo” cited by Plaintiffs shows that Defendants decided to change their 

collectability analysis as a result of its experience. (Id. (citing Opp’n 14).) Thus, the memo 

“describes a company that did a collectability analysis[,] which was responsive to changed 

circumstances and experience.” (Id.)

Plaintiffs quote S. Ferry LP #2 v. Killinger, as stating “[w]hen the facts known to a 

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person place him on notice of a risk, he cannot ignore the facts and plead ignorance.” 687 

F. Supp. 2d 1248, 1258 (W.D. Wash. 2009) (quoting Makor Issues & Rights, Ltd. v. 

Tellabs, Inc., 513 F.3d 702, 704 (7th Cir. 2008)). Plaintiffs do not explicitly identify the 

risk, but the Court infers the risk as “students without financial aid are considerably less 

likely to pay financial aid.” (See Opp’n 19.) And, when there was a spike in the number 

of students without financial aid Bridgepoint had to increase its Bad Debt percentage. (Id.) 

Yet, as Defendants point out, Bridgepoint was aware of the risk that students without 

financial aid were less likely to pay. Bridgepoint reserved revenue at rates of 60 and 85% 

for students with accounts “older” than 120 days, which was their “assumption that there 

was no financial aid available for what was owed.” (Id.) While Defendants’ accounting 

method was contrary to GAAP, Plaintiffs’ allegations demonstrate that Defendants were

aware, before the Restatements, that students without financial aid were less likely to pay 

and set their reserve rates accordingly. Therefore, Plaintiffs fail to demonstrate how 

Defendants awareness amounts to scienter.

The internal memo, attached to Bridgepoint’s February 28, 2014 letter to the SEC, 

does not counsel a different finding. The internal memo describes Bridgepoint’s realization 

in the second quarter of 2013 that “tuition related to the second or greater retake of a course 

is not reasonably collectible due to financial aid shortfalls” and that revenue would be 

recognized on a cash basis. (TAC, Ex. B, at 19.) The Court finds Defendants modified 

their collectability analysis based on their practical experience. Defendants encountered 

an issue and attempted to correct it. Plaintiffs have not demonstrated that Defendants 

remained ignorant of the facts and pled ignorance. See S. Ferry LP #2, 687 F. Supp. 2d at 

1258. Thus, the Court finds that Defendants’ knowledge that students without financial 

aid had lower collection rates does not raise an inference of scienter.

2. Bridgepoint’s Competitors

Plaintiffs also draw a comparison between Defendant Bridgepoint and its 

competitors. Plaintiffs point to the fact that Bridgepoint’s competitors properly assessed 

the collectability of revenue at the time it was recorded and specifically considered the 

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individual student’s ability to pay as part of that assessment. (Opp’n 20 (citing Medicis 

Pharm., 2010 WL 3154863, at *8 (considering competitor accounting for alleged GAAP 

violations as part of scienter analysis)).) For example, the SEC surveyed the Apollo 

Education Group and that company’s revenue collectability assessment was conducted 

prior to a student’s class attendance and was based on various factors. (Id. (citing TAC 

¶ 160).) Plaintiffs suggest that Defendants do not have an adequate explanation as to why 

they did not follow their competitors’ lead. Instead, Defendants can only point to the fact 

that the SEC encouraged an industry wide reassessment of collectability when a student’s 

circumstances change. (Id. (citing TAC ¶ 158).)

Plaintiffs also state that Defendants’ prior motions to dismiss argued that reasonable 

accountants could disagree over whether it was appropriate to address the collectability of 

revenue from independent paying students. (Id. at 21 (citing Prior Order 15).) Then, 

Plaintiffs filed their Third Amended Complaint illustrating that no other accountant in the 

industry took a similar approach as Bridgepoint. Defendants appear to have withdrawn 

their argument in their present motion. Thus, Plaintiffs conclude that Bridgepoint’s 

competitors knew they needed to undergo a collectability assessment for their students, the 

collectability assessment is a relatively simple accounting principle, and the simplicity of 

the accounting principle supports the inference of scienter. (See id. (citing Backe v. Novatel 

Wireless, Inc., 642 F. Supp. 2d 1169, 1187 (S.D. Cal. 2009)).)

Defendants argue that Plaintiffs mischaracterize their own complaint. The Third 

Amended Complaint alleges that of the “at least ten other companies in the for-profit posteducation sector” the SEC contacted, a “majority of these competitors similarly did not 

reassess collectability of revenue upon a change in a students’ circumstances prior to SEC 

correspondence.” (Reply 5 (quoting TAC ¶¶ 157–58).) Defendant contend that they did 

not abandon their argument that reasonable accountants could disagree as to collectability 

assessments. In fact, they argue the Third Amended Complaint describes that 

Bridgepoint’s treatment of the collectability assessment was consistent with a majority of 

companies in the industry. (Id.)

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An alleged GAAP violation concerning a simple accounting procedure can be a 

consideration as part of the holistic analysis. See Backe, 642 F. Supp. 2d at 1187; see also 

Okla. Firefighters Pension & Retirement Sys. v. IXIA, 50 F. Supp. 3d 1328, 1364 (C.D. 

Cal. 2014) (citing In re Medicis Pharm., 2010 WL 3154863, at *5 (“The magnitude of the 

error, however, is not the only consideration. Courts must also weigh the complexity or 

simplicity of the relevant accounting standard.”)).

Here, it is clear that Bridgepoint’s competitors used different accounting procedures. 

As Plaintiffs illustrate, the Apollo Education Group collected tuition prior to a student’s 

attendance and used a variety of factors to evaluate its students including whether the 

student had federal financial aid. (TAC ¶ 160.) American Public Education, Inc. explained 

that it had five detailed criteria to evaluate students, including review of students with 

patterns suggesting potential credit abuse. (Id. ¶ 159.) American Public Education also 

stratified its accounts receivable based on students’ payment situations; these included 

those who may be eligible for financial aid, students with deficits beyond the provided 

financial aid, and those with no financial aid. (Id.) Finally, Capella Education Company 

listed five factors and noted that for students that do not elect to receive federal Title IV 

funding as their primary option, Capella would review relevant funding materials specific 

to that individual. (Id. ¶ 161.) It also appears that Capella was the only cited competitor 

that reassessed collectability when a student withdrew from a course, (id.), and Plaintiffs 

allege that “the majority of [Bridgepoint’s] competitors similarly did not reassess 

collectability of revenue upon a change in a students’ [sic] circumstances prior to SEC 

correspondence.” (Id. ¶ 158.)

Plaintiffs’ comparisons to industry competitors illustrate that there was no common 

standard for assessing the collectability of student debt. Each competitor approached the 

debt collectability assessment in slightly different ways. This suggests that there was no 

simple accounting procedure and Defendant Bridgepoint was not an outlier from its 

competitors. Instead, these examples suggest there is room for disagreement on how to 

assess collectability. Nor was Defendant an outlier when it came to reassessing 

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collectability when a student’s circumstances changed. As both sides point out, the 

majority of competitors did not reassess collectability when a student withdrew from a 

course. (See Reply 5; TAC ¶ 158.)

The newly discovered letters in Plaintiffs’ Third Amended Complaint illustrate that 

Bridgepoint did stratify their accounts receivable. Bridgepoint stratified their accounts 

receivable first, by active versus inactive students and second, by “30-day aging buckets.” 

(TAC, Ex. A., at 12.) Bridgepoint further disclosed in the February 28, 2014 letter to the 

SEC that after 120 days the collection risk profile increases because federal financial aid 

should have been received prior to 120 days. (See id.) Defendants then assigned 

probabilities of not collecting the amounts owed at 60% and 85% rates. (Id. ¶ 80.) 

Plaintiffs label the rates “as proxies for the risk that a student would be not paying amounts 

owed without aid.” (Id. ¶ 81.) The critical link is that Bridgepoint used the 120-day as a 

proxy for whether students would or would not receive federal financial aid—the choice 

was deliberate.

Thus, Bridgepoint did stratify their accounts receivable and its method was a proxy 

for whether students were with or without financial aid. From this conclusion, the Court 

finds that reasonable accountants could disagree as to how to assess collectability. Indeed, 

Plaintiffs’ Third Amended Complaint illustrates that different competitors did disagree on 

assessment specifics. At the very least, there was no simple accounting procedure that 

Defendants did not follow but the rest of the industry did follow. Thus, the Court finds 

that this argument does not establish the requisite scienter.

3. Additional Scienter Allegations

Plaintiffs bring four additional arguments that they suggest support an inference of 

scienter.

a. Whether Bridgepoint’s Accounting Practices Allowed it to Manipulate Its 

Revenue

Plaintiffs argue that Defendants’ collectability assessment allowed Bridgepoint to 

recognize revenues immediately without considering the actual likelihood of collecting 

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revenue from students without financial aid funding. (Opp’n 22 (citing TAC ¶ 88).) 

Plaintiffs point to Defendant Devine’s admission that the delay in reporting bad debt, i.e., 

after 120 days, allowed Bridgepoint’s “operational initiatives implemented in late 2012 

aimed at reducing bad debt” to kick in. (Id. (quoting TAC ¶ 88).)

Plaintiffs also contend that the 120-day assessment scheme allowed Bridgepoint to 

meet revenue consensus in two out of five financial reports in Plaintiffs’ proposed class 

period. (Id.) Plaintiffs suggest that Bridgepoint would not have met its revenue consensus 

in 1st Quarter, 2013 or Fiscal Year 2013 and would have missed its revenue consensus by 

almost $44 million in Fiscal Year 2012. (Id. (citing TAC ¶ 93).) Plaintiffs cite In re 

Medicis Pharmaceutical Corp. Securities Litigation, 2010 WL 3154863, at *9–10, for the 

proposition that Bridgepoint’s revenue management is a relevant consideration in the 

scienter analysis. Finally, Plaintiffs point to Defendant Devine’s statement in 

Bridgepoint’s Staff Accounting Bulletin (“SAB”) 99 that the revenue misstatements were 

material. (Opp’n 22 (citing TAC ¶¶ 92–93).) The Court considers the two arguments in 

turn.

First, Plaintiffs argue that Bridgepoint’s accounting method allowed it to 

immediately recognize revenue without considering the actual likelihood of collecting 

revenue. Plaintiffs’ Third Amended Complaint includes a table that compares the default 

rate of student debt before and after the Restatement.

5

 The default rate is calculated by 

taking the allowance amount over the gross accounts receivable. (TAC ¶ 90.) For example, 

 

5

(TAC ¶ 89.)

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in the third quarter of 2013 Defendants originally reported their gross accounts receivable 

as $116,378 and their allowance amount as $53,319. Therefore, the default rate was 46%.

6

 

After the 2014 Restatement, the adjusted gross accounts receivable was $88,269 and the 

allowance was $32,809 resulting in a default rate of 37%. (See id. ¶ 89.) Finally, Plaintiffs 

calculate the default rate for the revenue that was eliminated or removed by the Restatement 

from the original. The Restatement for third quarter 2013 eliminated $28,109 in gross 

accounts receivable and an allowance of $20,510 resulting in a default rate of 73%. (Id.) 

These numbers represent a stratification of students between those with and without 

financial aid. Put differently, the table represents a before and after snapshot: before 

Bridgepoint revised its accounting practices and after it revised the practices and restated 

its revenue positions. After Bridgepoint restated its positions, it determined that the default 

rate for students with financial aid was 37% and the default rate for those without aid was 

73%. 

Defendants suggest that these default rates are not far off from the default rates it

assigned students before the 2014 Restatement. (See MTD 15.) As Plaintiffs allege and 

Defendants concede, Bridgepoint reserved accounts receivable based on both aging and 

activity. Thus, student accounts open between 0 and 120 days were given a 3% reserve 

rate; active accounts greater than 120 days were reserved at 60%; and inactive accounts 

greater than 120 days were reserved at 85%. (See TAC ¶ 63; MTD 15.) Defendants argue 

that they used the 120-day mark as a “close proxy” for whether or not the government 

would provide financial aid—after 120 days it was highly unlikely that the government 

would provide aid. (MTD 15.) 

The Court understands Plaintiffs’ argument as, had Bridgepoint reassessed on a 

student-by-student basis it would have found default rates for its students without financial 

aid ranging between 46% and 73%. (Opp’n 23 (“Put another way, the table shows that had 

Bridgepoint properly ‘put the major problems in one bucket’ during the Class Period, ‘that 

 

6

$53,319 / $116,378 = .458 or 46%.

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bucket [w]ould have high reserves.’” (quoting MTD 11)).) Yet, Defendants already 

reserved students beyond 120 days at rates of 60 and 85%. Thus, Defendants did, in fact, 

consider the likelihood of collecting revenue from students without financial aid and the 

rates were similar to or greater than the rates Plaintiffs calculated in their table. The bucket 

identified by Plaintiffs had rates within the range of rates historically reserved by 

Defendants. Thus, Plaintiffs’ argument is not persuasive.

Second, Courts may consider the alleged motive or purpose underlying a defendant’s 

accounting violation. In re Medicis Pharm., 2010 WL 3154863, at *9 (citing In re 

Hypercom Corp. Sec. Litig., No. CV-05-455-PHX-NVW, 2006 WL 726791, at *9 (D. Ariz. 

Jan. 25, 2006)). Thus, when a defendant’s violation of accounting principles allows a 

company to obtain a financial benefit or competitive advantage, court will generally find 

some inference of scienter. See Telabs, 551 U.S. at 325. That conclusion is tempered in 

part because “motive and opportunity alone are insufficient to show scienter at the pleading 

stage[;]” however, those factors may “still be considered as circumstantial evidence” of 

scienter. Howard v. Everex Sys., 228 F.3d 1057, 1064 (9th Cir. 2000) (citing In re Silicon 

Graphics, 183 F.3d at 977–79).

Plaintiffs allege that Bridgepoint’s accounting methodology had the benefit of 

meeting its revenue consensus in various financial quarters. (Opp’n 22.) Bridgepoint 

disclosed that its revenue recognition errors “were quantitatively significant.” (TAC ¶ 93.) 

In Fiscal Year 2012, Bridgepoint missed its revenue consensus, but had Bridgepoint 

assessed its revenue without error it would have missed revenue estimates by $44 million—

more than double the amount it actually missed consensus. (Id.) Thus, it is plausible that 

Bridgepoint derived tangible benefit from their erroneous accounting method. Given the 

lack of any other factual allegations demonstrating motive, the allegations here are not 

overly compelling. See Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 609 

(9th Cir. 2014) (“The case law indicates, therefore, that although overstatement of revenues 

in violation of GAAP may support a plaintiff’s claim of fraud, the plaintiff must show with 

particularity how the adjustments affected the company’s financial statements and whether 

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they were material in light of the company’s overall financial position.” (citing In re Daou 

Sys., Inc., 411 F.3d 1006, 1018 (9th Cir. 2005))). Thus, the Court will consider this factor 

in its holistic analysis.

b. Whether Bridgepoint’s Reliance on Its Auditor Negates Scienter

Plaintiffs ask the Court to reject Defendants’ argument that the Third Amended 

Complaint did not allege that scienter was negated in part because Bridgepoint’s 

independent auditor did not counsel against Bridgepoint’s accounting practices. (Id. at 23 

(citing MTD 12).)7 Plaintiffs go on to hypothesize as to what Bridgepoint’s independent 

auditor would have counseled had the auditor been privy to the actual reserve rates alleged 

in the Third Amended Complaint. (See id. (citing TAC ¶¶ 89–91) (“Had Bridgepoint’s 

auditor actually seen the 73% reserve rates for these students, it is very likely there would 

have been some sort of ‘counsel[ing] against’ the revenue recognition practices employed 

by Defendants.”).)

In its Second Motion to Dismiss Order, the Court cited two cases discussing opinions 

by external, independent auditors. (See Second MTD Order 14 & n.6.) First, Metzler 

Investment GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049, 1069 (9th Cir. 2008), stood 

for the proposition that an allegation that a defendant’s external auditor counseled against 

an improper accounting practice could support an inference that the defendant knowingly 

and recklessly engaged in that improper accounting practice. Second, the Court agreed 

with Plaintiffs that a clean audit opinion “does not, standing alone, negate any otherwise 

compelling inference of scienter” that a plaintiff’s pleading raises. Okla. Firefighters 

Pension & Retirement Sys., 50 F. Supp. 3d at 1365 n.183 (emphasis added). The Court 

understands Defendants’ brief as arguing that the allegations in the Third Amended 

Complaint did not meet the Ninth Circuit’s concern in Metzler. 

Defendants do not argue that their independent auditor gave them a clean bill of 

 

7 The Court believes that Plaintiffs meant to cite Defendants’ Motion to Dismiss brief at page 10, according 

to the CM/ECF pagination. The only references to an independent auditor are on page 10.

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health that might inoculate them against any scienter allegation. The district court in 

Oklahoma Firefighters Pension & Retirement System explained that, absent discovery, 

there is no way to know what communications transpired between the defendant and its 

independent auditor. 50 F. Supp. 3d at 1365 n. 183. Oklahoma Firefighters teaches that, 

absent discovery, this Court would need to evaluate what an auditor was told and what, if 

anything, was withheld from the auditor. Plaintiffs have not alleged facts to this end. Yet, 

Plaintiffs invite the Court to speculate as to what Bridgepoint’s independent auditor might 

have concluded if the auditor had all the facts. The Court will not engage in unsupported 

conjecture; the appropriate conclusions are that (1) Defendants are not suggesting an 

independent audit inoculates them and (2) Plaintiffs have not alleged an auditor counseled 

against Defendants’ accounting practice. Neither conclusion alters the Court’s analysis: 

there is no support here for the scienter inference and no support that Defendants were 

absolved due to an auditor.

c. Whether Bridgepoint Omitted Relevant Facts

Plaintiffs next argue that Defendant Bridgepoint’s statements omitted a material 

explanation as to when Bridgepoint recognized revenue; specifically, when and how it 

assessed revenue collectability. (Opp’n 24 (citing TAC ¶¶ 44, 118–19, 134–35).) This 

was a factor in In re Medicis Pharmaceuticals and Plaintiffs would have the Court make a 

similar finding here. See 2010 WL 3154863, at *7–9. In the Third Amended Complaint, 

Plaintiffs include excerpts from Bridgepoint’s Fiscal Year 2012 and 2013 SEC Form 10-

K’s. These two excerpts are exactly the same and describe Bridgepoint’s revenue 

recognition policies at the time. (See TAC ¶¶ 118, 134.) Plaintiffs also include the updated 

revenue recognition policy published in Defendants’ 2014 Restatement. (See id. ¶ 44.) 

Plaintiffs are correct that “an omission in public statements of materials facts related 

to the GAAP violations can also give rise to a strong inference of scienter in certain 

circumstances. Medicis Pharm., 2010 WL 3154863, at *7 (citing, e.g., Malone v. 

Microdyne Corp., 26 F.3d 471, 479 (4th Cir. 1994)). The relevant considerations are worth 

quoting at length:

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Hence, when a Defendant knowingly adopts a questionable or 

tenuous accounting methodology and fails to disclose material 

facts regarding that methodology to investors, an inference of 

scienter may arise. In contrast, where a defendant fully discloses 

its accounting methodology in a “transparent manner,” and the 

methodology is later shown to violate GAAP, any inference of 

scienter will be substantially tempered.

Id. (citing Malone, 26 F.3d at 479); see also In re WatchGaurd Sec. Litig., No. C05-678J,

2006 WL 2038656, at *5–6 (W.D. Wash. Apr. 21, 2006) (finding that the plaintiffs’

allegations failed to support a strong inference of scienter where defendants had 

“consistently disclosed” the accounting error on which a restatement was based because 

the “blatant error had been committed . . . in open and notorious fashion for years”).

Here, Plaintiffs point to Defendants’ 2014 Restatement as disclosing material 

information regarding Bridgepoint’s methodology that it previously did not disclose in its 

FY 2012 and FY 2013 Form 10-K’s. This is not an accurate description of Defendants’ 

disclosures. The 2014 Restatement did include new descriptions about its accounting 

methodology, but the new disclosure were prompted by the SEC’s inquiries and implicitly 

recognized that their previous methodology violated GAAP. The Third Amended 

Complaint alleged that on May 12, 2014, Bridgepoint admitted that it was evaluating 

whether to restate its financial results due, in part, to the lack of student-by-student 

reassessment of revenue. (TAC ¶ 34.) Plaintiffs then allege that Defendant Devine 

explained during the May 12, 2014 earnings conference call:

Under previous revenue recognition, revenues recognized 

subsequent to a student losing financial aid eligibility, and 

ultimately not collected, were included in our bad debt expense. 

Going forward, our policy will exclude these revenues and will 

result in a corresponding decrease in our bad debt expense that 

will be realized over subsequent quarters.

(Id. ¶ 35.) Defendant Bridgepoint then issued its Restatement which retrospectively 

corrected its misstated revenue. (See id. ¶ 36.) The additions to Bridgepoint’s updated 

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recognition policy reflect the changes that Defendant Devine mentioned in his conference 

call. Before, Bridgepoint did not conduct a student-by-student reassessment of revenue; 

going forward, Bridgepoint would “reassess collectability throughout the period revenue 

is recognized by the Company’s institutions, on a student-by-student basis.” (Id. ¶ 44.)

Thus, Defendants’ purported omissions in their public statements was not hiding 

their “questionable or tenuous accounting method.” In re Medicis Pharm., 2010 WL 

3154863, at *7. Instead, it was an admission that Defendants had made an error and the 

updated accounting policy recognized that Bridgepoint should have conducted a studentby-student revenue reassessment. Far from supporting Plaintiffs position, this fact is 

similar to a defendant who fully discloses its accounting methodology in a “transparent 

manner,” and that methodology is later show to violate GAAP. Id. Thus, in Bridgepoint’s 

February 28, 2014 response letter to the SEC, Bridgepoint disclosed the following:

Historically, the Company has evaluated allowance for doubtful 

accounts needs using a breakdown of students as active, currently 

attending class, or inactive, meaning no longer enrolled in 

courses or graduated, and their relative aging bucket. The 

company monitors its accounts receivable aging by 30-day aging 

buckets, however, for ease of presentation, the Company has 

summarized its accounts receivable analysis into categories of 

active and inactive, as well as agings of less than and greater than 

120 days, which is the date at which the collection risk profile 

increases as financial aid funding should have been received 

prior to this time and, in turn, the Company considers an account

receivable to be delinquent.

(TAC, Ex. A, at 12.) Thus, Defendants disclosed to the SEC its accounting method: it 

stratified accounts receivable into inactive vs. active and less than vs. greater than 120 days. 

In its June 3, 2014 letter to the SEC, Bridgepoint admitted that “[h]istorically, the Company 

was not performing a reassessment of collectibility under such circumstances”—such 

circumstances meant reassessing collectability on a student-by-student basis. (Id., Ex. B, 

at 6–7.) The Court finds Defendants were not hiding their questionable or tenuous 

accounting method, but rather disclosed the erroneous method to the SEC and then changed 

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their assessment because it was in error.

d. Whether Plaintiffs’ Additional Allegations Support Scienter as Part of 

Holistic Analysis

Finally, Plaintiffs argue that the SEC, Department of Education (“DOE”), and 

Department of Justice (“DOJ”) are conducting investigations into Bridgepoint, which 

supports a scienter inference. (Opp’n 24 (citing Prior Order 17).) Defendants attempt to

rebut this argument with a Request for Judicial Notice, (ECF No. 73-1).

8

 The Court agrees 

with Plaintiffs that an SEC letter indicating the SEC does not intend to take enforcement 

action cannot be construed as indicating that a party has been exonerated. (See ECF No.

74, at 3); see also 17 C.F.R. § 202.5(d).

Plaintiffs’ allegations regarding the DOE and DOJ investigations do not relate to the 

accounting issue at the core of the Restatements. The DOJ investigation concerned 

compliance with the 90/10 rule of the Higher Education Act. (See TAC ¶ 165 (“U.S. 

Department of Justice was conducting an ‘investigation concerning allegations that the 

Company may have misstated Title IV refund revenue or overstated revenue associated 

with private secondary loan programs and thereby misrepresented its compliance with the 

90/10 rule of the Higher Education Act.’”).) The DOE investigation concerned Ashford 

University’s administration of federal student financial aid—not Bridgepoint’s accounting 

procedures. 

The Court finds Plaintiffs’ argument unconvincing. They cite no authority why the 

existence of an investigation supports a scienter inference. Instead, several district courts 

 

8 Defendants’ Request for Judicial Notice is a letter from the SEC, dated June 15, 2017, indicating that 

the SEC would not recommend an enforcement action against Defendants. Courts have noticed the 

existence of similar letters. See, e.g., Batwin v. Occam Networks, Inc., No. CV 07–2750 CAS (SHx), 2008 

WL 2676364, at *2 n.3 (C.D. Cal. July 1, 2008) (citing Pension Benefit Guar. Corp. v. White Consol. 

Indus., 998 F.2d 1192, 1197 (3d Cir. 1993)). Plaintiffs oppose the request because the contents of the 

SEC letter cannot be used as a defense in this litigation. (ECF No. 74, at 3.) The Court GRANTS

Defendants’ Request for Judicial Notice, (ECF No. 73-2), but the Court does not consider the contents of 

the letter as relevant to the scienter analysis. See In re Am. Apparel, Inc. Shareholder Litig., No. CV 10-

6352 MMM (JCGx), 2013 WL 174119, at *13 (C.D. Cal. Jan. 16, 2013).

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have found the existence of an investigation, standing alone, insufficient to support 

scienter. See In re Maxim Integrated Prods., Inc. Sec. Litig., 639 F. Supp. 2d 1038, 1047 

(N.D. Cal. 2009); In re Hansen Natural Corp. Sec. Litig., 527 F. Supp. 2d 1142, 1162 (C.D.

Cal. 2007). The Court agrees with the cited opinions and finds that the existence of an 

SEC investigation, standing alone, does not support Plaintiffs’ scienter argument. See also 

Am. Apparel, 2013 WL 174119, at *13 (“[T]he existence or nonexistence of an SEC 

enforcement action is of little help in assessing whether plaintiffs have alleged sufficient 

facts to state a claim for violation of the securities laws.”).

Plaintiffs also urge the Court to consider Defendant Devine’s Sarbanes-Oxley 

(“SOX”) certifications and allegations of internal control deficiencies. (Opp’n 24 (citing 

TAC ¶¶ 136–38, 166–67).) Defendants argue that Plaintiffs’ allegations with respect to 

the contents of Defendants’ SOX certifications in the Third Amended Complaint are 

largely identical to those alleged in the previous two complaints. (MTD 18 (citing SAC 

¶¶ 113–15, 138–39)), which the Court found insufficient in its previous Order, (Second 

MTD Order 17). Plaintiffs urge the Court to consider the allegations of SOX certifications 

and internal control deficiencies along with Plaintiffs’ other allegations. (Opp’n 24–25.) 

With respect to the false SOX certifications, “Sarbanes-Oxley certifications are not 

sufficient, without more, to raise a strong inference of scienter.” Zucco Partners, LLC v. 

Digimarc Corp., 552 F.3d 981, 1004 (9th Cir. 2009) (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. Because the Court finds Plaintiffs’ other allegations 

insufficient, the Court gives no weight to Plaintiffs’ allegations concerning Defendants’ 

false Sarbanes-Oxley certifications. 

B. Holistic Analysis

Although none of Plaintiffs’ individual allegations concerning Defendants’ scienter 

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

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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. In Tellabs, the Supreme Court 

instructed that “the inference of scienter must be more than merely ‘reasonable’ or 

‘permissible’—it must be cogent and compelling, thus strong in light of other 

explanations.” Id. at 324.

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

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

conduct. The Court previously found the holistic analysis did not support Defendants’ 

scienter. (See First MTD Order 20; Second MTD Order 18.) After the first Motion to 

Dismiss Order, Plaintiffs removed allegations of insider trading, (see First MTD Order 16–

19). After the second Motion to Dismiss Order, Plaintiffs removed allegations concerning 

a confidential witness’s statements that individual defendants were generally aware of the 

day-to-day workings of the company. (See Second MTD Order 13 n.5.) Thus, each 

iteration has fewer allegations to support the holistic analysis, with the exception of the 

two letters.

In their Third Amended Complaint, Plaintiffs’ additional allegations concern two 

previously unavailable letters from Defendants to the SEC. The February 28, 2014 letter 

disclosed Bridgepoint’s prior accounting method, which violated GAAP. The June 3, 2014 

letter described the new accounting method adopted by Bridgepoint, which would bring 

the company into GAAP compliance. Neither letter reveals particular facts that give rise 

to a strong inference. The most plausible, nonculpable explanation is that Defendants used 

a proxy for student financial aid that did not fully comply with GAAP, but fully disclosed 

the proxy until Defendants realized it was incorrect. Defendants then amended their 

accounting methods to remove the proxy and devised a method to account for students on 

a student-by-student basis. In light of this explanation, Plaintiffs’ holistic analysis is not 

as compelling.

The Third Amended Complaint does not support an inference of scienter “that is 

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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; and Metzler, 540 F.3d at 1049).

C. Loss Causation

In addition to scienter, Plaintiffs must also show loss causation. Daou Sys., 411 F.3d 

at 1014. The Court previously concluded that Plaintiffs could plausibly establish loss 

causation. (Second MTD Order 19.) Defendants suggest that Plaintiffs’ loss causation 

allegations are identical to their Second Amended Complaint. (MTD 5 n.1.) Thus, neither 

party takes up the loss causation argument except that Defendants request the Court 

incorporate its loss causation argument by reference. (Id.) The Court agrees that Plaintiffs’

loss causation allegations are identical. (Compare TAC ¶¶ 139–53 with SAC ¶¶ 116–30.) 

Therefore, the Court finds no reason to depart from its previous holding—Plaintiffs’ 

allegations could plausibly establish loss causation. (Second MTD Order 19 (citing Gilead 

Scis., 536 F.3d at 1057; and Lloyd v. CVB Fin. Corp., 811 F.3d 1200, 1210 (9th Cir. 

2016)).) However, in light of the Court’s scienter conclusion, this finding does not alter 

the outcome of Plaintiffs’ first cause of action.

The Court finds that Plaintiffs have not established Defendants’ acted with the 

requisite scienter. Plaintiffs’ first cause of action cannot prevail without proving the 

scienter element. Therefore, the Court therefore GRANTS Defendants’ Motion to 

Dismiss, (ECF No. 70), and DISMISSES Plaintiffs’ first cause of action.

II. 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 

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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 Tr. Fund v. Am. W. 

Holding Corp., 320 F.3d 920, 945 (9th Cir. 2003); and 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 Plaintiffs’ cause of action predicated upon 

violations of Section 10(b), see supra section I, the Court GRANTS Defendants’ Motion 

to Dismiss and DISMISSES WITH PREJUDICE Plaintiffs’ second cause of action 

against Defendant Devine for violations of Section 20(a).

III. Leave to Amend

The Court must consider whether to grant leave to amend. In Foman v. Davis, 371 

U.S. 178, 182 (1962), the Supreme Court provided the following guidance for district 

courts to determine whether to grant leave to amend:

In the absence of any apparent or declared reason—such as 

undue delay, bad faith or dilatory motive on the part of the 

movant, repeated failure to cure deficiencies by amendments 

previously allowed, undue prejudice to the opposing party by 

virtue of allowance of the amendment, futility of amendment, 

etc.—the leave sought should, as the rules require, be “freely 

given.”

Not all factors are equal—“[p]rejudice is the ‘touchstone of the inquiry under rule 15(a).’” 

Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003) (per curiam) 

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(quoting Lone Star Ladies Inv. Club v. Schlotzsky’s Inc., 238 F.3d 363, 368 (5th Cir. 2001)). 

Absent prejudice, or a strong showing of any of the remaining Foman factors, there exists 

a presumption under Rule 15(a) in favor of granting leave to amend. Id. (citations omitted).

The Ninth Circuit has stated that adherence to Foman and its progeny is especially 

important in the context of the PSLRA. See id. In Eminence Capital, the Ninth Circuit 

reversed a district court that denied leave to amend even though the plaintiffs had three 

“bites at the apple.” Id. at 1053. The Circuit determined that the plaintiffs had not filed 

three substantially similar complaints alleging substantially similar theories—“it [was] not 

accurate to imply that plaintiffs had filed multiple pleadings in an attempt to cure preexisting deficiencies.” Id.

Here, Plaintiffs amended their complaint three times. Each prior order found that 

Plaintiffs failed to “state with particularity facts giving rise to a strong inference that the 

defendant acted with the required state of mind.” (First MTD Order 11–20; Second MTD 

Order 9–18.) Plaintiffs did not amend their complaint to state different causes of action, 

but rather amended the complaints to demonstrate a strong inference of scienter, as required 

by the PSLRA and Rule 10b-5. Moreover, Plaintiffs removed allegations from their 

complaints. After the first Motion to Dismiss Order, Plaintiffs removed allegations of 

insider trading, (see First MTD Order 16–19). After the second Motion to Dismiss Order, 

Plaintiffs removed allegations concerning a confidential witness’s statements that 

individual defendants were generally aware of the day-to-day workings of the company. 

(See Second MTD Order 13 n.5.) Thus, each iteration focused primarily on the scienter 

issue and each iteration failed to develop factual allegations to support the scienter element.

Plaintiffs have repeatedly failed to cure their scienter deficiency. Unlike Eminence 

Capital, Plaintiffs here have filed multiple pleadings in an attempt to cure the deficiency 

identified by the Court regarding scienter. With the exception of the two additional letters 

sent by Defendants to the SEC, no new factual allegations have come to light. The basic 

facts have not changed throughout the amended complaints, despite the addition of the 

letters. The letters confirm the basic facts of the case. The prejudice to Defendants alone 

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does not warrant denying leave to amend—a fourth round of amendments and motions 

would impose the same burden as the prior iterations. However, Plaintiffs have failed to 

cure the specific deficiency identified by the Court despite multiple opportunities to do so. 

Failure to correct identified deficiencies “is a strong indication that the plaintiffs have no 

additional facts to plead.” Zucco Partners, 552 F.3d at 1007 (quoting In re Vantive Corp. 

Sec. Litig., 283 F.3d 1079, 1098 (9th Cir. 2002), abrogated on other grounds by Tellabs, 

551 U.S. 308). Therefore, the Court will deny leave to amend.

CONCLUSION

In light of the foregoing, the Court GRANTS Defendants’ Motion to Dismiss (ECF 

No. 70). Accordingly, the Court DISMISSES WITH PREJUDICE Plaintiffs’ Third 

Amended Complaint. (ECF No. 66.) This Order ends the litigation in this matter. The 

Clerk of Court SHALL close the file.

IT IS SO ORDERED.

Dated: March 12, 2018

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