Investors Flunked in For- Profit College Fraud Suit
CHICAGO (CN) - Two pension funds cannot pursue claims that the for-profit college DeVry hid illegal recruiter compensation to inflate its stock price, a federal judge ruled.
U.S. District Judge John Grady tossed the case with prejudice Wednesday, finding no chance that the Boca Raton Firefighters' and Police Pension Fund and West Palm Beach Firefighters Pension Fund could salvage their claims against DeVry, CEO Daniel Hamburger and CFO Richard Gunst.
The fund's amended complaint focused on DeVry's recruiter compensation policies, and included anonymous declarations from recruiters stating that they received a bonus based on the number of students they enrolled.
In 2010, the Department of Education implemented new recruitment regulations after a report by the Government Accountability Office found numerous dubious practices across the for-profit college industry.
Following these revelations, new undergraduate enrollment at DeVry fell 25.6 percent, and its share price fell from a high of $70.86 in April 2010 to $37.98 in August 2010.
Grady concluded, however, that "the funds still have not alleged facts tying senior DeVry executives to their recruiter-compensation allegations."
"The company had an ostensibly HEA-compliant policy of 'fixed compensation,' which tends to support the inference that the defendants believed that their class-period compliance statements were truthful," Grady wrote, abbreviating the Higher Education Act. "The CWs [confidential witnesses] state that the official policy was a sham, but it is not clear how the individual defendants and other senior executives would know that. Even if the defendants reviewed recruiter evaluations - and there are no allegations that they did - an HEA violation would not be apparent on their face."
The judge found that the claims could not draw much ammunition from 2011 conference calls that DeVry held with investors. In one call, Hamburger, the CEO, said that the company did not pay illegal bonuses to recruiters, but conceded that enrollment does factor into their pay. He also indicated that DeVry's compensation plans would change under new Department of Education regulations.
Grady concluded, however, "that the complaint's allegations indicate only that
Hamburger's comments about the new regulations were evasive, and that is not enough."
The ruling slams the funds for failing to fully investigate their claims before filing suit.
"The Funds have lost money on their investments, but the securities laws do not insure against all such losses," he wrote. "The way that the plaintiffs and their attorneys have conducted this lawsuit - 'shoot first, aim later,' as the defendants aptly put it - indicates that insurance is what they are seeking."