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Pension Trust Fund for Operating Engineers v. Devry Education Group, Inc.

United States District Court, N.D. Illinois, Eastern Division

December 6, 2017

PENSION TRUST FUND FOR OPERATING ENGINEERS, individually and on behalf of all others similarly situated, Plaintiff,



         Lead plaintiff, the Utah Retirement Systems[1] (“plaintiff”), has filed a Second Amended Class Action Complaint For Violations of the Federal Securities Laws, asserting violations of sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 of the Securities Exchange Commission. Defendants, DeVry Education Group, Inc. (“DeVry”), Daniel Hamburger, Richard M. Gunst, Patrick J. Unzicker, and Timothy J. Wiggins, move to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim under Rule 8, Rule 9(b), and the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). For the following reasons, the motion is granted.


         This lawsuit centers on defendants' public statements concerning the job placement statistics for graduates of a DeVry subsidiary, DeVry University. DeVry University (“DVU”) is a for-profit post-secondary educational institution offering undergraduate and graduate degrees in programs including healthcare, business, technology, accounting, finance, and law. (2d Am. Compl. ¶ 2, ECF No. 51.) In recent years, DVU has accounted for between forty and fifty percent of DeVry's revenue. (Id.) For years, DVU has marketed itself to prospective students- and defendants have marketed it to investors-by claiming, in one form or another, that approximately 90% of DVU graduates obtain employment in their field of study within six months of graduation at average yearly salaries of approximately $40, 000 or more (“the 90% Statement”). (Id. ¶ 3.) Not only did the 90% Statement appear in DVU advertising and marketing materials for years, but defendants repeatedly made some version of the 90% Statement in documents filed with the Securities and Exchange Commission (“SEC”) and in public statements to investors and analysts, including press releases, quarterly earnings conference calls, and presentations at securities analyst conferences. (See, e.g., Id. ¶¶ 42, 46, 55, 59, 74, 100.)

         DeVry's use of the 90% Statement and other similar statements in its marketing and advertising attracted the notice of federal regulators. In January 2014, DeVry received a civil investigative demand (“CID”) from the Federal Trade Commission (“FTC”), requesting information “relating to the advertising, marketing or sale of secondary or postsecondary educational products or services” in order to determine whether DeVry had violated Section 5 of the FTC Act, 15 U.S.C. § 45, which prohibits “[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, ” including false or deceptive advertising.[2] (Geraci Decl., Ex. E, Annual Report on SEC Form 10-K at 124, ECF No. 60-5; see 2d Am. Compl. ¶ 28.)

         The FTC Action

         On January 27, 2016, after a two-year investigation in which the FTC allegedly “reviewed well over 2 million pages of documents and responses from DeVry to approximately 64 comprehensive interrogatories, and voluminous materials from third parties” (2d Am. Compl. ¶ 205, see Id. ¶ 215), the FTC filed a lawsuit against DeVry and DVU (“the DeVry entities”) in the Central District of California. The lawsuit alleged that their advertising contained “false and unsubstantiated” representations concerning the degree to which “obtaining a degree from DVU is highly likely to result in obtaining a desirable job soon after graduating-a well-paying, career-oriented job in the student's chosen field of study.” (Geraci Decl., Ex. A, FTC Compl., ¶¶ 16-17.) Specifically, the FTC alleged that the DeVry entities made two types of misrepresentations in their marketing and advertising. The first type consisted of various versions of the 90% Statement, or what the FTC called “the 90% claims, ” which consisted of misrepresentations to the effect that “as a result of obtaining a DVU degree, 90% of DVU graduates who were actively seeking employment landed or obtained new jobs in their field of study within six months of graduation”:

In some instances when Defendants make this representation, they claim this statistic applies to DVU graduates from a recent year, while in other instances, Defendants claim this statistic applies to all graduates since 1975, or “for more than 30 years.” In its advertising and in its presentations to prospective students, Defendants present this 90% “employment rate” as evidence of the likelihood that obtaining a DeVry degree leads to finding a job. While Defendants' advertisements and sales pitches most commonly express DVU's employment rate for recent graduates as exactly 90%, in some instances, during certain limited time periods, Defendants have stated a percentage that is slightly less or more than 90% (e.g., 87% or 92%). . . . [T]hese representations . . . are false and unsubstantiated.

(Id. ¶ 17.) The second type of misrepresentation was the DeVry entities' “higher-income claim.”

(Id. ¶ 18.) The FTC alleged that the DeVry entities misrepresented that DVU graduates “obtain jobs that pay significantly more than jobs that graduates of other colleges and universities obtain.” (Id.) For example, according to the FTC, the DeVry entities falsely represented in their marketing and advertising materials that “one year after graduation, DVU graduates with bachelor's degrees earned 15% more than graduates with bachelor's degrees from all other colleges and universities.” (Id.)

         The FTC alleged that its investigation had shown that the DeVry entities were unable to substantiate these claims. To calculate the statistics it used in its advertising, DVU relied on files composed of mostly student-reported information maintained by its career services department, but, according to the FTC, DVU counted graduates as working in their field of study even if they were performing work most people “would not reasonably consider to be” in their field of study at all. (Id. ¶¶ 44-45.) For example, DVU allegedly classified as working “in field” such graduates as a rural mail carrier with a degree in technical management; a server at a Cheesecake Factory with a degree in business administration; a secretary at a prison with a degree in business administration; and salespeople and customer service representatives with various degrees. (Id.) Further, the DeVry entities counted graduates as having obtained employment in their field of study even if they had not obtained a new job as a result of earning a DVU degree, but had merely continued with the same job they had already had, which happened to be in their field of study. (Id.)

         Additionally, the FTC alleged that DVU “exclude[d] certain students from the calculation who were actively seeking employment, ” but had not succeeded within six months of graduation. For example, they classified as inactive a 2012 graduate who had

viewed 177 jobs leads in DVU's jobs database; had at least six job interviews in the previous two months (including two interviews eleven days before DVU classified him as inactive); sent an email to DVU's Career Services department, two weeks before being classified as inactive, in which he stated that he “wanted to let you know I've been getting more response now that I am much more actively applying to positions, ” and that he “had two face to face interviews a while back and now 2 Skype interviews”; attended a DVU “Career Fair” the following day; and then sent the Career Services department an email informing them that, after attending the career fair, he sent three thank you notes to companies whose representatives he had spoken to at the fair.

(Id. ¶ 46.) Ultimately, the FTC alleged, “the actual percentage of DVU graduates who, at or near the time they graduated, found jobs that could reasonably be considered ‘in their field' is significantly smaller than 90%.” (Id. ¶ 47.)

         As for the higher-income claim, the FTC alleged that the DeVry entities relied on a third-party report that DVU had reason to believe was unreliable because it was based on a flawed sampling and surveying methodology. (Id. ¶¶ 48-49.) According to the FTC, DVU personnel internally expressed misgivings about whether the data genuinely supported DVU's higher-income claim. (Id. ¶ 49.) In fact, the third party's statistics differed from data in DVU's own files and in the public record. (Id. ¶¶ 49-50.)

         On December 15, 2016, the FTC issued a press release announcing that it had settled the case with the DeVry entities. (2d Am. Compl. ¶ 233.) Under the terms of the settlement, DeVry was to set up a $49.4 fund million to distribute to qualifying students who were harmed by the deceptive ads, as well as $50.6 million in debt relief. (Id. ¶ 234.) Additionally, DeVry was to discontinue the challenged advertising, implement certain reforms to allow it to keep track of data to support any representations it might make about graduate employment outcomes, and confirm its compliance with those reforms for a period of ten years, among other conditions. (Id. ¶¶ 234-41.)

         The DOE Action

         On the same day that the FTC filed its complaint, January 27, 2016, the Department of Education (“DOE”) publicly issued to DVU a Notice of Intent to impose limitations on DVU's participation in programs authorized pursuant to Title IV of the Higher Education Act, 20 U.S.C. § 1070 et seq. (2d Am. Compl. ¶ 217.) According to the DOE's Notice of Intent, the DOE had sent DVU an August 28, 2015 letter, seeking information about DVU's representations in marketing and promotional materials that approximately 90% of DVU graduates since 1975 held positions in their fields of study within six months of graduation. (Geraci Decl., Ex. H, Notice of Intent, at 2, ECF No. 60-8.) During the ensuing investigation, DVU was “unable to locate” student-by-student career services data for the period between 1975 and 1980, and it was able to locate only “certain student-by-student” records for the period between 1980 and 1990. (Id. at 3.) Although DVU was able to produce certain historical summary reports and data from legacy databases, the DOE concluded that, nevertheless, DVU did not have sufficient data to substantiate its “since 1975” representation. (Id. at 7-9.) Based on the findings of its investigation, the DOE decided to impose[3] certain conditions on DVU's receipt of Title IV funds, including, among other things, requiring DVU to cease making any representations based on graduate employment statistics, particularly the “since 1975” representation, unless and until it is able to substantiate them with graduate-specific information. (Id. at 9-12.)

         Confidential Witnesses

         Plaintiff alleges that it has received confidential statements from at least seven former employees of the DeVry entities, who describe how DVU compiled, used, or communicated graduate employment statistics. (2d Am. Compl. ¶ 242.) A number of these “Confidential Witnesses” suspected, sometimes based on complaints they heard from recent graduates, that the graduate employment statistics-and specific marketing language touting them-that they were required to use in advertising and recruiting efforts were false, misleading, or provided an incomplete picture of graduates' typical employment prospects. (Id. ¶¶ 243-59.) Although they do not claim to have discussed graduate employment statistics and related marketing efforts with the individual defendants themselves, some of these witnesses believe that the requirement that they use the approved statistics and language came from the upper levels of the corporate leadership. (See, e.g., Id. ¶¶ 247, 256, 258.)

         One Confidential Witness, identified as “CW3, ” served as Associate Director of Career Services at DVU's Fresno and Bakersfield, California campuses from January 2013 to January 2014, and, because his job required him to assist graduates in obtaining jobs, he was familiar with DVU's process for determining which students were sufficiently actively job-seeking to be included in its graduate employment statistics. (Id. ¶ 248.) In order to receive the assistance of the Career Services department, graduates had to participate in a burdensome process that required them to make certain job-search efforts outlined by the Career Services staff and to stay in regular contact with the staff. (Id. ¶¶ 249-50.) If graduates did not timely perform the job-search tasks prescribed by Career Services or respond to calls and emails from the Career Services staff, then DVU could consider them to have waived Career Services' support and classify them as “non-job-seeking, ” which meant that they were not counted in DVU's graduate employment statistics. (Id. ¶ 249.) But the list of tasks graduates were required to perform and calls or emails they were required to return was extensive, and DVU's determination of whether a student was sufficiently complying with his or her job-search obligations was “subjective, ” although it required the approval of the campus president. (Id.) Additionally, many graduates were so overwhelmed by the barrage of phone calls and emails from DVU's Career Services staff and the burdensome obligations the Career Services department placed on them in return for its support that they opted to sign a form expressly waiving Career Services' support, rather than comply with its onerous job-search requirements, and those graduates were also excluded from DVU's graduate employment statistics. (Id. ¶ 250.)

         CW3 estimated that if DVU had included in its graduate employment statistics all of the students who had waived Career Services' support, either by submitting the waiver form or failing to participate in the job-search process sufficiently actively, the job placement rate at his campuses would have been 60% to 70%. (Id. ¶ 252.) Further, in CW3's experience, graduates were unlikely to make more than $30, 000 in their first year after graduation-a fact, he discovered, that was often upsetting and disappointing to graduates who expected, based on DVU's marketing, to make more than $40, 000. (Id. ¶ 255.) According to CW3, “a few highly paid graduates and graduates working in cities with higher wages could skew the averages higher, ” but in his area, wages remained relatively low. (Id.)

         DeVry's Stock Price Drops

         On January 27, 2016, the day the FTC filed its lawsuit against the DeVry entities and the DOE disclosed that it had notified DVU of its intent to impose limitations, the market price of DeVry's publicly traded common stock dropped $3.65 per share on extraordinarily high trading volume. (Id. ¶ 338.) The price dropped a further $0.72 per share the following day, an 18% decline from the January 26, 2016 closing price. Plaintiff alleges that defendants' false and misleading representations to investors concerning graduate employment statistics over several years between August 2011 and January 2016 artificially inflated DeVry's stock price, and the news of the FTC lawsuit and DOE action on January 27, 2016, caused the stock value to fall, to the detriment of plaintiff and other investors, and in violation of the Securities Exchange Act and Rule 10b-5 of the SEC. Additionally, plaintiff claims that the individual defendants are liable as “controlling persons” of DeVry under § 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t. Defendants have moved to dismiss for failure to state a claim under Federal Rule of Procedure 12(b)(6).


         Section 10(b) of the Securities Exchange Act prohibits the use “in connection with the purchase or sale of any security . . . [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may ...

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