United States District Court, D. Arizona
A. Teilborg Senior United States District Judge.
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.
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.
Apollo's Online Classroom Upgrades
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was outdated and formulated plans to “rebuild”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).
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.
Statements on October 22, 2013
October 22, 2013, Apollo filed its 2013 Form 10-K with the
SEC. (Id. at ¶ 204). In relevant part, the Form
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
(Id.). During an investor conference call on the
(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.”
Statements on November 13, 2013
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].”
(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.).
Statements on March 11, 2014
March 11, 2014, Apollo presented at the Credit Suisse Global
Services Conference. (Id. at ¶ 209). During the
(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.”
Statements on April 1, 2014
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.”
Statements on April 8, 2014
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.
(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.).
Statements on June 25, 2014
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.).
Statement on September 18, 2014
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.
Statements on October 21, 2014
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
(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.).
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
Statements on November 12, 2014
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.).
Statements on January 8, 2015
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
(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
(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 , [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.).
Statements on March 25, 2015
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.).
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).
allege that the aforementioned statements by Defendants and
Apollo representatives were false and misleading for the
(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).
Apollo's Military Recruitment and Legal
UOP's declining enrollments between 2010 and 2013, Apollo
increased its marketing to individuals associated with the
military. (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.
Statements on ...