Opinion ID: 203099
Heading Depth: 3
Heading Rank: 4

Heading: Financial Aid Projections

Text: We turn to the plaintiffs' second tier of arguments  that the financial condition of the college would be adversely affected even if enrollment increased unless financial aid did not increase, and that the statements on this point were misleading. The amended complaint alleges that projections in the Official Statement for financial aid levels in the 1997-1998 and 1998-1999 academic years were false and misleading when made. The Official Statement acknowledges that there has been a substantial increase in financial aid funded by the College between 1989 and 1997. However, the plaintiffs point to the Statement's projections: [D]uring the 1997-98 academic year, the College estimates that financial aid will be reduced to 29.9% of student income versus 30.3% the previous year. This expected reduction is a result of a change in methodology of aiding students with college-funded support versus additional loans funded by students and/or parents. The College's financial plan currently calls for a further reduction of financial aid spending for [the] 1998-1999 academic year to 28.8% of student income. The amended complaint alleges that these statements were untrue  that the actual percentage of financial aid awarded in 1997-1998 was over 35% of student income. The plaintiffs also allege that the 1998-1999 budget, as of the date of the Official Statement, contemplated that financial aid would be 31.3% of student income, not 28.8%.
Again, the allegations concerning the discrepancies between the actual percentage for the 1997-1998 academic year and the estimated ones in the Official Statement come from hindsight. [12] The amended complaint obtained the 35% figure from Bradford's audited financials for the year, which were not produced until after the close of the fiscal year in June 1998, after the date of the Official Statement. No facts are pled to support the general allegation that [a]t the time the Official Statement was distributed, the College possessed, and the Defendants had access to, the data that proved the 1997-98 `estimate' was substantially incorrect. These allegations do not state with particularity facts giving rise to a strong inference that the defendant acted with [scienter]. 15 U.S.C. § 78u-4(b)(2). The plaintiffs do point to information which they say was available at the time of the Official Statement about the 1997-1998 academic year. They allege the college knew that enrollment for the spring term in 1998 was lower than in the budget and knew what its financial aid commitments were. They also say the defendants knew the financial aid commitments were almost $250,000 more than budgeted. Those two pieces of data, however, do not, without more, tell one of the actual percentage of financial aid as against student income, either as of May 1, 1998, or as of the end of that academic year.
The most troublesome issue in the case is presented by the allegations regarding the Official Statement's description of the financial plan for the 1998-1999 school year's financial aid levels. These are not mere optimistic projections because the statement is that [t]he College's financial plan currently calls for a further reduction of financial aid spending for [the] 1998-1999 academic year to 28.8% of student income. (Emphasis added.) This sentence would misrepresent the facts if the defendants, as of May 1, 1998, had actually decided to budget a significantly greater amount of the college's funds for student aid. The amended complaint alleges that Bradford's 1998-1999 budget was originally submitted to the Trustees on April 29, 1998, and reviewed by the Finance Committee of the Board on May 8, 1998. The allegation is that the budget was revised at a meeting of college administrators later in May. The finalized budget pegged financial aid spending for 1998-1999 at 31.3% of student income. According to the amended complaint, that amount was $280,000 greater than the sum referred to in the Official Statement issued on May 1. There is no allegation as to the budgeted figures in the April 29 draft budget. The plaintiffs draw the inference that the final figure of 31.3% was in the initial draft budget of April 29. The claim is that the makers of the statement about the 1998-1999 budget had actual knowledge that the statement was false or misleading, thus removing it from the safe harbor provisions of the PSLRA. See 15 U.S.C. §§ 77z-2, 78u-5; Greebel, 194 F.3d at 201. We cannot say that the discrepancy between the 28.8% figure in the Statement and the 31.3% figure alleged in the amended complaint is immaterial as a matter of law, as defendants argue. Materiality is usually a matter for the trier of fact. Shaw, 82 F.3d at 1217 (citing Basic Inc. v. Levinson, 485 U.S. 224, 236, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988)). Although $280,000 represents only a small portion of the college's operating revenues, which exceeded $13 million in fiscal year 1997, it amounts to about 7% of the amount Bradford spent on student aid that year. Put another way, $280,000 would cover about a third of the debt service due on the bonds in 1999. The 31.3% figure could indicate a trend of rising financial aid contributions, not the anticipated downward trend portrayed in the Statement. The Statement named the amount of financial aid awards as a risk factor in the college's ability to repay the bonds. Even assuming materiality, the amended complaint provides no information on what proposed budget figures were known to the Bradford defendants before the Official Statement was completed. One might infer that at least President Short, as an ex officio member of the Board of Trustees, knew that financial aid was budgeted to be 31.3% at the time he helped draft the Statement. But few specifics are given to support the inference that the defendants knew the representation about the budget was wrong when made. We must assess whether the plaintiffs have pleaded sufficient facts to give rise to a strong inference that the defendants wrote that passage in the Official Statement with intent to deceive, manipulate, or defraud. Ernst & Ernst, 425 U.S. at 193 n. 12, 96 S.Ct. 1375. More than mere proof that the defendants made a particular false or misleading statement is required to show scienter. Aldridge, 284 F.3d at 83; see also Geffon v. Micrion Corp., 249 F.3d 29, 36 (1st Cir.2001). But the fact that a defendant knowingly made a false statement is classic evidence of scienter. Aldridge, 284 F.3d at 83. One inference, urged by plaintiffs, is that the defendants  or at least Short and the Trustees  were in possession of a budget that clearly contradicted the numbers they planned to quote in the Official Statement. The argument is that they feared that portraying an upward trend in financial aid expenditures would warn off investors, so they opted instead to spin the numbers to suggest that Bradford was heading for a turnaround. According to the amended complaint, the Bradford defendants determined to operate the College at all costs rather than preserve its assets for the benefit of creditors. The defendants, on this theory, saw the 1998 bond offering as a means of continuing operations, even though the defendants knew it could not save Bradford from insolvency. With that in mind, the plaintiffs allege, the defendants were willing to misrepresent the amount of the funds they had earmarked for student aid in order to shade the college's operational health and induce hapless investors to purchase bonds to finance an already doomed project. But there are other inferences, which in our view are stronger. After years of budget deficits, the Bradford defendants realized by early 1997 that the college would have to cease operations within five years unless they could implement a plan to stabilize its budget. Still, within a year, the college had experienced a spike in its matriculation rate and the number of incoming students, leading the defendants to believe that demand would support an increase in the college's enrollment capacity. The Bradford defendants thus settled on an expansion plan to be funded by the 1998 bonds, and they expected that expansion would save the school. The defendants considered a draft budget for the 1998-1999 school year just a matter of days before the bond offering. That budget may or may not, at that time, have matched the defendants' sanguine financial aid projections in the Official Statement. However, the defendants would know that the draft budget would yet be revised, as the amended complaint confirms. In addition, the defendants may have been operating under a different set of assumptions. For instance, the Statement indicates that phase one of the project, to be financed by the bonds that had not yet been issued as of the time of the draft budget, would be completed by fall 1998. The resulting addition of new, townhouse-style dormitories could increase enrollment capacity and Bradford's attractiveness to current and prospective students. Given the defendants' enrollment targets for the 1998-1999 school year and their assumption that the expansion project would be financed and underway by that time, it would be reasonable to infer that they believed the 28.8% figure to be achievable. There is no set pattern of facts that will establish scienter; it is a case-by-case inquiry. Greebel, 194 F.3d at 196. There are several reasons why the plaintiffs' inference of scienter is not at least equally as strong. First, the Official Statement as a whole candidly laid out the sorry financial history of the college and, for most of its estimates and projections as to a happier future, it provided accurate and non-misleading information, as we discussed. The Official Statement fully disclosed that despite the college's enrollment growth, the college had (a) incurred operating deficits every year since 1989 and (b) done so with a substantial increase in financial aid funded by the college. It was careful to say it could only estimate that for the 1997-1998 academic year, there would be a reduction in financial aid as a proportion of student income, and that it would be a modest four-tenths of a percentage point. It explained the basis for the estimate. As to the 1998-1999 academic year, the Statement was careful to say that the college's financial plan currently called for a reduction of one and a tenth percentage points in financial aid over its estimates for the prior year. The Official Statement fully disclosed that some 80% of full-time students received Bradford-funded aid. And the Statement said that based on four factors, the college believed it could reach its enrollment goals and reduc[e] slightly the average amount of financial aid awards . . . from College funds. Conversely, the Statement said, failure to meet these goals could adversely affect the College's ability to reach Financial Equilibrium. In addition, the Bradford College defendants have different characteristics than are typical in securities fraud cases, characteristics which make it more difficult to infer a high degree of recklessness or an intent to defraud. They are unlike the paradigmatic securities fraud defendant, who is likely to be a corporate insider standing to profit from the sale of artificially inflated securities. Here, the defendants are Officers and Trustees of a non-profit educational institution. [13] There are no allegations that the proceeds from the Bradford bonds would be spent on anything that would personally enrich any of the Bradford defendants. There is no allegation that they are particularly sophisticated in securities transactions. Of course the self-interested motivation of defendants in the form of saving their salaries or jobs is relevant  though not necessarily sufficient  to a showing of scienter. Greebel, 194 F.3d at 196. There is no reason to credit the inference that the Official Statement was made in order to save Short's job as President, as he resigned a few months later, by July 1998. Short's resignation had long been anticipated, as the Official Statement itself referred to his expected resignation on June 30, 1998. In this case there is no allegation of any additional motive other than the defendants' desire to keep the college operating and to deprive creditors of their due in an inevitable bankruptcy proceeding. These are shaky grounds for leaping to the conclusion that there is a strong inference that the defendants intentionally or recklessly disregarded the facts available to them when quoting financial aid figures in an offering statement accompanying a multi-million dollar bond offering. We hold that the plaintiffs' allegations regarding planned financial aid expenditures for the 1998-1999 school year fail to establish an inference of scienter that is cogent and at least as compelling as available competing inferences of non-fraudulent conduct. [14] The dismissal of the section 10(b) and Rule 10b-5 claims against all of the Bradford defendants was appropriate. [15]