Risk Management

Verdict Nicks Apollo as Plaintiffs Rebound

Company that operates U. of Phoenix is hit with a $280-million federal jury verdict a day after the Supreme Court chills plaintiffs' bar in another...
Roy HarrisJanuary 16, 2008

After being beaten down on Tuesday by the Supreme Court, investors filing civil lawsuits came out on top in a federal court case against Apollo Group Inc., the for-profit company that owns the for-profit University of Phoenix.

A U.S. district court jury in Phoenix ruled that Apollo fraudulently misled investors about its student recruitment policies, and ordered the company to pay shareholders about $280 million, or $5.55 a share, according to the Associated Press. Shareholders had claimed Apollo misled investors four years ago when it kept secret a Department of Education report that criticized the University of Phoenix’s recruitment policies.

The DoE report had concluded that the university paid enrollment counselors “solely based on (the) recruiters’ success in securing enrollments,” which violated federal regulations. It added that the university systematically keeps its incentive-based recruitment practices hidden from the Department of Education.

In the case, a former Apollo finance chief had testified that the company kept secret a seemingly damaging report about its pay policy.

In the Supreme Court’s 5-3 ruling in StoneRidge v. Scientific-Atlanta a day earlier, corporate defendants in fraud cases won a huge victory when the majority said that suppliers, banks, accountants, and law firms that do business with publicly traded wrongdoer cannot be sued as part of a “scheme,” unless the third parties themselves specifically deceived investors. Yesterday’s verdict in Phoenix gave some hope to class-action plaintiffs, however.

“Any reasonable investor, I assure you, would have wanted to know the existence of this report,” Stephen R. Basser, an attorney representing shareholders with the Chicago policemen’s annuity and benefit fund, told jurors in the Apollo in closing arguments last week.

Shareholders had named CEO Todd S. Nelson and former chief financial officer Kenda B. Gonzales as the Apollo officials who failed to inform investors about the Department of Education’s report, and had sought restitution of $5.55 a share, which company officials had equated to $280 million. The jury agreed after two days of deliberation, according to AP.

Gonzales, who in November 2006 resigned as Apollo’s CFO, had told the jury that the company intentionally withheld a U.S. Education Department report that charged Apollo violated federal bans on paying staff based on the numbers of students they enrolled, according to the wire service. Nelson also left the company in 2006.

Apollo had argued that the report was largely false, and contained only anecdotal evidence, making the failure to disclose its existence to investors anything but misleading. However, the University of Phoenix agreed in September 2004 to pay DoE $9.8 million to settle the matter, and when reports of the agreement were made public it hit Apollo’s stock hard.

Wayne W. Smith, a Gibson, Dunn & Crutcher lawyer representing Apollo, had told jurors in his closing that the report was “seriously flawed” and made the university look like a diploma mill. Smith also had disputed claims by shareholders that the university was turning to unqualified students to keep their enrollment numbers high. “There’s no benefit to the university for people who can’t hack it,” he said, according to AP. “They just take one class at a time, and if they drop out, they get a pro-rata refund.”

In a statement, Apollo said it was disappointed with the decision in a case it said was “premised on Apollo’s supposed failure to disclose unsubstantiated allegations from a preliminary government report.” It added: “We disagree with the jury’s verdict, both the finding and the amount of damages,” attorney Smith said. “The law does not require the disclosure of preliminary or unproven charges in a government investigation. In not disclosing the report at issue, Apollo acted in good faith and in the best interests of its students, alumni, employees and shareholders, who could have been unfairly harmed by a premature disclosure.”