United States District Court, D. Arizona
A. TEILBORG DISTRICT JUDGE.
before the Court are: Defendants' Motion to Dismiss
[Plaintiffs'] Second Amended Complaint (the
“Motion”) for failure to state a claim pursuant
to Federal Rules of Civil Procedure (the “Federal
Rules”) 8(a), 9(b), and 12(b)(6), (Doc. 88), and
Defendants' Request for Judicial Notice in Support of
Moving Defendants' Motion to Dismiss, (the
“Request, ” Doc. 88 at 7 n.3; see also
Docs. 63; 64). Plaintiffs have filed their Response, (Doc.
90), and Defendants have filed their Reply, (Doc. 91). The
Court now rules on Defendants' Motion and Request.
a consolidated class action proceeding. Defendant Apollo
Education Group, Inc. (“Apollo”) is an
Arizona-based company that owns and operates proprietary
postsecondary educational institutions and is one of the
largest private education providers in the world. (Doc. 82,
Plaintiffs' [Second] Amended Class Action Complaint for
Violations of the Federal Securities Laws,
(“SAC”), at ¶ 1). In particular, University
of Phoenix (“UOP”) is Apollo's largest
university, accounting for approximately 90% of Apollo's
total enrollment and revenues. (Id.). The remaining
Defendants are various individuals who served as Apollo's
officers and directors between November 13, 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 ¶ 20); Defendant Gregory Cappelli served as
Apollo's CEO and a member of Apollo's Board of
Directors throughout the Class Period, (id. at
¶ 18); and Defendant Brian Swartz served as a Senior
Vice President and the CFO of Apollo until May 15, 2015,
(id. at ¶ 19). Plaintiffs purchased Apollo
stock during the Class Period. (Id. at ¶¶
Court previously dismissed Plaintiffs' Consolidated Class
Action Complaint (the “CAC”), finding that
Plaintiffs failed to state a claim upon which relief could be
granted because they failed to meet the standard for pleading
securities fraud. (See Doc. 80). Specifically, the
Court found that Plaintiffs failed to adequately plead that
Defendants made a false or misleading statement. Plaintiffs
then amended their CAC, (Doc. 82), and Defendants now seek to
dismiss Plaintiffs' SAC. (Doc. 88).
2009, Apollo determined that UOP's software for students
was outdated and formulated plans to “rebuild”
UOP's “online learning environment from
scratch.” (SAC at ¶ 30). 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 ¶ 29). 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 ¶¶ 29, 32).
the upgrades experienced multiple disruptions “from
mid-2012 to mid-2014.” (Id. at ¶¶ 4,
73). These disruptions included widespread blackouts, in
which users were unable to login to the platform.
(Id. at ¶¶ 4, 56). The online classroom
disruptions were further “exacerbated” by
“rounds of significant layoffs” within
Apollo's IT department from 2013 to 2015. (Id.
at ¶¶ 63-69). Plaintiffs allege that Defendants and
Apollo representatives made a number of false and/or
misleading statements during and after the rollout of
Apollo's online classroom upgrades.
Statements on November 13, 2013
November 13, 2013, Apollo presented at the JPMorgan Ultimate
Services Investor Conference. (Id. at ¶ 126).
During the presentation, Defendant Swartz stated the
Beyond our Education of Careers initiative, we've also
made some significant enhancements to the student experience.
I want to talk about two of those. The first is our new
classroom, or our new learning platform, as we refer to, and
secondly Adaptive Learning, in just a moment. Regarding the
new classroom, we want to offer a superior classroom
experience for the student. We want it to be second to none.
Just as an example, the new classroom as exist[s] today . . .
actually delivers personalized learning to individual
students, and it allows us to gather data on what's
working, and as importantly what's not working for
students. . . . We watch very closely for attendance and how
student behavior occurs after each assignment within each
class. The new platform is actually rolled out to all of our
graduate students today. We have a staggered roll out for all
of our undergraduates over the course of fiscal 2014. . . .
In the last few years, we have invested over $1 billion in
our learning and service platforms and data platforms at the
(Id. (emphasis omitted)).
Swartz also promoted the online classroom in a slide
presentation, which highlighted the online classroom's
“management and delivery of course materials” to
students and characterized the classroom as “simple,
” “efficient, ” and “personal.”
(Id. at ¶ 129). A slide in the presentation
also stated that the new classroom provided
“[i]ndividualized learning pathways, reports,
notifications and recommendations” and possessed
“[c]apabilities and features to keep students on track
and motivated.” (Id.).
Statements on March 11, 2014
March 11, 2014, Apollo presented at the Credit Suisse Global
Services Conference. (Id. at ¶ 132). During the
presentation, Beth Coronelli, Apollo's Vice President of
Investor Relations, described the new classroom as follows:
[I]f there seems to be an issue through the new classroom,
they can - if a student is having issue[s] - the faculty
member or the student advisor can step in and see what's
happening. So it's - like I said, it's a lot of
different things that are pulled together to create an
ecosystem or a culture around retention.
(Id. (emphasis omitted)). Ms. Coronelli also
promoted the new classroom in a slide presentation, featuring
a slide that included much of the same content as the slide
utilized by Defendant Swartz in his November 13, 2013
presentation. (Id. at ¶ 135).
Statements on April 8, 2014
April 8, 2014, Apollo held an investor meeting. (Id.
at ¶ 138). During the meeting:
(1) Defendant Cappelli stated that Apollo was “rolling
out a new learning platform. It's exciting. It has tools
that faculty members and students have never had before and
other new retention initiatives to support the success of our
students.” (Id. (emphasis omitted)).
(2) Jerrad Tausz, UOP's Chief Operating Officer, stated,
“I really think [the new classroom] makes things simple
for the students. It is an intuitive system that we allow a
lot more multimedia, a lot more engagement and interaction in
the online classroom as well its components can be used in
the ground classroom as well to interact with both the
faculty members as well as other students.”
(Id. (emphasis omitted)).
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 ¶ 141). 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.
(emphasis omitted)). Apollo also held an investor conference
call, in which Defendant Cappelli stated, “We're
also pleased to report that nearly all students in the [UOP]
are now being served by our new learning platform, which has
been greatly enhanced and provides a more efficient and user
friendly experience.” (Id. at ¶ 142
Statement on September 18, 2014
September 18, 2014, Apollo presented at the BMO Capital
Markets 14th Annual Back to School Education Conference.
(Id. at ¶ 145). 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.” (Id. (emphasis omitted)).
Statements on October 21, 2014
October 21, 2014, Apollo held an investor conference call.
(Id. at ¶ 148). During the call:
(1) Defendant Cappelli informed investors that Apollo
“recently experienced a short-term disruption with the
massive student conversion from our old online classroom to
our new significantly updated learning platform.”
(Id. (emphasis omitted)).
(2) Defendant Cappelli stated that “there's
additional training that needs to be done” and
“[t]here's a few bugs and things in the system that
are being worked out.” (Id. (emphasis
(3) Defendant Cappelli also stated that Apollo
“probably had some students stop out temporarily
because of some of the issues. This is not a huge part of the
student body by any means. It's reasonable. We have a
team on it. We expect it will get fixed over the near
term.” (Id. (emphasis omitted)).
(4) Defendant Cappelli finally stated that “retention
. . . [has] been our number one goal. It's interesting,
so many good things happening on retention, you can have a
small hiccup in something like the platform to get a
temporary setback.” (Id. at ¶ 150
same day, Apollo filed its Form 10-K for 2014 with the SEC.
(Id. at ¶ 153). The Form 10-K included the
following risk warnings:
(1) “From time to time we experience intermittent
outages of the information technology systems used by our
students and by our employees, including system-wide outages.
Any computer system error or failure, regardless of cause,
could result in a substantial outage that materially disrupts
our online and ground operations.” (Id.).
(2) “Although these new systems are expected to improve
the productivity, scalability, reliability and sustainability
of our IT infrastructure, the transition from the legacy
systems entails risk of unanticipated disruption or failure
to fully replicate all necessary data processing and
reporting functions, including in our core business
functions.” (Id. (emphasis omitted)).
(3) “Any disruption in our IT systems, including any
disruptions and system malfunctions that may arise from our
upgrade initiative, could significantly impact our
operations, reduce student and prospective student confidence
in our educational institutions, adversely affect our
compliance with applicable regulations and accrediting body
standards and have a material adverse effect on our business
and financial condition.” (Id. (emphasis
(4) “[T]he transition from the legacy systems entails
risk of unanticipated disruption or failure to fully
replicate all necessary data processing and reporting
functions, including in our core business functions, that
could adversely impact our business.” (Id.
Statement on November 12, 2014
November 12, 2014, Apollo presented at the JPMorgan Ultimate
Services Investor Conference. (Id. at ¶ 156).
During the presentation, 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 from that
perspective.” (Id. (emphasis omitted)).
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 ¶ 7). That same day, the
price of Apollo's stock fell by approximately 13.5% to
close at $27.55 per share. (Id. at ¶¶ 7,
175). Also on January 8, 2015, Apollo held an investor
conference call. (Id. at ¶ 159). During the
(1) Defendant Cappelli stated that Apollo was “100%
committed to fixing all the issues relative to the new
classroom as quickly as possible, and, in fact our teams have
already made substantial progress. We're on track with
our plan to aggressively address the technical issues related
to the classroom and have also accelerated future
enhancements.” (Id. (emphasis omitted)).
(2) Defendant Cappelli stated, “[w]e, obviously,
learned some valuable lessons along the way, but we put every
necessary asset on [the online classroom upgrade]. It's
our number one area of focus, it has, obviously, ...