Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_10-cv-01735/USCOURTS-azd-2_10-cv-01735-1/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:78m(a) Securities Exchange Act

---

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

WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

IN RE APOLLO GROUP, INC.

SECURITIES LITIGATION

)

)

)

)

)

)

)

)

)

)

Lead Case No. CV-10-1735-PHX-JAT

Consolidated With:

No. CV-10-2044-PHX-JAT

No. CV-10-2121-PHX-JAT 

ORDER

Pending before the Court are: Defendants’ Motion to Dismiss (Doc. 69), Request for

Judicial Notice in Support of Defendants’ Motion to Dismiss (Doc. 69-1), Defendants’

Motion to Strike Portions of the Consolidated Class Action Complaint (Doc. 71), Plaintiffs’

Request for Judicial Notice (Doc. 78), and Defendant’s Supplemental Request for Judicial

Notice in Support of Defendants’ Motion to Dismiss (Doc. 92). The Court now rules on

these motions.

I. BACKGROUND

This is a consolidated class action proceeding. The lead Plaintiffs are: Oregon Public

Employees Retirement Fund, “a state pension fund for retired public employees of the State

of Oregon,” Amalgamated Bank, “a New York bank that manages approximately $12 billion

for institutional investors,” as trustee for the LongView LargeCap 500 Index Fund, the

LongView LargeCap 500 Index VEBA Fund, the LongView Quantitative LargeCap Fund,

and the LongView Quantitative LargeCap VEBA Fund, and Mineworkers’ Pension Scheme,

“a pension fund located in Sheffield, United Kingdom.” (Doc. 45 at ¶¶ 21-23). Defendant

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 1 of 30
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

1

 Plaintiffs have included all of these allegations in Count I of the CAC. However,

upon careful reading of the CAC and Plaintiffs’ Opposition to the Motion to Dismiss, the

Court finds that Plaintiffs are actually pleading five separate categories of § 10(b) and Rule

10(b)-5 violations, i.e. misrepresentations regarding Apollo’s: (1) financial condition, (2)

business focus, (3) ethics, (4) compensation and recruitment practices, and (5) compliance

with Title IV of the Higher Education Act. To properly analyze Plaintiffs’ allegations and

determine whether Plaintiffs have stated a claim upon which relief may be granted, the Court

must treat these five categories as if they were five different Counts of the CAC. If Plaintiffs

choose to amend the CAC, they should break each violation into separate Counts or

adequately plead how these five categories amount to only one violation of § 10(b) and Rule

10(b)-5. 

- 2 -

Apollo Group, Inc. (“Apollo”) is an Arizona based company that owns and operates

proprietary postsecondary education institutions and is one of the largest private education

providers in the United States (Doc. 45 at ¶ 24; Doc. 69 at 4). The remaining Defendants are

various individuals who served as Apollo officers and directors between May 21, 2007 and

October 13, 2010 (the “Class Period”). Plaintiffs all purchased Apollo stock during the Class

Period. 

Plaintiffs’ Consolidated Class Action Complaint (Doc. 45) (the “CAC”) contains three

counts. In Count I, Plaintiffs allege that, during the Class Period, Defendants made false and

misleading statements of material fact regarding Apollo’s financial condition, business focus,

ethics, compensation and recruitment practices, and compliance with Title IV of the Higher

Education Act, 20 U.S.C. §1070, et seq. (“Title IV”)1

 and/or failed to disclose material facts

necessary to make the statements not misleading in violation of § 10(b) of the Securities

Exchange Act of 1934 (the “Exchange Act”) and Securities and Exchange Commission Rule

10(b)-5. Plaintiffs further allege that these false and misleading statements and/or omissions

resulted in artificial inflation of Apollo stock that led Plaintiffs to purchase common stock

at artificially inflated prices.

In Count II, Plaintiffs allege that, during the Class Period, Defendants John Sperling,

Peter Sperling, Joseph D’Amico, Gregory Capelli, Charles Edelstein, Brian Swartz, Brian

Mueller, and Gregory Iverson violated § 20(a) of the Exchange Act because each was a

controlling person who had direct and supervisory involvement in day-to-day operations of

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 2 of 30
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

- 3 -

Apollo and, as such, each is jointly and severally liable for the violations of § 10(b) and Rule

10(b)-5 of the Exchange Act described in Count I. 

 In Count III, Plaintiffs allege that, during the Class Period, Defendants John Sperling,

Peter Sperling, Joseph D’Amico, and William Pepicello sold Apollo stock while in

possession of material, adverse, non-public information in violation of § 20(a) of the

Exchange Act. 

Defendants move to dismiss the CAC based on Plaintiffs’ alleged failure to plead a

plausible theory of fraud as required by FED.R.CIV.P. 8(a), failure to state a claim upon

which relief can be granted as required by FED.R.CIV.P. 12(b)(6), failure to plead fraud with

particularity as required by FED.R.CIV.P. 9(b), and for failure to meet the heightened

pleading requirements of the Private Securities Litigation Reform Act (“PSLRA”).

II. LEGAL STANDARD

A pleading that states a claim for relief must contain “a short and plain statement of

the claim showing that the pleader is entitled to relief.” FED.R.CIV.P. 8(a)(2). The complaint

must allege enough facts so that the claim is plausible on its face. Bell Atl. Corp. v.

Twombly, 550 U.S. 544, 570 (2007). Securities fraud actions are also subject to the

heightened pleading standard of Federal Rule of Civil Procedure 9(b), which requires

Plaintiffs to “state with particularity the circumstances constituting fraud.” To satisfy this

standard, the party alleging fraud must include an account of the “time, place, and specific

content” of any “false representations as well as the identities of the parties to the

misrepresentation.” Edwards v. Marin Park, Inc., 356 F.3d 1058, 1066 (9th Cir. 2004).

Further, when seeking to enforce federal antifraud securities laws, private plaintiffs

must meet the higher, more exacting pleading standards contained in the PSLRA. See

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313-314 (2007). “The required

elements of a private securities fraud action 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.” Metzler Inv. GMBH v. Corinthian Colls., Inc.,

540 F.3d 1049, 1061 (9th Cir. 2008). To meet the pleading requirements for such an action,

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 3 of 30
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

 Both Defendants and Plaintiffs have asked the court to take judicial notice of certain

documents. The Court grants both Plaintiffs’ and Defendants’ Requests for Judicial Notice

to the extent that the documents were referenced in the CAC and denies them in all other

respects. 

- 4 -

the PSLRA requires that “the complaint shall, with respect to each act or omission . . . state

with particularity facts giving rise to a strong inference that the defendant acted with the

required state of mind.” 15 U.S.C. § 78u-4(b)(2). The “inference of scienter must be more

than merely plausible or reasonable—it must be cogent and at least as compelling as any

opposing inference of nonfraudulent intent.” Metzler, 540 F.3d at 1066. 

The PSLRA also requires that “the complaint shall specify each statement alleged to

have been misleading, the reason or reasons why the statement is misleading, and, if an

allegation regarding the statement or omission is made on information and belief, the

complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C.

§ 78u-4(b)(1). This requirement of specificity “prevents a plaintiff from skirting dismissal

by filing a complaint laden with vague allegations of deception unaccompanied by

particularized explanation stating why the defendant’s alleged statements or omissions are

deceitful.” Metzler, 540 F.3d at 1061.

In ruling on a 12(b)(6) motion to dismiss in a securities fraud action, the Court must

accept all factual allegations in the complaint as true. See Tellabs, 551 U.S. at 322. The

Court must consider the complaint in its entirety, materials incorporated into the complaint

by reference, and matters of which a court may take judicial notice.2

 Id. at 322-23.

III. COUNT I

A. Defendants’ Alleged Misrepresentations and/or Omissions

Plaintiffs seek to establish that Defendants violated the Exchange Act when they made

misleading statements of material fact regarding Apollo’s financial condition, business focus,

ethics, compensation and recruitment practices, and compliance with Title IV and/or failed

to disclose material facts necessary to make the statements not misleading. Plaintiffs also

claim that these allegedly false and misleading statements and/or omissions resulted in

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 4 of 30
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

- 5 -

artificial inflation of Apollo stock that led Plaintiffs to purchase common stock at artificially

inflated prices. The Court will briefly summarize Plaintiffs’ theory for each of these five

categories. 

1. Statements regarding Recruitment/Marketing Practices

Plaintiffs allege that Defendants used a number of unethical and deceptive recruiting

tactics to increase enrollment while publicly attributing their success to enhancing service

offerings and academic quality. (CAC ¶¶ 6, 15, 53, 69-71, 81-84, 145-150, 165). Plaintiffs

allege that revisions to Title IV, which allowed for-profit institutions to participate in federal

student aid funding, motivated Defendants to engage in unethical and deceptive recruiting

practices in order to increase enrollment, thus gaining access to large amounts of Title IV

funds. (CAC ¶5). Plaintiffs allege that Defendants’ improper recruiting practices included:

  recruiting intellectually and/or financially unqualified people (including

those at homeless shelters) (CAC ¶¶ 60-72);

 misleading prospective students about the cost of obtaining an education and

providing false information about the terms of the financial aid the students

received and their obligation to repay loans borrowed through Title IV

programs (CAC ¶¶ 49, 100-102);

 using inappropriate and deceptive sales practices to pressure prospective

students into enrolling (CAC ¶¶ 73-85); and

 incentivizing enrollment personnel to maximize the number of students they

were able to enroll, without regard to the students’ qualifications (CAC ¶¶ 52-

59).

(Doc. 76 at 2). 

Plaintiffs allege that they were misled by Defendants’ statements regarding the

reasons for enrollment increases at Apollo’s campuses, because, rather than disclosing these

practices, which Plaintiffs allege were the actual cause of the increase of enrollment,

Defendants claimed Apollo’s success and revenue growth resulted from: 

 “continued investment in enhancing and expanding [UOP] service offerings

and academic quality” (CAC ¶¶ 146-52);

 “a single-minded focus on providing quality education to serve the needs of

working students” (CAC ¶ 153);

 being “intensely focused on student success” and “retention” and “constantly

seeking ways to improve student completion and retention” and putting

“students first” (CAC ¶¶ 162, 164-65); and

 “ensur[ing] that only students who have a reasonable chance to succeed

enroll in our universities” (CAC ¶¶ 165, 168).

(Doc. 76 at 3) (quotation marks in original). 

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 5 of 30
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

3

 The Court’s determination that Plaintiffs have withdrawn their argument does not

prohibit Plaintiffs from amending the CAC to possibly state a cognizable claim based on

- 6 -

Plaintiffs claim that their allegations regarding these unethical and deceptive

recruiting practices are supported by an investigation conducted by the Government

Accountability Office and an ABC News Hidden Camera Investigation. (CAC ¶¶ 67, 69-71;

Doc. 76 at 1-2). Plaintiffs further claim that the Senate HELP Committee and “numerous

States Attorneys General” are currently conducting investigations regarding these practices.

(CAC ¶¶ 287-88, 291-93; Doc. 76 at 2). 

2. Statements regarding Compensation Practices

Plaintiffs allege that “during the Class Period, UOP’s enrollment staff were being

compensated based on the number of students they were able to enroll, in violation of the

Higher Education Opportunity Act.” (CAC ¶ 172). Plaintiffs allege that they were misled

by Defendants’ statements, during the Class Period, that Apollo was in compliance with the

Higher Education Opportunity Act when, in fact, it was violating the Act. (CAC ¶¶ 170-172).

In their Motion to Dismiss, Defendants argue that basing compensation on enrollment

was not a violation of the Higher Education Opportunity Act and thus, statements made by

Defendants that Apollo was in compliance could not have misled investors because they were

true. In Response, Plaintiffs appear to acknowledge that the compensation practices they

allege did not violate DOE regulations: 

Defendants argue that their compensation practices did not violate DOE

regulations. This too is irrelevant. Apollo’s compensation practices fueled its

undisclosed business strategy of increasing enrollment at all costs, regardless

of whether they were illegal.

(Doc. 76 at 3). It appears to the Court that Plaintiffs are abandoning their theory that

Defendants made misrepresentations regarding compliance with DOE regulations as stated

in the CAC. The Court must evaluate the Motion to Dismiss on the basis of what is alleged

in the CAC. Accordingly, the Court deems Plaintiffs to have withdrawn their allegations

concerning Defendants’ improper compensation practices for the purposes of the Court ruling

on the Motion to Dismiss.3

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 6 of 30
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’ representations of their compensation practices. 

- 7 -

3. Statements regarding Compliance with Title IV

Plaintiffs allege that, to maintain compliance with Title IV regulations, including a cap

on the ratio of government loan funds to cash revenue (the “90/10 Rule”) and limits on the

percentage of student borrowers who default on Title IV loans (the “Cohort Default Rate”),

Defendants developed an improper accounting practice. (CAC ¶ 7-8). 

 Plaintiffs’ theory of this improper accounting practice is as follows: “When a student

withdrew from classes prior to completing a program or obtaining a degree, Apollo was

required to return to the lender the unearned portion of the proceeds of that student’s Title

IV loans.” (CAC ¶ 8). In many cases, instead of returning the unearned proceeds to the

lender, Apollo “returned the full amount of the Title IV funds, including the portion that had

been earned and that Apollo was legally entitled to keep, and which students had a legal right

to have applied to their tuition bills.” (Id.). In many cases, Apollo then sought to collect the

full amount of tuition from the students themselves, even though these students often “did

not have the means to pay Apollo once their federal loans were returned.” (Id.). Defendants

did this “to prevent these students from going into default and increasing Apollo’s Cohort

Default Rate [and,] [b]y artificially inflating its revenue attributable to withdrawn students[,]

. . . Apollo also was able to improve its ratio of government loan-based revenue to cash

revenue, thereby helping to ensure its compliance with the 90/10 Rule.” (CAC ¶ 10). 

Plaintiffs allege that they were misled by Defendants’ disclosure of the negative

consequences that would flow from violating the Cohort Default Rate and/or the 90/10 Rule

while concealing the fact that Defendants were using improper practices to maintain

compliance with those regulations. (CAC ¶¶ 180-183). Plaintiffs further allege that they

were misled by Defendants’ statements that suggested Defendants only returned a portion

of the Title IV funds, when the truth was that Apollo was returning the entire amount of the

Title IV funds. (CAC ¶¶ 173-176). 

Further, Plaintiffs allege that, during the Class Period, Apollo failed to acknowledge

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 7 of 30
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

- 8 -

student withdrawals on a timely basis, which resulted in an untimely return of Title IV Funds.

(CAC ¶ 173). Prior to the Class Period, the DOE issued an audit report finding that Apollo

failed to return funds for withdrawn students in a timely manner. (CAC ¶ 173). Plaintiffs

allege that they were misled when Apollo made representations claiming that it had rectified

the problem identified in the DOE report, but, in fact, the problem was ongoing. (CAC ¶¶

173-77). 

Plaintiffs allege that these claims regarding Defendants’ improper practices relating

to Title IV funds are supported by a program review conducted by the DOE in February

2009, finding that UOP had failed to timely withdraw students which resulted in the untimely

return of Title IV funds throughout 2008 (CAC ¶ 173), and a lawsuit (that resulted in a

confidential settlement) filed by three former UOP students alleging that UOP improperly

returned the entire amount of their Title IV funds (CAC ¶ 177). 

4. Statements Regarding Apollo’s Financial Condition

Plaintiffs allege that Defendants violated Generally Accepted Accounting Principals

(“GAAP”) as follows:

First, Plaintiffs allege that Apollo improperly recognized revenue from students who

withdrew from school because it billed students for tuition and other charges that post-dated

their withdrawal even though Apollo did not earn those revenues (because no services were

provided after the students withdrew). (CAC ¶ 125). 

Second, Plaintiffs allege that:

as a result of its improper marketing and billing practices, Apollo knew that

the overwhelming majority of withdrawn students would not be able to pay

their tuition bills for the postwithdrawal period, and when Apollo returned

those students’ Title IV loan funds for the pre-withdrawal period, it likewise

knew that it was highly unlikely to recoup that money from the students

directly. Thus, the collectability of revenue from these withdrawn students was

highly ‘doubtful’ and not ‘reasonably assured,’ and under GAAP it should not

have been booked until (if ever) cash was received. Accordingly, when these

students withdrew, Apollo should have immediately reduced its revenue and

deferred revenue – which had been recorded when the Title IV loans were

received - by the amount owed by these students. 

(CAC ¶ 125). 

Third, Plaintiffs allege that:

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 8 of 30
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

 The CAC alleges that Defendants made various other disclosures with substantially

similar content, which constitute false and misleading statements concerning Apollo’s

disclosure controls and procedures and internal controls over financial reporting. (CAC ¶¶

237-250). 

- 9 -

Defendants violated ASC No. 450 by Apollo’s failure to take immediate and

adequate allowances for the receivables from students who withdrew from

school, including those whose Title IV funds were returned by Apollo, as

Defendants knew from the outset that it was probable that those amounts

would not be collected, and the amount of loss could be reasonably estimated

based on, inter alia, Apollo’s historic collections experience. Instead, the

Company recorded revenue in one period (which it never should have recorded

in the first place under CON No. 5) and then waited until a subsequent period

to record bad debt allowances and bad debt expense for the corresponding

account receivable. This inappropriate accounting allowed Apollo to overstate

revenue dollars and growth rates.

(CAC ¶ 129). 

Finally, Plaintiffs allege that “Apollo artificially increased the amount of tuition it

could treat as “earned,” thereby inflating its revenue and net income, by improperly delaying

the effective dates of students’ withdrawals from school.” (CAC ¶ 106). 

Plaintiffs allege that they were misled because Defendants did not disclose these

practices and instead “repeatedly issued false statements regarding Apollo’s disclosure

controls and procedures and its internal controls over financial reporting.” (CAC ¶ 237).

Plaintiffs allege that these false statements include:

 [after having to issue restatements of 2004 and 2005 financial statements]:

Our President and CFO of the Company have taken responsibility to

implement changes and improvements in the internal control over financial

reporting and remediate the control deficiencies that gave rise to the material

weaknesses. (CAC ¶ 238);

 We believe that we have made substantial progress in remediating these

material weaknesses, and we do not believe they will repeat. (CAC ¶ 239); 

 I am very pleased to report that each of the four material weaknesses

identified in last year’s audit were remediated, and we will report no material

weaknesses in internal controls this year. (CAC ¶ 241).

Plaintiffs allege that these statements “were materially false and misleading because

they created the false impression that Defendants had actually changed and improved

Apollo’s internal control[s] [and] remediated control deficiencies” when these deficiencies

continued to exist throughout the Class Period. (CAC ¶ 242).4

 

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 9 of 30
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

- 10 -

5. Business Focus

Plaintiffs allege that, throughout the Class Period, Defendants made statements that

attempted to portray Apollo “as an institution focused on providing a quality education to its

students and dedicated to changing lives through education,” making statements like:

 Our primary focus is providing the highest-quality educational product and

services for our students in order for them to maximize the benefits through

our educational experience. (CAC ¶ 161);

 Retention continues to be the number one focus at Apollo as it impacts so

many aspects of our results including enrollment, revenue, profit levels, bad

debt and student default rates. (CAC ¶ 162);

 none of this would be possible without always remembering to put our

students first. (CAC ¶ 164);

 We are committed to providing access to high quality education but want to

balance this with our responsibility to ensure that only students who have a

reasonable chance to succeed enroll in our universities. (CAC ¶ 165); 

 We remain committed to providing access to high-quality education, while

ensuring that only students who have a reasonable chance to succeed enroll in

our institutions. (CAC ¶ 168).

Plaintiffs allege that these statements were materially false and misleading because

“Apollo’s principal focus was on enrolling students in its institutions, regardless of their

suitability for college or the likelihood for success” and they “created the false impression

that Apollo was enrolling the types of students who were likely to remain in school and be

successful, thus providing a strong foundation for Apollo’s future . . . profitability.” (CAC

¶ 169). 

6. Ethics

Plaintiffs allege that, during the Class Period, Defendants “repeatedly trumpeted its

commitment to integrity and business ethics” making statements like:

 “the organization is committed to conducting its business ethically and with

integrity.” (CAC ¶ 155);

 “Our employees must act ethically at all times and in accordance with the

policies in our Code of Business Conduct and Ethics.” (CAC ¶ 156);

 “none of this would be possible without always remembering to put our

students first.” (CAC ¶ 164);

 Apollo’s “credibility and reputation depend upon the good judgment, ethical

standards and personal integrity of each director, executive and employee” and

Apollo “expects its directors, executives and employees to conduct themselves

with the highest degree of integrity, ethics and honesty.” CAC ¶ 157

Plaintiffs allege that these statements were materially false and misleading because

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 10 of 30
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

- 11 -

“neither Apollo nor its management were conducting themselves ethically and with integrity

during the Class Period, nor were they complying with the applicable rules and regulations

or providing full, fair and accurate disclosure to investors.” (CAC ¶ 160). 

B. Corrective Disclosures

Plaintiffs allege that “Plaintiffs and the Class purchased Apollo Class A stock at prices

that were artificially inflated because of Defendants’ misrepresentations and concealment of

material facts, and they suffered losses when the value of that stock declined significantly

as the true state of affairs was revealed.” (CAC ¶ 286). Plaintiffs allege that this “true state

of affairs” was revealed “through a series of disclosures during the Class Period,” which

revealed to investors “that Defendants’ portrayal of Apollo as a stable and growing company

with strong revenue growth and a promising future was materially misleading.” (CAC ¶

283). Plaintiffs allege that these disclosures caused a decline in Apollo’s stock price during

the Class period because “they revealed facts that had previously been misrepresented or

concealed by Defendants.” (CAC ¶ 285). 

The relevant corrective disclosures and allegations relating to them are as follows:

March 31, 2009. In a press release announcing its second quarter fiscal 2009

results, Apollo reported increased bad debt expense and a 9% decline in New

Degreed Enrollments from the previous quarter. As a result, Apollo’s stock

price dropped 15.15% ($11.87 per share) overnight. (Doc. 76 at 29-30; CAC

¶ 252).

October 27, 2009. In an earnings press release, Apollo announced that the SEC

had begun an informal inquiry into the Company’s revenue recognition

policies, and an Associated Press article the next day suggested that the issue

“revolve[d] around how Apollo determines when a student drops out of a class

and how much income Apollo can leave on its balance sheet, and for how

long.” In unusually heavy trading of Apollo shares, the stock price dropped

17.7% ($12.91 per share). (Doc. 76 at 30; CAC ¶¶253-54).

January 7, 2010. In its earnings press release and Form 10-Q, Apollo

announced its receipt of a preliminary Program Review Report from the DOE.

Although the report was not released, the Company revealed that it contained

“six findings and one concern” regarding the Company’s financial aid

policies.” (Doc. 76 at 31; CAC ¶ 255). Later that day on an earnings

conference call, Defendant Edelstein tried to downplay the DOE’s findings.

(CAC ¶ 256); In response to the disclosures of January 7, 2010, between

January 7 and January 8, Apollo’s stock price dropped by $3.44, or

approximately 5.4%. (CAC ¶ 257). 

June 21, 2010. The Preliminary Program Report was published by the DOE

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 11 of 30
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

- 12 -

providing “details that were not previously known to investors about the

DOE’s findings, such as the DOE’s determination that, despite concerns the

DOE had raised with UOP in March 2008 about the failure to timely recognize

withdrawal of students, ‘throughout 2008, UOP continued to fail to timely

withdraw students who expressed a desire to withdraw, resulting in UOP’s

untimely return of Title IV funds.’” “This negative news was tempered,

however, with assurances that the DOE’s findings had been fully resolved

during the six months since the Company received the preliminary report.

Apollo’s stock price declined only moderately in response to the June 21, 2010

announcement, from a closing price of $48.39 on June 18 (the previous trading

day) to a closing price of $48.01 on June 21.” (CAC ¶ 260). 

August 3 through August 6, 2010. On August 3, 2010, the GAO Report was

leaked to the press. (CAC ¶ 265). It described how fifteen for-profit schools

were investigated, and revealed widespread use of fraudulent and deceptive

marketing practices to attract students. (CAC ¶ 265). At the HELP Committee

hearing on August 4, a GAO official testified that two UOP campuses were

among the fifteen schools described in the Report. (CAC ¶ 269). On August

6, Apollo filed a Form 8-K announcing that the HELP Committee had sought

additional information regarding “a broad spectrum of the Company’s

business.” (CAC ¶ 273). From closing on August 2 to closing on August 4,

Apollo’s stock price fell from $47.14 to $44.76 (CAC ¶ 271), and following

the filing of the 8-K, it dropped to a new low of $41.11 before closing at $42.49 (CAC ¶ 273). (Doc. 76 at 32). 

August 13, 2010. The DOE released data showing that overall student loan

repayment rates were 36% at for-profit schools compared to 54% at public

universities. (CAC ¶ 274). The repayment rate for UOP students was only

44%, which was below the 45% threshold required by proposed new gainfulemployment rules. As a result of this disclosure, Apollo’s stock price fell 3.8%

between closing on August 12 ($40.47) and closing on August 13 ($38.94).

(CAC ¶ 274). (Doc. 76 at 32). 

October 13, 2010. In a press release, Apollo reported declining enrollment and

slowing revenue growth for its most recent quarter, and announced the

withdrawal of its financial forecast for fiscal 2011, citing increased regulatory

scrutiny and the implementation of new initiatives that would result in further

declining enrollment. (CAC ¶ 277). In its analyst call that day, Apollo further

disclosed a new orientation program during which students could drop out free

of charge, major changes in compensating enrollment counselors, and efforts

to monitor 30,000 of their conversations. (Id.). Defendants further revealed

that Apollo’s percentage of revenue from federal aid had increased over the

past year and was expected to exceed 90% by fiscal year 2012, triggering the

90/10 Rule and risking the loss of Title IV dollars. (CAC ¶ 279). As a result

of these disclosures, Apollo’s stock price dropped 23% during the next day’s

trading. (CAC ¶ 280). (Doc. 76 at 33). 

IV. ANALYSIS

Defendants argue that Plaintiffs have not met the standard for pleading a securities

fraud violation because they: (1) fail to adequately plead a cogent and compelling theory of

scienter, (2) fail to adequately plead falsity, and (3) fail to satisfy loss causation pleading

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 12 of 30
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

- 13 -

requirements. The Court finds that Plaintiffs have failed to plead a cogent and compelling

theory of scienter and failed to satisfy loss causation pleading requirements with regard to

each of the five categories of misrepresentations in Count I. 

A. Scienter

When proceeding under the PSLRA, Plaintiffs “can no longer aver intent in general

terms of mere motive and opportunity or recklessness, but rather, must state specific facts

indicating no less than a degree of recklessness that strongly suggests actual intent.” Metzler,

540 F.3d at 1066 (internal quotations omitted). Plaintiffs must state with particularity facts

giving rise to a strong inference that Defendants acted with the required state of mind. Id.

For such an inference to qualify as “strong,” it “must be more than merely plausible or

reasonable—it must be cogent and at least as compelling as an opposing inference of

nonfraudulent intent.” Id. (quoting Tellabs, 551 U.S. at 324). 

The Court “must engage in a comparative evaluation; it must consider, not only

inferences urged by plaintiff . . . but also competing inferences rationally drawn from the

facts alleged.” Tellabs, 551 U.S. at 314. Under this standard, “the Court must consider all

reasonable inferences to be drawn from the allegations, including references unfavorable to

the plaintiffs.” Metzler, 540 F.3d at 1061 (quoting Gompper v. VISX, Inc., 298 F.3d 893, 897

(9th Cir. 2002) (emphasis in original)). Where pleadings are not sufficiently particularized

or where, taken as a whole, they do not raise a strong inference that misleading statements

were made to investors knowingly or with deliberate recklessness, a private securities fraud

complaint is properly dismissed under Rule 12(b)(6).” Ronconi v. Larkin, 253 F.3d 423, 429

(9th Cir. 2001). 

Plaintiffs have listed fraudulent practices engaged in by Defendants and have

generally averred Defendants’ knowledge. Plaintiffs have made little attempt to link facts

indicating actual knowledge on the part of each Defendant to actual fraudulent practices of

Defendants and, to a great extent, have left it to the Court to try to match up Defendants’

alleged fraudulent practices with their alleged scienter. It is Plaintiffs’ burden to establish

a strong inference of scienter. Further, the PSLRA specifically requires the Complaint to

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 13 of 30
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

5

 Plaintiffs also rely on other lawsuits filed against Defendants to support their

allegations. (CAC ¶¶ 53, 100, 177). Plaintiffs further state that, if given leave to amend, an

amendment will include a “recently unsealed qui tam case against Apollo in which—contrary

to arguments made in Defendants’ brief—former UOP employees allege that UOP has been

in continual violation of regulations prohibiting compensation of recruiters based on the

number of students they enroll.” (Doc. 76 at 7, n. 9). Defendants argue that allegations from

other complaints are insufficient to satisfy the pleading requirements. The Court agrees that

because allegations from other complaints are unproven and contested, they do not amount

to “facts” sufficient to establish a strong inference of scienter. See In re Connetics Corp.

Secs. Litig., 542 F.Supp.2d 996, 1005 (N.D. Cal. 2008) (“an attorney has a nondelegable

responsibility to personally validate the truth and legal reasonableness of the papers filed and

to conduct a reasonable factual investigation. Given that this responsibility cannot be

delegated to another member of the attorney’s firm, it would make little sense that an

attorney somehow can rely on the analysis of attorneys in different actions and who are

presumably from different law firms.”) (internal quotations omitted); Geinko v. Padda, No.

00C5070, 2002 WL 276236, at *6 (N.D. Ill. 2002) (“if this Court were to accept Plaintiffs’

view of pleading fraud, two plaintiffs could file separate actions each relying on the

allegations in the other’s complaint and both would state a claim for fraud. Clearly, Rule 11’s

requirements do not allow this type of pleading loophole.”). This determination does not

prohibit Plaintiffs from amending the CAC to plead that these “facts” have been

independently verified.

- 14 -

“state with particularity facts giving rise to a strong inference that the defendant acted with

the required state of mind” “with respect to each act or omission.” 15 U.S.C. § 78u-4(b)(2)

(emphasis added). 

The CAC primarily relies on: (1) Defendants’ stock purchases, (2) Confidential

Witness statements, and (3) alleged GAAP violations to establish scienter.5

 

1. Stock Purchases

Plaintiffs assert that insider trading by Defendants John Sperling, Peter Sperling,

D’Amico, and Pepicello (the “insider trading Defendants”) supports a strong inference of

scienter. 

“While suspicious stock sales by corporate insiders may constitute circumstantial

evidence of scienter,” such sales only give rise to an inference of scienter when they are

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

personal benefit from undisclosed inside information.” Metzler, 540 F.3d at 1066-1067

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 14 of 30
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

- 15 -

(internal quotations omitted). “Three factors are relevant to this inquiry: (1) the amount and

percentage of the shares sold; (2) the timing of the sales; and (3) whether the sales were

consistent with the insider’s trading history.” Id. at 1067.

Plaintiffs allege that over the Class Period, Peter Sperling sold 21% of his Class A

shares, John Sperling sold 14% of his Class A shares, Pepicello sold 34% of his shares, and

D’Amico sold 26% of his shares. (CAC ¶¶ 305-308). 

Plaintiffs allege that these sales were not consistent with the insider trading

Defendants’ trading history. Peter Sperling’s sales in December 2004 and July 2005 totaled

less than 232,000 shares. (CAC ¶ 305). During the Class Period, he sold nearly three million

shares. (Id.). John Sperling sold shares more than twice the number of shares he had sold

in any previous month. (CAC ¶ 306). Although Pepicello owned stock or currently

exercisable stock options since August 31, 2005, his first sale was in January 14, 2008.

(CAC ¶ 307). D’Amico’s stock options became vested and exercisable in annual

installments on June 15, 2008 and yet his first sale was January 15, 2009. (CAC ¶ 308). 

Further, Plaintiffs allege that the timing of the insider trading Defendants’ selling was

unusual because Peter Sperling sold no shares between July 2005 and October 2007, John

Sperling sold no shares between January 2004 and July 2009, Pepicello first sold shares on

January 14, 2008, and D’Amico first sold shares on January 15, 2009. (CAC ¶¶ 305-308).

Plaintiffs further allege that the stock sales are suspicious because they coincided with

massive stock repurchases by Apollo. (CAC ¶ 309). Plaintiffs allege that the timing of the

2009 and 2010 sales coincided with Defendants’ knowledge of material, adverse information.

(CAC ¶ 315). 

When determining whether Plaintiffs have pleaded a strong inference of scienter, the

Court “must engage in a comparative evaluation; it must consider, not only inferences urged

by the plaintiff . . . but also competing inferences rationally drawn from the facts alleged.”

Tellabs, 551 U.S. at 314. Plaintiffs allege that only four of the nine Defendants engaged in

suspicious stock sales, even though they allege that all Defendants were involved in a

fraudulent scheme to defraud investors, and the insider trading Defendants only sold 21%,

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 15 of 30
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

6

 Plaintiffs assert that they have established scienter because they have pleaded that

Defendants’ bonuses and restricted stock awards were tied to Apollo’s earnings results,

demonstrating that Defendants had a motive to inflate those earnings results. (CAC ¶ 301;

Doc. 76 at 24). While Plaintiffs are correct that “[a] strong correlation between financial

results and stock options or cash bonuses for individual defendants may occasionally be

compelling enough to support an inference of scienter,” where a complaint makes only a bare

assertion that executive-level bonuses are based in part on financial performance and fails

to provide comparisons with prior year bonuses, such “generalized assertions of motive,

without more, are inadequate to meet the heightened pleading requirements” of the PSLRA.

Zucco, 552 F. 3d at 1004-1005. Accordingly, Plaintiffs have not adequately alleged enough

information about the bonuses and restricted stock awards to support a strong inference of

scienter.

7

 To the extent that Plaintiffs rely on anonymous internet postings to establish scienter

(CAC ¶¶ 78, 101, 102), the only appreciable difference that the Court can ascertain between

anonymous internet postings and confidential witness statements is that anonymous internet

postings are less reliable than confidential witness statements. Accordingly, with regard to

anonymous internet postings, it is Plaintiffs’ burden to plead reliability and knowledge that

are indicative of scienter to at least the same extent as it must when pleading scienter with

- 16 -

14%, 34%, and 26% of their stock respectively. Typically large sale amounts and

“corroborative sales by other defendants” are required to “allow insider trading to support

scienter.” Metzler, 540 F.3d at 1067; see Ronconi, 253 F.3d at 436 (“[o]ne insider’s well

timed sales [of 75.3% of his holdings] do not support the ‘strong inference’ required by the

statute where the rest of the equally knowledgeable insiders act in a way inconsistent with

the inference that the favorable characterization of the company’s affairs were known to be

false when made.”).6

 Accordingly, these stock sales do not support a strong inference of

scienter.

2. Confidential Witness Statements

A complaint relying on statements from confidential witnesses to establish scienter

must meet two elements: (1) the complaint must describe the confidential witnesses with

sufficiency and particularity to establish their reliability and knowledge, and (2) the

statements, which are reported by confidential witnesses with sufficient reliability and

personal knowledge, must themselves be indicative of scienter. Zucco Partners, LLC v.

Digimarc Corp., 552 F.3d 981, 995 (9th Cir. 2009).7

 

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 16 of 30
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

regard to confidential witness statements. Because Plaintiffs have not pled such reliability

and knowledge with regard to the anonymous internet postings, they do not support a strong

inference of scienter. 

8

 All confidential witness allegations are quoted directly from the CAC. 

- 17 -

Defendants do not challenge Plaintiffs’ description of the confidential witnesses, but

do argue that: (1) the confidential witnesses lack the requisite personal knowledge because

“all of the [confidential witnesses] are low-level employees with the possible exception of

CW 10,” and (2) the statements that the confidential witnesses attest to are not themselves

indicative of scienter. 

The confidential witnesses, their positions with Apollo, and their allegations in the

CAC are as follows:8

CW1 (an Enrollment Manager employed by UOP from March 2008 through

November 2010): Enrollment Managers were evaluated on a “performance

matrix,” seventy percent of which related to enrollments and retention.

Notably, a student was considered “retained” for purposes of this performance

matrix if the student stayed on through only the second set of classes. Prior to

September 2010, Enrollment Managers were given specific enrollment and

retention numbers that they were required to hit. Employees were threatened

(until 2009) with pay decreases for failing to enroll their target number of

students. (CAC ¶¶ 56-57). 

CW2 (an Admissions Manager with UOP from March 2003 through June

2010): Enrollment Counselors were expected to enroll 4.5 students per month,

Senior Enrollment Counselors were expected to enroll 6.5 students per month,

and executives were expected to enroll 8.5 students per month. As an

incentive for his recruiters to “hit the numbers,” Mike Bibbe, Vice President

for the Military Division, was known to tape a fake $500 bill in enrollment

counselors’ offices each time they enrolled a student because, according to

CW2, “every registered student was worth $500 on your review.” Many

enrollment counselors would not talk to students about when they would be

required to pay back financial aid loans, or would tell them the loans only had

to be repaid when a student graduated. Consequently, many students took

several years off from school erroneously thinking that the loans would not

become due until they completed their degrees. CW2 heard enrollment

counselors giving inaccurate information on financial aid to prospective

students “on a daily basis.” (CAC ¶¶ 57 & 65). 

CW3 (a Fraud Analyst/Examiner for UOP between 2003 and June 2010):

Apollo had a practice and policy of enrolling students “whatever the cost.”

This policy was communicated from senior executive management down

through the ranks of Enrollment and Finance Counselors. (CAC ¶ 60). 

CW4 (a Senior Enrollment Advisor): 66% of your performance-based

compensation was based upon how many students you enroll, whether they are

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 17 of 30
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

- 18 -

good or bad, can read or write, or whatever. It’s all about the hard number of

how many students you enroll. The culture is all about getting students. It’s not

about getting good, quality students as much as it is the number of students.

You can enroll anybody. If they have a heartbeat and a social security

number you can pretty much enroll them. CW4 estimated that

“conservatively speaking at least 60% of UOP students aren’t capable for or

ready for school for a variety of reasons including not being able to type. They

don’t have computers. They don’t have transportation to and from school, and

other reasons.” However, when CW4 raised concerns about a prospect’s

chances of successfully completing the required coursework, CW4 was

essentially told to mind his/her own business. According to CW4, his/her

supervisors would say, “Who are you to judge and say that they are not going

to make it? You let that person start. It’s not your call. If they fill out that

application and they’re approved for financial aid and they make that decision

that’s on them. You’re not responsible for that.” Enrollment counselors were

trained not to take “no” for an answer if a prospective student indicated that he

or she was not interested in attending UOP. Rather, enrollment counselors

were trained – pursuant to the “Overcoming Objections” program – to “make

the person feel bad for not going to school. They wanted you to make them

cry.” CW4’s immediate supervisor, a Director of Enrollment, told CW4, “If

you don’t make that person cry by the time you get off the phone you haven’t

done your job.” Similarly, CW4 stated that UOP trained its sales force on the

“Drive Theory,” pursuant to which enrollment counselors were trained “about

helping the prospect get to their motivation by making them feel bad about

what they didn’t have and getting them to dream about what they do want.” If

a prospect indicated to an enrollment counselor that he or she was not ready

to enroll, the enrollment counselor would say, “Well then you don’t really

want it that bad if you’re not ready to sign up to go to school right now.”

(CAC ¶¶ 60, 61, 74, & 75).

CW5 (a Senior Enrollment Counselor employed by Apollo from January 2007

through April 2010): CW5 was “encouraged not to discourage” students who

indicated an inability to pay from enrolling. In certain instances, CW5 heard

enrollment counselors touting the benefits of “excess funds” – i.e., the amount

of federal financial aid a student could receive over and above the cost of

tuition. CW5 heard other counselors encouraging students to enroll in UOP

because they would receive this money. CW5 heard counselors say things like,

“You don’t have to worry about it financially because aid will take care of the

entire cost and you will have some extra money that will be sent to you,” and

“You can use the money for a new computer or whatever you need to use it on,

that’s fine, always good to have extra money.” Further, CW5 believes that

many enrollment counselors misled prospective students about their liability

to repay excess money, noting that “a lot” of students would call back and say,

“I was told it was a grant not a loan,” when informed that they were required

to repay this excess money. CW5 believed that approximately 35-40% of

students took excess money and then dropped out of school. (CAC ¶ 64). 

CW6 (a Campus Accounting Supervisor working for Apollo subsidiary the

Institute for Professional Development (“IPD”) between 2005 and 2009) CW6

said, “A lot of times students expressed to me that they felt that the Enrollment

Counselors had hustled them into the program. They were brought in so

quickly and they didn’t have a clear understanding of the financial

commitment and investment that was going to be needed on their part.”

Further, CW6 noted that students repeatedly told CW6 that many of the details

concerning their financial aid, from financial aid obligations to how the money

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 18 of 30
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

- 19 -

was to be utilized, were not explained to the students clearly or fully. This,

CW6 observed, was evidenced by IPD’s common practice of allowing students

to enroll and start classes before important financial aid paperwork was filled

out or completed. (CAC ¶ 66). 

CW7 (a Senior Director of Product Marketing for UOP from November 2008

through February 2010): UOP’s six Regional Vice Presidents had their

respective bonuses structured based on how many people they enrolled, and

how many of those students attended at least three online classes (known

internally at UOP as “3Y”). CW7 believes the sole enrollment goal was to get

a student to stay for three classes. CW7 had multiple conversations with

people on the “academic side” of the school – including high-ranking

educators in the UOP Business School – who expressed their concern that the

practice of enrolling unqualified students was hurting the school’s reputation.

These individuals told CW7 that they were pressured to give students better

grades and to pass students who were not academically meeting the criteria so

that they would not fail out and so UOP could continue to collect money. Bill

Barry, Associate Dean of the Business School, told CW7 about a study he had

done which showed that UOP MBA graduates had inferior skills in

comparison to state school MBA graduates in all tested areas and had failed

miserably compared to their peers. Mr. Barry told CW7 that either Defendant

Pepicello or UOP Provost Adam Honea (CW7 could not recall which) told him

to “bury” the study. When UOP’s “Right Student Initiative” – a plan

designed to recruit more suitable students – led to a decline in enrollment, Rob

Rubell, Chief Marketing Officer and Head of Products, was told in a private

meeting with Defendant D’Amico “to turn the dial back up” – in other words,

to return to the old marketing models that enrolled more, but less qualified,

students. UOP had “created the perfect storm of achieving high enrollment

rate with poor quality students who tended to drop out. They just need to keep

feeding the lead machine.” UOP was run on a regional basis with six Regional

Vice Presidents. The different campuses would “roll up” to the Regional Vice

Presidents on a regional basis. The regions were: Midwest, Southwest,

Western, Mountain Plains, Southwest and Northeast. (CAC ¶¶ 58, 62-63, &

297).

CW8 (an Accounting Supervisor employed by UOP at its Greenville, South

Carolina campus from 2003 to October 2010, UOP’s Regional Accounting

manager for the South Region): CW8 reported to corporate accounting at

Apollo, and specifically to Defendant Swartz. CW8 and CW8’s colleagues

prepared weekly reports of the campuses’ financial results that were sent to

Swartz. These weekly reports encompassed all accounting aspects of UOP,

including the general ledger, balance sheet and income statement, as well as

information concerning student enrollments, dropouts, refunds to students of

Title IV funds, return to lender amounts, and accounts receivables from

students who had dropped out. This practice of weekly reporting occurred

across all educational segments of Apollo, including WIU and the Institute for

Professional Development. UOP/Apollo’s corporate accounting policy was

to write off these receivables after 90 days if they were not collected, although

oftentimes these receivables would be kept on UOP’s books for 180 days. It

was widely known at the corporate accounting level, including by the Chief

Financial Officer, that collecting on student accounts receivables was

“impossible” whether the receivables were one day old or 180 days old. (CAC

¶ 297)

CW9 (an Enrollment Counselor in UOP’s Center City, Philadelphia office

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 19 of 30
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

- 20 -

from August 2007 through July 2009): CW9’s supervisor pressured her to

“harass and constantly call” prospective students, leading the UOP to enroll

“people who couldn’t read and/or were homeless.” (CAC ¶ 82). 

CW10 (left Apollo in July 2010 after serving as a senior-level executive at

WIU since before the beginning of the Class Period, was a member of a

compensation committee comprised of senior executives of Apollo, Apollo

Global, WIU, UOP and IPD; reported directly to the President of WIU, who

in turn reported to the President of Apollo (Mueller until June 2008, and

thereafter D’Amico)): WIU’s compensation scheme was virtually the same as

UOP’s and consisted of a performance matrix that rewarded Enrollment

Advisors based primarily on the number of students that were enrolled and the

retention rate of students. The compensation packages outlined in the matrix

were issued and approved at the Apollo corporate level, and CW10 indicated

that defendant D’Amico “lent direction to the compensation committee and

approved all performance based compensation packages throughout all of

[Apollo’s] structure from the time he came on as President.” The

compensation program and performance matrix were not changed following

Apollo’s 2004 settlement with the DOE, and Apollo continued to compensate

its Enrollment Advisors primarily based on the number of students enrolled

and the retention rate. It was not until 2010, when the government was

considering new rules to govern for-profit schools, that Apollo began to

change its compensation system, although no new program was implemented

before CW10 left WIU in July 2010. Defendant D’Amico approved the

Company’s compensation system while financial and compliance issues were

handled at the Apollo corporate level by Defendants Edelstein, Cappelli,

D’Amico, and a few other individuals. CW10 characterized Apollo as a “very

tight organization” where “[t]he people who really tell you what to do and are

developing what the company is are confined to a small group and it’s a men’s

club, a close-knit group that works very closely and tightly with each other.”

(CAC ¶¶ 59 & 298).

 

The CAC suggests that CW1’s statements regarding the compensation of enrollment

managers shows that Defendants knew of “clear restrictions on tying compensation to

enrollment, and despite having been caught and severely penalized for violating those

restrictions [Apollo] continued to evaluate and compensate its ‘Enrollment Managers’ based

chiefly on the number of student they were able to enroll.” (CAC ¶ 56). As the Court noted

above, Plaintiffs appear to have withdrawn their argument that Apollo was violating

restrictions on tying compensation to enrollment during the Class Period. Accordingly,

CW1’s statements do not support a strong inference of scienter. To the extent that CW2,

CW4, and CW10 also discuss compensation practices for enrollment managers, their

statements likewise do not support a strong inference of scienter.

CW2 and CW5 also heard enrollment counselors giving inaccurate financial aid

advice to prospective students. CW6 reports students complaints that they did not clearly

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 20 of 30
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

- 21 -

understand their financial aid obligations. CW9 complains that her supervisor pressured her

to constantly call and harass prospective students. The Court finds that these statements do

not support a strong inference of scienter. None of these Confidential Witnesses actually

indicate any scienter on Defendants’ parts. If Plaintiffs seek to establish scienter through an

assumption that Defendants knew what their employees knew, this is inadequate. See Zucco,

552 F.3d at 998 (even conclusory assertions about defendant’s scienter are usually

insufficient, standing alone, to adequately allege scienter “since they fail to establish that the

witness reporting them has reliable personal knowledge of the defendant’s mental state.”).

Similarly, to the extent CW8 suggests that it was widely known at the corporate accounting

level that “collecting on student accounts receivables was ‘impossible’ whether the

receivables were one day old or 180 days old,” Plaintiffs assert no basis as to CW8’s

personal knowledge.

Because CW3’s assertion that “Apollo had a practice and policy of enrolling students

‘whatever the cost’” is conclusory, it likewise does not support a strong inference of scienter.

Only CW7 and CW8 actually allege scienter on the part of Defendants. However,

CW7’s information, as alleged, seems to be only based on hearsay. “[A] hearsay statement,

while not automatically precluded from consideration to support allegations of scienter, may

indicate that a confidential witnesses’ report is not sufficiently reliable, plausible, or coherent

to warrant further consideration.” Zucco, 552 F.3d at 998. Accordingly, CW7’s statements

do not support a strong inference of scienter. Because CW8 has personal knowledge of

Apollo’s corporate accounting policy regarding receivables and CW8 actually alleges

scienter on the part of Defendants, his statements support an inference of scienter. 

3. Alleged GAAP Violations

To allege a strong inference of scienter for a violation of GAAP, Plaintiffs must allege

that Defendants knowingly and recklessly engaged in improper accounting practices.

Metzler, 540 F.3d at 1068-69. 

Plaintiffs allege that, 

Defendants violated ASC No. 450 by Apollo’s failure to take immediate and

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 21 of 30
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

- 22 -

adequate allowances for the receivables from students who withdrew from

school, including those whose Title IV funds were returned by Apollo, as

Defendants knew from the outset that it was probable that those amounts

would not be collected, and the amount of loss could be reasonably estimated

based on, inter alia, Apollo’s historic collections experience.

(CAC ¶ 129). Plaintiffs only provide conclusory assertions that Defendants “knew” they

would not be able to collect certain amounts. This does not support a strong inference of

scienter. Moreover, knowledge regarding GAAP violations would not raise a strong

inference of scienter with regard to the other four categories of misrepresentations that

Plaintiffs claim Defendants engaged in throughout the Class Period.

Taking all of Plaintiffs’ allegations of scienter as a whole, the Court finds that

Plaintiffs have failed to adequately plead the required strong inference of scienter. Although

the Court can dismiss the CAC based on Plaintiffs’ failure to adequately plead scienter, the

Ninth Circuit Court of Appeals has instructed that Courts should provide Plaintiffs guidance

when granting leave to amend. Accordingly, the Court will also analyze whether Plaintiffs

have adequately pleaded loss causation. 

B. Loss Causation Pleading

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

the deceptive acts that form the basis for the claim of securities fraud and the injury suffered

by the plaintiff.” Ambassador Hotel Co., Ltd. v. Wei-Chuan Inv., 189 F.3d 1017, 1027 (9th

Cir. 1999). “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 1063. 

The Court notes, at the outset, that Plaintiffs have alleged a series of fraudulent

practices engaged in by Defendants as described above. Plaintiffs then alleged a series of

corrective disclosures that allegedly revealed these fraudulent practices to the market.

However, Plaintiffs have made little to no attempt to link specific fraudulent practices to

specific corrective disclosures. Instead, Plaintiffs have left it to the Court to puzzle together

which fraudulent practices were revealed through which corrective disclosures. 

Plaintiffs claim that a series of seven disclosures slowly revealed Defendants’

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 22 of 30
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

9

 Although the CAC implies that these seven disclosures are only “some of the

disclosures and events that have revealed, at least in part, the false and misleading nature of

Defendants’ public statements during the Class Period, and the true nature of the risks facing

Apollo” (CAC ¶ 251), Plaintiffs’ burden to plead loss causation necessarily means that they

must plead all facts upon which they are basing their allegations. Accordingly, the Court will

assume that these seven statements are the only basis for which Plaintiffs can prove loss

causation. 

- 23 -

fraudulent practices to investors.9

 First, Plaintiffs fail to adequately plead loss causation with

regard to the March 2009 earnings press release because they do not assert the necessary

causal link between Defendants’ fraudulent practices and those practices becoming generally

known to the market. Instead, the CAC admits that “these manipulative practices were still

unknown to investors” at the time of the disclosure. The CAC alleges that the manipulative

practices themselves caused the financial results that Apollo was reporting. 

To prove loss causation, Plaintiffs must show that the market learned of and reacted

to the fraudulent practices, not just that the alleged fraudulent practices were manifesting

themselves in the reports of Defendants’ poor financial health. See Metzler, 540 F.3d at 1063

(the complaint should show that “the market learned of and reacted to this fraud, as opposed

to merely reacting to reports of the defendant’s poor financial health generally.”). Although

Plaintiffs are correct that there is no prohibition against alleging loss causation through a

series of disclosures, Plaintiffs must still show how each individual disclosure revealed at

least some fraudulent conduct to the market and caused the resulting loss. The Court finds

that Plaintiffs have failed to allege loss causation for the March 2009 earnings press release.

Plaintiffs’ second alleged corrective disclosure is the October 27, 2009 earnings press

release that revealed that the SEC had begun an informal inquiry into the Company’s revenue

recognition policies. Defendants argue that “a stock price drop in response to the

announcement of an SEC investigation, without subsequent events that reveal fraudulent

practices, is not sufficient to plead loss causation.” (Doc. 89 at 22-23). While there is a split

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 23 of 30
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

10 Compare In re StockerYale, 453 F.Supp.2d 345, 359 (D.N.H. 2006) (finding that

where Plaintiffs alleged that shares dropped 15% per share on the day SEC announced

investigation into accuracy of press releases and shares dropped $0.84 per share in afterhours trading when public was informed of the SEC investigation by means of a Form 8k,

a causal connection was established between the release of corrective information and the

decline in the price of shares) with In re Maxim Integrated Prods., Inc. Secs. Litig., 639

F.Supp.2d 1038, 1047 (N.D. Cal. 2009) (finding that disclosures regarding compliance with

an SEC investigation, subpoenas from the United States Attorney's office, and the formation

of a Special Committee to investigate options granting practices did not indicate anything

more than a risk or potential that Defendants engaged in widespread fraudulent conduct and

thus could not be considered corrective disclosures for the purpose of pleading loss

causation). 

- 24 -

of authority among district courts10 with regard to whether the announcement of an

investigation is sufficient to plead loss causation, the Court finds that, at this stage in the

litigation, if Plaintiffs were able to adequately allege underlying facts and scienter of

misrepresentations or omissions that eventually led to this disclosure, the allegations related

to the October 27, 2009 would be sufficient to establish loss causation. 

More specifically, the October 27, 2009 earnings press release stated that the SEC was

conducting an informal inquiry into Apollo’s revenue recognition practices. This

information could signal to a reasonable investor that there were improprieties in Apollo’s

revenue recognition practices, leading to a market reaction causing the stock price to drop

17.7%. See In re Take–Two, 551 F.Supp.2d 247, 287 (S.D.N.Y. 2008) (finding allegation

of 7.5% drop in share price sufficient, stating that “[o]ther courts have found that similar

allegations of significant stock drops in response to announced SEC investigations are

sufficient to plead loss causation under the framework established by Dura and its progeny”).

Plaintiffs have pleaded that improprieties in Apollo’s revenue recognition practices were the

result of Defendants’ fraud and the announcement of the SEC inquiry put investors on notice

of those improprieties. Accordingly, if Plaintiffs were able to adequately allege underlying

facts and scienter of misrepresentations or omissions that eventually led to this disclosure,

the allegations related to the October 27, 2009 would be sufficient to establish loss causation.

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 24 of 30
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

- 25 -

Plaintiffs’ third alleged corrective disclosure is the January 7, 2010 press release

revealing that Apollo had received a preliminary Program Report from the Department of

Education (“DOE”). The report contained “six findings and one concern regarding the

Company’s financial aid policies.” The Court finds that if Plaintiffs were able to adequately

allege underlying facts and scienter of misrepresentations or omissions that eventually led

to this disclosure, the allegations related to the January 7, 2010 disclosure would be sufficient

to establish loss causation. Similar to the disclosure revealing the SEC investigation,

findings of the Department of Education that Apollo was improperly carrying out its financial

aid policies could lead to a market reaction causing the stock price to drop 5.4%. Plaintiffs

have pleaded that Apollo failed to timely return Title IV funds as a result of its delayed

recognition of student withdrawals and Defendants made representations stating that they had

corrected such problems when they had not. Plaintiffs’ assertion that investors were put on

notice of these practices by the announcement of the DOE report sufficiently establishes a

plausible causal link. The Court finds that the same analysis applies to the June 21, 2010

disclosure and the August 6, 2010 disclosure and thus, if Plaintiffs were able to adequately

allege underlying facts and scienter of misrepresentations or omissions that eventually led

to those disclosures, the allegations related to those disclosures would be sufficient to

establish loss causation. 

Plaintiffs allege that a series of disclosures from August 3, 2010 through August 4,

2010 that revealed an undercover investigation conducted by the Government Accountability

Office (“GAO”) revealed Defendants’ fraud with regard to deceptive marketing and

recruiting practices. The GAO report revealed that fifteen for-profit schools were

investigated, and revealed widespread use of fraudulent and deceptive marketing practices

to attract students. The GAO report did not reveal that any Apollo schools were part of the

investigation. To the extent that Plaintiffs rely on the August 3, 2010 leaking of the GAO

report, the Court finds that Plaintiffs have failed to establish a causal connection between

Defendants’ alleged fraud and any actual loss. Plaintiffs have not sufficiently alleged facts

showing how the fact that for-profit schools were being investigated was understood by the

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 25 of 30
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

- 26 -

market as realization of fraud being conducted by Defendants at Apollo. See Metzler, 540

F.3d 1064 (where Plaintiffs asserted that a disclosure made investors realize that there were

fraudulent practices at one of Defendants’ schools, the Court held Plaintiffs had failed to

assert enough facts showing that the market was alerted to Defendants’ widespread fraud).

Plaintiffs allege that, on August 4, 2010, a GAO official testified that two UOP

campuses were among the fifteen schools described in the Report. Plaintiffs fail to allege

which specific allegations from the report revealed Defendants’ fraud to the market. Without

knowing which allegations Plaintiffs specifically allege caused investors to become aware

of Defendants’ fraud, the Court finds it impossible to analyze these statements for a causal

connection. If Plaintiffs choose to amend the CAC with these allegations, they should

specify both the information revealed to the market and the misrepresentations by Defendants

that the information revealed to be fraudulent. 

Further, Defendants argue that there were significant errors in the GAO report

regarding what campus representatives at Apollo actually said. Although the Court must take

what Plaintiffs allege in the CAC as true, to adequately assert a causal connection between

Defendants’ alleged fraud and that fraud being revealed to the market, Plaintiffs must

identify the true fraudulent activities at Apollo that were revealed to the market. If the GAO

Report incorrectly revealed fraudulent activities to the market that Defendants were not

actually engaged in, those false reports cannot possibly have revealed a real fraud to the

investors. 

Even if Plaintiffs had adequately alleged a causal connection between specific

portions of the original GAO Report and Defendants’ fraud, Plaintiffs have failed to

adequately explain how the revisions to the report affect the loss causation analysis. Instead

of demonstrating to the Court that the revisions to the GAO Report do not change the

analysis and citing to the specific statements that would suffice to establish a causal

connection between the original release of the GAO Report and Defendants’ alleged fraud,

Plaintiffs cite to a GAO spokesman’s statement regarding the revised report that “[n]othing

changed with the overall message of the report, and nothing changed with any of our

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 26 of 30
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

- 27 -

findings” and a statement by a spokesman for Senator Harkin “that the revisions ‘do not

change the substance of the report’ or its conclusions that the for-profit schools at issue ‘used

deceptive or fraudulent recruiting techniques to enroll new students.’” (CAC ¶ 272).

Plaintiffs fail to assert their own theory as to how the specific statements actually made by

Defendants affected the market and how those statements revealed Defendants’ fraud to the

market. To adequately allege loss causation, Plaintiffs must link specific acts by Defendants

to a specific revelation to the market. The spokesmens’ statements do not aid the Court in

determining whether such a link exists. Accordingly, the Court finds that Plaintiffs have

failed to establish loss causation for the August 3, 2010 and August 4, 2010 disclosures.

Plaintiffs allege that the August 13, 2010 DOE release of data showing that the

repayment rates for students at UOP was only at 44%, below the 45% threshold required by

proposed gainful-employment rules and the DOE’s announcement that it was increasing its

enforcement staff and would be conducting more investigations generally revealed

Defendants’ fraud to the market. While it is unclear in the CAC what fraud this revealed to

the market, in their Opposition to the Motion to Dismiss, Plaintiffs assert that this revealed

to the market that “overly-aggressive and deceptive marketing practices in enrolling students

at any cost were rampant throughout the for-profit college industry.” (Doc. 76 at 32-22).

The Court finds that Plaintiffs have not sufficiently alleged facts showing how Apollo’s

repayment rates or the DOE’s staffing were understood by the market as a realization of

fraud being conducted by Defendants. Accordingly, Plaintiffs have failed to establish loss

causation for the August 13, 2010 disclosure.

Plaintiffs allege that the October 13, 2010 press release reporting declining

enrollment, slowing revenue growth, increased regulatory scrutiny, and implementation of

new initiatives revealed to the market “previously undisclosed fraudulent and deceptive

practices by Apollo and its peers in the for-profit education industry, and the increased

regulatory scrutiny that those revelations engendered.” (CAC ¶ 277). The revelation that

Plaintiffs point to is a conclusion, not a fact. “[W]hile the court assumes that the facts in a

complaint are true, it is not required to indulge unwarranted inferences in order to save a

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 27 of 30
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

- 28 -

complaint from dismissal.” Metzler, 540 F.3d at 1064-65. It is Plaintiffs’ burden to link the

market reaction to a disclosure with Defendants’ alleged fraudulent behavior revealed in that

disclosure. Plaintiffs have failed to meet that burden with regard to the October 13, 2010

press release.

The practical result of the Court’s loss causation analysis is that, even if Plaintiffs had

alleged facts proving scienter, Plaintiffs have only adequately pleaded loss causation with

regard to two of the categories of § 10(b) and 10(b)-5 violations asserted in its CAC, i.e.

statements regarding Apollo’s financial condition and compliance with Title IV. Plaintiffs

have failed to establish loss causation for violations relating to Apollo’s business focus,

ethics, and compensation and recruitment practices.

Accordingly, because Plaintiffs have failed to adequately plead a strong inference of

scienter and have failed to plead loss causation with regard to three categories of 10(b)

misrepresentations, the Court finds that Count I of the CAC should be dismissed. 

V. COUNT II

In Count II, Plaintiffs allege that, during the Class Period, Defendants John Sperling,

Peter Sperling, Joseph D’Amico, Gregory Capelli, Charles Edelstein, Brian Swartz, Brian

Mueller, and Gregory Iverson violated § 20(a) of the Exchange Act because each was a

controlling person who had direct and supervisory involvement in day-to-day operations of

Apollo and, as such, each is jointly and severally liable for the violations of § 10(b) and § 10

(b)5 of the Exchange Act described in Count I. 

Pursuant to § 20(a) of the Exchange Act:

(a) Every person who, directly or indirectly, controls any person liable under

any provision of this title 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 21(d)),

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.

Because the Court has found that Plaintiffs have failed to adequately allege violations

of 10(b) and § 10(b)5, Plaintiffs have necessarily failed to establish a violation of § 20(a) of

the Exchange Act. Accordingly, Count II should be dismissed.

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 28 of 30
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

- 29 -

VI. COUNT III

Pursuant to Rule 20a of the Exchange Act, 

Any person who violates any provision of this chapter or the rules or

regulations thereunder by purchasing or selling a security while in possession

of material, nonpublic information shall be liable in an action in any court of

competent jurisdiction to any person who, contemporaneously with the

purchase or sale of securities that is the subject of such violation, has

purchased (where such violation is based on a sale of securities) or sold (where

such violation is based on a purchase of securities) securities of the same class.

When Plaintiffs have failed to allege an independent violation of the Exchange Act, they

cannot maintain a claim under § 20a. In re Verifone Securities Litigation, 11 F.3d 865, 872

(9th Cir. 1993). Accordingly, Count III should be dismissed.

VII. LEAVE TO AMEND

In the event of dismissal, Plaintiffs have requested leave to amend the CAC. (Doc.

76 at 7). In response, Defendants argue that “any amendment ‘would be an exercise in

futility.’” (Doc. 89 at 25). 

The Ninth Circuit has instructed district courts to grant leave to amend, sua sponte,

when dismissing a case for failure to state a claim, “unless the court determines that the

pleading could not possibly be cured by the allegations of other facts.” Lopez v. Smith, 203

F.3d 1122, 1127 (9th Cir. 2000) (quoting Doe v. United States, 58 F.3d 494, 497 (9th Cir.

1995)). The Court cannot say that the CAC could not possibly be cured by the allegations

of other facts. Therefore, Plaintiffs’ request for leave to amend will be granted. 

However, in amending the CAC, Plaintiffs should carefully evaluate the allegations

therein and be clear and concise in identifying the false statements and articulating the factual

allegations supporting an inference that the statement is false or misleading. In addition to

the guidance the Court has provided to Plaintiffs throughout this Order, Plaintiffs should

streamline their arguments, delete duplicate allegations, and carefully align each alleged false

statement with the facts supporting that statement and the corrective disclosures connected

to that statement. Further, to the extent that Plaintiffs rely on facts that occurred before and

after the start of the Class Period, Plaintiffs should be careful to assert why those facts are

relevant to Plaintiffs’ claims for the Class Period as Defendants may only be held liable for

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 29 of 30
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

- 30 -

statements made during the Class Period. Teamsters Local 617 Pension and Welfare Funds

v. Apollo Group, Inc., No. CIV 06-02674-PHX-RCB, 2011 WL 1253250, at *32 (D. Ariz.

March 31, 2011) (noting that it is appropriate to strike statements in the Complaint made

before or after the Class Period because they are irrelevant and cannot serve as a basis for

liability as a matter of law). 

Accordingly,

IT IS ORDERED granting Defendants’ Motion to Dismiss (Doc. 69);

IT IS FURTHER ORDERED granting in part and denying in part Defendants’

Request for Judicial Notice (Doc. 69-1; Doc. 92) consistent with the terms of this Order;

IT IS FURTHER ORDERED granting in part and denying in part Plaintiffs’

Request for Judicial Notice (Doc. 78) consistent with the terms of this Order;

IT IS FURTHER ORDERED denying Defendants’ Motion to Strike Portions of the

Motion to Dismiss (Doc. 71) as moot;

IT IS FURTHER ORDERED that Plaintiffs are granted leave to amend and shall

file an amended complaint within thirty days of the date of this Order. If Plaintiffs fail to file

an amended complaint within thirty days, the Clerk of Court must, without further notice,

enter a judgment of dismissal of this action.

DATED this 27th day of October, 2011.

Case 2:10-cv-01735-JAT Document 106 Filed 10/27/11 Page 30 of 30