ANTHONY J. TRENGA, District Judge.
Defendant K12, Inc. ("K12") is a publicly traded company that provides online classroom services. In this securities class action, plaintiff Oklahoma Firefighters Pension & Retirement System ("plaintiff"), a public pension fund, purchased K12's common stock, whose stock price declined by nearly 40% on October 9, 2013, following K12's announcement of the results of its Fall 2013 enrollment season. Bringing this action on behalf of all purchasers of K12 stock from February 5, 2013 through October 8, 2013 (the "Class Period"), plaintiff alleges that K12 and certain of its officers (collectively "K12" or "defendants") violated Section 10(b), 20(a) and 20A of the Securities Exchange Act of 1934 ("the Exchange Act") when they made a series of false or misleading statements during the Class Period during several investors' conference calls and in K12's 2013 10-K annual report.
The sufficiency of plaintiffs complaint is governed by the Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 737 (the "PSLRA"). Under the PSLRA, plaintiff is required to prove: "(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Yates v. Mun. Mortg. & Equity, LLC, 744 F.3d 874, 884 (4th Cir.2014) (quoting Stoneridge Inv. Partners v. Scientific-Atlanta, Inc., 552 U.S. 148, 157, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008)).
A statement constitutes a "misrepresentation" if it either (1) is materially false or (2) contains an omission that renders the statement materially misleading. Longman v. Food Lion, Inc., 197 F.3d 675, 682 (4th Cir.1999). "[A] fact stated or omitted is material if there is a substantial likelihood that a reasonable purchaser or seller of a security (1) would consider the fact important in deciding whether to buy or sell the security or (2) would have viewed the total mix of information made available to be significantly altered by disclosure of the fact." Id. at 683. The materiality of an alleged misrepresentation or omission must be considered in the full context in which it was made. Gasner v. Bd. of Supervisors of the Cnty. of Dinwiddie, Va., 103 F.3d 351, 358 (4th Cir.1996). Cautionary language in a document may negate the materiality of an alleged misrepresentation or omission. Id. (citing In re Donald J. Trump Casino Securities Lit., 7 F.3d 357, 371 (3d Cir.1993), cert. denied, Gollomp v. Trump, 510 U.S. 1178, 114 S.Ct. 1219, 127 L.Ed.2d 565 (1994)).
Certain statements are legally incapable of satisfying these requirements. "Forward-looking statements" that are either accompanied by cautionary language, immaterial, or made without actual knowledge of their falsity are statutorily protected under the PSLRA's safe harbor provision. See 15 U.S.C. § 78u-5(c)(1). Likewise, statements that are commonly referred to as "puffery" are not material as a matter of law. In re Lab. Corp. of Am. Holdings Sec. Litig., No. 1:03cv591, 2006 WL 1367428, at *9 (M.D.N.C. May 18, 2006) ("[S]tatements that consist of nothing more than indefinite statements of corporate optimism, also known as `puffery,' are immaterial as a matter of law.") (citing Raab v. Gen. Physics Corp., 4 F.3d 286, 289 (4th Cir.1993)); see also In re Cable & Wireless, PLC, Sec. Litig., 332 F.Supp.2d 896, 900 (E.D.Va.2004) (defining
In order to satisfy the scienter requirement, the plaintiff must also establish that defendants made the false or misleading statements with an "intention to deceive, manipulate, or defraud." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007) (citation omitted). In order to satisfy that requirement, the plaintiff must allege in its complaint facts that show that a defendant had actual knowledge that a forward-looking statement was false at the time it was made. See 15 U.S.C. § 78u-5(c)(1)(B); In re CIENA Corp. Sec. Litig., 99 F.Supp.2d 650, 660-61 (D.Md.2000). The "actual knowledge" requirement may be satisfied by a showing of "recklessness." Matrix Capital Mgmt. Fund, LP v. BearingPoint, Inc., 576 F.3d 172, 181 (4th Cir.2009) ("Pleading recklessness is sufficient to satisfy the scienter requirement."). A "reckless" act is defined as an act that is "so highly unreasonable and such an extreme departure from the standard of ordinary care as to present a danger of misleading the plaintiff to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it." Ottmann v. Hanger Orthopedic Group, Inc., 353 F.3d 338, 343 (4th Cir.2003) (quoting Phillips v. LCI Intern., Inc., 190 F.3d 609, 621 (4th Cir.1999)). Overall, in order to satisfy the scienter requirement, the alleged facts must raise a "strong inference" that the required level of scienter accompanying the alleged material misrepresentation is "at least as likely as any plausible opposing inference." Matrix Capital at 181-82 (4th Cir.2009).
Plaintiff has alleged, and defendants have not disputed, that it purchased K12 stock during the Class Period and suffered a loss as a result of a decrease in K12 stock prices in October 2013. The plaintiff has also alleged with the required particularity the specific statements during the Class Period it relies upon as false or misleading and the facts on which it relies to satisfy its initial pleading burden under the PSLRA. Those facts fall into two categories: (1) statements made by various defendants after the Class Period in October and November 2013 (the "post-period statements"); and (2) facts set forth in confidential witness statements by certain employees of K12 ("the employee statements").
During an earnings conference call on February 5, 2013, defendant Murray made the following statements:
Doc. Nos. 38 ¶ 137; 40-1 at 1.
Plaintiff claims that this statement was false or misleading when made because in post-period comments, defendant Davis admitted that K12's promotional marketing program "started later than it should have." Doc. Nos. 38 ¶ 138; 40-6 at 3. Plaintiff claims K12 did not target its marketing at states with higher funding rates, but instead "embarked on a new, national marketing campaign," as alleged in employee statements. Doc. No. 38 at ¶¶ 46, 138. First, it appears that Murray's alleged misstatement, made during Q3 of FY13, was referring to the marketing plan for FY13, which began on July 1, 2012, while Davis' post-period statement refers to the marketing effort for FY14. In any event, none of these relied upon comments raises a sufficient inference that K12 was not "focused on marketing to states with higher funding rates" when K12 "rolled out our plan for this year" or that the marketing plan had not been "rolled out" by February 5, 2013, as Murray stated. Likewise, neither Davis' post-period comments nor the employee statements allow
Doc. Nos. 38 ¶ 137; 40-1 at 1.
Based on post-period statements, plaintiff contends that it was false or misleading for Murray to say that K12 was "focused on where the dollars are," and "focused on what [it could] do to improve unit cost efficiencies." Doc. No. 38 ¶ 138. In particular, plaintiff argues that, in light of post-period statements that K12's marketing plan was belatedly rolled out and "national" and that K12 "spent too many hours in the wrong states," K12 necessarily did not "focus" its efforts as stated. Id. Again, it appears that Murray's February 2013 statements are directed to the marketing effort for FY13, whereas Murray and Davis' post-period comments are directed to the marketing effort for FY14. In any event, the post-period comments do not conflict with Murray's February 5, 2013 statements, even if those were directed to the FY14 marketing effort. At most, his post-period comments suggest that, in hindsight, K12 realized that its marketing activities were not done in the most effective manner. They do not allow the inference that the February 5, 2013 statements were false or misleading or that Murray had the required degree of scienter.
Doc. Nos. 38 ¶ 139; 40-1 at 2.
Plaintiff contends it was false and misleading for Murray to represent that "higher call volumes to [K12's] enrollment center" could drive higher conversion rates because K12's enrollment center was "overwhelmed" throughout the Class Period. Doc. No. 38 ¶ 140. Specifically, plaintiff relies on Murray's post-period statements that "where the process broke down was in converting those applications to enrollments" because K12 made "serious missteps [throughout the] enrollment season" and its "forecast planning and reporting tools ... simply weren't robust enough" to administer K12's enrollment process. Id. ¶ 140. Plaintiff also presents employee statements recalling that, prior to 2013, employees typically handled an applicant through the entire enrollment process, which led to "consistent communications" and "higher conversion rates," but in Q1 (July-September) FY14, K12 reorganized the operations of the enrollment center, such that different employees handled different stages of the process for a particular applicant and "days or weeks would pass" between when an application was submitted and when an employee contacted the family to start the enrollment process. See id. ¶¶ 57, 140.
For the reasons mentioned as to Murray's other February 5, 2013 statements, nothing in these relied upon post-period statements or cited employee statements is sufficient to raise the required inference that this Class Period statement was factually incorrect, otherwise misleading, or stated with the required degree of scienter.
Plaintiff relies upon the following statements, presented in context, made by
Doc. Nos. 38 ¶ 143; 40-1 at 2.
Plaintiff has not presented facts from which it can be inferred that any of Packard's opinions regarding the various strengths of K12 were false or misleading or that Packard had the required scienter. See Ottmann v. Hanger Orthopedic Grp., Inc., 353 F.3d 338, 342-43 (4th Cir.2003) (stating that to allege a misrepresentation or omission of material fact, a plaintiff "must point to a factual statement or omission — that is, one that is demonstrable as being true or false") (emphasis added) (internal quotation marks omitted). There are no misstated facts; and the statements are, in substance, only non-actionable opinions.
Doc. Nos. 38 ¶¶ 144; 40-1 at 2-4.
Plaintiff challenges Packard's statement that K12 did an "amazing job" ensuring compliance and K12 "make[s] sure we comply with every rule and regulation" and that K12 took "compliance very seriously" and used a "sophisticated approach" to ensure compliance "with every rule and regulation," relying on Davis' post-period statements that "there were some new compliance requirements that [K12] did not factor in appropriately into [its] capacity planning model." Doc. No. 38 ¶ 145. Plaintiff also relies on employee statements that employees assigned to enrollments had "less familiarity with the individualized compliance requirements for
Again, plaintiff has not identified any misstated facts or presented facts that would allow the inference that on March 11, 2013 Packard falsely stated his opinions and beliefs concerning the company's attitude toward compliance. Whether K12 miscalculated the impact of compliance on the staff time needed to process applications is an issue different than whether K12 identified and satisfied compliance requirements. The relied upon post-period statements speak only to the impact of compliance on application processing times, not whether K12 successfully complied with any compliance requirements. Moreover, the issues identified in post-period comments appear to have arisen after Packard's March 11, 2013 comments and do not allow the required inferences to be drawn with respect to those Class Period statements. The employee statements do not contradict Packard's statements and Packard's statements are the kinds of statements that cannot be objectively demonstrated to be false or misleading. See In re Constellation Energy Grp., Inc. Sec. Litig., 738 F.Supp.2d 614, 631 (D.Md.2010) ("general statements about" the defendant's "`strong risk management culture' and `effective system of internal controls'" were "mere puffery").
Doc. Nos. 38 ¶ 146; 40-1 at 4-5.
Plaintiff contends that it was false or misleading for Packard to say that K12 had such high growth potential. Doc. No. 38 ¶ 147. Plaintiff relies on (1) defendant Davis' October 10, 2013 statement that "[d]uring March to June of 2013, [K12] received 9% fewer applications than [it] did during the timeframe one year earlier in 2012[]"; and (2) employee statements that describe declining student applications during the first half of 2013.
On May 3, 2013, K12 held its Q3 FY13 earnings conference call during which defendants Davis, Hawks, Packard and Murray made the following relied upon statements:
Doc. Nos. 38 ¶ 151; 40-1 at 5-6.
Plaintiff primarily contends that it was false and misleading to say that K12 was "in good shape" in managed schools and "performing as [] expected, as a matter of fact better than [] expected," again relying on the 9% year-over-year decline in applications for the period March to June 2013. Doc. No. 38 ¶ 153. But, again, a statement such as "in good shape," without evidence that defendants thought otherwise, is not actionable. See In re Cutera Sec. Litig., 610 F.3d 1103, 1111 (9th Cir.2010) ("[I]nvestors do not rely on vague statements of optimism like `good,' `well-regarded,' or other feel good monikers."); cf. Novak v. Kasaks, 216 F.3d 300, 315 (2d Cir.2000) (reasoning "defendants may be liable for misrepresentations of existing facts" where "the defendants stated that the inventory situation was `in good shape' or `under control' while they allegedly knew that the contrary was true"). Here, the focus of the discussion was the upcoming Q4 of FY13 (April-June 2013) and there is no complaint that the relied upon statements misrepresented what defendants thought were the prospects for Q4 or that, in fact, the Q4 or FY13 year end results were out of line with expectations. As Packard stated later in that same presentation, K12 usually ramps up its marketing
Plaintiff also asserts it was misleading to state, in effect, that K12 had no concerns with the Managed Public School segment because defendants had to implement sweeping changes in its enrollment center. See Doc. No. 38 ¶¶ 151, 153. In this regard, plaintiff also points to employee statements that recount employee frustration with K12's "woefully inadequate infrastructure and systems," and the reduction in enrollment staff bonuses that eliminated incentives to secure enrollments. Id. ¶¶ 60, 65. However, defendants' post-period statements that they had problems with their staffing model and enrollment center in the July to September 2013 period does not allow the necessary inference that in early May 2013 defendants did not believe that K12 was "in good shape" or not "performing as [] expected, as a matter of fact better than [] expected" for FY13, which ended on June 30, 2013. Nor are there any facts from which to conclude that the required level of scienter existed on the part of any defendant as to any relied upon statement.
Doc. Nos. 38 ¶ 152; 40-1 at 6-8.
Plaintiff relies principally on the statement that "... the underlying fundamentals in the core business remained strong, specifically enrollment, retention, funding environment, and revenue capture."
Doc. Nos. 38 ¶ 154; 40-1 at 8-9.
These statements not only include significant cautionary language ("... there is no guarantee that we will fill all of these [enrollment] slots ..."), but also lack any demonstrably false statements with respect to current or historical facts. As discussed above, a statement such as K12 is "on track to have one of the best business development years in [its] history" is the type of vague, ambiguous statement that does not justify reliance on the part of investors. Plaintiff claims it was false for Packard to state that enrollment slots created by cap expansions were "easier to fill" than slots for students in new states because K12 was suffering from an inability to convert applications to enrollments across the board. Doc. No. 38 ¶ 158. Those statements, however, do not raise any reasonable inference that any of the relied upon statements were false or misleading or that K12 had not, in fact, secured an additional 12,800 student enrollment slots by May 3, 2013. Moreover, there is no evidence that these statements were made with the required level of scienter.
Doc. Nos. 38 ¶ 155; 40-1 at 9-10.
Plaintiff relies on (1) K12's internal enrollment goal was only 45-50% of the possible enrollment level that Packard referenced; (2) K12's actual enrollment in Michigan by September 2013 of 4,700 students, rather than the 6,000-7,000 that Packard thought possible; and (3) employee statements that "K12 internally understood that 4,500 students" was more realistic than 6,000 or 7,000. Doc. No. 38 ¶ 157. Packard's statements are a prediction and therefore forward-looking statements. They also include cautionary language ("We don't know, because it really is an unprecedented amount of growth in a single year."). Overall, Packard's statement simply shows what Packard thought K12 might be able to achieve in Michigan, based on huge growth potential. There is no evidence that Packard did not, in fact, believe anything in this statement or that there was no reason for him to believe something in this statement when he made it in May 2013.
Doc. Nos. 38 ¶ 156; 40-1 at 10-12.
These statements are also forward-looking statements reflecting the speaker's opinions about the potential for business growth and therefore not actionable under the PSLRA, absent any showing that there was no reasonable basis for such statements. See In re Int'l Bus. Mach. Corp. Sec. Litig., 163 F.3d 102, 109 (2d Cir.1998) ("An opinion may ... be actionable ... if it is without a basis in fact.... [Or if] the speakers were aware of any facts undermining the accuracy of these statements"). Compare Doc. Nos. 38 ¶ 156; 40-1 at 10-11 ("[W]e are looking forward to strong fall enrollment and a great 2013-2014 school year."); with In re Trex Co., Inc. Sec. Litig., 454 F.Supp.2d 560, 576-77 (W.D.Va.2006) (CEO's statement "that he `expect[ed]' 20-25% revenue and earnings growth" was not actionable because "expectations are not guarantees"). That showing has not been made on the record before the Court.
Plaintiff takes issue with the statement that "[o]bviously, this year has exceeded our expectations," but that statement is referring to the results of FY13 and "new states and cap expansions" that occurred in FY13, none of which is claimed to be misrepresented; and the facts alleged would not allow in any event the required inferences of either falsity or scienter with respect to that statement. Finally, Plaintiff relies on Packard's statement that additional cap expansion would take place by July and that "certainly by early August everything is [wrapped] down' in terms of recruiting and enrollment," Doc. Nos. 38 at ¶ 156; 40-1 at 12.
Doc. Nos. 38 ¶ 160; Doc. No. 40-1 at 12-13.
Based on post-period statements that K12 started its promotional program later that it should have and did not react quickly enough to changes that occurred during the enrollment season to reallocate resources effectively, plaintiff contends it was false or misleading for Murray to state that K12 had implemented heightened
Plaintiff alleges that the following statements found in K12's 2013 Form 10-K, filed on August 29, 2013, were false or misleading:
Doc. Nos. 38 ¶ 165; 40-1 at 13-14.
Plaintiff contends that the statements are misleading because, as it turned out, K12 was unable to process the influx of applications that occurred during the Class Period. Doc. No. 38 ¶ 166. However, plaintiff has not alleged any facts that establish or suggest that K12 had not "developed management systems and processes designed to ensure that schools we serve are in compliance with all applicable requirements" or that it had not developed "proprietary computer software programs to provide specific functionality to support both our unique education offerings and the student and school management services." In fact, the plaintiff does not claim that K12 failed to detect compliance issues or perform the required compliance, but rather that it did not perform the required compliance in a sufficiently timely or efficient manner. See id. There are no representations, as plaintiff implies, that K12's systems had "grown increasingly robust" to ensure that it could timely process all of the applications required to meet its revenue goals. Plaintiff relies on employee
Doc. Nos. 38 ¶ 167; 40-1 at 15.
Plaintiff claims that the representation that K12 had "the ability to reroute calls" is false or misleading because employee statements revealed that K12 had a "number of phone and fax problems" that "prevented K12 from converting applications to enrollments" and Davis made a post-period statement that K12's model failed because the call center was "overwhelmed" by the volume of calls. Doc. No. 38 ¶¶ 59, 168; see also Doc. No. 40-6 at 5. With respect to the capabilities discussed in the statement, there are no allegations that the enrollment center did not, in fact, have the ability to reroute calls to other facilities or lessen the impact of significant interruptions on its customers. The allegations that the call center was overwhelmed do not make the relied upon statements false or misleading; and there are no facts alleged sufficient to establish the required scienter.
Finally, plaintiff alleges the following three statements from the August 29, 2013 call as being false or misleading.
Doc. Nos. 38 ¶ 170; 40-1 at 16.
Plaintiff does not contend that there did not exist "increased funding, unprecedented cap expansion and the continued mainstream of online education" or that "a solid growth foundation is being built for the next fiscal year [FY15]." And the statement that defendants are "sanguine" that FY14 is "shaping up to be an excellent year" is the kind of forward-looking opinion that is not actionable under the PSLRA.
Doc. Nos. 38 ¶ 171; 40-1 at 16-17.
The relied upon statement, "I think it's going to allow us to stay on track from where we were," is a general and vague opinion, within a context that included cautionary language ("[I]t would be wrong of me to try to project it, that we're going to accelerate enrollment growth on the basis of those things."). There is no evidence from which it could be inferred that the opinions expressed in these very general statements were not held by the speaker or that the opinions relate to "matters of facts which can be verified by objective evidence." See Nolte v. Capital One Fin. Corp., 390 F.3d 311, 315 (4th Cir.2004) ("[A] statement of opinion may be a false factual statement if the statement is false, disbelieved by its maker, and related to matters of facts which can be verified by objective evidence."). Certain facts were known at the time that would support the opinions that K12 was "on track" to hit the projections stated in the August 29 call. As mentioned above, K12 had received 25% more applications from July through September of 2013 as compared to 2012, and had they been able to convert those applications into enrollments, they would have been on target for their projections.
Doc. Nos. 38 ¶ 172; 40-1 at 17.
Plaintiff primarily relies on Rhyu's comment that he was "comfortable with" the FY14 projections on August 29, 2013. See Doc. No. 38 ¶ 174. However, Rhyu's statement is a forward-looking opinion that includes significant cautionary language. See Doc. No. 40-1 at 17 ("As you know, these estimates and our ability to achieve these figures are contingent on our final enrollment numbers, that which will not be available until October."). This opinion is essentially a forecast over a month before final enrollment numbers would become available and is based on an assumption that K12 would be able to convert a sufficient number of the applications it in fact received. For these reasons, these statements fall within the safe harbor provision of the PSLRA as well.
With respect to scienter as to the relied upon statements in the 10-K and the August 29, 2013 conference call, plaintiff relies heavily on Packard's sales of K12 stock during the Class Period, beginning
Based on the facts alleged, the Court concludes that none of the relied upon Class Period statements are actionable. None of them contains false or misleading statements of historical fact or actionable opinions; and there are no facts that any defendant made any relied upon statement with the required scienter. As it appears from the record, the defendants' statements occurred, at the latest, more than a month before the results of the 2013-2014 enrollment season would be known. They also occurred at a time when K12 reasonably assumed it would receive sufficient enrollment applications, or in fact had obtained sufficient enrollment applications, to achieve the forecasted financial results. As defendants acknowledged afterwards, they were ill-prepared at the staffing level, despite an all-out effort to convert those applications into actual enrollments before the end of the enrollment season.
The impact on investors of defendants' lack of managerial competence cannot be minimized; and this case is a cautionary tale concerning the risks inherent in relying on corporate management's endorsements of analysts' forecasts, against which the securities laws, as they now exist in the PSLRA, provide limited protections.
For the above reasons, the Court finds and concludes as a matter of law that the Amended Complaint does not state a claim under the PSLRA as to any of the defendants. Defendants' Motion to Dismiss will be granted and the action dismissed.
An appropriate Order will issue.