jimmy elias karam, et al. v. corinthian colleges, inc., et...

Case 2:10-cv-06523-GHK-PJW Document 109 Filed 08/20/12 of 19 Page ID

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UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES - GENERAL

Case No. CV 10-6523-GHK (PJWx) Date August 20, 2012

Title Jimmy Elias Karam v. Corinthian Colleges, Inc., et al.

Presiding: The Honorable GEORGE H. KING, U. S. DISTRICT JUDGE

Beatrice Herrera N/A N/A

Deputy Clerk Court Reporter / Recorder Tape No.

Attorneys Present for Plaintiffs: Attorneys Present for Defendants:

None None

Proceedings: (In Chambers) Order re: Motion to Dismiss Third Amended Complaint; [98]

This matter is before us on Defendants Corinthian Colleges, Inc. (“Corinthian”), Jack P.

Massimino (“Massimino”), Peter C. Waller (“Waller”), Matthew A. Ouimet (“Ouimet”), and Kenneth S.

Ord’s (“Ord” and collectively “Defendants”) Motion to Dismiss Third Amended Complaint (“Motion”). This is a putative federal securities fraud class action brought pursuant §§ 10(b) and 20(a) of the

Securities and Exchange Act of 1934 and Securities Exchange Commission (“SEC”) Rule 10b-5. Defendants move to dismiss the Third Amended Complaint on the ground that it fails to meet the

heightened pleading requirements of the Private Securities Litigation Reform Act (“PSLRA”). We have

considered the arguments in support of and in opposition to the Motion and deem this matter appropriate

for resolution without oral argument. L.R. 7-15. As the Parties are familiar with the facts, we will

repeat them only as necessary. Accordingly, we rule as follows.

I. Legal Standard for Motion to Dismiss Under Rule 12(b)(6) & the PSLRA

In ruling on a 12(b)(6) motion to dismiss in a securities fraud action, we must accept all factual

allegations in the complaint as true. See Tellabs, Inc. v. Makor Issues & Rights, Ltd. , 551 U.S. 308, 322 (2007). We must consider the complaint in its entirety, materials incorporated into the complaint by

reference, and matters of which we may take judicial notice. Id. at 322-23.

“The required elements of a private securities fraud action are: (1) a material misrepresentation

or omission of fact, (2) scienter, (3) a connection with the purchase or sale of a security, (4) transaction

and loss causation, and (5) economic loss.” Metzler Inv. GMBH v. Corinthian Colls., Inc. , 540 F.3d 1049, 1061 (9th Cir. 2008). When seeking to enforce federal securities laws, private plaintiffs must

meet the higher, more exacting pleading standards of the PSLRA. See Tellabs , 551 U.S. at 313-14. The PSLRA requires that “the complaint must raise a ‘strong inference’ of scienter– i.e. , a strong inference that the defendant acted with an intent to deceive, manipulate, or defraud.” Metzler , 540 F.3d at 1061 (citing 15 U.S.C. § 78u-4(b)(2)). In reviewing a complaint under this standard, “the court must consider

all reasonable inferences to be drawn from the allegations, including inferences unfavorable to the

plaintiffs.” Gompper v. VISX, Inc. , 298 F.3d 893, 897 (9th Cir. 2002). This examination requires us to

scrutinize the complaint in its entirety, not to simply scrutinize individual allegations in isolation. See Tellabs, 551 U.S. at 322. CV-90 (06/04) CIVIL MINUTES - GENERAL Page 1 of 19


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The PSLRA also requires that the “complaint shall specify each statement alleged to have been

misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the

statement or omission is made on information and belief, the complaint shall state with particularity all

facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). This requirement of specificity

“prevents a plaintiff from skirting dismissal by filing a complaint laden with vague allegations of

deception unaccompanied by particularized explanation stating why the defendant’s alleged statements

or omissions are deceitful.” Metzler , 540 F.3d at 1061.

II. Factual Background 1

Lead Plaintiffs Wyoming Retirement System and Stichting Pensioenfonds Metaal en Techniek

(collectively, “Plaintiffs”) seek to represent a class of investors who acquired Corinthian’s publicly

traded securities between October 30, 2007, and August 19, 2010 (“Class Period”). The Defendants

include Corinthian and four of its officers: Massimino, Corinthian’s current Executive Chairman of the

Board and former CEO and Chairman of the Board; Waller, Corinthian’s President and COO from

February 2006 through June 2009, and CEO from July 2009 to December 2010; Ouimet, Corinthian’s

President and COO from July 2009 until October 2010; and Ord, Corinthian’s current Executive Vice

President.

On January 30, 2012, we dismissed Plaintiffs’ Second Amended Complaint (“SAC”) and granted

leave to amend. Our decision rested on three grounds, each independently sufficient to require

dismissal: (1) Plaintiffs failed to plead specific facts demonstrating that any statement made by

Defendants was false or misleading, (2) Plaintiffs failed to plead facts giving rise to a “strong inference”

of scienter, and (3) Plaintiffs failed to adequately plead loss causation.

On February 29, 2012, Plaintiffs filed a Third Amended Complaint (“TAC”). Defendants now

move to dismiss the TAC arguing that it fails to cure the deficiencies of the SAC identified in our

January 30, 2012 Order. As discussed in more depth below, we agree.

A. TAC’s Allegations of Fraud and Falsity

Corinthian is a for-profit education company that operates campuses in the United States and

Canada under the Everest, Wyotech, and Heald brands. The majority of Corinthian’s revenue is

generated from federal Title IV funding. (TAC ¶ 8). Plaintiffs allege that during the Class Period

Corinthian “orchestrated a variety of deceptive and predatory tactics in order to benefit from as much

financial aid as possible.” (TAC ¶ 11). These deceptive and predatory practices included: enrolling

students who were incapable of passing classes, (TAC ¶ 54); changing failing grades to passing grades

to keep students enrolled, (TAC ¶ 144); retaining students who should have been dropped for non-attendance, (TAC ¶ 65); providing students with deceptive job placement numbers, (TAC ¶ 85); falsely

1 Our factual background is taken from the TAC, documents incorporated into the TAC by

reference, and documents submitted by the Parties that are properly subject to judicial notice. CV-90 (06/04) CIVIL MINUTES - GENERAL Page 2 of 19


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telling students that certain course credits would be transferable to other schools when those course

credits in fact were not transferable, (TAC ¶ 100); and failing to disclose to students the complete cost

of their education, (TAC ¶ 101). The TAC alleges that these practices were widespread, affecting “tens

of thousands” of students. (TAC ¶ 144).

The TAC relies on the statements of eight confidential witnesses (“CWs”) as the primary source

for these allegations. The CWs are former Corinthian employees and include an admissions

representative, a vice president responsible for audit work, a financial aid representative, an admissions

recruiter, a dean, an instructor, a student finance representative, and a regional admissions director. Six

of these CWs worked at a single Everest College campus.

The gravamen of the TAC is that Defendants failed to disclose Corinthian’s “predatory business

model to the market and its shareholders,” and instead provided “a completely different picture of what

drove its revenue.” (TAC ¶ 37). The TAC alleges that Defendants made four specific types of

misleading statements: statements pertaining to (1) Corinthian’s student enrollment and revenue growth,

(2) its graduation and placement rates, (3) its legal compliance, and (4) its admissions practices. For

each category, we will provide a few examples of the statements Plaintiffs challenge, followed by

Plaintiffs explanation of why these types of statements were misleading.

1. Statements Related to Student Enrollment and Revenue Growth

Plaintiffs allege that Defendants made misleading statements that attributed Corinthian’s student

enrollment and revenue growth to legitimate practices. For example, Plaintiffs challenge statements

such as:

“[M]ore effective advertisements, brand consolidation, and a shift toward national

advertising helped generate positive growth over the past several months.” (TAC ¶ 126).

“[W]e believe that our ongoing efforts to improve the caliber of management, standardize

and upgrade key business processes and improve service to students are helping to

revitalize growth.” (TAC ¶ 127). “Our national advertising campaign continued to be the primary impetus for growth in

the quarter.” (TAC ¶ 128).

Plaintiffs allege that these statements “were misleading because defendants concealed the fact

that the increases [in growth] depended upon enrolling and retaining tens of thousands of unqualified,

failing and non-attending students as active students, and churning through the tens of thousands of

students who quickly dropped out.” (TAC ¶ 144).

2. Statements Related to Corinthian’s Graduation and Placement Rates

Plaintiffs allege that statements such as “[w]e’re very proud of our graduation and placement

rates,” (TAC ¶ 155), “[l]ast year we placed 84% of the students who graduated,” (TAC ¶ 156), and

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“[w]e believe that ATB students 2 can successfully complete many of our diploma programs and our

colleges have demonstrated success in graduating and placing these students over the years,” (TAC ¶

159), “were false and misleading because defendants concealed the fact that a majority of Corinthian

students were quickly dropping out.” (TAC ¶ 164).

3. Statements Related to Corinthian’s Legal Compliance

Plaintiffs allege that “Defendants also made numerous false statements misrepresenting

Corinthian’s compliance with regulations governing access to federal education funds.” (TAC ¶ 171). These include statements such as:

“We routinely evaluate and strengthen existing compliance policies and procedures.” (TAC ¶ 171). “Compliance for the organization really has been job one for us.” (TAC ¶ 173).

“[T]he tone at the top of our organization is all about compliance.” (TAC ¶ 174).

Plaintiffs contend that these statements “were false in light of misleading recruiting claims,

manipulated admissions practices, widespread alteration of failing grades, and the retention of non-attending students.” (TAC ¶ 181).

4. Statements Related to Corinthian’s Admissions Practices

Plaintiffs challenge statements regarding Corinthian’s admissions practices, such as:

“One of our objectives in the admissions process is to identify students who have the

ability to succeed in our schools.” (TAC ¶ 186).

“The majority of prospective students must pass a standardized admissions test.” (TAC ¶

186). “We, certainly, from a Corinthian point of view, feel strongly about monitoring entrance

testing.” (TAC ¶ 188).

Plaintiffs allege that these “assurances that Corinthian followed effective admissions practices in

order to ensure that it only enrolled qualified students were grossly misleading” because “the truth was

the exact opposite, as demonstrated by the abysmal default and dropout rates due to a practice of

enrolling anyone possible in order to gain access to additional financial education funds.” (TAC ¶ 191).

In sum, the TAC alleges that through a collection of statements over the Class Period Defendants

misled investors by creating the impression that Corinthian was a well run company, when in fact its

success depended on a “systemically predatory business model.” (TAC ¶ 209).

2 “ATB students” refers to students in Corinthian’s “Ability to Benefit” program, a program for

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B. TAC’s Allegations of Scienter

The TAC alleges that the Defendants were aware of the alleged widespread problems by virtue

of their positions at Corinthian. (TAC ¶ 200). It alleges that they “had access to non-public information

about [Corinthian’s] business, finances, enrollment, markets and present and future business prospects

via access to internal corporate documents, conversations and connections with other corporate officers

and employees, attendance at management and board of directors meetings and committees thereof and

via reports and other information provided to them in connection therewith.” (TAC ¶ 203). Additionally, the TAC alleges that Massimino and Waller were aware of the alleged problems because

they “had been advised by [Confidential Witness 2 (“CW2”)] of the extensive and widespread problems

at Corinthian’s Everest campuses concerning unqualified, non-attending and failing students, including

the falsification of passing grades.” (TAC ¶ 201).

Because Defendants were allegedly aware of the pervasive problems at Corinthian, the TAC

alleges that the Defendants “knew that their false and misleading statements and public documents were

materially false and misleading.” (TAC ¶ 200). The TAC alleges that the Defendants were “motivated

to commit fraud as a result of the Company’s executive compensation structure . . . [because their]

compensation was variable and tied to the Company’s short-term financial performance.” (TAC ¶ 207).

C. TAC’s Allegations of Loss Causation

The TAC alleges that the following disclosures and events purportedly revealed the pervasive

fraud at Corinthian to the market, thus causing Plaintiffs’ losses:

• A February 2, 2010 conference call with market analysts, wherein “the Company

expressed concern over the potential effects of proposed government regulations on

financial aid resources, specifically aimed to protect students from taking on debt that

they would not be able to repay.” (TAC ¶ 214). “That day, the price per share of

Corinthian stock fell nearly 3% . . . .” (TAC ¶ 214).

• News released on May 27, 2010 “that the [Department of Education (“DOE”)] was

expected to issue new regulations to ‘protect students from enrolling in costly programs

whose graduates end up with dead-end jobs,’ unable to repay their loans.” That day,

“Corinthian’s stock price fell 3%.” (TAC ¶ 215). • A June 16, 2010 announcement by the DOE “that it was proposing new tougher

regulations on the industry designed to protect college students and taxpayers from

abusive or fraudulent practices.” (TAC ¶ 217). On this news, Corinthian’s stock price

fell 5%. • On June 24, 2010, the Senate held a hearing entitled, “Emerging Risk? An Overview of

the Federal Investment in For-Profit Education.” In response, Corinthian’s stock price

fell 5%. (TAC ¶ 218).



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• On August 3, 2010, “adverse news began to leak into the market concerning the findings

from an undercover operation conducted by the U.S. Governmental Accountability

Office (‘GAO’) on recruiting techniques used in the for-profit higher education industry.” (TAC ¶ 220). That day, Corinthian stock closed down 6%.

• On August 4, 2010, the GAO issued its report, “finding that many of the companies in the

industry employed fraudulent and deceptive practices in their student recruiting.” (TAC

¶ 222). • On August 16, 2010, Corinthian’s stock price dropped 22% after the DOE released data

on student loan repayment rates, “including data showing some Corinthian schools with

repayment rates less than 20%.” (TAC ¶ 225). • On August 20, 2010, Corinthian’s stock fell 17% after it announced that “it would phase

out the enrollment of students who had not graduated from high school, commonly

referred to as ATB students.” (TAC ¶ 226).

The TAC states that “[t]he timing and magnitude of the decline in Corinthian’s publicly traded

securities negates any inference that the loss suffered by plaintiffs and other Class members were [sic]

caused by changed market conditions, macroeconomic factors or Company-specific facts unrelated to

defendants’ fraudulent conduct.” (TAC ¶ 228).

III. Discussion

A. Falsity

“The PSLRA has exacting pleading requirements for ‘falsity.’” Metzler , 540 F.3d at 1070. The Complaint must “specify each statement alleged to have been misleading, the reason or reasons why the

statement is misleading, and, if an allegation regarding the statement or omission is made on information

and belief, the complaint shall state with particularity all facts on which that belief is formed.” 15

U.S.C. § 78u-4(b)(1). “A litany of alleged false statements, unaccompanied by the pleading of specific

facts indicating why those statements were false, does not meet this standard.” Metzler , 540 F.3d at 1070; accord Falkowski v. Imation Corp. , 309 F.3d 1123, 1133 (9th Cir. 2002) (“Although the

allegations here are voluminous, they do not rise to the level of specificity required under the PSLRA. The allegations consist of vague claims about what statements were false or misleading, how they were

false, and why we can infer intent to mislead. We have dismissed much more specific and compelling

allegations.”), abrogated on other grounds by Proctor v. Vishay Intertech. Inc., 584 F.3d 1208 (9th Cir. 2009). The relevant question is “whether the facts alleged are sufficient to support a reasonable belief as

to the misleading nature of the statement or omission.” Novak v. Kasaks , 216 F.3d 300, 314 n.1 (2d Cir. 2000).

A statement is misleading if it creates an “impression of a state of affairs that differs in a material

way from the one that actually exists.” Berson v. Applied Signal Tech., Inc. , 527 F.3d 982, 985 (9th Cir. 2008) (quotation marks omitted). An omission is misleading if the missing information alters the mix of

what investors consider material. Matrixx Initiatives, Inc. v. Siracusano , 131 S. Ct. 1309, 1312 (2011).



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“[T]he disclosure required by the securities laws is measured not by literal truth, but by the ability of the

material to accurately inform rather than mislead.” In re Convergent Techs. Sec. Litig. , 948 F.2d 507, 512 (9th Cir. 1991) (quotation marks omitted).

As noted above, the TAC groups the alleged misleading statements made by Defendants into

four categories: statements related to (1) student enrollment and revenue growth, (2) graduation and

placement rates, (3) legal compliance, and (4) admissions practices.

1. Statements Relating to Student Enrollment and Revenue Growth

Plaintiffs do not contend that any specific statement Defendants made regarding student

enrollment and revenue growth was literally false. They do not contend, for example, that “more

effective advertising” and “brand consolidation” did not contribute to the company’s growth during the

Class Period. Instead, they allege that Defendants’ statements attributing growth to legitimate practices

(such advertising) were misleading because Defendants concealed that growth also heavily relied on

enrolling and retaining “tens of thousands” of unqualified students through illegal recruiting practices

and false grading policies. We agree that if Corinthian’s growth was heavily dependent on serious or

pervasive misconduct, investors would find that to be material. We also agree that the failure to disclose

that growth was dependent on such misconduct would render one or more of Defendants’ Class Period

statements misleading. In re Syncor Int’l Corp. Sec. Litig. , 239 F. App’x 318, 320 (9th Cir. 2007) (“By

attributing Syncor’s success solely to legitimate practices, defendants implicitly (and falsely) warranted

that there were no illegal practices contributing to that success.”). However, the issue here is whether

Plaintiffs have alleged, with the particularity the PSLRA requires, that the alleged misconduct was in

fact of a sufficient magnitude to have a material impact on Corinthian’s student enrollment and revenue

growth.

As with the SAC, the TAC does not plead particularized facts showing that the supposed

improper practices and enrollment and retention of unqualified students contributed materially to

Corinthian’s growth. Although Plaintiffs assert that “tens of thousands” of “unqualified, failing, and

non-attending students” were improperly allowed to stay in school, critically, they fail to support this

generic assertion with the “pleading of specific facts” mandated by the PSLRA. Metzler , 540 F.3d at 1070.

In their Opposition, Plaintiffs argue that the following content in the TAC demonstrates that the

improper practices contributed materially to Corinthian’s growth: (1) the accounts of the CWs, (2) the

details of Corinthian’s August 2010 decision to terminate its ATB program for non-highschool

graduates, (3) the DOE’s data regarding Corinthian’s low student loan repayment rate, and (4) findings

by the Senate HELP Committee that Corinthian had a high student dropout rate.

The accounts of the eight CWs are the primary source for Plaintiffs’ allegations. While the

CWs’ statements document the occurrence of some of the alleged improper practices at Corinthian, the

problems with these statements are (1) that they are vague, and thus lack reliability, and (2) they fail to



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support Plaintiffs’ assertion that “tens of thousands,” or some other material number, of students were

affected by these practices. When a securities plaintiff relies on the statements of confidential

witnesses, he must describe those statements with “sufficient particularity to establish their reliability

and personal knowledge.” Zucco Partners, LLC v. Digimarc Corp. , 552 F.3d 981, 995 (9th Cir. 2009). When confidential witnesses “base their knowledge on vague hearsay,” it is not enough to satisfy the

reliability standard. Id. ; see also Boca Raton Firefighters’ & Police Pension Fund v. DeVry Inc. , No. 10 C 7031, 2012 WL 1030474, at *4, 7 (N.D. Ill. Mar. 27, 2012) (addressing similar allegations against a different group of for-profit schools and stating that “allegations from confidential witnesses should be

steeply discounted.” (quotation marks and alterations omitted)).

Here, the majority of the CWs’ statements are vague and pertain to each CW’s generalized,

subjective impressions of practices at individual campuses. 3 Thus they fail to satisfy the PSLRA’s specificity requirement. These statements also fail to support Plaintiffs’ allegations of widespread

misconduct because none of them purports to quantify the total number of students affected by the

alleged improper practices. See DeVry , 2012 WL 1030474, at*4 (“Even concrete allegations of

wrongdoing may be deficient if they do not allege a problem of sufficient magnitude to undermine the

defendants’ public statements about DeVry’s policies and practices.”); id. (finding that the vague statements of 33 confidential witnesses failed to support allegations of widespread fraud). Rather, they

either vaguely assert that the alleged improper practices were an “issue” at some schools, or they merely

describe a single instance of misconduct. Even if one cobbles together all of the CW statements, they

still do not support a reasonable inference that “tens of thousands” of “unqualified, failing, and non-attending students” were enrolled and retained at Corinthian’s campuses. Indeed, as noted in our prior

order, “none of the CWs is alleged to have worked at Corinthian throughout the entire Class Period, and

what they supposedly said appears to be limited to a few Everest Campuses.” (Dkt. No. 96, at 7). In

sum, the CWs’ statements fail to establish that the alleged misconduct materially affected Corinthian’s

3 (See TAC ¶ 54 (CW1, an admissions representative at one Everest campus in Texas, states that

“many of the students” were incapable of passing classes); TAC ¶ 64 (one auditor advised CW2, a vice

president in charge of internal audits, “that it appeared that a teacher had falsified attendance entries”);

TAC ¶ 65 (CW2 states that retaining non-attending students was “an ongoing issue” at eight to ten

schools); TAC ¶ 81 (CW3, a financial aid representative at a singe Everest campus, states that

“[o]cassionally” financial aid representatives would “put down anything they wanted in financial

applications”); TAC ¶ 86 (CW4, an admissions recruiter at a single Everest campus, states that it was

CW4’s “impression” that “many of the students” who got through courses were unable to construct

sentences, spell, or understand basic math); TAC ¶ 89 (CW5, a dean and instructor at a California

Everest campus, states that if a student was failing, “it was typical” for an instructor to give the student

extra course work and then disregard the other coursework or lack of attendance); TAC ¶ 90 (CW6, a

student finance representative, recalls that “many times” students “appeared” to have been coached by

admissions on what to say concerning their financial status); TAC ¶ 94 (CW7, a regional admissions

director, states that Corinthian enrolled students that “often had criminal histories”); TAC ¶ 95 (CW8,

an instructor for Everest College, states that “one reason” CW8 was terminated was “that too many of

CW8’s students dropped out”)).



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growth with the particularity the PSLRA requires. Therefore, they do not support Plaintiffs’ assertion

that Defendants’ statements relating to student enrollment and revenue growth were misleading.

Corinthian’s August 2010 decision to terminate its ATB program for non-highschool graduates

also does not help Plaintiffs’ establish falsity. As Defendants note, “[t]here is nothing inherently

improper about serving ATB students.” (Mot. 11). That Corinthian made a business decision to stop

serving ATB students does not show that supposedly improper grading and recruitment practices

materially contributed to the company’s growth during the Class Period. Additionally, the fact that the

DOE published data showing that Corinthian’s student loan repayment rate was much lower than the

rates of private, non-profit institutions does not show that the alleged improper practices contributed

materially to Corinthian’s growth. While these figures may be consistent with the idea that Corinthian

enrolled unqualified students, 4 they are also consistent with the idea that Corinthian’s students were hit

hard by the recent economic recession. “Where a complaint pleads facts that are merely consistent with

a defendant’s liability, it stops short of the line between possibility and plausibility of entitlement to

relief.” Ashcroft v. Iqbal , 556 U.S. 662, 678 (2009) (quotation marks omitted). Here, in light of the

recent economic recession, it is unwarranted to draw the inference that simply because Corinthian had a

low student loan repayment rate, it also had a widespread practice of enrolling unqualified students. See Metzler , 540 F.3d at 1064 (“[T]he court . . . is not required to indulge unwarranted inferences in order to

save a complaint from dismissal.”). In sum, Corinthian’s loan payment figures fail to establish with the

specificity the PSLRA requires that Corinthian had a materially widespread practice of enrolling

unqualified students such that its growth statements were misleading.

Finally, the findings by the Senate HELP Committee that Corinthian had a high student dropout

rate also fail to support Plaintiffs’ claims of materially widespread improper practices. That a large

number of students “dropped out” of Corinthian’s programs does not show that Corinthian enrolled

students who were unqualified because, as Defendants point out, students may withdraw for any number

of reasons unrelated to their ability to pass classes, such as decisions to pursue other career or

educational opportunities, family and personal circumstances, or financial factors. Students may also

withdraw due to their general lack of satisfaction with the quality of education being offered by

Corinthian – however, Plaintiffs cannot prevail on a securities fraud action merely by claiming that

Defendants offered a poor product. Moreover, Plaintiffs’ allegations that Corinthian had a widespread

practice of retaining failing and nonattending students suggest that the reasons the students “dropped

out” was not because they were failing. Thus, these statistics do not help Plaintiffs establish falsity.

The allegations here stand in stark contrast to those in Syncor, in which the Ninth Circuit found that a group of investor plaintiffs sufficiently alleged that the “defendants’ statements attributing

overseas growth solely to legitimate business practices” were misleading because the “plaintiffs alleged

specific facts suggesting that illegal payments were . . . a significant reason for [the company’s]

4 Even if these figures are consistent with the idea that Corinthian enrolled unqualified students,

they in no way show that Corinthian was engaged in a widespread practice of falsifying grades or

deceptively recruiting students such that its public statements were rendered misleading. CV-90 (06/04) CIVIL MINUTES - GENERAL Page 9 of 19

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overseas growth.” 239 F. App’x at 320. First, unlike Syncor , the statements Plaintiffs challenge do not

attribute Corinthian’s growth solely to legitimate practices. The statements are much more amorphous,

stating only, for example, that “more effective advertisements, brand consolidation, and a shift toward

national advertising helped generate positive growth over the past several months.” (TAC ¶ 126

(emphasis added)). Thus, unlike the defendants in Syncor , Defendants did not “implicitly (and falsely) warrant[] that there were no illegal practices contributing to [the company’s] success.” 239 F. App’x at

320. Therefore, in order to demonstrate that Defendants’ statements were false or misleading, Plaintiffs

would have to allege specific facts showing that Corinthian’s growth was so dependent on the alleged misconduct that the failure to mention that conduct when attributing growth to a legitimate factor would

create an “impression of a state of affairs that differs in a material way from the one that actually exists.” Berson , 527 F.3d at 985. As discussed above, Plaintiffs have not pled such specific facts. Second, in

Syncor, the plaintiffs were able to plead “specific facts suggesting that illegal payments were . . . a

significant reason for [the company’s] overseas growth” through the allegations of a confidential

witness “that two officer defendants . . . privately credited the illegal payments for spurring overseas

growth.” 239 F. App’x at 320. From this, the Ninth Circuit reasoned that “[w]hen corporate officers

credit an illegal payment scheme for raising revenues, a reasonable inference is that the scheme did raise revenues.” Id. Here, there are no similar allegations of statements by Defendants crediting the alleged

misconduct for driving student enrollment and revenue growth. Thus we cannot reasonably infer that

the alleged misconduct contributed materially to growth.

The allegations here are more in line with Metzler , another putative securities class action

against Corinthian asserting similar allegations. In Metzler , the plaintiff claimed that Corinthian’s “public face” of “financial success premised on increasing student enrollment and successful placement

rates” was belied by practices of enrolling students “unqualified for admission” and “falsifying student

grades.” 540 F.3d at 1055-56. Like Plaintiffs here, the Metzler plaintiff’s “allegations of fraudulent

practice [we]re supported principally by statements taken from former confidential witnesses, who

[we]re former Corinthian employees that served at numerous campuses in differing capacities.” Id. at 1056. “These CW’s, with varying degrees of specificity, attest[ed] to instances of misconduct on their

campuses” that the plaintiff cited to support his more generalized allegations of fraud. Id. However, the Ninth Circuit found these “allegations of fraud generally” to be ultimately unsubstantiated and

insufficient. Id. at 1070. Insofar as the TAC is based on alleged false statements related to student

enrollment and revenue growth, it warrants dismissal for the same reason. Id.; see also Gaer v. Education Management Corp. , No. 10-1061, 2011 WL 7277447, at *11 (W.D. Penn. Aug. 30, 2011) (dismissing complaint alleging that company’s “growth was not driven by [its] commitment to education . . . , but, rather, the fact that [it] employed pervasive . . . deceptive recruiting and enrollment practices”).

2. Statements Concerning Graduation and Placement Rates

As noted above, Plaintiffs claim that statements such as “[w]e’re very proud of our graduation

and placement rates,” (TAC ¶ 155), “[l]ast year we placed 84% of the students who graduated,” (TAC ¶

156), and “[w]e believe that ATB students can successfully complete many of our diploma programs








and our colleges have demonstrated success in graduating and placing these students over the years,”

(TAC ¶ 159), “were false and misleading because defendants concealed the fact that a majority of

Corinthian students were quickly dropping out.” (TAC ¶ 164).

Many of the statements Plaintiffs challenge with respect to graduation and placement rates

simply state the job placement rates for Corinthian’s graduates at particular points in time. While

Plaintiffs assert that these statements were “false and misleading,” they have made absolutely no

showing that these statements were literally false. That is, Plaintiffs do not show that the graduate

placement rates cited by Defendants were not in fact what Defendants stated. Instead, the thrust of

Plaintiffs’ claim appears to be that these statements were misleading because they disguised the fact that

a large number of Corinthian’s students “were quickly dropping out.” As noted above, a statement is

misleading if it creates an “impression of a state of affairs that differs in a material way from the one

that actually exists.” Berson , 527 F.3d at 985. Here, Defendants’ citation of positive job placement

numbers in no way suggests that Defendants’ “dropout” rate is similarly impressive. Accordingly, the

fact that the dropout rate was poor does not render Defendants’ statements about the career placement of

graduates misleading. See In re ITT Educ. Servs., Inc. Sec. Litig. , No. 10 Civ. 8323 (VM), 2012 WL 1632762, at *6 (S.D.N.Y. May 4, 2012) (statement not misleading because it did “not suggest that the

undisclosed improper activity alleged by Plaintiff was not occurring”).

Some of the other statements Plaintiffs challenge, such as the fact that the company was “proud”

of its graduation and placement rates, are merely non-actionable “vague statements of optimism” on

which “investors do not rely.” In re Cutera Sec. Litig. , 610 F.3d 1103, 1111 (9th Cir. 2010); see also In re Copper Mountain Sec. Litig. , 311 F. Supp. 2d 857, 868 (N.D. Cal. 2004) (“[V]ague statements are not

actionable because they are considered immaterial and discounted by the market and because reasonable

investors do not consider ‘soft’ statements or loose predictions important in making investment

decisions.” (quotation marks omitted)); In re Ford Motor Co. Sec. Litig. , 381 F.3d 563, 570 (6th Cir. 2004) (“All public companies praise their products and their objectives.”). Finally, with respect to the

statements about ATB students, as noted in our prior Order, “Plaintiffs at no point whatsoever identify

facts showing that Corinthian did not have success in graduating and placing [ATB students] at the time

th[o]se statements w[ere] made.” (Dkt. No. 96, at 8). In light of the foregoing, Plaintiffs have failed to

establish that Defendants’ statements related to graduation and placement rates were misleading.

3. Assurances Regarding Legal Compliance

Plaintiffs contend that a number of statements in which Defendants emphasized that Corinthian

was committed to regulatory compliance, ( see, e.g. , TAC ¶ 173 (“Compliance for the organization has

really been job one for us.”)), “were false in light of misleading recruiting claims, manipulated

admissions practices, widespread alteration of failing grades, and the retention of non-attending

students.” (TAC ¶ 181). Many of the challenged statements, however, are too generic and indefinite to

serve as the basis of a securities fraud claim. See, e.g. , In re Cutera, 610 F.3dd at 1113; ECA & Local

134 IBEW Joint Pension Trust of Chicago v. JP Morgan Case Co. , 553 F.3d 187, 206 (2d Cir. 2009) (finding statements regarding business practices such as that defendant “set the standard for integrity” to






Case No. CV 10-6523-GHK (PJWx)

Date August 20, 2012

Title

Jimmy Elias Karam v. Corinthian Colleges, Inc., et al.

be “precisely the type of ‘puffery’ that this and other circuits have consistently held to be inactionable”);

Footbridge Ltd. v. Countrywide Home Loans, Inc. , No. 09 Civ. 4050, 2010 WL 3790810, at * 24 (S.D.N.Y. Sept. 28, 2010) (“Statements about corporate culture and integrity are typically considered to

be inactionable puffery.”). Moreover, even if these statements were actionable, as discussed above,

Plaintiffs have failed to allege particularized facts to show how many students and faculty members

were involved in these alleged practices. Thus, we are unable to determine whether the alleged

problems were of a sufficient magnitude to render misleading Defendants’ statements regarding their

commitment to regulatory compliance. ( See Dkt. No. 96, at 9 (“Plaintiffs must identify particularly and

specifically more widespread problems of noncompliance in order to establish that a statement such as

‘the tone at the top of our organization is all about compliance’ was misleading.”)); see also ITT, 2012 WL 1632762, at *8 (“Plaintiff’s allegations of specific instances of unethical or fraudulent practices do

not render Defendants’ broad statements regarding compliance misleading.”). Finally, as noted in our

prior Order, Plaintiffs’ SAC, which quoted the public communications upon which Plaintiffs rely in

more length than the TAC, demonstrated that “Corinthian’s statements regarding compliance were

frequently accompanied by more cautionary statements, including: compliance is ‘always a risk’ and

that there would be problems with compliance ‘periodically.’” (Dkt. No. 96., at 8 (citing SAC ¶ 123)). “Thus, it would not be fair to characterize Corinthian’s public statements as full sail guarantees of

perfect compliance.” (Id. ). In sum, Plaintiffs have failed to cure the deficiencies of the SAC and

demonstrate, with the requisite level of specificity, that Defendants’ statements regarding legal

compliance were misleading.

4. Misleading Statements Regarding Admission Practices

As noted above, Plaintiffs contend that Defendants’ statements that the “majority” of

Corinthian’s prospective students are required to pass a standardized admissions test, (TAC ¶ 186), and

that one of the “objectives” of the company is “to identify students who have the ability to succeed in”

its schools, (TAC ¶ 186), were misleading in light of the company’s “abysmal default and dropout rates

due to a practice of enrolling anyone possible in order to gain access to additional financial education

funds,” (TAC ¶ 191).

Again, Plaintiffs do not point to any facts demonstrating that Defendants’ statements were

literally false. That is, Plaintiffs make no showing that Corinthian did not have entrance tests or

admissions criteria. Instead, Plaintiffs allege that Defendants’ statements were misleading because they

masked the fact that the company had an alleged practice of recruiting and retaining unqualified

students.

A majority of the statements Plaintiffs challenge, such as those regarding Corinthian’s

“objectives,” are not actionable because they are merely “vague statements of optimism,” or loose

predictions, on which “investors do not rely.” In re Cutera, 610 F.3d at 1111. In any event, as noted above, the TAC does not contain particularized facts demonstrating that Corinthian actually had a

materially widespread “practice of enrolling anyone possible.” Thus, Plaintiffs have failed to

demonstrate with the requisite level of specificity that these statements were actually misleading. As








previously discussed, the anecdotal accounts of the CWs are insufficient to demonstrate that Corinthian

had a materially widespread practice of enrolling unqualified students. Insofar as Plaintiffs again

attempt to rely on the company’s poor “dropout rate,” as discussed above, that rate does not demonstrate

that Corinthian recruited unqualified students because students can withdraw for any number of reasons

unrelated to their ability to pass classes. Moreover, insofar as Plaintiffs allege that Corinthian had a

widespread practice of retaining failing and non-attending students, it would appear that its students

were withdrawing for reasons other than poor academic performance. Finally, the mere fact that

Corinthian’s students were defaulting on their federal loans at high rates does not demonstrate that they

were unqualified for their programs, especially in light of the recent economic recession. Accordingly,

Plaintiffs have failed to plead specific facts demonstrating why Defendants’ statements regarding

Corinthian’s admissions practices were misleading.

B. Scienter

In order to state a claim for securities fraud, a plaintiff must allege that the defendant acted with

scienter – that the defendant had an intention “to deceive, manipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976). To establish that a corporate defendant, such as Corinthian,

acted with scienter, a plaintiff must show that one or more of its directors or officers acted with scienter. See Nordstrom, Inc. v. Chubb & Son, Inc. , 54 F.3d 1424, 1435 (9th Cir. 1995); In re Apple Computer, Inc. Sec. Litig. , 243 F. Supp. 2d 1012, 1023 (N.D. Cal. 2002).

Under the PSLRA, Plaintiffs “can no longer aver intent in general terms of mere motive and

opportunity or recklessness, but rather, must state specific facts indicating no less than a degree of

recklessness that strongly suggests actual intent.” Metzler , 540 F.3d at 1066 (quotation marks omitted). The complaint must state with particularity facts giving rise to a strong inference that Defendants acted

with the required state of mind. Id. For such an inference to qualify as “strong,” it “must be more than

merely plausible or reasonable – it must be cogent and at least as compelling as an opposing inference of

nonfraudulent intent.” Id. (quoting Tellabs , 551 U.S. at 314).

The court “must engage in a comparative evaluation; it must consider, not only inferences urged

by plaintiff . . . but also competing inferences rationally drawn from the facts alleged.” Tellabs, 551 U.S. at 314. Under this standard, “the Court must consider all reasonable inferences to be drawn from

the allegations, including those unfavorable to the plaintiffs.” Metzler , 540 F.3d at 1061 (quoting Gompper, 298 F.3d at 897). “Where pleadings are not sufficiently particularized or where, taken as a

whole, they do not raise a ‘strong inference’ that misleading statements were knowingly or [with]

deliberate recklessness made to investors, a private securities fraud complaint is properly dismissed

under Rule 12(b)(6).” Ronconi v. Larkin , 253 F.3d 423, 429 (9th Cir. 2001).

Here, since Plaintiffs failed to adequately plead even a single actionable misleading statement, it

follows that they cannot plead that any statement was made with scienter – that is, that Defendants made

any statement with the intention to deceive, manipulate, or defraud. In any event, even if Defendants’

Class Period statements were false or misleading, Plaintiffs’ allegations are still insufficient to establish








scienter.

The TAC rehashes many of the allegations of scienter from the SAC that we previously found to

be insufficient, such as Plaintiffs’ allegations that Defendants knew of the alleged fraud by virtue of

their positions at Corinthian and that Defendants had an incentive to commit fraud because of

Corinthian’s executive compensation structure. As we stated in our Order dismissing the SAC, “the fact

that Defendants held senior-level positions at Corinthian does not support a strong inference that they

acted with scienter, absent some additional allegation of specific information conveyed to Defendants

and related to the specific improper practices detailed in the SAC.” (Dkt. No. 96, at 10); see also Metzler , 540 F.3d at 1058 (“As this court has noted on more than one occasion, corporate management’s

general awareness of the day-to-day workings of the company’s business does not establish scienter – at

least absent some additional allegation of specific information conveyed to management and related to

the fraud.”). Additionally, we stated that Plaintiffs’ allegations that Defendants acted with scienter

“because they had potential bonuses tied to Corinthian’s short-term financial performance” failed to

establish a strong inference of scienter “because the Ninth Circuit has held that ‘simple allegations of

pecuniary motive’ are not enough to establish scienter.” (Dkt. No. 96, at 13 (citing Zucco Partners, 553 F.3d at 1005 (holding that an allegation “that executive-level bonuses were based in part on [the

defendant company’s] financial performance . . . [is] inadequate to meet the heightened pleading

requirements of Silicon Graphics and Tellabs” (quotation marks omitted))). Insofar as Plaintiffs simply

rehash these prior allegations, they do not support a strong inference of scienter.

Plaintiffs also attempt to establish scienter by alleging that Massimino and Waller “had been

advised by CW2 of the extensive and widespread problems at Corinthian’s Everest campuses

concerning unqualified, non-attending and failing students, including the falsification of passing

grades.” (TAC ¶ 201). First, as noted in our prior Order, “Plaintiffs cannot rely on any statements by

[CW2] to establish that Defendants Ord and Ouimet acted with scienter” because these Defendants are

not alleged to have communicated with CW2. (Dkt. No. 96, at 11). Second, as to Massimino and Waller, CW2’s communications with them do not establish a strong inference of scienter because many

of CW2’s statements are insufficiently reliable to support Plaintiffs’ claim of pervasive misconduct. Indeed, much of the supposedly improper conduct reported by CW2 does not appear to be based on

CW2’s personal knowledge, 5 but on opinion and “vague hearsay, which is not enough to satisfy [the

Ninth Circuit’s] reliability standard.” Zucco Partners, 552 F.3d at 997; see also Kinnett v. Strayer Educ., Inc. , Nos. 8:10-cv-2317-T-23MAP, 8:10-cv-2728-T-23MAP, 2012 WL 933285, at *7 (Jan. 3, 2012) (“Most [CW] statements . . . offer opinions or second hand accounts. . . . [S]tatements such as

these do nothing to bolster Plaintiff’s contentions or establish a fraudulent statement . . . .”). Moreover,

5 (See, e.g. , TAC ¶ 66 (“While visiting campuses, CW2 spoke with campus teachers. Many

indicated that they knew of teachers who had been fired from an Everest campus for failing too many

students or having too many dropouts.”); TAC ¶ 70 (“CW2 learned that teachers were encouraged to

give passing grades to failing students after working out agreements with students to improve on certain

areas in the next grading period.”); TAC ¶ 74 (it was CW2’s opinion “that the campuses were essentially

‘leaky buckets’”). CV-90 (06/04) CIVIL MINUTES - GENERAL Page 14 of 19







even if CW2’s statements were reliable, they fail to quantify the number of students and faculty

members involved in the misconduct. For example, CW2 stated that retaining students who should have

been dropped for nonattendance was “an ongoing issue” at approximately eight to ten campuses. However, it is entirely unclear how many students had to be involved for CW2 to consider

nonattendance to be an “issue.” Thus, it is unclear whether CW2 was aware of misconduct that was of a

sufficient magnitude to materially affect Corinthian’s business and whether he could have

communicated that information to Massimino and Waller.

Finally, as noted in our prior Order, because CW2 only worked at Corinthian for 1/6 of the Class

Period, even if CW2 was aware of pervasive misconduct and had communicated that information to

Massimino and Waller, those communications could only establish that Massimino and Waller acted

with scienter when they made statements during or near the time of CW2’s employment. Plaintiffs have

made absolutely no effort to link the timing of any of CW2’s communications with Massimino and

Waller to any public statement either Defendant made, and the majority of the statements these

Defendants made appear to have been made outside the time of CW2’s employment. See In re Splash Tech. Holdings, Inc. Sec. Litig. , 160 F. Supp. 2d 1059, 1075 (N.D. Cal. 2001) (“[C]ourts have repeatedly lamented plaintiffs’ counsels’ tendency to place the burden . . . on the reader

to sort out the statements and match them with the corresponding adverse facts to solve the ‘puzzle’ of

interpreting Plaintiffs’ claims.” (internal quotation marks omitted)); In re PetSmart, Inc. Sec. Litig. , 61 F. Supp. 2d 982, 991 (D. Ariz. 1999) (“The court should not have to play connect-the-dots . . . .”). Moreover, because Plaintiffs have failed to allege the specific dates on which any of CW2’s

communications with Massimino and Waller took place, 6 it is unclear even which statements made

during the time of CW2’s employment could have been made with scienter based on CW2’s

communications with Defendants. In sum, for all of the foregoing reasons, CW2’s communications

with Massimino and Waller are insufficient to establish a strong inference that these Defendants acted

with scienter.

There are no other allegations linking Defendants to facts contradicting their Class Period

statements. In light of the foregoing, when the TAC is read as a whole, it fails to establish a strong

inference of scienter. The TAC must be dismissed on this ground.

C. Loss Causation

A plaintiff does not need to prove loss causation in order to avoid dismissal, but the plaintiff

must properly allege it. Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 346 (2005) (“[N]either the [Federal] Rules [of Civil Procedure] nor the securities statutes impose any special further requirement

[beyond Rule 8(a)(2)] in respect to the pleading of proximate causation or economic loss.”). Loss

causation is the “causal connection between the [defendant’s] material misrepresentation and the

[plaintiff’s] loss.” Id. at 342. “The complaint must allege that the practices that the plaintiff contends

6 For example, the TAC cites “a specific conversation” that “CW2 recall[ed],” but fails to allege

the date that conversation took place. (TAC ¶ 73).








are fraudulent were revealed to the market and caused the resulting losses.” Metzler , 540 F.3d at 1063. That is, “the complaint must allege that the defendant’s ‘share price fell significantly after the truth

became known.’” Id. at 1062 (quoting Dura Pharms., 544 U.S. at 347). The loss must be caused by the

revelation of the alleged “earlier misrepresentation,” not “changed economic circumstances, changed

investor expectations, new industry-specific or firm-specific facts, conditions, or other events.” Dura Pharms., Inc. , 544 U.S. at 343.

Preliminarily, we note that Plaintiffs take issue with the Metzler ’s loss causation standard. That is, they argue that “disclosure of improper practices” is not necessary and, instead, all that is required

are allegations establishing that investor loss “was the foreseeable consequence of and was caused by

the defendants’ misconduct.” (Opp’n 20). This argument is not well taken. First, the Ninth Circuit has

recognized in subsequent cases that Metzler ’s loss causation standard is controlling. See, e.g. , In re Oracle Corp. Sec. Litig. , 627 F.3d 376, 392 (9th Cir. 2010) (“Loss causation is established if the market

learns of a defendant’s fraudulent act or practice, the market reacts to the fraudulent act or practice, and

a plaintiff suffers a loss as a result of the market’s reaction.” (citing Metzler)). To the extent Plaintiffs disagree with Metzler , they must take their quarrel to an en banc panel of the Ninth Circuit or the

Supreme Court. See Hart v. Massanari, 266 F.3d 1155, 1171 (9th Cir. 2001) (“Once a panel resolves an

issue in a precedential opinion, the matter is deemed resolved, unless overruled by the court itself sitting

en banc, or by the Supreme Court.”).

More problematically, however, Plaintiffs’ argument is contrary to Supreme Court precedent,

which – as noted above – holds that loss causation is the “causal connection between the material misrepresentation and the loss,” and thus a complaint must allege that the defendant’s “share price fell

significantly after the truth became known .” Dura Pharms., 544 U.S. at 342 (emphasis added). Metzler ’s statement that a complaint must allege that the defendant’s improper practices were revealed

to the market is merely a variation of this rule because in Metzler , the truth that was allegedly hidden from the market was that Corinthian was engaged in a practice of “manipulating student enrollment

figures company-wide.” 540 F.3d at 1063. Thus, when the court stated that to prove loss causation the

plaintiff had to demonstrate that these improper practices were revealed to the market and caused

Corinthian’s share price to fall, it was merely holding the plaintiff to the rule that a plaintiff must allege

that the share price fell “after the truth became known.” In light of the foregoing, we reject Plaintiffs’

objection to Metzler ’s loss causation standard. 7

7 In their Opposition, Plaintiffs seem to argue that their position finds support in In re Daou Systems , 411 F.3d 1006 (9th Cir. 2006), and In re Gilead Sciences Sec. Litig. , 536 F.3d 1049 (9th Cir. 2008), because in those cases the plaintiffs properly pled loss causation even though there was never a

disclosure containing an admission or finding of fraud. For example, Plaintiffs argue that in Daou, “the Ninth Circuit used the disclosure of Daou’s true financial condition to delineate which losses were

recoverable.” (Opp’n 18). This argument is not well taken because in Daou – even though the disclosure of the company’s true financial condition did not contain an admission or finding of fraud –

the disclosure still essentially told the market that the company had previously misled investors by

prematurely reporting revenues. The court noted that by failing “to disclose the actual figures to








Even if held to Metzler ’s standard, Plaintiffs still contend that they properly plead loss causation

because “[t]he TAC identifies specific stock price declines that were caused by . . . public disclosures

revealing Corinthian’s concealed problems.” (Opp’n 22). These disclosures, many of which we already

rejected as insufficient in our prior Order dismissing the SAC, include (1) a conference call between

Corinthian and market analysts wherein the company’s directors expressed concern over proposed

government regulations, (2) news that the DOE was expected to release new tougher regulations

governing for-profit schools’ Title IV eligibility, (3) an announcement by the DOE that it was proposing

these new regulations, (4) a Senate hearing examining federal investment in the for-profit industry, (5) a

GAO Report on recruiting techniques used in the for-profit industry, (6) data regarding Corinthian’s

student loan repayment rates, and (7) Corinthian’s announcement that it would phase out its ATB

program. However, like the SAC, the TAC does not explain, as it must, which specific events revealed

which specific misrepresentations. ( See Dkt. No. 96, at 14); see also In re Apollo Grp., Inc. Sec. Litig. , No. CV-10-1735-PHX-JAT, 2011 WL 5101787, at *16 (D. Ariz. Oct. 27, 2011) (dismissing complaint

where “[p]laintiffs have made little to no attempt to link specific fraudulent practices to specific

corrective disclosures,” and “left it to the Court to puzzle together” the statements and disclosures) . Having thoroughly reviewed these disclosures, we conclude that none of them revealed to the market –

explicitly or implicitly – the supposedly material and pervasive misconduct that undergirds the

misleading statements alleged in the TAC. See DeVry , 2012 WL 1030474, at *13-18 (rejecting loss causation allegation based on the most of the same events). Thus, Plaintiffs fail to adequately plead loss

causation.

The “disclosures” Plaintiffs identify show that Corinthian’s stock price movements were

primarily in response to announcements about potential changes in regulations related to Title IV

funding, not disclosure of the alleged pervasive misconduct at Corinthian that in turn revealed that

Defendants’ statements were misleading. Like many plaintiffs in other recent cases against for-profit

schools, Plaintiffs have “not explained (or even attempted to explain) how a future risk of losing

financial-aid eligibility based upon newly proposed regulations undermines any of [D]efendants’

previous statements.” Id. at *18 (“We conclude that the August 13, 2010 DOE report did not disclose

analysts,” the company was able “to conceal the fact that Daou’s operating earnings and margins were

deteriorating as a result of prematurely and improperly recognized revenue.” 411 F.3d at 1026. Later,

when the company revealed its true figures, the market was able to suspect fraud. Indeed, the court

noted that in response to the disclosure, an analyst commented, “ You have got to question whether they

are manufacturing earnings.” 411 F.3d at 1026. Thus, the disclosure of the company’s true financial

condition revealed to the market the prior misrepresentations and is consistent with Dura Pharmacueticals and Metzler . The same is true for Gilead, in which the plaintiffs properly pled loss causation by alleging that the defendant’s share price fell once “the public . . . realize[d] the impact of” a

letter issued by the FDA that expressed “significant public health and safety concerns raised by [the

defendant’s] promotional activities.” 536 F.3d at 1053. In sum, both cases are consistent with Dura Pharmaceuticals and Metzler because in both cases the plaintiffs alleged that the defendant’s share price

fell after the truth became known. CV-90 (06/04) CIVIL MINUTES - GENERAL Page 17 of 19







defendants’ alleged fraud.”). Moreover, Plaintiffs do not contend that Corinthian was the only for-profit

education company whose stock price fell upon the announcement of these new regulations. Indeed, the

fact that the parties have cited to us a number of cases brought against for-profit schools in the last ten

months that contain similar allegations suggests that the new DOE regulations are the type of “new

industry-specific event” on which plaintiffs may not rely to show loss causation. Dura Pharms., 544 U.S. at 343.

As we noted in our prior Order, the only disclosure that comes close to revealing any of the

alleged improper practices “is the August 4, 2010 GAO Report, which found ‘that many of the

companies in the [for-profit school] industry employed fraudulent and deceptive practices in their

student recruitment.’” (Dkt. No. 96, at 14). However, “the report was not exclusive to Corinthian, and

in fact, detailed recruiting practices at only two Corinthian campuses.” ( Id. ). Thus, the report is insufficient to show that the market was alerted to Corinthian’s alleged widespread misconduct. ( Id. ). 8

Moreover, just like the SAC, the TAC at no point alleges that any of the CW accounts Plaintiffs

rely on to establish the alleged misconduct was revealed to the market. Thus, the TAC fails to plead that

the primary sources detailing the alleged misconduct ever revealed their accounts of that misconduct to

the market. In sum, the TAC fails to identify any sources disclosing the pervasive misconduct alleged in

the TAC to the market. In fact, the “disclosures” identified by Plaintiffs show that Corinthian’s stock

dropped when new federal funding regulations were proposed, not when the alleged widespread fraud at

Corinthian was supposedly revealed. Other disclosures identified by Plaintiffs, such as the disclosure of

Corinthian’s low student loan repayment rate and decision to phase out its ATB program, show that its

stock price fell due to “changed economic circumstances” and new “firm-specific facts” and conditions,

8 We further noted that in Metzler , the Ninth Circuit reached the same conclusion based on a

similar limited disclosure of alleged improper practices at Corinthian. ( Id. ). In alleging loss causation, the Metzler plaintiff relied on – among other things – a “ Financial Times” story reporting a DOE investigation at one Corinthian campus. 540 F.3d at 1063. Even though the report related to only one

campus, Corinthian stock lost 10 percent of its value the day it was published. Id. at 1064. The Ninth Circuit, however, held that the plaintiff failed to adequately plead loss causation because the Financial

Times story did not “disclose–or even suggest[]–to the market that Corinthian was manipulating student

enrollment figures company-wide in order to procure excess federal funding,” which was the alleged

concealed misconduct that the plaintiff argued made the defendants’ statements misleading. Id. at 1063. Insofar as the plaintiff failed to adequately allege that “the truth became known,” he was necessarily

unable to properly demonstrate that “the defendant’s share price fell significantly after the truth became

known.” Id. at 1063. Similarly, here, the GAO Report cannot be reasonably read to reveal the

pervasive company-wide recruitment and enrollment practices, which are the alleged concealed

misconduct that Plaintiffs argue made Defendants’ Class Period statements misleading. Because

Plaintiffs have failed to properly allege that the market became aware of the magnitude of the

misconduct alleged in the TAC, they cannot demonstrate that the market learned Defendants’ Class

Period statements were misleading and that revelation caused Corinthian’s stock price to fall.






Case No. CV 10-6523-GHK (PJWx)

Date August 20, 2012

Title

Jimmy Elias Karam v. Corinthian Colleges, Inc., et al.

not disclosure of fraud. Dura Pharms., 544 U.S. at 343. In sum, none of the disclosures identified in

the TAC is sufficient to show that Corinthian’s “share price fell significantly after the truth became

known.” Dura Pharms., 544 U.S. at 347. “So long as there is a drop in a stock’s price, a plaintiff will

always be able to contend that the market ‘understood’ a . . . statement precipitating a loss as a coded

message revealing the fraud.” Metzler , 540 F.3d at 1049. However, a plaintiff may not “plead loss

causation through ‘euphemism,’” but instead must plead facts establishing the necessary connection

between the defendant’s misrepresentations and the actual loss. Because Plaintiffs fail to allege

sufficient facts to establish this necessary connection, they fail to properly plead loss causation.

IV. Conclusion

For the foregoing reasons, Plaintiffs have (1) failed to set forth particularized facts showing why

any statement made by Defendants during the Class Period was false or misleading, (2) failed to allege

particularized facts creating a strong inference of scienter, and (3) failed to adequately plead loss

causation. As such, Plaintiffs have failed to state a claim under § 10(b) of the Securities and Exchange

Act of 1934 and SEC Rule 10b-5 thereunder, and Count I of the TAC must be dismissed.

Count II of the TAC asserts a claim under § 20(a) of the Securities and Exchange Act of 1934 for

controlling person liability. “To establish ‘controlling person’ liability, the plaintiff must show that a

primary violation was committed and that the defendant ‘directly or indirectly’ controlled the violator.” Paracor Fin., Inc. v. Gen. Elec. Capital Corp., 96 F.3d 1151, 1161 (9th Cir. 1996). Because Plaintiffs

have failed to state a claim under § 10(b) and Rule 10b-5, Plaintiffs have failed to show that a primary

violation was committed. As such, their claim for controlling person liability under Count II must also

be dismissed.

Defendants’ Motion is hereby GRANTED . In the event of dismissal, Plaintiffs have requested

leave to amend the TAC. (Opp’n 25). As noted above, we previously granted Plaintiffs leave to amend

with our dismissal of the SAC. Our “discretion to deny leave to amend is particularly broad where [a]

plaintiff has previously amended the complaint.” Metzler , 540 F.3d at 1049. Despite having had an

opportunity to amend their allegations with the guidance of our prior Order, Plaintiffs still failed to

properly plead falsity, scienter, and loss causation. Additionally, they point to no additional facts that

they might allege to cure these deficiencies. We conclude that any further leave to amend would be

futile. Therefore, we dismiss the TAC with prejudice and without further leave to amend.

IT IS SO ORDERED.

-- : --

Initials of Deputy Clerk

Bea

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jimmy elias karam, et al. v. corinthian colleges, inc., et...

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