On December 6, 2017, the United States District Court for the Northern District of Illinois dismissed a securities fraud lawsuit brought against DeVry Education Group, Inc. and several of its executives (“DeVry”), with leave to amend, because plaintiffs failed to sufficiently plead that DeVry executives knowingly misrepresented the employment rates and placement statistics of DeVry University (“DVU”) graduates in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. Pension Trust Fund for Operating Engineers v. DeVry Education Group, Inc., No. 16 Civ. 5198 (N.D. Ill. Dec. 6, 2017). The Court held that the Private Securities Litigation Reform Act of 1995 (“PSLRA”) requires plaintiffs to set forth “particularized factual allegations” that do more than show the “plausibility or reasonableness” of scienter allegations and that the complaint, which relied heavily on earlier lawsuits by regulators, failed to meet this standard. The decision serves as a reminder that securities lawsuits often fail when they attempt to piggy-back on lawsuits filed by government regulators or other stakeholders.

The securities lawsuit was filed in the wake of a complaint filed by the Federal Trade Commission (“FTC”) against DeVry. The FTC’s lawsuit alleged that the FTC had conducted an investigation that revealed DVU had misclassified certain employed graduates as working in their fields of study, when they actually were not working in those fields, and misclassified certain unemployed graduates as not proactively seeking a job, when in fact they were searching for jobs. The Department of Education (“DOE”) simultaneously disclosed that it intended to limit DVU’s participation in various programs because DVU was unable to substantiate historic employment statistics of graduates.

The securities lawsuit alleged that DeVry’s public statements that approximately 90 percent of students obtained employment in their field of study within six months of graduation at average yearly salaries of approximately $40,000 or more were false and misleading. In making these claims, plaintiffs relied primarily on the allegations in the FTC’s complaint, which were never admitted by DeVry, a 26(f) discovery report filed in the FTC case that identified sources of relevant documents, the eventual settlement of the FTC’s lawsuit, and confidential witnesses. The Court acknowledged that whether DeVry made false statements presented a “close question” because the allegations in the FTC complaint were not admitted and plaintiffs’ remaining allegations did not plausibly imply broad problems at DVU. However, the Court acknowledged “information asymmetries” may have prevented plaintiffs from obtaining more detail, and noted the 26(f) discovery report filed in the FTC’s lawsuit lent additional support to plaintiffs’ allegations because it indicated there were documents that might support them.

The Court nevertheless concluded that plaintiffs failed to sufficiently allege that DeVry executives knew the post-graduation employment statistics were false. In reaching this conclusion, the Court held that the PSLRA requires allegations of scienter to establish more than the plausibility or reasonable likelihood of defendants’ having knowledge of misrepresentations. According to the Court, plaintiffs failed to allege particularized facts showing there were widespread issues tracking employment and average salaries, or that such information rose far up the corporate chain. The Court further held that the FTC’s lawsuit itself was not a “red flag” that should have triggered knowledge of misstatements on the part of DeVry’s executives because the FTC’s lawsuit contained only allegations and nothing indicated DeVry’s executives believed those allegations were true. The Court also held that DeVry’s eventual settlement with the FTC did not support an inference of scienter because it did not include admissions of wrongdoing and was entered after the class period ended.