Class Action

PSLRA Class Action Defense Cases–Metzler v. Corinthian Colleges: Ninth Circuit Affirms Dismissal Of Securities Fraud Class Action Holding Class Action Complaint Failed To Meet PSRLA’s Heightened Pleading Requirements

By Michael J. Hassen

Securities Fraud Class Action Properly Dismissed without Leave to Amend because Class Action Failed to Plead Loss Causation, Scienter or Falsity with Specificity Required by Private Securities Litigation Reform Act (PSLRA) Ninth Circuit Holds

Plaintiff filed a putative class action against Corinthian Colleges (one of the nation's largest operators of private for-profit vocational colleges) and three of its officers, alleging violations of federal securities laws; specifically, the securities fraud class action alleged violations of §§ 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule 10b-5. Metzler Investment GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049, 1055 (9th Cir. 2008). According to the class action complaint, “Corinthian's colleges are pervaded by fraudulent practices designed to maximize the amount of federal Title IV funding – a major source of Corinthian's revenue-that those schools receive.” Id. (footnote omitted). Defense attorneys moved to dismiss the class action for failure to meet the heightened pleadings requirements of the Private Securities Litigation Reform Act of 1995 (PSLRA); the district court granted the motion but dismissed the class action complaint with leave to amend. Id., at 1060. Plaintiff filed an amended class action complaint, and defense attorneys again moved to dismiss for failure to meet the PSRLA’s heightened pleading requirements. Id. The district court granted the motion and dismissed the class action without leave to amend, id. The Ninth Circuit affirmed.

We do not here discuss the class action complaint in detail: a detailed summary may be found at pages 1055 through 1059 of the opinion. The Ninth Circuit summarized the class action’s allegations of fraud as including “a variety of false or deceptive schemes: falsifying financial aid applications to obtain federal funds and increase federal award entitlements; encouraging students to falsify federal student aid forms themselves; manipulating student enrollment by counting students not yet enrolled (referred to in the [class action complaint] as ‘false starts’); manipulating or falsifying student grades to maintain federal funding eligibility; exposing the company to bad debt in order to meet regulatory requirements for continued federal funding; delaying notification to federal officials of dropped students and delaying refunds to the federal government after students had dropped; and manipulating job placement data in order to satisfy federal and state regulatory requirements.” Metzler Investment, at 1055. The fraud allegations were based on information from confidential witnesses – “former Corinthian employees that served at numerous campuses in differing capacities” including” campus presidents, admissions officials, financial aid officers, and IT and accounting personnel.” Id., at 1056. The class action complaint relied also on government investigations and private litigation that allegedly confirmed Corinthian's practices, and noted that certain States had revoked, or were threatening to revoke, Corinthian’s accreditation. Id. With respect to scienter, the class action relied on (1) “suspicious stock sales” totaling more than $33 million by two of the individually-named officers, (2) “Corinthian's ‘hands on’ management and tracking of student data and information,” to suggest that “Corinthian's management must have known about underlying fraudulent conduct to achieve maximum federal funding at various schools,” and (3) the allegation that Corinthian’s corporate officers knew that its early revenue recognition practices – “crediting a full month's worth of tuition regardless of whether a student started at the beginning or end of that particular month” – was improper. Id., at 1058. The bottom line is that the alleged fraud purportedly violated GAAP and inflated Corinthian’s stock price, id., at 1056.

Full post as published by Class Action Defense Blog on November 10, 2008 (boomark / email).