Citing GAO Report, Shareholders Sue|Apollo Group / University of Phoenix

PHOENIX (CN) - The Apollo Group, which owns the for-profit University of Phoenix, used "manipulative recruiting tactics" to inflate its reported growth, shareholders claim in a federal class action. Apollo is one of more than a dozen chains of colleges being scrutinized by Congress. The class claims the Apollo Group sold $46 million in stock based on its false and misleading reports.

Lead plaintiff John Fitch claims the Apollo Group falsely reported "strong financial performance and forecasted stable and predictable revenue growth," and attributed this to "competent management," though the "defendants had propped up the company's results by fraudulently inducing students to enroll in Apollo's scholastic and educational programs."

The class claims Apollo's misrepresentations and omissions included failing to report that it had participated in "illicit and improper recruiting activities."

The Apollo Group also falsely claimed that it had "adequate systems of internal operational or financial controls ... [and] that Apollo's reported operational statements and foreseeable growth prospects were true, accurate or reliable," according to the 50-page complaint.

But on Aug. 3 the class learned that Apollo "could no longer foreseeably maintain its growth expectations or meet guidance," after the U.S. General Accountability Office reported "for-profit educational institutions like Apollo had engaged in an illegal and fraudulent course of action designed to deceptively recruit students and overcharge the federal government for the cost of such education," according to the complaint.

GAO investigators posed as students and applied for admission, and reported that staff members at 15 for-profit colleges encouraged them to falsify financial aid information, gave them inaccurate information about tuition costs and accreditation.

Shares in Apollo declined by almost 10 percent between Aug. 3 and Aug. 5, "eradicating over $684.53 million of the company's market capitalization in only four trading days," according to the complaint. Apollo shares are traded on NASDAQ.

The Obama administration is drafting a proposal to regulate for-profit colleges. The colleges have responded with furious, full-page ads in The New York Times, claiming that the administration is trying to limit opportunities for students at so-called career colleges.

The Apollo Group operates campuses in 39 states, Washington, D.C., and Puerto Rico. It purports to offer associates, bachelor's, master's, and doctoral degrees in business, criminal justice, and psychology, among other fields.

The class claims it was deceived about the company's business operations and the actual value of its stock, and that the Apollo Group inflated its share price through misrepresentations. It seeks compensatory damages, costs and expenses.

Six officers and executives are also named as defendants: John Sperling, founder and executive chairman; Gregory Cappelli, co-CEO; Charles Edelstein, co-CEO; Joseph D'Amico, president and COO; Brian Swartz, CFO and senior vice president; and Gregory Iverson, chief accounting officer, controller and vice president.

The class is represented by Michael Salcido of Molever Connelly in Scottsdale.

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