Federal Judge Dismisses Investor Lawsuit Against K12 Inc.

Senior Editor

A federal judge in Virginia has tossed out a lawsuit brought by investors who claimed they were duped by overly optimistic statements put forward last year by for-profit education provider K12 Inc., shortly before the company’s stock plunged.

In a 25-page decision, Judge Anthony J. Trenga cited evidence of a “lack of managerial competence” in the Herndon, Va.-based company’s faulty predictions of growth in student enrollment—but found nothing that showed that the company violated securities law by purposely misleading the public.

The lawsuit against K12 was brought by the Oklahoma Firefighters Pension and Retirement System, whose members claimed K12 executives made misleadingly optimistic public statements during 2013 about enrollment in the online provider’s schools, when in fact there were signs that the company would miss its targets.

When the company’s stock collapsed by nearly 40 percent in October of last year, those investors say they suffered big financial losses.

But the judge said he did not find evidence that various K12 executives, including current chairman and CEO Nate Davis and former CEO Ronald Packard, had made knowingly false statements intended to deceive investors.

The Oklahoma investors, for instance, had objected to comments Packard made during a speech in March 2013 boasting of K12’s potential for growth and strong management—months before the company revealed disappointing enrollment numbers, problems executives blamed on breakdowns in recruiting and processing applications.

But Trenga said the plaintiffs had not met the legal standard to prove that Packard and his colleagues gave information that was false or knowingly misleading. In some cases, the remarks amounted to the kind of optimistic “soft statements or puffery” that companies often put forward about future performance, which on their own do not make for a violation of the law, the judge ruled.

Ultimately, the evidence suggested the investors were victimized by the company’s poor oversight of its enrollment practices, and not by a concerted effort to deceive, Trenga found.

“The impact on investors of defendants’ lack of managerial competence cannot be minimized,” Trenga wrote. “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 … provide limited protections.”

The plaintiffs in the lawsuit had also claimed that Packard had personally “reaped the rewards” of rosy projections by selling 43 percent of his personally held K12 common stock for gross proceeds of $6.4 million during those months before K12’s stock price plunged. (See Education Week’s story from earlier this year looking at those allegations.)

Company officials have strongly denied those claims, saying Packard had been upfront about his trading by filing a 10b5-1 plan, a document allowed by the U.S. Securities and Exchange Commission that provides a legal process through which a company executive makes stock trades where insider information does not factor in the decision about transactions.

Judge Trenga said that Packard’s sales—as a portion of his overall K12 holdings—were not big enough to show any evidence that the former company official had acted improperly. And the overall increase in Packard’s K12 stock holdings, as measured after his selling, “further undercuts” the lawsuit’s claims, the judge ruled.

A lawyer representing the plaintiffs, James Harrod, declined to comment on the judge’s decision. 

K12 spokesman Jeff Kwitowski also declined comment. He instead pointed to a statement from Davis, the company’s chairman, who said the ruling “reaffirmed the company’s commitment to the highest levels of professional integrity when providing quality education options for children across the nation.”

K12, which manages online schools around the country, has drawn intense scrutiny and criticism over the years from those who question its academic performance and business practices. Company officials have said their online education services meet the needs of students in states around the country who struggle in traditional academic settings. 

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