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Lomingkit v. Apollo Education Group Inc.

United States District Court, D. Arizona

February 16, 2017

Rameses Te Lomingkit, et al., Plaintiffs,
v.
Apollo Education Group Incorporated, et al., Defendants.

          ORDER

          James A. Teilborg Senior United States District Judge.

         Pending before the Court are: (1) Defendants' Motion to Dismiss Plaintiffs' Amended Consolidated Class Action Complaint (the “Motion”) for failure to state a claim pursuant to Federal Rule of Civil Procedure (“Federal Rule”) 12(b)(6), (Doc. 62); (2) Defendants' Request for Judicial Notice in Support of Defendants' Motion to Dismiss, (Doc. 63); (3) Plaintiffs' Request for Judicial Notice, (Doc. 71 at 3-4); and (4) Defendants' Supplemental Request for Judicial Notice in Support of Defendants' Motion to Dismiss, (Doc. 74). The Court now rules on the Motion and Requests.

         I. BACKGROUND[1]

         This is a consolidated class action proceeding. Defendant Apollo Education 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 world. (Docs. 54 (“CAC”) at ¶ 1; 62 at 8). In particular, University of Phoenix (“UOP”) is Apollo's largest university, accounting for approximately 90% of Apollo's total enrollment and revenues. (CAC at ¶ 1). The remaining Defendants are various individuals who served as Apollo officers and directors between October 22, 2013 and October 21, 2015 (the “Class Period”). In particular, Defendant Peter Sperling served as Chairman of the Apollo Board of Directors throughout the Class Period, (id. at ¶ 26); Defendant Gregory Cappelli served as Apollo's CEO and a member of Apollo's Board of Directors throughout the Class Period, (id. at ¶ 23); Defendant Brian Swartz served as a Senior Vice President and the CFO of Apollo until May 15, 2015, (id. at ¶ 24); and Defendant William Pepicello was a member of Apollo's “executive management” and served as UOP's President until June 20, 2014, (id. at ¶ 25). Plaintiffs purchased Apollo stock during the Class Period. (Id. at 4).

         A. Apollo's Online Classroom Upgrades

         In 2009, Apollo determined that UOP's software for students was outdated and formulated plans to “rebuild” UOP's “online learning environment from scratch.” (Id. at ¶ 39). This software-referred to as the “online classroom”-was used by all UOP students, whom relied on the platform to “access their [UOP] accounts, receive . . . educational content for their courses, and turn in their assignments.” (Id. at ¶ 38). Plaintiffs allege that the successful upgrade of the online classroom platform was “critically important” to Apollo's financial success, and Apollo had plans to sell the technology to other universities. (Id. at ¶¶ 38, 40-41).

         However, the upgrades experienced multiple disruptions “from mid-2012 to mid-2014.” (Id. at ¶¶ 51, 52). These disruptions included widespread blackouts, in which users were unable to login to the platform. (Id. at ¶ 54). The online classroom disruptions were further “exacerbated” by “rounds of significant layoffs” within Apollo's IT department from 2013 to 2015. (Id. at ¶¶ 58-61). Plaintiffs allege that Defendants and Apollo representatives made a number of false and misleading statements during and after the rollout of Apollo's online classroom upgrades.

         1. Statements on October 22, 2013

         On October 22, 2013, Apollo filed its 2013 Form 10-K with the SEC. (Id. at ¶ 204). In relevant part, the Form 10-K stated:

We are upgrading a substantial portion of our key IT systems, including our student learning system, student services platform and corporate applications, and retiring the related legacy systems. We believe that these new systems will improve the productivity, scalability, reliability and sustainability of our IT infrastructure and improve the student experience.

(Id.). During an investor conference call on the same day:

(1) Defendant Cappelli claimed that Apollo had made “meaningful progress” in “differentiat[ing] [UOP]” through “the rollout of our new learning platform.” (Id. at ¶ 205).
(2) Defendant Cappelli discussed the importance of “differentiating [UOP] . . . and raising the bar for efficient and effective operations within our industry” and noted that Apollo was “focused on offering a superior classroom experience.” (Id.). He further emphasized the importance of “putting these innovations into the marketplace.” (Id.).
(4) Defendant Swartz stated that the “ability to grow [UOP's] new enrollment [is] about our product and having a competitive product in the marketplace.” (Id.).

         2. Statements on November 13, 2013

         On November 13, 2013, Apollo presented at the JPMorgan Ultimate Services Investor Conference. (Id. at ¶ 207). During the presentation:

(1) Defendant Swartz discussed Apollo's online classroom upgrades, stating that Apollo had become a “much more leaner [sic], nimbler organization, and [is] introducing new products to market faster. In the last few years, we have invested over $1 billion in our learning and service platforms and data platforms at the [UOP].” (Id.).
(2) Defendant Swartz elaborated that, as part of offering a “second to none, ” “superior classroom experience for the student, ” Apollo made “significant enhancements to the student experience, ” with “[t]he first [being] our new classroom, or our new learning platform.” (Id.).
(3) Defendant Swartz informed investors that “[t]he new platform [was] actually rolled out to all of our graduate students today, ” while a “staggered roll out for all of [the] undergraduates” would take place over the course of fiscal year 2014. (Id.).
(4) Defendant Swartz presented a slide claiming the online classroom upgrades had “[c]apabilities and features to keep students on track” and was “simple” and “efficient.” (Id.).

         3. Statements on March 11, 2014

         On March 11, 2014, Apollo presented at the Credit Suisse Global Services Conference. (Id. at ¶ 209). During the presentation:

(1) Beth Coronelli, Apollo's Vice President of Investor Relations, stated that Apollo's “strategy about differentiations . . . all comes . . . down to the student learning experience.” (Id.).
(2) Ms. Coronelli discussed Apollo's ability to respond to issues that could arise during UOP's online classroom upgrades, stating that “if there seems to be an issue through the new classroom” that the student is having, “the faculty member or the student advisor can step in and see what's happening.” (Id.). Ms. Cornelli mentioned that these safeguards helped “to create an ecosystem or a culture around retention.” (Id.).

         4. Statements on April 1, 2014

         On April 1, 2014, Apollo held an investor conference call. (Id. at ¶ 211). During the conference call:

(1) Defendant Cappelli stated that Apollo was “first and foremost focused on improving retention” by “improv[ing] the student experience” through Apollo's “new, modernized and significantly upgraded online classroom.” (Id.).
(2) Ms. Coronelli stated that Apollo was “in the process of building out a significantly easier to use platform for [its] students that will be streamlined and much more efficient for [UOP] to administer.” (Id.).

         5. Statements on April 8, 2014

         On April 8, 2014, Apollo held an investor meeting. (Id. at ¶ 213). During the meeting:

(1) Defendant Cappelli stated that Apollo was “a different [c]ompany today than it was even a few years ago” and was now “really centered around differentiating [UOP]” from its competitors. (Id.).
(2) Defendant Cappelli informed investors that Apollo was “rolling out a new learning platform” that “has tools that faculty members and students have never had before and other new retention initiatives to support the success of [UOP's] students.” (Id.).
(3) Jerrad Tausz, UOP's Chief Operating Officer, stated that the online classroom upgrades were “the next key element” for Apollo's success. (Id.).

         6. Statements on June 25, 2014

         On June 25, 2014, Apollo published a press release announcing the company's financial results for the third quarter of 2014. (Id. at ¶ 215). The press release quoted Defendant Cappelli as stating that “[d]uring the third quarter, we . . . completed the rollout of our new learning platform across the university.” (Id.). Apollo also held an investor conference call, in which Defendant Cappelli stated that “nearly all [UOP students] are now being served by our new learning platform, which has been greatly enhanced and provides a more efficient and user friendly experience.” (Id.).

         7. Statement on September 18, 2014

         On September 18, 2014, Apollo presented at the BMO Capital Markets 14th Annual Back to School Education Conference. (Id. at ¶ 217). During the conference, Defendant Swartz stated that Apollo was “very, very focused on looking at both the service model as well as the learning model, upgrading our learning management system and making sure that the process to learn for a student is seamless” so that students are not “frustrated on how to move around” the online classroom. (Id.).

         8. Statements on October 21, 2014

         On October 21, 2014, Apollo held an investor conference call. (Id. at ¶ 219). During the call:

(1) Defendant Cappelli informed investors that Apollo had experienced a “short-term disruption” in transitioning to the upgraded online classroom, and there were “a few bugs and things in the system that [we]re being worked out.” (Id.).
(2) Defendant Cappelli informed investors that some students had been “stop[ped] out . . . temporarily, ” and “[t]his [wa]s not a huge part of the student body by any means.” (Id.).
(3) Defendant Cappelli stated that “there's additional training that needs to be done” for students, and Apollo was “beef[ing] up training” for them. (Id.).
(4) Defendant Cappelli assured investors that any problems were “already being improved” and would “get fixed over the near term.” (Id.).
(5) In response to a question regarding whether Apollo's rising bad debt expense was “a sign of people getting frustrated with the [upgraded online classroom] and dropping out, ” Defendant Swartz stated that bad debt expense “ticked up just a little bit, very, very slightly, simply because our new enrollment trends have improved.” (Id. at ¶ 220).
(6) Defendant Swartz assured investors that “we'll have the same number of students in the total student count.” (Id.).
(7) Defendant Cappelli summarized that the upgraded online classroom was “a great platform” and emphasized that one benefit of the new platform would be “customer satisfaction, ” because the platform “enhance[s] the overall learning experience.” (Id.).

         On the same day, Apollo filed its Form 10-K for 2014 with the SEC. (Id. at ¶ 221). The Form 10-K warned investors that “disruptions and system malfunctions . . . may arise from [Apollo's IT systems] upgrade initiative.” (Id.).

         9. Statements on November 12, 2014

         On November 12, 2014, Apollo presented at the JPMorgan Ultimate Services Investor Conference. (Id. at ¶ 223). During the presentation:

(1) Ms. Coronelli stated that “retention is [Apollo's] number one priority, ” and as part of improving retention, Apollo had “a new classroom . . . put in place.” (Id.).
(2) In response to a question regarding whether the online classroom upgrades were “really [a] differentiating kind of proposition for students, ” Ms. Coronelli responded, “Absolutely. Yes, it is. From a standpoint of the classroom it is-it is not just an upgrade. It was a complete new classroom” that was “an overall improved experience.” (Id.).

         10. Statements on January 8, 2015

         On January 8, 2015, Apollo announced a larger-than-expected drop in enrollment, attributable, in part, to the online classroom disruptions. (Id. at ¶¶ 167-70). That same day, the price of Apollo's stock fell by approximately 13.5% to close at $27.55 per share. (Id. at ¶ 6). Also on January 8, 2015, Apollo held an investor conference call. (Id. at ¶ 225). During the call:

(1) In response to a question regarding fixes to the online classroom, Defendant Cappelli stated that Apollo had “lots of communications going out to faculty and students about timelines and data so that they feel comfortable that this has been addressed, fixed and it won't be disrupted going forward.” (Id.).
(2) Defendant Cappelli stated that the online classroom was Apollo's “number one area of focus, ” and Apollo had “put every necessary asset on it” and possessed “a lot of data” regarding the disruption. (Id. at ¶ 226). Defendant Cappelli also noted that Apollo was “not guessing in terms of how [the disruption] emanated . . . [and] where the problems are.” (Id.).
(3) Defendant Cappelli reassured investors that Apollo had “accelerated [the online classroom's] future enhancements, ” including “ensuring the classroom [was] compatible with a broader range of browsers and other operating systems at all times, and that course content [was] more readily accessible.” (Id.).
(4) Defendant Cappelli informed investors that “beginning in January [2015], [Apollo] started to roll out a focused effort to help bring some of those students impacted by the [online] classroom [disruptions] back into [UOP].” (Id.). Defendant Cappelli further explained that “the majority of this disruption we feel very confident is from the explanation of the classroom” to users. (Id.).

         11. Statements on March 25, 2015

         On March 25, 2015, Apollo attributed greater amount of fault for UOP's retention difficulties to the “significant” online classroom disruptions. (Id. at ¶¶ 173-74). That same day, the price of Apollo's stock again dropped by approximately 28.4% to close at $20.04 per share. (Id. at ¶¶ 6, 177). Also on March 25, 2015, Apollo held an investor conference call. (Id. at ¶ 228). During the call:

(1) Defendant Cappelli stated that “[t]he majority of fixes related to third-party content access have been completed, ” and “[t]he classroom is now again compatible with a range of supported browsers and computer operating systems, which is an area [where] we were receiving the highest number of issues.” (Id.).
(2) In response to a question regarding retention improvements “given [that] the [online classroom is] fixed, ” Defendant Cappelli stated that “[w]e have worked very hard to make the fixes as quickly as possible and do them the right way.” (Id.).

         Finally, on June 29, 2015, Apollo announced that it was in the process of replacing its online classroom with a new, third-party learning management system called Blackboard. (Id. at ¶ 179). Over the next few days, Apollo's stock price dropped “nearly 20% on abnormally high volume.” (Id. at ¶ 182).

         Plaintiffs allege that the aforementioned statements by Defendants and Apollo representatives were false and misleading for the following reasons:

(i) the [upgraded online] classroom was consistently dysfunctional amid widespread outages; (ii) layoffs in Apollo's IT department worsened [the online] classroom's performance and depleted [Apollo] war rooms meant to fix [the online] classroom; (iii) [the online] classroom's dysfunction caused numerous student complaints and was reported to senior management in internal reports and conference calls; (iv) new classroom's consistent technical failures were causing Apollo's students to drop out or not enroll; and[, for the statements made on January 8, 2015 and March 25, 2015, ] (v) Apollo was taking steps to replace its [upgraded] online classroom with an off-the-shelf product from an outside company.

(Id. at ¶¶ 206, 208, 210, 212, 214, 216, 218, 222, 224, 227, 229).

         B. Apollo's Military Recruitment and Legal Compliance

         Amid UOP's declining enrollments between 2010 and 2013, Apollo increased its marketing to individuals associated with the military.[2] (Id. at ¶ 78). On February 10, 2012, UOP entered into an Alliance Memorandum of Understanding (the “2012 MOU”) with the DOD, in which UOP agreed to “abide by all applicable federal and state laws” and generally refrain from the use of the DOD's name and logo in writing. (Id. at ¶ 100). On April 27, 2012, President Barack Obama signed Executive Order 13607 into law. Exec. Order No. 13607, 77 Fed. Reg. 25, 861 (May 2, 2012). Executive Order 13607 ordered the Secretaries of Defense and Veterans Affairs to “strengthen enforcement and compliance mechanisms” for institutions that recruit service members, veterans, spouses, and other family members. Id. Plaintiffs allege that Defendants and Apollo representatives made a number of false and misleading statements regarding Apollo's compliance with the various regulations covering military recruitment.

         1. Statements on ...


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