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Zamir v. Bridgepoint Education, Inc.

United States District Court, S.D. California

April 5, 2017

NELDA ZAMIR, Individually and on Behalf of All Others Similarly Situated, Plaintiff,
BRIDGEPOINT EDUCATION, INC., et al., Defendants.


          Hon. Janis L. Sammartino United States District Judge.

         Presently before the Court is Defendants Bridgepoint Education, Inc., Andrew S. Clark, and Daniel J. Devine's (collectively, "Defendants") Motion to Dismiss Plaintiffs' Second Amended Class Action Complaint ("MTD, " ECF No. 58). Also before the Court are Lead Plaintiffs' Response in Opposition to, ("Opp'n, " ECF No. 61), and Defendants' Reply in Support of, ("Reply, " ECF No. 63), Defendants' MTD. The Court vacated the hearing and took this matter under submission without oral argument pursuant to Civil Local Rule 7.1(d)(1). (ECF No. 62.) Having considered the parties' arguments and the law, the Court GRANTS Defendants' MTD.


         I. The Defendants

         Defendant Bridgepoint provides for-profit higher education through two wholly-owned subsidiaries, Ashford University and the University of the Rockies. (Second Am. Class Action Compl. ("SAC") ¶¶ 3, 24, ECF No. 57.) Its common stock is publicly traded on the New York Stock Exchange. (Id. ¶ 24.)

         Defendant Clark is a co-founder of Defendant Bridgepoint, as well as its Chief Executive Officer, President, and a director. (Id. ¶ 25.) Defendant Devine served as Defendant Bridgepoint's Chief Financial Officer since January 2004 and its Executive Vice President since January 2011, resigning both positions on October 1, 2015. (Id. ¶ 27.)

         II. Factual Background

         Defendant Bridgepoint's primary source of revenue is tuition and related fees. (Id. ¶ 3.) Without federal financial aid, many of Defendant Bridgepoint's students would not choose to attend Bridgepoint's institutions, nor could they pay the tuition these institutions charge. (Id. ¶ 35.)

         In mid-2012, Defendant Bridgepoint experienced technical issues during an annual upgrade of its student management system. (Id. ¶ 62.) These technical issues resulted in delays in packaging students for financial aid qualification in between financial aid award years. (Id. ¶ 63.) 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. ¶ 64.) 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 in its bad debt expense for the fourth quarter of 2012 and the 2012 fiscal year. (Id. ¶ 97.) Defendant Devine explained to investors and analysts on an earnings conference call that Defendant Bridgepoint's technical issues were to blame, but that he did not expect the issue to repeat in 2013. (Id. ¶¶ 63, 97.) On May 17, 2013, Defendant Bridgepoint issued an amended Form 10-K for the 2012 fiscal year to reissue its financial statements. (Id. ¶ 67.)

         Despite Defendant Bridgepoint's assurances to the contrary, the 2012 technical issues caused a backlog in packaging financial aid throughout 2013. (Id. ¶¶ 63, 97.) Consequently, Defendant Bridgepoint continued to report higher than normal bad debt expenses as a percentage of revenues. (Id. ¶¶ H, 98.)

         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. (Id. ¶¶ 47, 65.) The SEC also asked Defendant Devine how Defendant Bridgepoint's internal processing issues with financial aid packages had affected its bad debt percentage. (Id. ¶ 65.) Defendant Devine's January 10, 2014 response detailed Defendant Bridgepoint's 2012 technical issues and the backlog affecting financial aid packaging through 2013. (Id. ¶ 65.) In response to the SEC's inquiry regarding Defendant Bridgepoint's determination that collectability is reasonably assured, Defendant Devine noted that 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. ¶ 45 (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. ¶ 48.)

         On March 11, 2014, Defendant Bridgepoint preliminarily announced its fourth quarter and 2013 fiscal year financial results in a press release. (Id. ¶ 120.) Later that day, Defendants held an earnings call, during which Defendants Clark and Devine fielded questions relating to Defendant Bridgepoint's increased bad debt percentage for the quarter. (Id. ¶ 121.) 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. ¶ 122.)

         On May 12, 2014, Defendants announced in a press release attached to a Form 8-K that Defendant Bridgepoint would be unable to timely file its Form 10-Q for the first quarter of 2014 because "[t]he Company is working to quantify the impact of an outstanding comment the Company received from the [SEC]." (Id. ¶¶ 36, 124.) 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. ¶ 125.) Specifically, Defendant Devine explained that

[u]nder previous revenue recognition, revenues recognized subsequent to a student losing financial aid eligibility, and ultimately not collected, were included in our bad debt expense. Going forward, our policy will exclude these revenues and will result in a corresponding decrease in our bad debt expense that will be realized over subsequent quarters.

(Id. ¶ 37.) Consequently, the price of Defendant Bridgepoint's shares declined nearly 9%, closing at $14.51 per share after unusually heavy trading volume. (Id. ¶ 127.)

         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. ¶ 126.) This resulted in an additional decline of 3.17% in Defendant Bridgepoint's share price, which closed at $14.05 per share. (Id. ¶ 127.)

         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. ¶¶ 13, 128-29.) 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 $12.82. (Id. ¶¶ 14, 130.) Defendant Bridgepoint issued its restated 2013 financials on August 4, 2014. (Id. ¶¶ 4, 38.)

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

Financial Period

Original Revenue (millions)

Restated Revenue (millions)

Difference in Revenue

Original Bad Debt Expense (millions)

Restated Bad Debt Expense (millions)

Original Bad Debt/ Revenue

Restated Bad Debt/ Revenue

Original Net Income (millions)

Restated Net Income/ Loss (millions)

Difference in Net Income/ Loss

FY 2012











1Q 2013











2Q 2013











3Q 2013











4Q 2013











FY 2013











(Id. ¶ 43; MTD Mem. 6, ECF No. 58-1; Manolova Decl. Ex. E at 32-33, ECF No. 28-2 at 39-40.)[1]

         On July 25, 2014, Defendant Bridgepoint disclosed that the SEC was investigating its accounting practices, including revenue recognition and receivables. (Id. ¶ 134.) The SEC also issued a subpoena for the revised and restated time periods, and documents and information dating back to July 1, 2009 to the present. (Id.) On July 12, 2016, via a Form 8-K filed with the SEC, Defendant Bridgepoint announced that the Department of Education would commence a review of Ashford's administration of federal student financial aid programs for certain students identified in the 2009-2012 calendar year. (Id. ¶ 136.) In this same Form 8-K, Defendant Bridgepoint also announced that the U.S. Department of Justice was conducting an "investigation concerning allegations that the Company may have misstated Title IV refund revenue or overstated revenue associated with private secondary loan programs and thereby misrepresented its compliance with the 90/10 rule of the Higher Education Act." (Id. ¶ 137.)

         III. Procedural Background

         Lead Plaintiff Zamir filed an initial complaint on February 24, 2015, alleging two causes of action for violation of Section 10(b) of the Exchange Act and Rule 10b-5 and violation of Section 20(a) of the Exchange Act. (See generally ECF No. 1.) Lead Plaintiffs moved for appointment as lead plaintiffs and approval of choice of counsel on April 27, 2015. (See ECF No. 3.) Because the motion was unopposed, (see ECF No. 13), the Court granted Lead Plaintiffs' motion, (see ECF No. 14).

         On September 18, 2015, Lead Plaintiffs filed the AC, asserting the same causes of action as in the original complaint. (See ECF No. 17.) Several Defendants filed motions to dismiss on November 24, 2015, (see ECF Nos. 28, 30), and on January 11, 2016, Lead Plaintiffs filed a Motion to Strike, (see ECF No. 37). The Court granted Defendants' motions to dismiss, and denied Lead Plaintiffs' Motion to Strike. ("First MTD Order, " ECF No. 53.) Thereafter Lead Plaintiffs dismissed several named Defendants. (ECF Nos. 56, 59.) Lead Plaintiffs filed their SAC on September 9, 2016. (ECF No. 57.) Defendants filed the instant Motion to Dismiss on October 24, 2016.


         I. ...

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