Jury Orders U. of Phoenix Parent to Pay $277 Million

Verdict finds Apollo Group (and two former officials) liable for having misled investors by withholding federal report critical of admissions practices.
January 17, 2008

With a major lawsuit challenging its admissions practices looming on the horizon, the Apollo Group -- parent of the University of Phoenix -- took a beating in another legal proceeding Wednesday.

A federal jury in Arizona ordered Apollo to pay an estimated $277.5 million to shareholders who sued the higher education company and two former executives in 2004 for securities fraud. The lawsuit alleged that company officials withheld a harshly critical U.S. Education Department report in February 2004 that accused Apollo of violating a federal prohibition against paying recruiters based on the number of students they enrolled. The company did not disclose the report in its Securities and Exchange Commission filings or in calls with analysts or reporters for months.

When the company finally released the preliminary report, in September when it announced a $9.8 million settlement with the Education Department, its stock took a dive. That month, a group of shareholders, led by the Policemen's Annuity and Benefit Fund of Chicago, sued the company under federal securities fraud laws, seeking to recoup the money they said they had lost.

Throughout the litigation, and in testimony during the trial, company officials had maintained that they did not agree with the report's findings and did not believe the law required them to disclose "unproven charges" contained in a preliminary report. They also argued that the report had not caused a material drop in Apollo's stock, so that the plaintiffs could not have suffered significant damage.

But testifying as a hostile witness for the shareholders, the company's former chief financial officer, Kenda Gonzales, acknowledged that Apollo had held the report back because it feared negative news coverage.

The jury ordered Gonzales and Todd W. Nelson, Apollo's former chief executive officer, to share the pain of the verdict against the company. Apollo must pay 60 percent of the ultimate total amount of the damages (which will be determined after investors submit claims to prove they suffered financial loss), Nelson, who is now president of Education Management Corp., another higher education provider, must pay 30 percent, and Gonzales 10 percent.

In a statement, company officials they were "evaluating options for appeal." "We disagree with the jury's verdict, both the finding and the amount of damages," said Wayne W. Smith, whose firm, Gibson Dunn & Crutcher, represented Apollo. "In not disclosing the report at issue, Apollo acted in good faith and in the best interests of its students, alumni, employees and shareholders, who could have been unfairly harmed by a premature disclosure."

Eye-popping as the dollar amount of the verdict is, Apollo could face a much bigger tab in the federal False Claims Act lawsuit that it faces stemming from the charges regarding its recruiting practices, which were at the core of the securities fraud suit. A federal appeals court has ordered a trial court to hear the allegations made by two former admissions officials -- which prompted the Education Department inquiry that produced the abovementioned report -- and a loss in that case could cost the company billions of dollars.

While the verdict in the securities case did not offer any clearcut assessment of the validity of the underlying accusations that Apollo violated the federal guidelines on recruiting students, the jury did hear testimony about the company's admissions practices. One higher education analyst, Trace A. Urdan of Signal Hill Capital, said Wednesday's verdict could bode badly for Apollo in the False Claims case, by one reading. "Apollo was arguing that the report and the [government's] charges against it were bogus, but if the jury thought the practices really weren't questionable, they might have been much more sympathetic to the company's argument" that it didn't need to release the report, Urdan said.


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