The opinion of the court was delivered by: Matthew F. Kennelly, District Judge:
MEMORANDUM OPINION AND ORDER
Thurman Ross, on behalf of a proposed class of similarly situated persons, sued Career Education Corporation (CEC), Gary E. McCullough, and Michael J. Graham, alleging securities fraud in violation of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t(a), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. The Court appointed several entities to act as co-lead plaintiffs, who then filed a consolidated class action complaint. Defendants have moved to dismiss the complaint for failure to state a claim and for failure to plead fraud with sufficient particularity. For the reasons stated below, the Court dismisses the claims against Graham but otherwise denies defendants' motion.
The Court draws the following facts from plaintiffs' complaint and accepts them as true for purposes of the motion to dismiss. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007) (Tellabs II).
CEC owns and operates for-profit professional schools and colleges. With a focus on offering "career-oriented" disciplines, CEC operates across ninety campuses and serves over 100,000 students. Almost all of CEC's revenue derives from federal financial aid provided to its students under Title IV (Title IV) of the Higher Education Act of 1965. Schools seeking to accept tuition payments from Title IV funding must be accredited by a national accrediting organization certified by the U.S. Department of Education. Meeting the requirements for accreditation is therefore essential for CEC to stay in business.
The two primary accrediting bodies covering CEC's schools are the Accrediting Commission of Career Schools and Colleges (ACCSC) and the Accrediting Counsel for Independent Colleges and Schools (ACICS). To gain accreditation from these organizations and thereby receive access to Title IV funding, a school must show that it complies with certain minimum standards. Compliance is based to a significant extent on the school achieving certain job placement rates for its graduates. These rates are calculated by counting the number of graduates who are gainfully employed in positions that require the degree they received.
Plaintiffs are individual and corporate investors that purchased CEC stock during the proposed class period, February 19, 2009 through November 21, 2011. According to plaintiffs' complaint, prior to the class period, CEC faced a number of lawsuits and government investigations, as well as scrutiny from accrediting agencies, regarding alleged falsification of job placement rates. In 2007, plaintiffs allege, years of legal and regulatory troubles led to the ouster of CEC's co-founder and the appointment of McCullough as CEO. CEC publicly heralded McCullough's arrival as marking a new era of compliance for the company.
On May 24, 2011, CEC reported that it had received a subpoena from the Attorney General of the State of New York (NYAG) requesting documents pertaining to student employment outcomes and placement rates of graduates. Shortly thereafter, on August 3, 2011, CEC reported on a Form 8-K filed with the Securities and Exchange Commission that in connection with preparing its response to the NYAG subpoena, CEC had found "improper practices . . . relating to the determination of reported placement rates." Compl. ¶ 126. CEC also stated that due to this discovery, CEC had engaged the law firm of Dewey & LeBoeuf (Dewey) to conduct an internal investigation of CEC's student placement practices across the country. The price of CEC's stock thereafter declined.
On October 31, 2011, McCullough and three senior vice presidents resigned. The very next day, CEC announced in a press release that the Dewey investigation, which had involved only CEC's 2010-11 placement rates, "confirmed the existence of improper placement determination practices" and found placements that "did not meet applicable placement guidelines established by [CEC]." Compl. ¶ 128. By November 3, 2011, the price of CEC's stock had fallen dramatically. On November 21, 2011, CEC announced receipt of a "show cause" letter from ACICS, threatening suspension of its accreditations of forty-nine CEC schools. Since the time that plaintiffs filed their complaint, CEC has publicly declined to extend Dewey's investigation of its placement rate practices to time periods before 2010-11. Compl. ¶ 134.
Plaintiffs allege that defendants violated SEC Rule 10b-5 by knowingly making numerous materially false public statements during the class period about CEC's placement rates, regulatory compliance, and accreditation status. These misleading statements, plaintiffs allege, artificially inflated CEC's stock value until the truth about its practices became public. Plaintiffs allege that McCullough and Graham are separately liable under section 20(a) as control persons. Defendants have moved to dismiss all of plaintiffs' claims.
To prevail on a Rule 10b-5 claim, a plaintiff must prove that the defendant: (1) made a misstatement or omission of material fact; (2) with scienter; (3) in connection with the purchase or sale of securities; (4) upon which the plaintiff relied; and (5) the plaintiff's reliance was the proximate cause of its injuries. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157 (2008). The first three of these elements are subject to "[e]xacting pleading requirements" pursuant to the Private Securities Litigation Reform Act of 1995 (PSLRA). Tellabs II, 551 U.S. at 313; see also 15 U.S.C. § 78u-4(a)(1). This requires a plaintiff to "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, [to] state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1). With respect to scienter, a plaintiff must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." Id. § 78u-4(b)(2).
The requirement of a "strong" inference means the inference must be cogent, more than plausible, and "at least as compelling as any opposing inference of nonfraudulent intent." Tellabs II, 551 U.S. at 310.
Under the PSLRA, a court must consider the complaint in its entirety and evaluate the factual allegations as a whole. Id. at 322-23. Particular allegations are not assessed in a vacuum. Id. Thus, "one or more deficient allegations will not doom [a] complaint if it is otherwise sufficient." Boca Raton Firefighters' & Police Pension Fund v. DeVry Inc., No. 10 C 7031, 2012 WL 1030474, at *4 (N.D. Ill. Mar. 27, 2012).
Defendants argue that plaintiffs do not sufficiently allege any misleading statements attributable to defendants and have failed to allege scienter and loss causation sufficiently. Defendants also contend there is no basis for control-person liability under section 20(a) with regard to McCullough and Graham.
a. Materially misleading statements
Plaintiffs allege that defendants made a number of false and misleading statements throughout the class period. Plaintiffs categorize the statements in three groups: (1) statements about placement rates; (2) statements about regulatory compliance; and (3) statements about accreditation.
i. Statements regarding reported placement rates
As noted above, the PSLRA's heightened pleading standard requires plaintiffs to specify the allegedly misleading statements and explain why they were untrue. See 15 U.S.C. § 78u--4(b)(1). This means that plaintiffs must allege, with particularity, the factual basis for their allegations. ABN AMRO, Inc. v. Capital Int'l Ltd., 595 F. Supp. 2d 805, 835 (N.D. Ill. 2008). 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." Makor Issues & Rights, Ltd. v. Tellabs Inc., 437 F.3d 588, 595 (7th Cir. 2006) (Tellabs I), rev'd on other grounds, 551 U.S. 308 (2007).
Plaintiffs contend that during the class period, defendants improperly determined and reported falsified job placements. In the complaint, plaintiffs identify various excerpts from interviews, publications, and public disclosures in which defendants claim the absence of "any significant declines" in their placement rates. Compl. ¶ 143. Plaintiffs also describe statements in which defendants affirmatively represented that CEC's high placement rates pertained to students "who have obtained employment in their field or a related field" when, plaintiffs argue, they had not. Id. ¶ 145.
According to defendants, these statements were neither false nor misleading. Defendants contend that because ACICS accreditation criteria provides no specific guidance on what types of employment can be counted as a placement, CEC's reported placement rates cannot have been false. This argument incorrectly suggests that ...