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Zamir v. Bridgepoint Education, Inc.

United States District Court, S.D. California

July 25, 2016

NELDA ZAMIR, Individually and on Behalf of All Others Similarly Situated, Plaintiff,



         Presently before the Court are Defendants Bridgepoint Education, Inc.; Andrew S. Clark; Daniel J. Devine; Patrick T. Hackett; and Adarsh Sarma’s (collectively, the Bridgepoint Defendants) Motion to Dismiss Plaintiffs’ Amended Class Action Complaint (the Bridgepoint MTD, ECF No. 28) and Request for Judicial Notice (RJN, ECF No. 28-3); Defendants Warburg Pincus Private Equity VIII, L.P., Warburg Pincus LLC; Warburg Pincus Partners L.P. (successor-in-interest to Warburg Pincus Partners LLC); and Warburg Pincus & Co.’s (collectively, the Warburg Defendants) Motion to Dismiss Amended Class Action Complaint for Violations of the Federal Securities Laws (the Warburg MTD, ECF No. 30); and Lead Plaintiffs’ Nelda Zamir and Thomas G. Prosch’s Motion to Strike and Objection to Defendants’ Request for Judicial Notice (Mot. to Strike, ECF No. 37). Also before the Court are the parties’ Oppositions to (ECF Nos. 36, 37) and Replies in Support of (ECF Nos. 41, 42, 43) the various motions, as well as two Notices of Supplemental Authority filed by Lead Plaintiffs (ECF Nos. 44, 46). The Court vacated the hearing and took these matters under submission without oral argument pursuant to Civil Local Rule 7.1(d)(1). (ECF No. 45.) Having considered the parties’ arguments and the law, the Court GRANTS the Bridgepoint Defendants’ RJN (ECF No. 28-3), DENIES Lead Plaintiffs’ Motion to Strike (ECF No. 37), GRANTS the Bridgepoint MTD (ECF No. 28), and GRANTS the Warburg MTD (ECF No. 30).


         I. The Defendants

         Defendant Bridgepoint provides for-profit higher education through two wholly-owned subsidiaries, Ashford University and the University of the Rockies. (Am. Class Action Compl. (AC) ¶¶ 3, 22, ECF No. 17; see also Id. at ¶ 40.) Its common stock is publicly traded on the New York Stock Exchange. (Id. at ¶ 22; see also Id. at ¶ 40.)

         Defendant Warburg Pincus Private Equity VIII, L.P. (Warburg VIII) is Defendant Bridgepoint’s controlling shareholder. (Id. at ¶ 34.) As of October 31, 2013, Defendant Warburg VIII owned approximately 63.4% of Defendant Bridgepoint’s outstanding stock. (Id.) Defendant Warburg Pincus & Co. (Warburg Co.) is a managing member of Defendant Warburg Pincus Partners LLC (Warburg LLC) (id. at ¶ 31), which is the sole general partner of Defendant Warburg VIII (id. at ¶ 33).

         Defendant Clark is a co-founder of Defendant Bridgepoint, as well as its Chief Executive Officer, President, and a director. (Id. at ¶ 23.) Defendant Devine has served as Defendant Bridgepoint’s Chief Financial Officer since January 2004 and its Executive Vice President since January 2011. (Id. at ¶ 25.) Defendant Hackett has served as a director of Defendant Bridgepoint since March 2008 and as Chairman of the Board since February 2009. (Id. at ¶ 27.) He is also a managing director at Defendant Warburg LLC and a general partner of Defendant Warburg Co. (Id.) Defendant Sarma has served as a director of Defendant Bridgepoint since July 2005 and is also Chair of its Nominating and Governance Committee of the Board and a member of the Defendant Bridgepoint’s Compensation and Strategic Oversight Committee of the Board. (Id. at ¶ 29.) He is also a managing director at Defendant Warburg LLC. (Id.) Defendants Clark, Devine, Hackett, and Sarma are collectively referred to as the Individual Defendants.

         II. Factual Background

         Defendant Bridgepoint’s primary source of revenue is tuition and related fees. (Id. at ¶ 40.) The vast majority of this tuition is paid via federal financial aid. (Id. at ¶ 41.) In 2012 and 2013, over 85% of Ashford University’s and University of the Rockies’ revenues came from Title IV federal student loan programs. (Id.; see also Id. at ¶ 64.)

         In mid-2012, Defendant Bridgepoint experienced technical issues during an annual upgrade of its student management system. (Id. at ¶¶ 5, 42.) These technical issues resulted in delays in packaging students for financial aid qualification in between financial aid award years. (Id. at ¶ 5.) As a result, a significant number of students were not packaged prior to leaving Defendant Bridgepoint’s institutions and were consequently not eligible for financial aid funding. (Id.) These students were therefore required to pay outstanding balances without the assistance of financial aid. (Id.)

         On March 12, 2013, Defendant Bridgepoint reported an increase over historic levels in its bad debt expense for the fourth quarter of 2012 and the 2012 fiscal year. (Id. at ¶ 6.) Defendants Clark and Devine explained to investors and analysts on an earnings conference call that Defendant Bridgepoint’s technical issues were to blame, but that they did not expect the issue to repeat in 2013. (Id. at ¶¶ 6, 42.) On May 17, 2013, Defendant Bridgepoint issued an amended Form 10-K for the 2012 fiscal year to reissue its financial statements. (Id. at ¶ 45.)

         Despite Defendant Bridgepoint’s assurances to the contrary, the 2012 technical issues caused a backlog in packaging financial aid throughout 2013. (Id. at ¶ 7; see also Id. at ¶ 43.) Consequently, Defendant Bridgepoint continued to report higher than normal bad debt expenses as a percentage of revenues. (Id. at ¶ 48.)

         On November 13, 2013, Defendant Bridgepoint issued a Form S.C. TO-I, announcing that a special committee of its board of directors had approved a plan to purchase up to 10, 250, 000 shares of its common stock through a tender offer at a purchase price of $19.50 per share. (Id. at ¶¶ 103, 140.) The special committee consisted of three independent directors: Dale Crandall, Marye Anne Fox, and Robert Harman. (Decl. of Teodora E. Manolova (Manolova Decl.) Ex. A at 7, ECF No. 28-2 at 10.[1]) The high and low sales price per share reported by the NYSE in the fourth quarter 2013 through November 12, 2013 were $20.33 and $15.64, respectively. (Manolova Decl. Ex. H at 21, ECF No. 28-2 at 56.) The $19.50 per share tender offer price thus represented a 4.2% discount to the stock price two weeks before the announcement. (Bridgepoint MTD Mem. 21 & n.20 (citing Manolova Decl. Ex. H at 21, ECF No. 28-2 at 56); see also MTD Opp’n 26 n.13, ECF No. 36; Bridgepoint MTD Reply 16 n.10, ECF No. 41.) The Form S.C. TO-I and press release noted that the Warburg Defendants and Defendant Bridgepoint’s officers and directors, including the Individual Defendants, planned to participate in the tender offer. (AC ¶ 140, ECF No. 17.)

         The Warburg Defendants ultimately sold back 6, 878, 646 shares to Defendant Bridgepoint, or nearly 20% of the shares the Warburg Defendants held prior to the tender offer. (Id. at ¶ 142.) Defendant Clark disposed of 254, 114 (12.8%) of his shares, Defendant Devine 114, 136 (22%), and Defendants Hackett and Sarma 2004 (10%) each. (Id.) Excluding transactions executed to satisfy tax withholding obligations, Defendant Clark sold 185, 326 shares (see Manolova Decl. Ex. K at 75, ECF No. 28-2 at 88), Defendant Devine 42, 519 (see Manolova Decl. Ex. L at 86, ECF No. 28-2 at 100), and Defendants Hackett and Sarma 925 each (see Manolova Decl. Ex. M at 93, ECF No. 28-2 at 108; Manolova Decl. Ex. N at 101, ECF No. 28-2 at 117.). Defendants Clark and Devine retained approximately 94% and 87% of their respective stock holdings in Defendant Bridgepoint during the class period, while Defendants Hackett and Sarma-excluding shares held by Warburg-each increased their holdings. (See Manolova Decl. Ex. F at 36, ECF No. 28-2 at 44; Manolova Decl. Ex. G at 40, ECF No. 28-2 at 49.)

         On December 11, 2013, the United States Securities and Exchange Commission (SEC) contacted Defendant Devine with comments and questions regarding Defendant Bridgepoint’s declining enrollments but increased revenue for the 2012 fiscal year. (AC ¶¶ 58, 60, ECF No. 17.) The SEC also asked Defendant Devine how Defendant Bridgepoint’s internal processing issues with financial aid packages had affected its bad debt percentage. (Id. at ¶ 60.) Defendant Devine’s January 10, 2014 response detailed Defendant Bridgepoint’s 2012 technical issues and the backlog affecting financial aid packaging through 2013. (Id. at ¶ 62.) In response to the SEC’s inquiry regarding Defendant Bridgepoint’s determination that collectability is reasonably assured, Defendant Devine noted that because “approximately 85 percent of [Defendant Bridgepoint’s] students pay for tuition and fees via Title IV funding . . ., [Defendant Bridgepoint] conclude[s its] collectability assessment based on the government’s ability to pay as opposed to a student’s ability to pay.” (Id. at ¶ 64 (emphasis omitted).)

         Defendant Devine’s response prompted the SEC to ask for additional information on February 12, 2014, including “why it is appropriate to base your collectability assessment on the government’s ability to pay.” (Id. at ¶ 66.) Defendant Devine replied on February 28, 2014 and a number of additional communications with the SEC followed, including two telephone conversations in May 2014 and an additional letter on June 3, 2014. (Id. at ¶ 67.)

         On March 11, 2014, Defendant Bridgepoint preliminarily announced its fourth quarter and 2013 fiscal year financial results in a press release. (Id. at ¶ 116.) Later that day, Defendants held an earnings call, at which the Individual Defendants fielded questions relating to Defendant Bridgepoint’s increase bad debt percentage for the quarter. (Id. at ¶ 117.) Following this news, the price of Defendant Bridgepoint’s stock fell 15.73%, or $2.99 per share, closing at $16.02 per share following unusually heavy trading volume. (Id. at ¶ 118.)

         On May 12, 2014, Defendants announced in a press release attached to a Form 8-K that Defendant Bridgepoint would be unable to file its Form 10-Q for the first quarter of 2014 on time because “[t]he Company is working to quantify the impact of an outstanding comment the Company received from the [SEC].” (Id. at ¶¶ 50, 120.) Defendants also explained that Defendant Bridgepoint was evaluating whether to restate its financial results for the periods from January 1, 2011 through December 31, 2013. (Id.) Defendants Clark and Devine held an earnings conference call later that day, during which Defendant Devine admitted that Defendant Bridgepoint’s prior revenue recognition policy was incorrect. (Id. at ¶ 121.) Consequently, the price of Defendant Bridgepoint’s shares declined nearly 9%, closing at $14.51 per share after unusually heavy trading volume. (Id. at ¶ 123.)

         The following day, Defendant Devine filed a notification of late filing for the first quarter of 2014 on Form 12b-25 with the SEC. (Id. at ¶ 122.) This resulted in an additional decline of 3.17% in Defendant Bridgepoint’s share price, which closed at $14.05 per share. (Id. at ¶ 123.)

         On May 30, 2014, Defendants announced that they were restating Defendant Bridgepoint’s financial results for the fiscal year ending December 31, 2013 and each of the three quarterly financial results during the year, as well as revising the financial statements for the fiscal years ending in December 31, 2012 and 2011. (Id. at ¶¶ 52, 124- 25.) On June 2, 2014, the first trading day following the press release, the price of Defendant Bridgepoint’s shares declined by 1.31%, or $0.17 per share, closing at $12.98. (Id. at ¶ 126.) Defendant Bridgepoint issued its restated 2013 financials on August 4, 2014. (Id.)

         As a result of the restatement, Defendant Bridgepoint saw a decrease in revenues, but a corresponding decrease in its bad debt expense and increase in net income:

Financial Period

Original Revenue (millions)

Restated Revenue (millions)

Difference in Revenue

Original Bad Debt Expense (millions)

Restated Bad Debt Expense (millions)

Original Bad Debt/


Restated Bad Debt/


Original Net Income (millions)

Restated Net Income/

Loss (millions)

Difference in Net Income/


FY 2012











1Q 2013











2Q 2013











3Q 2013











4Q 2013











FY 2013











         (Id. at ¶ 57; Bridgepoint MTD Mem. 16-17, ECF No. 28-1; Manolova Decl. Ex. E at 32- 33, ECF No. 28-2 at 39-40.)

         On June 20, 2014, the SEC sent another letter to Defendant Bridgepoint indicating the SEC’s belief that “the errors relating to revenue recognition and restricted cash were material to all periods presented” and requesting that Defendant Bridgepoint “please restate 2011 and 2012 in addition to 2013.” (AC ¶ 68, ECF No. 17 (emphasis omitted).) The SEC added that “a reassessment of the collectability criterion should be performed when you have new information that would affect a student’s ability to pay” and asked Defendant Bridgepoint to “please provide us with your corrected revenue recognition policy disclosures.” (Id. (emphasis omitted).)

         On July 22, 2014, the SEC sent Defendant Bridgepoint a subpoena “relating to certain of the Company’s accounting practices, including revenue recognition” and requesting documents and information dating back to July 1, 2009. (Id. at ¶¶ 71, 139.)

         III. ...

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