For-Profit Schools Accused of Securities Fraud

PITTSBURGH (CN) - In a third class action against for-profit colleges, shareholders claim the Education Management Corp. and its directors and underwriters defrauded investors with false and misleading statements in the prospectus for its October 2009 Initial Public Offering. Education Management offers online and campus-based college degrees through its Art Institutes, Argosy University, the Brown Mackie Colleges and South University, according to the federal complaint.

"At the time of the October 2009 IPO, Education Management operated 93 schools in 28 states of the U.S. and Canada," named plaintiff Douglas Gaer says.

He also sued eight directors, Goldman Sachs, JP Morgan Securities, Merrill Lynch, Barclays Capital, Credit Suisse Securities, and Morgan Stanley, which underwrote the IPO.

Gaer adds that "throughout the class period, defendants had propped up the company's results by fraudulently inducing students to enroll in Education Management's scholastic and educational programs and engaged in other manipulative recruiting tactics which defendants knew, or recklessly disregarded, could not be maintained.

"At all times during the class period, unbeknownst to investors, defendants had materially overstated the company's growth prospects by failing to properly disclose that defendants had engaged in illicit and improper recruiting activities, which also had the effect of artificially inflating the company's reported results and future growth prospects.

"At all times during the class period, unbeknownst to investors, defendants had materially overstated the company's growth prospects by failing to properly disclose that defendants had engaged in illicit and improper recruiting activities, which also had the effect of artificially inflating the company's reported results and future growth prospects.

"During that time, it was also not true that Education Management contained adequate systems of internal operational or financial controls, such that Education Management's reported operational statements and foreseeable growth prospects were true, accurate or reliable.

"As a result of the aforementioned adverse conditions which defendants failed to disclose, throughout the class period, defendants lacked any reasonable basis to claim that Education Management was operating according to plan, or that

Education Management could achieve guidance sponsored and/or endorsed by defendants."

As in the other recent class actions (see today's Courthouse News page), the class claims they learned about the book-juggling on Aug. 3, "after the United States General Accounting Office ('GAO') issued a report that concluded that for-profit educational institutions like Education Management had engaged in an illegal and fraudulent course of action designed to recruit students and overcharge the federal government for the cost of such education. Following these disclosures, shares of the company collapsed - falling almost 18 percent in several trading days as this news reached the market."

The class seeks damages for securities violations. They are represented by Alfred Yates Jr.

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