CHICAGO (CN) - The former CEO of a massive for-profit college cannot dismiss claims that he lied about job-placement rates, a federal judge ruled.
Career Education Corporation (CEC), headquartered in Schaumberg, Ill., is one of the largest for-profit colleges in the nation. It runs more than 90 campuses in the United States and Europe, and serves more than 100,000 students.
Since CEC derives almost all revenue from federal financial aid to students under Title IV of the Higher Education Act, accreditation with the U.S. Department of Education is essential for the school to stay in business, according to the complaint.
School must achieve certain job-placement rates for its graduates to keep accreditation and remain eligible for federal funding, the complaint adds.
CEC faced a number of investigations between 2005 and 2007 regarding its job-placement rates and misrepresentations to students, culminating in the ouster of CEC's co-founder and the appointment of Gary McCullough as CEO.
In 2012, however, the attorney general of New York subpoenaed CEC's records regarding student placement, leading the college to report "improper practices ... relating to the determination of reported placement rates" between 2010 and 2011. McCullough resigned one day before the school released this news.
CEC's stock price declined dramatically, and the Accrediting Counsel for Independent Colleges and Schools threatened to suspend the accreditation of 49 CEC campuses.
Shareholders sued the college, claiming that the school, McCullough and CFO Michael Graham knowingly made false statements about CEC's placement rates, artificially inflating the school's share price.
U.S. District Judge Matthew Kennelly dismissed the allegations against Graham, but found the plaintiffs had enough evidence to claim that CEC and McCullough knew of the inflated job-placement statistics.
"Plaintiffs sufficiently allege an inference of scienter with respect to CEC's CEO, McCullough," the decision states.
"Indeed, CEC's public statements suggest that McCullough was hired for the express purpose of, among other things, fixing CEC's compliance problems regarding its placement reporting," Kennelly added.
"McCullough made numerous public pronouncements in which he asserted that CEC was working on and had accomplished this task," the ruling states later. "One may readily and reasonable infer from these facts that McCullough made it his business to look into CEC's reporting practices, determine what constituted proper reporting, and bring the company into compliance."
The evidence against Graham, however, is less compelling.
"Plaintiffs allege no direct interaction that any CW [cooperating witness] had with Graham, nor do they allege how he would be privy to information that would make his allegedly misleading statements knowingly or recklessly false," Kennnelly wrote. "Plaintiffs' claim against Graham cannot survive 'on information and belief' alone."
The judge further ruled that "plaintiffs have adequately alleged that defendants' statements to the effect that CEC's 'significant' legal issues had been put behind it were materially misleading. CEC made these statements during the class period, shortly after a change in management resulting directly from the company's poor compliance track record. Given that context, the statements reasonably could have been understood to convey the message that CEC had changed its placement-rate practices for which it had come under fire. Given the nature of CEC's tainted past, defendants' statements about the company's current status - that it had eliminated its significant regulatory issues - could have misled a reasonable investor to believe that CEC had remedied the practice that led to those problems - the company's alleged improper reporting of placement rates."
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