Class Accuses College of Securities Fraud

MARTINSBURG, W.Va. (CN) - American Public Education fraudulently billed the federal government for students it recruited illegally, and inflated its share price as it did so, shareholders say in a federal class action. Citing a U.S. General Accounting Office report, the class claims that the company and its top officers cooked the books, and that "shares of the company collapsed" dropping by more than $12 - nearly 30 percent - in a single day after the GAO issued its report.

Charleston-based American Public Education is an online college that claims to have 63,700 students, according to the complaint. It "provides online post-secondary education to military and public service communities, operating through two universities, American Military University and American Public University, and offering 76 degree programs and 51 certificate programs in various disciplines, such as national security, military studies, intelligence, homeland security, criminal justice, technology, business administration, education, and liberal arts," according to the complaint.

The class claims that in its Feb. 22 financial report and forecast to shareholders, American Public Education Inc. (APEI) claimed its enrollment was up by 41 percent from the previous year and that its "fourth quarter 2009 revenues increased 39 percent to $43.7 million, compared to $31.5 million in the fourth quarter of 2008."

The report claimed that APEI expected to see "revenues to increase between 36 percent and 39 percent year-over-year" for the 2010 fiscal year.

But shareholders say the numbers were bogus, and that co-defendants CEO Wally Boston Jr., CFO Harry Wilkins, and provost Frank McCluskey knew it.

"Defendants had propped up the company's results by fraudulently inducing students to enroll in APEI's scholastic and education programs and engaged in other manipulative recruiting tactics which defendants knew, or recklessly disregarded, could not be maintained," the class claims.

The class claims that the three executives dumped 88,000 of their own shares at inflated prices, for more than $3.9 million, "while in possession of material adverse, non-public information about the company."

Boston sold more than 45,000 shares for gross proceeds of more than $2 million; Wilkins sold more than 13,000 shares for more than $580,000; and McCluskey sold more than 29,794 shares for more than $1.3 million, according to the complaint.

APEI issued another misleading report in early May, claiming similar revenue expectations, while it "continued to trade above $40 in the late spring," the complaint states.

Shareholders say APEI and its directors remained quiet as the media began reporting in early August on the government investigations of for-profit colleges. (See today's Courthouse News report on Westwood College, above.)

Reuters reported on Aug. 3 that U.S. GAO investigators had "posed as students and applied for admission at 15 for-profit colleges across the United States." The GAO investigators for that the for-profit colleges "encouraged fraudulent practices and made deceptive statements to prospective students," including that for-profit colleges charged 6 to 13 times more for a degree than a community college did.

Two days after that Reuters report, according to the shareholders class action, APEI said that it "would no longer be able to sustain its forecast growth."

The company's share price then "collapsed," dropping by 28 percent in a single trading day, the class claims.

The class seeks damages for securities violations, and costs.

Its lead counsel is Carl Frankovitch with Frankovitch, Anetakis, Colantonia and Simon, of Weirton, W. Va.

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