Northwest Education Law Blog : Northwest Education Lawyer & Attorney : Williams Kastner Law Firm : Tacoma, Seattle, Portland

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On June 23, 2010, the Ninth Circuit Court of Appeals reinstated a $277.5 million securities fraud verdict against Apollo Group, Inc.

A class of Apollo Group investors, represented by the Policemen’s Annuity and Benefit Fund of Chicago, initiated the underlying litigation after Apollo’s stock declined in 2004 following reports that the Department of Education had issued preliminary findings that Apollo’s subsidiary, University of Phoenix, had violated DOE regulations. The plaintiff investors alleged that, in public statements, Apollo misrepresented the actual state of affairs surrounding the program reviewed by the DOE. According to the plaintiffs, as a result, the market’s reaction to the news was delayed until several months after the issuance of the DOE’s report, when the “Flynn Reports” were issued.

The investors filed suit against Apollo under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. In order to establish their fraud claims, plaintiffs had to prove “loss causation,” defined as a causal connection between the material misrepresentation and the loss. Plaintiffs endeavored to prove loss causation by showing that a “corrective disclosure”—namely the Flynn Reports—caused Apollo’s stock price to decline. A “corrective disclosure” is defined as one which reveals the fraud, or at least some aspect of the fraud, to the market.

The matter proceeded to trial, where a jury awarded plaintiffs $277.5 million in damages against Apollo in a January 16, 2008 verdict. Months later, however, the United States District Court for the District of Arizona granted judgment as a matter of law in favor of Apollo, vacating the verdict. According to the district court, the jury’s verdict was in error, because the Flynn Reports did not qualify as “corrective disclosures” since the reports “were not necessary to reveal the fraud in this case because they did not provide any new, fraud-revealing analysis.”

Yesterday, June 23, 2010, the Ninth Circuit Court of Appeals reversed the district court’s judgment in favor of Apollo, reinstating the jury’s original $277.5 million verdict. According to the Ninth Circuit, “[t]he jury could have reasonably found that the UBS [Flynn] reports following various newspaper articles were ‘corrective disclosures’ providing additional or more authoritative fraud-related information that deflated the stock price.” Further appeal will likely follow, as Apollo’s general counsel declared in a press release: “We will explore all available options for seeking further review of the Ninth Circuit's decision.”

For more information, visit the Apollo Group, Inc.’s press release, Apollo Group, Inc.’s Legal Information Center.
 

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The United States District Court for the Eastern District Court of Pennsylvania recently ruled that two former University of Phoenix employees may proceed with their collective wage action against University of Phoenix parent Apollo Group, Inc. Erik Sabol and Rebecca Odom formerly worked as enrollment counselors at University of Phoenix’s Levittown, Pennsylvania campus. Sabol and Odom allege that in order to meet performance thresholds, they regularly worked 50-hour weeks with company permission, but were not paid for their overtime.

Sabol and Odom filed suit alleging violation of the Fair Labor Standards Act, and later petitioned the court for an order certifying a nationwide class of enrollment counselors. The district court held that Sabol and Odom satisfied the lenient first stage of the two-stage inquiry, establishing the putative class members were “similarly situated,” and the court held the lawsuit may proceed as a collective action through the discovery phase. While Apollo set forth employee handbooks specifying mandated break periods and providing that employees were to be paid for overtime hours, such evidence could not block class certification at this first-stage inquiry. A second, more demanding inquiry will follow after the parties complete discovery, and at that stage the court will determine whether the case will go to trial as a collective action.
 

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The U.S. Department of Justice reports today that the University of Phoenix reached a $67.5 million settlement in a False Claims Act (“FCA”) qui tam lawsuit in which the plaintiffs claimed the University unlawfully accepted federal funds while in violation laws which prohibit post-secondary institutions from providing their admissions representatives incentive-based compensation tied to the number of students recruited. The two former University of Phoenix employees who initiated the action on behalf of the government will receive $19 million from the settlement.

The FCA creates liability for any person who knowingly attempts to defraud the United States Government. Moore v. Cal. Institute, 275 F.3d 838 (9th Cir. 2002). The risk for employers frequently arises when they contract to provide services to the federal government or, for educational institutions, when they accept government-subsidized student aid, exposing themselves to the potential for FCA liability. One unique feature of the FCA is a mechanism which allows private individuals to bring an action on the government’s behalf and earn some portion of the judgment that is ultimately obtained. Such an action is known as a “qui tam” action, and its effect on employers is clear: private citizens, including employees and former employees, have a financial incentive to discover and reveal alleged deception of the federal government.

Nationwide, recovery under the FCA has increased dramatically in recent years. According to the Department of Justice, there were over $2.4 billion in settlements and judgments under the FCA in fiscal year 2009 alone, $2 billion of which was recovered in qui tam lawsuits.