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Plumbers Local #200 Pension Fund, Individually and On Behalf of All v. Washington Post Company

December 23, 2011


The opinion of the court was delivered by: Barbara J. Rothstein United States District Judge


This matter is before the court on Defendants' Motion to Dismiss [Docket No. 17; Filed August 26, 2011] ("Motion to Dismiss") and Defendants' Request for Judicial Notice [Docket No. 18; Filed August 26, 2011] ("Motion for Notice"). Pursuant to the briefing schedule approved by the court, Plaintiff filed responses in opposition to the Motions on October 11, 2011 [Docket Nos. 21 & 22], and Defendants filed replies on November 9, 2011 [Docket Nos. 24 & 25]. The Motions have been fully briefed and are ripe for resolution. Having reviewed the pleadings relevant to these issues and being fully informed,

IT IS HEREBY ORDERED that the Motion to Dismiss is GRANTED; the Motion for Judicial Notice is DENIED as moot.

I. Factual Background

Plumber's Local #200 Pension Fund is the lead Plaintiff in a putative federal securities fraud class action suit brought pursuant to §§ 10(b) and 20(a) of the Securities Exchange Act and Securities Exchange Commission Rule 10b-5. Defendant Washington Post ("WPO") is the parent company of Kaplan, Inc. ("Kaplan"). Among Kaplan's holdings is Kaplan Higher Education Corp. ("KHE"), a private for-profit college with approximately seventy campuses nationwide. Defendant Donald E. Graham is the Chairman of the Board and CEO of WPO. Defendant Hal S. Jones is the Senior Vice President and CFO of WPO. The lawsuit addresses dramatic decreases in the value of WPO stock in temporal proximity to revelations that the Department of Education ("DOE") and elected officials were investigating admissions and financial aid fraud throughout the for-profit college industry.

During the Class Period, which is pled as July 31, 2009 through August 13, 2010, Plaintiff alleges that Defendants "fail[ed] to disclose that WPO's business was driven by illegal predatory enrollment practices" and provided "false statements behind WPO's financial performance and future business prospects." Plaintiff's Opposition [#21] at 12. More specifically, Plaintiff contends that the individually named "Defendants misrepresented the true nature, cause, and driving force behind WPO's education division's financial performance during the [Class Period]." Id.

The allegations of fraud and falsity during the Class Period are manifest. To summarize, the Complaint explains, through 22 confidential witnesses as well as sworn testimonies of two former employees, how during the Class Period Defendants misled investors through a series of calculated statements attributing WPO's positive (or less negative) financial performance to legitimate business practices and growth at Kaplan and KHE. Only when government authorities investigated and reported on numerous questionable practices in the for-profit education industry -- practices that were standard, company-wide and top-down at KHE -- were market expectations corrected as the artificial inflation was stripped from WPO's stock price. Id. at 13-14.

II. Standard of Review

To state a private securities fraud claim, a complaint must sufficiently plead that: (1) there was a material misstatement or omission; (2) made with scienter, i.e., an intent to defraud; (3) in connection with the sale or purchase of security; (4) that was relied upon by plaintiffs; (5) which resulted in economic loss; and (6) that loss was caused by the material misstatement or omission. Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005). To curb potentially abusive lawsuits, motions to dismiss claims related to securities fraud are reviewed under the standard prescribed by the Private Securities Litigation Reform Act ("PSLRA"). Metzler Inv. GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049, 1054-55 (9th Cir. 2008). This heightened pleading standard exceeds those set forth in Fed. R. Civ. P. 8 & 9. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313, 317 (2007). In particular, a pleading must "specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading" and must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(1), (2).

In performing the relevant analysis, the court must accept all factual allegations in the complaint as true. Tellabs, 551 U.S. at 322. The court must also "consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice."*fn1 Id. In relation to scienter, "[t]he inquiry . . . is whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter." Id. at 323. This consideration necessarily requires the court to consider all inferences, both for and against plaintiffs' claims. Id. at 323-24. "A complaint will survive . . . only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged." Id. at 324.

III. Analysis

Sufficient allegations of scienter are necessary to plead securities fraud. Scienter requires a showing that Defendants intended "to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 188 (1976). The D.C. Circuit has defined scienter as "[e]ither intentional wrongdoing or 'extreme recklessness.'" Liberty Prop. Trust v. Republic Props. Corp., 577 F.3d 335, 342 (D.C. Cir. 2009) (citation omitted). While extreme recklessness is a lesser form of intent, it is not a "'should have known' standard." Dolphin & Bradbury, Inc. v. SEC, 512 F.3d 634, 639 (D.C. Cir. 2008) (citation omitted). Rather, extreme recklessness can only be shown where there is an "extreme departure from the standards of ordinary care, . . . which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it."

SEC v. Steadman, 967 F.2d 636, 641 (D.C. Cir. 1992) (citation omitted). Stated another way, scienter can only be shown where "the danger was so obvious that the actor was aware of it and consciously disregarded it." Dolphin, 512 F.3d at 639.

To determine whether a "strong inference of scienter" exists, the court "engage[s] in a comparative evaluation; it must consider, not only inferences urged by the plaintiff . . . but also competing inferences rationally drawn from the facts alleged." Tellabs, 551 U.S. at 314. To this end, "[a]n inference of fraudulent intent may be plausible, yet less cogent than other, nonculpable explanations for the defendant's conduct." Id. In such a case, the allegations fail to satisfy the stringent pleading requirements of the PSLRA.

The parties address six core allegations contained in the Complaint that speak to the issue of scienter. Specifically, Plaintiffs contend that the following allegations supply a strong inference of scienter:

(1) The twenty-two confidential witness statements consistently reference company-wide or "top-down" policies relating to abusive and/or improper recruiting and financial aid practices, mandatory quotas, and employee compensation;

(2) Defendant Graham attended several Compensation Committee meetings during the relevant class period and Kaplan/KHE executives attended other meeting and calls during this same time;

(3) "[D]ata was monitored closely at WPO and Kaplan," Plaintiff's Opposition [#21] at 52, which included information related to enrollment, financial aid, and anonymous employee ...

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