UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA PLUMBERS LOCAL #200 PENSION FUND, ) Civil No.:1:10-cv-01835-PLF Individually and on Behalf of All Others ) Similarly Situated, CLASS ACTION ) Plaintiff, DEMAND FOR JURY TRIAL vs. THE WASHINGTON POST COMPANY, DONALD E. GRAHAM and HAL S. JONES, Defendants. [PROPOSED] AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS TABLE OF CONTENTS I. INTRODUCTION AND NATURE OF THE ACTION .....................................................1 II. JURISDICTION AND VENUE..........................................................................................8 III. PARTIES .............................................................................................................................8 IV. CLASS ACTION ALLEGATIONS ..................................................................................10 V. CONFIDENTIAL SOURCES ...........................................................................................12 VI. SUBSTANTIVE ALLEGATIONS ...................................................................................24 A. Introduction............................................................................................................24 B. Washington Post’s Business Model Depends on Maximizing the Amount of Financial Aid Obtained by Kaplan Students, Regardless of Their Abilityto Ever Repay It.........................................................................................25 1. The For-Profit College Business Model Places Low-Income Students in High-Cost Schools ..................................................................25 2. The Vast Majority of For-Profit College Revenue Comes From FederalStudent Aid ...................................................................................27 C. The HEA Provides Eligibility Criteria that an Institution Must Meet in Order to Participate in the Federal Student Aid Programs ....................................28 1. Incentive Compensation for Recruiters Is Not Permitted..........................29 2. Substantial Misrepresentations Are Prohibited..........................................30 3. Kaplan Is Required to Keep Cohort Default Rates Under 25%.................31 4. Kaplan Must Comply With the 90/10 Rule ...............................................32 5. Kaplan Must Prepare Its Students For Gainful Employment....................32 6. Kaplan Must Promptly Disburse Federal Student Aid Funds to Students......................................................................................................33 7. Kaplan Must Meet State Authorization and Accreditation Requirements.............................................................................................33 8. Other “Applicable Laws”...........................................................................34 i D. At All Relevant Times, Kaplan Generated the Majority of Washington Post’s Revenues.....................................................................................................36 E. Washington Post’s Kaplan Was All A “Numbers Game”.....................................37 1. The Company’s Sales Machine Included an Army of Kaplan Admissions Advisors Stationed In Warehouse-Sized Call Centers...........38 2. Like A Boiler Room, Admissions Advisors Were Under Intense Pressure to Meet “Enrollment Quotas”......................................................39 3. Admissions Advisors’ Employment Status Was Directly Tied to EnrollmentNumbers..................................................................................43 4. Admissions Advisors’ Compensation was Directly Tied to Enrollments................................................................................................45 F. In Order to Artificially Inflate the Company’s Financials, Defendants Endorsed and Oversaw Unethical Recruiting Practices.........................................46 1. “Uncovering the Pain and the Fear – Creating Urgency” – Kaplan’s Scripts.........................................................................................56 2. Kaplan Works the System, and Its Students, In Order to Obtain Financial Aid Awards ................................................................................58 G. Ability to Benefit - Kaplan Takes One Step Forward and Two Steps Back..........60 H. Kaplan’s Improper Practices Throughout the Class Period Were Orchestrated to Circumvent the Requirements of the 90/10 Rule.........................61 I. Kaplan Skirts DOE Reviews..................................................................................65 J. The GAO Investigates Kaplan, Prompting the Company’s Education Division to Dramatically Change Its Practices......................................................66 1. The GAO Visit to the Pembroke Pines Campus........................................66 2. The Impact of GAO Report – Kaplan Scrambles to Minimize the Damage......................................................................................................67 K. The Florida Attorney General Investigates Kaplan, and Reveals the Sworn Testimony of Two Former Kaplan Admissions Advisors.....................................69 L. Throughout the Class Period, Defendants Had Knowledge of and Endorsed Kaplan’s Fraudulent Scheme.................................................................71 1. Kaplan Provided Washington Post With Daily Cash Transfers - Except on Days When It Was Violating the 90/10 Rule. ..........................71 ii 2. Defendants Actively Lobbied for Less Stringent Department of EducationGuidelines.................................................................................74 3. Federal Whistleblower Actions Put Defendants on Notice of the Wrongful Misconduct Alleged Herein.......................................................75 4. Kaplan’s Extensive Reporting Systems Provided Defendants With Knowledge of Kaplan’s Predatory Business Model..................................77 VII. DEFENDANTS’ FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIOD ......................................................................................80 VIII. POST CLASS PERIOD EVENTS AND DISCLOSURES.............................................123 IX. DEFENDANTS’ FALSE AND MISLEADING STATEMENTS REGARDING WASHINGTON POST’S BUSINESS CONDUCT AND ETHICS...............................133 X. ADDITIONAL SCIENTER ALLEGATIONS................................................................135 XI. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE ...................................................................................................139 XII. LOSS CAUSATION/ECONOMIC LOSS ......................................................................139 XIII. NO SAFE HARBOR .......................................................................................................143 XIV. COUNT I: FOR VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5 PROMULGATED THEREUNDER AGAINST ALL DEFENDANTS...............................................................................................................144 XV. COUNT II: FOR VIOLATIONS OF SECTION 20(a) OF THE EXCHANGE ACT AGAINST THE INDIVIDUAL DEFENDANTS..................................................148 XVI. JURY TRIAL DEMANDED...........................................................................................149 iii Lead Plaintiff Iron Workers Local No. 25 Pension Fund (“Plaintiff”), individually and on behalf of a proposed class (the “Class”) of all purchasers of the publicly traded common stock of The Washington Post Company (“Washington Post” or the “Company”) between July 31, 2009 and August 13, 2010, inclusive (the “Class Period”), by and through its undersigned counsel, brings suit against Washington Post, Donald E. Graham (“Graham”) and Hal S. Jones (“Jones”) (Graham and Jones are sometimes collectively referred to as the “Individual Defendants”) (Washington Post, Graham, and Jones are collectively the “Defendants”) 2. Plaintiff seeks remedies under the Securities Exchange Act of 1934 (the “Exchange Act”) as a result of the fraudulent scheme undertaken by Defendants and the economic loss suffered when the true facts were revealed to the public through a series of disclosure events. The claims asserted herein arise under and pursuant to §§10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. §240.10b-5. I. INTRODUCTION AND NATURE OF THE ACTION For decades, Washington Post operated as a well-known media company, most recognizable for its newspaper publication. Times, however, have changed. As set forth herein, the Company’s very viability has become ever more reliant upon revenues generated by its education division. Specifically, Washington Post operates Kaplan, Inc. (“Kaplan”), what the Company describes as “one of the world’s largest diversified providers of educational services.” Of relevance here is Kaplan Higher Education (“KHE”), the Company’s for-profit, post-secondary education division whose U.S. operations include more than 70 campuses in 20 states, as well as online offerings through Kaplan University. 4. Put simply, throughout the Class Period, Kaplan was the financial lifeline that kept the Company from drowning from the poor performance of Washington Post’s newspaper. To that end, as set forth herein, Kaplan provided daily cash infusions to Washington Post throughout the Class Period despite the fact that doing so violated Kaplan’s capital