Case: 1:10-cv-07031 Document #: 72 Filed: 05/04/12 Page 1 of 159 PageID #:1272
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
CHICAGO DIVISION
BOCA RATON FIREFIGHTERS’ AND
POLICE PENSION FUND, Individually and
on Behalf of All Others Similarly Situated,
No. 1:10-cv-07031
CLASS ACTION
Plaintiff,
DEMAND FOR JURY TRIAL
vs.
DEVRY INC., et al.,
Defendants.
AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF
THE FEDERAL SECURITIES LAWS
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TABLE OF CONTENTS
Page
I.
JURISDICTION AND VENUE..........................................................................................3
II.
PARTIES .............................................................................................................................4
III.
CLASS ACTION ALLEGATIONS ....................................................................................5
IV.
CONFIDENTIAL SOURCES .............................................................................................7
V.
SUBSTANTIVE ALLEGATIONS ...................................................................................19
A.
Background............................................................................................................19
B.
Incentive Compensation for Admissions Advisors is Not Permitted: The
HEA Provides Eligibility Criteria that an Institution Must Meet in Order to
Participate in the Federal Student Aid Programs...................................................20
1.
In Violation of HEA, DeVry Compensated “Advisors” Based
Solely on the Number of Student Enrollments They Attained..................21
2.
As a Result of Heightened Regulatory Scrutiny, DeVry Secretly
Changes its Compensation Plan.................................................................41
3.
DeVry’s Compensation Practices Were Well Known Throughout
theCompany..............................................................................................56
VI. DEFENDANTS’ FALSE AND MISLEADING STATEMENTS ISSUED
DURING THE CLASS PERIOD ......................................................................................58
VII. DEFENDANTS MADE FALSE AND MISLEADING STATEMENTS
REGARDING DEVRY’S BUSINESS CONDUCT AND ETHICS...............................139
VIII. ADDITIONAL SCIENTER ALLEGATIONS................................................................140
IX. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE
MARKET DOCTRINE ...................................................................................................145
X.
LOSS CAUSATION/ECONOMIC LOSS ......................................................................146
XI.
NO SAFE HARBOR .......................................................................................................149
XII. COUNT I: FOR VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE
ACT AND RULE 10b-5 PROMULGATED THEREUNDER AGAINST ALL
DEFENDANTS...............................................................................................................150
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XIII.
COUNT II: FOR VIOLATIONS OF SECTION 20(a) OF THE EXCHANGE
ACT AGAINST THE INDIVIDUAL DEFENDANTS..................................................153
XIV.
JURY TRIAL DEMANDED...........................................................................................155
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1.
Lead Plaintiff Boca Raton Firefighters’ and Police Pension Fund (“Plaintiff”),
individually and on behalf of a proposed class (the “Class”) of all purchasers of the publicly traded
common stock of DeVry Inc. (“DeVry” or the “Company”) between October 27, 2007 and August
11, 2011, inclusive (the “Class Period”), seeking to pursue remedies under §§10(b) and 20(a) of the
Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §§78j(b) and 78t(a), and Rule
10b-5 promulgated thereunder.
2.
Defendant DeVry, is a global provider of career-oriented education services – a for
profit educational institution. As such, DeVry, and its students, are heavily dependent on the
availability of federal financial aid for its students. Thus, anything that could jeopardize the
Company’s access to federal loan money was highly material to investors.
3.
During the Class Period, unbeknownst to investors, DeVry had a companywide
policy of paying bonus compensation to Admissions Advisors in violation of the Higher Education
Act of 1965 (the “HEA”). This compensation plan depended solely on Admissions Advisors
meeting enrollment quotas and incentivized DeVry’s Admissions Advisors to engage in predatory
business practices in order to enroll new students at any cost. Specifically, DeVry utilized a
Company-wide pattern and practice of paying Admissions Advisors salary and variable
compensation. Throughout a majority of the Class Period, salary and variable compensation
adjustments – both upward and downward – were based entirely on the ability of Admissions
Advisors to meet mandatory enrollment quotas. As detailed herein by numerous former DeVry
employees, to the extent the Company claimed non-enrollment factors (the Company’s so-called
“TEACH” factors) were taken into account when determining employee compensation, such claims
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were an absolute ruse. 1 These corroborating employees all detailed the same set of facts: DeVry’s
admissions-related compensation depended only upon enrollments and enrollment metrics. This
practice was a direct violation of the Higher Education Act of 1965 (the “HEA”), which prohibits, as
set forth in more detail below, compensation adjustments based solely on the number of students
recruited, admitted, enrolled, or awarded financial aid.
4.
Despite engaging in illegal compensation practices, the Company’s Code of Business
Conduct and Ethics assured investors the opposite was true:
DeVry seeks to be successful by acting fairly and honestly. We seek competitive
advantage through superior performance, not through unethical or illegal business
practices . Every employee, officer and director must deal fairly and in good faith
with, and respect the rights of, DeVry students, employees, business associates,
suppliers, consultants, competitors, the public and one another. Unfair dealing
practices such as manipulation (defined as exerting undue, improper, or inappropriate
influence for one’s own advantage), abuse or disclosure of privileged or confidential
information, misrepresentation of material facts and improper concealment of
business information will not be tolerated.
As the Class Period progressed, the Company, unbeknownst to the market and while
under the pressure of the federal government’s increased scrutiny of its business practices,
fundamentally changed its compensation practices. Starting with a partial roll-out in 2010, the
Company switched to a non-enrollment-based compensation framework. By eliminating any and all
illegal incentive compensation tied to enrollments, the Company, for the first time during the Class
Period, became compliant with the HEA. But, the consequence of the change in policy was that the
Company could no longer sustain its Class Period enrollment trends. With its admissions employees
1
“TEACH” stands for Teamwork, Employee Focus, Achieving, Continuously Improving, and Helping
Students Achieve Their Goals. The TEACH system was supposed to allow for the evaluation of nonenrollment factors in evaluating Admissions Advisors and determining their compensation. The reality
was, however, that the TEACH factors were entirely dependent upon the attainment of enrollment quotas.
These facts are detailed extensively herein based on the accounts of numerous well-placed former DeVry
employees.
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no longer motivated by the possibility of lucrative variable compensation increases and salary bumps
for hitting enrollment targets, the Company experienced immediate drops in new student enrollments
as a direct consequence of the change in policy. As numerous former DeVry employees detail
herein, the Company’s new, legal compensation policy drove down enrollments and was an
unmitigated disaster when it came to driving the Company’s financials. Despite this, Defendants
never informed the market that the Company was inevitably headed to large enrollment declines,
instead highlighting the strengths of the Company’s business, denying the existence of any illegal
compensation practices, and generally misleading the market as the to the reasons behind the
Company’s financial performance and its future business practices.
6.
At the end of the Class Period, on August 11, 2011, however, the Company
announced a significant decline in new enrollments and a sudden decline in total enrollments. The
Company also revealed that despite earlier forecasts of earnings growth for the 2012 fiscal year, the
Company was now expecting relatively flat bottom-line results. These disappointing results were a
result of the Company abandoning its illegal recruitment practices. With the link between
Defendants’ fraud and the true condition of the Company exposed, the price of DeVry stock declined
quickly. On August 12, 2011, the price of DeVry stock dropped $8.90 per share, or nearly 17%, to
close at $44.49, causing significant damages to Plaintiff and the Class.
I.
JURISDICTION AND VENUE
7.
Jurisdiction is conferred by §27 of the Exchange Act. The claims asserted herein
arise under §§10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§78j(b) and 78t(a), and U.S.
Securities and Exchange Commission (“SEC”) Rule 10b-5, 17 C.F.R. §240.10b-5.
8.
Venue is proper in this District pursuant to §27 of the Exchange Act. Many of the
false and misleading statements were made in or issued from this District and DeVry maintains its
principal executive offices in this District.
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9.
In connection with the acts alleged in this Complaint, Defendants, directly or
indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to,
the mails, interstate telephone communications and the facilities of the national securities markets.
II.
PARTIES
10.
Lead Plaintiff purchased DeVry common stock during the Class Period, as set forth in
its certification previously filed with the Court and incorporated by reference herein, and was
damaged thereby.
11.
Defendant DeVry is a global provider of career-oriented education services. DeVry is
the parent of Advanced Academics, Becker Professional Education, Carrington College, Carrington
College California, Chamberlain College of Nursing, DeVry Brasil, DeVry University, and Ross
University. Through these institutions, DeVry, as one of the largest for-profit schools, offers a wide
array of programs in business, healthcare and technology. DeVry is comprised of four business
segments: (i) Business, Technology and Management; (ii) Medical & Healthcare; (iii) Professional
Education; and (iv) Other Educational Services.
12.
Defendant Daniel Hamburger (“Hamburger”) has served as President and Chief
Executive Officer of DeVry since July 2004. During the Class Period, while the price of DeVry
stock was artificially inflated, Hamburger sold 144,073 shares of DeVry stock at prices between
$55.45 and $61.93 per share, for trading proceeds totaling $8,359,960.
13.
Defendant Richard M. Gunst (“Gunst”) has served as Senior Vice President, Chief
Financial Officer and Treasurer of DeVry since July 2006. During the Class Period, while the price
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of DeVry stock was artificially inflated, Gunst sold 55,244 shares of DeVry stock at prices between
$52.99 and $65.16 per share, for trading proceeds totaling $3,340,147. 2
14.
Throughout the Class Period, Hamburger and Gunst were responsible for ensuring the
accuracy of DeVry’s public filings and other public statements, and they both personally attested to
and certified the accuracy of DeVry’s financial statements. During the Class Period – specifically on
November 8, 2007, February 7, 2008, May 12, 2008, August 27, 2008, November 6, 2008, February
6, 2009, May 7, 2009, August 26, 2009, November 5, 2009, February 4, 2010, May 6, 2010, August
25, 2010, November 4, 2010, February 4, 2011, and May 5, 2011 – Hamburger and Gunst each
signed certifications included in the Company’s public filings stating:
I have reviewed this quarterly report on Form [10-Q or 10-K] of DeVry Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report.
III. CLASS ACTION ALLEGATIONS
15.
Plaintiff brings this action as a class action pursuant to Rule 23 of the Federal Rules
of Civil Procedure on behalf of all persons who purchased or otherwise acquired DeVry common
stock during the Class Period (the “Class”). Excluded from the Class are Defendants and their
families, the officers and directors of the Company, at all relevant times, members of their
2
Hamburger and Gunst are sometimes collectively referred to as the “Individual Defendants” and DeVry,
Hamburger and Gunst are sometimes collectively referred to as the “Defendants.”
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immediate families and their legal representatives, heirs, successors, or assigns and any entity in
which Defendants have or had a controlling interest.
16.
The members of the Class are so numerous that joinder of all members is
impracticable. The disposition of their claims in a class action will provide substantial benefits to
the parties and the Court. As of August 19, 2011, shortly after the last day of the Class Period,
DeVry had more than 68 million shares of stock outstanding, owned by hundreds if not thousands of
shareholders.
17.
There is a well-defined community of interest in the questions of law and fact
involved in this case. Questions of law and fact common to the members of the Class which
predominate over questions which may affect individual Class members include:
(a)
whether the Exchange Act was violated by Defendants;
(b)
whether Defendants omitted and/or misrepresented material facts;
(c)
whether Defendants’ statements omitted material facts necessary to make the
statements made, in light of the circumstances under which they were made, not misleading;
(d)
whether Defendants knew or deliberately disregarded that their statements
were false and misleading;
(e)
whether the price of DeVry common stock was artificially inflated; and
(f)
the extent of damage sustained by Class members and the appropriate measure
of damages.
18.
Plaintiff’s claims are typical of those of the Class because Plaintiff and the Class
sustained damages from Defendants’ wrongful conduct.
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19.
Plaintiff will adequately protect the interests of the Class and has retained counsel
who are experienced in class action securities litigation. Plaintiff has no interests which conflict
with those of the Class.
20.
A class action is superior to other available methods for the fair and efficient
adjudication of this controversy.
IV. CONFIDENTIAL SOURCES
21.
Plaintiff makes the allegations herein, concerning the falsity of Defendants’
statements and the scienter of the Individual Defendants, based upon the investigation undertaken by
Plaintiff’s counsel, which included analysis of publicly available news articles and reports, public
filings, securities analysts’ reports and advisories about DeVry, interviews of former employees and
students of DeVry, press releases and other public statements issued by the Company, and media
reports about the Company. Plaintiff believes that substantial additional evidentiary support will
exist for the allegations set forth herein after a reasonable opportunity for discovery.
22.
The allegations made herein are supported by the first-hand knowledge of twenty-six
(26) confidential witnesses (“CWs”). These CWs include many former employees of DeVry who
were employed during the Class Period and provided facts from various departments of the
Company. As detailed below, the CWs each served in positions at DeVry that provided them with
access to the information they are alleged to possess.
23.
Confidential Witness #1 (“CW 1”) was employed with DeVry at the Company’s
Federal Way, Washington campus from approximately October 3, 2007 through April 29, 2010, in a
variety of positions. For the first three months of CW 1’s employment with DeVry, CW 1 was an
Enrollment Advisor. Thereafter, CW 1 became a Community College Specialist, and later was given
additional responsibilities as a Military Specialist tasked with recruiting active duty military and
reservists. CW 1 reported to Director of Admissions Michelle Vanderbilt (“Vanderbilt”), who
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reported to Metro Campus President Dave Stewart (“Stewart”), who reported to the Regional Vice
President of Operations Jim Dugan (“Dugan”). Among other things, CW 1 has knowledge regarding
the Company’s improper “incentives” for Admissions Advisors to meet their sales targets, i.e. ,
enrollment quotas. For example, CW 1 stated there was a Daily Activity Report (“DAR”) that
detailed the performance of each Enrollment Advisor and that although the DARs varied somewhat
by campus, each campus had some form of the DAR. CW 1 knew this because she/he went to
Chicago, Illinois for training and remembers hearing various campus presidents discussing the DAR.
CW 1 stated that the DAR was necessary so that DeVry management could tell if Admissions
Advisors were keeping up with national standards.
24.
CW 1 further stated that Admissions Advisors were judged on how many “starts”
they sold in each “eight-week writing period.” CW 1 characterized the sales process as follows:
Admissions Advisors had eight weeks to “dial” as much as they could and enroll as many students as
they could. CW 1 stated that her/his compensation was tied to enrollments, and that meeting or
exceeding enrollment quotas led to significant increases in compensation.
25.
Confidential Witness #2 (“CW 2”) worked for DeVry from January 21, 2008 to June
2009, as a High School Program Representative, referred to internally as a Presenter, in Arlington,
Virginia. CW 2 was fired because she/he failed to meet numbers. CW 2 reported to the Director of
the High School Program in Washington, D.C., Maryland, and Virginia, Lisa Szott (“Szott”), who
reported to Regional Director Chuck Stewe (“Stewe”), who was based in New Jersey and was
responsible for the High School Program along the East coast. Stewe reported to the National
Director for DeVry’s High School Program Chris McKenzie (“McKenzie”), who reported directly to
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David Pauldine3 and Hamburger. Among other things, CW 2 has information regarding the
Company’s improper incentive compensation practices for student recruiting. For example, CW 2
stated that the compensation plan for representatives was very closely tied to meeting or exceeding
numbers.
26.
Confidential Witness #3 (“CW 3”) was employed by DeVry from January 2005
through July 2009. CW 3 worked as a recruiter for high school students for the first 18 months of
her/his employment and then moved into the Corporate Development Department. In that position,
CW 3 worked as a Local Accounts Manager and was responsible for recruiting adults who were
working for corporations, in the military reserves, and/or finishing their associate’s degree at a
community college and considering earning a bachelor’s degree. CW 3 was also responsible for
training other Local Accounts Managers. CW 3 reported to Corporate Development Metro Manager
Reagan Wilkins (“Wilkins”), who reported to Corporate Regional Manager Ken Cohn (“Cohn”)
Cohn reported directly to National Director of Corporate Development Ginger Bahr (“Bahr”). Bahr
reported to the Vice President overseeing Corporate Development and Military Development Tom
Brooks (“Brooks”). Brooks reported directly to Pauldine, who reported to Hamburger. CW 3 has
knowledge regarding, among other things, the Company’s compensation practices and how
employees were graded on their performance every six months.
27.
Confidential Witness #4 (“CW 4”) worked for DeVry from May 2008 through
December 2010. CW 4 started out as an Admissions Advisor at the Federal Way, Washington
3
David Pauldine (“Pauldine”) was, at all relevant times, the Executive Vice President of DeVry, and
became the President of DeVry University in July 2006. Pauldine reported directly to Hamburger and
Gunst. As a high-ranking executive within the Company, Pauldine had authority to and did speak on
behalf of the Company to the media on several occasions during the Class Period. During the Class
Period, while the price of DeVry stock was artificially inflated, Pauldine sold 19,000 shares of DeVry
stock at prices between $54.74 and $56.04 per share, for insider trading proceeds totaling $1,056,243.
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campus and was promoted to Assistant Director of Admissions at the Bellevue, Washington campus
around February 2009. In January 2010, CW 4 was demoted back down to Admissions Advisor for
failure to meet enrollment quotas. CW 4 was responsible for contacting “leads” provided to her/him
from supervisors and for setting up appointments for prospective students to tour the campus and
learn more about DeVry’s undergraduate programs. While Assistant Director of Admissions, CW 4
had additional administrative duties, which included generating her/his own leads, as well as
overseeing four other Admissions Advisors and attending conferences calls with other managers. As
Assistant Director of Admissions, CW 4 reported to Center Dean for the Bellevue campus Yana
Taskar (“Taskar”), who reported to Director of Admissions Vanderbilt. Vanderbilt reported to the
Vice President of Sales and Marketing Russ Gill (“Gill”), who reported to Stewart. Stewart reported
to Regional Vice President of Operations Dugan. CW 4 has knowledge concerning the Company’s
compensation practices for Admissions Advisors, “production” expectations, and the weekly
conference calls held to discuss employees’ “sales” numbers.
28.
Confidential Witness #5 (“CW 5”) was employed by DeVry from January 2006
through December 2010. CW 5 started out as an Administrative Coordinator providing support for
employees working with online students, and after about a year was promoted to Senior Academic
Advisor for online students at the Company’s Naperville, Illinois office. From April 2010 to
October 2010, CW 5 worked out of the Company’s Sherman Oaks, California office. In October
2010, CW 5 returned to the Naperville, Illinois office. CW 5 reported to a variety of different
directors, including the National Director of Admissions Paul Weber (“Weber”). Weber reported to
the Vice President of Online Ted Kulawiak (“Kulawiak”), who reported to the President of Online
Services Steve Reese (“Reese”). CW 5’s duties included recruiting and helping to enroll prospective
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students. Among other things, CW 5 has information regarding the compensation structure for
Admissions Advisors, which depended upon hitting sales quotas.
29.
Confidential Witness #6 (“CW 6”) worked at DeVry from 2002 until September 2010
as an Admissions Advisor. CW 6 was responsible for leading a team of Admissions Advisors who
recruited students for DeVry’s undergraduate programs and for DeVry’s graduate school, KGSM.
CW 6 reported to Director of Admissions Erin Miller (“Miller”), who reported to Center Dean Mary
Zock (“Zock”), and later Center Dean Mary Wahlbeck (“Wahlbeck”). CW 6 has information
regarding the Company’s compensation practices for Admissions Advisors, which were dependent
on a quota-driven sales culture.
30.
Confidential Witness #7 (“CW 7”) was employed as an Online Enrollment Advisor at
the Company’s Naperville, Illinois office from June 2007 through January 2010. CW 7 reported to
the Assistant Director of Online Enrollment Kelly Rowald (“Rowald”), who reported to Director of
Online Enrollment Chris Springer (“Springer”). CW 7 stated that overall, there were four teams of
10 Online Admissions Advisors, with 12 Assistant Directors of Admissions and four Directors. CW
7 stated there were two other online enrollment call centers, one in Phoenix, Arizona and one in
Florida, but that DeVry’s Naperville center was the largest. Although initially hired as a dean, CW 7
never worked in that capacity because the deanship was filled by the time CW 7 started work at
DeVry. Instead of working as a dean, CW 7, who has two master’s degrees, worked at DeVry as an
Online Enrollment Advisor, with the intention of working in that capacity until another deanship
became available. CW 7 described working at DeVry as one of the “worst experiences” CW 7 has
“ever had.” Among other things, CW 7 has information regarding DeVry’s compensation practices,
which CW 7 stated were based entirely on employees meeting enrollment targets.
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31.
Confidential Witness #8 (“CW 8”) was employed by DeVry from August 2002 to
June 2010. CW 8 worked as a New Student Coordinator from August 2002 to March 2004, in
Decatur, Georgia and briefly in Alpharetta, Georgia while enrolled at DeVry as a student. From
March 2004 to June 2010, CW 8 was employed as a High School Enrollment Advisor who spoke
with graduating seniors. CW 8 reported to the Director of High School Admissions Hunter
Wilberger (“Wilberger”), who reported to the Southeast Regional Director of Admissions Monal
Shah (“Shah”). Shah, who was based in Miramar, Florida, reported to the Vice President of
Admissions for the Southeast Region Julio Torres (“Torres”), who was later replaced by Marcy Pratt
(“Pratt”). Among other things, CW 8 has relevant information regarding DeVry’s use of an
employee compensation system that depended on employees meeting certain enrollment numbers.
32.
Confidential Witness #9 (“CW 9”) worked at DeVry from January 31, 2007 until the
end of January 2011. CW 9 started out as a Career Advisor at the Decatur, Georgia campus and was
promoted in late 2009 to Senior Career Advisor. In May 2009, CW 9 made a “lateral transition” to
the position of Admissions Advisor at the Company’s Alpharetta, Georgia campus. When working
as a Career Advisor, CW 9 reported to Director of Career Services Tom Allen (“Allen”) who
reported to Metro President Jeff Moore (“Moore”), who oversaw all the campuses and centers in
Georgia. Moore and later Chris Chavez (“Chavez”) reported to Hamburger. As an Admissions
Advisor, CW 9 reported to Director of Admission Jimmy Coples (“Coples”), who was later replaced
by Karina Koplcok (“Koplcok”). Coples reported directly to the Campus Dean Pam Harroff
(“Harroff”) and then Tonya Gibson (“Gibson”). CW 9 chose to leave DeVry because the Company
cut her/his pay in conjunction with DeVry implementing its new, non-enrollment based
compensation policy. Among other things, CW 9 has information regarding the Company’s use of
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an enrollment quota system to determine Admissions Advisor compensation, as well as the change in
compensation for Admissions Advisors put in place in the fall of 2010.
33.
Confidential Witness #10 (“CW 10”) worked at DeVry from August 2004 through
July 2010 at the Company’s Oakbrook Terrace, Naperville, and then the Chicago, Illinois campuses
as a Director of Admissions. CW 10’s responsibilities included training assistant directors, hiring
admissions employees, alleviating turnover, training admissions directors, and reviewing DeVry’s
compensation grid and applying it to people CW 10 supervised. CW 10 reported to Associate
Director of Admission Terri Ignoffo (“Ignoffo”), who was later promoted to Regional Dean for
Online Admissions. Ignoffo reported to Weber and Kolawiak. CW 10 has relevant information
regarding, among other things, DeVry’s improper incentive compensation practices.
34.
Confidential Witness #11 (“CW 11”) worked at DeVry from approximately May
2008 through June 2009, as an Admissions Advisor with KGSM online. CW 11 worked in the
Naperville, Illinois office and then moved to Addison, Illinois in November 2008. CW 11 stated that
the 80-person KGSM admissions call center was in a building across the street from the actual
physical DeVry campus in Addison, Illinois. CW 11 was responsible for enrolling students and
making outbound calls to recruit prospective students. CW 11 reported to Assistant Director of
Admission Christa Renello (“Renello”), who reported to Director of Admissions Kristen Tuten
(“Tuten”). Tuten reported to KGSM Director of Admissions James Wallace, who reported to
Kulawiak. As a result of her/his experiences, CW 11 has information regarding DeVry’s improper
incentive compensation system.
35.
Confidential Witness #12 (“CW 12”) was employed as the Metro President in
Georgia from May 2006 through October 2008. CW 12 reported to Senior Vice President of
Operations Jerry Murphy (“Murphy”) and later Rob Paul (“Paul”), the Vice President of Operations,
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who reported directly to Pauldine. CW 12 was responsible for operations at the Georgia campuses
and centers, with the exception of Admissions. CW 12 has information regarding DeVry’s improper
incentive compensation system, including the use of admission and enrollment quotas.
36.
Confidential Witness #13 (“CW 13”) was employed at DeVry from March 2002 to
March 2004, as an Admissions Advisor at the Crystal City, Virginia campus, and from July 2008
through September 23, 2010, as a Manager of Local Accounts. Upon returning to DeVry, CW 13
initially worked at the Raleigh, North Carolina campus and then transferred to Crystal City after the
July 4th holiday in 2010. As an Admissions Advisor, CW 13 stated she/he really had an “inside
sales position.” As a Manager of Local Accounts, CW 13 worked in a sales capacity and drummed
up “leads” (i.e. , prospective students) by working directly with corporations, community colleges,
and military offices and bases to recruit adult students. CW 13 stated that she/he was in a position of
being able to increase her/his salary based on sales. CW 13’s territory included Raleigh, North
Carolina, Arlington, Bethesda and Manassas, Virginia. CW 13 reported to Regional Director Larry
Taffel (“Taffel”), who was later replaced by Carmelita Senatz (“Senatz”). After Senatz was
demoted, CW 13 reported to the Regional Director overseeing New York, New Jersey, and
Philadelphia, Doreen Overstrom (“Overstrom”). Among other things, CW 13 has information
regarding DeVry’s improper incentive compensation system.
37.
Confidential Witness #14 (“CW 14”) worked as an Admissions Advisor at the
Company’s Indianapolis campus from July 2009 to November 2009, when CW 14 was fired for not
meeting enrollment quotas. CW 14 reported to Assistant Director of Admissions Julie Smith
(“Smith”), who reported to the Director of Admissions. CW 14’s duties included recruiting
prospective students to DeVry. CW 14 has relevant information regarding DeVry’s improper
incentive compensation system and the pressure to meet enrollment quotas.
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38.
Confidential Witness #15 (“CW 15”) joined DeVry in 1978 as a part-time instructor
and left at the end of 2008 as the Metro President for the Seattle, Washington and surrounding area.
During CW 15’s time at DeVry, she/he worked in Arizona, Colorado, and Washington. From
approximately 2006, CW 15 reported to Vice President of Operations Paul, who reported to
Defendant Pauldine. In mid-September 2007, CW 15 was told by Paul that DeVry created a new
and important position for CW 15 as University Dean of Administration, in which capacity CW 15
would work on academic curriculum and accreditation for DeVry, system-wide. CW 15 has
knowledge of, among other things, DeVry’s compensation policies for Admissions employees.
39.
Confidential Witness #16 (“CW 16”) worked at DeVry from 2007 through April
2011. Initially, CW 16 worked as an Admissions Advisor for DeVry Online. In approximately
Spring 2010, CW 16 left her/his position as a Senior Admissions Advisor and began working in
DeVry’s corporate headquarters, where CW 16 worked until approximately January 2011. CW 16
explained that she/he left her/his high paying Senior Admissions Advisor position because the lack
of compliance regarding admissions was so bad and included compensation practices based on
enrollment numbers. In January 2011, CW 16 moved back to being a Senior Admissions Advisor.
CW 16 was hired by Assistant Director of Admissions Tammy Kyrakoupoulos (“Kyrakoupoulos),
who reported to Director of Admissions Jenny Warwick (“Warwick”), who reported to National
Director of Admissions Weber.
40.
Confidential Witness #17 (“CW 17”) worked for DeVry from May 2008 through June
2011 as an Admissions Advisor. Until March 2011, CW 17 worked at the Chicago, Illinois campus
on Belmont that housed an online admissions call center. After March 2011, CW 17 worked at the
Gurness, Illinois campus. CW 17 reported to a Director of Admissions, who reported to the Dean of
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Students for the Chicago Online office, Thomas Kent (“Kent”). Among other things, CW 17 has
information concerning the Company’s compensation policy for Admissions Advisors.
41.
Confidential Witness #18 (“CW 18”) worked for DeVry from January 2008 through
December 2011. CW 18 started with DeVry as an Admissions Advisor at the Houston, Texas
DeVry campus. When CW 18 was hired, her/his Assistant Director of Admissions Ezra Spear
(“Spear”) and Director of Admissions Catherine Teller (“Teller”) told CW 18 she/he was starting out
at the highest point for new Admissions Advisor compensation. CW 18 stated that the Regional
Vice President of Admissions was David Wood (“Wood”). CW 18 became an Assistant Director of
Admissions in April 2011, and relocated to DeVry’s physical campus in Phoenix, Arizona. Among
other things, CW 18 has information concerning the compensation structure for DeVry’s Admissions
Advisors and the Company’s use of so-called TEACH values.
42.
Confidential Witness #19 (“CW 19”) worked as an Admissions Advisor at the
Oklahoma City, Oklahoma DeVry campus from March 2010 through January 2012. CW 19 started
as an Admissions Advisor for the KGSM and then moved to focus on DeVry enrollments in
November or December 2010. CW 19 reported to Director of Admissions Jessica Thompson
(“Thompson”). Among other things, CW 19 has information concerning DeVry’s compensation
practices for Admissions Advisors, as well as the change in compensation practices DeVry put in
place in June 2011.
43.
Confidential Witness #20 (“CW 20”) was an Admissions Advisor in DeVry’s
Phoenix, Arizona online admissions office from 2009 through June 2011, when the office closed.
CW 20 stated that the Phoenix office was closed due to a change in regulatory structure. CW 20
reported to Assistant Director of Admissions Yolanda Davis (“Davis”) and Director of Admissions
Mark Dudley (“Dudley”). CW 20 has knowledge concerning, among other things, the Company’s
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compensation policies for Admissions Advisors, and the decline in enrollments that occurred as a
result of DeVry implementing a new compensation structure in 2011.
44.
Confidential Witness #21 (“CW 21”) worked for DeVry from December 2010
through February 27, 2012, as an Admissions Advisor. Originally hired in Cleveland, Ohio, CW 21
was transferred to Southfield, Michigan in March 2011. In Michigan, CW 21 reported to Assistant
Director of Admissions Amanda Strombeck (“Strombeck”) and Director of Admissions Georgie Ann
Bailey (“Bailey”). CW 21 has information concerning, among other things, the Company’s
compensation policies for Admissions Advisors.
45.
Confidential Witness #22 (“CW 22”) worked as an Assistant Director of Admissions
at DeVry’s Queens, New York campus from 2009 through June 2011. Initially, CW 22 worked on
undergraduate student enrollment and after six months she/he took the position of Assistant Director
of Admissions for high school admissions. CW 22 reported to Director of Admissions Toral Bhatt
(“Bhatt”). CW 22 has information concerning DeVry’s use of an employee compensation system
that depended on employees meeting certain enrollment numbers and the Company’s use of socalled TEACH ratings.
46.
Confidential Witness #23 (“CW 23”) worked for DeVry from July 2009 through
November 2011, as a level one Admissions Advisor for Online, based in the physical Chicago
campus as part of the forty person Region 3911. CW 23 reported to Assistant Director of
Admissions AJ Fallico (“Fallico”) who initially reported to Director of Admissions Joseph Loobey
(“Loobey”) and then to Justin Riley (“Riley”). CW 23 has knowledge concerning, among other
things, DeVry’s implementation of a new compensation structure in 2011 and the resulting decline in
enrollments.
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47.
Confidential Witness #24 (“CW 24”) began working at DeVry in January 2008, in the
Online admissions office in Phoenix, Arizona as a Director of Admissions, a “mid to upper level
management” position. He/she remained in the Phoenix office until it was closed by DeVry in
approximately June 2011. CW 24 reported to Regional Dean Tom Petit (“Petit”) and later to Rick
Einstein (“Einstein”), who reported to National Director of Online Admissions Weber. Weber
reported to Kulawiak who reported to President of Online Services Steven Riehs (“Riehs”). CW 24
has information concerning DeVry’s use of an employee compensation system that depended on
employees meeting certain enrollment numbers and the Company’s use of so-called TEACH ratings.
48.
Confidential Witness #25 (“CW 25”) worked for DeVry from 2009 through Spring
2012, at the Gwinnett, Georgia DeVry Center. CW 25 began employment with DeVry as an
Admissions Advisor and was promoted to Associate Director of Admissions in January 2010,
overseeing a team of five to eight people. The Associate Director of Admissions is the senior
admissions employee at DeVry “Centers,” which are smaller than traditional campuses and is
considered to be a higher position than Assistant Director of Admissions. CW 25 reported to Center
Dean Greg Pace (“Pace”). CW 25 has information concerning the change in DeVry’s compensation
structure in 2011 and the resulting decline in enrollments.
49.
Confidential Witness #26 (“CW 26”) worked for DeVry from September 2005
through October 10, 2011, as an Assistant Director of Admissions for the Houston Metro,
supervising DeVry Admissions Advisors who recruited at high schools. The high school admissions
team for Houston Metro, including Assistant Directors, totaled approximately twelve people. CW
26 reported to Lawanda Beasley (“Beasely”). CW 26 has information concerning the change in
DeVry’s compensation structure in 2011 and the resulting decline in enrollments.
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V. SUBSTANTIVE ALLEGATIONS
A.
Background
50.
For-profit colleges, which are either privately-owned or owned by publicly traded
companies, offer post-secondary education to a wide-variety of students. Unlike their state-operated
and not-for-profit brethren, whose primary goal is to provide a quality education for their students,
for-profit colleges are profit-driven, bottom-line businesses.
51.
During the Class Period, each DeVry University campus was managed by a president
or campus dean and had a staff of academic deans, faculty and academic support staff, career service
and student service personnel, and other professionals. Each campus also had an admissions
director, who reported to a central organization responsible for new student recruiting. Group vice
presidents of operations oversaw the campuses and centers in geographically defined areas.
52.
In order to encourage Admissions Advisors to enroll as many students as possible,
DeVry created an incentive compensation plan that violated applicable regulations by awarding large
bonuses and incentive compensation to Admissions Advisors solely for meeting or exceeding
sales/enrollment quotas. The consequence of this plan was that DeVry’s salespeople were
incentivized to engage in predatory recruitment practices and deceptive enrollment practices
resulting in extremely low graduation rates and massive amounts of defaulted student loans.
53.
Defendants are liable to Plaintiff and the Class for the damages caused by their failure
to disclose to the market and its shareholders that DeVry paid bonuses and commissions to its
Admissions Advisors in direct violation of HEA mandates. By omitting this critical fact, and instead
providing a completely different picture of the reasons behind DeVry’s financial performance and
outlook, Defendants’ fraud caused DeVry common stock to trade at artificially inflated prices
throughout the Class Period.
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B.
Incentive Compensation for Admissions Advisors is Not Permitted:
The HEA Provides Eligibility Criteria that an Institution Must Meet
in Order to Participate in the Federal Student Aid Programs
54.
In the early 1990s,
Congress was concerned that certain schools were engaging in a
series of unethical practices leading to the admission of unqualified students just to obtain federal
financial aid.
55.
Congress and the DOE took a number of actions to address this situation, including
enacting the “incentive compensation” provision. The “incentive compensation” provision of the
HEA prohibits schools from paying student recruiters and employees involved in financial aid “any
commission, bonus, or other incentive payment based directly or indirectly on success in securing
enrollments or financial aid.” 20 U.S.C. §1094(a)(20). In 2002, the DOE clarified the “incentive
compensation” provision by issuing a series of “safe harbor” regulations, 34 C.F.R.
668.14(b)(22)(ii).
56.
Relevant here, 34 C.F.R. 668.14(b)(22)(ii)(A) provides that a school may make up to
two adjustments (upward or downward) to a covered employee’s annual salary or fixed hourly wage
rate within any 12-month period without the adjustment being considered an incentive payment,
provided that no adjustment is based solely on the number of students recruited, admitted,
enrolled, or awarded financial aid . Additionally, 34 C.F.R. 668.14(b)(22)(ii)(D) provides that
profit-sharing and bonus payments to all or substantially all of a school’s full-time employees are not
incentive payments based on success in securing enrollments or awarding financial aid, as long as
the profit-sharing or bonus payments are substantially the same amount or the same percentage of
salary or wages, and as long as the payments are made to all or substantially all of the school’s fulltime professional and administrative staff. Such compensation paid as part of a profit-sharing or
bonus plan is not considered a violation of the incentive payment prohibition. Finally, 34 C.F.R.
668.14(b)(22)(ii)(F) provides that generally, clerical pre-enrollment activities are not considered
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recruitment or admission activities. Accordingly, a school may make incentive payments to
individuals whose responsibilities are limited to pre-enrollment activities that are clerical in nature.
However, soliciting students for interviews is a recruitment activity, not a pre-enrollment activity,
and individuals may not receive incentive compensation based on their success in soliciting
students for interviews.
1.
57.
In Violation of HEA, DeVry Compensated “Advisors” Based
Solely on the Number of Student Enrollments They Attained
DeVry’s Admissions Advisors were compensated and received incentives based
solely on the number of sales they closed. To that end, DeVry conducted performance evaluations
of its admissions and financial advisors at least twice a year. Based on those evaluations, which
focused on whether Admissions Advisors hit enrollment targets, they had the opportunity to earn
significantly more money. Alternatively, Admissions Advisors would see their compensation
decrease specifically, or even be fired, if they failed to meet enrollment quotas. DeVry’s
compensation system, therefore, operated in direct violation of the HEA.
58.
While the Company purportedly used a grading system whereby sixty percent of the
evaluation was based on meeting enrollment quotas and forty percent was based on how well the
particular employee performed subjective TEACH values (such as behavior and timeliness), raises
and bonuses were, in fact, solely based on an advisor’s sales numbers. Numerous confidential
witnesses confirmed that DeVry’s leadership, behavioral and team-building criteria for performance
were merely pretextual, as advisors who exceeded their enrollment targets always got high marks for
these subjective criteria and were given large pay raises, while employees who missed their
enrollment targets were given low marks on the subjective standards, regardless of how good they
were at customer service or working with students and co-workers, and their compensation was
lowered. Sometimes, they were even fired.
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59.
CW 1 stated there was a portion of the Admissions Advisors’ performance review and
compensation plan that was supposedly based on intangible and subjective behavior-based criteria,
such as categories involving teamwork, education, and cooperation. But, CW 1 stated the reality
was that if Admissions Advisors met or exceeded enrollment targets, then the qualitative criteria
would not matter at all. CW 1 described how it was only when Admissions Advisors failed to make
their enrollment targets that the subjective performance metrics would be considered.
60.
CW 1 stated that prior to her/his six month compensation review, she/he, like other
Admissions Advisors at the same campus, would meet with Vanderbilt to go over where the advisors
stood in terms of enrollment numbers. Although compensation increases were theoretically based on
TEACH values, CW 1 stated that if an Admissions Advisor was not hitting or exceeding enrollment
targets, that advisor could not be graded at the top of the TEACH values. CW 1 stated that although
teamwork was one of the TEACH values, one of the Company’s internal “coined” phrases was
“How are you a team player if you are not hitting your numbers?” CW 1 stated that the TEACH
values were not an independent measure of employee quality used to consider compensation. Quite
the opposite, TEACH values would be determined by enrollment success: the quality of CW 1’s
TEACH value reviews depended on how many students CW 1 enrolled.
61.
Expanding on the issue, CW 1 stated it was “all about” enrollment numbers and that
if an Enrollment Advisor had a great month for enrollments, her/his TEACH values would go up.
So, although TEACH values were purportedly separate from enrollments, CW 1 stated that was not
the case.
62.
CW 1, who worked as an Enrollment Advisor at DeVry (see ¶27), stated that
Admissions Advisors had a “flat, base” pay. She/he stated that if Admissions Advisors exceeded
their enrollment targets, they would see significant compensation increases. CW 1 gave the
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following example: an Enrollment Advisor making $45,000 initially would see her/his
compensation go up to $64,000 annually if they exceeded enrollment goals for six months. Put
simply, CW 1 stated the more enrollments that advisors made, the more money they would make.
CW 1 stated that enrollment numbers would dictate increases or decreases in Admissions Advisors’
compensation. CW 1 stated that her/his salary increases were all variable based. Specifically, when
CW 1 and other employees met their enrollment numbers, they could receive 120% of their variable
salary increase. CW 1 explained that at an Admissions Advisors’ first review, she/he could get up to
100% of their variable rate if she/he averaged over 15 enrollments per eight week session. To get
120% of the variable rate, the Enrollment Advisor needed to average 20 enrollments per eight week
session.
63.
CW 1 stated Admissions Advisors receiving 150% variable rate increases for
exceeding enrollment targets, and that those raises were based on enrollment numbers. CW 1 stated
that these compensation increases would be based “just” on enrollments, “not TEACH values.” CW
1 also stated that Vanderbilt, the Director of Admissions at DeVry’s Federal Way, Washington
campus, was further motivated to push enrollments because her/his compensation also depended on
whether the admissions team made their enrollment targets.
64.
CW 1 stated that a DeVry trainer in Chicago, Illinois told CW 1 that some of the
Company’s most successful Admissions Advisors were making $120,000 a year because of hitting
enrollment targets. CW 1 also stated that top Admissions Advisors were rewarded with trips and
prizes. The Company’s national admissions department circulated a list of advisors in the running to
get the awards. The list was communicated “nationally” from the top down to all of the 90-plus
DeVry campuses. CW 1 stated the list detailed the Admissions Advisors’ total number of
interviews, number of applications, and the “one always highlighted was enrollments.” CW 1
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further stated there was “no mention” of TEACH values in the lists. CW 1 stated that there was also
a list the Admissions Advisors who were eligible to go to the annual DeVry “Pride” convention.
The list showed who was going and what their numbers were. CW 1 stated that those numbers did
not include TEACH values, and stated that in addition to $1,000 spending money, Pride attendees
received gifts, such as high definition video cameras.
65.
CW 2, who worked for DeVry as a High School Program Representative, stated that
the compensation plan for representatives like him was very closely tied to meeting and exceeding
numbers. Under the compensation plan, Representatives earned a salary of $35,000 to $75,000
annually, depending on performance, which was directly tied to meeting numbers. CW 2 stated that
her/his variable compensation was $7,500. If CW 2 achieved expected results, CW 2 would get
100% of her/his variable target.
66.
CW 2 explained that for Representatives, meeting expectations required them to
follow a “4-by-12” plan, which required giving 12 presentations over four days to 30 to 50 high
school seniors per session. Delivering three presentations a day, or 12 presentations a week, to 30
students would result in approximately 3,000 “education profiles” or EPs (DeVry’s internal code
word for high school seniors) per year. CW 2 stated that making presentations to this many students
would “meet standards.” CW 2 further stated that by meeting standards, Representatives could keep
their salaries. CW 2 stated there were two levels above the “meets standard” level and two below.
67.
CW 2 stated there were three sets of metrics that she/he was graded on. Two
categories were objective: 1) enrollments; and 2) metrics that led to enrollments, such as student
contacts, interviews, and applications. The third component on which employees were reviewed was
the subjective TEACH values. CW 2 stated she/he received a review every six months, and stated
that she/he was fired in 2009 because CW 2 had lower than expected enrollment numbers. The fact
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that CW 2 had the best possible scores for several TEACH categories did not prevent CW 2 from
being fired. CW 2 also confirmed that employees who enrolled the most students nationally were
invited to Pride, which CW 2 described as an all expenses paid trip to an exotic location. CW 2
stated that Pride was indisputably tied to numbers and that TEACH values did not matter for Pride.
68. Like CW 2, CW 3 stated that DeVry employees were graded on their performance
every six months, and stated that there was definitely a “quota system” in place, which required CW
3 to convert a certain number of leads or inquiries into applications, and a certain number of
applications into “starts.” CW 3 further stated that a DeVry employee could “meet standards,” or
fall into one of two levels above meeting standards or one of two levels below meeting standards.
CW 3 stated that employee salaries either increased, decreased, or stayed the same depending on
their performance over the previous six months. CW 3 stated that the performance evaluation
system was split, with 60% of the performance measured by numbers (leads, applications, starts) and
40% based on “soft skills.” Employees were graded on a 4.0 grade scale. CW 3 always met or
exceeded standards during her/his tenure with the Company. CW 3 stated that the subjective
TEACH values could be achieved by exceeding enrollment goals: beating quotas equated to good
reviews on TEACH values. Conversely, employees who failed to meet enrollment numbers would
necessarily have negative TEACH values. Stated directly, CW 3 clearly understood that the
Company’s TEACH values were just a pretext. Like other CWs, CW 3 stated that attendance at
Pride was based solely on enrollment numbers, not TEACH values. CW 3 also stated that the most
successful Admissions Advisors were identified in a “Top Hitter List” that showed employees how
they ranked nationally and regionally in terms of generating leads, applications, and enrollments.
CW 3 stated that the list was kept updated and was available on employees’ computers. Notably, the
Top Hitter List did not include any mention or ranking of TEACH values.
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69.
CW 3 explained the employment at DeVry could be very lucrative if Advisors
exceeded standards and stated that she/he was earning $32,000 when she/he joined DeVry in January
2005, and earning $84,000 annually when she/he left in July 2009. CW 3 specifically stated that
after one review, she/he received a $15,000 raise because she/he had exceeded her/his leads,
applications, and enrollment numbers. But, in the following period, CW 3 had to repeat those
numbers just to stay at the new, higher-salary. CW 3 knew that if she/he got lower enrollment
numbers, her/his compensation would decrease. CW 3 specifically stated instances where her/his
coworkers had their pay decreased as much as $15,000 to $25,000 for missing enrollment targets.
70.
Like other CWs identified herein, CW 4 stated that although 60 percent of the
performance evaluation was based on meeting quotas and 40 percent was supposedly based on how
well the employee performed the TEACH values, CW 4’s performance evaluations and raises were
based, in reality, only on meeting quotas. According to CW 4, it was “completely numbers.” CW 4
stated that based on these bi-annual evaluations, employees had the opportunity to earn more money
or less money. The change in compensation depended on how well the employee met his or her
numbers. CW 4 stated there was a variable component to her/his salary, as well as to the salaries of
all other DeVry Admissions Advisors. For CW 4 specifically, that amount was $7,500 per year.
That amount would be added to CW 4’s salary. If CW 4 exceeded expectations, CW 4 could receive
up to 200% of that variable component in the next year. CW 4 believed this framework was also
true for other Admissions Advisors.
71.
CW 5 stated that DeVry Admissions Advisors were compensated and rated based on
the number of students starting classes. CW 5 stated that the salary of Admissions Advisors had a
base component and a variable component. CW 5 gave the following example: an Admissions
Advisor might have a base salary of $35,000 and a variable salary of $10,000. If that Admissions
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Advisor did well, she/he could receive a raise of their variable portion of 250% in a year. So, the
variable portion could increase from $10,000 to $35,000, so that the overall salary could increase up
to $45,000 to $70,000 in a year. CW 5 further stated that raises coincided with the level of the
Admissions Advisor. CW 5 also stated that Admissions Advisors could lose a portion of their
salaries if they failed to meet their enrollment targets.
72.
CW 5 further stated that, on average, Online Admissions Advisors make $38,000
when they start at DeVry and move up to $40,000 or $42,000 after they complete their initial
probation. After probation, the advisors would be known as Level One, and could make between
$40,000 and $52,000 depending on their numbers. Level Two Advisors earned from the high$40,000 range to $60,000. CW 5 stated that she/he was a Level Five Advisor, and that Level Five
Advisors make close to $100,000 per year. Further discussing the issue, CW 5 stated that Vice
President of Online Operations Earl Frischkorn and the President of Online, Riehs, were well aware
of the Company’s compensation structure, where higher enrollment numbers led directly to higher
compensation.
73.
Discussing the TEACH ratings, CW 5 stated that while there was nothing in writing
stating that TEACH was a pretext, the Company’s Assistant Directors had written instructions, in the
form of Teamwork guidelines, on how to rate DeVry Admissions employees. CW 5 stated there was
an emphasis on better TEACH ratings for people who got better enrollment numbers, and worse
TEACH ratings for people who had poorer quality enrollment numbers. CW 5 stated there was a
direct correlation between enrollment numbers and TEACH ratings. Thus, to the extent CW 5 was
rated on performance, CW 5 knew that meant her/his enrollment performance. To that end, CW 5
knew of DeVry employees who performed well in TEACH value areas, but because their
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enrollments were poor, those employees’ TEACH scores were “fixed” to correlate to the poor
enrollment figures.
74.
When CW 6 started working for DeVry, she/he received 80% of her/his compensation
in salary and 20% as a variable bonus. By the time she/he left, CW 6 received 40% of her/his
compensation in salary that could only increase by a few percentage points each year and
approximately 60% of her/his compensation as a variable bonus. CW 6 stated that the variable
portion could increase by more than 100% each year depending on how many students the
Admissions Advisor and her/his team enrolled at DeVry. If an Admissions Advisor’s enrollment
numbers were exceptionally high, CW 6 stated that advisor could receive a raise of the variable
portion of their compensation of 250% in a single year.
75.
For example, CW 6’s starting salary at DeVry in 2002 was $28,000 annually, and
when CW 6 left in 2009, she/he was making $92,000 annually. According to CW 6, “you can make
more money based on your numbers.” Discussing the Company’s TEACH metrics, CW 6 confirmed
the subjective TEACH values were mere pretext. To that end, CW 6 stated it was “clear” that was
how DeVry disguised the fact that increasing compensation was based purely on meeting or
exceeding enrollment quotas. CW 6 confirmed it was her/his understanding that by law, to
participate in Title IV funding, DeVry was not supposed to compensate Admissions Advisors based
on securing enrollments. But, CW 6 also confirmed that to “make more money” at DeVry, it was
“based on your numbers.”
76.
CW 7 confirmed that “all” that mattered at DeVry was “numbers.” CW 7 stated that
ratings and compensation were based on an average of the Admissions Advisor’s enrollment
performance over the preceding three sessions. Describing the compensation structure at DeVry,
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CW 7 stated she/he had never before worked at a job where employees could “lose money.” At
DeVry, CW 7 confirmed Advisors could “lose money” if they did not meet enrollment targets.
77.
More specifically, CW 7 stated that when she/he arrived at DeVry, CW 7 had a
starting salary of $40,000. After 90 days, CW 7 was eligible for a $3,500 variable salary on top of
the $40,000. If CW 7 did not do well, DeVry would take away the eligibility for the additional
$3,500. If CW 7 again failed to meet numbers in the six months after that, CW 7 could lose more
from her/his compensation. Over CW 7’s three years at DeVry, CW 7’s compensation fluctuated
between $37,000 and $42,000, depending on whether CW 7 met enrollment targets.
78.
According to CW 7, DeVry’s TEACH values were purportedly used to count towards
the structure of an Advisor’s compensation. But, CW 7 stated, the TEACH values were “just
window-dressing” because compensation was based “entirely” on enrollment numbers. CW 7 stated
that numbers drove Advisors’ compensation so much that CW 7 did not know why TEACH metrics
existed. The TEACH values were superfluous because, as CW 7 stated, “all” that mattered were
“numbers.”
79.
CW 8, the former High School Enrollment Advisor, also stated that if employees did
not hit their enrollment “numbers,” and other quotas they would not receive a good performance
evaluation. CW 8 confirmed that performance reviews were based 60% on achieving quotas and
40% on TEACH values, which included teamwork, education, attitude, customer service, and
willingness to help students. Like other CWs, CW 8 stated that if a DeVry employee did not achieve
her/his quotas, that employee would either not get a raise or would have their pay decreased. CW 8
stated that she/he had to enroll a certain number of students per year, broken down by eight-week
sessions, and that she/he also had quotas for recruitment activity, such as the number of potential
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student interviews or meetings CW 8 conducted, and the number of applications submitted by the
students CW 8 recruited.
80.
CW 9 also confirmed that Admissions Advisors had to meet enrollment quotas and
that their performance was based 60% on meeting those quotas and 40% on the so-called TEACH
values. CW 9 stated that she/he always met her/his quotas, and that her/his performance reviews
were based solely on meeting those quotas. It was clear to CW 9 that she/he could not advance
within the Company if she/he did not meet the quotas.
81.
Discussing the quota system, CW 9 stated that as an Admissions Advisor, she/he was
expected to make at least 50 calls to “leads” every day. CW 9 had to secure at least two to four
interviews with those leads per week. Of the total number of interviews conducted with potential
students, CW 9 was expected to convert 30% to 50% into applications, which required a $50 fee. In
CW 9’s first eight-week session as an Admissions Advisor, she/he was expected to get four “starts,”
i.e. , enroll four students. For the next session, CW 9’s “budget” for starts increased to 10 students
per session, and then it was updated again to 15 starts per eight week session. CW 9 confirmed that
compensation was based on the number of appointments made and starts, or enrollments, attributable
to the Advisor. In CW 9’s evaluations, she/he was told that she/he needed a certain number of
appointments and starts to be eligible for a minimum amount of pay raise. Discussing TEACH, CW
9 stated that the performance reviews were numbers driven, and that enrollment-related numbers
were the “bottom line.”
82.
CW 10 confirmed that DeVry purportedly included TEACH values as part of the
employment review process, but that compensation was “tightly tied” to hitting enrollment targets.
CW 10 stated that “production” was “key” to salary increases, and that if Admissions Advisors hit
all their numbers, they would get a 250% raise in the variable portion of their salaries. CW 10
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further stated that compensation was reassessed up or down every six months depending on success
in meeting quotas, and that Advisors stood to lose a lot of money in six months. For example, CW
10 stated an Admissions Advisor could lose $3,000 to $5,000 in six months for failing to meet
quotas, which could equate to more than a 10% salary decrease for an Admissions Advisor making
$45,000.
83.
According to CW 11, although part of the employee incentive compensation was
purportedly based on TEACH values, that was just a pretext. CW 11 further explained that an
employee’s rating on TEACH values was just a reflection of how well the employee enrolled
students. CW 11 stated that if employees met their enrollment “targets,” they “got good TEACH
ratings.” For example, CW 11 stated her/his Assistant Director of Admissions, Sandra Farnick, told
CW 11 that the “H” in TEACH stood for helping students, and that the more students CW 11
enrolled, the more CW 11 would be “helping.” CW 11 stated that if she/he met or exceeded
enrollment targets that nothing else really mattered.
84.
CW 11 stated that compensation for Admissions Advisors changed every six months.
CW 11 stated that her/his base salary did not change much, but that the variable rate changed with
performance and increased quickly. Because the TEACH values were based on enrollment success,
it was that enrollment success that would cause the variable portion of CW 11’s salary to increase.
To that end, CW 11 stated that it was “absolutely” and “without a doubt” true that good enrollment
numbers led to good TEACH values, and that the reverse was also true. CW 11 gave the following
example: CW 11 was at DeVry for six or seven of the Company’s eight week sessions. CW 11 met
or exceeded quotas for every session until March 2009. That was the only session for which CW 11
missed her/his enrollment quota. When CW 11 met or exceeded enrollments in every other session,
CW 11 also met or exceeded expectations for TEACH values. CW 11 stated that in the March 2009
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session, CW 11’s TEACH values dropped from 4s and 5s to 1s and 2s, despite the fact that CW 11’s
behavior and performance as an employee did not change at all. The only factor that changed for
CW 11 was that CW 11 failed to enroll as many students as CW 11 was expected to. Thereafter,
CW 11’s TEACH values went “right back up” at the end of the next session when CW 11 again hit
her/his enrollment targets. Moreover, CW 11 was not aware of any Admissions Advisor that had
high TEACH values, but low enrollments.
85.
CW 11 stated that prior to her/his departure from DeVry, CW 11 had set a goal for
herself/himself of earning a 250% raise on her/his variable compensation. So, CW 11 set up a plan
with Christa Renello (“Renello”), CW 11’s Assistant Director of Admissions, for how many
interviews and applications CW 11 would need to reach the applicable enrollment target. Renello
talked with CW 11 about how many calls CW 11 would need to make to yield a certain number of
interviews, applications, and ultimately enrollments. But, CW 11 stated there were no comments
from Renello about what CW 11 would need to do as far as TEACH values. The plan Renello
worked on with CW 11, with the explicit purpose of achieving the 250% increase in variable
compensation was only about numbers leading to enrollments.
86.
CW 12, the Metro President for two campuses and five centers in Georgia, worked
closely with the Admissions department, even though CW 12 did not have direct control or hiring
and firing authority over it. CW 12 confirmed that the performance evaluations for Admissions
Advisors were based on enrollment quotas and the so-called TEACH values. CW 12, however,
confirmed that the TEACH values did not matter. CW 12 stated that the only factor that mattered
was enrollment-related numbers. Like the other former DeVry employees described herein, CW 12
confirmed that Admissions employees had a variable component to their salary, meaning they could
earn more money if they exceeded their quotas and less if they did not meet quotas. CW 12 stated
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that her/his likeability and rapport with students and other employees did not matter when it came to
performance review and compensation – profits were all that mattered and profits were driven by
enrollments.
87.
Like other CWs identified herein, CW 13 stated that she/he received a performance
review twice per year. CW 13 stated her/his compensation was based on how many “events” she/he
conducted and how many leads she/he developed during those events. CW 13 explained these
events could include a presentation to a group of employees at their workplace, setting up a table at a
military office or in the lobby of a large company or community college. CW 13 was required to
hold 65 events and generate 365 leads every six months. Of those 365 leads, CW 13 had to get at
least 50 individuals to fill out and submit enrollment applications. Of those enrollment applications,
12 individuals were required to enroll per eight week session, for a total of 36 students in a six
month period. CW 13 got credit for starts only if the student attended classes for the first two weeks
plus one day. CW 13 stated she/he was earning approximately $60,000 annually when she/he started
with DeVry in 2008 and saw her/his salary increase to $87,000 annually by the time CW 13 left in
September 2010.
88.
CW 13 explained that her/his performance on the job was graded. The Company had
at least four performance tiers, including “meets expectations,” “exceptionally exceeds
expectations,” and the highest category was considered “outstanding.” CW 13 confirmed that
employees were judged for failing to meet quotas. CW 13 stated that an employee could
consistently exceed quotas, but if she/he did not meet quotas for one eight week session, she/he
would be reprimanded. CW 13 further explained that her/his salary increase to $87,000 was based
on CW 13’s numbers – it was based on successfully meeting enrollment targets. CW 13 confirmed
that TEACH values had nothing to do with salary increases or decreases for admissions employees.
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CW 13 also stated that if employees achieved their enrollment targets, their TEACH values would
also be good. CW 13 stated that she/he always experienced salary increases because her/his
enrollments were always going up.
89.
CW 13 stated that if Managers of Local Accounts did not meet their quotas, their
salary decreased. To that end, CW 13 stated seeing a chart demonstrating that for every sale an
Admissions Advisor was short of the target, there would be a certain dollar decline in salary.
90.
CW 14 confirmed that her/his salary had a variable component, meaning CW 14
could earn anywhere from $3,000 to $7,500 per year in addition to her/his base salary if CW 14 met
and/or exceeded quotas. CW 14 stated that she/he was required to meet enrollment quotas to keep
her/his job. Although TEACH values were supposed to be included in CW 14’s performance
evaluation, CW 14 stated she/he was fired from DeVry after a 90-day probation period specifically
because CW 14 did not meet enrollment quotas.
91.
CW 15 stated that lower level DeVry employees, specifically Admissions employees,
were judged on meeting quotas. CW 15 acknowledged that they were also judged on the so-called
TEACH values, but CW 15 said the criteria or description of TEACH was “boilerplate” and “almost
impossible” to measure. CW 15 stated that numbers were all that mattered; that the numbers ruled.
92.
When CW 16 was hired, Kyrakoupoulos explained the Company’s compensation
structure. CW 16 started on a probationary period, and was told by Kyrakoupoulos that if CW 16
met enrollment targets during that period, CW 16 would get a raise. CW 16 was hired making
$38,000 and after 90 days probation, she/he exceeded the enrollment quotas and got a raise to
$40,000. Six months later, CW 16 stated she/he received another raise as CW 16 met the applicable
targets. CW 16 stated that she/he also scored well on the TEACH values, but confirmed that was
driven by enrollment results. CW 16 observed that for her/him and other Advisors, when they were
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exceeding enrollment targets they got good TEACH value reviews. Conversely, when they missed
enrollment targets, CW 16 stated their TEACH values went down. CW 16 stated that Kulawiak, the
Vice President of Enrollment Management for Online, was well aware of what was going on with
TEACH values and how Admissions Advisors were being compensated. CW 16 stated that
Kulawiak absolutely knew that TEACH values were just a pretext and proxy for enrollment
numbers, and that both Kulawiak and Weber, the National Director of Admissions, approved
employees’ raises. CW 16 stated receiving awards based on enrollment numbers, and that one of
those rewards came with a check for $1,500.
93.
Detailing the Company’s enrollment based compensation system, CW 16 stated that
as a level one Admissions Advisor, CW 16 met the required enrollment expectations. After a year,
CW 16 was promoted to level two, where there were higher expectations, including a minimum
number of 14 enrollments per eight week session. CW 16 stated that level two Advisors were
eligible to get larger raises. CW 16 stated that as a level one Advisor, she/he received a raise of
$2,500 to $3,000 for meeting enrollment targets. As a level two advisor, there was a $1,000 increase
of those amounts, to $3,500 or $4,000 for CW 16’s variable compensation for meeting enrollment
targets. CW 16 stated that if she/he did not meet enrollment targets, she/he would have lost
approximately $3,000. CW 16 stated that she/he was reviewed twice per year, and that the TEACH
values were not analyzed independently of how she/he performed on those criteria. Instead, they
were assessed in terms of how Advisors did in meeting their enrollment goals. CW 16 stated always
wondering how DeVry complied with Federal rules when the Company’s compensation was based
on enrollments. CW 16 stated thinking the Company’s practices violated Title IV, but that CW 16’s
assistant director and director acted as if the system for compensation at DeVry was okay. To that
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end, CW 16 confirmed it was clear that low TEACH values equaled low enrollment numbers and
that it was “just about enrollment numbers.”
94.
Like other Admissions Advisors, CW 17 experienced DeVry’s illegal compensation
system first hand. When CW 17 started with DeVry in May 2008, she/he was making $42,000.
When CW 17 left in June 2011, she/he was making $53,000. CW 17 received a $7,000 variable
increase as a level one Advisor, never lost money, and always got salary increases at twice yearly
compensation reviews. CW 17 stated the growth in her/his salary was for “hitting numbers,” i.e. ,
enrollment numbers. Although CW 17’s TEACH values “weren’t the greatest” because CW 17
complained about problems, CW 17 hit the necessary enrollment targets and always got raises.
Conversely, CW 17 stated that Advisors could hit their TEACH targets and still lose money for
failing to hit specified enrollment levels. CW 17 confirmed that her/his coworkers lost money
because of enrollments and that the failure to meet enrollment targets led to salary decreases, not
TEACH values problems. CW 17 stated that lots of Advisors with good TEACH values were fired
for failing to meet enrollment quotas, and that the TEACH values were “B.S.” because compensation
was based so heavily on enrollments.
95.
CW 18 was a successful Admissions Advisor who was made a mentor and then a
senior mentor to other Admissions Advisors. When first hired, CW 18 was told by Spear and Teller
that CW 18’s compensation would be broken into parts. CW 18 knew that her/his base salary would
not change much, but there was a variable component. When CW 18 started working for DeVry,
she/he learned her/his starting salary was $27,000 with a $13,000 variable component, and that the
variable portion could go up or down. CW 18 stated that her/his compensation increased to $74,000
because CW 18 consistently exceeded enrollment targets. CW 18 stated that because she/he was
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bringing in approximately 30 students every eight weeks that her/his salary was increasing $7,000 to
$8,000 every six months.
96.
Regarding TEACH values, CW 18 stated being told that if Advisors “service” their
students, “meaning enroll them,” then their TEACH values would reflect that. CW 18 stated her/his
TEACH values were always high because CW 18’s enrollment numbers were always good. CW 18
further explained that she/he could not imagine a good enroller getting poor TEACH reviews. For
example, CW 18 stated one Admissions Advisor in Arizona that was making $135,000 a year
because she had been enrolling 30 students per term for more than 15 years. CW 18, however,
described that Advisor as someone who would talk back to people, be mean, and be disrespectful to
others, but that she/he always got good TEACH reviews because she was hitting her enrollment
numbers. CW 18 stated that the managers loved this particular Advisor because she produced
enrollments, so there was no reason to give her a bad review on TEACH values.
97.
As an Admissions Advisor, CW 19 was hired at a base salary of $45,000 per year.
During CW 19’s initial training, she/he learned that she/he would be reviewed and compensated
based on her/his ability to meet certain enrollment-related metrics and student starts. Specifically,
CW 19 was required to call 60 potential students per day, and based on that she/he should be able to
set five appointments per day. Of those five appointments, CW 19 was expected to have 60%
attend, and 60% of the attendees enroll.
98.
At a review in 2010 or early 2011, CW 19 was denied a raise because CW 19 had not
met her/his enrollment targets. As a result, CW 19 met with a management-level DeVry
representative who reviewed CW 19’s performance. CW 19 stated there was an extensive discussion
of TEACH values, and it was made very clear that each TEACH value was directly tied to
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enrollments. Following that meeting, CW 19 understood that TEACH values were simply pretext,
and that enrollments were all that mattered: TEACH was just a proxy for enrollment success.
99. CW 20 was hired as an Admissions Advisor at a salary of between $37,000 and
$38,000 per year. CW 20 was told by her/his Assistant Director and Director of Admissions that
based on CW 20’s numbers and TEACH values, CW 20 would get raises. CW 20 stated that she/he
consistently argued with all of DeVry’s upper management during CW 20’s tenure at the Company.
CW 20 stated that she/he was mean and would yell at co-workers and superiors. But, CW 20
received raises and good TEACH value reviews because CW 20 was hitting her/his enrollment
targets. CW 20 knew that if she/he did not hit enrollment targets, she/he would be terminated, and
described the motivation for Admissions Advisors was to make more money by enrolling more
students. CW 20 stated that although the Company said she/he was hitting her/his TEACH values,
CW 20 knew that she/he was not. But, because CW 20 met or exceeded enrollment targets, TEACH
values were never an issue.
100. When CW 21 was hired, she/he was told that “after six months” she/he “would be
evaluated based on how many students” she/he “brought in” and that raises would be based on how
many students she/he enrolled. CW 21 stated there were tier levels for compensation, so that at
certain levels, enrolling a certain number of students led to a specific amount of salary increase. If
CW 21 did not hit targets her/his salary could decrease, but would not go beneath a base salary of
$38,000. CW 21 was supposed to enroll at least five students each session.
101. According to CW 22, the Assistant Director of Admissions, TEACH values were “so
broad you could be rated at anything. It had everything to do with numbers.” Indeed, CW 22 heard
her/his Director of Admissions say “if they are not enrolling students how can they be a good
teammate?” CW 22’s campus in Queens, New York, was “very into numbers” and Advisors who
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were not meeting their enrollment goals “would be publicly humiliated” [by the Director]. ‘That
happened a lot.” CW 22 was responsible for reviewing Admissions Advisors, and the review
software allowed her/him to select pre-written TEACH criteria review text. According to CW 22,
the Director thought her/his TEACH value reviews of Admissions Advisors were “always too high.”
The Director would question CW 22 asking “how can you possibly say they are taking care of
students” when their enrollment target was ten and they only got five. The Director gave the
Admissions Advisors lower TEACH ratings because they missed their enrollment targets.
102.
Like other CWs identified herein, CW 22 agreed that TEACH values were a pretext
and just a proxy for enrollment success. According to CW 22, there were Admissions Advisors who
got good TEACH value reviews because they met their enrollment goals, but when they had sessions
where they failed to meet their enrollment targets, their TEACH value ratings went down. The
TEACH values then went back up when the Admissions Advisors hit their targets again. According
to CW 22, the TEACH value reviews changed even though the Admissions Advisors’ behavior did
not change, only their enrollment success did. CW 22 summarized her/his experience at DeVry by
stating that when joining DeVry, CW 22 thought she/he was going to help kids and it was about
getting kids a good education. Instead, her/his job was really “a sales position.”
103.
CW 23 also confirmed that TEACH values were based on enrollment numbers,
stating “if you’ve got a lot of enrollment points and are exceeding your goal for stats, you’ll get the
highest TEACH points.” According to CW 23, Assistant Directors wanted to keep the best enrolling
Admissions Advisors happy and would not give them bad TEACH values even if they were
deserved. CW 23 further stated that if her/his “numbers were not quite where they need to be”
his/her “TEACH points” would “absolutely” be criticized.
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104.
CW 24 stated that DeVry had a “very illegal compensation plan.” According to CW
24, Admissions Advisors were paid more for enrolling more students and would lose compensation
and eventually be fired if they failed to meet those targets. CW 24, a Director of Admissions, was
also compensated based on numbers of students enrolled and was promoted “based on numbers.”
105.
CW 24 described DeVry’s TEACH values as a proxy tool for punishing employees
who didn’t meet their enrollment requirements stating, “if you aren’t hitting your numbers, your
TEACH values can’t be good.” CW 24 explained that while DeVry publicly claimed that TEACH
values and enrollment numbers are two separate things, they were inextricably linked in practice
because managers reduced TEACH values on the employees they supervised when they did not meet
their enrollment numbers. CW 24 participated in conference calls with other Directors of
Admissions throughout the country during which Weber would say “how can a manager missing
budget have good TEACH values?” During the conference calls, Weber reminded the Directors of
Admissions that their compensation depended on the performance of the managers below them and
told them “if you have managers missing budget with good TEACH values, that will hurt your
compensation.”
106.
According to CW 24, the online division of DeVry “is very micromanaged” as was
evidenced during national conference calls in which Kulawiak and Weber knew details and asked
specific questions about the performance of the division. CW 24 stated that “nothing happens
without Ted and Paul knowing and all that came down from the top.” In January or February 2011,
Weber gave a presentation in both Phoenix and Orlando detailing how the inflow of revenue by the
Phoenix office was not meeting the out flow and he threatened to close the Phoenix office because of
bad enrollment numbers unless the office began generating more enrollments and therefore revenue.
By summer of 2011, DeVry closed the online division in Phoenix.
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107.
As an Associate Director of Admissions, CW 25 oversaw a team of Admissions
Advisors and was responsible for reviewing their performance. CW 25 used TEACH values to aid
people or “give bad, bad reviews” to people failing to hit enrollment goals and confirmed DeVry’s
TEACH values were subjective and could mean whatever the person giving the review wanted them
to mean. CW 25 explained that in practice, TEACH values were pretextual and were a proxy for
enrollment success with no real differentiation between TEACH values and the metrics of
enrollment. For example, an Admissions Advisor who had only enrolled 5 students in a session in
which the target enrollment goal was 10 students, could not have been “providing excellent customer
service.” If the Admissions Advisor had been providing excellent customer service she/he would
have been able to get 10 students to enroll. “If enrollments were good, then your TEACH values
were going to be good.”
108.
CW 25’s compensation was based on the enrollment success of her/his team, so
she/he explained she/he had every incentive to reward Admissions Advisors who met or exceeded
enrollment targets with good TEACH value reviews, regardless of whether they were good at
helping others or communicating or deserved the good TEACH values review. Conversely, CW 25
stated that if Admissions Advisors were team and student focused and eligible for good TEACH
reviews but not getting students to enroll, she/he would give lower TEACH value reviews as a way
to get them out and to make room for someone new who could hit enrollment targets.
2.
109.
As a Result of Heightened Regulatory Scrutiny, DeVry
Secretly Changes its Compensation Plan
As described in detail herein, throughout the majority of the Class Period, DeVry
drove revenue and enrollments by illegally compensating its Admissions Advisors in violation of the
HEA. Creating the pretextual TEACH values, DeVry employed them in a manner that was directly
tied to the attainment of enrollment quotas. Simply stated, those Admissions Advisors who met or
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exceeded their enrollment quotas were rewarded with high TEACH value scores, raises and bonuses,
whether they actually exemplified the purported TEACH values or not. Conversely, those
Admissions Advisors who did not meet their enrollment quotas were punished with low TEACH
value scores, had their compensation reduced, and sometimes were terminated, even if, in practice,
they were exemplary in their application of what the TEACH values were supposed to be.
110.
Later in the Class Period, DeVry, in response to the effects of intensely heightened
government scrutiny (as evidenced by the GAO investigation and report, the possibility of new DOE
regulations and the HELP Committee Proceedings), secretly changed its compensation policies and
stopped paying its Admissions Advisors based upon the fulfillment of quotas. The new
compensation polices changed the very culture of DeVry. As demonstrated below and corroborated
by former DeVry employees, the abandonment of its quota-based compensation polices caused a
decline in DeVry’s enrollment and revenues.
111.
CW 1 stated that in June 2009, at a team meeting on a Friday, Vanderbilt, the Director
of Admissions for the Federal Way, Washington campus, told CW 1 and other Admissions Advisors
that changes were coming because of a federal review as to DeVry’s recruiting practices. CW 1
stated being told that DeVry would soon be moving away from enrollment goals being the driving
force for production and success, and that when that happened, Admissions Advisors would no
longer be getting salary increases for hitting enrollment targets. CW 1 stated Admissions Advisors
questioning whether their salaries would be decreased or stay at the same level, and that Vanderbilt
said they would stay at the same level. CW 1 stated that the changes were planned to be rolled out in
June 2010. CW 1, who remains in contact with Admissions Advisors who stayed employed at
DeVry after the new compensation plans were put in place and no longer emphasized or monetarily
rewarded enrollment targets, stated that Admissions Advisors, as a consequence, were no longer
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meeting their enrollment targets. CW 1 stated that recruitment was down significantly at the Federal
Way, Washington campus and that Admissions Advisors were attributing the change to the lack of
incentive compensation for hitting enrollment targets.
112.
Like CW 1, CW 4 stated that at some point in 2009, DeVry started to move away
from its compensation model of adjusting compensation based on meeting or exceeding enrollment
quotas. CW 4 stated that under the new policy, salaries could stay the same or increase, but would
not decline if an employee did not meet his or her numbers. CW 4 believed that Congressional
scrutiny of for-profit colleges was contributing to the change, and that her/his belief was based on
information CW 4 heard from CW 4’s managers at DeVry.
113.
CW 5 confirmed that at the end of 2009, CW 5 first heard about the possibility of the
Company implementing a new compensation system. CW 5 stated the date because she/he went to
work in California in April 2010, and had learned about the proposals for a new compensation plan
before she/he went. CW 5 stated still being in California when the new compensation policy was
piloted. CW 5 stated the new policy was internally announced in December 2010, but did not begin
to be rolled out until early 2011.
114.
CW 5 stated that DeVry completed its switch to a non-admissions-based
compensation policy for the whole company in June 2011. DeVry moved to eliminate the variable
portion of Admissions Advisors’ salaries entirely, and to cap annual raises at 10%. As a
consequence, CW 5 stated that she/he did not want to be in the industry any more come June 2011.
CW 5 stated that the new policy would make the job less sales-dependent and more customer-service
focused, and would take away the ability to receive very high compensation. CW 5 stated that
she/he would have had to take a major pay cut under the Company’s new structure that was
scheduled to take effect in June 2011. CW 5 further stated that instead of twice yearly compensation
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adjustments, the Company switched to annual reviews. CW 5 stated that Advisors no longer had
enrollment targets, and that raises are now based on human resources performance, “not numbers.”
115. CW 5 stated that prior to the full June 2011 rollout, DeVry piloted the new, nonenrollment based compensation programs at several physical DeVry campuses, including Sherman
Oaks, California, where CW 5 was working at the time. CW 5 stated it was also piloted at the
Naperville, Illinois campus and at the Orlando, Florida online recruiting office in approximately
November 2010. CW 5 stated the full rollout was delayed because the new system did not work
well. More specifically, CW 5 stated that the new program piloted “very poorly” in Orlando and on
the Sherman-Oaks and Naperville campuses. CW 5 stated that when the Company started the pilot
in Orlando, Florida, enrollments “took a swan dive.” Prior to DeVry implementing the new policy,
CW 5 stated that Orlando was averaging six or seven enrollments per Admissions Advisor, and that
the target number was 10. Once Orlando piloted the non-enrollment based compensation policy,
where Admissions Advisors could not be fired for failing to meet enrollment targets, Orlando
Admissions Advisors were only getting one or two enrollments per Advisor, per session. CW 5
stated that this information was well known throughout DeVry. CW 5 went through numbers from
other regions to see how she/he and her/his team stacked up. CW 5 stated it was easy to tell the
Company was doing very poorly with the new policy in place. She/he stated the test in Orlando
lasted two sessions, which was four months. As a consequence of the poor results, DeVry put its test
sites back on the old compensation plan until June 2011, when DeVry fully switched to the new nonenrollment based compensation plan. Likewise, CW 5 stated the Company’s Region 3902, based in
Naperville, also piloted the new compensation plan, but had to switch back after two months because
the results were so bad and enrollment numbers were so low.
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116.
CW 5 stated that during the session of the pilot program, DeVry “over-budgeted”
Naperville and Chicago offices to make up for the shortfall. CW 5 stated that when Advisors hit
their enrollment targets by week seven in an eight week session, it was standard for Advisors to start
lining up enrollments for the following session, which would make it easier to meet enrollment
requirements in the next session. With the pilot programs failing, CW 5 stated that Advisors were
told to make up for Orlando’s shortfall. To accomplish this, Advisors like CW 5 forced those
students who normally would have gone into the next session to enroll in the current session. CW 5
stated that as a result of the failed pilots, overall enrollment numbers started to go down. CW 5
stated that DeVry’s Naperville location had not missed a target for four years, but that in late 2010, it
started missing them.
117.
Discussing how the new compensation policy was rolled out, CW 5 stated that there
were regional roll-out meetings. CW 5 stated the first meeting was held with Pauldine, Hamburger,
Campus Presidents, and Regional Vice Presidents, along with Directors. CW 5 recalls talking to
Directors that attended the meeting, who described how the new compensation policy was
“supported by Corporate.” CW 5 stated the initial meeting discussed strategies for getting
enrollments in the new system, and that the Company could no longer give numerical targets to its
Admissions Advisors. CW 5 stated that she/he attended a compensation meeting in approximately
September 2010, which was led by Senior Director of Admissions Elise Awwad (“Awwad”) and
Weber. CW 5 stated that DeVry Assistant Directors and Directors then had meetings with the
Admissions Advisors. During these meetings, CW 5 stated the attending Advisors had to sign a
document acknowledging DeVry’s new compensation policy. CW 5 stated being told in the meeting
she/he attended that the new compensation policy change was done to meet new government
regulations for how people were compensated.
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118.
CW 5 further stated that the new compensation system drove away some of the
Company’s most successful Admissions Advisors. CW 5 ultimately left DeVry because she/he was
told in late 2010 that her/his new compensation for 2011 was going to be based on an average of
several prior reviews. The result was that CW 5’s compensation was decreased from $100,000 per
year in 2010 to approximately $65,000 per year in 2011. With the new compensation plan, CW 5
stated it was hard for the Company to keep “real sales people.” CW 5 described the new policy as
fine for “coasters,” i.e. , people who were happy to make calls but were not committed to enrolling as
many students as possible. With the new policy in place, CW 5 stated DeVry became more of a call
center and “less about sales.”
119.
The dual impact of the new compensation policy was a significant amount of Advisor
departures and a consequent substantial decrease in the number of enrollments. CW 5 stated that
only a “very small percentage” of Advisors remained in that position – many either went to other
schools to work in other capacities or went to work in other divisions of DeVry. CW 5 stated that
the new compensation plan removed incentives to work “really hard.” Instead of the chance to make
$20,000 to $30,000 more, CW 5 stated the most Advisors could get under the new plan was $5,000.
Summarizing the situation, CW 5 stated that in the pre-policy change timeframe, Advisors had
enrollment targets and would do whatever it took to hit those targets. Removing the enrollment
targets in June 2011 was designed to “remove the incentives” to do whatever it took to secure
enrollments. CW 5 stated that because the pilot program for the new enrollment compensation
system produced such terrible enrollment numbers, it was clear the new policy would lead to
significantly worse enrollment numbers when the policy became national in June 2011. CW 5
believed DeVry should have shared this information with investors because it was known within the
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Company that the new policy was “not working,” but that it was going to soon be rolled out for the
whole Company.
120.
CW 7 stated that she/he remains in contact with DeVry employees. Confirming the
accounts of other CWs, CW 7 stated that multiple sources within DeVry told CW 7 that within the
last four weeks before February 5, 2011, DeVry management made an internal push to deny that
compensation or employment decisions were tied to enrollment numbers. CW 7 stated that now the
internal Company policy is to no longer say that employees would be fired if they did not “get 10
starts per session,” whereas, internally, DeVry used to affirmatively say that.
121.
Discussing the change in compensation practices, CW 9 stated that she/he left the
Company because DeVry cut CW 9’s pay in late 2010 as part of the roll out of the new nonenrollment based compensation plan. CW 9 stated the new plan was vaguely announced by
Directors of Admissions in October 2010, with promises that more details would follow before any
decisions were made. CW 9 stated there were no further announcements until late December 2010,
when CW 9 received a reduced paycheck. CW 9 then resigned as a result.
122.
CW 13 stated that in July or August 2010, she/he received a letter from DeVry
announcing that CW 13’s salary was going to be decreased from $87,000 to an average of her/his
two prior salaries. CW 13 also stated being told by her/his boss, in September 2010, that the
Company was changing its compensation policies. CW 13 stated that going forward, Managers of
Local Accounts would be reviewed annually instead of every six months. CW 13 was told that
she/he would receive a salary based on an average of her/his salary over the last two review periods.
CW 13 stated being upset to hear this because it meant CW 13’s salary would decline by
approximately $4,000, even though CW 13 was meeting her/his quotas.
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123.
CW 16 stated that when she/he returned to work as a Senior Admissions Advisor in
January 2011, the compensation policy had changed. Instead of being measured on enrollment
numbers with the chance to rapidly increase salary, now Admissions Advisors were measured by
metrics like “talk time” and “phone minutes.” CW 16 confirmed that DeVry could no longer
decrease Advisors’ income for failing to meet enrollment quotas – it no longer paid employees based
on enrollments. CW 16 confirmed that DeVry did a test run of the new compensation policy in the
Orlando, Florida online admissions office and that enrollments “decreased dramatically.” CW 16
also stated that the Company did a test run for one region in CW 16’s office, and that enrollments
also decreased dramatically. CW 16 stated there was a meeting about the new compensation policy
led by Senior Director of Admissions Awwad, and that during the pilot programs for the new
compensation plan, enrollments were “cut by 50%.” CW 16 stated that the situation was “bad” and
that the Company was “very, very scared.” CW 16 stated the meeting led by Awwad was to discuss
the large enrollment decreases the Orlando, Florida office had suffered during the pilot of the new
compensation plan. During that meeting, Awwad stated that Orlando “didn’t do well” but that CW
16’s region would not be in the “same boat” because it had the “best team.” CW 16 stated that
despite Awwad’s positive message, things were not going any better than in Orlando prior to when
CW 16 left DeVry.
124.
CW 18 stated she/he was still working in Houston, Texas for DeVry when the
compensation policy change was announced. Going forward, Admissions Advisors’ compensation
would be based on an average of their compensation in previous review periods. CW 18 stated
she/he was making $74,000 when the change was internally announced, and that the Company
lowered CW 18’s compensation to $72,000. CW 18 complained, and DeVry gave CW 18 an
additional $1,000 to appease her/him. CW 18 stated that once DeVry eliminated the opportunity to
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make more money by exceeding enrollment targets, she/he decided to relocate so that she/he could
be an Assistant Director, get more experience, and potentially make more money.
125.
CW 18 stated that part of the reason she/he was hired to be an Assistant Director of
Admissions in Phoenix, Arizona was DeVry’s hope that CW 18, as a former high producing
Admissions Advisor, could motivate other Admissions Advisors to achieve enrollment gains in the
absence of financial incentives or formal targets starting in June 2011. In that regard, CW 18 said
that under the new compensation system, managers were still responsible for their teams hitting
enrollment targets. CW 18 supervised two Admissions Advisors and one part time advisor who
recruited KGSM students, and CW 18’s team was responsible for starting 25 new students per term.
Under the new system, CW 18 stated that Assistant Directors of Admissions were expected to get on
the phone and try to enroll students if their teams were not meeting enrollment targets.
126.
CW 18 stated that before the “New Regulatory World,” the Assistant Directors and
Directors of Admissions would make sure that anyone not producing was fired. Under the postApril 2011 set of rules based on non-enrollment-based compensation, enrollments declined
significantly. For example, CW 18 stated her/his team was enrolling 175 new students per session
before the change, and that after the change they were trying to “scratch to get 100” and “not hitting
it.” CW 18 stated that the downfall in enrollments was “dramatic” and “really bad.” CW 18, who
remained in contact with her/his former colleagues in Houston, Texas who confirmed that there too,
it was a “drought” of enrollments under the “new regulatory world” that did not include enrollmentbased compensation.
127.
CW 18 confirmed that under the “new regulatory world,” big producers ( i.e. , high-
performing Admissions Advisors) were leaving and those who stayed were just coasting. Under the
new compensation system, CW 18 and other managers referred to the prior way of doing things as
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the “good old days” when Advisors could do whatever they wanted. CW 18 stated there was little to
no oversight over Advisors under the old framework – they were basically free to enroll at any cost –
but that under the new system, Advisors would be severely threatened for any misconduct that
violated applicable regulations.
128.
CW 19 stated that in June 2011, DeVry introduced a “New World Order” in which
Admissions Advisors would not be reviewed “based on numbers.” CW 19 stated that under this new
system, she/he was able to hit the enrollment targets for the first session. But, CW 19 did not hit
enrollment goals for the next several sessions and neither did the Oklahoma City, Oklahoma facility
generally. CW 19 stated that “nationally, every campus was down” for enrollments under the “new
world order.”
129.
Likewise, CW 20 stated there was a negative change in enrollment performance
following implementation of the new recruiting and employee compensation rules. CW 20
confirmed that the Orlando, Florida location had at least a 30% decline in enrollments as a result of
the pilot program implementing the new rules, and acknowledged that the enrollment decline might
have been even larger.
130.
CW 21 also stated that in July of 2011, the Southfield, Michigan campus
implemented the new policies regarding Admissions Advisor compensation and new rules for how
DeVry could recruit students. The Assistant Director of Admissions explained the new rules to CW
21 and Regional Trainer Mandy Monroe (“Monroe”) visited the campus to provide training on them.
According to CW 21, DeVry officially called the new rules for compensation the New Regulatory
World, but amongst themselves, the Advisors called it the New World Order.
131.
The new policy meant that Admissions Advisors were no longer going to get raises
for enrollment success as they had in the past. “Our performance was going to be based on how we
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talk to students and how long we were on the phones with them.” Admissions Advisors had to
spend two hours on the phone every day and the calls were going to be recorded. In addition to
reducing the incentives for Admissions Advisors to get enrollments, DeVry also imposed stricter
rules on what Admissions Advisors could tell prospective students. For example, after the New
Regulatory World, Admissions Advisors “couldn’t do hard core recruiting like before,” while
previously Admissions Advisors could bad mouth other schools. Prior to implementation of the new
rules, the role of the Admissions Advisor was “more like a sales position,” but under the New
Regulatory World the rules were “much more” strict.
132.
After implementation of the New Regulatory World, CW 21’s campus met its
enrollment targets only once, in the very first session after the new rules were implemented.
According to CW 21, after the New Regulatory World “we weren’t hitting it.” CW 21 stated that the
enrollment goal for the Southfield campus was approximately sixty students per session for
undergraduate and graduate combined and that in September, after the New Regulatory World was
implemented they missed the enrollment target by eight students, in December they missed the
enrollment target by six students, and in February they missed the enrollment target by six students
again.
133.
CW 21 attributed the lower enrollments to the lack of potential to earn additional
compensation. According to CW 21, “once you take money away from people they don’t work as
hard.” CW 21 knew of several Admissions Advisors who had their salaries reduced from more than
$70,000 to the low $40,000 range as part of the change to the New Regulatory World. CW 21’s
counterparts at DeVry campuses in three Chicago area locations, as well as at campuses in Ohio and
Atlanta, Georgia, all reported that enrollment numbers were down in each location. CW 21 stated
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the consensus among Admissions Advisors was “why should we work this hard when we aren’t
getting compensated for it?”
134.
Similarly, CW 23 was told about a new policy for Admissions Advisor compensation
in the Spring or Summer of 2011 known as the New Regulatory World. Before it was rolled out,
“big bosses” like Kulawiak and Weber came to sit in on meetings about the New Regulatory World.
CW 23’s Assistant Director and Director of Admissions told her/him that going forward, Admissions
Advisors would be “judged on talk time, product knowledge” and observations of Admissions
Advisors calls with prospective students.
135.
According to CW 23, as soon as the new policy took effect, enrollment “numbers
went down significantly.” During one session under the New Regulatory World, CW 23 “started
five or six students” which “would have been low on the floor before, but with the new system it was
one of the highest.” Previously, five or six students per session was considered underperforming as
an Admissions Advisor, but under the New Regulatory World, the average was two or three
enrollments per Admissions Advisor per session and some Admissions Advisors did not enroll any
students at all. DeVry management “took away the money incentives for enrollment. The new
focus was on longer talk times,” which increased the time Admissions Advisors spent talking on the
phone, but it did not lead to comparable enrollment numbers as DeVry achieved under the old
system.
136.
CW 23 stated that the change in policy “changed the whole admissions culture
completely.” Prior to implementation of the new policy, there was competition for the most
applications and starts, but “once competition was taken away, the workplace became a boring place.
People would just try to get talk time. It made days drag by. Advisors who hit their talk time [goals]
for the day would just try to look busy” for the rest of the day.
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137.
As an example of the impact the New Regulatory World had on enrollments, CW 23
explained that there were times when DeVry would offer a limited time fee waiver so prospective
students did not have to pay an application fee which helped Admissions Advisors increase their
enrollments as students were more inclined to apply and enroll if it was free to apply. During one
week application fee waiver promotions under the old system CW 23’s Region typically enrolled
100 students in one week. In contrast, under the New Regulatory World it took three or four weeks
of fee waivers to reach 100 students.
138.
Like other CWs, CW 23 confirmed that the New Regulatory World lead to lower
enrollments and, not only because it removed the financial and job security incentives associated
with meeting enrollment goals, but because the New Regulatory World also required much stricter
disclosure rules for Admissions Advisors. CW 23 explained that on calls with prospective students,
Admissions Advisors now had to disclose that the full cost of earning a DeVry engineering degree
was $83,000, rather than downplaying expenses as Admissions Advisors could do before the change
in policy. Further, if prospective students asked about the graduation rate, Admissions Advisors
now had to disclose it. According to CW 23, saying 33 or 34 percent graduated “wasn’t helpful.”
CW 23 explained that there were “a lot of things that had to be disclosed with the New Regulatory
World that could have been skipped over before.”
139.
CW 23 believed that management was definitely aware that the New Regulatory
World was going to lead to lower enrollments by Admissions Advisors before it enacted the policy.
Prior to the New Regulatory World taking effect, Directors of Admissions put a lot of CW 23’s
colleagues on Performance Improvement Plans and then “let go six or seven” of them “before
instituting the new system because they knew [the Advisors] couldn’t be judged on enrollments” and
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could no longer be fired for missing enrollment targets after the new policy took effect. According
to CW 23, “eight to ten were let go in my region alone.”
140.
Further, once the new policy was enacted, “management could tell numbers were
dropping dramatically.” CW 23 explained that once a week there were Region Meetings for 90
minutes going over the Time, Knowledge and Observations statistics (“TKO”). The Directors of
Admissions were not permitted to talk about the need to hit numbers or enrollment goals, although
CW 23 stated that some still did, so they talked about TKO. According to CW 23, “management
knew there was a drop in enrollments” and “management still sees in Salesforce what Advisors are
doing with students, including when they submit an application and start for classes.”
141.
CW 24 also confirmed the implementation of new regulations rolled out by DeVry in
approximately May of 2011. In approximately 2011, CW 24 was told on conference calls attended
by other Directors of Online Admissions that “due to new laws with Title IV funding, [DeVry] could
no longer incent [Admissions Advisors] based on how many enrollees” they signed up.
142.
CW 25 confirmed that in June 2011 DeVry instituted a new set of policies changing
how Admissions Advisors were compensated and reviewed. This new policy was known as “NRW”
or New Regulatory World and according to CW 25, the new policies changed the culture at DeVry.
CW 25 stated that the changes in enrollment policy embodied in the New Regulatory World led to
massive drops in enrollment. For example, CW 25 stated that at the Gwinnett center post NRW, “we
enrolled 50% of the people we used to.” According to CW 25, Gwinnett started 38 students in a
session in the prior year, and in the same session the following year under the NRW, the center only
enrolled 20. Prior to the NRW, Admissions Advisors at his center were enrolling 10 to 16 students
per session on average. After the NRW, they were enrolling only three to four per session. CW 25
stated that the sizeable drop in enrollments experienced at Gwinnett “was not just my location, it was
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pretty much all locations” throughout the company. The drops in enrollment were discussed at
“Metro meetings in Atlanta.”
143.
CW 25 confirmed that due to the New Regulatory World, some of the top DeVry
Admissions Advisors “performers” left the Company because they knew there weren’t going to be
able to make as much money or get as many raises under the new policies. In other words,
Admissions Advisors left because DeVry stopped illegally compensating them. As an example, CW
25 explained that she/he had an Admissions Advisor who consistently enrolled 16 to 20 students per
session before the NRW, but that after the NRW she was only enrolling six to eight students per
session because she knew she did not have to do her best and her performance declined dramatically.
People would receive gift cards and other informal rewards for meeting enrollment goals before the
NRW, but after implementation of the new policy all of the rewards stopped.
144.
CW 25 also confirmed that after implementation of the New Regulatory World,
Associate Directors of Admissions and Assistant Directors of Admissions could not discuss
enrollment targets or results with Admissions Advisors and that the rules on what Admissions
Advisors could and could not tell prospective students were also tightened. Although the
Admissions management could not pressure the Admissions Advisors to meet enrollment goals,
managers remained under the same pressure themselves, but with no tools to motivate or incentivize
the Advisors to produce results. Every two weeks CW 25 participated in “Snapshot” calls in which
Directors, Assistant Directors and Associate Directors in her/his region were held accountable for
revenue, enrollments and the number of students completing financial aid, among other things. The
focus on these calls attended by Vice President of Admissions for the Southeast region Shah, and her
boss, Group Vice President of Operations Torres, was still on numbers even after the New
Regulatory World. CW 25 stated that she/he and the other Admissions management were directed to
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motivate their Advisors based on “intrinsic motivations” and because doing their best was the right
thing to do, but that “DeVry hired sales people” who were not likely to be motivated by the moral
goodness of hard work.
145.
CW 26 also confirmed that a new system of compensation policies for Admissions
Advisors took effect in July 2011, and that under the new system Admissions Advisors could no
longer be given enrollment targets. The new rules were rolled out by CW 26’s Director of
Admissions prior to taking effect in July 2011. Therefore, Admissions Advisors knew in advance
they would not be held responsible for successfully enrolling students and they stopped enrolling as
many students with the enactment of the new rules
146.
Like other CWs identified herein, CW 26 stated that DeVry’s enrollments “totally
dropped” once the new system was implemented. According to CW 26, “salespeople are driven by
money, period.” Without the potential to earn more for their hard work or the threat of losing money
for failing to perform, the Admissions Advisors were not motivated to continue working hard to
bring in students. CW 26 stated that as a result, the “July 2011 class was disastrous for DeVry,” not
just in Houston, but all over the nation the results were terrible. CW 25 stated that her/his Houston
high school division “didn’t even meet half” of their team goals in July and September.
3.
147.
DeVry’s Compensation Practices Were Well Known
Throughout the Company
CW 15 attended monthly conference calls led by Pauldine. Sometimes Hamburger
also participated on these calls. The calls could last for two hours and consisted mostly of Pauldine
(and sometimes Hamburger) talking about corporate-level and/or system-wide issues, including
enrollment, retention, career placement and financial aid. According to CW 15, Pauldine was “very
knowledgeable about details” of the business.
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148.
Defendants tracked employees’ enrollment numbers very carefully. During the Class
Period, a Daily Activity Report (“DAR”) that detailed the performance of each Admissions Advisor
was regularly circulated. The DAR was a matrix system that recorded how many calls were made to
leads by each Admissions Advisor, how many appointments they scheduled, how many interviews
they conducted each week and the number of enrollment applications submitted per week.
149.
Because quotas were critical at DeVry, they were discussed within the Company. To
that end, CW 4’s supervisors held weekly conference calls and meetings with the Admissions
Advisors, Admissions Directors and Assistant Directors in her/his region. The calls and meetings
were purely intended to go over “sales” numbers and were “terribly uncomfortable” because
employees would be called out and chastised for falling behind on their quotas. CW 4 described
both the calls and the meetings as “intense” and “stressful.”
150.
When employees questioned the legality and ethics of DeVry’s systemically
predatory business model, DeVry management silenced them by terminating employees who spoke
up, or by making it impossible for those employees to make their quotas. According to CW 1, if an
employee objected to unethical practices, they “cut your leads, potentially to zero, so [you have] no
one to call and then they can fire you for lack of numbers.”
151.
After raising an objection with Vanderbilt about advisors attempting to persuade
community college students to transfer to DeVry before the students completed their Associate’s
degree (resulting in none of their community college credits transferring), Vanderbilt took CW 1 out
of her/his community college recruiting role and she/he was no longer allowed to recruit off campus.
Vanderbilt further cut her/his lead flow and gave her/him two-year-old leads to call, even though
federal policy prohibits schools from calling a prospective student more than 90 days after she/he
initially expressed interest. As a result, CW 1 did not hit her/his numbers and was fired. According
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to CW 1, “if you go to management with anything, you get ostracized. You are seen as a threat or
problem.” According to CW 6, “[m]ost advisors, if they had a job and were doing well, they
couldn’t question anything because they didn’t want to get fired. I had never been in a company
where so many people were fired.”
VI. DEFENDANTS’ FALSE AND MISLEADING STATEMENTS ISSUED
DURING THE CLASS PERIOD 4
152.
The Class Period begins on October 25, 2007. On that date, DeVry issued a press
release reporting its financial results for its first quarter 2008. In the press release, the Company
reported that total enrollment at KGSM increased 12.7% compared to the same quarter the year
before. 5 Regarding DeVry’s first quarter 2008 results, Hamburger stated, in pertinent part:
“The strong earnings results during the first quarter were driven by double-digit
revenue growth across all three of our operating segments, combined with the
operating leverage we achieved from our cost management focus and the impact of
our real estate optimization plan, . . . .”
153.
In response to Defendants’ false and misleading statements, on October 25, 2007, the
price of DeVry common stock rose 37.62% , or $15.06 per share, to close at $55.09 per share on
October 26, 2007, on heavy trading volume.
154.
On October 26, 2007, William Blair & Company upgraded DeVry to “Outperform”
from “Market Perform,” “based on margin leverage at DeVry University (DVU) that significantly
exceeded our expectations.” William Blair also raised its fiscal 2008 and 2009 earnings per share
estimates to $1.79 (+$0.43) and $2.41 (+$0.75), respectively. Bear Sterns also upgraded DeVry to
4
Plaintiff has bolded and italicized the statements which it contends are false and misleading.
5
In furtherance of their fraud, Defendants touted positive enrollment statistics throughout the Class
Period, without ever disclosing that those positive enrollment trends (like DeVry’s financials and future
business prospects) were driven by predatory enrollment practices, illegal compensation practices and
violations of Title IV, among other things. Rather than repeating the dozens and dozens of false and
misleading statements regarding enrollment trends herein, Plaintiff has attached as Exhibits A through O
the portions of DeVry’s SEC filings in which the false and misleading statements appear.
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“Outperform” following the release of the Company’s “outstanding” first quarter 2008 financial
results.
155.
On November 8, 2007, DeVry filed its quarterly report on Form 10-Q for the quarter
ended September 30, 2007, which confirmed the Company’s previously announced financial results
and was signed by Gunst and Hamburger (the “First Quarter 2008 10-Q”). The First Quarter 2008
10-Q contained required Sarbanes-Oxley (“SOX”) certifications signed by Gunst and Hamburger
stating that the Form 10-Q did not include any material misrepresentations. Nevertheless, the First
Quarter 2008 10-Q did contain several false and misleading statements regarding DeVry’s financial
performance and future business prospects, which were based on an increase in student enrollment,
including the following:
Total consolidated revenues for the first quarter of fiscal year 2008 increased
14.2% to $250.3 million from the prior year quarter. Revenues increased at all
three of DeVry’s business segments as a result of continued growth in total student
enrollments , improved student retention, and tuition price increases as compared to
the year ago period.
*
*
*
DeVry University
For the first quarter of fiscal year 2008, DeVry University revenues increased
Tuition revenues are
12.9% to $194.8 million as compared to the year ago period.
the largest component of total revenues in the DeVry University segment. The two
principal factors that influence tuition revenues are enrollment and tuition rates.
156.
Despite omitting how DeVry boosted its enrollment and financial results by utilizing
an illegal compensation scheme for its Admissions Advisors, the First Quarter 2008 10-Q did
provide detailed enrollment data, which included the following “key trends”: at DeVry University,
total undergraduate enrollment by term for fall 2005 to fall 2006 through summer 2006 to
summer 2007 increased by between 4.9% and 9.8%.
Likewise new student enrollment by term
increased for fall 2005 to fall 2006 through summer 2006 to summer 2007 by between 6.9% and
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11.9% , and graduate coursetaker enrollment for July 2006 to July 2007 and September 2006 to
September 2007 increased by between 11.1% and 12.7% per session.
157.
6
In furtherance of Defendants’ fraud, the First Quarter 2008 10-Q purported to
describe the reasons behind DeVry’s increased enrollments and financial performance, stating in
part:
Management attributes the increasing undergraduate new student enrollments to
greater investments in marketing and recruiting, continued demand for DeVry’s
high quality educational programs and its position within the working adult market.
Management believes that efforts at Keller to create new brand awareness through
improved messaging have produced positive enrollment results.
*
*
*
DeVry’s Cost of Educational Services during the first quarter of fiscal year 2008
increased by $0.7 million, or 0.6%, as compared to the year-ago period . Cost
increases were incurred in support of the higher number of DeVry University
Centers and expanding online program enrollments . In addition, cost increases
were incurred at Ross University to support increasing student enrollments
.
*
For the first quarter of fiscal year 2008, Student Services and Administrative
Expense increased 6.8% to $91.6 million as compared to the year-ago quarter . The
increase in expenses primarily represents additional investments in advertising and
recruiting to drive and support future growth in new student
enrollments . Increased new student enrollments, as described above, at DeVry
University, Becker Professional Review and Ross University are believed to be, in
part, attributable to the higher level and effectiveness of this spending.
158.
The statements referenced in ¶¶152-157 were each materially false and misleading
when made as they represented and/or omitted adverse facts which then existed and disclosure of
which was necessary to make the statements not false and/or misleading. The true facts, which were
then known to or recklessly disregarded by each of the Defendants, were:
6
Attached as Exhibit A are the relevant portions of the First Quarter 2008 10-Q.
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.
Contrary to Defendants’ statements, DeVry’s enrollment and revenue growth was
not attributable to greater investments in marketing and recruiting or the higher
level and effectiveness of its spending, but instead was the result of DeVry’s illegal
recruiter compensation system extensively detailed herein.
The Company was solely focused on increasing enrollment numbers at any cost,
without regard to mandatory compensation restrictions. In violation of applicable
regulations, DeVry uniformly made adjustments to salary and compensation for its
employees that were based solely on the number of students recruited, admitted,
enrolled, or awarded financial aid . In addition to the foregoing, DeVry paid its
employees variable, incentive compensation based on their success in soliciting
students for interviews , which also violated 34 C.F.R. 668.14(b)(22)(ii)(A), 34
C.F.R. 668.14(b)(22)(ii)(D), 34 C.F.R. 668.14(b)(22)(ii)(F), and the HEA.
As set forth herein, the Company’s compensation practices violated applicable
regulations, and thus put DeVry in direct violation of Title IV. By violating title IV
in this way, Defendants were able to boost DeVry’s reported financial results and
mislead the market as to the truth behind DeVry’s enrollment figures, its financial
performance, and its future business prospects. More specifically, Defendants
omitted from the market any disclosure of the risk that enrollments would decrease
but for the Company’s illegal incentive compensation practices, thus concealing
that risk.
.
As a result of the foregoing, Defendants lacked a reasonable basis for their positive
statements about the Company, the Company’s Class Period revenue and
enrollment numbers, as well as DeVry’s future business prospects.
159. On December 6, 2007, DeVry issued a press release reporting positive growth in
undergraduate enrollment for the Company’s fall 2007 session at DeVry University. The Company
reported a 10.7% increase in new undergraduate enrollment and a 10.3% increase in total
undergraduate enrollment when compared to the same quarter the year before. Enrollment at
KGSM increased 12.5% from the year before, and enrollments in online courses at DeVry
University increased 28% for its October 2007 session.
The press release further stated, in part:
“Initiatives to increase enrollments produced very favorable undergraduate student
results in the fall at DeVry University and robust growth at Keller Graduate School
of Management in the November session. These results were driven by
improvements made to our recruiting processes , strong demand for online
programs, and a heightened focus on the retention of existing students,” said Daniel
Hamburger, president and chief executive officer of DeVry Inc.
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160.
In response, DeVry’s positive enrollment growth, the price of DeVry common stock
rose $2.28 per share, or 4.10%, from a closing price of $55.61 on December 6, 2007, to a closing
price of $57.89 on December 7, 2007, on heavy trading volume.
161.
The statements referenced in ¶159 were materially false and misleading when made
as they represented and/or omitted facts which then existed and disclosure of which was necessary to
make the statements not false and/or misleading. The true facts, which were then known to or
recklessly disregarded by each of the Defendants, in addition to those set forth in ¶158 above, were:
Contrary to Defendants’ statements, DeVry’s enrollment and revenue growth was
not attributable to improvement in the recruiting process, strong demand for online
programs or the heightened focus on the retention of existing students, but instead
was the result of DeVry’s illegal recruiter compensation system extensively detailed
herein.
.
162.
As a result of the foregoing, Defendants lacked a reasonable basis for their positive
statements about the Company and the Company’s enrollment numbers.
On January 24, 2008, DeVry issued a press release announcing its financial results for
the second quarter of 2008 and the six months ended December 31, 2007. Discussing student
enrollment, the press release stated:
DeVry University achieved its ninth consecutive period of positive undergraduate
new student growth and the sixth consecutive period of positive total student
enrollment growth. New students increased 10.7 percent and total students
increased 10.3 percent. At DeVry University’s Keller Graduate School of
Management (KGSM), the number of coursetakers for the 2007 November session
increased 12.5 percent.
163.
The press release also stated, in part:
“In the first half of fiscal 2008, we successfully executed on many of our strategic
initiatives - growing our total student population through improved new student
recruiting and better retention, opening new locations and diversifying into
secondary education through the acquisition of Advanced Academics,” said Daniel
Hamburger, DeVry’s president and chief executive officer. “Earnings were strong
as a result of solid revenues, operating leverage and disciplined cost management,
as well as the timing of certain marketing and personnel-related expenses now
likely to occur in the second half of the year.”
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164.
Following issuance of the press release, on January 24, 2008, after the market closed,
DeVry hosted a conference call to discuss its second quarter 2008 financial results and operations.
Hamburger and Gunst participated in the call on behalf of the Company. During the call, numerous
false and misleading statements regarding DeVry’s financials and future business prospects were
made that were designed to and did artificially inflate the Company’s stock price. For example,
Hamburger discussed the Company’s second quarter, touting student growth results and stating in
part:
We increased our dividend; opened new locations; and at DeVry University,
delivered our ninth consecutive period of positive undergraduate new student
growth and sixth consecutive period of positive total student growth. We also
experienced robust growth at DeVry University’s Keller Graduate School of
Management.
As you know, fall enrollments drive financial results in the second quarter, and we
are benefiting from the impact of higher enrollments in all operations and from
tuition increases. Increased revenues readily flow through to earnings due to the
significant operating leverage inherent in our operations, particularly at DeVry
University.
Our earnings were strong in the first half of fiscal 2008 and we expect them to
continue to grow. We don’t expect the growth rate to be as high as it was in the first
half. Rick will elaborate in a few minutes, but let me provide a little bit of color on
the two main reasons for this.
Some of it is simply timing, in that expenses slated for the first half are now expected
to fall into the second. The other reason has to do with investments in marketing,
recruiting and other areas to drive growth and quality over the long run.
165.
In response, the price of DeVry common stock fell approximately 10% per share from
$57.74 on January 24, 2008, the date of the Company’s press release, to $47.63 per share on
February 7, 2008, the date of the filing of DeVry’s Second Quarter 2008 10-Q. But, as a result of
their false and misleading statements and omissions to the market, Defendants were able to maintain
the artificial inflation in the price of DeVry common stock.
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166.
On February 7, 2008, DeVry filed its quarterly report on Form 10-Q for the quarter
ended December 31, 2007, which confirmed the Company’s previously announced financial results
and was signed by Gunst and Hamburger (the “Second Quarter 2008 10-Q”). The Second Quarter
2008 10-Q contained required SOX certifications signed by Gunst and Hamburger stating that the
Form 10-Q did not include any material misrepresentations. Nevertheless, the Second Quarter 2008
10-Q did contain several false and misleading statements regarding DeVry’s financials and future
business prospects, which were directly tied to increased and continued growth in student
enrollments, including the following:
For both the second quarter and first six months of fiscal year 2008, revenues
increased at all three of DeVry’s business segments as a result of continued growth
in total student enrollments, improved student retention, and tuition price increases
as compared to the year ago periods. In addition, revenues increased because of
expanding sales of electronic text books (“eBooks”) and higher sales of Becker CPA
review materials.
*
While DeVry University accounted for the majority of the revenue increase in this
segment, revenues at Advanced Academics Inc., which was acquired on October 31,
2007, also contributed to segment revenue growth. DeVry University tuition
revenues are the largest component of total revenues in the DeVry University
segment. The two principal factors that influence tuition revenues are enrollment
and tuition rates.
167.
The Second Quarter 2008 10-Q also provided detailed enrollment data, which
included the following “key trends”: at DeVry University, total undergraduate enrollment by term
for spring 2006 to spring 2007 through fall 2006 to fall 2007 increased by between 5.5% and
10.3%. Likewise, new student enrollment by term increased for spring 2006 to spring 2007
through fall 2006 to fall 2007 by between 6.9% and 10.7%
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for July 2006 to July 2007 through November 2006 to November 2007 increased by between
11.1% and 12.7% per session .7
168.
In further perpetrating Defendants’ fraud and purporting to describe the reasons
behind increased enrollments and financial performance, the Second Quarter 2008 10-Q continued:
Management attributes the increasing undergraduate student enrollments to the
impact of investments in marketing and recruiting, continued strong demand for
DeVry University’s online programs and a heightened focus on the retention of
existing students.
*
*
*
DeVry’s Cost of Educational Services increased 2.7% to $123.9 million during the
second quarter and grew 1.7% to $244.9 million during the first six months of
fiscal year 2008, as compared to the year-ago periods . Cost increases were
incurred in support of the higher number of DeVry University Centers and
expanding online program enrollments . In addition, cost increases were incurred
at Ross University and Chamberlain to both support increasing student
enrollments and capacity expansion to drive future growth .
*
Student Services and Administrative Expense increased 10.4% to $102.9 million
during the second quarter and grew by 8.7% to $194.6 million during the first six
months of fiscal year 2008 as compared to the year-ago periods. The increase in
expenses primarily represents additional investments in advertising and recruiting to
drive and support future growth in new student enrollments. Increased new student
enrollments, as described above, at DeVry University, Becker Professional Review
and Ross University are believed to be, in part, attributable to the higher level and
effectiveness of this spending.
169.
The statements referenced in ¶¶162-164, 166-168 were materially false and
misleading when made as they represented and/or omitted facts which then existed and disclosure of
which was necessary to make the statements not false and/or misleading, for reasons set forth in
¶158 above, and as evidenced by the factual detail contained throughout this Complaint. In addition,
the statements referenced in ¶¶162-164, 166-168 were materially false and misleading when made
7
Attached as Exhibit B are the relevant portions of the Second Quarter 2008 10-Q.
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because they represented and/or omitted adverse facts which then existed and disclosure of which
was necessary to make the statements not false and/or misleading. The true facts, which were
known to or recklessly disregarded by each of the Defendants, in addition to those set forth in ¶158
above, were:
The Company was not “successfully” executing on “strategic initiatives” to grow
student population “through improved new student recruiting and better retention.”
Quite the opposite, Defendants were successfully implementing DeVry’s illegal
compensation system, thus increasing DeVry’s enrollment numbers by any means
necessary.
Contrary to Defendants’ statements, DeVry’s enrollment and revenue growth was
not attributable to the impact of investments in marketing and recruiting, strong
demand for online programs, the heightened focus on the retention of existing
students or the higher level and effectiveness of spending, but instead was the result
of DeVry’s illegal recruiter compensation system extensively detailed herein.
DeVry failed to inform the market that the Company’s increased expenses tied to
additional investments in recruiting no doubt included additional illegal
compensation paid to DeVry Admissions Advisors in direct violation of mandatory
compensation restrictions. As the Company continued to experience significant
growth in new enrollments, its Admissions Advisors necessarily saw increased
variable compensation gains in direct violation of applicable regulations.
.
170.
As a result of the foregoing, Defendants lacked a reasonable basis for their positive
statements about the Company, the Company’s Class Period revenue and
enrollment numbers, as well as DeVry’s future business prospects.
On February 8, 2008, Morgan Stanley upgraded DeVry to “Overweight” from
“Equal-Weight,” citing the Company’s minimal exposure to the changing student lending market,
resulting from the Company’s purportedly low Title IV default rates and high starting salaries.
171.
On April 24, 2008, DeVry issued a press release reporting the Company’s financial
results for its third quarter of 2008. Explaining the reasons behind the Company’s positive financial
results and increased enrollment, the press release further stated in part:
“We are pleased with the strong performance from all our operations through the first
nine months of fiscal 2008,” said Daniel Hamburger, DeVry Inc.’s president and
chief executive officer. “Continued improvements in the new student recruiting
process and robust market demand for our high-quality programs resulted in solid
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enrollment results in the spring. These results combined with operating leverage
enabled DeVry to deliver another quarter of outstanding earnings growth.”
172.
Following issuance of the press release, on April 24, 2008, DeVry hosted a
conference call to discuss its third quarter 2008 financial results and operations. Hamburger and
Gunst participated in the call on behalf of the Company. During the call, numerous false and
misleading statements were made regarding the reasons behind DeVry’s financials and future
business prospects. These statements were designed to and did artificially inflate the Company’s
stock price. For example, Hamburger misleadingly touted DeVry’s purported high quality and
extremely positive financial results, and stated in part:
I will begin the operations review at DeVry University including its Keller Graduate
School of Management. As Rick described, we’ve been making investments in
marketing and human resources to drive growth with quality. As a result our
academic, financial, enrollment and employment outcomes are all improving. New
students were up over 12%, and total students were up more than 10% to 44,814
students. By the way, the largest class in over five years.
Total graduate course takers of 17,377 in the January 2008 session was an all-time
record, up nearly 14%. In the March session total course takers were up over 15%.
And this is
Online course takers in March were 43,889, up 25% from last year.
compared to a 2008 market growth rate of 17% according to Eduventures’
projections. So our online growth continues to outpace the market.
173.
In response to Defendants’ false and misleading statements made in the press release
and accompanying conference call, on April 25, 2008, the price of DeVry common stock increased
$1.69 per share, or 3.14%, to close at $55.49 per share.
174.
Also on April 25, 2008, while the price of DeVry common stock was artificially
inflated, Hamburger sold 16,735 shares of DeVry stock at prices between $55.44 per share and
$57.46 per share, for illicit trading proceeds totaling $945,687.
175.
On May 12, 2008, DeVry filed its quarterly report on Form 10-Q for the quarter
ended March 31, 2008, which confirmed the Company’s previously announced financial results and
was signed by Gunst and Hamburger (the “Third Quarter 2008 10-Q”). The Third Quarter 2008 10- 67 -
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Q contained required SOX certifications signed by Gunst and Hamburger stating that the Form 10-Q
did not include any material misrepresentations. Nevertheless, the Third Quarter 2008 10-Q did
contain several false and misleading statements regarding DeVry’s financials and future business
prospects, which were tied to increased and continued growth in student enrollments, including the
following:
For both the third quarter and first nine months of fiscal year 2008, revenues
increased at all three of fleVry’s business segments as a result of continued growth
in total student enrollments, improved student retention, and tuition price increases
as compared to the year ago periods. In addition, revenues increased because of
higher sales of Becker CPA review materials and expanding sales of electronic text
books (“eBooks”).
*
*
*
While DeVry University accounted for the majority of the revenue increase in this
segment, revenues at Advanced Academics Inc., which was acquired on October 31,
2007, also contributed to segment revenue growth. DeVry University tuition
revenues are the largest component of total revenues in the DeVry University
segment. The two principal factors that influence tuition revenues are enrollment
and tuition rates.
176.
The Third Quarter 2008 10-Q also provided detailed enrollment data, which included
the following “key trends”: at DeVry University, total undergraduate enrollment by term for
summer 2006 to summer 2007 through spring 2007 to spring 2008 increased by between 9.8% and
10.3%. Likewise, new student enrollment by term increased for summer 2006 to summer 2007
through spring 2007 to spring 2008 by between 9.7% and 12.1%
, and total graduate coursetaker
enrollment for July 2006 to July 2007 through March 2007 to March 2008 increased by between
11.1% and 15.2% per session . 8
177.
In further perpetrating Defendants’ fraud and purporting to describe the reasons
behind increased enrollments and financial performance, the Third Quarter 2008 10-Q continued:
8
Attached as Exhibit C are the relevant portions of the Third Quarter 2008 10-Q.
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Management believes the increased undergraduate student enrollments were most
significantly impacted by investments in marketing and recruiting, continued
strong demand for DeVry University’s online programs and a heightened focus on
the retention of existing students.
*
*
*
DeVry’s Cost of Educational Services increased 4.0% to $130.8 million during the
third quarter and grew 2.5% to $375.8 million during the first nine months of
fiscal year 2008, as compared to the year-ago periods . Cost increases were
incurred in support of the higher number of DeVry University Centers, expanding
online program enrollments and from Advanced Academics, which was acquired on
October 31, 2007. In addition, cost increases were incurred at Ross University to
both support increasing student enrollments and capacity expansion to drive future
growth . Also, Cost of Educational Services increased due to the operation of two
additional Chamberlain locations which began offering programs in March 2008.
*
Student Services and Administrative Expense increased 21.4% to $109.6 million
during the third quarter and grew by 12.9% to $304.1 million during the first nine
months of fiscal year 2008 as compared to the year-ago periods . The increase in
expenses primarily represents additional investments in advertising and recruiting
to drive and support future growth in new student enrollments . Increased new
student enrollments, as described above, at all three of DeVry’s business segments
are believed to be, in part, attributable to the higher level and effectiveness of this
spending.
178. The statements referenced in ¶¶171-172, 175-177 were materially false and
misleading when made as they represented and/or omitted facts which then existed and disclosure of
which was necessary to make the statements not false and/or misleading, for reasons set forth in
¶158 above, and as evidenced by the factual detail contained throughout this Complaint. In addition,
the statements referenced in ¶¶171-172, 175-177 were materially false and misleading when made
because they represented and/or omitted adverse facts which then existed and disclosure of which
was necessary to make the statements not false and/or misleading. The true facts, which were
known to or recklessly disregarded by each of the Defendants, in addition to those set forth in ¶158
above, were:
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.
Contrary to Defendants’ statements, DeVry’s enrollment growth was not
attributable to improvements in the new student recruiting process and robust
market demand for its high quality programs, investments in marketing, human
resources and recruiting, strong demand for online programs, the heightened focus
on the retention of existing students or the higher level and effectiveness of
spending, but instead was the result of DeVry’s illegal recruiter compensation
system extensively detailed herein.
DeVry failed to inform the market that the Company’s increased expenses tied to
additional investments in recruiting included additional illegal compensation paid to
DeVry Admissions Advisors in direct violation of mandatory compensation
restrictions. As the Company continued to experience significant growth in new
enrollments, its Admissions Advisors necessarily saw increased variable
compensation gains in direct violation of applicable regulations.
.
179.
As a result of the foregoing, Defendants lacked a reasonable basis for their positive
statements about the Company, the Company’s Class Period revenue and
enrollment numbers, as well as DeVry’s future business prospects.
On May 19, 2008, news entered the market regarding an investigation by the
Department of Justice into the Company’s recruiter compensation practices and performance
evaluations. In a press release, Defendants deflected any criticism and touted the Company’s “longstanding commitment to quality and integrity,” and told investors that “DeVry’s recruiter
compensation is structured in accordance with all governing rules and regulations.”
Thus
Defendants directly misled the market by misrepresenting the Company’s recruiting practices.
Although the price of DeVry common stock decreased $2.45, or 4.36%, from a closing price of
$56.67 on May 16, 2008 to a closing price of $54.20 per share on May 19, 2008, Defendants’ false
and misleading statements served to prevent any additional decline and to maintain the artificial
inflation in the price of DeVry’s common stock.
180.
On August 14, 2008, DeVry issued a press release reporting the Company’s “record”
financial results for its fourth quarter of 2008 and full-year ended June 30, 2008, as well as summer
2008 enrollment numbers. The press release touted record revenue tied to growing enrollment, and
stated in part:
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“Fiscal 2008 was an outstanding year, delivering record revenue and earnings.
and improving
We made excellent progress expanding student enrollments
academic quality in all of our schools,” said Daniel Hamburger, DeVry’s president
and chief executive officer.
181.
The August 14, 2008 press release also reported enrollment results for the Company’s
business segments. DeVry University reported a 19.3% increase in new summer enrollment, a
12.6% increase in total student enrollment, a 14.2% increase in total graduate coursetakers at
KGSM for July 2008, and a 15.7% increase in coursetakers for May 2008. The total number of
online undergraduate and graduate coursetakers for July 2008 increased 24.0% compared to the
same period a year ago.
182.
Following issuance of the press release, on August 14, 2008, DeVry hosted a
conference call to discuss its fourth quarter 2008 and full-year 2008 financial results and operations.
Hamburger and Gunst participated in the call on behalf of the Company. During the call, numerous
false and misleading statements regarding DeVry’s financials and future business prospects were
made that were designed to and did artificially inflate the Company’s stock price. Turning to the
Company’s fourth quarter and full-year financial results, which depended on increased enrollments,
Gunst stated in part:
With that overall perspective, let me now walk through some of the highlights of our
business segments, the details of which are provided in our earnings release. All of
our business segments delivered strong double-digit revenue growth in the quarter
and full year. The DeVry University segment revenue was up 17.6% versus last
year this quarter, with full-year growth of 15.5%, driven by continued online
expansion, improved campus enrollments and the addition of Advanced Academics.
183.
On August 27, 2008, DeVry filed its annual financial report on Form 10-K for the
year ending June 30, 2008. The financial results reported in the Form 10-K were substantially
similar to those reported in the Company’s prior press releases. The Form 10-K was signed by
Gunst and Hamburger and contained required SOX certifications signed by Gunst and Hamburger
stating that the Form 10-K did not include any material misrepresentations. Nevertheless, the Form
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10-K did contain several false and misleading statements regarding DeVry’s financials and future
business prospects, including the following statements regarding growth in student enrollment:
184.
Discussing recruiting and compensation practices, the Form 10-K, among other
things, misrepresented the legality of the Company’s practices, stating, in part:
Certain states and Canadian provinces require advisors and student recruiters to be
licensed or authorized by a particular regulatory agency. Regulations governing
student participation in U.S. federal financial assistance programs prohibit schools
from paying commissions, bonuses, or incentives to student recruiters based
directly or indirectly on the number of students they enroll. DeVry believes that its
compensation practices were designed to be in compliance with current
regulations.
In May 2008, the U.S. Department of Justice, Civil Division, working with the U.S.
Attorney for the Northern District of Illinois, requested that DeVry voluntarily
furnish documents and other information regarding its policies and practices with
respect to recruiter compensation and performance evaluation. The stated purpose of
the request was to examine whether DeVry may have submitted or caused the
submission of false claims or false statements to the U.S. Department of Education in
violation of the False Claims Act. DeVry made a timely production of documents
and continues to offer its full cooperation to the government in carrying out its
inquiry. DeVry believes that its compensation practices were designed to be in
compliance with current regulations.
185.
The Form 10-K for year ending June 30, 2008, also provided enrollment data, which
included the following “key trends”: at DeVry University, total undergraduate enrollment by term
for summer 2006 to summer 2007 through summer 2007 to summer 2008 increased by between
9.8% and 12.6% . Likewise, new student enrollment increased for summer 2006 to summer 2007
through summer 2007 to summer 2008 by between 9.7% and 19.3%,
and graduate coursetaker
enrollment for July 2006 to July 2007 through July 2007 to July 2008 increased by between
11.1% and 15.7% per session .9
9
Attached as Exhibit D are the relevant portions of the 10-K for year ending June 30, 2008.
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186.
In further perpetrating Defendants’ fraud and purporting to describe the reasons
behind increased enrollments and financial performance, the Form 10-K continued:
Management believes the increased undergraduate student enrollments were most
significantly impacted by improved marketing and recruiting efforts , continued
strong demand for DeVry University’s online programs and a heightened focus on
the retention of existing students.
*
*
*
DeVry’s Cost of Educational Services increased 3.4% to $503.1 million during
fiscal year 2008 as compared to the year-ago period. Cost increases were incurred
in support of the higher number of DeVry University Centers, expanding online
program enrollments and from Advanced Academics, which was acquired on
October 31, 2007. In addition, cost increases were incurred at Ross University to
both support increasing student enrollments and capacity expansion to drive future
growth . Also, Cost of Educational Services increased due to the operation of two
additional Chamberlain locations which began offering programs in March 2008.
*
Student Services and Administrative Expense grew by 17.7% to $422.6 million
during fiscal year 2008 as compared to the year-ago period. The increase in
expenses represented additional investments in advertising and recruiting to drive
and support future growth in new student enrollments . Increased new student
enrollments, as described above, at all three ofDeVry’s business segments are
believed to be, in part, attributable to the higher level and effectiveness of this
spending . In addition, cost increases were incurred for improved information
technology and student services. Also, expenses were higher as compared to the
year-ago periods as a result of the acquisition of Advanced Academics, which was
purchased on October 31, 2007.
187.
The statements referenced in ¶¶179-186 were materially false and misleading when
made as they represented and/or omitted facts which then existed and disclosure of which was
necessary to make the statements not false and/or misleading, for reasons set forth in ¶158 above,
and as evidenced by the factual detail contained throughout this Complaint. In addition, the
statements referenced in ¶¶179-186 were materially false and misleading when made because they
represented and/or omitted adverse facts which then existed and disclosure of which was necessary
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to make the statements not false and/or misleading. The true facts, which were known to or
recklessly disregarded by each of the Defendants, in addition to those set forth in ¶158 above, were:
DeVry’s recruiter compensation was not structured in accordance with all
governing rules and regulations. In fact, its TEACH values were meaningless and
were nothing more than a cover for DeVry’s illegal compensation policies as
corroborated by CW 3, CW 4, CW 6, CW 7, CW 11, CW 12, CW 16, CW 19,
CW 22, CW 24 and CW 25.
In response to an investigation by the Department of Justice, Defendants continued
to mislead the market and hide the existence of DeVry’s illegal compensation
system for Admissions Advisors by telling investors that DeVry’s recruiter
compensation practices were in compliance with all governing rules and
regulations.
Contrary to Defendants’ statements, DeVry’s enrollment growth was not
attributable to the higher level and effectiveness of spending nor was it driven by
continued online expansion or the addition of Advanced Academics, but instead
was the result of DeVry’s illegal recruiter compensation system extensively detailed
herein.
DeVry’s so called TEACH values were subjective factors that were manipulated on
a company-wide basis and were merely a pretext to allow Defendants to tell the
market the Company was in compliance with Title IV. In reality, Admissions
Advisors’ salaries, bonuses, promotions, demotions, pay cuts, and terminations
were based solely on hitting the student enrollment quotas that DeVry provided to
them.
.
As a result of the foregoing, Defendants lacked a reasonable basis for their positive
statements about the Company, the Company’s Class Period revenue and
enrollment numbers, as well as DeVry’s future business prospects.
188. On October 21, 2008, DeVry issued a press release announcing that the U.S.
Department of Justice had informed the Company that it declined to intervene in a lawsuit alleging
DeVry submitted false claims to the DOE in violation of the False Claims Act that was pending in
the Northern District of Illinois. The decision not to intervene came after the Department of Justice
concluded its previously-announced inquiry into the allegations. In approximately March of 2010,
DeVry settled the underlying case for $4.9 million.
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189.
On October 27, 2008, DeVry issued a press release reporting the Company’s financial
results for its first quarter 2009. Explaining the reasons behind the Company’s positive financial
results for its September 2008 session, the Company reported a 12.2% increase in DeVry University
graduate coursetakers, (including the graduate students at KGSM).
The press release also touted
increased enrollment, stating in part:
“Our strong results in the first quarter of fiscal 2009 demonstrate that we are
executing our strategic plan – increasing enrollment through improved marketing
and recruiting , as well as further diversifying our offerings with the completion of
the U.S. Education acquisition,” said Daniel Hamburger, DeVry’s president and chief
executive officer. “We continue to show sustained growth and believe that even in
tough economic times, our diversified portfolio positions us well to achieve our long
term growth goals and to maximize shareholder value.”
190.
Also on October 27, 2008, DeVry hosted a conference call to discuss its first quarter
2009 financial results and operations. Gunst and Hamburger participated in the call on behalf of the
Company. During the call, numerous false and misleading statements regarding DeVry’s financials
and future business prospects were made that were designed to and did artificially inflate the
Company’s stock price. Hamburger discussed the Company’s first quarter 2009 results and
enrollment, stating in part:
During the first quarter we continued to execute our strategic plan, delivering strong
financial results and increases in enrollment. At the same time, we invested in future
growth through enhanced academic quality, continued diversification and
investments in recruiting , marketing and technology.
191.
During the conference call, Hamburger further misled the market by highlighting
enrollment numbers, stating in part:
Our strong first quarter results were driven by solid enrollments across all our
operations, both on-site and online and our earnings benefited from continuing
operating leverage. We welcome the newest member of the DeVry family through
the acquisition of US Education, and our strategy of diversified growth is serving us
well despite the economic downturn.
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192.
On November 6, 2008, DeVry filed its quarterly report on Form 10-Q for the quarter
ended September 30, 2008, which confirmed the Company’s previously announced financial results
and was signed by Gunst and Hamburger (the “First Quarter 2009 10-Q”). The First Quarter 2009
10-Q contained required SOX certifications signed by Gunst and Hamburger stating that the Form
10-Q did not include any material misrepresentations. Nevertheless, the First Quarter 2009 10-Q did
contain several false and misleading statements regarding DeVry’s financials and future business
prospects, including the following statements which linked DeVry’s financial results to enrollment
growth:
Revenues increased at all three of DeVry’s business segments as a result of
continued growth in student enrollments and tuition price increases as compared
to the year ago period.
DeVry University
For the first quarter of fiscal year 2009, DeVry University segment revenues
increased 18.4% to $230.7 million as compared to the year ago period driven by
strong enrollment growth. While DeVry University accounted for the majority of
the revenue increase in this segment, revenues at Advanced Academics Inc., which
was acquired on October 31, 2007, also contributed to segment revenue
growth. DeVry University tuition revenues are the largest component of total
revenues in the DeVry University segment. The two principal factors that
influence tuition revenues are enrollment and tuition rates.
193.
The First Quarter 2009 10-Q also provided enrollment data, which included the
following “key trends”: at DeVry University, total undergraduate enrollment by term for fall 2006
to fall 2007 through summer 2007 to summer 2008 increased by between 10.3% and 12.6%
Likewise, new student enrollment increased for fall 2006 to fall 2007 through summer 2007 to
summer 2008 by between 10.7% and 19.3% , and graduate coursetaker enrollment for July 2007 to
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.
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July 2008 through September 2007 to September 2008 increased by between 12.2% and 14.2% per
session . 10
194.
Further perpetuating Defendants’ fraud and purporting to describe the reasons behind
increased enrollments and financial performance, the First Quarter 2009 10-Q continued:
Management believes the increased undergraduate student enrollments were most
significantly impacted by improved marketing and recruiting efforts, continued
strong demand for DeVry University’s online programs and a heightened focus on
the retention of existing students.
*
During the first quarter of fiscal year 2009, DeVry’s Cost of Educational Services
increased 15.4% to $139.6 million as compared to the year-ago period . Cost
increases were incurred in support of expanding DeVry University online and
onsite enrollments and operating a higher number of DeVry University Centers as
compared to the prior year period. In addition, higher costs were incurred to
support increasing student enrollments and capacity expansion to drive future
growth at Ross University as well as for the operation of two additional campuses at
Chamberlain which began offering programs in March 2008.
*
Student Services and Administrative Expense grew 28.0% to $117.3 million during
the first quarter of fiscal year 2009 as compared to the year-ago period . The
increase in expenses primarily represents additional investments in advertising and
.
recruiting to drive and support future growth in new student enrollments
195.
In response to Defendants’ false and misleading statements, the price of DeVry
common stock rose $3.50 per share, or 8.09%, from a closing price of $43.25 on October 23, 2008,
to close at $46.25 per share on October 24, 2008, on heavy trading volume.
196.
The statements referenced in ¶¶189-194 were materially false and misleading when
made as they represented and/or omitted facts which then existed and disclosure of which was
necessary to make the statements not false and/or misleading, for reasons set forth in ¶158 above,
10
Attached as Exhibit E are the relevant portions of the First Quarter 2009 10-Q.
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and as evidenced by the factual detail contained throughout this Complaint. In addition, the
statements referenced in ¶¶189-194 were materially false and misleading when made because they
represented and/or omitted adverse facts which then existed and disclosure of which was necessary
to make the statements not false and/or misleading. The true facts, which were known to or
recklessly disregarded by each of the Defendants, in addition to those set forth in ¶158 above, were:
•
Contrary to Defendants’ statements, DeVry’s enrollment growth was not
attributable to improvements in marketing and recruiting, strong demand for its
online programs, operating leverage or the higher level of effectiveness of spending,
but instead was the result of DeVry’s illegal recruiter compensation system
extensively detailed herein.
•
DeVry uniformly made adjustments to salary and compensation for its employees
that were based solely on the number of students recruited, admitted, enrolled, or
awarded financial aid, utilizing the purported TEACH values to conceal the truth
behind DeVry’s illegal compensation policies.
•
To the extent Defendants touted enrollment results and reported revenues that were
tied to improved recruiting, Defendants omitted the critical fact that such
“improvements,” in reality, translated to nothing more than increased payments to
Admissions Advisors that violated applicable regulations.
•
As a result of the foregoing, Defendants lacked a reasonable basis for their positive
statements about the Company, the Company’s Class Period revenue and
enrollment numbers, as well as DeVry’s future business prospects.
197. On December 4, 2008, DeVry issued a press release announcing fall 2008 enrollment
results at DeVry University, noting a 19.7% increase in new undergraduate student enrollment and
a 16.9% increase in total undergraduate enrollment.
The Company also reported a 13.7% increase
in graduate coursetakers enrolled in its master’s degree programs at DeVry University
graduate students at KGSM) for the November 2008 session.
, (including
The total of undergraduate and
graduate coursetakers increased 25.5% compared to the same session from the year before.
press release further stated in part:
“We delivered outstanding enrollment results at DeVry University in a challenging
economic environment, driven by our focus on academic quality,” said Daniel
Hamburger, president and chief executive officer of DeVry Inc. . . . We plan to
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The
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continue to make investments to support DeVry University’s strategy of improving
student retention through academic quality and customer service, increasing real
estate utilization and enhancing marketing and recruiting.”
198.
In response to Defendants’ false and misleading statements, the price of DeVry
common stock climbed $2.28 per share, or 4.06%, from a closing price of $56.09 on December 4,
2008 to close at $58.37 per share on December 5, 2008.
199.
The statements referenced in ¶197 were materially false and misleading when made
as they represented and/or omitted facts which then existed and disclosure of which was necessary to
make the statements not false and/or misleading, for reasons set forth in ¶158 above, and as
evidenced by the factual detail contained throughout this Complaint. In addition, the statements
referenced in ¶197 were materially false and misleading when made because they represented and/or
omitted adverse facts which then existed and disclosure of which was necessary to make the
statements not false and/or misleading. The true facts, which were known to or recklessly
disregarded by each of the Defendants, in addition to those set forth in ¶158 above, were:
•
Contrary to Defendants’ statements, DeVry’s outstanding enrollment results were
not the result of the Company’s focus on academic quality, but instead was the
result of DeVry’s illegal recruiter compensation system extensively detailed herein.
•
As a result of the foregoing, Defendants lacked a reasonable basis for their positive
statements about the Company, the Company’s Class Period revenue and
enrollment numbers, as well as DeVry’s future business prospects.
200.
On January 27, 2009, DeVry issued a press release reporting its financial results for
the second quarter of 2009 and six months ended December 31, 2008. The press release misled the
market by pointing to enrollment gains while omitting critical facts, stating in part:
“In these turbulent times, we are especially pleased to report these results, which
were driven by enrollment gains in the fall and our continued focus on academic
outcomes,” said Daniel Hamburger, DeVry’s president and chief executive officer.
201.
Following issuance of the press release on January 27, 2009, after the market closed,
DeVry hosted a conference call to discuss its second quarter 2009 financial results and operations.
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Gunst and Hamburger participated in the call on behalf of the Company. During the call, numerous
false and misleading statements were made regarding DeVry’s financials and future business
prospects. These statements were made designed to artificially inflate the Company’s stock price.
For example, Hamburger touted enrollment growth without revealing the truth behind those
numbers, stating in part:
We’re pleased to report that we delivered strong academic outcomes and financial
results this quarter, driven by several factors. And of course, first among them was
the double-digit enrollment growth in the fall at DeVry University.
202.
As the call continued, Gunst discussed the Company’s second quarter 2009 financial
results, stating in part:
Now, with that let me walk you through some of the key highlights of our operating
segment results, which are further detailed in the earnings release. First, revenue
within DeVry University’s segment was up 18.9% versus prior year in the quarter
and 18.7% year-to-date, driven by the strong enrollment growth, coming both from
continued online expansion and improved on-site enrollments.
203.
On February 3, 2009, while the price of DeVry stock was artificially inflated,
Hamburger sold 39,999 shares of DeVry stock at $57.50 per share, for trading proceeds of
$2,299,943.
204.
On February 6, 2009, DeVry filed its quarterly report on Form 10-Q for the quarter
ended December 31, 2008, which confirmed the Company’s previously reported financial results and
was signed by Gunst and Hamburger (the “Second Quarter 2009 10-Q”). The Second Quarter 2009
10-Q contained the required SOX certifications signed by Gunst and Hamburger stating that the
Form 10-Q did not include any material misrepresentations. Despite that, the Second Quarter 2009
10-Q did indeed mislead the market, and contained false statements regarding the Company’s
revenue growth, which was tied to enrollment increases, stating in part:
For both the second quarter and first six months of fiscal year 2009, revenues
increased at all three of DeVry’s business segments as a result of continued growth
in student enrollments and tuition price increases as compared to the year ago
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period. In addition, U.S. Education, which was acquired on September 18, 2008,
contributed to the revenue growth in the second quarter and first six months of fiscal
year 2009.
*
*
*
DeVry University segment revenues increased 18.9% to $253.7 million in the
second quarter, and rose 18.7% to $484.3 million for the first six months of fiscal
2009 as compared to the year ago periods driven by strong enrollment
growth. While DeVry University accounted for the majority of the revenue increase
in this segment, revenues at Advanced Academics Inc., which was acquired on
October 31, 2007, also contributed to segment revenue growth. DeVry University
tuition revenues are the largest component of total revenues in the DeVry
University segment. The two principal factors that influence tuition revenues are
enrollment and tuition rates.
205.
The Second Quarter 2009 10-Q also provided enrollment data, which included the
following “key trends”: at DeVry University, total undergraduate enrollment by term for spring
2007 to spring 2008 through fall 2007 to fall 2008 increased by between 10.3% and 16.9%.
Likewise, new student enrollment increased for spring 2007 to spring 2008 through fall 2007 to
fall 2008 by between 12.1% and 19.7% , and graduate coursetaker enrollment for July 2007 to July
2008 through November 2007 to November 2008 increased by between 12.2% and 14.2% per
session. 11
206.
Further perpetuating Defendants’ fraud and purporting to describe the reasons behind
increased enrollments and financial performance, the Second Quarter 2009 10-Q continued:
Management believes the increased undergraduate student enrollments were most
significantly impacted by improved marketing and recruiting efforts, continued
strong demand for DeVry University’s online programs and a heightened focus on
the retention of existing students.
*
DeVry’s Cost of Educational Services increased 34.9% to $167.1 million during
the second quarter and grew 25.2% to $306.7 million during the first six months of
11
Attached as Exhibit F are the relevant portions of the Second Quarter 2009 10-Q.
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fiscal year 2009 as compared to the year-ago periods . U.S. Education, which was
acquired by DeVry on September 18, 2008, accounted for more than half of the
increase in Cost of Educational Services during the second quarter of fiscal 2009.
For both the second quarter and first six months of fiscal 2009, cost increases were
incurred in support of expanding DeVry University online and onsite enrollments
and operating a higher number of DeVry University Centers as compared to the prior
year periods. Also, higher costs were incurred to support increasing student
enrollments and capacity expansion to drive future growth at Ross University
.
*
Student Services and Administrative Expense grew 36.0% to $140.0 million during
the second quarter and increased 32.2% to $257.3 million during the first six
months of fiscal year 2009 as compared to the year-ago periods . U.S. Education,
which was acquired by DeVry on September 18, 2008, accounted for approximately
one-third of the increase in Student Services and Administrative Expense during the
second quarter of fiscal 2009. For both the second quarter and first six months of
fiscal 2009, the balance of the increase in expenses primarily represents additional
investments in advertising and recruiting to drive and support future growth in new
student enrollments .
207. The statements referenced in ¶¶200-202, 204-205 were materially false and
misleading when made as they represented and/or omitted facts which then existed and disclosure of
which was necessary to make the statements not false and/or misleading, for reasons set forth in
¶158 above, and as evidenced by the factual detail contained throughout this Complaint. In addition,
the statements referenced in ¶¶200-202, 204-205 were materially false and misleading when made
because they represented and/or omitted adverse facts which then existed and disclosure of which
was necessary to make the statements not false and/or misleading. The true facts, which were
known to or recklessly disregarded by each of the Defendants, in addition to those set forth in ¶158
above, were:
~
The “principal factor” that influenced tuition revenues was DeVry’s illegal
compensation plan, which drove enrollment and concealed the Company’s true
financials and future business prospects.
Contrary to Defendants’ statements, DeVry’s enrollment growth was not
attributable to improvements in marketing and recruiting, strong demand for its
online programs, or the heightened focus on the retention of existing students, but
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instead was the result of DeVry’s illegal recruiter compensation system extensively
detailed herein.
•
To the extent Defendants touted enrollment results and reported revenues that were
tied to investments in recruiting, Defendants omitted the critical fact that such
“improvements,” in reality, translated to nothing more than increased payments to
Admissions Advisors that violated applicable regulations.
•
As a result of the foregoing, Defendants lacked a reasonable basis for their positive
statements about the Company, the Company’s Class Period revenue and
enrollment numbers, as well as DeVry’s future business prospects.
208.
On February 26, 2009, Gunst participated at the Robert W. Baird & Co., Inc.
Business Solutions Conference on behalf of the Company. During the conference, Gunst misled
investors while discussing the Company’s investments in marketing and recruiting, stating:
And that’s resulted in good improvement in enrollments. This shows you the last
three years of enrollments. The blue bars being the new student growth, the gold
bars being total student enrollment improvement and see the focus on new student
growth has paid off. We saw almost 20% growth last year reporting periods and
total enrollment, which is a combination of the new students coming in and the
other eight semesters of students that are along with them have been catching up
growing to almost 17% growth in the most recent reported period.
209.
On April 23, 2009, DeVry issued a press release reporting the Company’s “ record
revenues driven by favorable enrollment trends
” and financial results for its third quarter 2009 and
nine months ended March 31, 2009. The press release touted enrollment growth, stating:
“We continued to see significant gains in enrollment, as prospective students are
attracted by our strong track record of high quality education and career
outcomes,” said Daniel Hamburger, DeVry’s president and chief executive officer.
“I am very pleased with the progress we have made in improving academic quality
across all of our schools, growing enrollment, and further diversifying our offerings.
Our strong enrollment and improved retention are providing a quality base of
revenue, which we expect will help propel future growth.”
210.
The April 23, 2009, press release gave additional, misleading detail on the
Company’s enrollment results. DeVry University reported a 15.1% increase in new spring
enrollment, an 18.8% increase in total student enrollment, a 12.1% increase in graduate
coursetakers enrolled in its master’s degree programs, (including graduate coursetakers at
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KGSM) for its January 2009 session, and a 13.8% increase for its March 2009 session.
For online
undergraduate and graduate coursetakers for its March 2009 session, DeVry University reported a
27.0% increase compared to the same session a year ago.
211.
Following issuance of the press release on April 23, 2009, after the market closed,
DeVry hosted a conference call to discuss its third quarter 2009 financial results and operations.
Gunst and Hamburger participated in the call on behalf of the Company. During the call, numerous
false and misleading statements regarding DeVry’s financials and future business prospects were
made that were designed to and did artificially inflate the Company’s stock price. For example,
Hamburger misled investors by boasting about continued enrollment growth, stating:
We are pleased to report that DeVry delivered solid academic results this quarter,
and as a result, we saw strong and steady enrollment growth at all of our schools.
*
Despite the economic difficulties, DeVry is weathering the storm better than most
with steady growth in enrollment , revenues and cash flows and a solid balance sheet.
This performance, together with our diversified platform, gives us the ability to
sustain investments in growth and quality for the long-term during good times and
bad.
212.
Gunst discussed the Company’s third quarter 2009 financial results, attributing them
to enrollment growth and stating, in part:
We continued to deliver very strong results once again in the third quarter as the
excellent results with our DeVry University and medical and healthcare segments
offset the continued softness within the professional and training segments.
*
First, revenue growth within DeVry University segment continued at a strong pace,
up 18.7% versus prior year for the quarter and year-to-date. This growth is being
driven by continued online expansion and improved on-site enrollments.
213.
Again misleading the market by praising the Company’s enrollment results,
Hamburger stated:
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Let me start here with DeVry University, including our Keller Graduate School of
Management where we experienced excellent academic outcomes and very strong
enrollment growth this quarter. At DeVry University new undergraduate student
enrollment increased 15%, while total student enrollment was up almost 19%.
214.
Commenting on new student enrollments for the fall quarter versus spring quarter,
and the reason for a slowdown in growth rates, Hamburger stated that “I think it is noise in the
machine.” Gunst added:
Yes, we have a chart that is attached in the press release that gives you the absolute
and the growth rates on new students, as well as total students, and I think the
seasonality really is what you’re looking at. The growth rate is 15% in this term on
top of a 19% growth the previous year. So I think the rate of growth is the same,
and it has been pretty consistent.
215.
In response to Defendants’ false and misleading statements, the price of DeVry
common stock rose $2.91 per share, or $7.16%, from a closing price of $41.46 on April 23, 2009, to
close at $44.46 per share on April 24, 2009.
216.
On May 7, 2009, DeVry filed its quarterly report on Form 10-Q for the quarter ended
March 31, 2009, which confirmed the Company’s previously announced financial results and was
signed by Gunst and Hamburger (the “Third Quarter 2009 10-Q”). The Third Quarter 2009 10-Q
contained the required SOX certifications signed by Gunst and Hamburger stating that the Form 10Q did not include any material misrepresentations. Nevertheless, the Third Quarter 2009 10-Q did
contain several false and misleading statements regarding DeVry’s financials and future business
prospects, including the following statements linking revenue to “continued growth in student
enrollments”:
For both the third quarter and first nine months of fiscal year 2009, revenues
increased at the respective DeVry University and Medical and Healthcare business
segments as a result of continued growth in student enrollments and tuition price
increases as compared to the year ago period.
*
*
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*
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DeVry University
While DeVry University accounted for the majority of the revenue increase in this
segment, revenues at Advanced Academics Inc. also contributed to segment revenue
growth. DeVry University tuition revenues are the largest component of total
revenues in the DeVry University segment. The two principal factors that influence
tuition revenues are enrollment and tuition rates.
217.
The Third Quarter 2009 10-Q also provided enrollment data, which included the
following “key trends”: at DeVry University, total undergraduate enrollment by term for summer
2007 to summer 2008 through spring 2008 to spring 2009 increased by between 12.6% and 18.8%.
Likewise, new student enrollment increased for summer 2007 to summer 2008 through spring
2008 to spring 2009 by between 15.1% and 19.7% , and graduate coursetaker enrollment for July
2007 to July 2008 through March 2008 to March 2009 increased by between 12.1% and 14.2% per
session. 12
218.
Further perpetuating Defendants’ fraud and purporting to describe the reasons behind
increased enrollments and financial performance, the Third Quarter 2009 10-Q continued:
Management believes the increased undergraduate student enrollments were most
significantly impacted by DeVry’s strong track record of high-quality education
and career outcomes, improved marketing and recruiting efforts, continued strong
demand for DeVry University’s online programs and a heightened focus on the
retention of existing students.
*
DeVry’s Cost of Educational Services increased 36.2% to $178.2 million during
the third quarter and grew 29.1% to $484.9 million during the first nine months of
fiscal year 2009 as compared to the year-ago periods . U.S. Education, which was
acquired by DeVry on September 18, 2008, accounted for more than half of the
increase in Cost of Educational Services during both the third quarter and first nine
months of fiscal 2009. For both the third quarter and first nine months of fiscal
2009, cost increases were incurred in support of expanding DeVry University
online and onsite enrollments and operating a higher number of DeVry University
Centers as compared to the prior year periods. Also, higher costs were incurred to
12
Attached as Exhibit G are the relevant portions of the Third Quarter 2009 10-Q.
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support increasing student enrollments and capacity expansion to drive future
growth at Ross University .
*
*
*
Student Services and Administrative Expense grew 25.9% to $137.9 million during
the third quarter and increased 29.9% to $395.2 million during the first nine
months of fiscal year 2009 as compared to the year-ago periods . U.S. Education,
which was acquired by DeVry on September 18, 2008, accounted for nearly one-half
and one-third, respectively, of the increases in Student Services and Administrative
Expense during the third quarter and first nine months of fiscal 2009. For both the
third quarter and first nine months of fiscal 2009, the balance of the increase in
expenses primarily represented additional investments in advertising and recruiting
to drive and support future growth in new student enrollments .
219. The statements referenced in ¶¶208-214, 216-218 were materially false and
misleading when made as they represented and/or omitted facts which then existed and disclosure of
which was necessary to make the statements not false and/or misleading, for reasons set forth in
¶158 above, and as evidenced by the factual detail contained throughout this Complaint. In addition,
the statements referenced in ¶¶208-214, 216-218 were materially false and misleading when made
because they represented and/or omitted adverse facts which then existed and disclosure of which
was necessary to make the statements not false and/or misleading. The true facts, which were
known to or recklessly disregarded by each of the Defendants, in addition to those set forth in ¶158
above, were:
•
The principal factor driving DeVry’s revenue was its illegal compensation policies
which were masked by its farcical TEACH values.
•
The Company’s gains in enrollment were not the result of students being attracted
to DeVry’s strong track record of high quality education and career outcomes, but
were instead the result of the need for Admissions Advisors to enroll students at any
cost in order to obtain compensation in violation of compensation regulations.
•
To the extent Defendants discussed an increase in costs related to future growth at
DeVry, those costs included increased payments to Admissions Advisors that
violated applicable regulations.
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.
220.
As a result of the foregoing, Defendants lacked a reasonable basis for their positive
statements about the Company, the Company’s Class Period revenue and
enrollment numbers, as well as DeVry’s future business prospects.
On June 10, 2009, Hamburger and Gunst participated at the William Blair &
Company Growth Stock Conference on behalf of the Company. During the conference, Hamburger
discussed DeVry’s strategy and operations, and made several false and misleading statements,
including the following:
Third, to do a better job of telling the world what we are doing as we complete that
turn around process, we are now investing more in marketing and recruiting with
the confidence we are getting the return on those investments and that’s this focus
on the number one career oriented university based on those wonderful statistics of
nine out of ten DeVry graduates employed in the field of study. You can see that the
investments we are making there have been paying off. The most recent statistic
the blue shows the growth in new students year over year for DeVry University
undergraduate at 15.1% last reporting period, the yellow showing the total
enrollment growth at 18.8%. So it’s working and we are going to continue that
focus on achieving the full potential at DeVry.
221.
Near the end of the June 10, 2009 call, Hamburger addressed the possibility of
changes to incentive compensation for Admissions Advisors being considered by the DOE. In his
statements, Hamburger misled the market regarding DeVry’s compensation structure, and stated in
part:
Then in terms of how we incentivize the admission advis[or]s, through training,
through management from that a compensation perspective which I’m sure is the
other part of where you are going. They have a base salary and their salary can be
adjusted twice a year up or down. This is part of what’s known as the Safe Harbor
Rubric that the Department of Education put in place back in 2002. Is there going
to be a mandate to have there, their evaluation be also driven by the retention of
the students that they recruit. Not just recruit a new student, but how do they
retain, and graduation. That’s not mandated but it is allowed and we already do
that. So we do evaluate the job that they do based on the retention and the
graduation of the students. So we actually track that on a per recruiter basis
haven’t that data and that’s part of the evaluation as well. No, we don’t expect any
impact on our ability to recruit students as a result of any changes that might come
about. If there are any changes.
We don’t know if there will be changes. We just know that the Department has said,
these rules were put in place back in 2002. Haven’t really been examined since then,
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time to take a fresh look. That’s a normal part of how the department of education
and every other department does business. They do these sessions on an ongoing
basis. By the way, we just completed two of these, they call negotiated rule making
sessions, one on student finance and one on accreditation and by the way our
organization had representatives appointed to both the those bodes [sic] which is very
unusual. So we have very good relationships, very productive ongoing dialogue
with all the key players at the Department of Education, as well as in Congress and
so forth .
222.
On August 13, 2009, DeVry issued a press release reporting its “record” earnings for
its fourth quarter 2009 and full-year ended June 30, 2009. The press release again touted enrollment
growth and financial results, while omitting key information, and stated in pertinent part:
“Fiscal 2009 was a year of accomplishment for DeVry,” said Daniel Hamburger,
DeVry’s president and chief executive officer. “We made great strides in executing
our strategic plan and expanding into educational areas that are in high demand.
We also continued investing in our brands, programs and infrastructure. As a
result, we experienced strong enrollment growth, improved retention throughout
the year, and delivered record financial results.”
223.
The August 13, 2009, press release also reported enrollment results for DeVry
University, (including graduate coursetakers at KGSM) and USEC. DeVry University reported a
14.8% increase in new undergraduate enrollments and a 21.9% increase in total student
enrollment compared to the prior year. Total graduate enrollment, (including graduate
coursetakers at KGSM), increased 13.8% for its May 2009 session, and a 12.3% for its July 2009
session, compared to the same sessions from the year before.
Additionally, the total number of
online undergraduate and graduate coursetakers increased a record 26.6% for its July 2009
session compared to the same session from the year before.
224.
Also on August 13, 2009, DeVry issued a press release announcing that it recently
renamed and repositioned its segments. The four reporting segments changed to: (1) Business,
Technology and Management, which includes DeVry University and KGSM; (2) Medical and
Healthcare, which includes Chamberlain College of Nursing, Ross University, and U.S. Education,
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including Apollo College and Western Career College; (3) Professional Education; and (4) Other
Educational Services, which includes Advanced Academics and Fanor.
225.
Following issuance of the press release on August 13, 2009, after the market closed,
DeVry hosted a conference call to discuss its fourth quarter 2009 and full-year financial results and
operations. Gunst and Hamburger participated in the call on behalf of the Company. During the
call, numerous false and misleading statements were made regarding DeVry’s financials and future
business prospects that were designed to and did artificially inflate the Company’s stock price. For
example, Hamburger discussed the Company’s fourth quarter and full-year financial results and
stated, in part:
This was truly a year of accomplishment at DeVry. We continued to enhance
academic quality, which led to outstanding enrollment growth and, in turn,
improved financial performance.
226.
Gunst discussed the Court’s recent dismissal of a lawsuit against DeVry, stating,
“finally, and most importantly, DeVry did nothing wrong, did not violate the False Claims Act,
and our recruiter compensation system has been and continues to be fully compliant.”
227.
Gunst further misled the market when he discussed the Company’s fourth quarter
results, stating:
Revenue growth within the Business Technology and Management segment was
up 18.8% versus last year -- for the year, and 21.6% in the fourth quarter, driven
by continued online expansion and improved on-site enrollments. Operating
income was up about 57% for the year and nearly 150% in the quarter, excluding
the discrete items, driven primarily by improved operating leverage from
enrollment growth.
228.
As the call continued, Hamburger again touted the Company’s enrollment growth and
the so-called value of a DeVry education, stating in part:
I won’t reiterate the enrollment figures that are found in the press release. Let me
simply say that the very strong enrollment growth across all of our schools
demonstrates the value that prospective students see in the education they receive
at one of DeVry’s institutions. And moreover, we saw improved retention, which
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showed that the quality of our programs is meeting or exceeding our students’
expectations.
229.
On August 26, 2009, DeVry filed its annual financial report on Form 10-K for the
year ending June 30, 2009. The financial results reported in the Form 10-K were substantially
similar to those reported in the Company’s prior press releases. The Form 10-K was signed by
Gunst and Hamburger and contained required SOX certifications sign by Gunst and Hamburger
stating that the Form 10-K did not include any material misrepresentations. Nevertheless, the Form
10-K did contain several false and misleading statements regarding DeVry’s financials and future
business prospects, including the following statements regarding enrollment trends:
Total undergraduate enrollment in summer 2009 reached a record high of 55,979
students, an increase of 21.9% compared to 45,907 in the previous summer. There
were 17,991 coursetakers for the summer 2009 term in DeVry University’s
graduate programs, including its Keller Graduate School of Management,
representing an increase of 12.3% over the prior year. Coursetaker enrollment in
DeVry University online program offerings in summer 2009 was 56,321, an
increase of 26.6% over the prior year. The term coursetaker refers to the number of
courses taken by a student. Thus, one student taking two courses is counted as two
coursetakers.
230.
Discussing student recruiting and admissions, the annual report falsely claimed
DeVry’s compensation practices for Admission Advisors satisfied applicable regulations:
Certain states and Canadian provinces require advisors and student recruiters to be
licensed or authorized by a particular regulatory agency. Regulations governing
student participation in U.S. federal financial assistance programs prohibit schools
from paying commissions, bonuses, or incentives to student recruiters based directly
or indirectly on the number of students they enroll. DeVry University’s
compensation practices have been designed to be in compliance with current
regulations.
231.
Tying revenue growth to enrollment, the Form 10-K continued:
Revenues increased at all four of DeVry’s business segments as a result of
continued growth in total student enrollments, improved student retention and
tuition price increases. In addition, U.S. Education, which was acquired on
September 18, 2008, and Fanor, which was acquired on April 1, 2009, contributed a
total of $150.7 million of revenue growth in fiscal year 2009. The revenue growth
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rate for Becker Professional Education slowed significantly during fiscal year 2009
due to the economic downturn.
Business, Technology and Management
During fiscal year 2009, Business, Technology and Management segment
revenues increased by 18.8% to $989.5 million as compared to fiscal year 2008
driven primarily by strong enrollment growth . The Business, Technology and
Management segment is comprised solely of DeVry University. The two principal
factors that influence revenues are enrollment and tuition rates.
232.
The Form 10-K for year ending June 30, 2009, also provided enrollment data, which
included the following “key trends”: at DeVry University, total undergraduate enrollment by term
for summer 2007 to summer 2008 through summer 2008 to summer 2009 increased by between
12.6% and 21.9% . Likewise, new student enrollment increased for summer 2007 to summer 2008
through summer 2008 to summer 2009 by between 15.1% and 19.7%,
and graduate coursetaker
enrollment for July 2007 to July 2008 through July 2008 to July 2009 increased by between
12.1% and 14.2% per session . 13
233.
Purporting to describe the reasons behind increased enrollments and financial
performance, the Form 10-K for year ending June 30, 2009 continued:
Management believes the increased undergraduate student enrollments were most
significantly impacted by DeVry’s strong track record of high-quality education
and career outcomes, improved marketing and recruiting efforts, continued strong
demand for DeVry University’s online programs and a heightened focus on the
retention of existing students.
*
*
*
DeVry’s Cost of Educational Services increased 33.1% to $669.7 million during
fiscal year 2009 as compared to the prior year . U.S. Education, which was acquired
by DeVry on September 18, 2008, and Fanor, which was acquired on April 1, 2009
accounted for more than half of the increase in Cost of Educational Services during
fiscal year 2009. Cost increases were also incurred in support of expanding DeVry
University online and onsite enrollments and operating a higher number of DeVry
13
Attached as Exhibit H are the relevant portions of the 10-K for year ending June 30, 2009.
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University locations as compared to the prior year. In addition, higher costs were
incurred to support increasing student enrollments and capacity expansion to drive
future growth at Ross University .
*
*
*
Student Services and Administrative Expense grew 29.7% to $548.1 million during
fiscal year 2009 as compared to the prior year . The fiscal year 2009 acquisitions of
U.S. Education and Fanor accounted for nearly one-third of the increase in Student
Services and Administrative Expense. The balance of the increase in expenses
primarily represented additional investments in advertising and recruiting to drive
and support future growth in new student enrollments .
234. The statements referenced in ¶¶220-233 were materially false and misleading when
made as they represented and/or omitted facts which then existed and disclosure of which was
necessary to make the statements not false and/or misleading, for reasons set forth in ¶158 above,
and as evidenced by the factual detail contained throughout this Complaint. In addition, the
statements referenced in ¶¶220-233 were materially false and misleading when made because they
represented and/or omitted adverse facts which then existed and disclosure of which was necessary
to make the statements not false and/or misleading. The true facts, which were known to or
recklessly disregarded by each of the Defendants, in addition to those set forth in ¶158 above, were:
•
Defendants lacked any legitimate basis by which to reassure the market that they
did not expect new regulations to impact the Company’s compensation of its
Admission Advisors. Defendants knew that DeVry’s incentive-compensation
policy already violated existing Title IV regulations, meaning that it would
definitely violate any of the more stringent regulations that were proposed. Indeed,
as alleged throughout this Complaint, DeVry was a sales machine that operated on
the basis of quotas and incentive compensation for its sales force that was solely
tied to meeting or exceeding quotas. As detailed by numerous confidential
witnesses herein, including CW 1, CW CW 3, CW 4, CW 6, CW 7, CW 8, CW 9,
CW 12, CW 13, CW 15, CW 16, CW 19, the only method by which Admissions
Advisors were evaluated was whether they met or exceeded quotas, and if quotas
were not met, those Admissions Advisors knew they would be fired.
•
Contrary to Defendants’ statements, DeVry’s strong track record of high-quality
education and student outcomes, improved marketing and recruiting efforts, strong
demand for its online programs, or the heightened focus on the retention of existing
students, but instead was the result of DeVry’s illegal recruiter compensation
system extensively detailed herein.
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.
To the extent Defendants touted enrollment results and reported revenues that were
tied to investments that were “paying off” such investments were, in reality,
investments of monies used to pay illegal compensation to its Admissions Advisors
in violation of applicable regulations.
Contrary to Defendants’ statements, DeVry’s payments to its Admissions Advisors
were not within the “Safe Harbor Rubric” and its TEACH values were manipulated
to provide cover for and conceal illegal compensation.
.
.
235.
Part of Defendants’ “investments” in its brands, programs and infrastructure was, in
reality, money illegally paid as incentive compensation to its Admissions Advisors.
As a result of the foregoing, Defendants lacked a reasonable basis for their positive
statements about the Company, the Company’s Class Period revenue and
enrollment numbers, as well as DeVry’s future business prospects.
On September 17, 2009, Hamburger participated at the BMO Capital Markets School
Education Conference on behalf of the Company. Describing how DeVry was superior to
“traditional academia,” Hamburger misleadingly continued:
And then to increase our investments in marketing and recruiting and tell the world
about the success of DeVry University emphasizing the fact that DeVry is the
career University, those statistics that I mentioned earlier. And the strategy is
working. At DeVry University our enrollment was up a little over 21% this past
year on the undergraduate side about 12% at the Keller Graduate School of
Management. So that’s strategy number one.
236.
On October 15, 2009, while the price of DeVry stock was artificially inflated,
Hamburger sold 1,200 shares of DeVry stock at $57.52 per share for trading proceeds of $69,024.
237.
On October 27, 2009, DeVry issued a press release reporting “record” earnings for its
first quarter 2010 and enrollment results for Ross University and DeVry University. DeVry
University reported a 15.2% increase in total graduate coursetakers at DeVry University,
(including graduate coursetakers at KGSM). The press release further touted enrollment growth
and stated in part:
“Our financial results this quarter were driven largely by exceptional revenue
growth,” said Daniel Hamburger, DeVry’s president and chief executive officer.
“Our institutions continue to experience strong enrollment and student retention, as
evidenced by our results at Keller, Ross and Fanor. These financial results provide
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the resources for us to continue to make investments that enhance academic quality,
improve student services, and expand access to education.”
238.
Following issuance of the press release on October 27, 2009, after the market closed,
DeVry hosted a conference call to discuss its first quarter 2010 financial results and operations.
Gunst and Hamburger participated in the call on behalf of the Company. During the call, numerous
false and misleading statements regarding DeVry’s financials and future business prospects were
made that were designed to and did artificially inflate the Company’s stock price. For example,
Hamburger misleadingly discussed the Company’s “focus on academic quality” and increased
enrollment numbers, stating in part:
Now, during the first quarter our focus on academic quality continued to pay off in
the form of higher student enrollment and increased retention. From a financial
perspective margins increased largely as a result of the strong revenue growth and
we continued to invest for the future in online and geographic expansion as well as
in recruiting and branding and in technology.
239.
Expanding on the Company’s financial results and enrollment numbers, Gunst stated
in part:
However, at the same time, revenue and associated earnings and margins came in
stronger than anticipated, thanks primarily to DeVry University.
Here, as we
entered the fiscal year, we have seen a bit of softness in application volume for the
September class. Due to some hard work at DeVry University and improved
conversions, start rates and retention, we managed our way back to our plan and even
exceeded it. We also had some delayed timing on certain marketing activities, further
helping DeVry University margins in the quarter.
In addition, Apollo College and Western Career College enrollment results
continued to benefit from the softer economy, leading to the upsides .
240.
On October 28, 2009, while the price of DeVry stock was artificially inflated,
Hamburger sold 15,432 shares of DeVry stock at $57.56 per share, for trading proceeds of $888,266.
241.
On November 5, 2009, DeVry filed its quarterly report on Form 10-Q for the quarter
ending September 30, 2009, which confirmed the Company’s previously reported financial results
and was signed by Gunst and Hamburger (the “First Quarter 2010 10-Q”). The First Quarter 2010
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10-Q contained the required SOX certifications signed by Gunst and Hamburger stating that the
Form 10-Q did not include any material misrepresentations. Nevertheless, the First Quarter 2010
10-Q misleadingly touted revenue and enrollment increases, stating:
Revenues increased at DeVry’s respective Business, Technology and Management;
Medical and Healthcare; and Other Educational Services segments as a result of
continued growth in total student enrollments , improved student retention and
tuition price increases. In addition, U.S. Education, which was acquired on
September 18, 2008, and Fanor, which was acquired on April 1, 2009, contributed to
the revenue growth in the first quarter of fiscal year 2010. Professional Education
segment revenues declined during the quarter due to the impact of the economic
downturn on the accounting and finance professions.
Business, Technology and Management
During first quarter of fiscal year 2010, Business, Technology and Management
segment revenues increased by 23.9% to $283.5 million as compared to the yearago quarter driven primarily by strong enrollment growth and improved retention.
The Business, Technology and Management segment is comprised solely of DeVry
University. The two principal factors that influence revenues are enrollment and
tuition rates.
242.
The First Quarter 2010 10-Q also provided enrollment data, which included the
following “key trends”: at DeVry University, total undergraduate enrollment by term for fall 2007
to fall 2008 through summer 2008 to summer 2009 increased by between 16.9% and 21.9%.
Likewise, new student enrollment increased for fall 2007 to fall 2008 through summer 2008 to
summer 2009 by between 14.8% and 19.7%,
and graduate coursetaker enrollment for July 2008 to
July 2009 through September 2008 to September 2009 increased by between 12.3% and 15.2% per
session . 14
243.
Purporting to describe the reasons behind increased enrollments and financial
performance, the First Quarter 2010 10-Q continued:
14
Attached as Exhibit I are the relevant portions of the First Quarter 2010 10-Q.
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Management believes the increased undergraduate student enrollments were most
significantly impacted by DeVry’s strong track record of high-quality education
and career outcomes, continued strong demand for DeVry University’s online
programs and improved retention of existing students.
*
*
*
DeVry’s Cost of Educational Services increased 40.7% to $196.5 million during
the first quarter of fiscal year 2010 as compared to the year-ago quarter . U.S.
Education, which was acquired by DeVry on September 18, 2008, and Fanor, which
was acquired on April 1, 2009 accounted for more than half of the increase in Cost of
Educational Services during the first quarter of fiscal year 2010. Cost increases were
also incurred in support of expanding DeVry University online and onsite
enrollments and operating a higher number of DeVry University locations as
compared to the prior year. In addition, higher costs were incurred to support
increasing student enrollments and capacity expansion to drive future growth at
Ross University .
*
*
*
Student Services and Administrative Expense grew 32.4% to $155.2 million during
the first quarter of fiscal year 2010 as compared to the year-ago quarter . The fiscal
year 2009 acquisitions of U.S. Education and Fanor accounted for more than onethird of the increase in Student Services and Administrative Expense. The balance
of the increase in expenses primarily represented additional investments in
advertising and recruiting to drive and support future growth in new student
enrollments . In addition, cost increases were incurred in information technology and
student services.
244. The statements referenced in ¶¶235, 237-239, 241-243 were materially false and
misleading when made as they represented and/or omitted facts which then existed and disclosure of
which was necessary to make the statements not false and/or misleading, for reasons set forth in
¶158 above, and as evidenced by the factual detail contained throughout this Complaint. In addition,
the statements referenced in ¶¶235, 237-239, 241-243 were materially false and misleading when
made because they represented and/or omitted adverse facts which then existed and disclosure of
which was necessary to make the statements not false and/or misleading. The true facts, which were
known to or recklessly disregarded by each of the Defendants, in addition to those set forth in ¶158
above, were:
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•
Contrary to Defendants’ statements, DeVry’s revenue was not being driven by its
strong track record of high-quality education and student outcomes, improved
marketing and recruiting efforts, strong demand for its online programs, or the
heightened focus on the retention of existing students. Instead, it was the result of
DeVry’s illegal recruiter compensation system extensively detailed herein.
•
DeVry’s increased expenses included additional illegal compensation paid to
DeVry Admissions Advisors in direct violation of mandatory compensation
restrictions. As the Company continued to experience significant growth in new
enrollments, its Admissions Advisors necessarily saw increased variable
compensation gains in direct violation of applicable regulations.
•
As a result of the foregoing, Defendants lacked a reasonable basis for their positive
statements about the Company, the Company’s Class Period revenue and
enrollment numbers, as well as DeVry’s future business prospects.
245.
On November 29, 2009, the Associated Press Online , published an article entitled,
“AP Impact: For-Profit colleges haul in gov’t aid.” The article discussed the surge in income that
the for-profit sector was receiving from the U.S. government as a result of the increase in the
enrollment of low-income students. The article stated, in relevant part:
Last year, the five institutions that received the most federal Pell Grant dollars were
all for-profit colleges, collecting over $1 billion among them. That was two and a
half times what those schools hauled in just two years prior, the AP found, analyzing
Department of Education data on disbursements from the Pell program,
Washington’s main form of college aid to the poor.
This year, the trend is accelerating: In the first quarter after the maximum Pell Grant
was increased last July 1, Washington paid out 45 percent more through the program
than during the same period a year ago, the AP found. But the amount of dollars
heading to for-profit, or “proprietary,” schools is up even more about 67 percent.
*
*
*
But critics say the increased federal aid has unleashed a new gold rush. They
complain the industry has too many incentives simply to enroll students and tap the
spigot from Washington and not enough to make sure students succeed.
246.
On December 8, 2009, DeVry issued a press release reporting DeVry University
enrollment results for fall 2009. The Company reported a 22.7% increase in total enrollment, a
19.4% increase in new student enrollment, a 16.5% increase in coursetakers at KGSM, and a
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22.5% increase an online undergraduate and graduate takers for the November 2009 session.
Hamburger commented on the results, in pertinent part, as follows:
“ We are quite pleased with the enrollment growth and retention for all of our
schools, which experienced strong demand across all programs, from technology to
business to healthcare, and delivery modalities, from campuses to online” said
Daniel Hamburger, president and chief executive officer of DeVry Inc. “We expect
that DeVry’s diversified array of educational offerings will continue to serve us well
in both good and bad economic times.”
247.
The statements referenced in ¶246 were materially false and misleading when made
as they represented and/or omitted facts which then existed and disclosure of which was necessary to
make the statements not false and/or misleading, for reasons set forth in ¶158 above, and as
evidenced by the factual detail contained throughout this Complaint.
248.
In response to Defendants’ false and misleading statements, the price of DeVry
common stock rose $2.94 per share, or 5.42%, from a closing price of 54.29 per share on December
8, 2009, to close at $57.23 per share on December 9, 2009.
249.
From December 9, 2009 through December 14, 2009, while the price of DeVry stock
was artificially inflated, Hamburger sold 50,188 shares of DeVry stock at prices between $57.50 per
share and $57.78 per share, for trading proceeds totaling $2,891,885.
250.
Following issuance of a press release on January 26, 2010 reporting results for
DeVry’s second quarter 2010 and six months ended December 31, 2009, after the market closed,
DeVry hosted a conference call to discuss its second quarter 2010 financial results and operations.
Gunst and Hamburger participated in the call on behalf of the Company. During the call, numerous
false and misleading statements regarding DeVry’s financials and future business prospects were
made that were designed to and did artificially inflate the Company’s stock price. For example,
Hamburger discussed DeVry’s increased enrollments while omitting key information, stating in part:
So we are pleased to announce that the continued execution of our growth and
diversification strategy and our focus on investing in academic quality has produced
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successful student outcomes and another quarter of strong financial results. The
increase that we saw in enrollments in December translated into exceptional
revenue growth in the quarter, which drove margin improvement and record
earnings. At the same time, we continued to invest in our program in student
services to drive future growth.
*
*
*
Our confidence is bolstered by two factors. The first, our operating philosophy,
namely that quality leads to growth. At DeVry our institutions educate students for
positions across a variety of industries, but they have one thing in common. Each
provides high-quality programs and services to our students. And as we continue to
invest in quality, academic outcomes improve. This continued success of our
students drives enrollment and retention, which leads to financial growth.
251.
Gunst further touted how the Company’s results were “driven by excellent
enrollment growth and retention results across our schools . . . .”
252.
Continuing, Gunst linked the Company’s financial performance to enrollment growth,
stating in part:
First, the business technology and management segment achieved very strong topand bottom-line results. Revenue was up 26% versus prior year in the quarter and
25% year-to-date, driven by the strong enrollment growth
and increased retention
driven by our focus on student services.
253.
Discussing how the Company’s enrollment results had positioned the Company’s
future business prospects for 2010, Hamburger stated:
Let me begin the operating review with our Business, Technology and Management
segment, which is DeVry University, and its Keller Graduate School of Management.
And since we didn’t have a conference call in December when we reported the fall
enrollment, I would like to comment on the strong growth that DeVry University
experienced during that period with new undergraduate enrollment of more than
19% and total undergraduate enrollment rising nearly 23%. These results and our
continued strong execution position us well for the remainder of 2010.
*
At Keller Graduate School of Management, total course takers in the November
session increased more than 16.5% from a year ago.
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254.
As the call continued, Hamburger addressed the Negotiated Rulemaking proceedings,
specifically gainful employment and the Company’s debt service to income ratio, and misled the
market by pointing to the so-called high ROI DeVry claimed to provide for its students.
255.
In response to Defendants’ false and misleading statements, the price of DeVry
common stock rose $7.15 per share, or 12.7%, from a closing price of $56.17 on January 26, 2010,
to close at $63.32 per share on January 27, 2010, on heavy trading volume.
256.
On February 4, 2010, DeVry filed its quarterly report on Form 10-Q for the second
quarter ended December 31, 2009, which confirmed the Company’s previously reported financial
results and was signed by Gunst and Hamburger (the “Second Quarter 2010 10-Q”). The Second
Quarter 2010 10-Q contained the required SOX certifications signed by Gunst and Hamburger
stating that the Form 10-Q did not include any material misrepresentations. Nevertheless, the
Second Quarter 2010 10-Q misled the market as to DeVry’s financial results and the reasons behind
enrollment growth. For example, it stated:
For both the second quarter and first six months of fiscal year 2010, revenues
increased at fleVry’s respective Business, Technology and Management; Medical
and Healthcare; and Other Educational Services segments as a result ofcontinued
growth in total student enrollments , improved student retention and tuition price
increases. In addition, U.S. Education, which was acquired on September 18, 2008,
and Fanor (DeVry Brasil), which was acquired on April 1, 2009, contributed to the
revenue growth in the first six months of fiscal year 2010. Professional Education
segment revenues declined during both the second quarter and first six months of
fiscal year 2010 due to the impact of the economic downturn on the accounting and
finance professions.
Business, Technology and Management
Business, Technology and Management segment revenues increased 25.6% to
$313.3 million in the second quarter and rose 24.8% to $596.8 million for the first
six months of fiscal year 2010 as compared to the year-ago periods driven
primarily by strong enrollment growth, improved retention
and tuition price
increases. The Business, Technology and Management segment is comprised solely
of DeVry University. The two principal factors that influence revenues are
enrollment and tuition rates.
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257.
The Second Quarter 2010 10-Q also provided enrollment data, which included the
following “key trends”: at DeVry University, total undergraduate enrollment by term for spring
2008 to spring 2009 through fall 2008 to fall 2009 increased by between 18.8% and 22.7%.
Likewise, new student enrollment increased for spring 2008 to spring 2009 through fall 2008 to
fall 2009 by between 14.8% and 19.4% , and graduate coursetaker enrollment for July 2008 to July
2009 through November 2008 to November 2009 increased by between 12.3% and 16.5% per
session. 15
258.
Purporting to describe the reasons behind increased enrollments and financial
performance, the Second Quarter 2010 10-Q continued:
Management believes the increased undergraduate student enrollments were most
significantly impacted by DeVry’s strong track record of high-quality education
and academic outcomes, continued strong demand for DeVry University’s online
programs and improved retention of existing students.
*
*
*
DeVry’s Cost of Educational Services increased 19.7% to $200.0 million during
the second quarter and grew 29.3% to $396.4 million for the first six months of
fiscal year 2010 as compared to the year-ago period . U.S. Education, which was
acquired by DeVry on September 18, 2008, and DeVry Brasil, which was acquired
on April 1, 2009 accounted for more than half of the increase in Cost of Educational
Services during the first six months of fiscal year 2010. For both the second quarter
and first six months of fiscal year 2010, cost increases were also incurred in
support of expanding DeVry University online and onsite enrollments and
operating a higher number of DeVry University locations as compared to the prior
year. In addition, higher costs were incurred to support increasing student
enrollments and the higher cost of medical clinical rotations for Ross University .
*
*
*
Student Services and Administrative Expense grew 17.3% to $164.1 million during
the second quarter and increased 24.1% to $319.4 million in the first six months of
fiscal year 2010 as compared to the year-ago quarter. The fiscal year 2009
acquisitions of U.S. Education and DeVry Brasil accounted for nearly one-third of
15
Attached as Exhibit J are the relevant portions of the Second Quarter 2010 10-Q.
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the increase in Student Services and Administrative Expense for the first six months
of fiscal year 2010. For both the second quarter and first six months of fiscal year
2010, the balance of the increase in expenses primarily represented additional
investments in advertising and recruiting to drive and support future growth in new
student enrollments .
259.
The statements referenced in ¶¶250-254, 256-258 were materially false and
misleading when made as they represented and/or omitted facts which then existed and disclosure of
which was necessary to make the statements not false and/or misleading, for reasons set forth in
¶158 above, and as evidenced by the factual detail contained throughout this Complaint. In addition,
the statements referenced in ¶¶250-254, 256-258 were materially false and misleading when made
because they represented and/or omitted adverse facts which then existed and disclosure of which
was necessary to make the statements not false and/or misleading. The true facts, which were
known to or recklessly disregarded by each of the Defendants, in addition to those set forth in ¶158
above, were:
•
DeVry’s enrollment growth was not driven by the success of DeVry’s students, the
Company’s strong track record of high-quality education and academic outcomes,
strong demand for its online programs, or the heightened focus on the retention of
existing students, but instead was the result of DeVry’s illegal recruiter
compensation system extensively detailed herein.
•
DeVry’s increased expenses included additional illegal compensation paid to
DeVry Admissions Advisors in direct violation of mandatory compensation
restrictions. As the Company continued to experience significant growth in new
enrollments, its Admissions Advisors necessarily saw increased variable
compensation gains in direct violation of applicable regulations.
•
As a result of the foregoing, Defendants lacked a reasonable basis for their positive
statements about the Company, the Company’s Class Period revenue and
enrollment numbers, as well as DeVry’s future business prospects.
260.
On February 8, 2010, Gunst participated at the Deutsche Bank Securities Small and
Mid Cap Conference on behalf of the Company. During the conference, Gunst purported to discuss
recruiter compensation, stating:
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Again I still think it’s premature to draw any conclusions as to how that has fully
shaken out because I think the debate is still on. If you take it to it’s scenario that you
paint where there is no correlation to the person’s job and how they get paid, I don’t
know about you but that is not the way that you want to run your life.
I am a performance-driven guy myself so I think there has got to be some connection.
We feel very comfortable that our performance in our programs in the past have
been calling those regulations and we want to make sure that we followed them
going forward. I think there is going to be some, again, commonsense approach to
this when it’s all said and done.
If there is no correlation to a person’s performance but they just have to show up,
whether that be for our private sector or the public sector, I will see how that plays
out. I don’t even know how to speculate.
261.
On April 22, 2010, DeVry issued a press release reporting results for its third quarter
2010 and nine months ended March 31, 2010. Highlighting enrollment growth, Hamburger
commented, in pertinent part:
“We continued to achieve favorable enrollment trends during this quarter, as
students were attracted by the value proposition of our educational offerings,
which includes high quality programs and services and a strong track record of
academic outcomes for students,” said Daniel Hamburger, DeVry’s president and
chief executive officer. “We remain committed to investing in quality and providing
the access and capacity needed to educate our country’s workforce to compete in
the midst of a tough economy.”
The April 22, 2010 press release also reported enrollment results for spring 2010.
DeVry University reported a 24.0% increase in new student enrollment, a 25.6%
increase in total enrollment, a 16.5% increase in graduate coursetakers enrolled in
its master’s degree program, (including graduate coursetakers at KGSM) for its
January 2010 session, and a 15.4% increase for its March 2010 session. Total
online undergraduate and graduate coursetakers for its March 2010 session
increased 21.5% compared to the same session a year ago .
262.
Following issuance of the press release on April 22, 2010, after the market closed,
DeVry hosted a conference call to discuss its third quarter 2010 financial results and operations.
Gunst and Hamburger participated in the call on behalf of the Company. During the call, numerous
false and misleading statements were made that were designed to artificially inflate the Company’s
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stock price. For example, Hamburger discussed the Company’s strong third quarter performance,
stating in part:
We are pleased to announce another quarter a very strong performance driven by
the continued execution of our diversification strategy and by our operating
philosophy, and namely, that is, that quality leads to growth. During the quarter
total undergraduate enrollment for DeVry University was up nearly 26% from the
year-ago period to a record of 66,909 students. These results flowed directly from
the investments we’ve made in the quality of our programs and services.
263.
Turning to enrollment figures, Hamburger further misled the market, stating in part:
Let me start with Business Technology and Management segment, which, of course,
is DeVry University and its Keller Graduate School of Management. This was
another strong quarter of positive academic outcome and excellent enrollment
growth. We were especially pleased to see contributions across all curriculum areas,
degree levels and delivery modes. Let me give you some color on that.
Total undergraduate enrollment in DeVry University’s business programs grew
22%. Technology programs grew 27%, and the Healthcare programs grew 46%.
We’re also seeing significant enrollment growth at the graduate level as course
takers rose 17% for the January session and more than 15% in March. 17% is the
highest growth rate in total graduate course takers since 2003. We believe this
demonstrates the strong return on the investments we’re making to raise awareness of
the quality of our graduate degree programs.
The total number of online course takers at DeVry University in the March session
-- this includes undergraduate and graduate together -- increased 21.5% from the
prior year , and the campuses and centers grew nicely as well. So we are seeing
contributions to our overall strong growth rates at DeVry University from all
channels -- that is curriculum areas, degree levels and delivery modes.
264.
The statements referenced in ¶¶260-263 were materially false and misleading when
made as they represented and/or omitted facts which then existed and disclosure of which was
necessary to make the statements not false and/or misleading, for reasons set forth in ¶158 above,
and as evidenced by the factual detail contained throughout this Complaint. In addition, the
statements referenced in ¶¶260-263 were materially false and misleading when made because they
represented and/or omitted adverse facts which then existed and disclosure of which was necessary
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to make the statements not false and/or misleading. The true facts, which were known to or
recklessly disregarded by each of the Defendants, in addition to those set forth in ¶158 above, were:
•
DeVry’s “operating philosophy” was anything but “quality leads to growth.” In
reality, DeVry’s operating philosophy was to maximize enrollments at all costs and
to run roughshod over any regulations or ethical boundaries (including the
Company’s own code of ethics) that stood in the Company’s way.
•
Defendants lacked any reasonable basis by which to proclaim that fiscal 2010
would be a breakthrough year for DeVry. Defendants were well aware that
increased scrutiny on the Company’s business practices threatened to expose
Defendants’ fraud, compromise their ability to maintain their fraudulent scheme,
and remove the artificial inflation from the price of DeVry stock. In short, DeVry’s
best kept secret, its illegal compensation scheme, was in jeopardy of being exposed.
•
DeVry’s favorable enrollment trends were not the result of students being attracted
to the value proposition of the Company’s educational offerings, but instead was the
result of DeVry’s illegal recruiter compensation system extensively detailed herein.
•
DeVry’s increased expenses included additional illegal compensation paid to
DeVry Admissions Advisors in direct violation of mandatory compensation
restrictions. As the Company continued to experience significant growth in new
enrollments, its Admissions Advisors necessarily saw increased variable
compensation gains in direct violation of applicable regulations.
•
As a result of the foregoing, Defendants lacked a reasonable basis for their positive
statements about the Company, the Company’s Class Period revenue and
enrollment numbers, as well as DeVry’s future business prospects.
265.
In response to the negative scrutiny surrounding the for-profit education industry, the
price of DeVry common stock dropped $4.79 per share, or 6.45%, from a closing price of $74.25 on
April 22, 2010, to close at $69.46 per share on April 23, 2010 and then fell and additional $4.01 per
share, or 5.77%, to close at $65.45 on April 26, 2010.
266.
On May 6, 2010, DeVry filed its quarterly report on Form 10-Q for the third quarter
ended March 31, 2010, which confirmed the Company’s previously reported financial results and
was signed by Gunst and Hamburger (the “Third Quarter 2010 10-Q”). The Third Quarter 2010 10Q contained the required SOX certifications signed by Gunst and Hamburger stating that the Form
10-Q did not include any material misrepresentations. Nevertheless, the Third Quarter 2010 10-Q
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did contain several false and misleading statements regarding DeVry’s financial results and the
reasons behind enrollment growth. For example, it stated:
For both the third quarter and first nine months of fiscal year 2010, revenues
increased at fleVry’s respective Business, Technology and Management; Medical
and Healthcare; and Other Educational Services segments as a result of continued
growth in total student enrollments, improved student retention and tuition price
increases. In addition, U.S. Education, which was acquired on September 18, 2008,
and Fanor (DeVry Brasil), which was acquired on April 1, 2009, contributed to the
revenue growth in the first nine months of fiscal year 2010. Professional Education
segment revenues increased slightly during third quarter, but declined in the first nine
months of fiscal year 2010 due to the impact of the economic downturn on the
accounting and finance professions.
Business, Technology and Management
Business, Technology and Management segment revenues increased 28.6% to
$334.6 million in the third quarter and rose 26.1% to $931.4 million for the first
nine months of fiscal year 2010 as compared to the year-ago periods driven
primarily by strong enrollment growth, improved retention and tuition price
increases. The Business, Technology and Management segment is comprised solely
of DeVry University. The two principal factors that influence revenues are
enrollment and tuition rates.
267.
The Third Quarter 2010 10-Q also provided enrollment data, which included the
following “key trends”: at DeVry University, total undergraduate enrollment by term for summer
2008 to summer 2009 through spring 2009 to spring 2010 increased by between 21.9% and 25.6%.
Likewise, new student enrollment increased for summer 2008 to summer 2009 through spring
2009 to spring 2010 by between 14.8% and 24.0% , and graduate coursetaker enrollment for July
2008 to July 2009 through March 2009 to March 2010 increased by between 12.3% and 16.5% per
session. 16
268.
Purporting to describe the reasons behind increased enrollments and financial
performance, the Third Quarter 2010 10-Q continued:
16
Attached as Exhibit K are the relevant portions of the Third Quarter 2010 10-Q.
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Management believes the increased undergraduate student enrollments were most
significantly impacted by DeVry’s strong track record of high-quality education
and academic outcomes, continued strong demand for DeVry University’s online
programs and improved retention of existing students.
*
*
*
DeVry’s Cost of Educational Services increased 20.3% to $214.3 million during
the third quarter and grew 25.9% to $610.7 million for the first nine months of
fiscal year 2010 as compared to the year-ago period . U.S. Education, which was
acquired by DeVry on September 18, 2008, and DeVry Brasil, which was acquired
on April 1, 2009 accounted for almost half of the increase in Cost of Educational
Services during the first nine months of fiscal year 2010. For both the third quarter
and first nine months of fiscal year 2010, cost increases were also incurred in
support of expanding DeVry University online and onsite enrollments
and
operating a higher number of DeVry University locations as compared to the prior
year. In addition, higher costs were incurred to support increasing student
enrollments and the higher cost of medical clinical rotations for Ross University .
*
*
*
Student Services and Administrative Expense grew 21.9% to $168.1 million during
the third quarter and increased 23.3% to $487.4 million in the first nine months of
fiscal year 2010 as compared to the year-ago quarter . The fiscal year 2009
acquisitions of U.S. Education and DeVry Brasil accounted for nearly one-fourth of
the increase in Student Services and Administrative Expense for the first nine months
of fiscal year 2010. For both the third quarter and first nine months of fiscal year
2010, the balance of the increase in expenses primarily represented additional
investments in advertising and recruiting to drive and support future growth in new
student enrollments .
269.
The statements referenced in ¶¶266-268 were materially false and misleading when
made as they represented and/or omitted facts which then existed and disclosure of which was
necessary to make the statements not false and/or misleading, for reasons set forth in ¶158 above,
and as evidenced by the factual detail contained throughout this Complaint.
270.
On May 19, 2010, Defendant Hamburger participated at the Robert W. Baird Growth
Stock Conference on behalf of the Company. Commenting on the “ biggest misunderstanding ”
about the Company within the private sector, Hamburger described how the Company had the ability
to demonstrate that it was not “too aggressive in [its] recruiting .”
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271.
Commenting on demand trends for the undergraduate division at DeVry University,
Gunst touted how they had been “spectacular ” and were the result of the Company’s
“investments ... over the past three or four years, ” and stated:
Yes, I mean our trends for new student enrollment obviously have been pretty
spectacular for the past several terms. We have been reporting strong growth on
top of strong growth from the prior year and exceeding our own internal
expectations, quite frankly, I think largely due to the impact of a lot of the
It starts with a
investments we have been making over the past three or four years.
high school program. Another reason why we believe that DeVry University
undergrad is not as countercyclical as others is that we have got a big chunk of our
enrollment that is tied to students graduating from high school continuing on in postsecondary.
272.
The statements referenced in ¶270-271 were materially false and misleading when
made as they represented and/or omitted facts which then existed and disclosure of which was
necessary to make the statements not false and/or misleading, for reasons set forth in ¶158 above,
and as evidenced by the factual detail contained throughout this Complaint. In addition, the
statements referenced in ¶270-271 were materially false and misleading when made because they
represented and/or omitted adverse facts which then existed and disclosure of which was necessary
to make the statements not false and/or misleading. The true facts, which were known to or
recklessly disregarded by each of the Defendants, in addition to those set forth in ¶158 above, were:
.
DeVry was too aggressive in its recruiting, paying its Admissions Advisors using
the cover of its so-called TEACH values, in violation of federal law.
DeVry’s strong enrollment trends over the past several terms were not the result of
so-called internal investments, but instead were the result of the Company’s
established improper, unethical and illegal compensation practices.
.
As a result of the foregoing, Defendants lacked a reasonable basis for their positive
statements about the Company, the Company’s Class Period revenue and
enrollment numbers, as well as DeVry’s future business prospects.
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273.
On June 10, 2010, Senator Tom Harkin, chair of the U.S. Senate’s Health, Education,
Labor and Pensions Committee, announced that he would be holding a series of hearings to examine
federal spending at for-profit colleges. The press release provided in pertinent part:
Senator Tom Harkin (D-IA), Chairman of the Health, Education, Labor and Pensions
(HELP) Committee, today announced that he plans to hold a series of hearings to
examine federal education spending at for-profit higher education institutions. The
hearings will begin June 24th.
“In the past two years we have made major new investments to expand federal
financial aid,” said Harkin. “Pell Grants and student loans now provide more than
$20 billion to for-profit higher education companies every year. We need to ensure
for-profit colleges are working well to meet the needs of students and not just
shareholders. We owe it to students and taxpayers to make sure these dollars are
being well spent.”
Between 1998 and 2008 the for-profit sector has grown from 550,000 students to 1.8
million, a 225 percent increase. Students at for-profit institutions are borrowing
more, and more frequently, than their peers at non-profit schools, and according to
the Department of Education, one in five students who left a for-profit college in
2007 defaulted on their loan within three years.
The Committee will examine a broad range of issues related to the growing role of
the for-profit higher education sector, including the scope and rapid growth of the
federal investment in for-profit higher education and the corresponding opportunities
and risks for students and taxpayers. Details on the first hearing will be available in
the coming weeks.
274.
On June 16, 2010, the DOE announced that it was proposing new tougher regulations
on the for-profit education industry designed to protect college students and taxpayers from abusive
or fraudulent practices.
275.
On June 24, 2010, the United States Senate Committee on Health, Education, Labor,
and Pensions (the “HELP Committee”) held a hearing on the for-profit education industry. As part
of the hearing, the Committee released a report titled “Emerging Risk? An Overview of the Federal
Investment in For-Profit Education.”
276.
The report noted that “[e]vidence suggests that for-profit schools charge higher tuition
than comparable public schools, spend a large share of revenues on expenses unrelated to teaching,
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experience high dropout rates, and, in some cases, employ abusive recruiting and debt-management
practices.” The report further noted “mounting reports of questionable practices” at for-profit
colleges. With regard to job-placement data provided by colleges in the for-profit education industry
to prospective students, the report found that “there is no agreed-upon definition of how placement
in a relevant field is calculated. For example, a restaurant dishwasher or even a janitor might be
considered a ‘placement’ by a culinary school.”
277.
As a result of these and similar statements calling into question the practices of for-
profit schools, by the end of June 2010, DeVry’s stock was trading at $52.49, down 29% from its
Class Period peak of $74.25 on April 22, 2010.
278.
On July 1, 2010, the Chicago Tribune Company published an article entitled,
“Senator critical of for-profit colleges; Durbin seeks more regulation for some school.” In the
article, Senator Durbin discussed the need to for “legislation to strengthen regulation of for-profit
schools” because the schools were leaving students with “worthless diplomas,” and “whopping
levels of debt.” The article described how Senator Durbin specifically cited to large for-profit
schools, including the University of Phoenix, Kaplan University and DeVry University.
279.
On July 15, 2010, DeVry submitted responses to questions from the United States
Senate Committee on Health, Education, Welfare and Pensions, which were raised by Senate
Committee members regarding testimony given during the June 24, 2010 hearing on “Emerging
Risk? An Overview of the Federal Investment in For-Profit Education.”
280.
On July 23, 2010, the stock prices of for-profit colleges, including DeVry, rallied in
response to an announcement that the U.S. government was relaxing its proposal governing access to
federal financial aid. The price of DeVry common stock rose $7.78 per share, or 15.10%, from a
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closing price of $51.51 on July 22, 2010, to close at $59.29 per share on July 23, 2010, on unusually
heavy trading volume.
281. On August 3, 2010, news began to leak into the market concerning the findings from
an undercover operation conducted by the U.S. Government Accountability Office (“GAO”) on
recruiting techniques used in the for-profit higher education industry. For example, on August 3,
2010, The New York Times published an article entitled “For-Profit Colleges Mislead Students,
Report Finds,” stating in pertinent part, as follows:
Undercover investigators posing as students interested in enrolling at 15 for-profit
colleges found that recruiters at four of the colleges encouraged prospective students
to lie on their financial aid applications – and all 15 misled potential students about
their programs’ cost, quality and duration, or the average salary of graduates,
according to a federal report.
The report and its accompanying video are to be released publicly Wednesday by the
Government Accountability Office, the auditing arm of Congress, at an oversight
hearing on for-profit colleges by the Senate Committee on Health, Education Labor
and Pensions.
The report does not identify the colleges involved, but it includes both privately held
and publicly traded institutions in Arizona, California, Florida, Illinois, Pennsylvania,
Texas and Washington, D.C. According to the report, the colleges in question were
chosen because they got nearly 90 percent of their revenues from federal aid, or they
were in states that are among the top 10 recipients of Title IV money.
The fast-growing for-profit education industry, which received more than $4 billion
in federal grants and $20 billion in Department of Education loans last year, has
become a source of concern, with many lawmakers suggesting that too much
taxpayer money is being used to generate profits for the colleges, instead of
providing students with a useful high-quality education.
The report gave specific instances in which some colleges encouraged fraud. At one
college in Texas, a recruiter encouraged the undercover investigator not to report
$250,000 in savings, saying it was “not the government’s business.” At a
Pennsylvania college, the financial representative told an undercover applicant who
had reported a $250,000 inheritance that he should have answered “zero” when asked
about money he had in savings – and then told him she would “correct” his form by
reducing the reported assets to zero, a change she later confirmed by e-mail and
voicemail.
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At a college in California, an undercover investigator was encouraged to list three
nonexistent dependents on the financial aid application.
In addition to the colleges that encouraged fraud, all the colleges made some
deceptive statements. At one certificate program in Washington, for example, the
admissions representative told the undercover applicant that barbers could earn
$150,000 to $250,000 a year, when the vast majority earn less than $50,000 a year.
And at an associate degree program in Florida, the report said, a prospective student
was falsely told that the college was accredited by the same organization that
accredits Harvard and the University of Florida.
According to the report, courses in massage therapy and computer-aided drafting that
cost $14,000 at a California for-profit college were presented as good values, when
the same courses cost $520 at a local community college.
Six colleges in four states told the undercover applicants that they could not speak
with financial aid representatives or find out what grants and loans they were eligible
for until they completed enrollment forms agreeing to become a student and paid a
small application fee.
And one Florida college owned by a publicly traded company told an undercover
applicant that she needed to take a 50-question test, and answer 18 questions
correctly, to be admitted – and then had a representative sit with her and coach her
through the test. A representative at that college encouraged the applicant to sign an
enrollment contract, while assuring her it was not legally binding.
But in some instances, the report said, the applicants were given accurate and helpful
information, about likely salaries and not taking out more loans than they needed.
282.
As a result, on August 3, 2010, DeVry stock declined $2.26, or 4.15%, from a closing
price of $54.50 per share on August 2, 2010, to a closing price of $52.24 per share on August 3,
2010.
283.
On August 4, 2010, the GAO issued its report detailing its findings. At the request of
Congress, the GAO undertook its investigation to determine if for-profit colleges engaged in
fraudulent, deceptive or otherwise questionable marketing practices. The GAO’s report cited many
instances of abuse in the sector, finding that many of the companies in the industry employed
fraudulent and deceptive practices in their student recruitment, targeting students who used federal
financial aid to pay for their schooling. The study was presented at a Senate education hearing held
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on August 4, 2010, as part of the ongoing government inquiry into the for-profit education sector.
This was the second of the Senate’s hearings on the industry, and was entitled “For Profit Schools:
The Student Recruitment Experience.”
284.
On August 6, 2010, DeVry announced that it had received a request for information
from the HELP Committee relating to the Committee’s ongoing hearings in connection with privatesector colleges receiving Title IV financial aid. Specifically, the request sought information to more
accurately understand how DeVry’s institutions use federal resources, including how they recruit and
enroll students, set program price or tuition, determine financial aid including private or institutional
loans, track attendance, handle withdrawal of students and return of Title IV dollars and manage
compliance with the requirement that no more than 90% of revenues come from Title IV dollars. In
addition, the request also sought information concerning the number of students who complete or
graduate from programs offered by DeVry’s institutions, how many of those students find new work
in their educational area, the debt levels of students enrolling and completing programs and how
DeVry tracks and manages the number of students who risk default within the cohort default rate
window.
285.
As a result, DeVry stock declined $3.13, or 6.14%, from a closing price of $50.96 on
August 5, 2010, to a closing price of $47.83 on August 6, 2010, on a 108% increase in trading
volume. Between August 3, 2010 – when news regarding the GAO report broke – and August 6,
2010, the stock fell by more than 12%:
286.
On August 12, 2010, DeVry issued a press release reporting financial results for its
fourth quarter 2010 and full-year ended June 30, 2010. The press release also disclosed the
Company’s slowing enrollment results. DeVry University reported a 9.9% increase in new student
enrollment and a 22.0% increase in total student enrollment compared to the prior year. Total
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graduate coursetakers, (including graduate coursetakers at KGSM) increased 17.4% for its May
2010 session, and 17.6% for its July 2010 session, while the total number of online undergraduate
and graduate coursetakers increase 24.4% for July 2010.
287.
Following issuance of the press release on August 12, 2010, after the market closed,
DeVry hosted a conference call to discuss its financial results and operations. Gunst and Hamburger
participated in the call on behalf of the Company. During the call, numerous false and misleading
statements were made regarding DeVry’s financials and future business prospects that were designed
to and did artificially inflate the Company’s stock price. For example, Hamburger discussed the
regulatory scrutiny facing the Company, proposed rulemaking, and the HELP Committee’s
activities, and made blatantly false statements concerning how DeVry’s Admissions Advisors were
compensated, stating in part:
Now let me make a few comments on the so-called incentive compensation
proposals. I say so-called, as there seems to be a misperception that the current
Safe Harbor allow for employment-based bonuses, and that the supposed rules
would ban them. It is not so. Such payments are already prohibited.
Now we support the Department’s efforts to refine regulations and to ensure
Congress’ intent per the statute is carried out effectively. Consistent with current
regulations, we don’t pay commissions or bonuses based on enrollment. We pay
salaries to all of our employees, who also receive annual performance reviews and
are rewarded on merit.
288.
Continuing, Hamburger stated that “quantitative performance measurements should
be permitted to play a least some part in the judgment that institutions make about base salary
adjustments,” never disclosing that quantitative enrollment quotas were the only factor used to
evaluate the Company’s Admissions Advisors.
289.
As the call continued, Gunst discussed the Company’s financial results and touted
increased enrollment, stating in part:
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The Business, Technology and Management segments had very strong results with
total enrollment up 22%. As expected, new student enrollment has begun to
moderate, but still up 10% versus the tough comparison in the prior year.
*
*
*
Revenue in the segment was up about 32% versus last year in the quarter and 28%
for the fiscal year, driven by continued online expansion and strong on-site
enrollments.
Segment earnings which are, of course, pretax were up about 140% for the quarter
and more than doubled for the year, excluding last year’s discrete items, driven
primarily by improved operating leverage from the strong enrollment growth.
290.
Commenting on the controls DeVry has in place to ensure that none of its admissions
personnel are misrepresenting anything to students and how confident they are that those controls are
preventing any such misrepresentations, Hamburger made numerous false statements:
DeVry does have a very robust, multilayered compliance program. We’ve had that
for years and decades. The details of it go far beyond the time that we have
available on this call.
Although we know our compliance program is very effective overall, we also know
that exceptions can occur. That is true for any organization. So what is equally
important is what we do when an error occurs or a problem occurs. The answer is
we take immediate corrective action. We walk the walk and we talk the talk on that.
Many examples, and we talk about that explicitly within DeVry as part of
continuing to maintain and enhance our culture of accountability and integrity.
An example, a couple -- several years ago we became aware of an issue at one
campus that related to this.
Once we investigated it, we promptly notify the Department of Education and
terminated the employees that were responsible in that case. So we do the right
thing, and we deal with it. And I think that is what any organization has to do.
*
*
*
So these things can happen, but the key is how you deal with that, and the key is
how do you make sure you’ve got an overarching training and compliance
program to ensure that it’s very much the exception and not the norm.
291.
The statements referenced in ¶¶286-290 were materially false and misleading when
made as they represented and/or omitted facts which then existed and disclosure of which was
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necessary to make the statements not false and/or misleading, for reasons set forth in ¶158 above,
and as evidenced by the factual detail contained throughout this Complaint. In addition, the
statements referenced in ¶¶286-290 were materially false and misleading when made because they
represented and/or omitted adverse facts which then existed and disclosure of which was necessary
to make the statements not false and/or misleading. The true facts, which were known to or
recklessly disregarded by each of the Defendants, in addition to those set forth in ¶158 above, were:
•
DeVry did pay commissions and bonuses based on enrollment, but used its’
TEACH criteria to conceal them.
•
Contrary to DeVry’s statements, DeVry’s Admissions Advisors were not reviewed
and rewarded based on merit, but were instead reviewed solely based on the number
of students enrolled. The so-called “quantitative performance measurements”
DeVry purported to rely on when making base salary adjustments were nothing
more than a pretext to disguise the fact the Admissions Advisors’ compensation
was based solely on the number of enrollments attained.
•
Notwithstanding Defendants’ insinuation that predatory enrollment practices were
only engaged in by rogue advisors at select campuses, in reality, Defendants created
a systemically predatory business model at DeVry that directed advisors to prey on
poor, uneducated and unsophisticated people through the use of high-pressure sales
tactics, misrepresentations and psychological manipulation. Advisors were
encouraged (and expected) by their supervisors to engage in these unethical and
illegal practices. Further, if advisors did not meet their established enrollment
quotas, which were achievable by engaging in these practices, saw their
compensation decrease. Those who did meet or exceed their enrollment quotas
were compensated with incentives in direct violation of Title IV.
•
As a result of the foregoing, Defendants lacked a reasonable basis for their positive
statements about the Company, the Company’s Class Period revenue and
enrollment numbers, as well as DeVry’s future business prospects.
292. Following the earnings announcement, DeVry common stock declined $2.60, or
5.74% per share, from a closing price of $45.31 on August 12, 2010, to a closing price of $42.71 per
share on August 13, 2010. Although Defendants were reporting seemingly positive financial results,
as news continued to come out concerning details of the government’s investigation and the
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anticipated repercussions from the investigation on DeVry’s business and prospects, DeVry stock
continued to decline.
293.
Despite these declines, the price of DeVry stock remained artificially inflated.
Indeed, Defendants refused to reveal to the market the extent to which DeVry depended upon a
blatantly illegal Admissions Advisor compensation scheme. Defendants, however, knew they would
have to change DeVry’s illegal compensation practices in light of increased regulatory scrutiny.
Because such changes would lead to dramatically decreased student enrollments, Defendants were
well aware that DeVry’s financial performance was poised for significant declines.
294.
On August 13, 2010, after the market closed, the DOE released data on student-loan
repayment rates at the nation’s colleges and universities. The data showed that the repayment rates
were 54% at public colleges and universities, 56% at private nonprofit institutions and 36% at forprofit colleges. The data showed that the repayment rates at DeVry’s schools were just 38%. In
addition, the DOE proposed new regulations for programs to continue to be eligible to receive
federal financial aid. The tests for eligibility would be based on repayment rates and debt-to-income
loads.
295.
On this news, the price of DeVry stock decreased an additional $3.74, or 8.76%, from
a closing price of $42.71 on August 13, 2010, to a closing price of $38.97 on August 16, 2010, the
next trading day, on a 234% increase in trading volume.
296.
Also on August 13, 2010, Sterne Agee published an analyst report discussing the
Company’s fourth quarter financial results and pointed to the slowdown in new undergraduate
student enrollment at DeVry University, which only posted a 10% increase compared to a 24%
increase in the previous quarter.
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297.
On August 25, 2010, DeVry filed its annual financial report on Form 10-K for the
year ending June 30, 2010. The financial results reported in the Form 10-K were substantially
similar to those reported in the Company’s prior press releases. The Form 10-K was signed by
Gunst and Hamburger and contained required SOX certifications sign by Gunst and Hamburger
stating that the Form 10-K did not include any material misrepresentations. Nevertheless, the Form
10-K did contain several false and misleading statements regarding DeVry’s financials and future
business prospects, including the following statements:
Total undergraduate enrollment in summer 2010 reached a record high of 68,290
students, an increase of 22.0% compared to 55,979 in the previous summer. There
were 21,165 coursetakers for the July 2010 session in DeVry University’s graduate
programs, including its Keller Graduate School of Management, representing an
increase of 17.6% over the prior year. Coursetaker enrollment in DeVry University
online program offerings in summer 2010 was 70,088, an increase of 24.4% over
the prior year . The term coursetaker refers to the number of courses taken by a
student. Thus, one student taking two courses is counted as two coursetakers.
298.
Discussing student recruiting and admissions, the annual report falsely omitted that
DeVry’s compensation practices for Admissions Advisors violated applicable regulations:
Extensive and complex regulations in the United States and Canada govern all the
government grant, loan, and work study programs in which DeVry University, Ross
University, Chamberlain College of Nursing, Carrington College and Carrington
College California and their respective students participate. DeVry must comply with
many rules and standards, including maximum student loan default rates, limits on
the proportion of its revenue that can be derived from federal aid programs,
prohibitions on certain types of incentive payments to student recruiters and
financial aid officers , standards of financial responsibility, and administrative
capability requirements. Like any other educational institution, DeVry’s
administration of these programs is periodically reviewed by various regulatory
agencies and is subject to audit or investigation by other governmental authorities.
Any violation could be the basis for penalties or other disciplinary action, including
initiation of a suspension, limitation or termination proceeding. Previous Department
of Education and state regulatory agency program reviews have not resulted in
significant findings or adjustments against DeVry. If a proceeding were initiated and
caused the Department of Education to substantially curtail DeVry’s participation in
government grant or loan programs, DeVry’s enrollments, revenues and accounts
receivable could be all adversely affected.
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299.
Tying revenue growth to enrollment, the Form 10-K continued:
Total consolidated revenues for fiscal 2010 of $1,915.2 million increased $453.7
million, or 31.0%, as compared to last year. Revenues increased within all four of
and
DeVry’s business segments as a result of continued enrollment growth
improved student retention. In addition, Carrington, which was acquired on
September 18, 2008, and DeVry Brasil, which was acquired on April 1, 2009,
contributed $101.6 million to the revenue growth in fiscal year 2010. Professional
Education segment revenues were down during the first half, but increased during the
second half to end up nearly 1% for fiscal year 2010.
Business, Technology and Management
During fiscal year 2010, Business, Technology and Management segment
revenues increased by 27.7% to $1,263.6 million as compared to fiscal year 2009
driven primarily by strong enrollment growth and improved retention.
300.
The Form 10-K for the year ending June 30, 2010 also provided enrollment data,
which included the following “key trends”: at DeVry University, total undergraduate enrollment by
term for summer 2008 to summer 2009 through summer 2009 to summer 2010 increased by
between 21.9% and 22.0% . Likewise, new student enrollment increased for summer 2008 to
summer 2009 through summer 2009 to summer 2010 by between 14.8% and 9.9%, and graduate
coursetaker enrollment for July 2008 to July 2009 through July 2009 to July 2010 increased by
between 12.3% and 17.7% per session . 17
301.
The statements referenced in ¶¶297-300 were materially false and misleading when
made as they represented and/or omitted facts which then existed and disclosure of which was
necessary to make the statements not false and/or misleading, for reasons set forth in ¶158 above,
and as evidenced by the factual detail contained throughout this Complaint. In addition, the
statements referenced in ¶¶297-300 were materially false and misleading when made because they
represented and/or omitted adverse facts which then existed and disclosure of which was necessary
17
Attached as Exhibit L are the relevant portions of the 10-K for the year ending June 30, 2010.
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to make the statements not false and/or misleading. The true facts, which were known to or
recklessly disregarded by each of the Defendants, in addition to those set forth in ¶158 above, were:
When addressing regulations governing compensation to student recruiters, DeVry
failed to inform the market that the Company made incentive payments to its
Admissions Advisors in direct violation of Title IV.
.
302.
As a result of the foregoing, Defendants lacked a reasonable basis for their positive
statements about the Company, the Company’s Class Period revenue and
enrollment numbers, as well as DeVry’s future business prospects.
On October 26, 2010, DeVry issued a press release announcing its first quarter ended
September 30, 2010. The Company reported a 34% increase in net income to $74 million, a 21%
increase in revenue to $521 million, and a 36% increase in diluted earnings per share to $1.03. The
press release further stated, in part:
DeVry University expects to report a modest decline in new undergraduate student
enrollments and growth in the mid-teens for total students. Keller Graduate School
. In
believes that total coursetaker enrollment will be similar to previous sessions
the fall, Carrington expects to report a decrease in new student enrollments in the
mid-single digits and a decrease in total students in the low-single digits .
Chamberlain College of Nursing continues to see strong demand for its nursing
programs and expects to report continued strong growth rates.
“Our growth and diversification strategy continues to serve us well as we navigate
these uncertain economic times ,” said Hamburger. “We remain confident that our
investments in academic quality and student services will enable us to achieve our
long-term performance goals this year and beyond.”
303.
Following issuance of the press release on October 26, 2010, after the market closed,
DeVry hosted a conference call to discuss its first quarter 2010 financial results. Gunst and
Hamburger participated in the call on behalf of the Company. During the call, Hamburger misled
the market, stating the Company was not planning any significant changes:
And concurrent with working with the Department, we also have teams developing
strategies for where we might need to make adjustments based on the new
regulations, depending on how they evolve. However, we aren’t making large
operational changes in anticipation of the new rules . Part of the reason for this is
that DeVry has always been focused on quality, even though that has meant slower
growth sometimes.
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304.
Discussing enrollment trends, Gunst stated, in part:
We will report fall enrollment for DeVry University in December, and while we
expect Keller to maintain this trend, we expect to report a modest decline in new
student enrollment for undergraduate students in this period .
This is driven by continuing tough comps , with fall 2009 growth of 19.4% on top of
growth in fall 2008 of 19.7%. Assuming a modest decline this fall, new student
enrollment would grow at a compound annual rate of 11% to 12% over the past three
years. It’s also important to note that the new student enrollment will still be near
record levels this term.
During the recent period, we’ve seen decreased volume of higher quality inquiry
flow coupled with lower conversion. One potential factor could be the difficult and
uncertain external economic environment. Another factor contributing to this is
that we are below the number of admission advisors we’d like to employ to serve
our new and prospective students. We’re actively hiring advisors to ensure we’re
meeting those students’ needs .
*
We still believe the supply/demand relationship and value proposition for our
programs remains strong over the long-term and see no evidence that this
deceleration is a long-term trend .
305.
As the call continued, Hamburger stated that the Company did not see declining
enrollments “as a long-term trend .” Continuing, Hamburger stated, “So we do think that we can
continue to follow our longer-term what we’ve been looking for of mid to high single digit new
student enrollment growth .” Discussing the Company’s newfound shortfall in Admissions
Advisors, Hamburger downplayed the issue and omitted any mention of the new non-enrollment
based compensation plan the Company was putting into place, instead stating:
Yes, again, really an operational management challenge I would say that we have I
think good plans in place to turn that around. And we just got a little bit behind
the ball on filling some open positions, and that left us with less ability to follow-up
on some of this new student inquiries that we did receive than we should have .
And that led to a little bit lower conversion rate.
306.
As the call continued, Hamburger was asked about incentive compensation policies
across DeVry’s schools and whether the number of students signed up was currently part of the
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formula in any sense, and whether the Company would think about changing that based on proposed
rules. In response, Hamburger made it clear he was aware of the limits on incentive compensation,
but also directly misled the market, stating:
Well, thanks for asking that because that gives me a great opportunity to clarify in
case anybody thinks that we pay a bonus or an incentive payment to our
admissions advisors. The answer is no, we don’t. We pay a base salary. And we
expect to continue to pay them a base salary ; I don’t think they’re going to work for
free.
So no, we don’t -- we do not pay incentives or bonuses. And that’s one of the things
I think is so unfortunate about some of the reporting that’s out there -- again,
based on anecdotes and stories and not based on facts. The fact is that incentive
compensation is already banned, has been since 1992 .
And so, no, we don’t -- I mean, well, there could be changes; we may need to make
changes in our evaluation processes, depending on the rules that are forthcoming,
but it won’t be like we’re going from a situation where before, you were paying a
commission and after, you’re not, and you have to make this massive adjustment.
That’s not the case .
307.
When asked to clarify whether the salary for Admissions Advisors was “impacted or
has been by success in signing up students,” Hamburger misleadingly stated:
Yes. We do a performance evaluation for admissions advisors just like we do for
any other employee. And just like we do for any other employee, we look at the
effectiveness of that person in their job. And since a recruiter’s job is to recruit, we
certainly do take into account, did they recruit any students? And that is a
consideration, which is compliant with the statute and the regulations .
308.
Later in the call, Hamburger reiterated his denial that the Company paid improper
incentive compensation, stating, in part:
Yes, the incentive -- the so-called incentive comp. I call it so-called because it’s not
like we’re paying incentive comp now and suddenly can’t do it. We don’t pay
incentive comp now .
309.
In response to Defendants’ false and misleading statements, the price of DeVry
common stock increased $3.01 per share, or 7%, from a closing price of $42.74 on October 26, 2010,
to close at $45.75 per share on October 27, 2010.
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310.
On November 4, 2010, DeVry filed its quarterly report on Form 10-Q for the quarter
ended September 30, 2010, which confirmed the Company’s previously announced financial results
and was signed by Gunst and Hamburger (the “First Quarter 2011 10-Q”). The First Quarter 2010
10-Q contained the required SOX certifications signed by Gunst and Hamburger stating that the
Form 10-Q did not include any material misrepresentations. Despite that, the quarterly report
included numerous false and misleading statements regarding DeVry’s financial performance and
future business prospects, which were tied to student enrollment, including the following:
Total consolidated revenues for the first quarter of fiscal year 2011 of $521.4
million increased $90.3 million, or 21.0%, as compared to the year-ago quarter.
Revenues increased within all four of DeVry’s business segments as a result of
growth in total student enrollments , improved student retention and tuition price
increases.
Business, Technology and Management
Business, Technology and Management segment revenues increased 24.5% to
$352.9 million as compared to the year-ago period driven primarily by strong
enrollment growth , improved retention and tuition price increases. The Business,
Technology and Management segment is comprised solely of DeVry University.
311.
Despite omitting how DeVry achieved its enrollment and financial results by utilizing
an illegal compensation scheme for its Admissions Advisors, or that the Company would be
abandoning that illegal scheme, the First Quarter 2011 10-Q did provide detailed enrollment data,
which included the following “key trends”: at DeVry University, total undergraduate enrollment by
term for fall 2008 to fall 2009 through summer 2009 to summer 2010 increased between 22.7%
and 22.0% . Likewise, new student enrollment increased for fall 2008 to fall 2009 through
summer 2009 to summer 2010 by between 19.4% and 9.9%, and graduate coursetaker enrollment
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for July 2009 to July 2010 through September 2009 to September 2010 increased by between
17.6% and 14.1% per session . 18
312. In furtherance of Defendants’ fraud, the First Quarter 2011 10-Q purported to
describe the reasons behind DeVry’s increased enrollments and financial performance, stating in
part:
Management believes the increased undergraduate student enrollments were most
significantly impacted by DeVry’s strong track record of high-quality education
and academic outcomes, graduate employment outcomes, continued strong
demand for DeVry University’s online programs and improved retention of
existing students. Management believes efforts to enhance the Keller Graduate
School of Management brand awareness through improved messaging have
produced positive graduate enrollment results.
Management expects that DeVry University undergraduate new student growth
will decelerate resulting in a modest decline in new student enrollments for the
upcoming fall 2010 enrollment period. This is being driven by overlapping high
new student growth rates in prior years; decreasing volume of high quality inquiry
flow; and economic uncertainties. However, management expects that DeVry
University total student growth for the fall enrollment period will be in the mid-tohigh teens, benefiting from continued improvements in student persistence.
*
DeVry’s Cost of Educational Services increased 16.1% to $228.1 million during
the first quarter of fiscal year 2011 as compared to the year-ago quarter . Cost
increases were incurred in support of expanding DeVry University online and
onsite enrollments and operating a higher number of DeVry University locations as
compared to the prior year. Also, cost increases were incurred for the operation of
the new Chamberlain campuses in Chicago and Arlington, Virginia, which began
offering programs in July 2010 and to support growing online student enrollments .
*
Student Services and Administrative Expense grew 16.9% to $181.5 million during
the first quarter of fiscal year 2011 as compared to the year-ago quarter . The
advertising and
increase in expenses represented additional investments in
recruiting to drive and support future growth in new student enrollments
.
18
Attached as Exhibit M are the relevant portions of the First Quarter 2011 10-Q.
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313. The statements referenced in ¶¶302-308, 310-312 were materially false and
misleading when made as they represented and/or omitted facts which then existed and disclosure of
which was necessary to make the statements not false and/or misleading, for reasons set forth in
¶158 above, and as evidenced by the factual detail contained throughout this Complaint. In addition,
the statements referenced in ¶¶302-308, 310-312 were materially false and misleading when made
because they represented and/or omitted adverse facts which then existed and disclosure of which
was necessary to make the statements not false and/or misleading. The true facts, which were
known to or recklessly disregarded by each of the Defendants, in addition to those set forth in ¶158
above, were:
.
DeVry falsely denied that it had ever paid incentive compensation to its Admissions
Advisors. As evidenced by the factual detail provided by the CWs, including CW 1,
CW 2, CW 3, CW 4, CW 5, CW 6, CW 7, CW 8, CW 10, CW 11, CW 13, CW 16,
CW 17, CW 18, CW 19, CW 21 and CW 24, DeVry consistently paid incentive
compensation to its Admissions Advisors who saw their compensation adjusted
downward if they did not meet their established enrollment quotas, or adjusted
upward, in the form of bonuses or incentive compensation, when they exceeded
their enrollment quotas in direct violation of Title IV.
DeVry falsely denied making operational changes in response to new regulations.
The truth is that DeVry instituted a new compensation policy for its Admissions
Advisors known internally as the New Regulatory World, which changed the
compensation structure so that Admissions Advisors were no longer compensated
based on the number of enrollments they achieved, as evidenced by the factual
detail provided by CW 1, CW 4, CW 5, CW 16, CW 18, CW 19, CW 21, CW 23,
CW 24 and CW 26.
DeVry failed to disclose to the market that the Company was “below the number of
admissions advisors” it liked to employ because many Admissions Advisors left the
Company once they were informed they were no longer being paid incentive
compensation, eliminating the opportunity for Admissions Advisors to earn higher
income, and that their salaries had been lowered under the New Regulatory World.
Information concerning Admissions Advisors leaving the Company after learning
of the New Regulatory World was provided by CWs, including CW 5, CW 9,
CW 18 and CW 25.
.
DeVry omitted to inform the market that decline in undergraduate enrollments was
a result of the New Regulatory World which eliminated incentives for Admissions
Advisors to engage in predatory recruiting practices and changed compensation
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policies so that Admissions Advisors were no longer compensated on the number of
students enrolled. Thus, DeVry continued to attempt to conceal the risk that its
enrollment would continue to decline as a result of the elimination of illegal
compensation.
.
314.
As a result of the foregoing, Defendants lacked a reasonable basis for their positive
statements about the Company, the Company’s Class Period revenue and
enrollment numbers, as well as DeVry’s future business prospects.
On December 7, 2010, DeVry issued a press release announcing its fall 2010
enrollment at DeVry University, which included a 4.7% decline in new student enrollment. The
press release also stated:
“In the coming years, the strong demand for quality education will continue to grow
in the United States and around the world. DeVry provides a key part of the solution
by providing capacity and access so our students can achieve their educational and
career goals,” said Daniel Hamburger, president and chief executive officer of DeVry
Inc. “ While we experienced lower demand at some of our colleges during this
enrollment period, we remain well-positioned through our diverse family of
schools and programs should these trends continue. We have strategies in place to
address areas where we can improve and remain confident in our ability to meet
our long term performance goals .”
315.
On January 25, 2011, DeVry issued a press release announcing its second quarter
ended December 31, 2011. The Company again reported a 4.7% decrease in DeVry’s new
undergraduate enrollment. The Company also reported that revenues increased 17% to $551 million,
net income increased 22% to $89 million and diluted earnings per share increased 25% to $1.25.
The press release further stated, in part:
“Despite some near-term enrollment challenges that we are actively managing, we
executed well against our strategy in the first half of fiscal 2011 ,” said Hamburger.
“I am confident our diversification strategy will serve us well in the second half of
the year and beyond, as we continue to help our students achieve their career
aspirations.”
316.
Following the issuance of the press release on January 25, 2011, DeVry hosted a
conference call to discuss its financial results and operations. Gunst and Hamburger participated in
the call on behalf of the Company. During the call, numerous false and misleading statements were
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made regarding DeVry’s financials and future business prospects that were designed to and did
artificially inflate the Company’s stock price. For example, Hamburger stated, in part:
So as we look forward to 2011, we remain focused on executing our growth plans
with continued emphasis on our diversification strategy. Despite the softening new
student enrollment that we reported in our fall term, our diversified family of
schools will continue to be a real strength for us, and this diversification concept is
directly relevant to how we’re managing in this environment . A number of you
have asked us about the declines in new student enrollment. So let me try to provide
some color on that. It’s important to keep in mind that there’s no single explanation.
Several factors affect different schools in different ways, ranging from internal
execution to external market dynamics. Carrington Colleges, for example,
experienced a decline in fall enrollment because of how we managed our name
change and other process issues that we’re working through, as well as some external
factors. DeVry University undergraduate program saw some slowing that’s more
tied to inquiry flow in the market in general. However, there are other schools
within our diverse offerings, like Chamberlain, Becker, DeVry Brasil and Keller,
where we continue to see growing demand. And so our diversification strategy
positions us to achieve consistent performance throughout various economic or
programmatic cycles, and to create value in good times and bad.
317.
As the call continued, Gunst commented on the DeVry’s slowing of enrollment
growth and stated, in pertinent part;
While enrollment growth is slowing due to the external challenges and tough yearover-year comps, we still believe the supply-demand relationship and value
proposition for our programs remains strong over the long-term and see no
evidence of this deceleration as a long-term trend.
318.
When asked to give his thoughts “around compensation structured for enrollment
advisors,” Hamburger stated, in part:
Well, compensation structures for enrollment advisors are a base salary. And I
want to be very clear that DeVry -- and when I say DeVry without University, that
means DeVry, all of DeVry -- DeVry pays a base salary . That means all the
schools of DeVry that are covered Title IV employees . . . .
But DeVry schools, like we’re talking about here, pay a base salary to enrollment
advisors and financial aid professionals. And so a lot of this talk about incentive
compensation is -- there’s a lot of misunderstanding. A lot of people think that
suddenly incentive compensation is banned, and that’s not the case. It’s been
banned since 1992. And so what the concern that many, many schools have
around the compensation regulations -- and of course, those apply to all schools,
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public sector, private sector like DeVry or independent schools, for that matter -- is
that it makes it very difficult to manage and it treats your base salary as though it
were incentive compensation as well. So you can’t do performance management
of somebody even in their annual performance review, directly or indirectly, based
on how they do their job. And we are very -- many schools, all schools, are
concerned about the potential litigation risk that that could create for colleges and
universities.
319.
When directly asked if the Company was planning for changes to its compensation
structure for enrollment advisors, “recognizing that you are only paying base salaries,” Hamburger
omitted critical facts when he responded as follows:
Nothing that you would be able to model or see. I mean, there’s always
management changes. There are things that we’re looking at in our performance
management system. We will certainly do everything we need to do to ensure that
we are compliant, as we always strive to be, with all rules and laws, but nothing
that would be significant or that would affect your model .
320.
When asked to provide an update on staffing levels for Admissions Advisors,
Hamburger stated, in relevant part:
[WJe are pretty much in the same situation there. It’s as much to do with
allocation of resources to the right place. We were over here, we were under there,
this team versus that team.
321.
In response to Defendants’ false and misleading statements, the price of DeVry
common stock increased $5.98 per share, or 12.6%, from a closing price of $47.38 on January 25,
2011 to close at $53.36 per share on January 26, 2011.
322.
On February 4, 2011, DeVry filed its quarterly report on Form 10-Q for the quarter
ended December 31, 2010, which confirmed the Company’s previously announced financial results
and was signed by Gunst and Hamburger (the “Second Quarter 2011 10-Q”). The Second Quarter
2011 10-Q contained the required SOX certifications signed by Gunst and Hamburger stating that
the Form 10-Q did not include any material misrepresentations. Despite that, the quarterly report
included numerous false and misleading statements regarding DeVry’s financial performance and
future business prospects, which were tied to student enrollment, including the following:
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Total consolidated revenues for the second quarter of fiscal year 2011 of $551.5
million increased $78.5 million, or 16.6%, as compared to the year-ago quarter. For
the first six months of fiscal year 2011, total consolidated revenues increased 18.7%
to $1,072.9 million as compared to the year-ago period. For both the second
quarter and first six months of fiscal year 2011, revenues increased within all four
of DeVry’s business segments as a result of growth in total student enrollments ,
improved student retention and tuition price increases.
Business, Technology and Management
Business, Technology and Management segment revenues increased 18.4% to
$370.7 million in the second quarter and rose 21.3% to $723.7 million for the first
six months of fiscal year 2011 as compared to the respective year-ago periods
driven primarily by growth in total student enrollments , improved retention and
tuition price increases. The Business, Technology and Management segment is
comprised solely of DeVry University.
323.
Despite omitting how DeVry achieved its enrollment and financial results by utilizing
an illegal compensation scheme for its Admissions Advisors, or that the Company would be
abandoning that illegal scheme, the Second Quarter 2011 10-Q did provide detailed enrollment data,
which included the following “key trends”: at DeVry University, total undergraduate enrollment by
term for spring 2009 to spring 2010 through fall 2009 to fall 2010 increased between 25.6% and
14.9% . Likewise, new student enrollment increased for spring 2009 to spring 2010 by 24%, but
decreased 4.7% from fall 2009 to fall 2010, and graduate coursetaker enrollment for July 2009 to
July 2010 through November 2009 to November 2010 increased by between 17.6% and 11.9% per
session . 19
324.
In furtherance of Defendants’ fraud, the Second Quarter 2011 10-Q purported to
describe the reasons behind DeVry’s increased enrollments and financial performance, stating in
part:
Management believes the increased undergraduate total student enrollments were
most significantly impacted by DeVry’s strong track record of high-quality
19
Attached as Exhibit N are the relevant portions of the Second Quarter 2011 10-Q.
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education, academic and graduate employment outcomes, and improved retention
of existing students. Management believes the decrease in undergraduate new
student enrollments was the result of decreasing volume of high quality inquiry
flow, economic uncertainties, and overlapping high new student growth rates in
prior years. Management believes efforts to enhance the Keller Graduate School of
Management brand awareness through improved messaging have helped produce
positive graduate enrollment results.
*
*
*
DeVry’s Cost of Educational Services increased 15.0% to $229.9 million during
the second quarter and grew 15.5% to $458.0 million for the first six months of
fiscal year 2011 as compared to the respective year-ago periods . Cost increases
were incurred in support of expanding DeVry University online and onsite total
student enrollments and operating a higher number of DeVry University locations as
compared to the prior year. Also, cost increases were incurred for the operation of
the new Chamberlain campuses in Chicago and Arlington, Virginia, which began
offering programs in July 2010, and to support growing online student enrollments .
Cost increases were incurred at Carrington associated with operating a higher
number of locations as compared to the prior year and increased hiring of career
services employees.
*
Student Services and Administrative Expense grew 13.3% to $186.0 million during
the second quarter and increased 15.1% to $367.5 million during the first six
months of fiscal year 2011 as compared to the respective year-ago periods . The
advertising and
increase in expenses represented additional investments in
.
recruiting to drive and support future growth in new student enrollments
325. The statements referenced in ¶¶314-320, 322-324 were materially false and
misleading when made as they represented and/or omitted facts which then existed and disclosure of
which was necessary to make the statements not false and/or misleading, for reasons set forth in
¶¶158 and 313 above, and as evidenced by the factual detail contained throughout this Complaint. In
addition, the statements referenced in ¶¶314-320, 322-324 were materially false and misleading
when made because they represented and/or omitted adverse facts which then existed and disclosure
of which was necessary to make the statements not false and/or misleading. The true facts, which
were known to or recklessly disregarded by each of the Defendants, in addition to those set forth in
¶¶158 and 313 above, were:
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.
The decline in DeVry’s enrollment was not due to “internal execution,” “external
market dynamics,” or “inquiry flow” in the market in general.” Instead, declining
enrollments was a result of DeVry’s inability to continue to illegally compensate its
Admissions Advisors.
Far from being “nothing that would be significant,” DeVry’s abandonment of its
illegal compensation policies in favor of the New Regulatory World was a drastic
and significant change that materially impacted DeVry’s enrollments. Thus,
Defendants continued to conceal the risk that DeVry’s enrollments would continue
to decrease as the effects of no longer being able to illegally compensate its
Admissions Advisors mounted.
.
326.
As a result of the foregoing, Defendants lacked a reasonable basis for their positive
statements about the Company, the Company’s Class Period revenue and
enrollment numbers, as well as DeVry’s future business prospects.
On February 16, 2011, Gunst and Hamburger participated on behalf of DeVry in
Deutsche Bank’s small mid-cap conference. During the conference, Gunst and Hamburger made
numerous false and misleading statements regarding DeVry’s financials and future business
prospects that were designed to and did artificially inflate the Company’s stock price. For example,
when speaking about the impact of the regulatory environment on DeVry, Gunst stated:
We have programs in place to make sure that we’re complying with our
regulations and are always focused in on serving the students.
*
But as I said, we’ve had a strong culture of compliance and that puts us in a good
position so that, as a regular course, we’re making sure that everything we do is
consistent with regulations that are put forth . And by having a diversified portfolio
across the different segments that I just walked you through, that helps in terms of
our ability to mitigate whatever risks that could come forth from regulation.
327.
The statements referenced in ¶326 were materially false and misleading when made
as they represented and/or omitted facts which then existed and disclosure of which was necessary to
make the statements not false and/or misleading, for reasons set forth in ¶¶158 and 313 above, and as
evidenced by the factual detail contained throughout this Complaint. In addition, the statements
referenced in ¶326 were materially false and misleading when made because they represented and/or
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omitted adverse facts which then existed and disclosure of which was necessary to make the
statements not false and/or misleading. The true facts, which were known to or recklessly
disregarded by each of the Defendants, in addition to those set forth in ¶¶158 and 313 above, were:
Contrary to Defendants’ statements, DeVry did not have a strong culture of
compliance in place for “many, many years.” To the contrary, DeVry utilized its
pretextual TEACH values to obfuscate its illegal compensation policies. Moreover,
it had begun rolling out New Regulatory World, planning to begin full compliance
with government regulations prohibiting incentive compensation in June 2011.
.
328.
As a result of the foregoing, Defendants lacked a reasonable basis for their positive
statements about the Company, the Company’s Class Period revenue and
enrollment numbers, as well as DeVry’s future business prospects.
On April 26, 2011, DeVry issued a press release announcing its financial results for
the third quarter ended March 31, 2011. The Company reported a 15.4% decline in new
undergraduate enrollment, and a total student enrollment increase of 5.9%. The press release also
stated, in relevant part:
“Our diversification strategy and focus on enhancing academic quality to support
long term growth continue to serve us well,” said Daniel Hamburger, DeVry’s
president and chief executive officer. “ Total enrollment growth across our family
of degree-granting schools was 7.6 percent in the spring . While Carrington and
DeVry University undergraduate new student enrollments experienced softness
during this period , strong growth within Chamberlain, Keller and DeVry Brasil
helped to offset the weakness. This demonstrates the value of our diversification
strategy and allows DeVry to continue to make investments in the quality of its
academic programs and services.”
329.
Following the issuance of the press release on April 26, 2011, DeVry hosted a
conference call to discuss its financial results and operations. Gunst and Hamburger participated in
the call on behalf of the Company. During the call, numerous false and misleading statements were
made regarding DeVry’s financials and future business prospects that were designed to and did
artificially inflate the Company’s stock price. For example, Gunst stated, in part:
So new enrollment growth is slowing, and that was to be expected after achieving
nine consecutive semesters with growth of 10% or more. And while we’re not
totally happy with these results, and there are broader external factors at play here,
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we believe that supply/demand relationship and the value proposition of our
programs at DeVry University, undergraduate and graduate, remain strong over
the long-term .
330.
During the question and answer portion of the call, the Company was asked about
where it was on changing incentive compensation to “fit with the new regulations” and what impact
that would have on enrollment trends going forward. In response, Hamburger misleadingly stated:
Of course, when it comes to compensation regulations, we have been compliant, we
are compliant and we will continue to be compliant with the regulations in that
area . So we do not pay bonus or commission or anything like that today, and I’m
not trying to tell you anything that you don’t know. But I know there’s just been a
lot of misunderstandings and misinformation out there. So just take the
opportunity to clarify that.
But we will be making some changes to our performance-management systems and
processes in the areas that are covered under the Title IV regulations. And that could
have some distractions for our folks. We do have people working on changes, so that
certainly could be one of the factors that are included when I say internal factors
earlier.
But to this point, I would [not] see that as a major driver, but it’s a factor. And we’ll
just have to see where we go in the future.
331.
In response to Defendants’ false and misleading statements, the price of DeVry
common stock increased $3.61 per share, or 7.2%, from a closing price of $50.09 on April 26, 2011
to close at $53.70 per share on April 27, 2011.
332.
On May 5, 2011, DeVry filed its quarterly report on Form 10-Q for the quarter ended
March 31, 2011, which confirmed the Company’s previously announced financial results and was
signed by Gunst and Hamburger (the “Third Quarter 2011 10-Q”). The Third Quarter 2011 10-Q
contained the required SOX certifications signed by Gunst and Hamburger stating that the Form 10Q did not include any material misrepresentations. Despite that, the quarterly report included
numerous false and misleading statements regarding DeVry’s financial performance and future
business prospects, which were tied to student enrollment, including the following:
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Total consolidated revenues for the third quarter of fiscal year 2011 of $562.7
million increased $58.3 million, or 11.6%, as compared to the year-ago quarter.
For the first nine months of fiscal year 2011, total consolidated revenues increased
16.1% to $1,635.6 million as compared to the year-ago period. For both the third
quarter and first nine months of fiscal year 2011, revenues increased within all
four of DeVry’s business segments as a result of growth in total student
enrollments , improved student retention and tuition price increases.
Business, Technology and Management
Business, Technology and Management segment revenues increased 13.2% to
$378.7 million in the third quarter and rose 18.4% to $1,102.3 million for the first
nine months of fiscal year 2011 as compared to the respective year-ago periods
driven primarily by growth in total student enrollments , tuition price increases, and
improved student retention on a year to date basis. The Business, Technology and
Management segment is comprised solely of DeVry University.
333.
Despite omitting how DeVry achieved its enrollment and financial results by utilizing
an illegal compensation scheme for its Admissions Advisors, or that the Company would be
abandoning that illegal scheme, the Third Quarter 2011 10-Q did provide detailed enrollment data,
which included the following “key trends”: at DeVry University, total undergraduate enrollment by
term for summer 2009 to summer 2010 through spring 2010 to spring 2010 increased between
22.0% and 5.9% . Likewise, new student enrollment increased for summer 2009 to summer 2010
by 9.9%, but decreased 15.4.7% from spring 2010 to spring 2011, and graduate coursetaker
enrollment for July 2009 to July 2010 through March 2010 to March 2011 increased by between
17.6% and 9.2% per session .20
334.
In furtherance of Defendants’ fraud, the Third Quarter 2011 10-Q purported to
describe the reasons behind DeVry’s increased enrollments and financial performance, stating in
part:
Management believes the increased undergraduate total student enrollments were
most significantly impacted by DeVry’s strong track record of high-quality
20
Attached as Exhibit O are the relevant portions of the Third Quarter 2011 10-Q.
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education, academic and graduate employment outcomes, and improved retention
of existing students on a year to date basis. Management believes the decrease in
undergraduate new student enrollments was the result of decreasing volume of
high quality inquiry flow, economic uncertainties, and overlapping high new
student growth rates in prior years . Management believes efforts to enhance the
Keller Graduate School of Management brand awareness through improved
messaging have helped produce positive graduate enrollment results .
*
DeVry’s Cost of Educational Services increased 8.7% to $232.9 million during the
third quarter and grew 13.1% to $690.9 million for the first nine months of fiscal
year 2011 as compared to the respective year-ago periods. Cost increases were
incurred in support of expanding DeVry University online and onsite total student
enrollments and operating a higher number of DeVry University locations as
compared to the prior year. Also, cost increases were incurred for the operation of
the new Chamberlain campuses in Chicago, Arlington, Virginia, and Houston, Texas,
and to support growing online student enrollments .
*
Student Services and Administrative Expense grew 14.6% to $192.6 million during
the third quarter and increased 14.9% to $560.1 million during the first nine
months of fiscal year 2011 as compared to the respective year-ago periods. The
advertising and
increase in expenses represented additional investments in
.
recruiting to drive and support future growth in new student enrollments
335. The statements referenced in ¶¶328-330, 332-336 were materially false and
misleading when made as they represented and/or omitted facts which then existed and disclosure of
which was necessary to make the statements not false and/or misleading, for reasons set forth in
¶¶158 and 313 above, and as evidenced by the factual detail contained throughout this Complaint. In
addition, the statements referenced in ¶¶328-330, 332-336 were materially false and misleading
when made because they represented and/or omitted adverse facts which then existed and disclosure
of which was necessary to make the statements not false and/or misleading. The true facts, which
were known to or recklessly disregarded by each of the Defendants, in addition to those set forth in
¶¶158 and 313 above, were:
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•
DeVry failed to inform the market that the “broader external factors” at play in
slowing enrollment growth included its inability to continue pay incentive
compensation to its Admissions Advisors under the New Regulatory World.
•
DeVry had not been compliant with compensation regulations and had been paying
bonuses and commissions to the Company’s Admissions Advisors prior to
government scrutiny and DeVry’s implementation of the New Regulatory World.
•
As a result of the foregoing, Defendants lacked a reasonable basis for their positive
statements about the Company, the Company’s Class Period revenue and
enrollment numbers, as well as DeVry’s future business prospects.
336.
On May 11, 2011, Gunst spoke on behalf of the Company at the Barclays Capital Inc.
Global Services Conference. Touting the Company’s so-called regulatory compliance, Gunst stated,
in part:
We have a strong culture of compliance that’s been in place for many, many years,
not something that we just put in place because of the increased regulatory focus
in the recent months, but it’s been in place for decades and that foundation will
serve us well for the future along the way .
337.
On June 9, 2011, DeVry issued a press release announcing the retirement of Gunst as
the Company’s CFO. The press release stated that Gunst would remain in his role as CFO as long as
necessary to ensure a smooth transition of duties while DeVry conducted an external search for his
successor.
338.
On August 11, 2011, DeVry shocked the market when it issued a press release
announcing its financial results for the fourth quarter and year ended June 30, 2011. Pointing to,
among other things, “regulatory changes,” the Company reported a 25.6% decline in new
undergraduate enrollment , and a total student enrollment decrease of 5.8% . During a conference
call after the market closed on August 11, 2011, Hamburger made clear to the market that complying
with new compensation rules was impacting the Company (although he continued to mislead the
market by misrepresenting that DeVry’s prior compensation system was compliant), stating, in
relevant part:
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Another adjustment is compliance with the new compensation rules which apply to
all colleges, whether private sector, public sector or independent. Again, I will point
out a misperception here. Some people think we were paying commissions before -people think we were paying commissions before the rule changes and that the rule
changes, therefore, had an impact. But that is not the case. We weren’t paying
commissions and so that wasn’t an impact from the new regulation. But we did need
to adjust our performance management system and our processes for employees
whose compen
sation is covered by these Department of Education rules . We are being careful to
ensure we remain in compliance and to properly assess the performance of these
employees.
339.
In that same conference call, Gunst warned that future earnings growth, “while still
possible” would “be more challenging” and stated that earnings in the first half of fiscal 2012 would
be below the first half of fiscal 2011.
340.
In response to the sudden drop in total student enrollments, as well as the disclosure
that the Company was having to adjust its compliance with new compensation rules, which was
having a negative impact on DeVry’s financial performance, as well as the disclosure of significantly
increased declines in new student enrollments, the price of DeVry common stock dropped sharply,
falling $8.90 per share, or nearly 17%, from a closing price of $53.39 on August 11, 2011 to close at
$44.49 per share on August 12, 2011. This series of events – the disclosure of rapidly declining
enrollments as a consequence of a switch to a legal compensation policy not based solely on
enrollments – represented the materialization of the risk, i.e. , the foreseeable consequence, concealed
by Defendants’ fraud.
341.
More specifically, DeVry was the worst-performing stock in the S&P 500 on August
12, 2011, a day Forbes described as a “generally up day for the market.” In an article titled,
“DeVry: Hey, Where’d Everybody Go?” The Wall Street Journal’s MarketBeat website stated that
DeVry shares had previously “bucked the downturn in the broader stock market all the way up until
late July, when they peaked at $65.45.” Analysts at Robert W. Baird downgraded DeVry that same
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day, cutting it to “neutral” from “outperform,” stating that “[w]ithout growth in F2012 and a pending
CFO transition, we struggle to recommend investors put new money to work.”
342.
Commenting on the Company’s explanation for its poor results, in an article titled
“Plummeting DeVry Leads Education Section Down,” Forbes reported the following on August 12,
2011:
DeVry’s CEO Dan Hamburger blamed the usual culprits, the “economy” and new
government “regulations.” But the highly compensated Hamburger must have felt
like chopped liver when the market wasn’t buying this now cliché refrain from
CEOs. This is especially true because DeVry has not been in the government’s
regulatory crosshairs as much as its competitors, all but three of whom were down on
the day, though by far less than the Downers-Grove-based education provider.
VII. DEFENDANTS MADE FALSE AND MISLEADING STATEMENTS
REGARDING DEVRY’S BUSINESS CONDUCT AND ETHICS
343.
During the Class Period, DeVry repeatedly discussed the Company’s commitment to
its reputation for integrity and quality. For example, the Company’s Form 10-K cited to DeVry’s
published “Code of Business Conduct and Ethics,” (the “Code”). The Code contained a host of false
and misleading statements that were designed to mislead the market. For example, the Code states,
“[w]e strive to achieve the highest business and personal standards of conduct, as well as full
compliance with the laws and regulations that apply to our business.” The Code further states in
pertinent part:
This Code is designed to promote:
• Honest and ethical conduct, including the handling of actual or apparent
conflicts of interest between personal and professional relationships;
• Fair, full, accurate, timely, truthful and understandable disclosure in reports
and documents compiled within DeVry that are filed with government
regulatory and accreditation agencies and in other public communications
made by DeVry;
• Full and complete compliance with all applicable laws and regulations;
• Prompt internal reporting of violations of this Code; and
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~
344.
Accountability for adherence to this Code.
A reference to the Company’s Code was also made by Defendants in DeVry’s
responses to questions from the United States Senate Committee on July 15, 2010. More
specifically, DeVry claimed that the Company is “guided by its values, which include maintaining a
high standard of performance and integrity in all areas of operation.”
345.
The business conduct and integrity of DeVry and its management are material to
investors. Contrary to statements made by Defendants during the Class Period, neither DeVry nor its
management were acting ethically or with integrity. Not only were Defendants in violation of
multiple rules and regulations, such as Title IV, but they failed to adequately disclose their unethical,
abusive and fraudulent business practices to investors.
VIII. ADDITIONAL SCIENTER ALLEGATIONS
346.
As alleged herein, Defendants acted with scienter in that Defendants knew that the
public documents and statements issued or disseminated in the name of the Company were
materially false and misleading; knew that such statements or documents would be issued or
disseminated to the investing public; and knowingly and substantially participated or acquiesced in
the issuance or dissemination of such statements or documents as primary violations of the federal
securities laws. As set forth elsewhere herein in detail, Defendants, by virtue of their receipt of
information reflecting the true facts regarding DeVry, their control over, and/or receipt and/or
modification of DeVry’s allegedly materially misleading misstatements and/or their associations
with the Company which made them privy to confidential proprietary information concerning
DeVry, participated in the fraudulent scheme alleged herein.
347.
Defendants knew and/or recklessly disregarded the falsity and misleading nature of
the information that they caused to be disseminated to the investing public. The ongoing fraudulent
scheme described in this complaint could not have been perpetrated over a substantial period of time,
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as has occurred, without the knowledge and complicity of the personnel at the highest level of the
Company, including each of the Individual Defendants.
348.
The Individual Defendants were intimately involved with all aspects of the
Company’s business, were hands-on managers and were privy to confidential and proprietary
information concerning DeVry, its operations, finances, financial condition, and present and future
business prospects. The Individual Defendants also had access to material adverse non-public
information concerning DeVry, as discussed in detail below. Because of their positions with DeVry,
the Individual Defendants had access to non-public information about its business practices,
finances, enrollment, markets and present and future business prospects via access to internal
corporate documents, conversations and connections with other corporate officers and employees,
attendance at management and board of directors meetings and committees thereof and via reports
and other information provided to them in connection therewith. Because of their possession of such
information, the Individual Defendants knew or were severely reckless in disregarding the fact that
adverse facts specified herein had not been disclosed to, and were being concealed from (in order to
mislead), the investing public.
349.
Throughout the Class Period, the Individual Defendants were able to, and did, control
the contents of the Company’s SEC filings, reports, press releases, and other public statements. The
Individual Defendants were provided with copies of, reviewed and approved, and/or signed such
filings, reports, releases, and other statements prior to or shortly after their issuance and had the
ability and opportunity to prevent their issuance or to cause them to be corrected. The Individual
Defendants were also able to, and did, directly or indirectly, control the conduct of DeVry’s
business, the information contained in its filings with the SEC, and its public statements. Moreover,
the Individual Defendants made or directed the making of affirmative statements to the investing
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public, and participated in meetings, conference calls, and discussions concerning such statements.
Each of the Individual Defendants knew that the adverse facts specified herein had not been
disclosed to and were being concealed from the public, and that the positive representations that
were being made were then false and misleading. As a result, each of the Individual Defendants is
responsible for the accuracy of DeVry’s corporate releases detailed herein and is therefore
responsible and liable for the misrepresentations and omissions contained therein.
350.
The Individual Defendants are liable as direct participants and co-conspirators with
respect to the wrongs complained of herein. In addition, the Individual Defendants, by reason of
their status as senior executive officers and/or directors, were “controlling persons” within the
meaning of §20 of the Exchange Act and had the power and influence to cause the Company to
engage in the unlawful conduct complained of herein. Because of their positions of control, the
Individual Defendants were able to and did, directly or indirectly, control the conduct of DeVry’s
business.
351.
As senior executive officers and/or directors and controlling persons of a publicly-
traded company whose common stock and other securities were, and are, registered with the SEC
pursuant to the Exchange Act, and whose shares traded on NYSE and governed by the federal
securities laws, the Individual Defendants had a duty to disseminate accurate and truthful
information promptly with respect to DeVry’s financial condition and performance, growth,
operations, financial statements, business, products, markets, management, earnings and present and
future business prospects, to correct any previously issued statements that had become materially
misleading or untrue, so that the market price of DeVry’s common stock would be based upon
truthful and accurate information. The Individual Defendants’ misrepresentations and omissions
during the Class Period violated these specific requirements and obligations.
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352.
The Individual Defendants are liable as primary participants in a fraudulent scheme
and wrongful course of business which operated as a fraud or deceit on purchasers of DeVry
common stock by disseminating materially false and misleading statements and/or concealing
material adverse facts. The fraudulent scheme employed by the Individual Defendants was a
success, as it: (i) deceived the investing public regarding DeVry’s financials, future business
prospects and business; (ii) artificially inflated the price of DeVry common stock; and (iii) caused
Plaintiff and other members of the Class to purchase DeVry common stock at inflated prices and
suffer losses when the relevant truth regarding DeVry’s true financial condition was revealed and the
artificial inflation was removed from the price of the stock.
353.
Further, during the Class Period, the Individual Defendants were motivated to
misrepresent the Company’s true financial condition and future business prospects so that they could
artificially increase the price of DeVry’s stock. To that end, and in the midst of orchestrating their
fraud, Hamburger sold 144,073 shares of DeVry stock at artificially inflated prices, generating
proceeds of $8,359,960, and Gunst sold 55,244 shares of DeVry stock at artificially inflated prices,
generating proceeds of $3,340,147. Hamburger’s and Gunst’s stock sales were unusual and
suspicious in timing and amount. Indeed, neither of the Individual Defendants sold a single share of
DeVry stock in the two years prior to the beginning of the Class Period.
354.
Further, Hamburger took advantage of the artificial inflation created by Defendants’
fraud by selling DeVry shares immediately after making false and misleading statements. For
instance, Hamburger initially sold shares on April 25, 2008, the day after the Company’s third
quarter 2008 earnings conference call, on which the Defendants made numerous false and
misleading statements about DeVry’s enrollment numbers, recruiting process and employment
statistics. Hamburger also sold shares on February 3, 2009, seven days after the Company’s second
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quarter 2009 earnings conference call, on which the Defendants made numerous false and
misleading statements about DeVry’s enrollment numbers and employment statistics.
355.
Hamburger also sold shares on October 28, 2009, the day after the Company’s first
quarter 2010 earnings conference call, on which the Defendants made numerous false and
misleading statements about DeVry’s enrollment numbers, retention rates and employment statistics.
Finally, Hamburger also sold a significant number of shares during the five days beginning on
December 9, 2009, following DeVry’s December 8, 2009 press release which touted DeVry
University’s (inflated) enrollment results for fall 2009.
356.
Similarly, Gunst took advantage of the artificial inflation created by Defendants’
fraud by selling DeVry shares immediately after making false and misleading statements and/or
selling shares ahead of negative news. For example, Gunst sold shares on February 18, 2011, two
days after participating in the Deutsche Bank small mid-cap conference call, on which the
Defendants made numerous false and misleading statements about DeVry’s compliance with
government regulations. Likewise, Gunst sold a total of 28,316 shares from July 1, 2011 through
August 1, 2011, just weeks before DeVry issued the August 11, 2011 press release disclosing the
significant decline in student enrollment, related to compliance with regulatory changes.
357.
The Individual Defendants were further motivated to commit fraud by the Company’s
Management Incentive Program (“MIP”). During the Class Period, the Company’s MIP awarded
DeVry’s executives annual bonuses when they met or exceeded individual performance goals and
Company financial objectives. In the case of Hamburger and Gunst, 70% of the incentive
compensation available to them during the Class Period through the Company’s MIP was tied to
earnings per share and revenue goals set by DeVry’s Compensation Committee – metrics which the
Individual Defendants ultimately manipulated to further their own interests. Indeed, by fraudulently
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inflating the Company’s financials, the Individual Defendants were able to greatly increase their
compensation in each year of the Class Period, as set forth in the chart below:
Hamburger:
Year
2008
2009
2010
2011
Base Salary
$675,322
$734,116
$751,689
$788,067
MIP Bonus Pay-Out
$991,749 (147% of base salary)
$1,019,277 (139% of base salary)
$1,339,969 (178% of base salary)
$867,000 (110% of base salary)
Gunst:
Year
2008
2009
2010
2011
Base Salary
$285,970
$360,258
$369,348
$382,162
MIP Bonus Pay-Out
$212,127 (74% of base salary)
$260,440 (72% of base salary)
$343,742 (93% of base salary)
$248,332 (65% of base salary)
IX. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE
MARKET DOCTRINE
358. At all relevant times, the market for DeVry common stock was an efficient market for
the following reasons, among other things:
(a)
DeVry stock met the requirements for listing, and were listed and actively
traded on the NYSE, a highly efficient and automated market;
(b)
As a regulated issuer, DeVry filed periodic public reports with the SEC; and
(c)
DeVry regularly communicated with public investors via established market
communication mechanisms, including through regular disseminations of press releases on the
national circuits of major newswire services and through other wide-ranging public disclosures, such
as communications with the financial press and other similar reporting services.
359. As a result, the market for DeVry common stock promptly digested current
information regarding DeVry from all publicly-available sources and reflected such information in
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the price of DeVry stock. Under these circumstances, all purchasers of DeVry common stock during
the Class Period suffered similar injury through their purchase of DeVry common stock at artificially
inflated prices and a presumption of reliance applies.
X. LOSS CAUSATION/ECONOMIC LOSS
360.
During the Class Period, as detailed herein, Defendants engaged in a scheme to
deceive the market through a course of conduct that artificially inflated the value of DeVry common
stock throughout the Class Period. Defendants’ creation and implementation of a compensation plan
that violated the HEA operated as a fraud or deceit on Class Period purchasers of DeVry common
stock by misrepresenting the reasons behind the Company’s financials and future business prospects,
including but not limited to, misrepresenting the strength and source of the Company’s revenues and
reasons behind the volume of student enrollments in DeVry’s degree programs. By their conduct,
Defendants concealed the risk that enrollments, and therefore revenue, would decline substantially if
DeVry complied with the HEA’s compensation rules.
361.
Defendants’ false and misleading statements had their intended effect and directly and
proximately caused, or were a substantial contributing cause of DeVry’s common stock trading at
artificially inflated levels, reaching a Class Period high of $74.25 per share on April 22, 2010.
362.
As a result of Defendants’ fraudulent conduct as alleged herein, the prices at which
DeVry common stock traded were artificially inflated, at varying levels, throughout the Class Period.
When Plaintiff and other members of the Class purchased their DeVry common stock, the true value
of such common stock was substantially lower than the prices actually paid by Plaintiff and the other
members of the Class. As a result of their purchases of DeVry common stock during the Class
Period at artificially inflated prices, Plaintiff and other members of the Class suffered economic loss,
i.e. , damages under federal securities laws, when such artificial inflation dissipated.
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363.
For example, at the start of the Class Period, Defendants touted swelling enrollments,
and attributed the Company’s financial success to those rapidly increasing enrollment trends.
Defendants, however, failed to disclose how those enrollments were achieved. Because they were
well aware of how DeVry achieved its seemingly positive results – through a uniformly employed
compensation plan that violated the HEA and was based solely on Advisors’ ability to hit or exceed
enrollment quotas – Defendants knew their Class Period statements omitted facts that concealed a
material and foreseeable risk. That risk is simply described as follows: the Company’s enrollments
depended on an illegal compensation policy and absent that policy, enrollments would drop
precipitously.
364.
As a result of Defendants’ materially false and misleading statements and documents,
as well as the adverse, undisclosed information known to the Defendants, Plaintiff and other
members of the Class relied, to their detriment, on such statements and documents, and/or the
integrity of the market, in purchasing their DeVry common stock at artificially inflated prices during
the Class Period. Had Plaintiff and the other members of the Class known the truth, they would not
have taken such actions.
365.
In the summer of 2010, scrutiny of the for-profit education sector increased
dramatically to previously unseen levels. Concerned with the billions of dollars being funneled from
the federal government to for-profit schools, regulators and members of Congress set their sights on
for-profit education companies.
366.
In conjunction with that heightened scrutiny, Defendants repeatedly and affirmatively
assured investors that DeVry did not engage in illegal compensation practices for the Company’s
recruiters. Defendants’ efforts were nothing more than further attempts to mislead the market’s
expectations for the Company. For example, Defendants declared that the Company unequivocally
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did not engage in recruiter compensation based solely on enrollments. Indeed, Defendants
repeatedly told the market that any suggestion to the contrary ( i.e. , any suggestion that DeVry paid
illegal compensation to Admissions Advisors) was baseless. For a time, Defendants were
successful. To that end, Defendants’ false and misleading statements maintained and increased the
artificial inflation in the price of DeVry common stock.
367.
Nevertheless, Defendants were aware or were reckless in disregarding that not only
did DeVry’s uniform Admissions Advisor compensation plan depend solely on quotas, in direct
violation of applicable regulations set forth herein, but Defendants also knew or recklessly
disregarded that their Class Period statements were materially false and misleading for another
reason. On top of denying that there was any need to change DeVry’s compensation practices,
Defendants omitted any and all disclosure that the Company was doing just that. As specifically
detailed herein by numerous well-placed Confidential Witnesses, DeVry put in place a plan to
completely revise its compensation practices. Under the new system, Admissions Advisors would
not see their compensation increase or decrease based solely on enrollment-based factors. Upon
testing that plan, the Company and the Defendants learned its rollout would result in rapidly
declining enrollments and a high rate of Admissions Advisor turnover as employees left the
Company rather than take pay cuts and see their incentive compensation disappear. Despite the clear
results of testing the new policy in limited markets, Defendants continued to omit any disclosure of
the change or its inevitable impact, even as the Company made the policy mandatory across the
entire universe of DeVry campuses.
368.
The significant decline in enrollments and poor financial results reported at the end of
the Class Period were a direct and foreseeable consequence of the Defendants’ fraud unraveling.
Although they did not affirmatively admit to the particulars of their fraud, they did not have to. The
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market, which reacted by punishing the Company’s stock price, clearly understood there had been a
new revelation – a revelation that DeVry’s financial condition was not as previously (and
misleadingly) presented to the market.
369.
Thus, the risks concealed by Defendants’ fraud materialized on August 11, 2011, with
the Company pointing to “regulatory changes” while reporting a 25.6% decline in new
undergraduate enrollment and a total student enrollment decrease of 5.8%. As Hamburger informed
the market that complying with new compensation rules was impacting the Company, and market
commentators criticized DeVry, the price of DeVry stock declined significantly on what was a
“generally up day for the market.” More specifically, the price of DeVry stock fell nearly 17%, or
$8.90 per share, on August 12, 2011.
370.
The timing and magnitude of the decline in DeVry common stock negates any
inference that the loss suffered by Plaintiff and other Class members were caused by changed market
conditions, macroeconomic factors or Company-specific facts unrelated to the Defendants’
fraudulent conduct. As a result of their purchases of DeVry common stock during the Class Period,
Plaintiff and other members of the Class suffered economic loss, i.e. , damages, under the federal
securities laws when the above-described revelations reached the market and the artificial inflation
was removed.
XI. NO SAFE HARBOR
371.
DeVry’s verbal “Safe Harbor” warnings accompanying its oral forward-looking
statements (“FLS”) issued during the Class Period were ineffective to shield those statements from
liability.
372.
The Defendants are also liable for any false or misleading FLS pleaded because, at
the time each FLS was made, the speaker knew the FLS was false or misleading and the FLS was
authorized and/or approved by an executive officer of DeVry who knew that the FLS was false.
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None of the historic or present tense statements made by Defendants were assumptions underlying or
relating to any plan, projection or statement of future economic performance, as they were not stated
to be such assumptions underlying or relating to any projection or statement of future economic
performance when made, nor were any of the projections or forecasts made by Defendants expressly
related to or stated to be dependent on those historic or present tense statements when made.
XII. COUNT I: FOR VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE
ACT AND RULE 10b-5 PROMULGATED THEREUNDER AGAINST ALL
DEFENDANTS
373.
Plaintiff repeats and realleges the allegations set forth above as though fully set forth
herein. This claim is asserted against all Defendants.
374.
During the Class Period, DeVry and the Individual Defendants carried out a plan,
scheme and course of conduct which was intended to and, throughout the Class Period, did: (i)
deceive the investing public, Plaintiff and other Class members, as alleged herein; (ii) artificially
inflate and maintain the market price of DeVry common stock; and (iii) cause Plaintiff and other
members of the Class to purchase DeVry common stock at artificially inflated prices. In furtherance
of this unlawful scheme, plan and course of conduct, DeVry and the Individual Defendants took the
actions set forth herein.
375.
These Defendants: (i) employed devices, schemes, and artifices to defraud; (ii) made
untrue statements of material fact and/or omitted to state material facts necessary to make the
statements not misleading; and (iii) engaged in acts, practices, and a course of business which
operated as a fraud and deceit upon the purchasers of the Company’s common stock in an effort to
maintain artificially high market prices for DeVry’s common stock in violation of §10(b) of the
Exchange Act and Rule 10b-5. These Defendants are sued as primary participants in the wrongful
and illegal conduct charged herein. The Individual Defendants are also sued as controlling persons
of DeVry, as alleged below.
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376.
In addition to the duties of full disclosure imposed on Defendants as a result of their
making of affirmative statements and reports, or participating in the making of affirmative
statements and reports, to the investing public, they each had a duty to promptly disseminate truthful
information that would be material to investors in compliance with the integrated disclosure
provisions of the SEC as embodied in SEC Regulation S-X (17 C.F.R. §210.01, et seq .) and S-K (17
C.F.R. §229.10, et seq .) and other SEC regulations, including accurate and truthful information with
respect to the Company’s operations, financial condition, future business prospects, and operational
performance, so that the market prices of Company common stock would be based on truthful,
complete and accurate information.
377.
DeVry and each of the Individual Defendants, individually and in concert, directly
and indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails,
engaged and participated in a continuous course of conduct to conceal adverse material information
about the business, business practices, performance, operations and future business prospects of
DeVry as specified herein.
378.
These Defendants each employed devices, schemes and artifices to defraud while in
possession of material adverse non-public information. These Defendants also engaged in acts,
practices, and a course of conduct, as alleged herein, in an effort to assure investors of DeVry’s
value, performance, and financial and operational growth. These acts included the making of, or the
participation in the making of, untrue statements of material facts and omitting to state necessary
facts in order to make the statements made about DeVry and its business operations and future
business prospects in light of the circumstances under which they were made, not misleading, as set
forth more particularly herein, and engaged in transactions, practices and a course of business which
operated as a fraud and deceit upon the purchasers of DeVry common stock during the Class Period.
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379.
Each of the Individual Defendants’ primary liability and controlling person liability
arises from the following facts: (i) each of the Individual Defendants was a high-level executive
and/or director at the Company during the Class Period; (ii) each of the Individual Defendants, by
virtue of her/his responsibilities and activities as a senior executive officer and/or director of the
Company, was privy to and participated in the creation, development and reporting of the
Company’s financial performance, projections and/or reports; and (iii) each of the Individual
Defendants was aware of the Company’s dissemination of information to the investing public, which
each knew or disregarded with recklessness was materially false and misleading.
380.
Each of these Defendants had actual knowledge of the misrepresentations and
omissions of material facts set forth herein, or acted with reckless disregard for the truth in that each
failed to ascertain and to disclose such facts, even though such facts were available to each of them.
Such Defendants’ material misrepresentations and/or omissions were done knowingly or with
recklessness and for the purpose and effect of concealing DeVry’s operating condition and future
business prospects from the investing public and supporting the artificially inflated price of its
common stock. As demonstrated by Defendants’ misstatements of the Company’s financial
condition and performance throughout the Class Period, each of the Individual Defendants, if he or
she did not have actual knowledge of the misrepresentations and omissions alleged, was reckless in
failing to obtain such knowledge by deliberately refraining from taking those steps necessary to
discover whether those statements were false and misleading.
381.
As a result of the dissemination of the materially false and misleading information
and failure to disclose material facts, as set forth above, the market prices of DeVry common stock
were artificially inflated, at varying levels, throughout the Class Period. In ignorance of the fact that
market prices of DeVry common stock were artificially inflated, and relying directly or indirectly on
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the false and misleading statements made by Defendants, or upon the integrity of the market in
which the common stock trades, and/or on the absence of material adverse information that was
known to or disregarded with recklessness by Defendants but not disclosed in public statements by
Defendants during the Class Period, Plaintiff and the other members of the Class acquired DeVry
common stock during the Class Period at artificially high prices and were damaged thereby, as
evidenced by, among other things, the common stock price declines identified herein that released
the artificial inflation from the price of DeVry common stock.
382.
At the time of said misrepresentations and omissions, Plaintiff and other members of
the Class were ignorant of their falsity, and believed them to be true. Had Plaintiff and the other
members of the Class and the marketplace known of the true performance, future business prospects
and intrinsic value of DeVry, which were not disclosed by Defendants, Plaintiff and other members
of the Class would not have purchased or otherwise acquired their DeVry common stock during the
Class Period, or they would not have done so at artificially inflated prices which they paid.
383.
By virtue of the foregoing, DeVry and the Individual Defendants have each violated
§10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder.
384.
As a direct and proximate result of Defendants’ wrongful conduct, Plaintiff and the
other members of the Class suffered damages in connection with their respective purchases and sales
of the Company’s common stock during the Class Period, as evidenced by, among other things, the
common stock price decline on or about February 11, 2009, that released the artificial inflation from
DeVry’s common stock.
XIII. COUNT II: FOR VIOLATIONS OF SECTION 20(a) OF THE
EXCHANGE ACT AGAINST THE INDIVIDUAL DEFENDANTS
385.
Plaintiff repeats and realleges the allegations set forth above as though fully set forth
herein. This claim is asserted against the Individual Defendants.
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386.
Each of the Individual Defendants acted as a controlling person of DeVry within the
meaning of §20(a) of the Exchange Act as alleged herein. By virtue of their high-level positions
with the Company, participation in and/or awareness of the Company’s operations and/or intimate
knowledge of the Company’s fraudulent financial reporting and actual performance, each of the
Individual Defendants had the power to influence and control and did influence and control, directly
or indirectly, the decision-making of the Company, including the content and dissemination of the
various statements which Plaintiff contends are false and misleading. Each of the Individual
Defendants was provided with or had unlimited access to copies of the Company’s reports, press
releases, public filings and other statements alleged by Plaintiff to be misleading prior to and/or
shortly after these statements were issued and had the ability to prevent the issuance of the
statements or cause the statements to be corrected.
387.
In addition, each of the Individual Defendants had direct involvement in the day-to-
day operations of the Company and, therefore, is presumed to have had the power to control or
influence the particular transactions giving rise to the securities violations alleged herein, and
exercised the same.
388.
As set forth above, DeVry and the Individual Defendants each violated §10(b) and
Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue of their controlling
positions, each of the Individual Defendants is liable pursuant to §20(a) of the Exchange Act. As a
direct and proximate result of Defendants’ wrongful conduct, Plaintiff and other members of the
Class suffered damages in connection with their purchases of the Company’s common stock during
the Class Period when the artificial inflation was released from DeVry common stock, as detailed
herein.
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WHEREFORE, Plaintiff prays for relief and judgment, as follows:
(a)
Determining that this action is a proper class action and designating Plaintiff
as class representative under Rule 23 of the Federal Rules of Civil Procedure;
(b)
Awarding compensatory damages in favor of Plaintiff and the other Class
members against all Defendants, jointly and severally, for all damages sustained as a result of
Defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;
(c)
Awarding Plaintiff and the Class their reasonable costs and expenses incurred
in this action, including counsel fees and expert fees; and
(d)
Such other and further relief as the Court may deem just and proper.
XIV. JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by jury.
DATED: May 4, 2012
WEXLER WALLACE LLP
s/ Kara A. Elgersma
KARA A. ELGERSMA
Kenneth A. Wexler
Edward A. Wallace
Kara A. Elgersma
55 W. Monroe Street, Suite 3300
Chicago, IL 60603
Telephone: 312/346-2222
312/346-0022 (fax)
kaw@wexlerwallace.com
eaw@wexlerwallace.com
kae@wexlerwallace.com
Liaison Counsel
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ROBBINS GELLER RUDMAN
& DOWD LLP
David J. George
Robert J. Robbins
120 E. Palmetto Park Road, Suite 500
Boca Raton, FL 33432
Telephone: 561/750-3000
561/750-3364 (fax)
dgeorge@rgrdlaw.com
rrobbins@rgrdlaw.com
ROBBINS GELLER RUDMAN
& DOWD LLP
John K. Grant
Post Montgomery Center
One Montgomery Street, Suite 1800
San Francisco, CA 94104
Telephone: 415/288-4545
415/288-4534 (fax)
jgrant@rgrdlaw.com
ROBBINS GELLER RUDMAN
& DOWD LLP
David W. Hall
655 West Broadway, Suite 1900
San Diego, CA 92101
Telephone: 619/231-1058
619/231-7423 (fax)
dhall@rgrdlaw.com
Lead Counsel for Plaintiff
SUGARMAN & SUSSKIND
Robert A. Sugarman
Pedro A. Herrera
100 Miracle Mile, Suite 300
Coral Gables, FL 33134
Telephone: 305/529-2801
305/447-8115 (fax)
PHerrera@sugarmansusskind.com
Sugarman@sugarmansusskind.com
Attorneys for Plaintiff
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