Metzler Inv. Gmbh v. Corinthian Colleges, Inc.

• Decision Date: 26 August 2008
• Docket Number: No. 06-55826.,06-55826.
• Citation: 540 F.3d 1049
• Parties: METZLER INVESTMENT GMBH, Plaintiff-Appellant, and Conway Investment Club, individually and on behalf of all others similarly situated, Plaintiff, v. CORINTHIAN COLLEGES, INC.; David Moore; Anthony Digiovanni; Dennis Beal, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

540 F.3d 1049

METZLER INVESTMENT GMBH, Plaintiff-Appellant, and Conway Investment Club, individually and on behalf of all others similarly situated, Plaintiff, v. CORINTHIAN COLLEGES, INC.; David Moore; Anthony Digiovanni; Dennis Beal, Defendants-Appellees.

No. 06-55826.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted February 11, 2008.

Filed August 26, 2008.

Amended August 26, 2008.

Jeff S. Westerman, Arthur Miller (argued), Milberg Weiss Bershad & Schulman

LLP, Los Angeles, CA, for the plaintiff-appellant.

John W. Spiegel, Munger, Tolles & Olson LLP, Los Angeles, CA, for the defendants-appellees.

Appeal from the United States District Court for the Central District of California; Manuel L. Real, District Judge, Presiding. D.C. No. CV-04-05025-R.

Before: ALFRED T. GOODWIN, B. FLETCHER, and N. RANDY SMITH, Circuit Judges.

ORDER

We hereby amend our Opinion filed July 25, 2008 at Slip Opinion 9249 . We file the Amended Opinion contemporaneously with this order. We amend as follows:

Delete the paragraph on page 9282 beginning "Second, Corinthian ..." and ending with "regulatory scrutiny."

Insert a new paragraph reading:

"Second, Corinthian was not required to make an immediate disclosure of the DOE and California AG investigations, at least not on the facts of this case. A comparison to In re Apollo Group, Inc. Securities Litigation, 509 F.Supp.2d 837, 841 (D.Ariz.2007), is instructive. In Apollo the district court denied the parties' cross-motions for summary judgment based in part on a disputed fact regarding the materiality of a DOE investigation of the Apollo Group. Id. Like Corinthian, Apollo is a large for-profit provider of post-secondary education. Id. at 839. The plaintiffs based their claim on the fact that Apollo failed to reveal a DOE investigation of misconduct that tied recruiters' compensation to enrollment figures. Id. Defendants failed to disclose a report containing a preliminary DOE finding of non-compliance related to those practices. Id. ("The report, which was issued on February 5, 2004, concluded, among other things, that the [Apollo campus at issue] improperly compensated its enrollment counselors `solely based on [the] recruiters' success in securing enrollments,' a violation of DOE regulations.") (second alteration in original). Two weeks after the DOE issued that report, Apollo released a press statement regarding a dismissal in related lawsuits based on allegations of recruiter misconduct and that "the government declined to intervene" in those suits. Id. at 841-42. Although this statement was formally true, the court found a disputed issue of fact as to whether it was "misleading" in light of the DOE report concerning the exact same recruiting practices.¹⁴ Id. at 842; see also In re Apollo Group, Inc. Sec. Litig., 395 F.Supp.2d 906, 920 (D.Ariz.2005) (denying motion to dismiss in same case where CEO misleadingly suggested that no report would issue from DOE). Here, unlike the complaint in Apollo, the TAC does not connect the DOE or California Attorney General investigations to any false or misleading statement — i.e., some affirmative statement or omission by Corinthian that suggested it was not under any regulatory scrutiny."

OPINION

BETTY B. FLETCHER, Circuit Judge:

Due in large part to the enactment of the Private Securities Litigation Reform Act ("PSLRA") of 1995, Pub.L. No. 104-67, 109 Stat. 737 (1995), plaintiffs in private securities fraud class actions face formidable pleading requirements to properly state a claim and avoid dismissal under Fed.R.Civ.P. 12(b)(6). Plaintiff Metzler Investment GMBH's ("Metzler") Consolidated Third Amended Complaint ("TAC"), despite its lengthy and far-ranging allegations, fails to meet these requirements. We affirm the district court's dismissal of the TAC, with prejudice.

I. FACTUAL BACKGROUND ¹ AND PROCEDURAL HISTORY

Metzler, an institutional investor, is lead plaintiff in a putative federal securities fraud class action brought pursuant to §§ 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Securities Exchange Commission ("SEC") Rule 10b-5. Defendant-Appellee Corinthian Colleges, Inc. ("Corinthian") is one of the nation's largest operators of private for-profit vocational colleges. As of June 30, 2004, Corinthian operated 88 such colleges in 22 states. Three individuals who served as officers of Corinthian during the Class Period are also named as Defendants: Dennis Beal, Corinthian's Chief Financial Officer and Vice President; David Moore, Corinthian's Chairman and Chief Executive Officer; and Anthony Digiovanni, Corinthian's President and Chief Operating Officer.

During the Class Period, which extended from August 27, 2003 to July 30, 2004, Metzler purchased 116,000 shares of Corinthian stock. Numerous other plaintiffs also purchased stock during the Class Period and filed their own actions against Corinthian. Eleven separate actions were consolidated with this proceeding and Metzler was appointed lead plaintiff.

A. The TAC's allegations of fraud and falsity.

Metzler alleges that Corinthian's colleges are pervaded by fraudulent practices designed to maximize the amount of federal Title IV funding — a major source² of Corinthian's revenue — that those schools receive. The TAC alleges that Corinthian engaged in 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 TAC 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. According to the TAC, the net effect of these practices was that "at numerous Corinthian campuses, as many as 50% to 60% of the people defendants represented to the U.S. government as being qualified, attending `students' were either `no shows' in class or unqualified for admission and federal funds from the outset." TAC ¶ 4. Thus, according to the TAC, Corinthian's public face to the market — one of growth and financial success premised on increasing student enrollment and successful placement rates — masked extensive fraud. The TAC alleges that this fraud resulted in an artificial inflation of Corinthian's stock price.

The TAC further alleges that Corinthian violated Generally Accepted Accounting Principles ("GAAP") by improperly recognizing revenue. According to the TAC, at some of its schools Corinthian recognized an entire month's worth of tuition revenue for a student's first full month of attendance, regardless of the date during that month on which the student started. Corinthian ultimately changed this practice to recognize tuition for half of a student's first month of attendance and half of a student's final month of attendance. As a result, in August 2005, it issued restated financials that reflected a $16.9 million decrease in retained earnings.

These allegations of fraudulent practices are supported principally by statements taken from confidential witnesses (abbreviated in the TAC as "CW"), who are former Corinthian employees that served at numerous campuses in differing capacities. The CW's identified in the TAC include campus presidents, admissions officials, financial aid officers, and IT and accounting personnel. These CW's, with varying degrees of specificity, attest to instances of misconduct on their campuses that support the more generalized allegations of fraud contained elsewhere in the TAC.

The TAC also avers to post-Class Period events that serve to confirm the TAC's allegations of Corinthian's fraud during the Class Period. In November 2005, Corinthian released restated financials that revealed Corinthian had overstated its revenues during the Class Period. The restatement revealed that revenues were overstated by 10.5% for the quarter ending September 30, 2003, 4.5% for the quarter ending December 21, 2003, and 15% for the quarter ending March 31, 2004. The TAC points to government investigations and private litigation, initiated after the close of the Class Period, that further confirm Corinthian's fraudulent practices. In November 2005, the Florida Attorney General subpoenaed documents from a Corinthian campus in Florida related to Corinthian's advertising and admissions practices. In December 2005, three Corinthian campuses in Georgia had their accreditation revoked by the Accrediting Bureau of Health Education Schools ("ABHES") for failing to meet student completion and placement requirements. Similarly, Corinthian colleges in Michigan and Indiana were ordered by the ABHES to show cause why, because of alleged improper admissions and high attrition, they should not have their accreditation revoked.

Because Corinthian campuses were allegedly pervaded by fraudulent admission practices, the TAC alleges that virtually every Class Period statement discussing Corinthian's financial status was false. Specifically, the TAC alleges that public statements in regulatory disclosures and related documents regarding the company's financial performance were rendered false by the fact that Corinthian's underlying fraudulent practices remained hidden. The TAC states:

All of Corinthian's stated financial results during the entire Class Period were false and misleading as a result of the Company-wide scheme to inflate enrollment figures in order to misappropriate federal financial aid funding. Likewise, defendants' statements lauding the Company's strong financial performance were also false and misleading.... Defendants...