2012.08.20 - Karam v. Corinthian, TAC Dismissed W Prejudice

E-Filed UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA CIVIL MINUTES - GENERAL Case No.
Title CV 10-6523-GHK (PJWx) Jimmy Elias Karam v. Corinthian Colleges, Inc., et al. Date August 20, 2012
Presiding: The Honorable Beatrice Herrera Deputy Clerk Attorneys Present for Plaintiffs: None
GEORGE H. KING, U. S. DISTRICT JUDGE N/A Court Reporter / Recorder N/A Tape No.
Attorneys Present for Defendants: None
Proceedings:
(In Chambers) Order re: Motion to Dismiss Third Amended Complaint; [98]
This matter is before us on Defendants Corinthian Colleges, Inc. (Corinthian), Jack P. Massimino (Massimino), Peter C. Waller (Waller), Matthew A. Ouimet (Ouimet), and Kenneth S. Ords (Ord and collectively Defendants) Motion to Dismiss Third Amended Complaint (Motion). This is a putative federal securities fraud class action brought pursuant 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Securities Exchange Commission (SEC) Rule 10b-5. Defendants move to dismiss the Third Amended Complaint on the ground that it fails to meet the heightened pleading requirements of the Private Securities Litigation Reform Act (PSLRA). We have considered the arguments in support of and in opposition to the Motion and deem this matter appropriate for resolution without oral argument. L.R. 7-15. As the Parties are familiar with the facts, we will repeat them only as necessary. Accordingly, we rule as follows. I. Legal Standard for Motion to Dismiss Under Rule 12(b)(6) & the PSLRA
In ruling on a 12(b)(6) motion to dismiss in a securities fraud action, we must accept all factual allegations in the complaint as true. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007). We must consider the complaint in its entirety, materials incorporated into the complaint by reference, and matters of which we may take judicial notice. Id. at 322-23. 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). When seeking to enforce federal securities laws, private plaintiffs must meet the higher, more exacting pleading standards of the PSLRA. See Tellabs, 551 U.S. at 313-14. The PSLRA requires that the complaint must raise a strong inference of scienteri.e., a strong inference that the defendant acted with an intent to deceive, manipulate, or defraud. Metzler, 540 F.3d at 1061 (citing 15 U.S.C. 78u-4(b)(2)). In reviewing a complaint under this standard, the court must consider all reasonable inferences to be drawn from the allegations, including inferences unfavorable to the plaintiffs. Gompper v. VISX, Inc., 298 F.3d 893, 897 (9th Cir. 2002). This examination requires us to scrutinize the complaint in its entirety, not to simply scrutinize individual allegations in isolation. See Tellabs, 551 U.S. at 322.
CV-90 (06/04) CIVIL MINUTES - GENERAL Page 1 of 19
E-Filed UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA CIVIL MINUTES - GENERAL Case No. Title CV 10-6523-GHK (PJWx) Jimmy Elias Karam v. Corinthian Colleges, Inc., et al. Date August 20, 2012
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 defendants alleged statements or omissions are deceitful. Metzler, 540 F.3d at 1061. II. Factual Background1
Lead Plaintiffs Wyoming Retirement System and Stichting Pensioenfonds Metaal en Techniek (collectively, Plaintiffs) seek to represent a class of investors who acquired Corinthians publicly traded securities between October 30, 2007, and August 19, 2010 (Class Period). The Defendants include Corinthian and four of its officers: Massimino, Corinthians current Executive Chairman of the Board and former CEO and Chairman of the Board; Waller, Corinthians President and COO from February 2006 through June 2009, and CEO from July 2009 to December 2010; Ouimet, Corinthians President and COO from July 2009 until October 2010; and Ord, Corinthians current Executive Vice President. On January 30, 2012, we dismissed Plaintiffs Second Amended Complaint (SAC) and granted leave to amend. Our decision rested on three grounds, each independently sufficient to require dismissal: (1) Plaintiffs failed to plead specific facts demonstrating that any statement made by Defendants was false or misleading, (2) Plaintiffs failed to plead facts giving rise to a strong inference of scienter, and (3) Plaintiffs failed to adequately plead loss causation. On February 29, 2012, Plaintiffs filed a Third Amended Complaint (TAC). Defendants now move to dismiss the TAC arguing that it fails to cure the deficiencies of the SAC identified in our January 30, 2012 Order. As discussed in more depth below, we agree. A. TACs Allegations of Fraud and Falsity
Corinthian is a for-profit education company that operates campuses in the United States and Canada under the Everest, Wyotech, and Heald brands. The majority of Corinthians revenue is generated from federal Title IV funding. (TAC 8). Plaintiffs allege that during the Class Period Corinthian orchestrated a variety of deceptive and predatory tactics in order to benefit from as much financial aid as possible. (TAC 11). These deceptive and predatory practices included: enrolling students who were incapable of passing classes, (TAC 54); changing failing grades to passing grades to keep students enrolled, (TAC 144); retaining students who should have been dropped for nonattendance, (TAC 65); providing students with deceptive job placement numbers, (TAC 85); falsely Our factual background is taken from the TAC, documents incorporated into the TAC by reference, and documents submitted by the Parties that are properly subject to judicial notice.
1
telling students that certain course credits would be transferable to other schools when those course credits in fact were not transferable, (TAC 100); and failing to disclose to students the complete cost of their education, (TAC 101). The TAC alleges that these practices were widespread, affecting tens of thousands of students. (TAC 144). The TAC relies on the statements of eight confidential witnesses (CWs) as the primary source for these allegations. The CWs are former Corinthian employees and include an admissions representative, a vice president responsible for audit work, a financial aid representative, an admissions recruiter, a dean, an instructor, a student finance representative, and a regional admissions director. Six of these CWs worked at a single Everest College campus. The gravamen of the TAC is that Defendants failed to disclose Corinthians predatory business model to the market and its shareholders, and instead provided a completely different picture of what drove its revenue. (TAC 37). The TAC alleges that Defendants made four specific types of misleading statements: statements pertaining to (1) Corinthians student enrollment and revenue growth, (2) its graduation and placement rates, (3) its legal compliance, and (4) its admissions practices. For each category, we will provide a few examples of the statements Plaintiffs challenge, followed by Plaintiffs explanation of why these types of statements were misleading. 1. Statements Related to Student Enrollment and Revenue Growth
Plaintiffs allege that Defendants made misleading statements that attributed Corinthians student enrollment and revenue growth to legitimate practices. For example, Plaintiffs challenge statements such as: [M]ore effective advertisements, brand consolidation, and a shift toward national advertising helped generate positive growth over the past several months. (TAC 126). [W]e believe that our ongoing efforts to improve the caliber of management, standardize and upgrade key business processes and improve service to students are helping to revitalize growth. (TAC 127). Our national advertising campaign continued to be the primary impetus for growth in the quarter. (TAC 128).
Plaintiffs allege that these statements were misleading because defendants concealed the fact that the increases [in growth] depended upon enrolling and retaining tens of thousands of unqualified, failing and non-attending students as active students, and churning through the tens of thousands of students who quickly dropped out. (TAC 144). 2. Statements Related to Corinthians Graduation and Placement Rates
Plaintiffs allege that statements such as [w]ere very proud of our graduation and placement rates, (TAC 155), [l]ast year we placed 84% of the students who graduated, (TAC 156), and
[w]e believe that ATB students2 can successfully complete many of our diploma programs and our colleges have demonstrated success in graduating and placing these students over the years, (TAC 159), were false and misleading because defendants concealed the fact that a majority of Corinthian students were quickly dropping out. (TAC 164). 3. Statements Related to Corinthians Legal Compliance
Plaintiffs allege that Defendants also made numerous false statements misrepresenting Corinthians compliance with regulations governing access to federal education funds. (TAC 171). These include statements such as: We routinely evaluate and strengthen existing compliance policies and procedures. (TAC 171). Compliance for the organization really has been job one for us. (TAC 173). [T]he tone at the top of our organization is all about compliance. (TAC 174).
Plaintiffs contend that these statements were false in light of misleading recruiting claims, manipulated admissions practices, widespread alteration of failing grades, and the retention of nonattending students. (TAC 181). 4. Statements Related to Corinthians Admissions Practices
Plaintiffs challenge statements regarding Corinthians admissions practices, such as: One of our objectives in the admissions process is to identify students who have the ability to succeed in our schools. (TAC 186). The majority of prospective students must pass a standardized admissions test. (TAC 186). We, certainly, from a Corinthian point of view, feel strongly about monitoring entrance testing. (TAC 188).
Plaintiffs allege that these assurances that Corinthian followed effective admissions practices in order to ensure that it only enrolled qualified students were grossly misleading because the truth was the exact opposite, as demonstrated by the abysmal default and dropout rates due to a practice of enrolling anyone possible in order to gain access to additional financial education funds. (TAC 191). In sum, the TAC alleges that through a collection of statements over the Class Period Defendants misled investors by creating the impression that Corinthian was a well run company, when in fact its success depended on a systemically predatory business model. (TAC 209). ATB students refers to students in Corinthians Ability to Benefit program, a program for students without a high school diploma.
2
B.
TACs Allegations of Scienter
The TAC alleges that the Defendants were aware of the alleged widespread problems by virtue of their positions at Corinthian. (TAC 200). It alleges that they had access to non-public information about [Corinthians] business, finances, enrollment, markets and present and future business prospects via access to internal corporate documents, conversations and connections with other corporate officers and employees, attendance at management and board of directors meetings and committees thereof and via reports and other information provided to them in connection therewith. (TAC 203). Additionally, the TAC alleges that Massimino and Waller were aware of the alleged problems because they had been advised by [Confidential Witness 2 (CW2)] of the extensive and widespread problems at Corinthians Everest campuses concerning unqualified, non-attending and failing students, including the falsification of passing grades. (TAC 201). Because Defendants were allegedly aware of the pervasive problems at Corinthian, the TAC alleges that the Defendants knew that their false and misleading statements and public documents were materially false and misleading. (TAC 200). The TAC alleges that the Defendants were motivated to commit fraud as a result of the Companys executive compensation structure . . . [because their] compensation was variable and tied to the Companys short-term financial performance. (TAC 207). C. TACs Allegations of Loss Causation
The TAC alleges that the following disclosures and events purportedly revealed the pervasive fraud at Corinthian to the market, thus causing Plaintiffs losses: A February 2, 2010 conference call with market analysts, wherein the Company expressed concern over the potential effects of proposed government regulations on financial aid resources, specifically aimed to protect students from taking on debt that they would not be able to repay. (TAC 214). That day, the price per share of Corinthian stock fell nearly 3% . . . . (TAC 214). News released on May 27, 2010 that the [Department of Education (DOE)] was expected to issue new regulations to protect students from enrolling in costly programs whose graduates end up with dead-end jobs, unable to repay their loans. That day, Corinthians stock price fell 3%. (TAC 215). A June 16, 2010 announcement by the DOE that it was proposing new tougher regulations on the industry designed to protect college students and taxpayers from abusive or fraudulent practices. (TAC 217). On this news, Corinthians stock price fell 5%. On June 24, 2010, the Senate held a hearing entitled, Emerging Risk? An Overview of the Federal Investment in For-Profit Education. In response, Corinthians stock price fell 5%. (TAC 218).
CIVIL MINUTES - GENERAL Page 5 of 19
CV-90 (06/04)
On August 3, 2010, adverse news began to leak into the market concerning the findings from an undercover operation conducted by the U.S. Governmental Accountability Office (GAO) on recruiting techniques used in the for-profit higher education industry. (TAC 220). That day, Corinthian stock closed down 6%. On August 4, 2010, the GAO issued its report, finding that many of the companies in the industry employed fraudulent and deceptive practices in their student recruiting. (TAC 222). On August 16, 2010, Corinthians stock price dropped 22% after the DOE released data on student loan repayment rates, including data showing some Corinthian schools with repayment rates less than 20%. (TAC 225). On August 20, 2010, Corinthians stock fell 17% after it announced that it would phase out the enrollment of students who had not graduated from high school, commonly referred to as ATB students. (TAC 226).
The TAC states that [t]he timing and magnitude of the decline in Corinthians publicly traded securities negates any inference that the loss suffered by plaintiffs and other Class members were [sic] caused by changed market conditions, macroeconomic factors or Company-specific facts unrelated to defendants fraudulent conduct. (TAC 228). III. Discussion A. Falsity
The PSLRA has exacting pleading requirements for falsity. Metzler, 540 F.3d at 1070. The Complaint must 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). A litany of alleged false statements, unaccompanied by the pleading of specific facts indicating why those statements were false, does not meet this standard. Metzler, 540 F.3d at 1070; accord Falkowski v. Imation Corp., 309 F.3d 1123, 1133 (9th Cir. 2002) (Although the allegations here are voluminous, they do not rise to the level of specificity required under the PSLRA. The allegations consist of vague claims about what statements were false or misleading, how they were false, and why we can infer intent to mislead. We have dismissed much more specific and compelling allegations.), abrogated on other grounds by Proctor v. Vishay Intertech. Inc., 584 F.3d 1208 (9th Cir. 2009). The relevant question is whether the facts alleged are sufficient to support a reasonable belief as to the misleading nature of the statement or omission. Novak v. Kasaks, 216 F.3d 300, 314 n.1 (2d Cir. 2000). A statement is misleading if it creates an impression of a state of affairs that differs in a material way from the one that actually exists. Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 985 (9th Cir. 2008) (quotation marks omitted). An omission is misleading if the missing information alters the mix of what investors consider material. Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309, 1312 (2011).
[T]he disclosure required by the securities laws is measured not by literal truth, but by the ability of the material to accurately inform rather than mislead. In re Convergent Techs. Sec. Litig., 948 F.2d 507, 512 (9th Cir. 1991) (quotation marks omitted). As noted above, the TAC groups the alleged misleading statements made by Defendants into four categories: statements related to (1) student enrollment and revenue growth, (2) graduation and placement rates, (3) legal compliance, and (4) admissions practices. 1. Statements Relating to Student Enrollment and Revenue Growth
Plaintiffs do not contend that any specific statement Defendants made regarding student enrollment and revenue growth was literally false. They do not contend, for example, that more effective advertising and brand consolidation did not contribute to the companys growth during the Class Period. Instead, they allege that Defendants statements attributing growth to legitimate practices (such advertising) were misleading because Defendants concealed that growth also heavily relied on enrolling and retaining tens of thousands of unqualified students through illegal recruiting practices and false grading policies. We agree that if Corinthians growth was heavily dependent on serious or pervasive misconduct, investors would find that to be material. We also agree that the failure to disclose that growth was dependent on such misconduct would render one or more of Defendants Class Period statements misleading. In re Syncor Intl Corp. Sec. Litig., 239 F. Appx 318, 320 (9th Cir. 2007) (By attributing Syncors success solely to legitimate practices, defendants implicitly (and falsely) warranted that there were no illegal practices contributing to that success.). However, the issue here is whether Plaintiffs have alleged, with the particularity the PSLRA requires, that the alleged misconduct was in fact of a sufficient magnitude to have a material impact on Corinthians student enrollment and revenue growth. As with the SAC, the TAC does not plead particularized facts showing that the supposed improper practices and enrollment and retention of unqualified students contributed materially to Corinthians growth. Although Plaintiffs assert that tens of thousands of unqualified, failing, and non-attending students were improperly allowed to stay in school, critically, they fail to support this generic assertion with the pleading of specific facts mandated by the PSLRA. Metzler, 540 F.3d at 1070. In their Opposition, Plaintiffs argue that the following content in the TAC demonstrates that the improper practices contributed materially to Corinthians growth: (1) the accounts of the CWs, (2) the details of Corinthians August 2010 decision to terminate its ATB program for non-highschool graduates, (3) the DOEs data regarding Corinthians low student loan repayment rate, and (4) findings by the Senate HELP Committee that Corinthian had a high student dropout rate. The accounts of the eight CWs are the primary source for Plaintiffs allegations. While the CWs statements document the occurrence of some of the alleged improper practices at Corinthian, the problems with these statements are (1) that they are vague, and thus lack reliability, and (2) they fail to
support Plaintiffs assertion that tens of thousands, or some other material number, of students were affected by these practices. When a securities plaintiff relies on the statements of confidential witnesses, he must describe those statements with sufficient particularity to establish their reliability and personal knowledge. Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 995 (9th Cir. 2009). When confidential witnesses base their knowledge on vague hearsay, it is not enough to satisfy the reliability standard. Id.; see also Boca Raton Firefighters & Police Pension Fund v. DeVry Inc., No. 10 C 7031, 2012 WL 1030474, at *4, 7 (N.D. Ill. Mar. 27, 2012) (addressing similar allegations against a different group of for-profit schools and stating that allegations from confidential witnesses should be steeply discounted. (quotation marks and alterations omitted)). Here, the majority of the CWs statements are vague and pertain to each CWs generalized, subjective impressions of practices at individual campuses.3 Thus they fail to satisfy the PSLRAs specificity requirement. These statements also fail to support Plaintiffs allegations of widespread misconduct because none of them purports to quantify the total number of students affected by the alleged improper practices. See DeVry, 2012 WL 1030474, at*4 (Even concrete allegations of wrongdoing may be deficient if they do not allege a problem of sufficient magnitude to undermine the defendants public statements about DeVrys policies and practices.); id. (finding that the vague statements of 33 confidential witnesses failed to support allegations of widespread fraud). Rather, they either vaguely assert that the alleged improper practices were an issue at some schools, or they merely describe a single instance of misconduct. Even if one cobbles together all of the CW statements, they still do not support a reasonable inference that tens of thousands of unqualified, failing, and nonattending students were enrolled and retained at Corinthians campuses. Indeed, as noted in our prior order, none of the CWs is alleged to have worked at Corinthian throughout the entire Class Period, and what they supposedly said appears to be limited to a few Everest Campuses. (Dkt. No. 96, at 7). In sum, the CWs statements fail to establish that the alleged misconduct materially affected Corinthians (See TAC 54 (CW1, an admissions representative at one Everest campus in Texas, states that many of the students were incapable of passing classes); TAC 64 (one auditor advised CW2, a vice president in charge of internal audits, that it appeared that a teacher had falsified attendance entries); TAC 65 (CW2 states that retaining non-attending students was an ongoing issue at eight to ten schools); TAC 81 (CW3, a financial aid representative at a singe Everest campus, states that [o]cassionally financial aid representatives would put down anything they wanted in financial applications); TAC 86 (CW4, an admissions recruiter at a single Everest campus, states that it was CW4s impression that many of the students who got through courses were unable to construct sentences, spell, or understand basic math); TAC 89 (CW5, a dean and instructor at a California Everest campus, states that if a student was failing, it was typical for an instructor to give the student extra course work and then disregard the other coursework or lack of attendance); TAC 90 (CW6, a student finance representative, recalls that many times students appeared to have been coached by admissions on what to say concerning their financial status); TAC 94 (CW7, a regional admissions director, states that Corinthian enrolled students that often had criminal histories); TAC 95 (CW8, an instructor for Everest College, states that one reason CW8 was terminated was that too many of CW8s students dropped out)).
3
growth with the particularity the PSLRA requires. Therefore, they do not support Plaintiffs assertion that Defendants statements relating to student enrollment and revenue growth were misleading. Corinthians August 2010 decision to terminate its ATB program for non-highschool graduates also does not help Plaintiffs establish falsity. As Defendants note, [t]here is nothing inherently improper about serving ATB students. (Mot. 11). That Corinthian made a business decision to stop serving ATB students does not show that supposedly improper grading and recruitment practices materially contributed to the companys growth during the Class Period. Additionally, the fact that the DOE published data showing that Corinthians student loan repayment rate was much lower than the rates of private, non-profit institutions does not show that the alleged improper practices contributed materially to Corinthians growth. While these figures may be consistent with the idea that Corinthian enrolled unqualified students,4 they are also consistent with the idea that Corinthians students were hit hard by the recent economic recession. Where a complaint pleads facts that are merely consistent with a defendants liability, it stops short of the line between possibility and plausibility of entitlement to relief. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quotation marks omitted). Here, in light of the recent economic recession, it is unwarranted to draw the inference that simply because Corinthian had a low student loan repayment rate, it also had a widespread practice of enrolling unqualified students. See Metzler, 540 F.3d at 1064 ([T]he court . . . is not required to indulge unwarranted inferences in order to save a complaint from dismissal.). In sum, Corinthians loan payment figures fail to establish with the specificity the PSLRA requires that Corinthian had a materially widespread practice of enrolling unqualified students such that its growth statements were misleading. Finally, the findings by the Senate HELP Committee that Corinthian had a high student dropout rate also fail to support Plaintiffs claims of materially widespread improper practices. That a large number of students dropped out of Corinthians programs does not show that Corinthian enrolled students who were unqualified because, as Defendants point out, students may withdraw for any number of reasons unrelated to their ability to pass classes, such as decisions to pursue other career or educational opportunities, family and personal circumstances, or financial factors. Students may also withdraw due to their general lack of satisfaction with the quality of education being offered by Corinthian however, Plaintiffs cannot prevail on a securities fraud action merely by claiming that Defendants offered a poor product. Moreover, Plaintiffs allegations that Corinthian had a widespread practice of retaining failing and nonattending students suggest that the reasons the students dropped out was not because they were failing. Thus, these statistics do not help Plaintiffs establish falsity. The allegations here stand in stark contrast to those in Syncor, in which the Ninth Circuit found that a group of investor plaintiffs sufficiently alleged that the defendants statements attributing overseas growth solely to legitimate business practices were misleading because the plaintiffs alleged specific facts suggesting that illegal payments were . . . a significant reason for [the companys] Even if these figures are consistent with the idea that Corinthian enrolled unqualified students, they in no way show that Corinthian was engaged in a widespread practice of falsifying grades or deceptively recruiting students such that its public statements were rendered misleading.
4
overseas growth. 239 F. Appx at 320. First, unlike Syncor, the statements Plaintiffs challenge do not attribute Corinthians growth solely to legitimate practices. The statements are much more amorphous, stating only, for example, that more effective advertisements, brand consolidation, and a shift toward national advertising helped generate positive growth over the past several months. (TAC 126 (emphasis added)). Thus, unlike the defendants in Syncor, Defendants did not implicitly (and falsely) warrant[] that there were no illegal practices contributing to [the companys] success. 239 F. Appx at 320. Therefore, in order to demonstrate that Defendants statements were false or misleading, Plaintiffs would have to allege specific facts showing that Corinthians growth was so dependent on the alleged misconduct that the failure to mention that conduct when attributing growth to a legitimate factor would create an impression of a state of affairs that differs in a material way from the one that actually exists. Berson, 527 F.3d at 985. As discussed above, Plaintiffs have not pled such specific facts. Second, in Syncor, the plaintiffs were able to plead specific facts suggesting that illegal payments were . . . a significant reason for [the companys] overseas growth through the allegations of a confidential witness that two officer defendants . . . privately credited the illegal payments for spurring overseas growth. 239 F. Appx at 320. From this, the Ninth Circuit reasoned that [w]hen corporate officers credit an illegal payment scheme for raising revenues, a reasonable inference is that the scheme did raise revenues. Id. Here, there are no similar allegations of statements by Defendants crediting the alleged misconduct for driving student enrollment and revenue growth. Thus we cannot reasonably infer that the alleged misconduct contributed materially to growth. The allegations here are more in line with Metzler, another putative securities class action against Corinthian asserting similar allegations. In Metzler, the plaintiff claimed that Corinthians public face of financial success premised on increasing student enrollment and successful placement rates was belied by practices of enrolling students unqualified for admission and falsifying student grades. 540 F.3d at 1055-56. Like Plaintiffs here, the Metzler plaintiffs allegations of fraudulent practice [we]re supported principally by statements taken from former confidential witnesses, who [we]re former Corinthian employees that served at numerous campuses in differing capacities. Id. at 1056. These CWs, with varying degrees of specificity, attest[ed] to instances of misconduct on their campuses that the plaintiff cited to support his more generalized allegations of fraud. Id. However, the Ninth Circuit found these allegations of fraud generally to be ultimately unsubstantiated and insufficient. Id. at 1070. Insofar as the TAC is based on alleged false statements related to student enrollment and revenue growth, it warrants dismissal for the same reason. Id.; see also Gaer v. Education Management Corp., No. 10-1061, 2011 WL 7277447, at *11 (W.D. Penn. Aug. 30, 2011) (dismissing complaint alleging that companys growth was not driven by [its] commitment to education . . . , but, rather, the fact that [it] employed pervasive . . . deceptive recruiting and enrollment practices).
2.
Statements Concerning Graduation and Placement Rates
As noted above, Plaintiffs claim that statements such as [w]ere very proud of our graduation and placement rates, (TAC 155), [l]ast year we placed 84% of the students who graduated, (TAC 156), and [w]e believe that ATB students can successfully complete many of our diploma programs
and our colleges have demonstrated success in graduating and placing these students over the years, (TAC 159), were false and misleading because defendants concealed the fact that a majority of Corinthian students were quickly dropping out. (TAC 164). Many of the statements Plaintiffs challenge with respect to graduation and placement rates simply state the job placement rates for Corinthians graduates at particular points in time. While Plaintiffs assert that these statements were false and misleading, they have made absolutely no showing that these statements were literally false. That is, Plaintiffs do not show that the graduate placement rates cited by Defendants were not in fact what Defendants stated. Instead, the thrust of Plaintiffs claim appears to be that these statements were misleading because they disguised the fact that a large number of Corinthians students were quickly dropping out. As noted above, a statement is misleading if it creates an impression of a state of affairs that differs in a material way from the one that actually exists. Berson, 527 F.3d at 985. Here, Defendants citation of positive job placement numbers in no way suggests that Defendants dropout rate is similarly impressive. Accordingly, the fact that the dropout rate was poor does not render Defendants statements about the career placement of graduates misleading. See In re ITT Educ. Servs., Inc. Sec. Litig., No. 10 Civ. 8323 (VM), 2012 WL 1632762, at *6 (S.D.N.Y. May 4, 2012) (statement not misleading because it did not suggest that the undisclosed improper activity alleged by Plaintiff was not occurring). Some of the other statements Plaintiffs challenge, such as the fact that the company was proud of its graduation and placement rates, are merely non-actionable vague statements of optimism on which investors do not rely. In re Cutera Sec. Litig., 610 F.3d 1103, 1111 (9th Cir. 2010); see also In re Copper Mountain Sec. Litig., 311 F. Supp. 2d 857, 868 (N.D. Cal. 2004) ([V]ague statements are not actionable because they are considered immaterial and discounted by the market and because reasonable investors do not consider soft statements or loose predictions important in making investment decisions. (quotation marks omitted)); In re Ford Motor Co. Sec. Litig., 381 F.3d 563, 570 (6th Cir. 2004) (All public companies praise their products and their objectives.). Finally, with respect to the statements about ATB students, as noted in our prior Order, Plaintiffs at no point whatsoever identify facts showing that Corinthian did not have success in graduating and placing [ATB students] at the time th[o]se statements w[ere] made. (Dkt. No. 96, at 8). In light of the foregoing, Plaintiffs have failed to establish that Defendants statements related to graduation and placement rates were misleading. 3. Assurances Regarding Legal Compliance
Plaintiffs contend that a number of statements in which Defendants emphasized that Corinthian was committed to regulatory compliance, (see, e.g., TAC 173 (Compliance for the organization has really been job one for us.)), were false in light of misleading recruiting claims, manipulated admissions practices, widespread alteration of failing grades, and the retention of non-attending students. (TAC 181). Many of the challenged statements, however, are too generic and indefinite to serve as the basis of a securities fraud claim. See, e.g., In re Cutera, 610 F.3dd at 1113; ECA & Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Case Co., 553 F.3d 187, 206 (2d Cir. 2009) (finding statements regarding business practices such as that defendant set the standard for integrity to
be precisely the type of puffery that this and other circuits have consistently held to be inactionable); Footbridge Ltd. v. Countrywide Home Loans, Inc., No. 09 Civ. 4050, 2010 WL 3790810, at * 24 (S.D.N.Y. Sept. 28, 2010) (Statements about corporate culture and integrity are typically considered to be inactionable puffery.). Moreover, even if these statements were actionable, as discussed above, Plaintiffs have failed to allege particularized facts to show how many students and faculty members were involved in these alleged practices. Thus, we are unable to determine whether the alleged problems were of a sufficient magnitude to render misleading Defendants statements regarding their commitment to regulatory compliance. (See Dkt. No. 96, at 9 (Plaintiffs must identify particularly and specifically more widespread problems of noncompliance in order to establish that a statement such as the tone at the top of our organization is all about compliance was misleading.)); see also ITT, 2012 WL 1632762, at *8 (Plaintiffs allegations of specific instances of unethical or fraudulent practices do not render Defendants broad statements regarding compliance misleading.). Finally, as noted in our prior Order, Plaintiffs SAC, which quoted the public communications upon which Plaintiffs rely in more length than the TAC, demonstrated that Corinthians statements regarding compliance were frequently accompanied by more cautionary statements, including: compliance is always a risk and that there would be problems with compliance periodically. (Dkt. No. 96., at 8 (citing SAC 123)). Thus, it would not be fair to characterize Corinthians public statements as full sail guarantees of perfect compliance. (Id.). In sum, Plaintiffs have failed to cure the deficiencies of the SAC and demonstrate, with the requisite level of specificity, that Defendants statements regarding legal compliance were misleading. 4. Misleading Statements Regarding Admission Practices
As noted above, Plaintiffs contend that Defendants statements that the majority of Corinthians prospective students are required to pass a standardized admissions test, (TAC 186), and that one of the objectives of the company is to identify students who have the ability to succeed in its schools, (TAC 186), were misleading in light of the companys abysmal default and dropout rates due to a practice of enrolling anyone possible in order to gain access to additional financial education funds, (TAC 191). Again, Plaintiffs do not point to any facts demonstrating that Defendants statements were literally false. That is, Plaintiffs make no showing that Corinthian did not have entrance tests or admissions criteria. Instead, Plaintiffs allege that Defendants statements were misleading because they masked the fact that the company had an alleged practice of recruiting and retaining unqualified students. A majority of the statements Plaintiffs challenge, such as those regarding Corinthians objectives, are not actionable because they are merely vague statements of optimism, or loose predictions, on which investors do not rely. In re Cutera, 610 F.3d at 1111. In any event, as noted above, the TAC does not contain particularized facts demonstrating that Corinthian actually had a materially widespread practice of enrolling anyone possible. Thus, Plaintiffs have failed to demonstrate with the requisite level of specificity that these statements were actually misleading. As
previously discussed, the anecdotal accounts of the CWs are insufficient to demonstrate that Corinthian had a materially widespread practice of enrolling unqualified students. Insofar as Plaintiffs again attempt to rely on the companys poor dropout rate, as discussed above, that rate does not demonstrate that Corinthian recruited unqualified students because students can withdraw for any number of reasons unrelated to their ability to pass classes. Moreover, insofar as Plaintiffs allege that Corinthian had a widespread practice of retaining failing and non-attending students, it would appear that its students were withdrawing for reasons other than poor academic performance. Finally, the mere fact that Corinthians students were defaulting on their federal loans at high rates does not demonstrate that they were unqualified for their programs, especially in light of the recent economic recession. Accordingly, Plaintiffs have failed to plead specific facts demonstrating why Defendants statements regarding Corinthians admissions practices were misleading. B. Scienter
In order to state a claim for securities fraud, a plaintiff must allege that the defendant acted with scienter that the defendant had an intention to deceive, manipulate, or defraud. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976). To establish that a corporate defendant, such as Corinthian, acted with scienter, a plaintiff must show that one or more of its directors or officers acted with scienter. See Nordstrom, Inc. v. Chubb & Son, Inc., 54 F.3d 1424, 1435 (9th Cir. 1995); In re Apple Computer, Inc. Sec. Litig., 243 F. Supp. 2d 1012, 1023 (N.D. Cal. 2002). 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 (quotation marks omitted). The complaint 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 314). 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 those unfavorable to the plaintiffs. Metzler, 540 F.3d at 1061 (quoting Gompper, 298 F.3d at 897). Where pleadings are not sufficiently particularized or where, taken as a whole, they do not raise a strong inference that misleading statements were knowingly or [with] deliberate recklessness made to investors, a private securities fraud complaint is properly dismissed under Rule 12(b)(6). Ronconi v. Larkin, 253 F.3d 423, 429 (9th Cir. 2001). Here, since Plaintiffs failed to adequately plead even a single actionable misleading statement, it follows that they cannot plead that any statement was made with scienter that is, that Defendants made any statement with the intention to deceive, manipulate, or defraud. In any event, even if Defendants Class Period statements were false or misleading, Plaintiffs allegations are still insufficient to establish
scienter. The TAC rehashes many of the allegations of scienter from the SAC that we previously found to be insufficient, such as Plaintiffs allegations that Defendants knew of the alleged fraud by virtue of their positions at Corinthian and that Defendants had an incentive to commit fraud because of Corinthians executive compensation structure. As we stated in our Order dismissing the SAC, the fact that Defendants held senior-level positions at Corinthian does not support a strong inference that they acted with scienter, absent some additional allegation of specific information conveyed to Defendants and related to the specific improper practices detailed in the SAC. (Dkt. No. 96, at 10); see also Metzler, 540 F.3d at 1058 (As this court has noted on more than one occasion, corporate managements general awareness of the day-to-day workings of the companys business does not establish scienter at least absent some additional allegation of specific information conveyed to management and related to the fraud.). Additionally, we stated that Plaintiffs allegations that Defendants acted with scienter because they had potential bonuses tied to Corinthians short-term financial performance failed to establish a strong inference of scienter because the Ninth Circuit has held that simple allegations of pecuniary motive are not enough to establish scienter. (Dkt. No. 96, at 13 (citing Zucco Partners, 553 F.3d at 1005 (holding that an allegation that executive-level bonuses were based in part on [the defendant companys] financial performance . . . [is] inadequate to meet the heightened pleading requirements of Silicon Graphics and Tellabs (quotation marks omitted))). Insofar as Plaintiffs simply rehash these prior allegations, they do not support a strong inference of scienter. Plaintiffs also attempt to establish scienter by alleging that Massimino and Waller had been advised by CW2 of the extensive and widespread problems at Corinthians Everest campuses concerning unqualified, non-attending and failing students, including the falsification of passing grades. (TAC 201). First, as noted in our prior Order, Plaintiffs cannot rely on any statements by [CW2] to establish that Defendants Ord and Ouimet acted with scienter because these Defendants are not alleged to have communicated with CW2. (Dkt. No. 96, at 11). Second, as to Massimino and Waller, CW2s communications with them do not establish a strong inference of scienter because many of CW2s statements are insufficiently reliable to support Plaintiffs claim of pervasive misconduct. Indeed, much of the supposedly improper conduct reported by CW2 does not appear to be based on CW2s personal knowledge,5 but on opinion and vague hearsay, which is not enough to satisfy [the Ninth Circuits] reliability standard. Zucco Partners, 552 F.3d at 997; see also Kinnett v. Strayer Educ., Inc., Nos. 8:10-cv-2317-T-23MAP, 8:10-cv-2728-T-23MAP, 2012 WL 933285, at *7 (Jan. 3, 2012) (Most [CW] statements . . . offer opinions or second hand accounts. . . . [S]tatements such as these do nothing to bolster Plaintiffs contentions or establish a fraudulent statement . . . .). Moreover, (See, e.g., TAC 66 (While visiting campuses, CW2 spoke with campus teachers. Many indicated that they knew of teachers who had been fired from an Everest campus for failing too many students or having too many dropouts.); TAC 70 (CW2 learned that teachers were encouraged to give passing grades to failing students after working out agreements with students to improve on certain areas in the next grading period.); TAC 74 (it was CW2s opinion that the campuses were essentially leaky buckets).
5
even if CW2s statements were reliable, they fail to quantify the number of students and faculty members involved in the misconduct. For example, CW2 stated that retaining students who should have been dropped for nonattendance was an ongoing issue at approximately eight to ten campuses. However, it is entirely unclear how many students had to be involved for CW2 to consider nonattendance to be an issue. Thus, it is unclear whether CW2 was aware of misconduct that was of a sufficient magnitude to materially affect Corinthians business and whether he could have communicated that information to Massimino and Waller. Finally, as noted in our prior Order, because CW2 only worked at Corinthian for 1/6 of the Class Period, even if CW2 was aware of pervasive misconduct and had communicated that information to Massimino and Waller, those communications could only establish that Massimino and Waller acted with scienter when they made statements during or near the time of CW2s employment. Plaintiffs have made absolutely no effort to link the timing of any of CW2s communications with Massimino and Waller to any public statement either Defendant made, and the majority of the statements these Defendants made appear to have been made outside the time of CW2s employment. See In re Splash Tech. Holdings, Inc. Sec. Litig., 160 F. Supp. 2d 1059, 1075 (N.D. Cal. 2001) ([C]ourts have repeatedly lamented plaintiffs counsels tendency to place the burden . . . on the reader to sort out the statements and match them with the corresponding adverse facts to solve the puzzle of interpreting Plaintiffs claims. (internal quotation marks omitted)); In re PetSmart, Inc. Sec. Litig., 61 F. Supp. 2d 982, 991 (D. Ariz. 1999) (The court should not have to play connect-the-dots . . . .). Moreover, because Plaintiffs have failed to allege the specific dates on which any of CW2s communications with Massimino and Waller took place,6 it is unclear even which statements made during the time of CW2s employment could have been made with scienter based on CW2s communications with Defendants. In sum, for all of the foregoing reasons, CW2s communications with Massimino and Waller are insufficient to establish a strong inference that these Defendants acted with scienter. There are no other allegations linking Defendants to facts contradicting their Class Period statements. In light of the foregoing, when the TAC is read as a whole, it fails to establish a strong inference of scienter. The TAC must be dismissed on this ground. C. Loss Causation
A plaintiff does not need to prove loss causation in order to avoid dismissal, but the plaintiff must properly allege it. Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 346 (2005) ([N]either the [Federal] Rules [of Civil Procedure] nor the securities statutes impose any special further requirement [beyond Rule 8(a)(2)] in respect to the pleading of proximate causation or economic loss.). Loss causation is the causal connection between the [defendants] material misrepresentation and the [plaintiffs] loss. Id. at 342. The complaint must allege that the practices that the plaintiff contends For example, the TAC cites a specific conversation that CW2 recall[ed], but fails to allege the date that conversation took place. (TAC 73).
6
are fraudulent were revealed to the market and caused the resulting losses. Metzler, 540 F.3d at 1063. That is, the complaint must allege that the defendants share price fell significantly after the truth became known. Id. at 1062 (quoting Dura Pharms., 544 U.S. at 347). The loss must be caused by the revelation of the alleged earlier misrepresentation, not changed economic circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions, or other events. Dura Pharms., Inc., 544 U.S. at 343. Preliminarily, we note that Plaintiffs take issue with the Metzlers loss causation standard. That is, they argue that disclosure of improper practices is not necessary and, instead, all that is required are allegations establishing that investor loss was the foreseeable consequence of and was caused by the defendants misconduct. (Oppn 20). This argument is not well taken. First, the Ninth Circuit has recognized in subsequent cases that Metzlers loss causation standard is controlling. See, e.g., In re Oracle Corp. Sec. Litig., 627 F.3d 376, 392 (9th Cir. 2010) (Loss causation is established if the market learns of a defendants fraudulent act or practice, the market reacts to the fraudulent act or practice, and a plaintiff suffers a loss as a result of the markets reaction. (citing Metzler)). To the extent Plaintiffs disagree with Metzler, they must take their quarrel to an en banc panel of the Ninth Circuit or the Supreme Court. See Hart v. Massanari, 266 F.3d 1155, 1171 (9th Cir. 2001) (Once a panel resolves an issue in a precedential opinion, the matter is deemed resolved, unless overruled by the court itself sitting en banc, or by the Supreme Court.). More problematically, however, Plaintiffs argument is contrary to Supreme Court precedent, which as noted above holds that loss causation is the causal connection between the material misrepresentation and the loss, and thus a complaint must allege that the defendants share price fell significantly after the truth became known. Dura Pharms., 544 U.S. at 342 (emphasis added). Metzlers statement that a complaint must allege that the defendants improper practices were revealed to the market is merely a variation of this rule because in Metzler, the truth that was allegedly hidden from the market was that Corinthian was engaged in a practice of manipulating student enrollment figures company-wide. 540 F.3d at 1063. Thus, when the court stated that to prove loss causation the plaintiff had to demonstrate that these improper practices were revealed to the market and caused Corinthians share price to fall, it was merely holding the plaintiff to the rule that a plaintiff must allege that the share price fell after the truth became known. In light of the foregoing, we reject Plaintiffs objection to Metzlers loss causation standard.7 In their Opposition, Plaintiffs seem to argue that their position finds support in In re Daou Systems, 411 F.3d 1006 (9th Cir. 2006), and In re Gilead Sciences Sec. Litig., 536 F.3d 1049 (9th Cir. 2008), because in those cases the plaintiffs properly pled loss causation even though there was never a disclosure containing an admission or finding of fraud. For example, Plaintiffs argue that in Daou, the Ninth Circuit used the disclosure of Daous true financial condition to delineate which losses were recoverable. (Oppn 18). This argument is not well taken because in Daou even though the disclosure of the companys true financial condition did not contain an admission or finding of fraud the disclosure still essentially told the market that the company had previously misled investors by prematurely reporting revenues. The court noted that by failing to disclose the actual figures to
7
Even if held to Metzlers standard, Plaintiffs still contend that they properly plead loss causation because [t]he TAC identifies specific stock price declines that were caused by . . . public disclosures revealing Corinthians concealed problems. (Oppn 22). These disclosures, many of which we already rejected as insufficient in our prior Order dismissing the SAC, include (1) a conference call between Corinthian and market analysts wherein the companys directors expressed concern over proposed government regulations, (2) news that the DOE was expected to release new tougher regulations governing for-profit schools Title IV eligibility, (3) an announcement by the DOE that it was proposing these new regulations, (4) a Senate hearing examining federal investment in the for-profit industry, (5) a GAO Report on recruiting techniques used in the for-profit industry, (6) data regarding Corinthians student loan repayment rates, and (7) Corinthians announcement that it would phase out its ATB program. However, like the SAC, the TAC does not explain, as it must, which specific events revealed which specific misrepresentations. (See Dkt. No. 96, at 14); see also In re Apollo Grp., Inc. Sec. Litig., No. CV-10-1735-PHX-JAT, 2011 WL 5101787, at *16 (D. Ariz. Oct. 27, 2011) (dismissing complaint where [p]laintiffs have made little to no attempt to link specific fraudulent practices to specific corrective disclosures, and left it to the Court to puzzle together the statements and disclosures). Having thoroughly reviewed these disclosures, we conclude that none of them revealed to the market explicitly or implicitly the supposedly material and pervasive misconduct that undergirds the misleading statements alleged in the TAC. See DeVry, 2012 WL 1030474, at *13-18 (rejecting loss causation allegation based on the most of the same events). Thus, Plaintiffs fail to adequately plead loss causation. The disclosures Plaintiffs identify show that Corinthians stock price movements were primarily in response to announcements about potential changes in regulations related to Title IV funding, not disclosure of the alleged pervasive misconduct at Corinthian that in turn revealed that Defendants statements were misleading. Like many plaintiffs in other recent cases against for-profit schools, Plaintiffs have not explained (or even attempted to explain) how a future risk of losing financial-aid eligibility based upon newly proposed regulations undermines any of [D]efendants previous statements. Id. at *18 (We conclude that the August 13, 2010 DOE report did not disclose analysts, the company was able to conceal the fact that Daous operating earnings and margins were deteriorating as a result of prematurely and improperly recognized revenue. 411 F.3d at 1026. Later, when the company revealed its true figures, the market was able to suspect fraud. Indeed, the court noted that in response to the disclosure, an analyst commented, You have got to question whether they are manufacturing earnings. 411 F.3d at 1026. Thus, the disclosure of the companys true financial condition revealed to the market the prior misrepresentations and is consistent with Dura Pharmacueticals and Metzler. The same is true for Gilead, in which the plaintiffs properly pled loss causation by alleging that the defendants share price fell once the public . . . realize[d] the impact of a letter issued by the FDA that expressed significant public health and safety concerns raised by [the defendants] promotional activities. 536 F.3d at 1053. In sum, both cases are consistent with Dura Pharmaceuticals and Metzler because in both cases the plaintiffs alleged that the defendants share price fell after the truth became known.
defendants alleged fraud.). Moreover, Plaintiffs do not contend that Corinthian was the only for-profit education company whose stock price fell upon the announcement of these new regulations. Indeed, the fact that the parties have cited to us a number of cases brought against for-profit schools in the last ten months that contain similar allegations suggests that the new DOE regulations are the type of new industry-specific event on which plaintiffs may not rely to show loss causation. Dura Pharms., 544 U.S. at 343. As we noted in our prior Order, the only disclosure that comes close to revealing any of the alleged improper practices is the August 4, 2010 GAO Report, which found that many of the companies in the [for-profit school] industry employed fraudulent and deceptive practices in their student recruitment. (Dkt. No. 96, at 14). However, the report was not exclusive to Corinthian, and in fact, detailed recruiting practices at only two Corinthian campuses. (Id.). Thus, the report is insufficient to show that the market was alerted to Corinthians alleged widespread misconduct. (Id.).8 Moreover, just like the SAC, the TAC at no point alleges that any of the CW accounts Plaintiffs rely on to establish the alleged misconduct was revealed to the market. Thus, the TAC fails to plead that the primary sources detailing the alleged misconduct ever revealed their accounts of that misconduct to the market. In sum, the TAC fails to identify any sources disclosing the pervasive misconduct alleged in the TAC to the market. In fact, the disclosures identified by Plaintiffs show that Corinthians stock dropped when new federal funding regulations were proposed, not when the alleged widespread fraud at Corinthian was supposedly revealed. Other disclosures identified by Plaintiffs, such as the disclosure of Corinthians low student loan repayment rate and decision to phase out its ATB program, show that its stock price fell due to changed economic circumstances and new firm-specific facts and conditions, We further noted that in Metzler, the Ninth Circuit reached the same conclusion based on a similar limited disclosure of alleged improper practices at Corinthian. (Id.). In alleging loss causation, the Metzler plaintiff relied on among other things a Financial Times story reporting a DOE investigation at one Corinthian campus. 540 F.3d at 1063. Even though the report related to only one campus, Corinthian stock lost 10 percent of its value the day it was published. Id. at 1064. The Ninth Circuit, however, held that the plaintiff failed to adequately plead loss causation because the Financial Times story did not discloseor even suggest[]to the market that Corinthian was manipulating student enrollment figures company-wide in order to procure excess federal funding, which was the alleged concealed misconduct that the plaintiff argued made the defendants statements misleading. Id. at 1063. Insofar as the plaintiff failed to adequately allege that the truth became known, he was necessarily unable to properly demonstrate that the defendants share price fell significantly after the truth became known. Id. at 1063. Similarly, here, the GAO Report cannot be reasonably read to reveal the pervasive company-wide recruitment and enrollment practices, which are the alleged concealed misconduct that Plaintiffs argue made Defendants Class Period statements misleading. Because Plaintiffs have failed to properly allege that the market became aware of the magnitude of the misconduct alleged in the TAC, they cannot demonstrate that the market learned Defendants Class Period statements were misleading and that revelation caused Corinthians stock price to fall.
8
not disclosure of fraud. Dura Pharms., 544 U.S. at 343. In sum, none of the disclosures identified in the TAC is sufficient to show that Corinthians share price fell significantly after the truth became known. Dura Pharms., 544 U.S. at 347. So long as there is a drop in a stocks price, a plaintiff will always be able to contend that the market understood a . . . statement precipitating a loss as a coded message revealing the fraud. Metzler, 540 F.3d at 1049. However, a plaintiff may not plead loss causation through euphemism, but instead must plead facts establishing the necessary connection between the defendants misrepresentations and the actual loss. Because Plaintiffs fail to allege sufficient facts to establish this necessary connection, they fail to properly plead loss causation. IV. Conclusion
For the foregoing reasons, Plaintiffs have (1) failed to set forth particularized facts showing why any statement made by Defendants during the Class Period was false or misleading, (2) failed to allege particularized facts creating a strong inference of scienter, and (3) failed to adequately plead loss causation. As such, Plaintiffs have failed to state a claim under 10(b) of the Securities and Exchange Act of 1934 and SEC Rule 10b-5 thereunder, and Count I of the TAC must be dismissed. Count II of the TAC asserts a claim under 20(a) of the Securities and Exchange Act of 1934 for controlling person liability. To establish controlling person liability, the plaintiff must show that a primary violation was committed and that the defendant directly or indirectly controlled the violator. Paracor Fin., Inc. v. Gen. Elec. Capital Corp., 96 F.3d 1151, 1161 (9th Cir. 1996). Because Plaintiffs have failed to state a claim under 10(b) and Rule 10b-5, Plaintiffs have failed to show that a primary violation was committed. As such, their claim for controlling person liability under Count II must also be dismissed. Defendants Motion is hereby GRANTED. In the event of dismissal, Plaintiffs have requested leave to amend the TAC. (Oppn 25). As noted above, we previously granted Plaintiffs leave to amend with our dismissal of the SAC. Our discretion to deny leave to amend is particularly broad where [a] plaintiff has previously amended the complaint. Metzler, 540 F.3d at 1049. Despite having had an opportunity to amend their allegations with the guidance of our prior Order, Plaintiffs still failed to properly plead falsity, scienter, and loss causation. Additionally, they point to no additional facts that they might allege to cure these deficiencies. We conclude that any further leave to amend would be futile. Therefore, we dismiss the TAC with prejudice and without further leave to amend. IT IS SO ORDERED.
-Initials of Deputy Clerk Bea
--
CV-90 (06/04)
CIVIL MINUTES - GENERAL
Page 19 of 19

2012.08.20 - Karam v. Corinthian, TAC Dismissed W Prejudice

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

2012.08.20 - Karam v. Corinthian, TAC Dismissed W Prejudice

Uploaded by

Copyright:

Available Formats

E-Filed UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA CIVIL MINUTES - GENERAL Case No.

Attorneys Present for Defendants: None

TACs Allegations of Scienter

Statements Concerning Graduation and Placement Rates

-Initials of Deputy Clerk Bea

CIVIL MINUTES - GENERAL

You might also like