The opinion
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8 UNITED STATES DISTRICT COURT
9 SOUTHERN DISTRICT OF CALIFORNIA
10
11 SHIVA STEIN, Individually and Case No.: 3:19-cv-00460-WQH-AHG
on Behalf of All Others Similarly
12 Situated, ORDER
13 Plaintiff,
14 v.
15 BRIDGEPOINT EDUCATION,
INC.; ANDREW S. CLARK;
16
KEVIN ROYAL; AND JOSEPH
17 L. D’AMICO,
18 Defendants.
19
HAYES, Judge:
20
The matter pending before the Court is the Motion to Dismiss filed by Defendants
21
Bridgepoint Education, Inc.; Andrew S. Clark; Kevin Royal; and Joseph L. D’Amico. (ECF
22
No. 22).
23
PROCEDURAL BACKGROUND
24
On March 8, 2019, Plaintiff Shiva Stein initiated this action by filing a class action
25
Complaint against Defendants Bridgepoint Education, Inc. (“Bridgepoint”); Andrew S.
26
Clark; Kevin Royal; and Joseph L. D’Amico for claims pursuant to §§ 10(b) and 20(a) of
27
the Securities Exchange Act of 1934. (ECF No. 1).
28
1 On June 18, 2019, Plaintiff filed a Motion for Appointment as Lead Plaintiff and
2 Approval of Counsel. (ECF No. 8). On July 12, 2019, Plaintiff filed a Notice of Non-
3 Opposition. (ECF No. 12). On August 2, 2019, the Court issued an Order stating:
4 IT IS HEREBY ORDERED that the Motion for Appointment as Lead Plaintiff
and Approval of Counsel filed by Plaintiff Shiva Stein (ECF No. 8) is
5
GRANTED. The Court appoints Plaintiff Shiva Stein to serve as lead plaintiff
6 in this action. The Court approves Plaintiff’s choice of counsel and appoints
Pomerantz as lead counsel in this action.
7
8 (ECF No. 13 at 7).
9 On October 1, 2019, Plaintiff filed an Amended Complaint. (ECF No. 19). Plaintiff
10 brings the following causes of action: (1) violations of § 10(b) of the Securities Exchange
11 Act of 1934 and Securities and Exchange Commission (“SEC”) Rule 10b-5 against all
12 Defendants, and (2) violation of § 20(a) of the Securities Exchange Act of 1934 against
13 Defendants Andrew S. Clark, Kevin Royal, and Joseph L. D’Amico. See id. at 67-70.
14 Plaintiff seeks a determination “that the instant action may be maintained as a class action,”
15 certification of “Lead Plaintiffs as Class representatives,” damages, pre-judgement and
16 post-judgment interest, attorneys’ fees, expert fees, other costs, and “other and further relief
17 as this Court deems just and proper.” Id. at 71.
18 On November 27, 2019, Defendants filed a Motion to Dismiss1. (ECF No. 22). On
19 January 13, 2020, Plaintiff filed a Response in opposition. (ECF No. 23). On February
20 11, 2020, Defendants filed a Reply. (ECF No. 24).
21 ALLEGATIONS OF THE AMENDED COMPLAINT
22 Plaintiff acquired Defendant Bridgepoint’s securities “at artificially inflated prices”
23 “between March 8, 2016 and March 12, 2019, both dates inclusive,” (the “Class Period”)
24 “and was damaged upon the revelation of the alleged corrective disclosures.” (ECF No.
25
26
1 Defendants request the Court to take judicial notice of the following two documents: (1) the SEC’s
27 October 24, 2019 No-Action Letter regarding In the Matter of Bridgepoint Education, Inc. (FW-3886) and
(2) the March 26, 2016 Form 8-K filed by Defendant Bridgepoint in connection with its dismissal of PwC.
28
1 19 at 4, 6). Plaintiff brings this action “on behalf of all persons who purchased or otherwise
2 acquired” Defendant Bridgepoint’s securities during the Class Period. Id. at 4. Defendant
3 Bridgepoint was a Delaware corporation with its principal executive offices in San Diego,
4 California. See id. at 6-7. On April 2, 2019, Defendant Bridgepoint “changed its name to
5 Zovio Inc. and moved its headquarters” to Chandler, Arizona. Id. at 7. Defendant Andrew
6 S. Clark “co-founded [Defendant] Bridgepoint in November 2003 and has served [ ] [sic]
7 at all relevant times as [Chief Executive Officer (“CEO”)], President, and a director of
8 [Defendant] Bridgepoint.” Id. Defendant Kevin Royal “served as [Defendant]
9 Bridgepoint’s Chief Financial Officer (‘CFO’) from October 1, 2015 until October 13,
10 2017 and then since April 16, 2018.” Id. at 8. Defendant Joseph L. D’Amico “served as
11 [Defendant] Bridgepoint’s Interim CFO from October 16, 2017 until April 16, 2018.” Id.
12 at 7.
13 Defendant “Bridgepoint is a provider of post-secondary education services.” Id. at
14 28. “Originally, [Defendant] Bridgepoint was a provider of ‘affordable, accelerated work-
15 place related courses for adult students seeking a bachelor’s degree’ backed by the global
16 private equity firm Warburg Pincus.” Id. “But its business model changed dramatically in
17 March 2005, when it acquired what became Ashford University.” Id. “Before the
18 acquisition, Ashford University was a small regionally accredited non-profit religious
19 college in Iowa ….” Id. “After the acquisition, [Defendant] Bridgepoint renamed it to
20 ‘Ashford University’ and began operating it as a for-profit commercial venture.” Id. at 29.
21 “In September 2007, [Defendant] Bridgepoint bought the Colorado School of Professional
22 Psychology in Colorado Springs and renamed it University of the Rockies.” Id. “Over the
23 next decade, Ashford grew rapidly, eventually peaking at more than 90,000 students.” Id.
24 “However, virtually all of [Defendant] Bridgepoint’s enrollment growth was online.” Id.
25 “Around 2012, after years of rapid growth, [Defendant] Bridgepoint’s business
26 prospects started declining rapidly.” Id. at 30. “Enrollment started declining quickly every
27 year, which devastated [Defendant] Bridgepoint’s revenue and operating income ….” Id.
28 “By 2015, [Defendant] Bridgepoint could no longer afford to maintain Ashford
1 University’s physical campus, and was forced to shut down the physical campus.” Id. at
2 30-31. “Following this sudden reversal in [Defendant Bridgepoint]’s business prospects,
3 Defendants began taking drastic measures to reverse the decline as well as to convince
4 investors not to abandon [Defendant Bridgepoint].” Id. at 31. “Declining enrollments also
5 exposed [Defendant] Bridgepoint to significant new regulatory risks and forced it to seek
6 new revenue streams to reduce their reliance on federal student aid funds at a time of
7 increasing regulatory scrutiny.” Id.
8 “By 2012, more than 85% of [Defendant] Bridgepoint’s revenues came from federal
9 student aid funds under Title IV of the Higher Education Act ….” Id. “[U]nder Title IV’s
10 ‘90/10’ Rule, in order to maintain access to federal student aid funds, Ashford University
11 and University of the Rockies had to generate at least 10% of their revenues from sources
12 other than federal student aid under Title IV.” Id. “To avoid running into the 90% cap,
13 [Defendant] Bridgepoint had to find new sources of revenue—at a time when its overall
14 enrollment and revenue were quickly declining.” Id. at 32.
15 Defendant Bridgepoint “formed various corporate partnerships with employers to
16 offer their employees a way to pursue and complete a college degree purportedly without
17 incurring any student debt.” Id. at 33. Over time, Defendant “Bridgepoint became
18 increasingly reliant on one such program—what it now calls its Full Tuition Grant (‘FTG’)
19 Program.” Id. “The FTG [P]rogram … differed from [Defendant Bridgepoint]’s typical
20 scholarships.” Id. at 36. “Typically, scholarships would be tied to a ‘specific course, term
21 or payment period.’” Id. “In contrast, the FTG [P]rogram was a 12-month grant under
22 which students were ‘eligible to take up to ten undergraduate or eight graduate courses per
23 12-month grant period.’” Id. (emphasis omitted).
24 “In 2014, the SEC heightened its scrutiny regarding [Defendant] Bridgepoint’s
25 accounting practices, especially with respect to revenue recognition and receivables.” Id.
26 at 37. Pursuant to Generally Accepted Accounting Principles (“GAAP”), “revenue cannot
27 be properly recognized if its collectibility is not reasonably assured.” Id. at 38. “But
28 [Defendant] Bridgepoint had been blindly basing this determination of collectibility for
1 many of its students based on the government’s ability to pay, reasoning that [Defendant]
2 Bridgepoint students will most likely be eligible for federal student loans—even though
3 [Defendant Bridgepoint] knew, and admitted, that not every student was receiving financial
4 aid, and not all of [Defendant] Bridgepoint’s revenue was actually collected from the
5 government.” Id. (emphasis omitted). Defendant “Bridgepoint’s accounting practices
6 made no distinction as to students with financial aid funding and those without—treating
7 them all as equivalent in terms of collectability—while also failing to reconcile whether
8 revenue recognition was still appropriate if or when a student dropped out of or became
9 ineligible for the [FTG] [P]rogram ….” Id.
10 “On July 25, 2014, [Defendant] Bridgepoint disclosed that it had received from the
11 SEC a subpoena relating to certain of its accounting practices, including revenue
12 recognition and receivables, and that the SEC had ‘requested documents and detailed
13 information for the time period January 1, 2009 to present.’” Id. at 40.
14 “On August 4, 2014, [Defendant] Bridgepoint issued a restatement of financial results
15 for 2013 and the first three quarters thereof.” Id. Defendant Bridgepoint’s 2013 10-K/A
16 stated the following regarding the August 4, 2014 restatement:
17 Our management has concluded that there are two material weaknesses in
internal control over financial reporting, as we did not maintain effective
18
controls over the selection and application of GAAP related to revenue
19 recognition and restricted cash…. One control deficiency related to our failure
to maintain effective internal controls over the accounting for revenue
20
recognition. Specifically, the process for analyzing the collectibility criterion
21 for revenue recognition was not designed to reassess collectibility, on a
student-by-student basis, throughout the period revenue was recognized by
22
[Defendant Bridgepoint]’s institutions…. The other control deficiency related
23 to our failure to maintain effective internal controls over the presentation of
certain funds as restricted cash…. [O]ur management has determined that
24
these control deficiencies constitute individual material weaknesses.
25
Id. at 41-42 (emphasis omitted). Defendant Bridgepoint stated in its 2013 10-K/A that
26
“[w]e plan to take additional measures to remediate the underlying causes of the material
27
weaknesses.” Id. at 42. However, “those material weaknesses persisted for years.” Id.
28
1 On March 10, 2015, Defendant
2 Bridgepoint stated in its 2014 10-K that it still had a “material weakness in
internal control over financial reporting surrounding our failure to maintain
3
effective internal controls over the accounting for revenue recognition”—
4 specifically, that [Defendant] Bridgepoint “did not maintain effective controls
surrounding the selection and application of GAAP related to revenue
5
recognition as of December 31, 2014”….
6
Id.
7
“On August 10, 2015, [Defendant Bridgepoint] received Civil Investigative
8
Demands from the Consumer Financial Protection Bureau [(“CFPB”)] ‘related to the
9
CFPB’s investigation to determine whether for-profit post-secondary education companies
10
or other unnamed persons have engaged in or are engaging in unlawful acts or practices
11
related to the advertising, marketing or origination of private student loans.’” Id. at 44. On
12
December 10, 2015, Defendant Bridgepoint received a
13
request for information from the Multi-Regional and Foreign School
14
Participation Division of the [Department of Education Office of Federal
15 Student Aid] for (i) advertising and marketing materials provided to
prospective students regarding transferability of certain credit, (ii) documents
16
produced in response to the CFPB’s August 10, 2015 Civil Investigative
17 Demand related to the CFPB’s investigation to determine whether for-profit
post-secondary education companies or other unnamed persons have engaged
18
in or are engaging in unlawful acts or practices related to the advertising,
19 marketing or origination of private student loans, (iii) certain documents
produced in response to subpoenas and interrogatories issued by the
20
California Attorney General and (iv) records created between 2009 and 2012
21 related to the disbursement of certain Title IV funds.
22
Id. (alteration in original).
23
On March 8, 2016 Defendant Bridgepoint filed its 2015 10-K (the date the Class
24
Period begins). See id. at 49. Defendant Bridgepoint’s 2015 10-K
25
contained signed certifications pursuant to the Sarbanes-Oxley Act of 2002
26 (“SOX”), in which Defendants Clark and Royal certified that the 2015 10-K
“fully complies with the requirements of Section 13(a) or 15(b) of the
27
Securities Exchange Act of 1934, as amended” and that “[t]he information
28
1 contained in the [2015 10-K] fairly presents, in all material respects, the
financial condition and results of operations of [Defendant Bridgepoint].”
2
3 Id. at 49-50 (first and second alterations in original).
4 Defendant Bridgepoint’s 2015 10-K stated, in relevant part,
5 Based on the remediation measures tested, which were found to be operating
effectively, [Defendant Bridgepoint] concluded that the material weakness
6
relating to the selection and application of GAAP related to restricted cash
7 was remediated as of December 31, 2014.
8
Id. at 44. Defendant Bridgepoint’s 2015 10-K further stated, in relevant part,
9
We are committed to remediating the control deficiencies that constitute the
10 … remaining material weakness by implementing changes to our internal
control over financial reporting.
11
12 Id. at 43. Defendant Bridgepoint’s 2015 10-K “mentioned a new material weakness that
13 was not mentioned in the 2014 10-K—specifically, that [Defendant Bridgepoint] ‘also did
14 not maintain effective controls to assess the reliability of system generated data used in the
15 operation of certain revenue recognition controls.’” Id. at 45. Defendant Bridgepoint stated
16 in its 2015 10-K that “[w]e plan to implement measures to remediate the underlying causes
17 of the control deficiencies that gave rise to the material weakness.” Id.
18 On March 24, 2016, Defendant Bridgepoint announced that it had dismissed
19 PricewaterhouseCoopers, LLP (“PwC”) and approved the appointment of Deloitte &
20 Touche LLP (“Deloitte”) as Defendant Bridgepoint’s “independent registered public
21 accounting firm for the fiscal year ending December 31, 2016 and the interim quarterly
22 period beginning with the quarter ending March 31, 2016.” Id. at 45-46.
23 “On May 18, 2016 … the SEC expanded its investigation of [Defendant]
24 Bridgepoint to include [Defendant Bridgepoint]’s ‘scholarship and institutional loan
25 programs and any other extensions of credit made by [Defendant Bridgepoint] to students,
26 and student enrollment and retention at [Defendant Bridgepoint]’s academic institutions’
27 from as early as January 1, 2014.” Id. at 46. “On July 12, 2016, [Defendant] Bridgepoint
28 announced that the U.S. Department of Justice was conducting an ‘investigation
1 concerning allegations that [Defendant Bridgepoint] may have misstated Title IV refund
2 revenue or overstated revenue associated with private secondary loan programs and thereby
3 misrepresented its compliance with the 90/10 rule of the Higher Education Act.’” Id. at
4 47.
5 On March 7, 2017, Defendant Bridgepoint filed its 2016 10-K. See id. at 50.
6 Defendant Bridgepoint’s 2016 10-K
7 contained signed SOX certifications in which Defendants Clark and Royal
certified that the 2016 10-K “fully complies with the requirements of Section
8
13(a) or 15(b) of the Securities Exchange Act of 1934, as amended” and that
9 “[t]he information contained in the [2016 10-K] fairly presents, in all material
respects, the financial condition and results of operations of [Defendant
10
Bridgepoint].”
11
Id. at 52 (first and second alterations in original). Defendant Bridgepoint’s 2016 10-K
12
stated, in relevant part,
13
We have implemented measures to remediate the control deficiencies that
14
gave rise to the material weaknesses…. We believe the … measures have
15 enabled us to remediate the control deficiencies that gave rise to the material
weaknesses. We will continue to maintain appropriate focus on this critical
16
accounting area going forward. We believe these measures have remediated
17 the identified control deficiencies and strengthen internal control over
financial reporting.
18
19 Id. at 47-48, 50-51 (emphasis omitted). Defendant Bridgepoint’s 2016 10-K stated, in
20 relevant part,
21 [O]ur [CEO] and our [CFO] concluded that our disclosure controls and
procedures were effective at the reasonable assurance level as of December
22
31, 2016…. Our management has assessed the effectiveness of our internal
23 control over financial reporting as of December 31, 2016 …. Our management
has concluded that our internal control over financial reporting was effective
24
as of December 31, 2016.
25
Id. at 51-52.
26
On February 21, 2018, Defendant Bridgepoint filed its 2017 10-K. See id. at 53.
27
Defendant Bridgepoint’s 2017 10-K “contained statements substantively identical to the
28
1 statements in the 2016 10-K” regarding “the effectiveness of [Defendant] Bridgepoint’s
2 disclosure controls and procedures, as well as internal control over financial reporting ….”
3 Id. at 53. Defendant Bridgepoint’s 2017 10-K “contained general and boilerplate
4 representations concerning [Defendant] Bridgepoint’s risk of error relating to its disclosure
5 controls and procedures, as well as internal control over financial reporting, substantively
6 identical to the statements in [Defendant Bridgepoint]’s 2016 10-K ….” Id. at 53-54.
7 Defendant Bridgepoint’s 2017 10-K
8 contained signed SOX certifications in which Defendants Clark and D’Amico
certified that the 2017 10-K “fully complies with the requirements of Section
9
13(a) or 15(b) of the Securities Exchange Act of 1934, as amended” and that
10 “[t]he information contained in the [2017 10-K] fairly presents, in all material
respects, the financial condition and results of operations of [Defendant
11
Bridgepoint].”
12
Id. at 54 (first and second alterations in original).
13
On March 13, 2018, Defendant Bridgepoint “issued a press release” announcing its
14
“plans to separate from its academic institutions, Ashford University and University of the
15
Rockies, and become an Online Program Management (OPM) company.” Id. at 36.
16
On May 1, 2018, Defendant Bridgepoint filed its quarterly report for the first quarter
17
of 2018 (“2018 Q1 10-Q”). See id. at 54. Defendant Bridgepoint’s 2018 Q1 10-Q
18
contained signed SOX certifications in which Defendants Clark and Royal
19
certified that the 2018 Q1 10-Q “fully complies with the requirements of
20 Section 13(a) or 15(b) of the Securities Exchange Act of 1934, as amended”
and that “[t]he information contained in the [1Q18 10-Q] fairly presents, in all
21
material respects, the financial condition and results of operations of
22 [Defendant Bridgepoint].”
23
Id. (first and second alterations in original).
24
On July 25, 2018, Defendant Bridgepoint filed its quarterly report for the second
25
quarter of 2018 (“2018 Q2 10-Q”). See id. Defendant Bridgepoint’s 2018 Q2 10-Q
26
contained signed SOX certifications in which Defendants Clark and Royal
27 certified that the 2018 Q2 10-Q “fully complies with the requirements of
Section 13(a) or 15(b) of the Securities Exchange Act of 1934, as amended”
28
1 and that “[t]he information contained in the [2Q18 10-Q] fairly presents, in all
material respects, the financial condition and results of operations of
2
[Defendant Bridgepoint].”
3
Id. at 55 (first and second alterations in original).
4
On November 8, 2018, Defendant Bridgepoint filed its quarterly report for the third
5
quarter of 2018 (“2018 Q3 10-Q”). See id. Defendant Bridgepoint’s 2018 Q3 10-Q
6
contained signed SOX certifications in which Defendants Clark and Royal
7
certified that the 2018 Q3 10-Q “fully complies with the requirements of
8 Section 13(a) or 15(b) of the Securities Exchange Act of 1934, as amended”
and that “[t]he information contained in the [3Q18 10-Q] fairly presents, in all
9
material respects, the financial condition and results of operations of
10 [Defendant Bridgepoint].”
11
Id. (first and second alterations in original).
12
On March 7, 2019, Defendant Bridgepoint filed a Form 8-K. See id. at 56. Defendant
13
Bridgepoint’s Form 8-K stated, in relevant part,
14
On March 6, 2019, the Audit Committee of the Board of Directors …
15 concluded that [Defendant Bridgepoint]’s previously issued unaudited
condensed consolidated financial statements for the three and nine months
16
ended September 30, 2018 …, should no longer be relied upon because of
17 errors. Additionally, [Defendant Bridgepoint]’s earnings and press releases
and similar communications to the extent that they relate to our financial
18
statements for the [three and nine months ended September 30, 2018] should
19 no longer be relied upon.
20
Specifically, during the preparation of the 2018 annual consolidated financial
21 statements, [Defendant Bridgepoint] determined that the process used for
recording the revenue for the [FTG] [P]rogram portion of our students
22
contracts and the related judgments and estimates were not designed with
23 sufficient precision. As a result, [Defendant Bridgepoint] identified errors,
relating to revenue, provision for bad debts, accounts receivable and deferred
24
revenue, which resulted in the overstatement of revenue and expenses for the
25 [three and nine months ended September 30, 2018]. The errors described
above were material … and will be corrected in the restatement of our
26
financial statements for the [three and nine months ended September 30,
27 2018]….
28
1 [Defendant Bridgepoint] has subsequently identified two material weaknesses
in internal control over financial reporting related to 1) control design in the
2
accounting for revenue related to the [FTG] [P]rogram and 2) operation of
3 review controls over unusual or non-recurring and significant transactions.
4
Our management has re-evaluated its assessment of our disclosure controls
5 and procedures and internal control over financial reporting as of September
30, 2018 and concluded that each was ineffective as of that date due to the
6
existence of material weaknesses.
7
Id. at 57-58 (emphasis omitted). “On this news, [Defendant] Bridgepoint’s stock price
8
plummeted by $3.21 per share, or over 34%, to close at $6.22 per share on March 7, 2019,
9
on unusually heavy trading volume.” Id. at 58.
10
Defendant Bridgepoint’s 2018 Q3 10-Q/A stated the following regarding the
11
restatement:
12
For the three and nine months ended September 30, 2018, [Defendant
13
Bridgepoint] determined that such financial statements had errors related to
14 (i) revenue for the [FTG] [P]rogram portion of our student contracts which
was misstated due to allowances that had not been properly determined and
15
computational errors, which also resulted in misstatements in accounts
16 receivable and its provision for bad debts, deferred revenue and student
deposits, and the related income tax impact; (ii) classification error of $5.7
17
million between restricted cash and other long term-assets as of September
18 30, 2018 related to a long-term letter of credit issued as collateral for the build-
to-suit lease, and (iii) a misstatement in the adjustment to beginning retained
19
earnings as of January 1, 2018 as a result of the incorrect adoption of ASU
20 2014-09, Revenue from Contracts with Customers, or Accounting Standards
Codification Topic 606 … as it relates to the [FTG] Program, resulting in a
21
decrease of $2.2 million from the amount previously reported of $3.2 million
22 to $1.0 million [sic], as restated.
23
Id. at 58-59 (emphasis omitted). Defendant Bridgepoint’s 2018 Q3 10-Q/A reflects the
24
following misstatements for the nine months ended September 30, 2018:
25
net income decreased by $5.8 million ($23.8M to $18.05M), revenue
26 decreased $5 million ($353.7M to $348.7M), accounts receivable decreased
by $4.7 million ($33.57M to $28.9M), and deferred revenue and student
27
deposits (a liability account) increased by $4.5 million ($53.87M to $58.4M).
28
1 Id. at 59.
2 On March 12, 2019, Defendant Bridgepoint filed its 2018 10-K. See id. Defendant
3 Bridgepoint’s 2018 10-K
4 told investors that other prior period financial statements (i.e., 2017, and 2016,
and for 2015 and prior) also contained misstatements attributable to the same
5
improper accounting “for the [FTG] [P]rogram portion of [its] student
6 contracts,” stating again that it was “due to allowances that had not been
properly determined [as well as] computational errors … in accounts
7
receivable and its provision for bad debts and deferred revenue and student
8 deposits.”
9
Id. (third, fourth, and fifth alteration in original). Defendant Bridgepoint’s 2018 10-K
10
identified the following “material weakness” in Defendant Bridgepoint’s internal controls
11
over financial reporting as of December 31, 2018:
12
[Its] control design in the accounting of the student contracts for the [FTG]
13 [P]rogram whereby revenue was misstated due to allowances that had not
been properly determined and contained computational errors, which also
14
resulted in misstatements in accounts receivable and its provision for bad
15 debts and deferred revenue and student deposits.
16
Id. at 60 (first alteration in original). Defendant Bridgepoint’s 2018 10-K “explained this
17
material weakness, and that the restatement of its financial statements, resulted from
18
management incorrectly applying ASC 606 upon adoption on January 1, 2018 ‘as it relates
19
to the [FTG] [P]rogram, specifically the time period for which to recognize revenue in 2018
20
related to [FTG] students that became inactive.’” Id. at 61 (emphasis omitted). Defendant
21
Bridgepoint stated in its 2018 10-K that “[w]e are committed to remediating the material
22
weaknesses by implementing changes to our internal control over financial reporting.” Id.
23
These errors led to the following misstatements for 2017:
24
net income decreased by $1.4 million ($10.5M to $$ [sic] 9.1M), revenue
25 decreased $3.4 million ($478.4M to $475M), accounts receivable decreased
by $2.8 million ($27M to $24.2M), and the liability account “deferred revenue
26
and student deposits” increased by $2.8 million ($68M to $70.8M).
27
28
1 Id. at 59-60. “Following this filing, [Defendant] Bridgepoint’s stock price fell once again,
2 declining from $7.00 on March 12, 2019 at close to $6.90 at close on March 13, 2019.” Id.
3 at 60.
4 Defendant Bridgepoint’s false and misleading statements during the Class Period
5 include Defendant Bridgepoint’s 2015 10-K, 2016 10-K, 2017 10-K, 2018 Q1 10-Q, 2018
6 Q2 10-Q, and 2018 Q3 10-Q. See id. at 49-56. “Defendants were reckless in designing
7 and/or employing [Defendant Bridgepoint]’s processes for recording revenue, deferred
8 revenue, accounts receivable, and bad debt expense for its FTG [P]rogram in a manner than
9 violated GAAP, SEC regulations, and its own stated revenue recognition policy ….” Id. at
10 55-56. Defendant “Bridgepoint failed to maintain effective internal controls over financial
11 reporting ….” Id. at 56. Defendant
12 Bridgepoint made material accounting errors related to deferred revenue,
accounts receivable, and its provision for bad debts in its financial statements
13
during the Class Period—most significantly, [Defendant] Bridgepoint’s
14 financial statements for the first three quarters of 2018 overstated revenue by
$5.06 million and overstated net income by $5.78 million—which violated
15
GAAP, SEC regulations, and its own stated revenue recognition policy and
16 thus rendered [Defendant] Bridgepoint’s financial statements for the Class
Period “misleading or inaccurate” under 17 C.F.R. § 210.4-01(a)(1).
17
18 Id.
19 “[E]rrors in [Defendant] Bridgepoint’s Class Period financial statements appear to
20 have emanated from its inability to report appropriate and ‘precise’ estimates in the
21 allowance it created for students who withdrew, were terminated, dropped-out of the FTG
22 [P]rogram, or could no longer pay for program costs that fell to them.” Id. at 64. Defendant
23 “Bridgepoint also apparently did not sufficiently track the students who were ‘active’ in this
24 program, or whether its financial statements properly reflected this phenomenon.” Id. “The
25 foregoing caused or contributed to [Defendant Bridgepoint] failing to properly account for
26 revenue, deferred revenue, accounts receivable, or bad debt expense, including significantly
27 with respect to students enrolled in its FTG [P]rogram throughout the Class Period.” Id.
28 “[T]he identification of material weaknesses in internal controls for the year 2018 confirmed
1 that … [Defendant Bridgepoint] had ultimately failed to sufficiently remediated its
2 identified internal control deficiencies since as far back as 2013.” Id. at 63.
3 CONTENTIONS OF THE PARTIES
4 Defendant Bridgepoint contends that Plaintiff fails to allege facts demonstrating
5 scienter. Defendant Bridgepoint contends that scienter requires more than a misapplication
6 of GAAP principles. Defendant Bridgepoint asserts that the problems identified in the 2013
7 Restatement are different than the problems identified in the 2018 Restatement. Defendants
8 Clark, Royal, and D’Amico contend that they did not engage in fraud by addressing the
9 problems identified in the 2013 Restatement and failing to anticipate future problems
10 identified in the 2018 Restatement.
11 Plaintiff contends that the Complaint sufficiently alleges facts demonstrating
12 scienter. Plaintiff asserts that Defendant Bridgepoint disregarded GAAP requirements for
13 revenue recognition because the same revenue recognition problems underlying the 2013
14 Restatement resurfaced in the 2018 Restatement. Plaintiff contends that the 2013
15 Restatement and acknowledgment of internal control problems were red flags that put
16 Defendants Clark, Royal, and D’Amico on notice of Defendant Bridgepoint’s revenue
17 recognition problems. Plaintiff asserts that Defendants Clark, Royal, and D’Amico were in
18 positions to recognize the significance of the red flags and investigate.
19 STANDARD OF REVIEW
20 Federal Rule of Civil Procedure 12(b)(6) permits dismissal for “failure to state a
21 claim upon which relief can be granted ….” Fed. R. Civ. P. 12(b)(6). Federal Rule of Civil
22 Procedure 8(a) provides that “[a] pleading that states a claim for relief must contain … a
23 short and plain statement of the claim showing that the pleader is entitled to relief ….”
24 Fed. R. Civ. P. 8(a)(2). “A district court’s dismissal for failure to state a claim under
25 Federal Rule of Civil Procedure 12(b)(6) is proper if there is a lack of a cognizable legal
26 theory or the absence of sufficient facts alleged under a cognizable legal theory.”
27 Conservation Force v. Salazar, 646 F.3d 1240, 1242 (9th Cir. 2011) (internal quotation
28 marks and citation omitted). “All allegations of material fact are taken as true and
1 construed in the light most favorable to the nonmoving party.” Thompson v. Davis, 295
2 F.3d 890, 895 (9th Cir. 2002) (citation omitted).
3 “[A] plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’
4 requires more than labels and conclusions, and a formulaic recitation of the elements of a
5 cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting
6 Fed. R. Civ. P. 8(a)) (alteration in original). When considering a motion to dismiss, a court
7 must accept as true all “well-pleaded factual allegations ….” Ashcroft v. Iqbal, 556 U.S.
8 662, 679 (2009). However, a court is not “required to accept as true allegations that are
9 merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” Sprewell
10 v. Golden St. Warriors, 266 F.3d 979, 988 (9th Cir. 2001) (citation omitted). “In sum, for
11 a complaint to survive a motion to dismiss, the non-conclusory factual content, and
12 reasonable inferences from that content, must be plausibly suggestive of a claim entitling
13 the plaintiff to relief.” Moss v. U.S. Secret Serv., 572 F.3d 962, 969 (9th Cir. 2009) (internal
14 quotation marks omitted).
15 DISCUSSION
16 A. Violations of § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-
17 5 (Count 1)
18 Section 10(b) of the Securities and Exchange Act of 1934 makes it unlawful
19 To use or employ, in connection with the purchase or sale of any security
registered on a national securities exchange or any security not so registered,
20
or any securities-based swap agreement any manipulative or deceptive device
21 or contrivance in contravention of such rules and regulations as the
Commission may prescribe as necessary or appropriate in the public interest
22
or for the protection of investors.
23
15 U.S.C. § 78j(b). SEC Rule 10b-5 states that
24
It shall be unlawful for any person, directly or indirectly, by the use of any
25
means or instrumentality of interstate commerce, or of the mails or of any
26 facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
27
28
1 (b) To make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made, in the light of
2
the circumstances under which they were made, not misleading, or
3 (c) To engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon any person,
4
in connection with the purchase or sale of any security.
5
17 C.F.R. § 240.10b-5. To state a valid claim under Section 10(b) and SEC Rule 10b-5, a
6
plaintiff must plead that: (1) defendants made a material misrepresentation or omission; (2)
7
defendants acted with scienter; (3) there was a connection with the purchase or sale of a
8
security; (4) plaintiffs relied on the alleged misrepresentation or omission; (5) plaintiffs
9
suffered economic loss; and (6) the alleged misrepresentation or omission caused the loss
10
from which plaintiffs seek to recover damages. See Dura Pharmaceuticals, Inc. v. Broudo,
11
544 U.S. 336, 341-42 (2005).
12
In 1995, Congress passed the Private Securities Litigation Reform Act (“PSLRA”),
13
which calls for exacting pleading requirements in § 10(b) and Rule 10b-5 actions. See 15
14
U.S.C. § 78u-4. The PSLRA states that
15
In any private action arising under this chapter in which the plaintiff alleges
16
that the defendant—
17 (A) made an untrue statement of a material fact; or
(B) omitted to state a material fact necessary in order to make the statements
18
made, in the light of the circumstances in which they were made, not
19 misleading;
the complaint shall specify each statement alleged to have been misleading,
20
the reason or reasons why the statement is misleading, and, if an allegation
21 regarding the statement or omission is made on information and belief, the
complaint shall state with particularity all facts on which that belief is formed.
22
23 15 U.S.C. § 78u-4(b)(1). The PSLRA requires that
24 … in any private action arising under this chapter in which the plaintiff may
recover money damages only on proof that the defendant acted with a
25
particular state of mind, the complaint shall, with respect to each act or
26 omission alleged to violate this chapter, state with particularity facts giving
rise to a strong inference that the defendant acted with the required state of
27
mind.
28
1 15 U.S.C. § 78u-4(b)(2)(A). A PSLRA claim must “state with particularity both the facts
2 constituting the alleged violation, and the facts evidencing scienter, i.e., the defendant’s
3 intention to deceive, manipulate, or defraud.” Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
4 551 U.S. 308, 313 (2007) (emphasis in original) (internal quotation marks and citation
5 omitted). If the complaint does not contain such allegations, it must be dismissed. See 15
6 U.S.C. § 78u-4(b)(3)(A).
7 “Plaintiffs must ‘demonstrate that a particular statement, when read in light of all the
8 information then available to the market, or a failure to disclose particular information,
9 conveyed a false or misleading impression.’” In re Oracle Corp. Securities Litigation, 627
10 F.3d 376, 390 (9th Cir. 2010) (quoting In re Convergent Techs. Sec. Litig., 948 F.2d 507,
11 512 (9th Cir. 1991)). Plaintiffs must also show that defendants “engaged in ‘knowing’ or
12 ‘intentional’ conduct or acted with ‘deliberate recklessness.’” Id. (quoting South Ferry LP,
13 No. 2 v. Killinger, 542 F.3d 776, 782 (9th Cir. 2008)). “In the securities context, ‘an actor
14 is reckless if he had reasonable grounds to believe material facts existed that were misstated
15 or omitted, but nonetheless failed to obtain and disclose such facts although he could have
16 done so without extraordinary effort.’” Id. (quoting Howard v. Everex Sys., Inc., 228 F.3d
17 1057, 1064 (9th Cir. 2000)).
18 The Court of Appeals has articulated a “two-part inquiry for scienter: first, [the court
19 must] determine whether any of the allegations, standing alone, are sufficient to create a
20 strong inference of scienter; second, if no individual allegation is sufficient, [the court must]
21 conduct a ‘holistic’ review of the same allegations to determine whether the insufficient
22 allegations combine to create a strong inference of intentional conduct or deliberate
23 recklessness.” New Mexico State Investment Council v. Ernst & Young, 641 F.3d 1089,
24 1095 (9th Cir. 2011) (quoting Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 991-
25 92 (9th Cir. 2009)).
26 Unlike the court’s typical analysis under a 12b(6) motion wherein all inferences must
27 be construed in the light most favorable to the plaintiff, a motion to dismiss pursuant to the
28 PSLRA requires that the court “take into account plausible opposing inferences.” Tellabs,
1 551 U.S. at 323. Specifically, in order to determine whether a complaint’s scienter
2 allegations are sufficient pursuant to the PSLRA, “a court … must engage in a comparative
3 evaluation; it must consider, not only inferences urged by the plaintiff ... but also competing
4 inferences rationally drawn from the facts alleged.” Id. at 314. “To qualify as ‘strong’ …,
5 an inference of scienter must be more than merely plausible or reasonable—it must be
6 cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Id.
7 Additionally, the court “must consider the complaint in its entirety ….” Id. at 322. “The
8 inquiry … is whether all of the facts alleged, taken collectively, give rise to a strong
9 inference of scienter, not whether any individual allegation, scrutinized in isolation, meets
10 that standard.” Id. at 322-23 (emphasis in original).
11 The Amended Complaint alleges facts showing that Defendant Bridgepoint
12 recognized a “failure to maintain effective internal controls over the accounting for revenue
13 recognition” in its 2013 10-K/A. (ECF No. 19 at 41) (emphasis omitted). “Specifically,
14 the process for analyzing the collectibility criterion for revenue recognition was not
15 designed to reassess collectibility, on a student-by-student basis, throughout the period
16 revenue was recognized by [Defendant Bridgepoint]’s institutions.” Id. (emphasis omitted).
17 The Amended Complaint alleges that Defendant Bridgepoint “stated in its 2014 10-K that
18 it still had a ‘material weakness in internal control over financial reporting surrounding our
19 failure to maintain effective internal controls over the accounting for revenue recognition’
20 ….” Id. at 42. The Amended Complaint alleges that Defendant Bridgepoint stated in its
21 2015 10-K that it remained “committed to remediating the control deficiencies that
22 constitute the … material weakness” identified in the 2013 10-K/A. Id. at 43. The Amended
23 Complaint alleges that Defendant Bridgepoint stated in its 2016 10-K that it had
24 “remediate[d] the control deficiencies that gave rise to the material weakness[]” identified
25 in the 2013 10-K/A. Id. at 48, 51 (emphasis omitted).
26 The Amended Complaint alleges that Defendant Bridgepoint’s 2017 10-K “contained
27 statements substantively identical to the statements in the 2016 10-K” regarding “the
28 effectiveness of [Defendant] Bridgepoint’s disclosure controls and procedures, as well as
1 internal control over financial reporting ….” Id. at 53. The Amended Complaint alleges
2 that Defendant Bridgepoint’s 2017 10-K
3 contained signed SOX certifications in which Defendants Clark and D’Amico
certified that the 2017 10-K “fully complies with the requirements of Section
4
13(a) or 15(b) of the Securities Exchange Act of 1934, as amended” and that
5 “[t]he information contained in the [2017 10-K] fairly presents, in all material
respects, the financial condition and results of operations of [Defendant
6
Bridgepoint].”
7
Id. at 54 (first and second alterations in original). The Amended Complaint alleges that
8
Defendant Bridgepoint’s 2018 Q1 10-Q, 2018 Q2 10-Q, and 2018 Q3 10-Q
9
contained signed SOX certifications in which Defendants Clark and Royal
10
certified that the 2018 Q1 10-Q[, 2018 Q2 10-Q, and 2018 Q3 10-Q] “fully
11 compl[y] with the requirements of Section 13(a) or 15(b) of the Securities
Exchange Act of 1934, as amended” and that “[t]he information contained in
12
the [1Q18 10-Q, 2Q18 10-Q, and 3Q18 10-Q] fairly presents, in all material
13 respects, the financial condition and results of operations of [Defendant
Bridgepoint].”
14
15
Id. at 54-55 (third alteration in original).
16
The Amended Complaint alleges facts showing that Defendant Bridgepoint
17
recognized a new accounting problem in its March 7, 2019 Form 8-K. See id. at 57.
18
Specifically, “the process used for recording the revenue for the [FTG] [P]rogram portion
19
of [Defendant Bridgepoint’s] students contracts and the related judgments and estimates
20
were not designed with sufficient precision.” Id. (emphasis omitted). The Amended
21
Complaint alleges that Defendant Bridgepoint “told investors” in its 2018 10-K “that other
22
prior period financial statements … also contained misstatements attributable to the same
23
improper accounting “for the [FTG] [P]rogram portion of [its] student contracts ….” Id. at
24
59 (fourth alteration in original). The Amended Complaint alleges that Defendant
25
Bridgepoint stated in its 2018 10-K that “[w]e are committed to remediating the material
26
weaknesses by implementing changes to our internal control over financial reporting.” Id.
27
28
1 “In general, the mere publication of a restatement is not enough to create a strong
2 inference of scienter.” Zucco, 552 F.3d at 1000. In addition, “[s]cienter requires more than
3 a misapplication of accounting principles.” New Mexico, 641 F.3d at 1098 (quoting In re
4 Software Toolworks Inc., 50 F.3d 615, 628 (9th Cir. 1994)). “The plaintiff must prove that
5 the accounting practices were so deficient that the audit amounted to no audit at all, or an
6 egregious refusal to see the obvious, or to investigate the doubtful, or that the accounting
7 judgments which were made were such that no reasonable accountant would have made the
8 same decisions if confronted with the same facts.” Id. (quoting In re Software, 50 F.3d at
9 628). “When assessing GAAP violations …, the violations should generally be more than
10 ‘minor or technical in nature’ and ‘constitute [ ] widespread and significant inflation’ to
11 contribute to a strong inference of scienter.” Id. (quoting In re Daou Systems, Inc., 411 F.3d
12 1006, 1017 (9th Cir. 2005)) (alteration in original). “While a violation of GAAP, standing
13 alone, is not sufficient, allegations of recklessness have been sufficient where defendants
14 failed to review or check information that they had a duty to monitor, or ignored obvious
15 signs of fraud.” Id. (internal quotation marks and citation omitted).
16 The 2013 Restatement identified “two material weaknesses in internal control over
17 financial reporting”:
18 One control deficiency related to [the] failure to maintain effective internal
controls over the accounting for revenue recognition. Specifically, the process
19
for analyzing the collectibility criterion for revenue recognition was not
20 designed to reassess collectibility, on a student-by-student basis, throughout
the period revenue was recognized by [Defendant Bridgepoint]’s
21
institutions…. The other control deficiency related to [the] failure to maintain
22 effective internal controls over the presentation of certain funds as restricted
cash.
23
24 (ECF No. 19 at 41). The 2018 Restatement identified “two material weaknesses in internal
25 control over financial reporting related to 1) control design in the accounting for revenue
26 related to the [FTG] [P]rogram and 2) operation of review controls over unusual or non-
27 recurring and significant transactions.” Id. at 57. More specifically, the first material
28 weakness in the 2018 Restatement arose because “the process used for recording the
1 revenue for the [FTG] [P]rogram portion of [Defendant Bridgepoint’s] students contracts
2 and the related judgments and estimates were not designed with sufficient precision.” Id.
3 at 57 (emphasis omitted). The accounting problems identified in the 2013 Restatement
4 differed from the accounting problems identified in the 2018 Restatement. The 2013
5 Restatement involved a “failure … to reassess collectibility, on a student-by-student basis”
6 and “the presentation of certain funds as restricted cash” while the 2018 Restatement
7 involved misstatements in “accounting for revenue related to the [FTG] [P]rogram” and
8 “unusual or non-recurring and significant transactions.” Id. at 41, 57.
9 The “mere publication” of Defendant Bridgepoint’s 2013 Restatement on August 4,
10 2014 and 2018 Restatement on March 7, 2019 “is not enough to create a strong inference
11 of scienter.” Zucco, 552 F.3d at 1000. Evidence of revenue misstatements, even those
12 involving “misapplication of accounting principles”, without more, are insufficient to create
13 an inference of scienter. New Mexico, 641 F.3d at 1098 (quoting In re Software, 50 F.3d at
14 628).
15 There are no facts alleged in the Amended Complaint which evidence accounting
16 practices “so deficient” as to amount to “an egregious refusal to see the obvious[] or to
17 investigate the doubtful ….” New Mexico, 641 F.3d at 1098 (quoting In re Software, 50
18 F.3d at 628). The alleged facts in the Amended Complaint demonstrate consistent
19 recognition of and response to internal control weaknesses set forth in detail in the public
20 filings. The Restatements and remediation measures demonstrate that Defendant
21 Bridgepoint “review[ed] [and] check[ed] information that they had a duty to monitor ….”
22 Id. (internal quotation marks and citation omitted). The Court concludes that Plaintiff fails
23 to state a claim for violations of § 10(b) of the Securities Exchange Act of 1934 and SEC
24 Rule 10b-5 because Plaintiff fails to allege facts to support the requisite element of scienter.
25 Plaintiff’s first claim is dismissed without prejudice.
26 B. Violation of § 20(a) of the Securities Exchange Act of 1934 (Count 2)
27 Section 20(a) of the Securities and Exchange Act of 1934 states that
28
1 Every person who, directly or indirectly, controls any person liable under any
7 provision of this chapter or of any rule or regulation thereunder shall also be
liable jointly and severally with and to the same extent as such controlled
3 person to any person to whom such controlled person is liable, unless the
A controlling person acted in good faith and did not directly or indirectly induce
the act or acts constituting the violation or cause of action.
5
6 15 U.S.C. § 78t(a). “Thus, a defendant employee of a corporation who has violated the
4 securities laws will be jointly and severally liable to the plaintiff, as long as the plaintiff
g demonstrates ‘a primary violation of federal securities law’ and that ‘the defendant
9 exercised actual power or control over the primary violator.’” Zucco, 552 F.3d at 990
10 (quoting No. 84 Employer—Teamster Joint Council Pension Trust Fund v. Am. W. Holding
ll Corp., 320 F.3d 920, 945 (9th Cir. 2003)). The Court concludes that Plaintiff fails to state
12 claim for violation of § 20(a) of the Securities Exchange Act of 1934 because Plaintiff
13 fails to allege a requisite “primary violation of federal securities law ....” Jd. (citation
14 omitted). Plaintiff's second claim is dismissed without prejudice.
15 CONCLUSION
16 IT IS HEREBY ORDERED that the Motion to Dismiss filed by Defendant
7 Bridgepoint Education, Inc.; Andrew S. Clark; Kevin Royal; and Joseph L. D’Amico (ECI
18 No. 22) is GRANTED. Plaintiff’s Amended Complaint is DISMISSED without prejudice
19 Any motion for leave to file an amended pleading must be filed within 30 days of this Order
20 Dated: June 15, 2020 BE: ie 2. Ma
Hon, William Q. Hayes
United States District Court
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