The opinion of the court was delivered by: Chesler, District Judge
THIS DOCUMENT RELATES TO: ALL ACTIONS OPINION
This matter comes before the Court on Defendants' motion to dismiss the Consolidated Amended Class Action Complaint (the "Complaint") pursuant to Federal Rule of Civil Procedure 12(b)(6). Lead Plaintiff Richard Arons ("Plaintiff") has opposed the motion. The Court has considered the papers filed by the parties and, pursuant to Federal Rule of Civil Procedure 78, will rule on the motion without oral argument. For the reasons expressed below, Defendants' motion will be granted.
This is a securities fraud case, filed as a putative class action on behalf of shareholders who bought the common stock of Defendant Lincoln Educational Services Corp. ("Defendant" or "Lincoln") between March 3, 2010 and August 4, 2010, inclusive (hereinafter, the "Class Period"). The essence of the fraud alleged is that Lincoln and individuals employed by Lincoln misled investors concerning how the implementation of certain reforms to its admissions standards and protocols would affect the student enrollment growth rate projected by Lincoln for 2010. The individuals named as Defendants in the Complaint are David Carney (Chairman of Lincoln's Board of Directors during the Class Period), Shaun McAlmont (Lincoln's President and Chief Executive Officer) and Cesar Ribeiro (Lincoln's Senior Vice President and Chief Financial Officer).
Before turning to the alleged misrepresentations on which the instant legal action is based, the Court will review pertinent facts about Lincoln's business and the relevant changes to its admissions standards. The Court bases the following narration solely on the Complaint's factual allegations, which are assumed to be true for purposes of this motion only.
Lincoln is classified by the Department of Education ("DOE") as a "for-profit" school. The Complaint describes for-profit schools as follows:
For-profit schools offer students certificates and/or degrees after preparing them for employment in a trade. These schools typically receive a large amount of their tuition payments from federal financial aid. Accordingly, for-profit schools are subject to regulation by the U.S. Government, which can prohibit students receiving federal financial aid from attending a for-profit school that does not meet the Government's requirements. (Compl., ¶ 3.) Lincoln's 2009 SEC Form 10-K stated that approximately 81% of Lincoln's revenue is derived from federal financial aid funds pursuant to Title IV of the Higher Education Act. (Id., ¶ 30.)
Some students who enroll at Lincoln have not graduated high school. (Id., ¶¶ 35, 38.)
The DOE and Lincoln classify such students, meaning those who are admitted to secondary education programs without a high school diploma, as "ability to benefit" ("ATB") students. (Id., ¶ 36.) Statistically, ATB students are less likely to complete their program, become gainfully employed and/or pay back student loans. (Id., ¶ 37.) DOE regulations thus cap the number of ATB students which may be admitted to a school subject to the DOE's jurisdiction. (Id.) Under the regulations, ATB students may not constitute 50% or more of the student body. (Id.) In 2009, ATB students accounted for approximately 11% to 12% of Lincoln's total student population. (Id., ¶¶ 38, 55.)
In October 2009, the DOE published proposed new regulations, which in relevant part would deny Title IV funds to schools that failed to prepare their students for "gainful employment," a standard measured by various factors, including a school's average student loan debt and repayment rate and program completion by students. (Id., ¶¶ 31-34.) According to the Complaint, the DOE recognized that debt loads and defaults had grown rapidly at for-profit schools as a result of the failure to position students to earn enough to pay their obligations. (Id.,
¶ 34.) The proposed rule aimed to hold for-profit schools accountable for preparing students for gainful employment, so that the students would be able to pay back their federal loans. (Id.) In anticipation of the rule change, Lincoln decided to limit its enrollment of ATB students, with the alleged goal of making it easier to comply with the DOE's proposed regulations regarding the preparation of students for gainful employment and the reduction of debt and loan defaults. (Id., ¶¶ 44-45.)
On March 3, 2010, Lincoln issued an Earnings Release, which contained year-end results for 2009 as well as revenue and student start rate growth projections for 2010. (Id., ¶ 42.) The release stated that for 2010, Lincoln would experience an "increase in expected student starts of 13% to 15% over 2009." (Id., ¶ 67.) On that date, Lincoln also held a conference call with investors (hereinafter, the "March 3 conference call"). (Id., ¶¶ 43, 72.) During the March 3 conference call, Lincoln announced that the company was raising its admissions standards to reduce the school's population of ATB students. (Id., ¶ 73.) In particular, Defendants Carney and McAlmont stated that Lincoln had increased its required test scores for ATB students and had begun requiring a pre-admission and orientation program. (Id., ¶ 44). Carney reiterated the student growth start projection announced in the press release, and McAlmont explained that, in spite of the tightened ATB student entrance requirements, Lincoln believed that a loss in the ATB student portion of the population would be offset by an increase in students who had graduated from high school. (Id., ¶¶ 43, 73.) He stated:
I will just say that our approach on looking at entrance requirements is a gradual one. We look at offsetting and so if we tighten our entrance requirements, it may, for example, affect ATB students and lessen that population over time. But we offset that with an increase in our recent high school grad population. And we feel that that particular offset gives us better outcomes, a student that is more committed and it really does relieve the burden on some of our entrances processes. (Id., ¶ 73.)
A couple of months later, on May 5, 2010, Defendants issued a press release reporting on results for the first quarter of 2010. It stated that Lincoln had met projected revenue and student start rate growth for the quarter. The press release reiterated the expected overall student start increase for 2010 and also stated that the expected student start increase for the second quarter was 8% to 10%. (Id., ¶¶ 47, 49, 75.) Commenting on the results during a May 5, 2010 conference call (hereinafter, the "May 5 conference call"), Defendant Carney stated:
Our strong student starts during the last several quarters has led us to take a more selective approach to our admissions standards. We expect these actions will reduce our start growth over time, but improve retention, student outcomes, and placement rates as well as ultimately reduce bad debt expense and default rates. We implemented these efforts at the beginning of the year and therefore factored them in to our 2010 outlook that we provided on our March 3 earnings call. (Id., ¶ 50.) Later in the call, Defendant McAlmont reassured investors that the new approach to reduce ATB student enrollment "has already been implemented" and further reassured that there were "no other changes to admission standards." (Id., ¶ 81.)
According to the Complaint, the truth about student starts was revealed on August 5, 2010. Before the trading day began, Lincoln issued a press release which reported that for the second quarter, "student starts were essentially flat and reflected actions to raise outcomes." (Id.,¶ 86.) The press release quoted McAlmont as stating that in light of the ATB student admissions reforms, "we now believe student starts will be essentially flat for the remainder of 2010." (Id.) Plaintiff alleges that, during the August 5, 2010 conference call, "Defendants revealed for the first time that two thirds of student start growth for the second quarter was expected to come from ATB enrollments, that ATB enrollment remained at 11% and that high school enrollments did not materialize." (Id., ¶ 89.) Both Carney and McAlmont represented during the conference call that the ATB student admissions reforms would limit new student start growth in "the short-term." (Id., ¶¶ 87, 88.) Moreover, McAlmont told investors that there would be a start rate impact "while we implement [restrictions on ATB enrollments]." (Id.,¶ 89 (alteration in Complaint).) The Complaint alleges that as a result of the revelations of August 5, 2010, Lincoln's stock price fell approximately 20%, as the market incorporated the information that Lincoln's actions to limit ATB student admissions were likely to stunt the school's student starts for the rest of the year and thus would have a negative effect on Lincoln's business. (Id., ¶ 92.)
According to the Complaint, the statements made on March 3, 2010 and May 5, 2010 regarding student starts were materially false and misleading because Defendants knew or recklessly disregarded that Lincoln would be unable to achieve its full year and second quarter start rates while simultaneously implementing measures to reduce enrollment of ATB students. (Id., ¶ 76.) Plaintiff alleges that Lincoln concealed from investors that it largely depended on ATB student start growth to achieve overall student start growth. (Id., ¶ 77.) Plaintiff further avers that Carney's representations that the effects of such measures had been incorporated into the projections were also false. (Id., ¶ 78.) Finally, the Complaint also alleges that Defendants made material misrepresentations when they stated that the admissions reforms would affect student start rates "over time" and when they stated that the reforms had already been implemented. (Id., ¶¶ 87-88, 90.)
Plaintiff seeks relief under § 10(b) of the Securities and Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b). He also asserts a claim against the Individual Defendants for control person liability, pursuant to Exchange Act § 20(a), 15 U.S.C. §78t(a).