A District of Columbia federal judge has dismissed a securities fraud lawsuit against the Washington Post Company, finding that the plaintiffs failed to sufficiently allege that executives intended to deceive the market about the financial health of for-profit education subsidiary Kaplan Inc.
The March 19 ruling was the latest in a string of defeats for dissatisfied investors suing over the workings of for-profit education institutions, U.S. District Senior Judge Barbara Rothstein noted in her opinion. Rothstein is a judge in the Western District of Washington serving as a visiting judge in the District of Columbia.
The plaintiffs were represented by Robbins Geller Rudman & Dowd, which has pursued securities fraud cases against other for-profit education institutions in recent years in light of growing scrutiny over their recruitment and financial aid practices. Partners David George and Robert Robbins could not be reached for comment.
The Post Company and its co-defendants – board chairman and chief executive officer Donald Graham and senior vice president and chief financial officer Hal Jones – were represented by Kevin Baine and Steven Farina of Williams & Connolly; Baine and a spokeswoman for the Post Company, Rima Calderon, declined to comment.
Kaplan, which offers a variety of test preparation and other educational services, has long been a crown jewel of the Post Company’s portfolio. Kaplan’s divisions included Kaplan Higher Education, which runs post-secondary education programs online and at sites around the country.
Around August 2010, however, the company’s stock dropped when the U.S. Department of Education published new data highlighting low repayment rates on government loans for students at for-profit education institutions, a category that included Kaplan Higher Education. Federal officials expressed concern about the recruitment and financial aid practices at for-profit institutions, spurring congressional investigations.
The class of investors who sued in October 2010 claimed that they were misled about Kaplan’s stability and the reasons for its success – chiefly, that Kaplan was allegedly engaging in "predatory and deceptive recruiting and financial aid practices" as opposed to boosting enrollment in compliance with federal law, according to the complaint.
The Post Company countered that it accurately reported on Kaplan’s health in securities filings and that the Education Department’s report wasn’t limited to Kaplan; the company noted in its motion to dismiss that its stock value later rebounded. The plaintiffs’ complaint, the company argued, lacked any specific allegations of fraud on the part of the Post Company.
Rothstein sided with the Post Company and granted its first motion to dismiss in December 2011, but gave the plaintiffs an opportunity to amend their complaint. In yesterday’s opinion, she wrote that the class had again failed to clear the hurdle of making sufficient allegations of intentional fraud.
Plaintiffs in other similar cases have found it hard to prove scienter, she wrote, but the plaintiffs in this case faced an even tougher challenge because the Post Company executives weren’t employees of the company at issue. Instead, they were part of the parent company of a subsidiary and several steps removed from day-to-day operations.
The plaintiffs claimed that Post Company executives had a number of opportunities to learn about Kaplan’s allegedly improper practices: participating in meetings about Kaplan’s business practices, collecting data on its finances, lobbying for Kaplan, and defending Kaplan against whistleblower lawsuits, for example.
But Rothstein found that there were no specific allegations that in any of those circumstances the Post Company and its executives learned about or participated in any fraud.
"Read in its totality, the Amended Complaint does not sufficiently allege that the individual Defendants knowingly or recklessly misled the market," she wrote.
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