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Lomingkit v. Apollo Education Group Inc.

United States District Court, D. Arizona

July 26, 2017

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

          ORDER

          JAMES A. TEILBORG DISTRICT JUDGE.

         Pending 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.

         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 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 ¶¶ 14-16).

         The 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).

         In 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.[2] (Id. at ¶¶ 29, 32).

         However, 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.

         A. Statements on November 13, 2013

         On November 13, 2013, Apollo presented at the JPMorgan Ultimate Services Investor Conference. (Id. at ¶ 126). During the presentation, Defendant Swartz stated the following:

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 [UOP].

(Id. (emphasis omitted)).

         Defendant 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.).

         B. Statements on March 11, 2014

         On 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).

         C. Statements on April 8, 2014

         On 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)).

         D. 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 ¶ 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 (emphasis omitted)).

         E. 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 ¶ 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)).

         F. Statements on October 21, 2014

         On 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 omitted)).
(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 (emphasis omitted)).

         On the 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 omitted)).
(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. (emphasis omitted)).

         G. Statement on November 12, 2014

         On 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)).

         H. 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 ¶ 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 call:

(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, ...

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