Oregon has joined a class-action lawsuit against for-profit college behemoth University of Phoenix, seeking $10 million for losses due to the school’s misrepresentations to investors and other fraudulent practices, Oregon state officials announced on Monday (“Oregon Sues to Recover $10 Million Connected to Misleading Filings by University of Phoenix,” Oregon Department of Justice press release, Oct. 18, 2010).
The state has asked for lead-plaintiff status in the case.
In the lawsuit, originally filed in August in U.S. District Court in Arizona, Apollo Group, the Arizona-based parent company of University of Phoenix, is charged with securities fraud, accused of making misleading financial statements to investors and to the U.S. Securities and Exchange Commission that artificially inflated the company’s stock price and its projected future performance (Gaer et al. v. University of Phoenix class-action complaint, Aug. 13, 2010).
As part of the company’s misrepresentations, the suit alleges, Apollo also masked its damaging practices of deceptive marketing, improper student recruitment, and the encouraged fraudulent use of federal student loans and other government financial aid funds — practices that, when brought to light, caused the company’s stock to plunge and lost investors millions of dollars.
Fraudulent Accounting, Federal Investigations Cost Apollo Investors Millions
Apollo’s activities drew the attention of the SEC, and the resulting SEC investigation, which Apollo disclosed in late October of 2009, brought about the first tumble in the company’s stock price.
The company allegedly misrepresented its income to investors by failing to account for losses associated with student withdrawals from school courses, an accounting practice that came to light in its quarterly earnings filing last October, at the same time that Apollo disclosed it was being investigated by the SEC (“SEC Investigates University of Phoenix Owner, Apollo Group,” Oct. 29, 2009).
As a result of the disclosures, Apollo’s stock price slumped, losing 18 percent of its value in a single day, falling from $73 per share to $60.
Apollo shares remained depressed, Oregon officials say, and continued to erode as the U.S. Department of Education, Congressional panels, and consumer advocacy groups began to push more aggressively for stricter regulations governing for-profit schools and the industry’s use of federal student loans and financial aid money.
By Aug. 2, Apollo stock was trading in the neighborhood of $46.
Then on Aug. 3, news leaked of an undercover investigation into 15 for-profit colleges conducted by the Government Accountability Office, the auditing arm of Congress. The resulting GAO report, which found that the schools were engaged in numerous deceptive and fraudulent practices, caused another slide in Apollo shares. By Aug. 13, when the class-action suit against Apollo was filed in Arizona, the company’s stock price had shrunk to $39.
All told, the drop in Apollo’s shares from $73 to $39 between October 2009 and August 2010 cost the state of Oregon an estimated $10 million from the Oregon Public Employee Retirement Fund, say state officials. The state retirement fund invests in an index fund that includes the Apollo Group.
By joining the class-action lawsuit in Arizona, Oregon officials are charging Apollo with making “materially false and misleading” statements that prevented the state, as an investor, from accurately assessing the risk of its investment in the company.
“As a responsible investor, the Oregon Treasury takes action against companies that violate the public trust and fail to act in shareholders’ best interests,” said State Treasurer Ted Wheeler, in the statement released by the state’s Department of Justice.
Added Oregon’s attorney general, John Kroger, “Companies that cook their books will have to answer to Oregon in court.”
School’s Fraudulent Dealings Included Student Loans
Apollo’s financial practices were also detrimental to Oregon students who were pursuing a degree through the University of Phoenix, the state maintains.
The school improperly cancelled federal college loans for students who had withdrawn from classes, Oregon officials charge, leaving these students with financial obligations to the university instead — an accusation reminiscent of another class-action lawsuit filed against Apollo and the University of Phoenix by three former students in December 2008.
In the 2008 case, the three former University of Phoenix students accused Apollo and the university of improperly denying them the use of federal student loans, in violation of the Higher Education Act (Martin et al. v. Apollo Group and University of Phoenix class-action complaint, Dec. 9, 2008).
The students alleged that, when they dropped courses shortly after enrolling, the University of Phoenix returned all of their federal student loan funds to the lenders without the students’ “knowledge or consent,” even though the students had already incurred tuition charges. The school then demanded immediate repayment from the students for the partial tuition owed.
By charging the students directly and not allowing them to use their federal student loans as payment, the 2008 complaint stated, the University of Phoenix denied these students the borrower protections and more generous loan repayment terms offered by the federal government.
Returning the students’ federal student loan money was also a “transparent attempt” by the University of Phoenix to unlawfully manipulate its federal student loan default rate, the lawsuit charged, since students who don’t finish their education are at the highest risk of defaulting on their student loans. A school can lose access to federal financial aid funds if its student loan default rate exceeds an acceptable level.
But since the school had cancelled the students’ federal loans, if the students failed to pay their tuition charges, they would be defaulting on a debt to the University of Phoenix, not to the government — a default that wouldn’t affect the school’s eligibility for federal funds.
Apollo derives the bulk of its revenue from government-backed college loans and is the largest single recipient of federal student loan funds in the United States.
“With this lawsuit,” said Wheeler, the Oregon treasurer, “we are taking a clear stand that we will not tolerate businesses practices like those used by the University of Phoenix to take advantage of their students and their investors.”
Apollo Responds to Oregon Lawsuit
The Apollo Group responded to the news of Oregon’s charges in a company statement.
“Apollo Group takes its disclosure obligations very seriously and intends to defend this lawsuit vigorously,” said Manny Rivera, a company spokesman.
“Apollo Group is a leader in enhancing the student experience, expanding student protections, and working to help students succeed in completing their degree programs,” he added.
The company operates four University of Phoenix campuses in Oregon, serving about 4,200 students.
The University of Phoenix is the nation’s largest for-profit college, and Apollo, which is also parent company to the for-profit schools Western International University and Axia College, is Arizona's fifth-most valuable company, with a stock-market worth of more than $6 billion.
Further Reading
Gaer et al. v. University of Phoenix. Class-action complaint. Filed August 13, 2010.
Martin et al. v. Apollo Group and University of Phoenix. Class-action complaint. Filed December 9, 2008.
“SEC Investigates University of Phoenix Owner, Apollo Group.” October 29, 2009.
U.S. Government Accountability Office. “For-Profit Colleges: Undercover Testing Finds Colleges Encouraged Fraud and Engaged in Deceptive and Questionable Marketing Practices.” Testimony submitted to the U.S. Senate Committee on Health, Education, Labor, and Pensions. August 4, 2010.
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