Case: 1: 1 0-cv-07031 Document #: 27 Filed: 03/07/11 Page 1 of 178 PageID #:213
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
CHICAGO DIVISION
BOCA RATON FIREFIGHTERS’ AND ) No. 1:10-cv-07031 POLICE PENSION FUND, Individually and ) on Behalf of All Others Similarly Situated, ) CLASS ACTION ) Plaintiff, ) ) DEMAND FOR JURY TRIAL vs. ) ) DEVRY INC., et al., ) Defendants. ) ) )
CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Case: 1: 1 0-cv-07031 Document #: 27 Filed: 03/07/11 Page 2 of 178 PageID #:214
TABLE OF CONTENTS
I. INTRODUCTION AND NATURE OF THE ACTION 1
II. JURISDICTION AND VENUE 6
III. PARTIES 6
IV. THE INDIVIDUAL DEFENDANTS’ ACCESS TO CRITICAL INFORMATION 8
V. CLASS ACTION ALLEGATIONS 10
VI. CONFIDENTIAL SOURCES 11
VII. SUBSTANTIVE ALLEGATIONS 25
A) Introduction 25
B) DeVry’s Business Model Depends on Maximizing the Amount of Financial Aid Obtained by Its Students, Regardless of Their Ability to Ever Repay It 26
1. The For-Profit College Business Model Places Low-Income Students in High Cost Schools 26
2. The Vast Majority of For-Profit College Revenue Comes From Federal Student Aid 27
C) The HEA Provides Eligibility Criteria that an Institution Must Meet in Order to Participate in the Federal Student Aid Programs 29
1. Incentive Compensation for Recruiters Is Not Permitted 29
2. Graduation Rates 30
3. Cohort Default Rates 30
4. The “90/10” Rule 31
D) Defendants’ Fraudulent Scheme 33
1. DeVry’s Admissions Process was a Con Game 33
a. “Starts,” “Leads,” “Sales,” and “Numbers” – DeVry Admissions Advisors and Financial Advisors Were Merely Telemarketers in Disguise 33 Case: 1: 1 0-cv-07031 Document #: 27 Filed: 03/07/11 Page 3 of 178 PageID #:215
b. “If You Make Them Cry, They’ll Choose DeVry” – DeVry Used Psychological Manipulation to Coerce Prospective Students into Enrolling 40
c. The Company Misled Prospective Students in Order to Persuade them to Enroll at DeVry 44
(1) “Cooking the Books” and a “Shell Game” – Defendants Manipulated DeVry’s Employment Statistics 44
(2) “My Advisor Told Me This Was Free Money...” – DeVry Misled Students About Financial Aid 48
2. DeVry Boosted Enrollments by Using Illegal Incentive Compensation and Targeting Impoverished People, Community College and High School Students and Military Personnel 57
a. “Everybody Was Clear That This Was How They Were Disguising It” – In Violation of HEA, DeVry Compensated “Advisors” Based Solely on the Number of Student Enrollments They Attained 57
b. DeVry Trained Advisors to Prey on Suspect Classes of “Prospective Students” 59
(1) Underrepresented Minorities, Low-Income and Disabled Individuals 59
(2) “It Was Outside Sales. That’s What it Was” – Community College and High School Students 61
(3) “Military is the Lowest Hanging Fruit” – DeVry Sets its Sights on Military Personnel 63
VIII. DEFENDANTS’ FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIOD 67
IX. THE ULTIMATE TRUTH IS REVEALED 156
X. POST CLASS PERIOD EVENTS 157
XI. DEFENDANTS MADE FALSE AND MISLEADING STATEMENTS REGARDING DEVRY’S BUSINESS CONDUCT AND ETHICS 160
XII. ADDITIONAL SCIENTER ALLEGATIONS 161 Case: 1: 1 0-cv-07031 Document #: 27 Filed: 03/07/11 Page 4 of 178 PageID #:216
XIII. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE 163
XIV. LOSS CAUSATION/ECONOMIC LOSS 164
XV. NO SAFE HARBOR 167
XVI. COUNT I: FOR VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 1 0b-5 PROMULGATED THEREUNDER AGAINST ALL DEFENDANTS 168
XVII. COUNT II: FOR VIOLATIONS OF SECTION 20(a) OF THE EXCHANGE ACT AGAINST THE INDIVIDUAL DEFENDANTS 171
XVIII. JURY TRIAL DEMANDED 173 Case: 1: 1 0-cv-07031 Document #: 27 Filed: 03/07/11 Page 5 of 178 PageID #:217
1. Lead Plaintiff Boca Raton Firefighters’ and Police Pension Fund (“Plaintiff”), individually and on behalf of a proposed class (the “Class”) of all purchasers of the publicly traded common stock of DeVry Inc. (“DeVry” or the “Company”) between October 27, 2007 and August
13, 2010, inclusive (the “Class Period”), by and through its undersigned counsel, brings suit against
Daniel Hamburger (“Hamburger”), Richard M. Gunst (“Gunst”) (Hamburger and Gunst are sometimes collectively referred to as the “Individual Defendants”) and DeVry (DeVry, Hamburger and Gunst are sometimes collectively referred to as “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
3. DeVry, like every other for-profit company, has virtually unfettered discretion to conduct its business as it sees fit, even when it decides to create a business model that is essentially devoid of even a tincture of business ethics. In this instance, as described in great detail below and confirmed by myriad corroborating confidential witnesses, DeVry did just that, creating a systemically predatory business model designed for one purpose and one purpose alone – to identify, target and exploit “sales leads” (or students, as they are referred to by most institutions of higher learning) in order to close as many “sales” (or student enrollments, as they are referred to by most institutions of higher learning) as possible and then use its students to effectuate a cash grab by cannibalizing federal student financial aid monies.
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4. As demonstrated throughout this Complaint, Defendants’ systematically predatory business model stood in stark contrast to its so-called Code of Business Conduct and Ethics. For
instance, DeVry’s Code of Business Conduct and Ethics stated, in pertinent part:
DeVry seeks to be successful by acting fairly and honestly. We seek competitive advantage through superior performance, not through unethical or illegal business practices. Every employee, officer and director must deal fairly and in good faith with, and respect the rights of, DeVry students, employees, business associates, suppliers, consultants, competitors, the public and one another. Unfair dealing practices such as manipulation (defined as exerting undue, improper, or inappropriate influence for one's own advantage), abuse or disclosure of privileged or confidential information, misrepresentation of material facts and improper concealment of business information will not be tolerated.
5. Nevertheless, it is not DeVry’s systemically predatory business model that forms the basis of Plaintiff’s claims. To the contrary, it is DeVry’s failure to disclose the existence of this
model as the driving force behind its financials and future business prospects to the market and its
shareholders that is the basis for these claims. As a result of Defendants’ fraud, Plaintiff and all of
DeVry’s shareholders incurred massive financial damages.
6. Indeed, throughout the Class Period, DeVry portrayed its mammoth growth, healthy
financials and future business prospects as driven by an ever-expanding student body that was
flocking to DeVry as a result of the DeVry’s stellar reputation, excellent education, high job placement rates and post-graduation salaries, none of which was true. The truth is that DeVry’s
financials and future business prospects were being driven by the systemically predatory business
model that was finally exposed at the end of the Class Period. When the reality of what drove
DeVry’s business came to light, the artificial inflation in the price of DeVry stock (which was
created as a result of Defendants’ fraud), came out of the stock, and DeVry’s shareholders paid the price as they suffered substantial financial damages.
7. While utilizing a huge marketing budget to portray its purpose as being “to empower
its students to achieve their educational and career goals,” DeVry was, all the while, employing an
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army of salespeople (cleverly disguised as so-called Admission Advisors) that were trained in the
not so fine art of exploitation. This quota-driven sales force was taught to identify, target and exploit potential students’ hopes, dreams and fears in order to browbeat, convince and cajole them into
enrolling. DeVry purportedly prided itself on the opportunities it offered students who otherwise
would have been unable to pursue higher education. The truth, however, was a far different story.
8. Without question, Admissions Advisors were compensated solely for hitting sales
(i.e., enrollment) quotas and, conversely, would have their pay reduced and could be and were
terminated for failing to hit those quotas. As detailed herein, the corroborating accounts of many
former DeVry employees and students universally describe how the Company was a sales
organization focused solely on quotas, which, in turn, would enable DeVry to rake in vast sums of
federal financial aid.
9. In addition to targeting “sales leads” that were considered the easiest to manipulate,
the Company provided only enough academic counseling and financial aid assistance to guide prospective students through the enrollment and financial aid process. In other words, students were
given only enough assistance to allow DeVry to obtain the federal financial aid dollars Defendants
so coveted. As one of many examples detailed below, on many occasions, students without access to
or an understanding of computers were enrolled in online classes. As one confidential witness
attested, at DeVry, “[i]t was all about getting butts in seats.”
10. DeVry’s systemically predatory business model was well-hidden from investors.
Defendants trumpeted the Company’s Code of Business Conduct and Ethics, ever-expanding
enrollment numbers, and seemingly impressive financial results and future business prospects,
constantly extolling that it was DeVry’s top-rate education, superior reputation, job placement rates
and post graduation salaries that were the keys to its success. The result was that the price of DeVry
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common stock was artificially inflated throughout the Class Period, reaching a high of $74.25 on
April 22, 2010.
11. The Individual Defendants were uniquely motivated to misrepresent the Company’s
true financial condition, as evidenced in part, by Hamburger’s Class Period sales of 123,554 shares
of DeVry stock at artificially inflated prices, generating proceeds of $7,094,805. Hamburger had not
sold a single share of DeVry stock in the two years prior to the Class Period. Further, the Individual
Defendants were incentivized by a bonus plan that enabled them to significantly increase their yearly
compensation by hitting certain revenue and earnings per share numbers.
12. Almost all of DeVry’s revenue is generated through tuition payments. Most students
rely on federal financial aid provided by Title IV (“Title IV”) of the Higher Education Act of 1965,
as amended (the “HEA”). During the Class Period, DeVry University derived between 70% and
77% of its revenue from Title IV funding. As a result of DeVry’s dependence on Title IV funding,
the Company is highly regulated by federal, state and private accreditation agencies, including the
Accrediting Council for Independent Colleges and Schools (“ACICS”). In order to be and remain
eligible to receive Title IV funds, each DeVry institution must comply with the standards set forth in
the HEA.
13. The HEA and the Department of Education impose requirements on institutions
seeking to participate in Title IV student financial aid programs. For example, these regulations prohibit misleading prospective students, as well as paying incentive compensation to Admissions
and Financial Aid Advisors based on meeting enrollment quotas. Institutions must also prepare their
students for “gainful employment in a recognized occupation,” and maintain accreditation by a
recognized accrediting commission in each state in which it operates. Any institution that violates
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these regulations risks losing its Title IV funding eligibility. For DeVry, losing its eligibility would be a death knell as the loss of Title IV eligibility would decimate DeVry’s financial condition.
14. As detailed below, more than thirty former DeVry employees (including salespeople)
and students located throughout the United States confirmed that Defendants used a variety of
deceptive and predatory tactics to lure prospective students to enroll at DeVry, all for the unitary purpose of garnering as much financial aid as possible. The strong growth reported by the Company
during the Class Period was therefore based on abusive and predatory practices, and rendered
DeVry’s reported financial results and statements regarding its future business prospects materially
false and misleading. Specifically, Defendants failed to disclose the Company’s systemically predatory business model. Moreover, Defendants employed (and failed to disclose) an incentive
compensation system that was in direct violation of HEA, thus jeopardizing DeVry’s access to
federal financial aid, its accreditation, and its very ability to continue its operations.
15. Despite Defendants’ best efforts, and a lengthy and successful run of subterfuge, they
could not keep their scheme under wraps forever. Through a series of partial disclosure events
regarding the Company’s business practices and true financial condition, the artificial inflation came
out of the price of DeVry common stock, culminating in an 8.76% drop in the price of DeVry
common stock on August 16, 2010, following a U. S. Department of Education (“DOE”) publication
on federal student-loan repayment rates at the nation’s colleges and universities showing student
loan repayment rates at DeVry were a mere 38%, compared to 54% at public colleges and 56% at private non-profit institutions.
16. As a result of Defendants’ false statements and omissions, DeVry common stock
traded at artificially inflated prices throughout the Class Period. However, as the truth emerged and
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seeped into the market, the Company’s shares were hammered by massive sales, sending them down
approximately 47.5% from their Class Period high.
II. JURISDICTION AND VENUE
17. Jurisdiction is conferred by §27 of the Exchange Act. The claims asserted herein
arise under §§10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§78j(b) and 78t(a), and U.S.
Securities and Exchange Commission (“SEC”) Rule 10b-5, 17 C.F.R. §240.10b-5.
18. Venue is proper in this District pursuant to §27 of the Exchange Act. Many of the
false and misleading statements were made in or issued from this District.
19. DeVry’s principal executive offices are located at 3005 Highland Parkway, Downers
Grove, Illinois 60515.
20. In connection with the acts alleged in this Complaint, Defendants, directly or
indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to,
the mails, interstate telephone communications and the facilities of the national securities markets.
III. PARTIES
21. Plaintiff Boca Raton Firefighters’ and Police Pension Fund purchased DeVry
common stock on the open market during the Class Period, as set forth in its certification previously
filed with the Court. On January 5, 2011, the Court appointed Boca Raton Firefighters’ and Police
Pension Fund as Lead Plaintiff in this action.
22. DeVry is a global provider of career-oriented education services, incorporated in the
state of Delaware, with principal executive offices located in Downers Grove, Illinois. DeVry is the parent of Advanced Academics, Becker Professional Education, Carrington College, Carrington
College California, Chamberlain College of Nursing, DeVry Brasil, DeVry University, and Ross
University. Through these institutions, DeVry, as one of the largest for-profit schools, offers a wide
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array of programs in business, healthcare and technology. According to the Company, DeVry’s purpose “is to empower its students to achieve their educational and career goals.”
23. DeVry is comprised of four business segments: (i) Business, Technology and
Management; (ii) Medical & Healthcare; (iii) Professional Education; and (iv) Other Educational
Services. The Business, Technology and Management segment includes DeVry University, one of
the largest private, degree-granting, regionally accredited, higher education systems in North
America. DeVry University includes both undergraduate and graduate degrees programs, including
the Keller Graduate School of Management (“KGSM”), one of the largest graduate management
schools in the U.S. In 2009 and 2010, DeVry’s Business, Technology and Management segment
generated $989.5 million and $1.263 billion, respectively.
24. Defendant Hamburger has served as President and Chief Executive Officer of DeVry
since July 2004. During the Class Period, while the price of DeVry stock was artificially inflated,
Hamburger sold 123,554 shares of DeVry stock at prices between $55.45 and $57.78 per share, for
trading proceeds totaling $7,094,805.
25. Defendant Gunst has served as Senior Vice President, Chief Financial Officer and
Treasurer of DeVry since July 2006.
26. Throughout the Class Period, Hamburger and Gunst were responsible for ensuring the
accuracy of DeVry’s public filings and other public statements, and they both personally attested to
and certified the accuracy of DeVry’s financial statements. During the Class Period – specifically on
November 8, 2007, February 7, 2008, May 12, 2008, August 27, 2008, November 6, 2008, February
6, 2009, May 7, 2009, August 26, 2009, November 5, 2009, February 4, 2010, and May 6, 2010 –
Hamburger and Gunst each signed certifications included in the Company’s public filings stating:
1. I have reviewed this quarterly report on Form [10-Q or 10-K] of DeVry Inc.;
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2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
IV. THE INDIVIDUAL DEFENDANTS’ ACCESS TO CRITICAL INFORMATION
27. The Individual Defendants were intimately involved with all aspects of the
Company’s business, were hand’s on managers and were privy to confidential and proprietary
information concerning DeVry, its operations, finances, financial condition, and present and future business prospects. The Individual Defendants also had access to material adverse non-public
information concerning DeVry, as discussed in detail below. Because of their positions with DeVry,
the Individual Defendants had access to non-public information about its business practices,
finances, enrollment, markets and present and future business prospects via access to internal
corporate documents, conversations and connections with other corporate officers and employees,
attendance at management and board of directors meetings and committees thereof and via reports
and other information provided to them in connection therewith. Because of their possession of such
information, the Individual Defendants knew or were severely reckless in disregarding the fact that
adverse facts specified herein had not been disclosed to, and were being concealed from (in order to
mislead), the investing public.
28. Throughout the Class Period, the Individual Defendants were able to, and did, control
the contents of the Company’s SEC filings, reports, press releases, and other public statements. The
Individual Defendants were provided with copies of, reviewed and approved, and/or signed such
filings, reports, releases, and other statements prior to or shortly after their issuance and had the
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ability and opportunity to prevent their issuance or to cause them to be corrected. The Individual
Defendants were also able to, and did, directly or indirectly, control the conduct of DeVry’s business, the information contained in its filings with the SEC, and its public statements. Moreover,
the Individual Defendants made or directed the making of affirmative statements to the investing public, and participated in meetings, conference calls, and discussions concerning such statements.
Each of the Individual Defendants knew that the adverse facts specified herein had not been
disclosed to and were being concealed from the public, and that the positive representations that
were being made were then false and misleading. As a result, each of the Individual Defendants is
responsible for the accuracy of DeVry’s corporate releases detailed herein and is therefore
responsible and liable for the misrepresentations and omissions contained therein.
29. The Individual Defendants are liable as direct participants and co-conspirators with
respect to the wrongs complained of herein. In addition, the Individual Defendants, by reason of
their status as senior executive officers and/or directors, were “controlling persons” within the
meaning of §20 of the Exchange Act and had the power and influence to cause the Company to
engage in the unlawful conduct complained of herein. Because of their positions of control, the
Individual Defendants were able to and did, directly or indirectly, control the conduct of DeVry’s business.
30. As senior executive officers and/or directors and controlling persons of a publicly
traded company whose common stock and other securities were, and are, registered with the SEC pursuant to the Exchange Act, and whose shares traded on NYSE and governed by the federal
securities laws, the Individual Defendants had a duty to disseminate promptly accurate and truthful
information with respect to DeVry’s financial condition and performance, growth, operations,
financial statements, business, products, markets, management, earnings and present and future
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business prospects, to correct any previously issued statements that had become materially
misleading or untrue, so that the market price of DeVry’s common stock would be based upon
truthful and accurate information. The Individual Defendants’ misrepresentations and omissions
during the Class Period violated these specific requirements and obligations.
31. The Individual Defendants are liable as primary participants in a fraudulent scheme
and wrongful course of business which operated as a fraud or deceit on purchasers of DeVry
common stock by disseminating materially false and misleading statements and/or concealing
material adverse facts. The fraudulent scheme employed by the Individual Defendants was a
success, as it: (i) deceived the investing public regarding DeVry’s financials, future business prospects and business; (ii) artificially inflated the price of DeVry common stock; and (iii) caused
Plaintiff and other members of the Class to purchase DeVry common stock at inflated prices and
suffer losses when the relevant truth regarding DeVry’s true financial condition was revealed and the
artificial inflation was removed from the price of the stock.
V. CLASS ACTION ALLEGATIONS
32. Plaintiff brings this action as a class action pursuant to Rule 23 of the Federal Rules
of Civil Procedure on behalf of all persons who purchased or otherwise acquired DeVry common
stock during the Class Period (the “Class”). Excluded from the Class are Defendants and their
families, the officers and directors of the Company, at all relevant times, members of their
immediate families and their legal representatives, heirs, successors, or assigns and any entity in
which Defendants have or had a controlling interest.
33. The members of the Class are so numerous that joinder of all members is
impracticable. The disposition of their claims in a class action will provide substantial benefits to
the parties and the Court. As of August 13, 2010, the last day of the Class Period, DeVry had nearly
70 million shares of stock outstanding, owned by hundreds if not thousands of shareholders.
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34. There is a well-defined community of interest in the questions of law and fact
involved in this case. Questions of law and fact common to the members of the Class which
predominate over questions which may affect individual Class members include:
(a) whether the Exchange Act was violated by Defendants;
(b) whether Defendants omitted and/or misrepresented material facts;
(c) whether Defendants’ statements omitted material facts necessary to make the
statements made, in light of the circumstances under which they were made, not misleading;
(d) whether Defendants knew or deliberately disregarded that their statements
were false and misleading;
(e) whether the price of DeVry common stock was artificially inflated; and
(f) the extent of damage sustained by Class members and the appropriate measure
of damages.
35. Plaintiff’s claims are typical of those of the Class because Plaintiff and the Class
sustained damages from Defendants’ wrongful conduct.
36. Plaintiff will adequately protect the interests of the Class and has retained counsel
who are experienced in class action securities litigation. Plaintiff has no interests which conflict
with those of the Class.
37. A class action is superior to other available methods for the fair and efficient
adjudication of this controversy.
VI. CONFIDENTIAL SOURCES
38. Plaintiff makes the allegations herein, concerning the falsity of Defendants’
statements and the scienter of the Individual Defendants, based upon the investigation undertaken by
Plaintiff’s counsel, which included analysis of publicly available news articles and reports, public
filings, securities analysts’ reports and advisories about DeVry, interviews of former employees and
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students of DeVry, press releases and other public statements issued by the Company, and media reports about the Company. Plaintiff believes that substantial additional evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery.
39. The allegations made herein are supported by the first-hand knowledge of thirty-three
(33) confidential witnesses (“CWs”). These CWs include many former employees of DeVry who were employed during the Class Period and provided facts from various departments of the
Company, as well as students who fell victim to DeVry’s systemically predatory business model. As detailed below, the CWs each served in positions at DeVry that provided them with access to the information they are alleged to possess.
40. Confidential Witness #1 (“CW 1”) was employed with DeVry at the Company’s
Federal Way, Washington campus from approximately October 3, 2007 through April 29, 2010, in a variety of positions. For the first three months of CW 1’s employment with DeVry, CW 1 was an
Enrollment Advisor. Thereafter, CW 1 became a Community College Specialist, and later was given additional responsibilities as a Military Specialist tasked with recruiting active duty military and reservists. CW 1 reported to Director of Admissions Michelle Vanderbilt (“Vanderbilt”), who reported to Metro Campus President Dave Stewart (“Stewart”), who reported to the Regional Vice
President of Operations Jim Dugan (“Dugan”). Among other things, CW 1 has knowledge regarding the Company’s predatory recruitment practices, inaccurate career placement statistics, and improper
“incentives” for Admissions Advisors to meet their sales targets, i.e., enrollment quotas.
41. Confidential Witness #2 (“CW 2”) worked for DeVry from January 21, 2008 to June
2009 as a High School Program Representative, referred to internally as a Presenter, in Arlington,
Virginia. CW 2 was fired because she/he “wasn’t performing up to [her/his] potential,” meaning she/he failed to meet quotas. CW 2 reported to the Director of the High School Program in
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Washington, D.C., Maryland, and Virginia, Lisa Szott (“Szott”), who reported to Regional Director
Chuck Stewe (“Stewe”), who was based in New Jersey and was responsible for the High School
Program along the East coast. Stewe reported to the National Director for DeVry’s High School
Program Chris McKenzie (“McKenzie”), who reported directly to David Pauldine 1 and Hamburger.
CW 2 has information regarding the Company’s intense emphasis on enrollment numbers, the
Company’s predatory recruitment practices and the Company’s improper incentive compensation practices for student recruiting.
42. Confidential Witness #3 (“CW 3”) was employed by DeVry from January 2005
through July 2009. CW 3 worked as a recruiter for high school students for the first 18 months of
her/his employment and then moved into the Corporate Development Department where CW 3
worked as a Local Accounts Manager. CW 3 was also responsible for training other Local Accounts
Managers. CW 3 reported to Corporate Development Metro Manager Reagan Wilkins (“Wilkins”),
who reported to Corporate Regional Manager Ken Cohn (“Cohn”), Cohn reported directly to
National Director of Corporate Development Ginger Bahr (“Bahr”). Bahr reported to the Vice
President overseeing Corporate Development and Military Development Tom Brooks (“Brooks”).
Brooks reported directly to Pauldine, who reported to Hamburger. As such, CW 3 has knowledge
regarding the Company’s performance matrix and the number of leads each employee was expected
to secure each month.
1 David Pauldine (“Pauldine”) was, at all relevant times, the Executive Vice President of DeVry, and became the President of DeVry University in July 2006. Pauldine reported directly to Hamburger and Gunst. As a high-ranking executive within the Company, Pauldine had authority to and did speak on behalf of the Company to the media on several occasions during the Class Period. During the Class Period, while the price of DeVry stock was artificially inflated, Pauldine sold 19,000 shares of DeVry stock at prices between $54.74 and $56.04 per share, for insider trading proceeds totaling $1,056,243.
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43. Confidential Witness #4 (“CW 4”) worked for DeVry from May 2008 through
December 2010. CW 4 started out as an Admissions Advisor at the Federal Way, Washington campus and was promoted to Assistant Director of Admissions at the Bellevue, Washington campus around February 2009. In January 2010, CW 4 was demoted back down to Admissions Advisor for failure to meet enrollment quotas. CW 4 was responsible for contacting “leads” provided to her/him from supervisors and for setting up appointments for prospective students to tour the campus and learn more about DeVry’s undergraduate programs. While Assistant Director of Admissions, CW 4 had additional administrative duties, which included generating her/his own leads, as well as overseeing four other Admissions Advisors and attending conferences calls with other managers. As
Assistant Director of Admissions, CW 4 reported to Center Dean for the Bellevue campus Yana
Taskar (“Taskar”), who reported to Director of Admissions Vanderbilt. Vanderbilt reported to the
Vice President of Sales and Marketing Russ Gill (“Gill”), who reported to Stewart. Stewart reported to Regional Vice President of Operations Dugan. CW 4 has knowledge concerning “production” expectations, the weekly conference calls held to discuss employees’ “sales” numbers, and the
Company’s predatory and abusive recruitment practices.
44. Confidential Witness #5 (“CW 5”) was employed by DeVry from January 2006 through December 2010. CW 5 started out as an Administrative Coordinator providing support for employees working with online students, and after about a year was promoted to Senior Academic
Advisor for online students at the Company’s Naperville, Illinois office. From April 2010 to
October 2010, CW 5 worked out of the Company’s Sherman Oaks, California office. In October
2010, CW 5 returned to the Naperville, Illinois office. CW 5 reported to a variety of different directors, including the National Director of Admissions Paul Weber (“Weber”). Weber reported to the Vice President of Online Ted Kulawiak (“Kulawiak” ), who reported to the President of Online
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Services Steve Reese (“Reese”). CW 5’s duties included recruiting prospective students. Among
other things, CW 5 has information regarding the compensation structure for Admission Advisors,
which depended upon hitting sales quotas and DeVry’s abusive and predatory recruiting practices.
45. Confidential Witness #6 (“CW 6”) worked at DeVry’s Naperville, Illinois office as a
Student Financial Advisor from approximately April 2008 to April 2009. CW 6 was responsible for
counseling prospective students by telephone about the different types of financing available, and
applying for financial aid and private loans. CW 6 has information regarding the role of Student
Finance Advisors at DeVry.
46. Confidential Witness # 7 (“CW 7”) worked for DeVry as a contract employee at the
Company’s Naperville, Illinois headquarters from December 2007 through March 31, 2008. CW 7
was a Student Finance Advisor, working exclusively with continuing online undergraduate students,
as opposed to newly enrolled students. CW 7 was responsible for calling students who owed DeVry
money to “make sure their balances were at zero.” CW 7 reported to the Manager of all online
Financial Aid Planners and Advisors Tim Newell (“Newell”). As such, CW 7 has information about
students’ concerns regarding tuition and the misrepresentations the Company made regarding the
amount of tuition covered by financial aid.
47. Confidential Witness #8 (“CW 8”) was employed at DeVry as a Senior Marketing
Project Manager in the DeVry Marketing and Communications Group based out of the Oakbrook
Terrace, Illinois corporate headquarters. CW 8 reported to the Director of Marketing Jo Ann Seager
(“Seager”) who reported to the Chief Marketing Officer. CW 8’s duties included collecting and
organizing collateral to be used in marketing for DeVry. CW 8 worked on marketing collateral for billboards, postcards, ads, flyers, and posters and maintained a database of collateral for the Regional
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Marketing Directors. CW 8 has information regarding the Company’s “We Major in Careers” campaign and the employment statistics used therein.
48. Confidential Witness #9 (“CW 9”) worked at DeVry from 2002 until September 2010 as an Admissions Advisor. CW 9 was responsible for leading a team of Admissions Advisors who recruited students for DeVry’s undergraduate programs and for KGSM. CW 9 reported to Director of Admissions Erin Miller (“Miller”), who reported to Center Dean Mary Zock (“Zock”), and later
Center Dean Mary Wahlbeck (“Wahlbeck”). CW 9 has information regarding the Company’s quota- driven sales and compensation structure for Admission Advisors, and the lack of financial aid assistance provided to DeVry students.
49. Confidential Witness #10 (“CW 10”) was employed as an Online Enrollment Advisor at the Company’s Naperville, Illinois office from June 2007 through January 2010. She reported to the Assistant Director of Online Enrollment Kelly Rowald (“Rowald”), who reported to Director of
Online Enrollment Chris Springer (“Springer”). CW 10 has information regarding DeVry’s misleading recruitment practices, including the use of “spin selling,” the practice of enrollment advisors taking entrance exams for prospective students, DeVry’s improper incentive compensation, and the forging of student documents by enrollment advisors in order to hit enrollment quotas.
50. Confidential Witness #11 (“CW 11”) was employed as the Director of Career
Services for the Western Career College (“WCC”) San Jose, California campus from January 2006 through May 2009. CW 11 supervised three to five career services employees. Her/his duties included arranging externships for all students who required externships for completion of their certificates and to ensure that graduates were employed in jobs within six months of graduation. CW
11 reported to San Jose Campus Executive Director Tim Gienapp (“Gienapp”). As such, CW 11 has
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information regarding the Company’s manipulation of placement numbers and the excessive use of purported externships to artificially inflate the Company’s graduate employment statistics.
51. Confidential Witness #12 (“CW 12”) was employed by DeVry from August 2002 to
June 2010. CW 12 worked as a New Student Coordinator from August 2002 to March 2004 in
Decatur, Georgia and briefly in Alpharetta, Georgia while enrolled at DeVry as a student. From
March 2004 to June 2010, CW 12 was employed as a High School Enrollment Advisor who spoke
with graduating seniors. CW 12 reported to the Director of High School Admissions Hunter
Wilberger (“Wilberger”), who reported to the Southeast Regional Director of Admissions Monal
Shah (“Shah”). Shah, who was based in Miramar, Florida, reported to the Vice President of
Admissions for the Southeast Region Julio Torres (“Torres”), who was later replaced by Marcy Pratt
(“Pratt”). Among other things, CW 12 has relevant information regarding DeVry’s preying on low-
income families, the Company’s loosening of enrollment requirements during the Class Period, and
the use of inaccurate career employment statistics to attract prospective students to DeVry.
52. Confidential Witness #13 (“CW 13”) worked at DeVry from January 31, 2007 until
January 2011. CW 13 started out as a Career Advisor at the Decatur, Georgia campus and was promoted in late 2009 to Senior Career Advisor. In May 2009, CW 13 made a “lateral transition” to
the position of Admissions Advisor at the Company’s Alpharetta, Georgia campus. When working
as a Career Advisor, CW 13 reported to Director of Career Services Tom Allen (“Allen”) who
reported to Metro President Jeff Moore (“Moore”), who oversaw all the campuses and centers in
Georgia. Moore and later Chris Chavez (“Chavez”) reported to Hamburger. As an Admissions
Advisor, CW 13 reported to Director of Admission Jimmy Coples (“Coples”), who was later
replaced by Karina Koplcok (“Koplcok”). Coples reported directly to the Campus Dean Pam
Harroff (“Harroff”) and then Tonya Gibson (“Gibson”). As such, CW 13 has information regarding
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the role of a career advisor, DeVry’s placement rates, and the admission of unqualified students, as well as the change in compensation for Admission Advisors that was put in place in the fall of 2010.
53. Confidential Witness #14 (“CW 14”) worked at DeVry as a Student Services
Coordinator and then as an Academic Advisor from June 2008 to September 2009. While employed as a Student Service Coordinator, CW 14 answered general inquiries at the Naperville, Illinois call center and forwarded calls and emails to the appropriate department. As an Academic Advisor, CW
14 was responsible for communicating with students across the country, to help them select and register for classes, to assist them with transferring their transcripts or credits, and to provide assistance with late or missing financial aid. While an Academic Advisor, CW 14 reported to Team
Lead Andrea Miller (“Miller”), who reported to Megan Hintz (“Hintz”), who oversaw two teams of
Academic Advisors. Hintz reported to the Vice President of Student Services Online Earl Frischkorn
(“Frischkorn”). CW 14 has information regarding, among other things, DeVry’s improper incentive compensation and its use of quotas.
54. Confidential Witness #15 (“CW 15”) was employed at DeVry from November 2006 through November 2010, following her/his graduation from DeVry. CW 15 began working as an hourly employee in Student Finance and then transitioned to Team Lead in the Company’s Wood
Dale, Illinois office. As Team Lead, CW 15 oversaw a team of eight to ten Student Finance
Advisors and was responsible for working with students who had dropped out in an effort to convince them to re-enroll at DeVry. CW 15 also worked with students who owed money to DeVry to try and work-out repayment. CW 15 reported to Directors of Student Finance Nicole Zater
(“Zater”), Ken Maher (“Maher”) and Steve Riehs (“Riehs”), who reported to Sanjay Sardana
(“Sardana”). As such, CW 15 has information regarding the tactics utilized by Student Finance
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Advisors, the Company’s questionable collections and recruitment practices, and its excessive
default rates that threatened DeVry’s ability to receive federal financial aid funding.
55. Confidential Witness #16 (“CW 16”) worked at DeVry from August 2004 through
July 2010 at the Company’s Oakbrook Terrace, Naperville, and then the Chicago, Illinois campuses
as a Director of Admissions. CW 16’s responsibilities included training assistant directors, hiring
admissions employees, alleviating turnover, training admissions directors, and reviewing DeVry’s
compensation grid and applying it to people CW 16 supervised. CW 16 reported to Associate
Director of Admission Terri Ignoffo (“Ignoffo”), who was later promoted to Regional Dean for
Online Admissions. Ignoffo reported to Weber and Kolawiak. CW 16 has relevant information
regarding DeVry’s improper incentive compensation, the Company’s abusive and predatory
recruitment practices, forgery of student signatures on applications, and the lack of post-enrollment
support available to DeVry students.
56. Confidential Witness #17 (“CW 17”) was employed by DeVry as a National College
Dean for the College of Business and Management in DeVry, Illinois from November 2009 through
October 2010. CW 17’s duties included managing undergraduate and graduate colleges at a high
level for 43 campuses in 26 states. The main focus of CW 17’s responsibilities was on academics
and curriculum. CW 17 reported to Curriculum Director Jesus Fernandez (‘Fernandez”), who
reported to Provost/Vice President of Academic Affairs Donna Loraine (“Loraine”) who reported to
Pauldine. Among other things, CW 17 has information regarding the enrollment of unqualified
students, grade inflation, and students’ low academic performances and expectations.
57. Confidential Witness #18 (“CW 18”) worked at DeVry from approximately May
2008 through June 2009 as an Admissions Advisor with KGSM online. CW 18 worked in the
Naperville, Illinois office and then moved to Addison, Illinois in November 2008. CW 18 was
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responsible for enrolling students and making outbound calls to recruit prospective students. CW 18
reported to Assistant Director of Admission Christa Renello (“Renello”), who reported to Director of
Admissions Kristen Tuten (“Tuten”). Tuten reported to KGSM Director of Admissions James
Wallace, who reported to Kulawiak. As such, CW 18 has information regarding DeVry’s improper
incentive compensation system.
58. Confidential Witness #19 (“CW 19”) was employed at several DeVry centers and
campuses in Texas from March 2003 to January 2009. CW 19 was initially hired as a Center Dean
for the Plano Center, where she/he was responsible for its operations. After about a year, CW 19 became the Center Dean for the Fort Worth Center, where she/he had similar responsibilities. In
January 2007, CW 19 became the Dean of Academics at the Irving Campus. As Dean of
Academics, CW 19 reported to Metro President Bill Van Zwol (“Van Zwol”), who was later
replaced by Kevin Lamountain (“Lamountain”). Loraine, DeVry’s Provost/Vice President of
Academic Affairs, oversaw Academics for DeVry from the corporate office in Illinois. CW 19 has
information regarding DeVry students’ lack of understanding of their financial aid obligations,
executive team meetings, and the Company’s graduate enrollment statistics and improper incentive
compensation system.
59. Confidential Witness #20 (“CW 20”) worked at DeVry from approximately July 2009
through July 2010 as a Student Financial Advisor in the Department of Student Finance. CW 20
worked for the online division of DeVry at the Company’s Wood Dale, Illinois call center. CW 20
reported to Team Lead Jennifer Kolar (“Kolar”), who supervised a team of eight Student Financial
Advisors. Kolar reported to a manager, who, in turn, reported to Sardana. CW 20 was assigned to
discuss financial aid with a group of 500 to 600 students. Once a student was enrolled in online
courses, CW 20 was responsible for assisting students with setting up their “initial payment plan,”
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which could include Veteran Affairs (“VA”) funding, out-of-pocket payments, or Title IV funding.
CW 20 has information regarding issues with students receiving and expecting refunds, DeVry
students being neglected and provided with inadequate information regarding financial aid, and
fraudulent practices employed by Admissions Advisors such as signing students up for classes in a
deceptive manner so they would owe money to DeVry.
60. Confidential Witness #21 (“CW 21”) was employed as the Metro President in
Georgia from May 2006 through October 2008. CW 21 reported to Senior Vice President of
Operations Jerry Murphy (“Murphy”) and later Rob Paul (“Paul”), who reported directly to Pauldine.
CW 21 was responsible for operations at the Georgia campuses and centers, with the exception of
Admissions. CW 21 has information regarding DeVry’s improper incentive compensation system,
the use of admission and enrollment quotas, the Company’s inaccurate and misleading graduate
employment statistics and the Company’s tracking of student retention rates.
61. Confidential Witness #22 (“CW 22”) worked at DeVry from February 2005 to April
2009. CW 22 was hired as the Director of Career Services for all Georgia locations, and was later promoted in January 2007 to Dean of Career Services and Student Services for all Georgia locations.
CW 22 reported directly to the Metro President, a position that changed multiple times during CW
22’s employment. The Metro President reported to Paul, who reported to Pauldine. As such, CW 22
has information regarding the enrollment of unqualified students, DeVry’s poor quality academic programs, inaccurate and misleading graduate employment rates, and the Company’s associates
degrees, which offered little value when compared to their cost.
62. Confidential Witness #23 (“CW 23”) was employed at DeVry from March 2002 to
March 2004 as an Admission Advisor at the Crystal City, Virginia campus, and from July 2008
through September 23, 2010 as a Manager of Local Accounts. As an Admissions Advisor, CW 23
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stated she/he really had an “inside sales position.” As a Manager of Local Accounts, CW 23
drummed up “leads” (i.e., prospective students) by working directly with corporations, community
colleges, and military offices and bases to recruit adult students. CW 23’s territory included
Raleigh, North Carolina, Arlington, Bethesda and Manassas, Virginia. CW 23 reported to Regional
Director Larry Taffel (“Taffel”), who was later replaced by Carmelita Senatz (“Senatz”). After
Senatz was demoted, CW 23 reported to the Regional Director overseeing New York, New Jersey,
and Philadelphia, Doreen Overstrom (“Overstrom”). Among other things, CW 23 has information
regarding DeVry’s improper incentive compensation system and the Company’s abusive and predatory recruiting practices.
63. Confidential Witness #24 (“CW 24”) worked as an Admissions Advisor at the
Company’s Indianapolis campus from July 2009 to November 2009, when CW 24 was fired for not
meeting enrollment quotas. CW 24 reported to Assistant Director of Admissions Julie Smith
(“Smith”), who reported to the Director of Admissions. CW 24’s duties included recruiting prospective students to DeVry. CW 24 has relevant information regarding DeVry’s improper
incentive compensation system, the pressure to meet enrollment quotas, and the misleading
information Admissions Advisors gave to prospective students.
64. Confidential Witness #25 (“CW 25”) was employed by Apollo College (“Apollo”)
which was acquired by DeVry in June 2008. CW 25 was the Dean of Education at the Arizona
campus from September 2008 through January 2009. CW 25 reported to Campus President Jeffrey
Gearhart (“Gearhart”). CW 25 has relevant information concerning Apollo’s treatment of potential
dropouts and its drive to have students stay enrolled for at least two weeks solely for the purpose of
allowing the Company to keep its Title IV funds.
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65. Confidential Witness #26 (“CW 26”) enrolled as a student at DeVry’s Edina,
Minnesota campus in the summer of 2010 to earn a bachelor’s degree in Computer Information
Systems. CW 26 was repeatedly misled during the enrollment process and, due to unexpected costs,
was recently forced to leave DeVry. As a result, CW 26 has information regarding the misleading
statements made by DeVry’s Admissions Advisors and financial aid department, including
misrepresentations about the costs associated with his/her degree.
66. Confidential Witness #27 (“CW 27”) was pursing her/his bachelor’s degree in
Operations Management at DeVry through its online program from September 2007 until June 2010.
CW 27 was forced to drop-out of DeVry due to the unexpectedly high costs associated with
attending DeVry. CW 27 has information regarding the Company misleading students as to the cost
of tuition and amount of tuition actually covered by federal financial aid.
67. Confidential Witness #28 (“CW 28”) attended DeVry’s Decatur, Georgia campus
from 2009 to 2010, while she/he was pursuing an associate’s degree in computer networking
administration. As such, CW 28 has relevant information regarding the misrepresentations made by
the Company’s financial aid advisors.
68. Confidential Witness #29 (“CW 29”) is currently enrolled in DeVry’s online program. CW 29 has relevant information regarding the Company’s lack of post-enrollment concern
for its students and the poor quality education provided by DeVry.
69. Confidential Witness #30 (“CW 30”) was enrolled at DeVry from 1997 to 1998 and
then again from 2007 to 2008. CW 30 received her/his Electronics Technology (“ET”) associate’s
degree at DeVry’s Long Beach, California campus. CW 30 has information regarding DeVry’s lack
of post-enrollment concern for its students.
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70. Confidential Witness #31 (“CW 31”) was enrolled at DeVry University’s Houston,
Texas campus from October 2008 through late 2009. CW 31 was persuaded to enroll in DeVry’s
Small Business Management and E-Commerce degree program after the Company misrepresented its prestige, employment statistics, including job placements rate and starting salary, and the transferability of credits. As such, CW 31 has information regarding DeVry’s abusive and predatory recruitment practices.
71. Confidential Witness #32 (“CW 32”) worked at DeVry from August 1978 to
December 28, 2008. CW 32 worked in Arizona, Colorado, and Washington while employed at
DeVry. From November 2000 until August 2008, CW 32 was the Metro President who oversaw operations at the Federal Way Campus, the Bellevue (Seattle) Center in Washington, and the
Portland, Oregon campus. From approximately 2006 or 2007, CW 32 reported to Paul, who reported to Pauldine. In September 2007, CW 32 became Dean of Academic Affairs. As Dean, CW 32 reported to Marie Hallinan. Among other things, CW 32 has information regarding DeVry’s Seattle
Metro area business and operations and conversations she/he had with Hamburger and other DeVry executives about enrollment numbers, demonstrating their knowledge of DeVry’s quota-driven culture.
72. Confidential Witness #33 (“CW 33”) was employed by DeVry at the Company’s
Houston, Texas campus from July 2004 to February 2009. CW 33 was hired as a Career Advisor in
Career Services and was promoted in 2005 to Associate Director of Career Services and then
Director of Career Services. As Director of Career Services, CW 33 reported to Metro President
Claude Toland (“Toland”). CW 33 has information regarding the Company’s inaccurate and misleading employment statistics and the Company’s predatory recruiting practices.
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VII. SUBSTANTIVE ALLEGATIONS
A) Introduction
73. For-profit colleges, which are either privately-owned or owned by publicly traded
companies, offer post-secondary education to a wide-variety of students. Unlike their state-operated
and not-for-profit brethren, whose primary goal is to provide a quality education for their students,
for-profit colleges are profit-driven, bottom-line businesses. Not surprisingly then, given their profit-driven goals, for-profit colleges charge their students significantly more to attend than not-for- profit schools (often twice as much or more), and students at for-profit schools end-up with
substantially more debt upon graduation (if, indeed, they graduate at all) than students at non-profit
colleges. Moreover, most for-profit colleges rely extremely heavily on federal funds (in the form of
Pell Grants, Stafford Loans and the like) – up to 90% of their gross revenues are derived in this way.
74. As described more fully throughout this Complaint, in an attempt to cannibalize
federal funds, DeVry has created a business model that mandates its salespeople to engage in predatory recruitment practices and deceptive enrollment practices resulting in extremely low
graduation rates and massive amounts of defaulted student loans. Of course, it is not these untoward business practices that create the basis for liability in this case, as DeVry is free to conduct its business as it sees fit. Rather, Defendants are liable to Plaintiff and the Class for the damages caused by their failure to disclose DeVry’s systemically predatory business model to the market and its
shareholders, providing instead a completely different picture of what drives its revenue, and
consequently misrepresenting the nature and substance of the Company’s financials and future business prospects. These misrepresentations and material omissions caused DeVry common stock
to trade at artificially inflated prices throughout the Class Period.
75. Enrollment at for-profit colleges has grown dramatically in the past decade. To be
sure, between 1998 and 2008, enrollment at for-profit colleges expanded by approximately 236
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percent, while enrollment at traditional institutions of higher learning rose only approximately 31 percent during that same period. 2
76. DeVry’s secret business model, as detailed below, was well-hidden for years, until,
through a series of partial disclosures, the truth was revealed. When the truth came out, the artificial
inflation was removed from the price of DeVry common stock, and its shareholders paid the price
and incurred substantial damages.
B) DeVry’s Business Model Depends on Maximizing the Amount of Financial Aid Obtained by Its Students, Regardless of Their Ability to Ever Repay It
1. The For-Profit College Business Model Places Low-Income Students in High Cost Schools
77. Historically, families with greater needs generally sought lower-cost colleges to
maximize the available federal loans and grants available, getting the most out of every dollar to
reduce out-of-pocket expenses and minimize heavy debt burdens. Conversely, families with greater
financial resources often sought higher-cost institutions because they could afford to pay in excess of
what federal loans covered. For-profit colleges have turned this traditional relationship between
costs and means on its head by targeting and preying upon students with the greatest financial needs
and convincing them to incur massive debt, regardless of their creditworthiness or ability to repay
the loans.
78. Indeed, low-income and minority students make up 50 and 37 percent of students at
for-profit colleges respectively, while, on average, for-profit colleges cost five and a half times the price of community colleges offering similar programs and degrees. Bachelor’s degree recipients at
2 The expansion of the sector has been so extraordinary that the largest for-profit – the University of Phoenix – today enrolls more students than the entire for-profit sector enrolled in 1991.
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for-profit colleges have median debt of $31,190.00 compared with $17,040.00 at private, non-profit
institutions and $7,960.00 at public colleges. At four-year for-profit colleges, low-income students
must find a way to finance, on average, almost $25,000.00 each year.
79. At DeVry University, undergraduate tuition ranges from $550 to $595 per credit hour
for students enrolled in 1 to 11 credit hours and $330 to $355 per credit hour for each credit hour
thereafter. As an example, for a full-time student enrolled in a five-term undergraduate networking
systems administration program ends up paying total tuition in the range of $34,260 to $35,815. A
student enrolled in an eight-term undergraduate business administration program will be required to pay total tuition of between $60,330 and $63,070.
80. Prospective students obtain these funds by turning, usually at the direction of the for- profit colleges themselves, to the federal government. For students with financial need, the federal
government helps pay for higher education through Title IV. Title IV covers the administration of
the United States federal student financial aid programs, and includes Pell Grants, Stafford Loans,
and other forms of federal financial aid. Title IV aid is a combination of grants and low-interest
loans available in limited quantity to students enrolled at any type of college.
2. The Vast Majority of For-Profit College Revenue Comes From Federal Student Aid
81. The reason for-profit colleges recruit low-income students for a high-cost education is
as simple as it is nefarious: this formula maximizes the amount of federal loans and grants the
students must take on in order to be able to afford classes, and, as a result, maximizes the amount of
federal loans and grant monies that the for-profit colleges receive. As much as 90 percent of revenue
generated at for-profit colleges comes from federal student aid . 3 Indeed, in 2007-08, approximately
3 Twenty-four percent of 2008 graduates of for-profit colleges took out federal loans in excess of $40,000.00.
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97 percent of undergraduates attending for-profit 2-year colleges took out student loans, while only
13 percent of undergraduates attending 2-year public institutions took out student loans. Similarly,
during that same time period, approximately 95 percent of undergraduates attending for-profit four-
year colleges took out student loans, while only 47 percent of undergraduates attending public 4-year
colleges took out student loans. The staggering statistical disconnect demonstrates the loan driven
nature of for-profit colleges.
82. Though federal financial aid is intended for the benefit of the student, as a practical
matter, aside from education-related expenses, student aid disbursements go directly to the student’s
school. Thus – as long as the school can keep enrollment rates steady or increase them – the more
money a for-profit college charges per credit, and the more revenue the institution will generate in
guaranteed federal dollars from loans taken out by low-income and other at-risk students.
83. Federal Pell Grants and Stafford Loans, together with aid from smaller Title IV programs, make up the lion’s share of for-profit colleges’ revenues . 4 While for-profit colleges enroll
close to 10 percent of all higher education students, they currently receive approximately 24 percent
of all Title IV funds. Indeed, between 2000 and 2009, the amount of Pell Grants, Stafford Loans,
and other Title IV aid packages given to for-profit institutions grew from $4.6 billion to $26.5 billion, representing a sizeable burden for U.S. taxpayers. 5
4 A Pell Grant is a post-secondary educational federal grant sponsored by the DOE which does not have to be repaid. A Stafford Loan is a student loan offered to eligible students enrolled in accredited American institutions of higher education. The repayment period for a Stafford Loan typically begins upon graduation or withdrawal by the student from the institution of higher education.
5 In 2009, for-profit colleges collected $4.4 billion of the $18.2 billion in Federal Pell Grants.
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C) The HEA Provides Eligibility Criteria that an Institution Must Meet in Order to Participate in the Federal Student Aid Programs
1. Incentive Compensation for Recruiters Is Not Permitted
84. In the early 1990s, Congress was concerned that certain schools were engaging in a
series of unethical practices leading to the admission of unqualified students just to obtain federal
financial aid. This led, ultimately, to students being unable to repay their loans – leaving the
government holding the bag.
85. Congress and the DOE took a number of actions to address this situation, including
enacting the “incentive compensation” provision. The “incentive compensation provision” of the
HEA prohibits schools from paying student recruiters and employees involved in financial aid “any
commission, bonus, or other incentive payment based directly or indirectly on success in securing
enrollments or financial aid.” 20 U.S.C. §1094(a)(20). In 2002, the DOE clarified the “incentive
compensation plan” by issuing a series of “safe harbor” regulations, 34 CFR 668.14(b)(22)(ii).
86. Relevant here, 34 CFR 668.14(b)(22)(ii)(A) provides that a school may make up to
two adjustments (upward or downward) to a covered employee’s annual salary or fixed hourly wage
rate within any 12-month period without the adjustment being considered an incentive payment, provided that no adjustment is based solely on the number of students recruited, admitted,
enrolled, or awarded financial aid. Additionally, 34 CFR 668.14(b)(22)(ii)(D) provides that profit-
sharing and bonus payments to all or substantially all of a school’s full-time employees are not
incentive payments based on success in securing enrollments or awarding financial aid, as long as
the profit-sharing or bonus payments are substantially the same amount or the same percentage of
salary or wages, and as long as the payments are made to all or substantially all of the school’s full-
time professional and administrative staff, compensation paid as part of a profit-sharing or bonus plan is not considered a violation of the incentive payment prohibition. Finally, 34 CFR
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668.14(b)(22)(ii)(F) provides that generally, clerical pre-enrollment activities are not considered
recruitment or admission activities. Accordingly, a school may make incentive payments to
individuals whose responsibilities are limited to pre-enrollment activities that are clerical in nature.
However, soliciting students for interviews is a recruitment activity, not a pre-enrollment activity,
and individuals may not receive incentive compensation based on their success in soliciting students for interviews.
2. Graduation Rates
87. DeVry is required to report graduation rates to the DOE. Though DeVry and other
for-profit colleges report graduation rates to the DOE, the data is self-reported and only captures
first-time, full-time enrolled students. Given the large number of for-profit college students who
attend part-time, or who have previous college experience, a very significant share of students fall
outside this reporting requirement. As set forth herein, it was not until April 22, 2010 that DeVry publicly reported its graduation statistics.
3. Cohort Default Rates
88. The Cohort Default Rate (“CDR”) is the percentage of a school’s borrowers who
enter repayment on certain federal student loans during a particular federal fiscal year (October 1 to
September 30), and who default prior to the end of the next fiscal year. The “cohort” is the group of
students who first enter into student loan repayment during a federal fiscal year, and the CDR for
each cohort is the percentage of the cohort members who default on their student loans prior to the
end of the following federal fiscal year. The CDR was initiated in the late 1980s to address the
growing concern that fly-by-night trade schools were preying upon minorities and low income populations to build their enrollments by enticing academically under-qualified students to apply for
grants and guaranteed student loans that the students were unlikely to repay.
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89. To remain eligible to participate in Title IV programs, educational institutions must
maintain an appropriate CDR. Under current law, if an institution’s CDR exceeds 10 percent for any
one of the three preceding years, it must delay for 30 days the release of the first disbursement of
U.S. federal student loan proceeds to first time borrowers enrolled in the first year of an
undergraduate program. Institutions with three consecutive CDRs of 25 percent or greater or with a
CDR greater than 40 percent in any one federal fiscal year could lose eligibility to participate in
certain Title IV programs.
4. The “90/10” Rule
90. Under HEA, proprietary institutions of higher education – including DeVry – must
comply with the 90/10 Rule. Specifically, a proprietary institution will be ineligible to participate in
Title IV programs if, for any two consecutive fiscal years, it derives more than 90% of its cash basis
revenue, as defined in the Rule, from Title IV programs. An institution that derives more than 90%
of its revenue from Title IV programs for any single fiscal year will be placed on provisional
certification for two fiscal years and will be subject to possible additional sanctions by the DOE in
the exercise of its broad discretion.
91. The HEA requires DeVry to demonstrate on an annual basis that at least 10% of its
revenue is derived from sources other than Title IV programs (the “90/10 Rule”), and DeVry must
report the calculation as a footnote to its annual audited financial statements. Further, DeVry’s
certified public accountant is expected to test the accuracy of its 90/10 assertion as part of the audit
of the institution’s financial statements. If DeVry exceeds the 90% threshold for two consecutive
institutional fiscal years, it could be subject to loss of Title IV eligibility.
5. Other Requirements
92. The HEA further requires that programs at for-profit institutions – other than those
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clearly designated as “liberal arts,” or not designed to lead to a degree – must prepare students for
“gainful employment in a recognized occupation” to be eligible for Title IV federal student aid.
93. In addition, state authorization and accreditation by an accrediting commission
recognized by the DOE are also required for an institution to become and remain eligible to participate in Title IV programs. As such, DeVry is also subject to extensive state regulations and
requirements of accrediting agencies, including the ACICS, Accrediting Commission of Career
Schools and Colleges (“ACCSC”), Commission on Colleges of the Southern Association of Colleges
and Schools, Higher Learning Commission of the North Central Association, Middle States
Association of Colleges & Schools of the Commission on Higher Education, Northwest Commission
on Colleges and Universities, and the Commission on Colleges of the Western Association of
Schools and Colleges.
94. For example, ACICS requires each accredited institution to maintain retention and placement standards of 60% and 65%, respectively. An institution with retention and/or placement
rates not in keeping with those standards may be subject to reporting. Other requirements of the
accrediting agencies include:
• “Advertising, recruiting, and admissions information adequately and accurately represent the programs, requirements, and services available to students.”
• “An institution may not delegate without supervision these [recruiting] activities to anyone whose economic incentives are to recruit prospects through means that are unethical or subject to public criticism or to admit ill-prepared applicants.”
• “[r]ecruiting shall be ethical and compatible with the educational objectives of the institution. ... The following minimums apply: (a) An institution shall ensure that any person or entity engaged in admissions or recruitment activities on its behalf is communicating current and accurate information regarding courses and programs, services, tuition, terms, and operating policies.”
• Schools are required “to describe themselves to prospective students fully and accurately and to follow practices that permit prospective students to make informed and considered enrollment decisions without undue pressure. The school’s recruitment efforts must
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attract students who are qualified and likely to complete and benefit from the training provided by the school and not simply obtain enrollments ... Each school observes ethical practices and procedures in the recruitment of its students.”
• “No misrepresentations should be made in student recruitment, including ...; b. misrepresenting job placement and employment opportunities for graduates; c. misrepresenting program costs; d. misrepresenting abilities required to complete intended program.”
D) Defendants’ Fraudulent Scheme
1. DeVry’s Admissions Process was a Con Game
95. DeVry’s “admissions process” was designed to manipulate as many prospective
students as possible into enrolling at DeVry so that the Company could obtain the federal financial
aid dollars that these enrollments garnered. DeVry’s bottom-line is not the education of its students, but the generation of monies to bloat its coffers. In order to do this, DeVry created, but failed to
disclose, a systemically predatory business model calculated to deceive prospective students about
the price of tuition and related expenses, the availability and coverage of financial aid, the quality of
its programs, the amount of time in which a degree could be completed, graduation rates and career
opportunities, among other things.
a. “Starts,” “Leads,” “Sales,” and “Numbers” – DeVry Admissions Advisors and Financial Advisors Were Merely Telemarketers in Disguise
96. DeVry’s corporate structure, devised and driven from the top-down, is to sell as many
students as possible on the necessity of obtaining a degree from DeVry. According to CW 1, “[i]t
was a sale, 150 percent – DeVry was definitely more concerned about the sale of the student rather
than the student as a person.” CW 9 stated that the position of Admissions Advisor was “definitely a
sales position. We didn’t look for people with educational experience, we looked for salespeople.”
According to CW 16, “[f]or the majority of my career, it was numbers, numbers, numbers by any
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means necessary.” According to CW 9, “[t]he bottom line was numbers,” the “people who were let
go [fired] had bad numbers.”
97. Internally, the Admissions department at DeVry was referred to as the “sales
department.” According to CW 2, the Company “was not concerned with retention or the quality or
rigor of the programs. It was all about getting butts in seats.” Indeed, DeVry employees referred to
new students as “sales,” and prospective students as “leads.” According to CW 8, the view of prospective students as “sales” or “leads” dehumanized the prospective students and let DeVry focus
more on the sale than on the needs or concerns of the students. According to CW 1, there was “so
much pressure to sell, to sell, to sell. The more enrollments you get the more money you make.”
CW 1 stated that she/he was “always surprised” that the Company, its campuses, and its
management got “away with so much unethical and illegal and high-pressure sales tactics.”
98. Senior management exerted tremendous pressure on DeVry employees to close as
many sales as possible. According to CW 17, at DeVry there was a “top-down management
structure.” Defendants liked to claim it was an up-down or lateral structure where all ideas were
welcome, but that was not the case. Instead, Defendants gave orders and everyone else was
supposed to follow them. CW 17 was told by her/his bosses that defendant Daniel “Hamburger is
very demanding. He wants it done his way and that filters down.” CW 19 also believed that
Pauldine and Hamburger met with the Metro Presidents offsite once per quarter. See Exhibit A, a
true and correct copy of an excerpt of the DeVry University Atlanta Metro Review 2006, discussing
the implementation of mandatory phone sessions for all advisors and advisors being held
accountable through weekly performance review and phone time management. Indeed, by “holding
accountable” its sales force for failing to meet sales quotas, Defendants made it clear that there
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would be a heavy price to pay – either lower compensation or termination – for failing to implement
DeVry’s systemically predatory business model.
99. CW 32 attended monthly conference calls led by Pauldine. Sometimes Hamburger also participated on these calls. The calls could last for two hours and consisted mostly of Pauldine
(and sometimes Hamburger) talking about corporate-level and/or system-wide issues, including enrollment, retention, career placement and financial aid. According to CW 32, Pauldine was “very knowledgeable about details” of the business. This was corroborated by CW 33, who stated that
Defendants had to be monitoring the placement numbers because the numbers – placement, enrollment, and retention – were so important and were discussed at weekly local “executive team” meetings (all Directors from the campus) and on conference calls and meetings with other Career
Services directors (possibly monthly).
100. In mid-September 2007, CW 32 had a meeting with Loraine, Paul, Pauldine and
Hamburger during which Pauldine and Hamburger told CW 32 that they were unhappy with enrollment numbers in her/his area, specifically at the Federal Way Campus. Loraine, Paul,
Pauldine and Hamburger came to Federal Way for a “metro review.” During the first day of their visit, Loraine, Paul, Pauldine, Hamburger and more than a dozen employees from the corporate office met with Academic Deans and instructors/professors.
101. The second day was an all-day review that took place from about 8 a.m. to 6 p.m.
The heads of each department (Directors of Financial Aid, Admissions, Career Placement and so on) came into a room and gave a presentation to Loraine, Paul, Pauldine, Hamburger, and other corporate employees. The presentations involved each Director talking about her/his department and then answering any questions from the corporate employees and Hamburger.
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102. At the end of the review period, CW 32 went to dinner with Loraine, Paul, Pauldine and Hamburger to discuss her/his performance and their observations during the metro review. CW
32 likened the dinner to being “raked over the coals.” Loraine, Paul, Pauldine and Hamburger were very concerned about the Federal Way Campus’ enrollment numbers, and wanted higher enrollment numbers.
103. Shortly thereafter, CW 32 received a call at home from Paul telling CW 32 DeVry created a new and “very important” position for CW 32 as University Dean of Administration (or a similar title) in which she/he would work on academic curriculum and accreditation for DeVry system-wide. Based on the tenor of CW 32’s dinner conversation with Loraine, Paul, Pauldine and
Hamburger, and the timing of the call from Paul, CW 32 believed Defendants wanted new leadership to come in and increase enrollment numbers. During that call, Paul told CW 32 she/he could take the new position or leave DeVry.
104. Defendants tracked employees’ enrollment numbers very carefully. During the Class
Period, a Daily Activity Report (“DAR”) that detailed the performance of each Admissions Advisor was regularly circulated. The DAR was a matrix system that recorded how many calls were made to leads by each Admissions Advisor, how many appointments they scheduled, how many interviews they conducted each week and the number of enrollment applications submitted per week. Indeed,
DeVry’s systemic predatory business model required its advisors to identify and exploit prospective students’ hopes, dreams and fears for the unitary purpose of closing sales and grabbing federal financial aid monies.
105. Admissions Advisors received a certain number of “leads” or names and contact information for prospective students from their managers. Admissions Advisors were expected to convert 30 percent of the leads they received into appointments to meet on campus. Of those
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appointments, 60 percent of the prospective students were expected to actually keep those
appointments. Of the total number of appointments kept, 65 percent were expected to fill out
applications and pay the application fee. In turn, eighty percent of those students that submitted
applications were expected to enroll at DeVry.
106. The enrollment sales goal was always a moving target. Initially, Admissions
Advisors were expected to sell 10 enrollments per eight-week session. If advisors reached that goal,
the Company moved the goal to 15. If they made their goal of 15, the Company moved the goal to
18. The sales quotas were numbers based, and every advisor had different goals. Assistant Directors
had their own enrollment sales targets and would often encourage Admissions Advisors to engage in predatory behavior to meet their numbers.
107. DeVry and the Individual Defendants mandated that advisors were to spend 85 percent of their time each day on the phone, either fielding calls or making calls to students. Initial
meetings with prospective students were 60 to 90 minutes and would include the student and at least
one parent. Internally, DeVry referred to the family members as “the buying committee.” The buying committee would include anyone – a grandparent or an uncle, for example – who might be
willing to help pay for the prospective student’s education at DeVry.
108. The admissions process at DeVry was tightly controlled by the Company.
Admissions Advisors went through training and followed scripts to carry out all steps of the
recruiting process and implement DeVry’s systemically predatory business model, which was never
disclosed to investors. This training taught DeVry employees how to exploit perceived weaknesses
to overcome student objections and persuade “leads” to enroll during sales presentations. In their
first contact with prospective students by phone, Admissions Advisors were directed to provide prospective students with the minimal amount of information necessary to get them to visit a DeVry
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campus, because Defendants believed they were more likely to close a sale if advisors were face-to- face with leads. For instance, Admissions Advisors were forbidden from providing information over the phone about the costs of enrollment. Instead, they were trained to sidestep direct questions and focus on getting the students to campus, with promises that their questions would then be answered.
109. Similarly, DeVry Financial Advisors had their own scripts – laid out on their computer screens – setting forth the process for selling prospective students on DeVry. The main role of the Financial Advisor was to get the student to fill out an application, which the Financial
Advisor would often complete for the prospective student. The application would include the student’s name, address, telephone number, social security number and career interests.
110. Financial Advisors were expected to get a certain number of “starts” each semester and were directed to be as aggressive as necessary to make the sales. Further, Financial Advisors received credit for convincing students to fill out an application and pay the application fee. CW 6 recalled that she/he was expected to help secure financing for at least 100 students every three months, whether that included securing federal financial aid, military aid or private financing. These students had to be “fully packaged and ready to attend class” in order to count towards her/his quota.
111. Moreover, Defendants made employees aware that if they did not hit their ever- increasing quota of sales, or questioned the sales practices that the Company trained them to employ, they would be terminated.6 For each advisor who did not hit her/his sales quotas in a certain period, the Company placed a note in her/his personnel file indicating that the employee received a written warning and was in danger of being fired for failing to generate enough enrollments. According to
CW 9, “[p]eople were fired because the Company said you need to have 20 starts. You miss it two
6 CW 1, CW 2, CW 9, CW 10 and CW 24 were all terminated by DeVry for failure to meet their sales numbers.
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to three times in a year and you were let go.” DeVry, put simply, was a sales machine - nothing
more.
112. Because quotas were critical at DeVry, they were discussed within the Company. To
that end, CW 4’s supervisors held weekly conference calls and meetings with the Admissions
Advisors, Admission Directors and Assistant Directors in her/his region. The calls and meetings
were purely intended to go over “sales” numbers and were “terribly uncomfortable” because
employees would be called out and chastised for falling behind on their quotas. CW 4 described both the calls and the meetings as “intense” and “stressful.”
113. As a result of DeVry’s training and the pressure employed by senior management,
employees did anything they could to make sure they hit or exceeded their numbers. For example,
once prospective students completed their enrollment applications, those students who had not
completed a certain number of college credits had to pass an entrance exam to be admitted at DeVry.
CW 10 recalled that in order to meet their numbers and keep their jobs, “a lot of advisors would take
the exam” for prospective students. For example, according to CW 10, Admissions Advisors would
call their prospective students and say, “give me your password and I’ll take it for you and make sure
you pass.” According to CW 10, “taking tests for students was done, and discussed, openly.”
114. Additionally, CW 16 was aware of several instances of advisors forging enrollment
documents. The forgeries typically occurred in situations in which a student had submitted parts of
their application signed, but had not submitted every page that had to be signed. The advisor would
copy the student’s signature onto an unsigned page. This was confirmed by CW 18, who stated that
“at least one or two [advisors] forged documents at least once every eight weeks.” Although CW 16
reported the forgeries to senior management on several occasions, nothing was ever done. DeVry
was concerned with quotas - not correcting outright fraud.
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115. Further, CW 14 stated that the pressure to meet calling quotas was so great that
advisors quickly learned to manipulate the system by making calls to out-of-service phone numbers
or wrong numbers. Some advisors even called the outside number for the DeVry financial aid
department rather than dialing the internal extension so the call would count towards their quota.
When supervisors realized this was happening, the advisors responded by telling them that it was all
they could do to keep up with the quotas.
116. The information regarding the systemically predatory, quota-driven sales culture at
DeVry was provided by numerous Confidential Witnesses, including CW 1, CW 2, CW 4, CW 6,
CW 8, CW 9, CW 10, CW 13, CW 14, CW 16, CW 17, CW 18, CW 19, CW 21, CW 23, CW 24,
CW 32 and CW 33. Each of these CWs had similar experiences at DeVry and told a uniform
account of DeVry’s internal sales practices. The corroborating accounts of so many former
Company employees provides the allegations herein with significant weight. For example, CW 1
recalled that advisors were required to get four to five alternate phone numbers from a prospective
student applicant, including the student’s neighbor’s phone number. This was so the advisor could
track down the prospective students if the prospective student was not answering their primary phone and try to convince her/him to enroll and close the sale.
b. “If You Make Them Cry, They’ll Choose DeVry” – DeVry Used Psychological Manipulation to Coerce Prospective Students into Enrolling
117. Employees were trained by DeVry to use predatory and exploitive techniques the
Company found to be the most successful in closing sales, notwithstanding the legality or morality
of the recruiting techniques (or the strictures of the HEA). Advisors were told by their supervisors
not to take “no” for an answer from prospective students and to use hard-sell tactics to convince
them to enroll. DeVry Admissions Advisors were taught, and employed, varying predatory tactics to
use on students in order to manipulate them into enrolling at DeVry.
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118. For instance, Admissions Advisors were required to use a system called “Profile
Interest Evaluation” or “PIE.” Using PIE, DeVry Admissions Advisors were tasked with identifying
in great detail the prospective student’s aspirations and fears. Then, armed with knowledge of their
leads’ vulnerabilities, Defendants’ sales force used this information to manipulate and exploit prospective students into choosing DeVry. For example, Admissions Advisors were told to ask
students questions about their goals and their commitment to completing their degree. Admissions
Advisors were then coached by their supervisors to use the students’ own statements against them to pressure them into enrolling. Indeed, CW 1 was directed to use these exact tactics by Vanderbilt,
Stewart and Gill, all of whom demanded a very high-pressure sales approach.
119. According to CW 5, the focus of presentations to prospective students was to “find
areas of pain” or vulnerability and to play on that vulnerability to convince the individual to enroll at
DeVry. CW 5 stated that DeVry used a “script interview guide to test student motivation.” This was
corroborated by CW 18, who stated that Admissions Advisors would “poke the pain” – a common
statement among her/his co-workers meaning that they would focus on the prospective students’
fears and regrets to convince them to enroll. Another frequently heard statement was “If you make
them cry, they’ll choose DeVry.”
120. As a supplement to PIE, Admissions Advisors were trained to use the Socratic
Method on prospective students – the goal of which was to ask leading questions to get the student to
agree with the Admissions Advisor that enrolling at DeVry was the best thing for the students. For
instance, Admissions Advisors were taught that after providing a prospective student with
information such as graduate employment data, they should ask the student questions such as “do
you now see how DeVry can be the vehicle for achieving your goals” or “don’t you agree this is best
for you?”
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121. Additionally, to overcome a prospective student’s reservations about enrolling at
DeVry, Admissions Advisors were trained to manipulate students through a process known as “spin-
selling.” With spin-selling, Defendants’ salespeople were taught to overcome a prospective
students’ negative views about DeVry and redirect those views back on the students’ own personal
situations. For example, if a student expressed concerns about the cost of attending DeVry,
Admissions Advisors were trained to respond by changing the conversation to be about the student’s poor job prognosis and lack of steady income. If a prospective student expressed concerns about the
cost of tuition or the time it would take to earn a degree, the Admissions Advisor was directed to play on the individual’s emotions about whether the individual was actually committed to bettering
themselves. As a result of these abusive and predatory sales tactics, prospective students were
manipulated into disregarding their concerns about enrolling at DeVry. According to CW 10,
DeVry’s use of spin-selling was “totally a mind game.”
122. DeVry also employed a psychological practice called “second-voicing.” If a student
elected not to enroll at DeVry following a conversation with an advisor, another salesperson who
was a stronger “closer,” such as an Assistant Director, would “second voice” the student to close the
sale. According to CW 10, her/his Assistant Director referred to prospective students as “b”
meaning the word “bitch.” The Assistant Director would make comments like “I’ll call them back
and ‘second-voice’ them and we’ll get that b,” or “that b is no good, but we’ll get her.” There was
so much pressure to get enrollments that predatory recruiting was the norm and prospective students
were not people – they were leads, sales, and a means by which to meet quotas. Thus, they were
spoken about in very dehumanizing terms. CW 20 stated, “I took a lower paying job because I
couldn’t stay at a job that was evil. DeVry was the most evil place I ever worked.”
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123. Each prospective student had to fill out an application and pay an application fee of
$100.00. If the student did not pay the application fee, they would not be permitted to obtain
specific information about how much DeVry would cost, or whether the student would qualify for
grants and/or loans. Numerous prospective students objected to paying the application fee (many
times because they could not afford it), but DeVry never made exceptions on paying the application
fee and would not permit prospective students to discuss financial aid without paying the fee.
124. If students absolutely refused to pay the application fee, Admissions Advisors were
required to tell them that the advisor needed to speak to her/his supervisor. When CW 1 would go to
Vanderbilt with a student who would not pay the application fee, Vanderbilt would come into the
meeting and tell the student that “they don’t want to go to school.” Vanderbilt used very high- pressure tactics and took advantage of CW 1’s presence to outnumber the student. Vanderbilt would
tell the student, “You told us you wanted this. You know you need this. What has changed?” –
essentially bullying the prospective student into paying the fee as an effort to lock in another sale.
125. When employees questioned the legality and ethics of DeVry’s systemically predatory business model, DeVry management silenced them by terminating employees who spoke
up, or by making it impossible for those employees to make their quotas. According to CW 1, if an
employee objected to unethical practices, they “cut your leads, potentially to zero, so [you have] no
one to call and then they can fire you for lack of numbers.”
126. After raising an objection with Vanderbilt about advisors attempting to persuade
community college students to transfer to DeVry before the students completed their Associate’s
degree (resulting in none of their community college credits transferring), Vanderbilt took CW 1 out
of her/his community college recruiting role and she/he was no longer allowed to recruit off campus.
Vanderbilt further cut her/his lead flow and gave her/him two-year-old leads to call, even though
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federal policy prohibits schools from calling a prospective student more than 90 days after she/he
initially expressed interest. As a result, CW 1 did not hit her/his numbers and was fired. According
to CW 1, “if you go to management with anything, you get ostracized. You are seen as a threat or problem.” According to CW 9, “[m]ost advisors, if they had a job and were doing well, they
couldn’t question anything because they didn’t want to get fired. I had never been in a company
where so many people were fired.”
127. The information regarding the systematically predatory enrollment devices
Defendants used on prospective students to manipulate them into enrolling at DeVry was provided by numerous Confidential Witnesses, including CW 1, CW 3, CW 5, CW 9, CW 10, CW 16, CW
18, CW 20, CW 24.
c. The Company Misled Prospective Students in Order to Persuade them to Enroll at DeVry
(1) “Cooking the Books” and a “Shell Game” – Defendants Manipulated DeVry’s Employment Statistics
128. One of DeVry’s major selling points to prospective students is its employment
statistics and the supposed value of a degree from DeVry to the students once they are out in the
workforce. DeVry coached its Admissions Advisors to focus on return on investment when pitching
the school to prospective students. According to CW 8, the “placement rate was the driver of
marketing campaigns” and, the number came from DeVry’s compliance department. Indeed,
DeVry’s “We Major in Careers” campaign relied heavily on statistics describing the percentage of
DeVry’s graduates who were employed within their field of study within six months of graduation.
129. Based upon the representations made by DeVry, the campaign was construed by a
majority of prospective students as, “If I graduate, I’ll definitely get a job.” According to CW 8, the
Company’s targeted marketing offered “a focus on [a] pie-in-the-sky perfect life, making it seem
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attainable to everyone.” But in reality, the Company knew that a significant percentage of students
that DeVry was recruiting lacked the skill set or financial means to complete a degree, such that the promise of post-degree career was a pipe dream.
130. Even worse, the employment statistics, which were both told to prospective students
and repeated to investors, were manipulated by Defendants. In order to inflate DeVry’s employment
statistics, senior management got creative with the use of the term “employed within their field of
study.” For example, according to CW 1, if a student graduated with a computer networking
degree, but was only able to find employment at Wal-Mart as a teller who sometimes used a
computerized cash register, DeVry would claim that the student was employed within their field.
DeVry would justify this by asserting that because the graduate was working with a “computer,”
she/he was working in her/his field of study. Regardless of the fact that the graduate was not using
the computer networking skills associated with her/his degree program - and was using a cash
register - DeVry still reported that the student was successfully placed in a job related to their degree
within six months of graduation.
131. Similarly, CW 33 gave the example of two Health and Information Technology (HIT)
graduates were employed in customer service jobs at a health-related company and were counted by
DeVry as employed in their field. According to CW 21, DeVry would count students who graduated
with IT-related degrees who found jobs as accountants as placed in their field of study if the
graduates were working on general ledger entries.
132. Another way that DeVry manipulated its employment statistics was by counting
students who were already employed when they enrolled at DeVry as placed within their field of
study when they graduated, even though they were just continuing with the same job that they
already had before matriculating at DeVry. Further, according to CW 21, DeVry counted graduates
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as placed in their field even if the graduate only held a job for one day. DeVry did not go back and
change its employment statistics once a student was fired, so students were counted as employed
even if they had been terminated or quit after one day on the job.
133. The Career Services department at DeVry’s Federal Way, Washington campus was
required to report that 85 percent of graduates were successfully placed in a job in their field of
study within six months of graduation. In reality, the Federal Way campus job placement rate was
around 50%. In order to keep DeVry’s employment statistics artificially inflated, DeVry’s Pleasant
Hill campus listed students as participating in externships when those students already should have
graduated. Indeed, the Pleasant Hill campus reported students with 500 hours of externships when
most externships were 45 hours to 150 hours in length, and those students were listed as still participating in externships 200 days after they should have graduated. Prospective DeVry students
could not know that DeVry was manipulating its employment statistics, and, according to CW 20,
DeVry counted on the fact that prospective students would not ask questions about job placement or
average salaries within their field, but instead take the information provided by DeVry at face value.
134. DeVry regularly targeted prospective students who did not understand financial aid –
telling them that DeVry could guarantee them a job making $40,000.00 after graduation as a way of persuading them to enroll. Unfortunately, DeVry could not guarantee students a job within their
chosen field, let alone employment with a salary of $40,000.00 per year. Furthermore, prospective
students were given a false sense of how easy it is to succeed at DeVry. Advisors would downplay
the amount of work necessary to obtain a degree, stating to prospective students that they would only
have to log in to online classes three times a week for 15 minutes each session or only work on
schoolwork for three hours a week. Admissions Advisors would often deceive prospective students by representing that a DeVry degree was no different than getting a degree at Princeton or the
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University of Illinois. Although DeVry has the same accreditation, its degrees are nowhere near the
equivalent of Ivy League or Big Ten schools.
135. Advisors would also downplay the experience necessary for attaining a job after
graduation. For instance, upwards of 20 percent of all students admitted into the criminal justice program lacked the law enforcement experience they needed with their DeVry degree to get a job.
The DeVry catalog indicated that students in criminal justice needed one year of work experience to
enroll, yet, according to CW 17, “admissions people said they could enroll even if the catalog said
they lacked qualifications.” According to CW 17, Admissions Advisors bypassed the prior
experience requirement because they were under pressure to admit a large quota of students each
term. Pauldine was aware of the issues with advisors downplaying the criminal justice
qualifications. Pauldine visited campuses and spoke with students who identified the problem, and
also spoke with CW 17’s supervisor Lorraine about the issue. See Exhibit B, a true and correct copy
of an excerpt of the Georgia Metro GSP Conference Call, 09-11-08, discussing employment issues,
including graduates with insufficient work experience and students failing pre-employment programming exams.
136. DeVry used a proprietary software system to track graduates. Career Services input
data about graduates into this system following the students’ graduation. Those numbers were then pulled into reports by DeVry’s corporate office. CW 22 believed the reports were compiled by
Director of Career Services at the corporate level Marlene Greenberg (“Greenberg”) (Greenberg was
later replaced by Christine Rubin). The reports were distributed via email from Greenberg to Metro
Presidents. CW 22 believes that Hamburger and Pauldine either reviewed them or had a direct
report review them. CW 22 also made presentations to Hamburger and Pauldine when they visited
Georgia for an operational review of the campuses and centers. CW 22 believed she/he made Career
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Placement presentations to Pauldine and Hamburger in the 2006-2007 timeframe and possibly in
2008. CW 22 referred to the process of collecting data for DeVry’s employment statistics as
“cooking the books” and a “shell game” because the numbers were so misleading.
137. The information regarding Defendants’ manipulation of DeVry’s employment statistics and the use of those numbers in misleading prospective students was provided by numerous
Confidential Witnesses, including CW 1, CW 8, CW 10, CW 11, CW 13, CW 17, CW 21 CW 22,
CW 23 and CW 33. Indeed, according to CW 23, DeVry was “selling people pipe dreams.”
(2) “My Advisor Told Me This Was Free Money...” – DeVry Misled Students About Financial Aid
138. According to CW 14, advisors frequently gave students incorrect or misleading information about financial aid, but the Company never investigated student complaints or held advisors accountable. According to CW 20, one of the most common complaint that students made about financial aid was “my advisor told me that this was free money, I didn’t realize it was a loan I had to pay back someday.” According to CW 18, students “were encouraged to take out max funds for fixing up their house or buying a new car. Employees guaranteed financial aid to students and encouraged them to take out max funds.” CW 18 explained this to a Deloitte investigator who was working on behalf of DeVry asking questions about financial aid. CW 18 told the investigator that even when encouraged to take the maximum amount of financial aid available, students were “not necessarily told it needed to be repaid.”
139. Prospective students were misled from the beginning about how much financial aid they would need and how quickly the students would have to repay loans. When students expressed concerns about the amount of a loan or the cost of repaying it, advisors would minimize the cost while talking up the fact that upon graduation, the students would have high-paying jobs making it easy for them to cover the loan payments. According to CW 6, most prospective students she/he
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worked with did not understand the ramifications of missing loan payments nor of defaulting on student loans. They also did not comprehend their responsibilities as a debtor. DeVry Admissions
Advisors were often working with students who were fresh out of high school and who had parents with low-paying jobs and/or bad credit.
140. CW 12 complained to her boss, Wilberger, several times during her tenure that she was setting students up for failure as many did not realize the ramifications of borrowing money for their education. CW 12 estimated that about 95 percent of the potential DeVry students she met with were the first in their family to attend college. This was corroborated by CW 19, who noted that there was a lot of students who were dependent on their parents to secure financial aid, and in many instances, the parents only spoke Spanish. Overall, these students and their parents did not seem to grasp the debt associated with attending DeVry. Given the high cost of attending DeVry, it was common that a low-income student without the ability to contribute personally to their education would max out her/his financial aid in a very short period of time.
141. DeVry cost as much as $24,000.00 per year in tuition for full-time students. A student enrolled in three to six credits could burn through $8,000.00 to $12,000.00 in tuition, books, and other education-related costs in a semester. Yet, if prospective students did not ask how much tuition and expenses would cost, Admissions Advisors were prohibited from telling them. Indeed, if students had any misconceptions about financial aid, advisors were directed to keep quiet and not to correct their misconceptions. Rather than assisting the students in setting up a plan to finance their educations, DeVry’s Financial Advisors’ mandate was just to make sure the students enrolled and took out as much financial aid as possible.
142. This lack of guidance left many students unaware that they would run out of money for tuition prior to graduating. After a student’s first year at DeVry, tuition increased, creating a
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sizeable gap between the amount of money available through financial aid and the total cost of enrollment. If the students did not qualify for loans from private lenders or could not afford to pay out of their own pockets, they would have no choice but to drop out before finishing their degrees.
Many students ultimately dropped out because they could no longer afford the tuition. According to
CW 20, more then half of the students enrolled at DeVry left because of financial problems.
143. This was corroborated by CW 26, who enrolled at the Edina, Minnesota campus of
DeVry during the summer of 2010 to earn a bachelor’s degree in Computer Information Systems.
From the onset, CW 26 was misled by her/his Admissions Advisor and the DeVry financial aid department. CW 26 claimed it was all “smoke and mirrors,” and that DeVry told prospective students “anything to get [them] through the door and then tell[s] you nothing later.”
144. At the time of enrollment, CW 26 expressed her/his concerns about the costs of attending DeVry. To prevent any unknown expenses, CW 26 “asked them about every dollar,” she/he would be responsible for paying. CW 26 was told that she/he would only have to pay $600 twice a year and that everything else would be covered by financial aid. After enrolling, CW 26 was contacted by the Company and told that she/he would be unable to continue her/his education at
DeVry unless she/he began making payments of $600 per month, as opposed to twice a year. As a result, CW 26 could no longer continue at DeVry because she/he would have had to pay an extra
$6,000.00 per year out-of-pocket – money that she/he did not have.
145. Of the small percentage of students who made it through two or three years at DeVry, most ran out of funding because they had exceeded their maximum federal financial aid loan limits of $65,000.00 to $70,000.00. Many students were ignorant of the possibility of running out of financial aid because the Financial Advisors at DeVry had never mentioned the loan limits to them.
According to CW 9, students “would go through three years of DeVry undergraduate classes and run
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out of financial aid. The school wouldn’t help them.” Ultimately, these students were significantly
more likely to default on their student loans because they had all the debt associated with attending
DeVry but did not get a degree.
146. CW 20 regularly saw Admissions Advisors and Financial Advisors sign students up
for classes that the students did not want, resulting in the students having to drop the classes when
the students became aware of them. Adding or dropping a class after a student received a refund
caused the student to owe money to DeVry. This issue was regularly discussed in weekly “Team
Lead” calls and the “Team Lead” supervisors were well aware of it, but nothing was ever done about
it.
147. To add insult to injury, if a student had a remaining balance for tuition, DeVry would
not transfer any of the students’ credits to another institution – even credits that were already
completed and paid for. Basically DeVry held the credits that students had already completed and paid for hostage until the student resolved any purported balance owed to DeVry.
148. CW 7 discussed with “seasoned co-workers” what to tell students who could no
longer afford the tuition and would not qualify for private loans. The co-workers advised CW 7 to
tell the students to ask their parents to take out second mortgages on their homes to pay for the
tuition. Students could drop a class or withdraw from a class, but they were usually on the hook for
some portion of the cost depending on when they withdrew. If an advisor was able to convince a
student not to drop a class, this was referred to internally as a “save” and the advisor would be
singled out for praise.
149. Further, advisors were trained to omit information about the time period and cost for
completing a degree at DeVry when speaking with prospective students. For instance, DeVry
trained Admissions Advisors to compare the education available and costs associated with DeVry to
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those of state schools when recruiting prospective students. When comparing DeVry to state
schools, Admissions Advisors were taught to emphasize DeVry’s shorter completion times for
degree programs and similar costs to state schools.
150. For example, according to CW 1, DeVry Admissions Advisors would claim a business degree would cost $68,000.00 if completed within two years and eight months at DeVry,
whereas if the student attended a state school it would take them four to five years. In order for a
student to obtain a business degree from DeVry for $68,000.00, the student would have to finish
their classes in two years and eight months, necessitating a full course-load of 12 or more credit
hours per term. What DeVry knew but what most prospective students did not was that federal
financial aid benefits usually only covered six to nine credits per term. Thus, for students dependant
on financial aid (as most students at DeVry were), it was nearly impossible to finish their degrees in
that short a period of time.
151. It took most students six years at DeVry to complete their education, more than twice
as long as advisors were directed to tell students; and thus at a significantly higher cost. The scripts
that Admissions Advisors used with prospective students emphasized the ability to graduate in two
years and eight months, but the scripts provided no information about how unlikely and difficult it
was to do that. According to CW 16, “almost all students had the misperception they could finish in
three years.”
152. This was corroborated by CW 27, who enrolled in DeVry’s online degree program to pursue her/his bachelor’s degree in Operations Management. CW 27 worked full-time as a
mechanic and needed to attend an online school in order to maintain her/his employment. CW 27
was misled by DeVry’s representations that students could complete their degrees in two year and
eight months. CW 27’s Admissions Advisor failed to inform her/him federal financial aid would not
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cover the tuition necessary to graduate in that amount of time. DeVry also prevented CW 27 from taking 12 credits per term, as she/he had been promised based on the fact that she/he was employed full-time. CW 27 left DeVry in 2010 when it became apparent that the Company “was sucking the money out of me.”
153. None of this was of any concern to Defendants as their focus always centered on the first two weeks of the semester – the point at which the students had enrolled, had paid application fees, taken the entrance exam, and paid enrollment fees. DeVry had little interest in the students’ experiences at the school after the first two weeks of classes because after the two-week mark was achieved, DeVry was no longer required to return federal financial aid monies to the government if a student dropped out. Indeed, for an Admissions Advisor to be able to count that student toward their quota, the student only had to attend classes for two weeks. Admissions Advisors were not required to monitor the students’ progress after the two-week period. Even the so-called Student Success
Coaches on campus had little interest in students past the first two weeks of school.
154. This was corroborated by CW 29, who is currently enrolled at DeVry online.
According to CW 29, she/he has a “team” of Student Advisors who are never available when she/he calls to discuss her/his academic needs and have never explained the number of credits she/he needs to take per term in order to graduate in the two year and eight months she/he has been promised.
CW 29’s advisors repeatedly enrolled her/him in classes she/he had already taken and passed in an effort to collect additional tuition.
155. On one occasion, CW 29 had to call DeVry Financial Aid three times to get the issue resolved. The first two times she/he called, the Financial Aid employees insisted that she/he owed the money. Eventually, CW 29 realized the charges were related to DeVry enrolling her/him in a class she/he had already passed. After calling DeVry for a third time in an attempt to resolve the
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issue, CW 29 was told she/he was correct and did not actually owe DeVry anything. Had CW 29 been less persistent or unable to decipher why she/he got charged the $1,080.00 for a class she/he
had already passed, she would have had a balance she/he was unable to pay.
156. As recently as mid-February 2011, CW 29’s online student account indicated she/he
owed $400.00 to DeVry. However, by March 1, 2011 CW 29’s account indicated a balance of more
than $7,000.00, although CW 29 has no idea why. CW 29 stated that the quality of education at
DeVry is so bad that she/he has to prepare for exams online with free tutorials offered by third- parties because DeVry professors do not teach or properly prepare students for exams.
157. Defendants’ failure to care about student experiences and to provide a quality
education was also corroborated by CW 30, who began pursuing her/his Electronics Technology
(“ET”) Associate’s degree in 1997 at DeVry’s Long Beach, California campus. CW 30 left DeVry
when she/he moved to Illinois, but re-enrolled at DeVry in 2007 to complete her/his Associate’s
degree. Unfortunately, CW 30 found that the school was “completely different,” and was not like
when she/he started. According to CW 30, “[i]t was a really good education in 1997 and 1998 but
changed radically by 2007.”
158. For example, CW 30 stated that by 2007, “DeVry [had] changed its practices to make
sure everyone could pass tests and move up.” In 1997 and 1998 the courses were vigorous and the
exams were difficult. In contrast, in 2007 and 2008, all tests were either open book or had been previewed completely by the professor. According to CW 30, a DeVry diploma was “just given to
you for your money,” rather than something earned through study. It was “not a learning experience, just degree earning.” Whereas in the past, classes started with 40 students ended with only 20 due to
their difficulty, DeVry had initiated a 10 point or more curve to make it appears students did better
than they really did. On two separate occasions, after an exam the professors would work through
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the test problems (that many students had answered wrong) on the board and then give all students credits as if they had answered the problems correctly in the first place.
159. Furthermore, throughout CW 30’s time at DeVry, she/he was told by her/his
Academic Advisor that she/he was on pace to graduate on time. After completing all necessary courses, CW 30 was forced to go through seven different offices to get them to sign off that she/he completed the degree. A few months after CW 30 thought she/he had graduated, she/he received a call from DeVry informing her/him that she/he needed one more class to graduate. The extra semester cost CW 30 about $5,000.00. To make matters worse, when CW 30 spoke with other institutions about pursuing a bachelor’s degree, CW 30 learned that if she/he wanted to transfer her/his associate's degree from DeVry to another university and use the credits towards a bachelor's degree she/he would “have to start over.” Not only would CW 30 have to take placements tests, but her/his credits from DeVry were considered worthless.
160. Further, DeVry encouraged students who considered withdrawing from school within the first two weeks to stay in school for at least two weeks. For example, at Apollo, advisors were encouraged to tell students who were going to withdraw within the first two weeks to do the minimum required to stay enrolled. Apollo convinced students to do this by explaining to them that if they dropped out in the first two weeks of the session, then the students would be required to immediately begin making payments to Apollo for costs incurred up the point of drop out. If the students stayed longer than two weeks, they would owe money to the federal government, not
Apollo, and would be able to delay those payments for six months.
161. According to CW 25, the reason for this practice was that Apollo would have to return the student’s federal financial aid money to the federal government if the student dropped out during the first two weeks of class. The student would then owe Apollo some amount of money for
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the length of time she/he attended class. If the student stayed at Apollo for more than two weeks,
Apollo would not have to return the financial aid money to the federal government. Apollo knew it
was unlikely the student would pay back the amount owed, so this was a way to shift the debt from
Apollo to the federal government by telling the student they could postpone paying the debt by
staying in school.
162. According to CW 7, multiple students per day, “yelled and cursed and said DeVry is just a diploma mill.” CW 7 stated that students were “upset with the costs and that they weren’t
getting help from anyone” at DeVry. They get you through the door and then don’t help.” CW 20
was told when she/he went to work at DeVry that the job was all about helping students succeed and
graduate. Once she/he began working there though, it became clear to CW 20 that she/he was to
“work on collecting money from those who owed rather than helping those who had a chance.”
163. CW 10 often followed up with her/his students and at least 90% dropped out of
DeVry within six months of enrolling. According to CW 20, it was “rare to see anyone graduate.”
When a student in CW 20’s portfolio did graduate, she/he would mention it to co-workers and
her/his co-workers would do the same because a student gradating from DeVry was such a rare
occurrence that they felt like they had to share the news with each other when it happened. Indeed,
DeVry’s Federal Way campus had a graduation rate of 5 percent during the Class Period.
164. The information regarding DeVry’s misrepresentations to prospective students
concerning financial aid and education costs was provided by numerous Confidential Witnesses,
including CW 1, CW 4, CW 6, CW 7, CW 9, CW 10, CW 14, CW 16, CW 18, CW 19, CW 20, CW
24, CW 25, CW 28 and CW 29. For example, according to CW 1, DeVry hid from prospective
students that tuition increased approximately $60 per credit hour for each credit taken in a term when
the student was not enrolled for at least 12 credits. Thus, students who could not afford to take 12
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credits a semester because their financial aid did not cover the tuition were gouged for additional money for each class, increasing their overall tuition and debt.
165. Defendants’ financial aid misrepresentations were also corroborated by CW 28, who was enrolled in an associate’s degree computer networking program at DeVry’s Decatur, Georgia campus from 2009 to 2010. She/he was told by DeVry that the degree would cost $40,000.00. A
DeVry financial advisor further told her/him that she/he would receive a refund during her/his second term because her/his financial aid exceeded the amount of tuition and books for the term.
When CW 28 received the refund, she/he was assured that refunds were for “overpayments of student loans and didn’t need to be paid back.” However, when CW 28 left DeVry in April 2010 due to DeVry’s poor quality education, she/he was repeatedly harassed by multiple collections agencies for payment of the “refund.”
2. DeVry Boosted Enrollments by Using Illegal Incentive Compensation and Targeting Impoverished People, Community College and High School Students and Military Personnel
a. “Everybody Was Clear That This Was How They Were Disguising It” – In Violation of HEA, DeVry Compensated “Advisors” Based Solely on the Number of Student Enrollments They Attained
166. DeVry’s salespeople were compensated and received incentives based solely on the number of sales they closed. DeVry conducted performance evaluations of its admissions and financial advisors at least twice a year. Based on those evaluations, which focused on whether advisors hit their enrollment targets, advisors had the opportunity to earn more money.
Alternatively, advisors could lose a portion of their salary if they failed to meet their quotas.
167. While the Company purportedly used a grading system whereby sixty percent of the evaluation was based on meeting quotas and forty percent was based on how well the particular employee performed subjective TEACH values (such as behavior and timeliness), raises and bonuses
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were, in fact, solely based on an advisor’s sales numbers. DeVry’s leadership, behavioral and team- building criteria for performance were merely pretextual as advisors who exceeded their enrollment
targets always got high marks for these subjective criteria, and employees who missed their targets
were given low marks on the subjective standards regardless of how good they were at customer
service or working with students and co-workers.
168. According to CW 4, “[i]t was completely numbers.” CW 1 corroborated this
information, stating that it was well known that if you “don’t hit your numbers, they bust you on behavior. If you are meeting or exceeding numbers, terrible behavior wouldn’t matter.” This was
also corroborated by CW 9, who stated that “[e]verybody was clear that was how they were
disguising it.” According to CW 5, “if you are successful at admissions, it was really a numbers
game.” CW 1 stated that “[e]very eight weeks, it was explicitly said if you don’t hit your numbers
we can’t keep you. This is a performance numbers job.”
169. Admissions Advisor’s wages consisted of a salary and a bonus. When CW 9 started
working for DeVry, she/he received 80 percent of her/his compensation in salary and 20 percent as a
variable bonus. By the time she/he left, she/he received 40 percent of her/his compensation as a
salary that could only increase by a few percentage points each year and approximately 60 percent of
her/his compensation as a variable bonus. The variable portion could increase by more than 100 percent each year depending on how many students the Admissions Advisor and her/his team
enrolled at DeVry. If an Admissions Advisor’s enrollment numbers were exceptionally high, she/he
could receive a raise of the variable portion of their compensation of 250 percent in a single year.
170. The Company provided employees with a list ranking each employee’s performance
every Friday afternoon via email. According to CW 2, it was very much a competition: “it was all
about beating people.” She/he recalled that the list would “call out” the star performers and that the
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Company was very big on referring to the best performers as “stars.” In violation of HEA, DeVry provided its “star” advisors with additional types of compensation for hitting or exceeding their
quotas. These included expensive dinners, cash gifts, and days off from work. Perhaps the most
extravagant reward was an invitation to an all-expense paid trip held over a long weekend for
employees who consistently met or exceeded their numbers. The invitation only event was called
the Pride Retreat and included an awards ceremony for the Company’s top salespeople. Every
employee invited to Pride (approximately 400-500 in any given year) was allowed to bring a guest
and got free airfare, lodging at a fancy hotel, and a per diem. Recent locations for the yearly Pride
Retreat included Las Vegas, Boca Raton, Florida and Puerto Rico.
171. The information regarding DeVry’s compensation of “advisors” based solely on the
number of student enrollments they attained was provided by numerous Confidential Witnesses,
including CW 1, CW 2, CW 3, CW 4, CW 5, CW 6, CW 9 and CW 16. Indeed, to illustrate how
lucrative the job could be if employees exceeded their enrollment numbers, when CW 9 began
working at DeVry in 2002, she/he was making $28,000 annually, and when she/he left in 2009
she/he was making $92,000 annually. When CW 23 began working for DeVry in 2008, she/he was
earning $60,000 annually, and when she/he left in 2010, she was making $87,000 annually. These
dramatic salary increases were solely the result Defendants’ illegal incentive compensation policy.
b. DeVry Trained Advisors to Prey on Suspect Classes of “Prospective Students”
(1) Underrepresented Minorities, Low-Income and Disabled Individuals
172. DeVry Admissions Advisors were trained to pursue non-competitive students with
high school grade point averages in the range of 1.8 to 2.0. The Company focused on recruiting low-
income, underrepresented minorities that did not have a lot of cultural experience with higher
education. Some of the “leads” given to advisors did not even have working cars or working phones.
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DeVry recruited anywhere it could find people who were potentially eligible for financial aid and in
need of money to live. Advisors recruited at retirement homes and homeless shelters. DeVry pursued students who only spoke Spanish, even though DeVry did not offer any classes in Spanish.
CW 22 even said that she/he saw students enrolled at DeVry that appeared to be mildly retarded or
autistic.
173. Some students who had no access to a computer were accepted and enrolled in online
courses. CW 14 had a call with one woman who literally could not turn on a computer, let alone
figure out how to register and attend online courses. One of CW 20’s coworkers told her/him about
a call with a little old lady who was crying she had borrowed money from the federal government to
take a few classes to learn how to use a computer so she could email with her grandchildren.
Instead, DeVry enrolled her in an engineering program, and took loans out on her behalf for the
classes. According to CW 20, there was “no good resolution for her. She dropped the classes but
still owed the money.”
174. DeVry also recruited people off of the streets. CW 22 recalled a few troubling
incidents from her/his tenure involving homeless students. In one case, her/his Director of Security
showed CW 22 video footage of a homeless woman looking for a place to sleep in a classroom at
one of the campuses around 9:30 p.m., when a few classes were still meeting. The woman tried to
enter a classroom where a male adjunct instructor was working, got into an altercation with him, and
accused him of rape. The police were called and the adjunct professor most likely would have been
arrested if the Director of Security had not showed police the video tape of the incident. CW 22 later
found out the homeless woman was enrolled at DeVry. CW 22 noted that there was at least one
other incident in which a homeless person enrolled at DeVry was sleeping on campus and police had been called to deal with it.
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175. According to CW 15, one prospective student with schizophrenia called employees in
the call center and threatened to kill them, but he was still allowed to enroll. Another student CW 14
worked with suffered from a learning disability and paranoia, making the student impossible to
market to potential employers. CW 14 did not know how DeVry had enrolled this student but said
she/he felt the Company would “turn a blind eye” to the enrollment of these types of students. 7
(2) “It Was Outside Sales. That’s What it Was” – Community College and High School Students
176. Additionally, as a means inflating the Company’s enrollment numbers, Admissions
Advisors were told to recruit students from nearby community colleges. In many cases, students
who only had a year left in community college and would have been better served by completing
their degree prior to attending DeVry were aggressively recruited by DeVry anyway. Once a student
completes her/his associate’s degree that degree translates into more transferable credits to DeVry.
Notwithstanding this fact, it was DeVry’s practice to aggressively pursue all community college
students, even those nearing completion of their associates’ degrees.
177. DeVry Admissions Advisors would tell these students that immediately transferring
to DeVry was in their best interests, regardless of whether the transfer was actually beneficial to the
student. Students would only find out after transferring to DeVry that they would not be given credit
for all their courses unless they had completed their Associate’s degree. Admissions Advisors were
forbidden from telling prospective students that DeVry would cost more than community college.
7 In roughly mid-2009, in order to continue to inflate its enrollment numbers, DeVry changed its requirements to allow students with a special education diploma to enroll at DeVry. Previously, DeVry would only enroll students with a high school diploma or a GED. Special education students did not receive any additional educational support from DeVry.
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Advisors were also not permitted to discuss with prospective students the requirements for them to
complete their degrees at DeVry.
178. DeVry also employed High School Representatives who were tasked with targeting
high school students for enrollment at DeVry. High School Representatives were given scripts by
their managers to use when making presentations and CW 2 believed that 80 to 90 percent of the
representatives followed the scripts verbatim. For DeVry’s High School Representatives, meeting
expectations required them to follow a “4-by-12” plan, which essentially meant that they would have
to give 12 presentations over four days to 30 to 50 high school seniors per session.
179. High school seniors were referred to internally as “EPs” or “education profiles.”
Delivering three presentations a day, 12 presentations a week to 30 students per presentation would
result in approximately 360 EPs per week in a 10-week term. That would result in about 3,000 EPs per year. Making presentations to this many students would meet standards, which meant the
Representative could keep her/his salary. During each presentation, the DeVry representative would
give students a personal digital assistant (“PDA”). Students would follow along with a PDA that
allowed them to create their own animated avatar to move through the presentation. Each student
was required to input their name and email address into the device. Following the presentation, the
students who provided their contact information would get bombarded with emails from DeVry.
180. Part of the job of a High School Representative required speaking with teachers,
guidance counselors and the principal at the school to try and sell DeVry. This was called an “all
service visit.” CW 2 described it this way: “It was outside sales. That’s what it was.” When CW 2
was hired, she/he was told her/his position would be to act as a “motivational speaker,” but “when I
finished training it became clear to me I would be a sales person,” she/he said.
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(3) “Military is the Lowest Hanging Fruit” – DeVry Sets its Sights on Military Personnel
181. Recognizing the fact that military students provided DeVry with an opportunity to escape the strictures of the 90-10 rule while still being able to receive federal taxpayer dollars,
DeVry targeted military personnel with their predatory recruiting practices. 8 DeVry’s focus on recruiting military personnel was so intense that benefits received from DoD and VA funds increased exponentially during the Class Period.
182. According to CW 1, DeVry management “wanted to sell [to] them, not to educate them.” DeVry Admissions Advisors were trained to tell military personnel they could use the GI
Bill to pay for school, and that if they came to DeVry for one course every semester, they would get a $1,300.00 monthly housing allowance. Further, in order to sell military personnel on enrolling, they were told that since school was being paid for by the government, any grants the students received could go right into the students’ pockets. According to CW 1, DeVry’s sales pitch would enable them to enroll students who had no interest in education, but “were there only to get their housing allowance. The students were terrible because they were not motivated.”
183. Members of the military have a limited amount of lifetime educational aid they qualify for under the GI Bill, depending on their length of service. Yet, DeVry failed to inform military personnel that they could exhaust lifetime education limits without earning a degree – a huge disservice to the students who enrolled in classes at DeVry to receive housing allowances or grant money. Rather than advising military personnel to talk with their VA representative about
8 The DOE’s 90-10 rule effectively considers Department of Defense and Veterans’ Administration funds as non-federal aid by allowing these funds to be counted as part of the “10” component of the 90-10 rule, despite the fact that the money does indeed come from federal taxpayers. Additionally, military students were also valued by DeVry because DeVry received automatic payments from the government. As such, DeVry did not have to go chasing military students to collect out-of-pocket expenses.
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financial aid and enrollment issues, CW 1 stated that DeVry “made [the students] think of DeVry as
their quasi-VA representative.” According to CW 1, Admissions, Career Services, and Financial
Aid employees were all doing this because Senior Management told them to.
184. The Fort Lewis military base was located right near DeVry’s Federal Way,
Washington campus. According to CW 1, there was “a big emphasis on getting on base to recruit.”
DeVry employees were allowed to visit the base once a month to recruit soldiers to attend DeVry, but there were very strict rules of conduct. While Admissions Advisors could set up a table on the base, they could not solicit; rather, the military personnel had to approach the DeVry representatives.
185. Notwithstanding these rules, Vanderbilt told CW 1 to roam the halls, grab soldiers
and bring them over to DeVry’s table. CW 1 was “pushed and pushed to roam the halls, and
repeatedly told to ‘go sell soldiers. Recruit them.’” Gill had been in the Navy, and on one occasion
told CW 1, “to target the low hanging fruit first,” and according to Gill, the “military is the lowest
hanging fruit.” On another occasion, CW 1 was directed by Vanderbilt to go on base under “false pretenses,” and recruit prospective students. DeVry employees, including CW 1, said they were at
Ft. Lewis “for an event but we were really there to recruit.” CW 1 recalled another occasion in
which Vanderbilt questioned her/his enrollment numbers. She told CW 1 to bring in more
enrollments by recruiting more aggressively at Fort Lewis and advising community college students
to transfer to DeVry even when it was not in the students’ best interests.
186. One of the main degrees Admissions Advisors were told to encourage military personnel to pursue was an Electronic Engineering Technology (“EET”) degree. Some military personnel were reluctant to enroll in this degree because of the likelihood they would be deployed
overseas at some point during their education, thus making it impossible to continue attending
classes. Admissions Advisors were directed to tell students they could complete their EET degree
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online, but this was not typically true. Only students with significant experience in the engineering
technology field could complete the degree online.
187. According to CW 1, “[y]ou have to be on campus because you need applied calculus
one or calculus two” to get the EET degree. Yet, DeVry Admissions Advisors were directed to push
military personnel who could barely pass basic math into the program. Vanderbilt, Stewart and CW
1 knew that most military enrollees who pursued an EET degree online without significant prior
experience in the field were not going to be successful, but they concealed that information during
the recruiting and enrollment process, in order to meet their quotas. Admissions Advisors were also
coached to sell military recruits on the fact that they could earn their EET degree in two years and
eight months. This was, in fact, untrue. Typically, it took a minimum of four years to complete an
EET degree, and most EET students dropped out before completing their degree.
188. The information regarding DeVry’s predatory recruitment of impoverished
individuals, community college and high school students and military personnel was provided by
numerous Confidential Witnesses, including CW 1, CW 2, CW 13, CW 15, CW 20, CW 22 and CW
31. For example, CW 31 was born with cerebral palsy and uses a motorized wheelchair to move
from place to place. In 2008, CW 31 began researching online schools to get her/his degree in Small
Business Management and E-Commerce. She/he contacted DeVry in October 2008 and was told
what she/he could receive her/his degree in her/his desired field through a mixture of campus and
online classes.
189. CW 31 was upfront with the university about her/his disability, but, according to CW
31, DeVry misrepresented everything anyway. CW 31 said DeVry officials pitched her/him with the prestige of a degree from the school, the promise of job placement, an expected starting salary and
the anticipation that should she/he want to continue his education, DeVry’s credits would transfer to
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any college of her/his choice. DeVry also represented to CW 31 that its degree was a fast-track program – that it was the equivalent of getting a four-year degree in three years.
190. In October 2008, CW 31 enrolled at DeVry University in Houston. To help offset the
cost of her/his education, CW 31 was encouraged and then pushed by DeVry to apply for private
loans to augment the federal financial aid she/he was eligible to receive. CW 31 said she/he agreed
to receive six loans, including a federal Pell grant, four Sallie Mae loans and an internal Opportunity
Loan from DeVry. CW 31 has since learned that instead of six loans, she/he was actually signed up
and approved for 24 loans – most which CW 31 had no idea she/he was receiving.
191. Within six weeks of starting classes, DeVry dropped CW 31’s course curriculum and
stopped offering the degree she/he sought. DeVry told CW 31 that she/he could instead pursue a
degree in Operations Management, but she/he researched the degree determined that she/he would
not be eligible for anything above a low-wage position as a security guard for a contract security
firm, not the high-paying computer administration executive salary that DeVry had promised
her/him.
192. CW 31 said DeVry changed her/his degree program four times, and each time it
changed, her/his tuition cost increased because each new degree program mandated additional
courses. CW 31 said she/he was presented with the increase matter-of-factly with no room to
negotiate.
193. CW 31 is no longer taking classes at DeVry, yet she/he cannot shake the Company.
CW 31 has been threatened and harassed for two years by debt collectors, including a Sallie Mae
official who said she would have CW 31 declared mentally incompetent if she/he refused to start
making loan payments.
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VIII. DEFENDANTS’ FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIOD 9
194. The Class Period begins on October 25, 2007. On that date, DeVry issued a press
release reporting its financial results for its first quarter 2008. The Company reported net income of
$26.8 million, or $0.37 diluted earnings per share, and a 14.2% increase in revenue to $250.3
million compared to the same quarter year ago. On this date, DeVry also reported September 2007
enrollment at KGSM. The Company reported that total enrollment at KGSM increased 12.7%
compared to the same quarter the year before. 10 DeVry also released its DeVry University
employment statistics for the periods ending June 2006, October 2006, and February 2007, stating
the percentage of “graduates who actively pursued employment or who were already employed
when they graduated and held positions in their chosen fields within six months of graduation,”
was 92.6%, with an average salary of $41,898. Regarding DeVry’s first quarter 2008 results,
Hamburger stated, in pertinent part:
“The strong earnings results during the first quarter were driven by double-digit revenue growth across all three of our operating segments, combined with the operating leverage we achieved from our cost management focus and the impact of our real estate optimization plan, . . . .”
195. Following issuance of the press release, on October 25, 2007, after the market closed,
DeVry hosted a conference call to discuss its first quarter 2008 financial results and operations.
Hamburger and Gunst participated in the call on behalf of the Company. During the call, numerous
9 Plaintiff has bolded and italicized the statements which it contends are false and misleading.
10 In furtherance of their fraud, Defendants touted positive enrollment statistics throughout the Class Period, without ever disclosing that those positive enrollment trends (like DeVry’s financials and future business prospects) were driven by predatory enrollment practices, and violations of Title IV, among other things. Rather than repeating the dozens and dozens of false and misleading statements regarding enrollment trends herein, Plaintiff has attached as Exhibits C through M the portions of DeVry’s SEC filings in which the false and misleading statements appear.
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false and misleading statements regarding DeVry’s financials and future business prospects were
made that were designed to and did artificially inflate the Company’s stock price. For example,
Gunst commented on the Company’s financial results, stating, in part:
First-quarter revenue was up 14.2% versus prior year, with all three business segments achieving double-digit revenue growth.
* * *
First, each of our business segments recorded double-digit revenue growth, with DeVry University up 12.9%, Medical and Healthcare up 22.1 % and Professional and Training up 13.5%. Second, the DeVry University segment showed the most significant year-over -year earnings improvement, going from an operating loss of $1.6 million last year to earnings of $19.3 million this quarter, excluding the discrete items, driven by the revenue growth combined with the labor and facility cost savings.
196. As the call continued, Hamburger also spoke positively about DeVry University’s
employment placement results for the periods June 2006, October 2006, and February 2007, as well
as the Company’s strong financial results across all three of its business segments, stating in relevant part:
We continue to deliver on the value of a DeVry University education as employment results keep getting better. For the three terms June and October 2006 and February 2007, nearly 93% [of] our graduates obtained employment in their field of study within six months of graduation, at an average starting salary of almost $42,000. At Keller Graduate School of Management, we reached an all-time record of 15,857 course takers in the September term, an increase of 12.7% from last year. That’s a little stronger than Keller’s average, and it was driven by better lead flow for the recruiting period.
197. Hamburger further misled the market by highlighting DeVry University’s purported
employment statistics, stating in relevant part:
The DeVry 90/40 that we talked about, 90 % employed in their field of study within six months of graduation, $40,000 plus, is now at 93/42, roughly speaking. So we’re sort of the overdelivering on that goal.
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198. In response to Defendants’ false and misleading statements, on October 25, 2007, the price DeVry common stock rose 37.62%, or $15.06 per share, to close at $55.09 per share on
October 26, 2007, on heavy trading volume, as set forth in the chart below:
6000000 60
5000000 - - 55
4000000 -
- 50
Volume 3000000 - Price
- 45
2000000 -
- 40 1000000 -
0 35 10/23/2007 10/24/2007 10/25/2007 10/26/2007
199. On October 26, 2007, William Blair & Company upgraded DeVry to “Outperform”
from “Market Perform,” “based on margin leverage at DeVry University (DVU) that significantly
exceeded our expectations.” William Blair also raised its fiscal 2008 and 2009 earnings per share
estimates to $1.79 (+$0.43) and $2.41 (+$0.75), respectively. Bear Sterns also upgraded DeVry to
“Outperform” following the release of the Company’s “outstanding” first quarter 2008 financial
results.
200. On November 8, 2007, DeVry filed its quarterly report on Form 10-Q for the quarter
ended September 30, 2007, which confirmed the Company’s previously announced financial results
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and was signed by Gunst and Hamburger (the “First Quarter 2008 10-Q”). The First Quarter 2008
10-Q contained required Sarbanes-Oxley certifications signed by Gunst and Hamburger stating that
the Form 10-Q did not include any material misrepresentations Nevertheless, the First Quarter 2008
10-Q did contain several false and misleading statements regarding DeVry’s financial performance
and future business prospects, which were based on an increase in student enrollment, including the
following:
Total consolidated revenues for the first quarter of fiscal year 2008 increased 14.2% to $250.3 million from the prior year quarter. Revenues increased at all three of DeVry’s business segments as a result of continued growth in total student enrollments, improved student retention, and tuition price increases as compared to the year ago period.
DeVry University
For the first quarter of fiscal year 2008, DeVry University revenues increased 12.9% to $194.8 million as compared to the year ago period. Tuition revenues are the largest component of total revenues in the DeVry University segment. The two principal factors that influence tuition revenues are enrollment and tuition rates.
201. Despite omitting how DeVry boosted its enrollment and financial results, the First
Quarter 2008 10-Q did provide detailed enrollment data, which included the following “key trends”:
at DeVry University, total undergraduate enrollment by term for fall 2005 to fall 2006 through summer 2006 to summer 2007 increased by between 4.9% and 9.8%. Likewise new student
enrollment by term increased for fall 2005 to fall 2006 through summer 2006 to summer 2007 by
between 6.9% and 11.9%, and graduate coursetaker enrollment for July 2006 to July 2007 and
September 2006 to September 2007 increased by between 11.1 % and 12.7% per session. 11
11 Attached as Exhibit C are the relevant portions of the First Quarter 2008 10-Q.
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202. In furtherance of Defendants’ fraud, the First Quarter 2008 10-Q purported to
describe the reasons behind DeVry’s increased enrollments and financial performance, stating in part:
Management attributes the increasing undergraduate new student enrollments to greater investments in marketing and recruiting, continued demand for DeVry’s high quality educational programs and its position within the working adult market. Management believes that efforts at Keller to create new brand awareness through improved messaging have produced positive enrollment results.
For the first quarter of fiscal year 2008, Student Services and Administrative Expense increased 6.8% to $91.6 million as compared to the year-ago quarter. The increase in expenses primarily represents additional investments in advertising and recruiting to drive and support future growth in new student enrollments. Increased new student enrollments, as described above, at DeVry University, Becker Professional Review and Ross University are believed to be, in part, attributable to the higher level and effectiveness of this spending.
203. The statements referenced in ¶¶194-197; 200-202 were each materially false and
misleading when made as they represented and/or omitted adverse facts which then existed and
disclosure of which was necessary to make the statements not false and/or misleading. The true
facts, which were then known to or recklessly disregarded by each of the Defendants, were:
• Contrary to Defendants’ statements, DeVry’s enrollment and revenue growth was not attributable to the strength of its programs or the higher level and effectiveness of its spending, but instead was the result of DeVry’s systemically predatory business model, including the Company’s diverse predatory recruiting practices extensively detailed herein.
• The Company was solely focused on increasing enrollment numbers at any cost, without regard to students’ academic success or preparedness for employment following graduation. Indeed, Defendants viewed students solely as leads and sales. All that mattered to DeVry was meeting quotas: the Company would boost the compensation of Admissions Advisors who met or exceeded their quotas; and the Company would routinely fire Admissions Advisors who failed to meet those quotas. Put simply, DeVry only evaluated its Admissions Advisors on the basis of quotas despite the guise of considering other subjective criteria. The Company is nothing more than a sales machine that operates on federal financial aid.
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• Defendants manipulated DeVry’s employment statistics throughout the Class Period. By falsely touting the “DeVry 90/40,” Defendants were, in reality committing a double-dip fraud. First, they were deceiving students into believing a DeVry education offered them legitimate employment opportunities. Second, Defendants likewise manipulated the market into believing in the legitimacy of DeVry’s recruitment efforts and that DeVry diplomas delivered value to DeVry students. As detailed herein, Defendants accomplished their employment statistics manipulation in several ways. For example, Defendants routinely included students who were employed in low-paying jobs that were in no way related to their field of study. Had Defendants honestly reported these figures, DeVry’s enrollment numbers would have suffered materially, DeVry’s revenues would have declined, and the market would have learned the truth about DeVry’s financial condition and future business prospects.
• Despite touting bloated employment statistics, Defendants failed to disclose that DeVry was “ just a diploma mill” and that a vast majority - as high as 90% according to some confidential witnesses - dropped out of DeVry within six months of enrolling. The graduation rate at DeVry was paltry at best, yet DeVry students almost universally are left with exorbitant amounts of federal student loans that they will never be able to repay. Rather than disclose these facts to investors, Defendants consistently misrepresented throughout the Class Period that DeVry provided an excellent return on investment to its students.
• As set forth herein, the Company’s recruiting practices were unethical, predatory and in direct violation of Title IV. Among other things, DeVry routinely converted leads to sales by using psychological manipulation to coerce prospective students into enrolling. Once students agreed to enroll, DeVry set its sights on coaching them to maximize the amount of federal financial aid that they could obtain. Among other tactics, DeVry’s standard practice was to misrepresent the amount of time required to complete degree programs at DeVry, thus grossly misrepresenting the cost of attending the Company’s schools. By violating title IV in this way, Defendants were able to boost DeVry’s reported financial results and grossly mislead the market as to the truth behind both DeVry’s enrollment figures and its financial performance and future business prospects.
• Due to the fact that the Company’s recruiting practices were in violation of Title IV, DeVry faced the real risk of losing the ability to receive federal financial aid – the driving force behind the Company’s revenue during the Class Period.
• Due to DeVry’s predatory recruiting and financial aid practices, which resulted in students routinely and unnecessarily borrowing the maximum federal financial aid available and turning those monies over to DeVry, the Company’s revenue numbers were inflated throughout the Class Period.
• As a result of the foregoing, Defendants lacked a reasonable basis for their positive statements about the Company, the Company’s Class Period revenue and enrollment numbers, as well as DeVry’s future business prospects.
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204. On December 6, 2007, DeVry issued a press release reporting positive growth in
undergraduate enrollment for the Company’s fall 2007 session at DeVry University. The Company
reported a 10.7% increase in new undergraduate enrollment and a 10.3% increase in total
undergraduate enrollment when compared to the same quarter the year before. Enrollment at
KGSM increased 12.5% from the year before, and enrollments in online courses at DeVry
University increased 28% for its October 2007 session. The press release further stated, in part:
“Initiatives to increase enrollments produced very favorable undergraduate student results in the fall at DeVry University and robust growth at Keller Graduate School of Management in the November session. These results were driven by improvements made to our recruiting processes, strong demand for online programs, and a heightened focus on the retention of existing students,” said Daniel Hamburger, president and chief executive officer of DeVry Inc. “We’re making progress in attracting recent high school graduates and we believe much of the opportunity still lies ahead. We also remain focused on better utilization of our real estate assets.”
205. In response, DeVry’s positive enrollment growth, the price of DeVry common stock
rose $2.28 per share, or 4.10%, from a closing price of $55.61 on December 6, 2007, to a closing price of $57.89 on December 7, 2007, on heavy trading volume, as set forth in the chart below:
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1600000 59
1400000 — 58.5
1200000 — — 58
1000000 — 57.5
Volume 800000 — — 57 Price
600000 — 56.5
400000 — — 56
200000 — 55.5
0 55 12/6/2007 12/7/2007 12/10/2007
206. The statements referenced in ¶204 were materially false and misleading when made as they represented and/or omitted facts which then existed and disclosure of which was necessary to make the statements not false and/or misleading. The true facts, which were then known to or recklessly disregarded by each of the Defendants, were:
• Contrary to Defendants’ statements, DeVry’s enrollment and revenue growth was not attributable to the strength of its programs or the higher level and effectiveness of its spending, but instead was the result of DeVry’s systemically predatory business model, including the Company’s diverse predatory recruiting practices extensively detailed herein.
• The Company was solely focused on increasing enrollment numbers at any cost, without regard to students’ academic success or preparedness for employment following graduation. Indeed, Defendants viewed students solely as leads and sales. All that mattered to DeVry was meeting quotas: the Company would boost the compensation of Admissions Advisors who met or exceeded their quotas; and the Company would routinely fire Admissions Advisors who failed to meet those quotas. Put simply, DeVry only evaluated its Admissions Advisors on the basis of quotas
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despite the guise of considering other subjective criteria. The Company is nothing more than a sales machine that operates on federal financial aid.
• As set forth herein, the Company’s recruiting practices were unethical, predatory and in direct violation of Title IV. Among other things, DeVry routinely converted leads to sales by using psychological manipulation to coerce prospective students into enrolling. Once students agreed to enroll, DeVry set its sights on coaching them to maximize the amount of federal financial aid that they could obtain. Among other tactics, DeVry’s standard practice was to misrepresent the amount of time required to complete degree programs at DeVry, thus grossly misrepresenting the cost of attending the Company’s schools. By violating title IV in this way, Defendants were able to boost DeVry’s reported financial results and grossly mislead the market as to the truth behind both DeVry’s enrollment figures and its financial performance and future business prospects.
• As a result of the foregoing, Defendants lacked a reasonable basis for their positive statements about the Company and the Company’s enrollment numbers.
207. On January 24, 2008, DeVry issued a press release announcing its financial results for the second quarter of 2008 and the six months ended December 31, 2007. The Company reported a
118% increase in net income to $35.8 million, a 16.2% increase in revenue to $273.7 million, a
115% increase in operating income to $46.9 million, and diluted earnings per share of $0.49, an increase of 113% from the same quarter a year ago. DeVry further reported that its DeVry
University segment exceed its 90/45 goal for October 2006, February 2007 and June 2007, with a
92.6% employment placement rate and an average salary of $42,805. The press release further stated, in part:
“In the first half of fiscal 2008, we successfully executed on many of our strategic initiatives - growing our total student population through improved new student recruiting and better retention, opening new locations and diversifying into secondary education through the acquisition of Advanced Academics,” said Daniel Hamburger, DeVry’s president and chief executive officer. “Earnings were strong as a result of solid revenues, operating leverage and disciplined cost management, as well as the timing of certain marketing and personnel-related expenses now likely to occur in the second half of the year.”
208. Following issuance of the press release, on January 24, 2008, after the market closed,
DeVry hosted a conference call to discuss its second quarter 2008 financial results and operations.
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Hamburger and Gunst participated in the call on behalf of the Company. During the call, numerous
false and misleading statements regarding DeVry’s financials and future business prospects were
made that were designed to and did artificially inflate the Company’s stock price. For example,
Hamburger discussed the Company’s second quarter, touting student growth results and stating in part:
We increased our dividend; opened new locations; and at DeVry University, delivered our ninth consecutive period of positive undergraduate new student growth and sixth consecutive period of positive total student growth. We also experienced robust growth at DeVry University’s Keller Graduate School of Management.
As you know, fall enrollments drive financial results in the second quarter, and we are benefiting from the impact of higher enrollments in all operations and from tuition increases. Increased revenues readily flow through to earnings due to the significant operating leverage inherent in our operations, particularly at DeVry University.
Our earnings were strong in the first half of fiscal 2008 and we expect them to continue to grow. We don’t expect the growth rate to be as high as it was in the first half. Rick will elaborate in a few minutes, but let me provide a little bit of color on the two main reasons for this.
Some of it is simply timing, in that expenses slated for the first half are now expected to fall into the second. The other reason has to do with investments in marketing, recruiting and other areas to drive growth and quality over the long run.
209. As the call continued, Hamburger misleadingly discussed how DeVry purported to
help its students who received financial aid, stating in relevant part:
Fourth, we provide extensive financial aid counseling for our students. For example, educating them on getting co-borrowers and helping match their academic load to available financing. We also ensure that they understand their re -payment responsibilities after graduation. And as a result of all these factors and our focus on quality, DeVry students have a strong track record in meeting their financial obligations, as noted in our press release Tuesday, where you can see the loan default rates for DeVry’s institution.
210. Gunst further commented on the Company’s second quarter 2008 financial results,
stating, in part:
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We delivered outstanding results once again in the second quarter, recording strong revenue growth and realizing the benefit of our cost management efforts to achieve very strong earnings results.
Turning now to our segment results, here are a few key headlines. First, revenue within DeVry University segment, which includes Advanced Academics, was up 14.9%. Medical and health care, up 20.5%; and the professional training segment, up 21.5%. Advanced Academics, which was acquired on October 31, positively impacted the DeVry University segment growth rate, but by less than 100 basis points in the quarter.
Second, the DeVry University business segment showed the most significant year- over -year earnings improvement. Increasing segment operating income from $6.8 million last year to $28.2 million this quarter, or up over $21 million driven by revenue growth combined with labor and facility cost savings.
211. As the call continued, Hamburger misleadingly reiterated the DeVry University segment’s employment statistics, stating:
The most recent three terms, 92.6% of our graduates obtained employment in their field of study within six months of graduation at an average starting salary of $42,805.
212. In response to a question from an analyst at Robert W. Baird regarding the
Company’s recruitment at high schools, Hamburger discussed how the Company was focusing on recruiting high school students, omitting any mention of how DeVry was merely seeking more sales.
Hamburger stated, in part:
. . . we’re pleased with the progress we’re making in revitalizing our high school recruiting efforts, with relatively new leadership, a new high school presentation, visiting more high schools and reaching more high school students, where we reach about three-quarters of a million high school students per year with that program.
Yes, we did see an increase in the fall in both broad stroke segments -- both the high school graduate segment and the adult student segment. It’s going in the right direction; not where we want it to be within the high school market, but we are committed to the high school market. We’ve done some recent work looking at the program, and based on that analysis and based on that work, we’ve, if you will, recommitted to that and we are committed to that high school segment.
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And the early indications for future classes continue to move in that same positive direction. So thanks a lot for asking about that.
213. Later in the call, Hamburger made additional false statements when he responded to a question by a Morgan Stanley analyst regarding cohort default rates and the Company’s management of students after graduation, stating in part:
Yes, we are. I mean, we’ve always invested time there. And the results show it with the cohort default rates that were in the press release we put out Tuesday, as low as less than 1% for some of these institutions.
What we’re doing even more so is the education that we do with students and the counseling. I mentioned some of those things. For example, helping to educate students on the importance, in many cases, of getting a co-borrower to sign up with them. That can help them get more and better financing and more attractive rates.
We do counseling and educational programs with students to prepare them and make sure that they understand their re -payment responsibilities after graduation. And we do work with the lenders to provide that kind of education. And in many other thrusts and activities and investments that we make, all of which has paid off. And once again, DeVry’s long-term focus on quality has served us in good stead. So those are some of the activities.
214. In response to market concerns regarding uncertainty in the private student lending industry, including that several private lenders were no longer offering private lending, the price of
DeVry common stock fell approximately 10% per share from $57.74 on January 24, 2008, the date of the Company’s press release, to $47.63 per share on February 7, 2008, the date of the filing of
DeVry’s Second Quarter 2008 10-Q. But Defendants were able to maintain the artificial inflation in the price of DeVry common stock by misleading the market.
215. On February 7, 2008, DeVry filed its quarterly report on Form 10-Q for the quarter ended December 31, 2007, which confirmed the Company’s previously announced financial results and was signed by Gunst and Hamburger (the “Second Quarter 2008 10-Q”). The Second Quarter
2008 10-Q contained required Sarbanes-Oxley certifications signed by Gunst and Hamburger stating that the Form 10-Q did not include any material misrepresentations. Nevertheless, the Second
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Quarter 2008 10-Q did contain several false and misleading statements regarding DeVry’s financials
and future business prospects, which were directly tied to increased and continued growth in student
enrollments, including the following:
Total consolidated revenues for the second quarter of fiscal year 2008 of $273.7 million increased 16.2% versus the prior year quarter. For the first six months of fiscal year 2008, total consolidated revenues of $524.1 million increased 15.2% versus the same period a year ago. For both the second quarter and first six months of fiscal year 2008, revenues increased at all three of DeVry’s business segments as a result of continued growth in total student enrollments, improved student retention, and tuition price increases as compared to the year ago periods. In addition, revenues increased because of expanding sales of electronic text books (“eBooks”) and higher sales of Becker CPA review materials.
DeVry University
DeVry University segment revenues increased by 14.9% in the second quarter to $213.4 million, and rose by 13.9% to $408.2 million for the first six months of fiscal year 2008. While DeVry University accounted for the majority of the revenue increase in this segment, revenues at Advanced Academics Inc., which was acquired on October 31, 2007, also contributed to segment revenue growth. DeVry University tuition revenues are the largest component of total revenues in the DeVry University segment. The two principal factors that influence tuition revenues are enrollment and tuition rates.
216. The Second Quarter 2008 10-Q also provided detailed enrollment data, which
included the following “key trends”: at DeVry University, total undergraduate enrollment by term for spring 2006 to spring 2007 through fall 2006 to fall 2007 increased by between 5.5% and
10.3%. Likewise, new student enrollment by term increased for spring 2006 to spring 2007
through fall 2006 to fall 2007 by between 6.9% and 10.7%, and graduate coursetaker enrollment for July 2006 to July 2007 through November 2006 to November 2007 increased by between
11.1 % and 12.7% per session. 12
12 Attached as Exhibit D are the relevant portions of the Second Quarter 2008 10-Q.
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217. In further perpetrating Defendants’ fraud and purporting to describe the reasons behind increased enrollments and financial performance, the Second Quarter 2008 10-Q continued:
Management attributes the increasing undergraduate student enrollments to the impact of investments in marketing and recruiting, continued strong demand for DeVry University’s online programs and a heightened focus on the retention of existing students.
Student Services and Administrative Expense increased 10.4% to $102.9 million during the second quarter and grew by 8.7% to $194.6 million during the first six months of fiscal year 2008 as compared to the year-ago periods. The increase in expenses primarily represents additional investments in advertising and recruiting to drive and support future growth in new student enrollments. Increased new student enrollments, as described above, at DeVry University, Becker Professional Review and Ross University are believed to be, in part, attributable to the higher level and effectiveness of this spending.
218. The statements referenced in ¶¶207-213; 215-217 were materially false and
misleading when made as they represented and/or omitted facts which then existed and disclosure of
which was necessary to make the statements not false and/or misleading, for reasons set forth in
¶203 above, and as evidenced by the factual detail contained throughout this Complaint. In addition,
the statements referenced in ¶¶207-213; 215-217 were materially false and misleading when made because they represented and/or omitted adverse facts which then existed and disclosure of which
was necessary to make the statements not false and/or misleading. The true facts, which were
known to or recklessly disregarded by each of the Defendants, were:
• The Company was not “successfully” executing on “strategic initiatives” to grow student population “through improved new student recruiting and better retention.” Quite the opposite, Defendants were successfully implementing DeVry’s systemically predatory business model, executing their scheme to manipulate, deceive, and take advantage of prospective sales, i. e. students, through violative and high-pressure recruiting tactics. The truth was that Defendants were not focused on retaining students beyond the first two weeks of each semester (the cutoff date for the return of federal financial aid monies to students who withdrew from classes), but instead were only concerned with increasing DeVry’s enrollment numbers by any means necessary.
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• Rather than meaningfully counseling students on financial aid issues, Defendants’ unitary purpose was to manipulate students into taking out the maximum amount of financial aid available, thus putting as much money in federal loan dollars as possible into Defendants’ pockets. DeVry simply did not engage in any level of legitimate counseling or educational programs to prepare students and “make sure that they understand their re-payment responsibilities after graduation.” As the factual detail in this Complaint makes clear, Defendants’ Class Period statements directly contradicted DeVry’s standard internal business practices.
• As a result of the foregoing, Defendants lacked a reasonable basis for their positive statements about the Company, the Company’s Class Period revenue and enrollment numbers, as well as DeVry’s future business prospects.
219. On February 8, 2008, Morgan Stanley upgraded DeVry to “Overweight” from
“Equal-Weight,” citing the Company’s minimal exposure to the changing student lending market,
resulting from the Company’s purportedly low Title IV default rates and high starting salaries.
220. On April 24, 2008, DeVry issued a press release reporting the Company’s financial
results for its third quarter of 2008. The Company reported a 67.2% increase in net income to $38.3
million, an 18.4% increase in revenues to $291.0 million, a 70.9% increase in operating income to
$50.6 million, and diluted earnings per share of $0.53, a 65.6% increase compared to the same
quarter a year ago. The Company reported a 12.1 % increase in new student enrollment and a
10.3% increase in total enrollment for the Spring 2008 session at DeVry University. Additionally,
the Company reported a 13.7% increase in graduate coursetakers and a 15.2% increase in graduate coursetakers at KGSM for its January 2008 and March 2008 sessions, respectively. The
total number of online undergraduate and graduate coursetakers increased 25.0% for its March
2008 session. DeVry further reported that its DeVry University segment exceeded its 90/45 goal for
October 2006, February 2007 and June 2007, with a 92.6% employment placement rate and an
average salary of $42,805. Touting student recruiting and “solid” enrollment results, the press
release further stated in part:
“We are pleased with the strong performance from all our operations through the first nine months of fiscal 2008,” said Daniel Hamburger, DeVry Inc.’s president and
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chief executive officer. “Continued improvements in the new student recruiting process and robust market demand for our high-quality programs resulted in solid enrollment results in the spring. These results combined with operating leverage enabled DeVry to deliver another quarter of outstanding earnings growth.”
Employment Statistics
System-wide, 92.6 percent of DeVry University’s graduates for the year ending June 2007 were in the active job market and employed in their fields within 6 months of graduation at an average starting salary of $42,805.
221. Following issuance of the press release, on April 24, 2008, DeVry hosted a
conference call to discuss its third quarter 2008 financial results and operations. Hamburger and
Gunst participated in the call on behalf of the Company. During the call, numerous false and
misleading statements were made regarding DeVry’s financials and future business prospects that
were designed to and did artificially inflate the Company’s stock price. For example, Hamburger purported to discuss the “many news stories” regarding the student lending industry and the lending
opportunities available to DeVry students. Hamburger misleadingly touted DeVry’s purported high
quality and extremely positive financial results, and stated in part:
Second, DeVry’s focus is on high quality programs with excellent academic outcomes. Because our graduates have a great track record of employment outcomes, lenders are available to help finance their education whether we are talking about Ross physicians and veterinarians, Chamberlain nurses or DeVry University’s 90% plus employment statistics.
222. As the call continued, without revealing the truth, Gunst commented on the
Company’s strong third quarter financial results stating in relevant part:
We delivered outstanding results once again in the third quarter recording strong revenue growth and continued to drive operating margin improvement.
223. Recapping enrollment growth rates and employment outcomes/placements,
Hamburger further misled the market, stating in part:
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I will begin the operations review at DeVry University including its Keller Graduate School of Management. As Rick described, we’ve been making investments in marketing and human resources to drive growth with quality. As a result our academic, financial, enrollment and employment outcomes are all improving. New students were up over 12%, and total students were up more than 10% to 44,814 students. By the way, the largest class in over five years.
Total graduate course takers of 17,377 in the January 2008 session was an all-time record, up nearly 14%. In the March session total course takers were up over 15%. Online course takers in March were 43,889, up 25% from last year. And this is compared to a 2008 market growth rate of 17% according to Eduventures’ projections. So our online growth continues to outpace the market.
Our employment statistics also continued to be strong. The DeVry University value proposition centers around what we call the 90/40, that is at least 90% of our graduates are employed in their field of study within six months at an average starting salary of $40,000. We are the only university that we know of with a 33- year average over 90%. And for the most recent reporting period our 90/40 was nearly 93/43.
224. Hamburger also misleadingly discussed the Company’s claimed focus on improving the course load per student, stating in part:
That is a metric we look at internally here very, very closely and there’s a lot of focus on that. It really helps a student to achieve their educational and career goals more quickly. And so where it is appropriate and they are able to take an extra course and take a bigger academic load, we will advise them as such. And that is showing some early signs of improvement. But that is pretty recent investments. I think there is a lot more in front of us on that one.
225. In response to Defendants’ false and misleading statements made in the press release and accompanying conference call, on April 25, 2008, the price of DeVry common stock increased
$1.69 per share, or 3.14%, to close at $55.49 per share, as shown in the chart below:
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2500000 59
— 58 2000000 —
— 57
1500000 —
Volume — 56 Price
1000000 —
— 55
500000 — — 54
0 53 4/24/2008 4/25/2008 4/28/2008 4/29/2008
226. Also on April 25, 2008, while the price of DeVry common stock was artificially
inflated, Hamburger sold 16,735 shares of DeVry stock at prices between $55.44 per share and
$57.46 per share, for illicit trading proceeds totaling $945,687.
227. On May 12, 2008, DeVry filed its quarterly report on Form 10-Q for the quarter
ended March 31, 2008, which confirmed the Company’s previously announced financial results and
was signed by Gunst and Hamburger (the “Third Quarter 2008 10-Q”). The Third Quarter 2008 10-
Q contained required Sarbanes-Oxley certifications signed by Gunst and Hamburger stating that the
Form 10-Q did not include any material misrepresentations. Nevertheless, the Third Quarter 2008
10-Q did contain several false and misleading statements regarding DeVry’s financials and future
business prospects, which were tied to increased and continued growth in student enrollments,
including the following:
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Total consolidated revenues for the third quarter of fiscal year 2008 of $291.0 million increased 18.4% versus the prior year quarter. For the first nine months of fiscal year 2008, total consolidated revenues of $815.0 million increased 16.3% versus the same period a year ago. For both the third quarter and first nine months of fiscal year 2008, revenues increased at all three of DeVry’s business segments as a result of continued growth in total student enrollments, improved student retention, and tuition price increases as compared to the year ago periods. In addition, revenues increased because of higher sales of Becker CPA review materials and expanding sales of electronic text books (“eBooks”).
DeVry University
DeVry University segment revenues increased by 16.3% in the third quarter to $222.6 million, and rose by 14.8% to $630.8 million for the first nine months of fiscal year 2008. While DeVry University accounted for the majority of the revenue increase in this segment, revenues at Advanced Academics Inc., which was acquired on October 31, 2007, also contributed to segment revenue growth. DeVry University tuition revenues are the largest component of total revenues in the DeVry University segment. The two principal factors that influence tuition revenues are enrollment and tuition rates.
228. The Third Quarter 2008 10-Q also provided detailed enrollment data, which included
the following “key trends”: at DeVry University, total undergraduate enrollment by term for summer 2006 to summer 2007 through spring 2007 to spring 2008 increased by between 9.8% and
10.3%. Likewise, new student enrollment by term increased for summer 2006 to summer 2007
through spring 2007 to spring 2008 by between 9.7% and 12.1 %, and total graduate coursetaker
enrollment for July 2006 to July 2007 through March 2007 to March 2008 increased by between
11.1 % and 15.2% per session. 13
229. In further perpetrating Defendants’ fraud and purporting to describe the reasons behind increased enrollments and financial performance, the Third Quarter 2008 10-Q continued:
Management believes the increased undergraduate student enrollments were most significantly impacted by investments in marketing and recruiting, continued
13 Attached as Exhibit E are the relevant portions of the Third Quarter 2008 10-Q.
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strong demandfor DeVry University’s online programs and a heightened focus on the retention of existing students.
* * *
Student Services and Administrative Expense increased 21.4% to $109.6 million during the third quarter and grew by 12.9% to $304.1 million during the first nine months of fiscal year 2008 as compared to the year-ago periods. The increase in expenses primarily represents additional investments in advertising and recruiting to drive and support future growth in new student enrollments. Increased new student enrollments, as described above, at all three of DeVry’s business segments are believed to be, in part, attributable to the higher level and effectiveness of this spending.
230. The statements referenced in ¶¶220-224; 227-229 were materially false and
misleading when made as they represented and/or omitted facts which then existed and disclosure of
which was necessary to make the statements not false and/or misleading, for reasons set forth in
¶203 and ¶218 above, and as evidenced by the factual detail contained throughout this Complaint. In
addition, the statements referenced in ¶¶220-224; 227-229 were materially false and misleading
when made because they represented and/or omitted adverse facts which then existed and disclosure
of which was necessary to make the statements not false and/or misleading. The true facts, which
were known to or recklessly disregarded by each of the Defendants, were:
• Defendants had no reasonable basis for repeatedly assuring investors that DeVry’s students had a great track record of employment outcomes because Defendants were manipulating DeVry’s employment statistics throughout the Class Period. For example, Defendants included students who were already employed when they enrolled in DeVry as employed within their degree field when they graduated, despite the fact that DeVry played no part whatsoever in the student obtaining their jobs.
• DeVry did not legitimately look “internally. . . very, very closely” at employment statistics. To the contrary, Defendants were aware that DeVry intentionally manipulated its employments statistics, through a variety of tactics, to boost the Company’s enrollment results, increase the Company’s reported revenues, and to artificially inflate the price of DeVry stock.
• DeVry students were not encouraged to “achieve their educational and career goals more quickly.” Defendants knew that their representations to students that they could obtain their degrees in two years and eight months were grossly misleading,
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and that few if any students were able to do so. Rather, students were prevented from enrolling in additional classes or taking full course loads so that DeVry could keep them enrolled longer and charge them higher tuition rates, artificially inflating the Company’s revenue numbers.
• As a result of the foregoing, Defendants lacked a reasonable basis for their positive statements about the Company, the Company’s Class Period revenue and enrollment numbers, as well as DeVry’s future business prospects.
231. On May 19, 2008, news entered the market regarding an investigation by the
Department of Justice into the Company’s recruiter compensation practices and performance
evaluations. In a press release, Defendants’ deflected any criticism and touted the Company’s “long-
standing commitment to quality and integrity,” and told investors that “DeVry’s recruiter
compensation is structured in accordance with all governing rules and regulations.” Thus Defendants
misled the market, by misrepresenting the Company’s recruiting practices. Although the price of
DeVry common stock decreased $2.45, or 4.36%, from a closing price of $56.67 on May 16, 2008 to
a closing price of $54.20 per share on May 19, 2008, Defendants’ false and misleading statements
served to prevent any additional decline and to maintain the artificial inflation in the price of
DeVry’s common stock.
232. On August 14, 2008, DeVry issued a press release reporting the Company’s “record”
financial results for its fourth quarter of 2008 and full-year ended June 30, 2008, as well as summer
2008 enrollment numbers. The Company reported a 54.0% increase in net income to $24.6 million,
an 18.9% increase in revenue to $276.8 million, a 72.5% increase in operating income to $30.9
million, and diluted earnings per share o f $0.34, a 54.5% increase compared to the same quarter a year ago. For full-year 2008, the Company reported a 64.8% increase in net income to $125.5
million, a 17.0% increase in revenue to $1,091.8 million, a 58.7% increase in operating income
and diluted earning per share o f $1.73, a 61.7 increase from a year ago. DeVry further reported
that its DeVry University segment exceeded its 90/40 goal for February, June and October 2007,
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with a 92.4% employment placement rate and an average salary of $43,635. The press release
continued by touting record revenue tied to growing enrollment, and stated in part:
“Fiscal 2008 was an outstanding year, delivering record revenue and earnings. We made excellent progress expanding student enrollments and improving academic quality in all of our schools,” said Daniel Hamburger, DeVry’s president and chief executive officer.
Mr. Hamburger added, “The recently announced acquisition of U.S. Education Corporation marks a major step in DeVry’s strategy to increase our presence in healthcare and to broaden our offerings at the pre-baccalaureate level. The addition of 17 campuses in the western U.S. will also help us extend our programs beyond Ross and Chamberlain to a wider array of students seeking high-demand healthcare careers through certificate and associate degree programs.”
233. The August 14, 2008 press release also reported enrollment results for the Company’s business segments. DeVry University reported a 19.3% increase in new summer enrollment, a
12.6% increase in total student enrollment, a 14.2% increase in total graduate coursetakers at
KGSM for July 2008, and a 15.7% increase in coursetakers for May 2008. The total number of
online undergraduate and graduate coursetakers for July 2008 increased 24.0% compared to the same period a year ago. The press release continued to mislead the market by highlighting so-called
“academic outcomes” and “graduate employment statistics,” stating in part:
System-wide, 92.4 percent of DeVry University’s graduates for the year ending October 2007 were in the active job market and employed in their fields within 6 months of graduation at an average starting salary of $43,635.
234. Following issuance of the press release, on August 14, 2008, DeVry hosted a
conference call to discuss its fourth quarter 2008 and full-year 2008 financial results and operations.
Hamburger and Gunst participated in the call on behalf of the Company. During the call, numerous
false and misleading statements regarding DeVry’s financials and future business prospects were
made that were designed to and did artificially inflate the Company’s stock price. For example,
Hamburger falsely pointed to DeVry’s focus on its students’ actual performance, stating in part:
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And let me start by saying that I think by any measure, DeVry had a very successful year. Most importantly, academic quality was up at all our divisions. By keeping our focus on our students’ success, the numbers tend to take care of themselves, and the numbers were very good.
235. Turning to the Company’s fourth quarter and full-year financial results, which depended on increased enrollments, Gunst stated in part:
With that overall perspective, let me now walk through some of the highlights of our business segments, the details of which are provided in our earnings release. All of our business segments delivered strong double-digit revenue growth in the quarter and full year. The DeVry University segment revenue was up 17.6% versus last year this quarter, with full -year growth of 15.5%, driven by continued online expansion, improved campus enrollments and the addition of Advanced Academics.
236. Hamburger also misled the market by pointing to DeVry’s increased enrollment and falsified employments statistics, stating in part:
Let me begin with DeVry University, including its Keller Graduate School of Management, where academic quality continued to be strong here at DeVry University. As an example, for the past year, 92% ofour graduates in the active job market were employed in their field of study within six months after graduation, this at an average starting salary of almost $44,000. Year after year, thousands of our graduates begin their career with top companies such as Abbott Labs and Hewlett-Packard. And employers tell us that our curriculum and hands-on training and education prepares graduates to hit the ground running.
In the summer of 2008, new student undergraduate enrollment was up 19.3%, while on-campus enrollment continued to show improvement. Online was, again, the bigger driver. Total student enrollment was up 12.6%.
237. Hamburger also discussed how the Company was boosting its recruiting results, stating in part:
Yes, we are continuing to see improvement in our high school recruiting results, where we’re going and visiting thousands of high schools and improving the number of schools we see, the productivity of that group. It’s not reached its full potential yet, but it is moving in the right direction. Continuing to invest in the working adult segment as well, in particular those who are seeking online studies. We talked about that. So it’s just good, continued, steady progress.
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238. On August 27, 2008, DeVry filed its annual financial report on Form 10-K for the
year ending June 30, 2008. The financial results reported in the Form 10-K were substantially
similar to those reported in the Company’s prior press releases. The Form 10-K was signed by
Gunst and Hamburger and contained required Sarbanes-Oxley certifications signed by Gunst and
Hamburger stating that the Form 10-K did not include any material misrepresentations.
Nevertheless, the Form 10-K did contain several false and misleading statements regarding DeVry’s
financials and future business prospects, including the following statements regarding growth in
student enrollment:
Enrollment Trends
In spring 2008, 44,814 full and part-time students were enrolled in DeVry University’s undergraduate day, evening, and online programs. There were 16,537 coursetakers in DeVry University graduate programs, including its Keller Graduate School of Management, for the term that began in May 2008. The term coursetaker refers to the number of courses taken by a student. Thus, one student taking two courses is counted as two coursetakers.
Total undergraduate enrollment in summer 2008 was 45,90 7, an increase of 12.6% compared to 40,774 in the previous summer. There were 16,017 graduate coursetakers in the July term, an increase of 14.2% from the same term of last year. Coursetaker enrollment in DeVry University online program offerings in summer 2008 was 44,503, an increase of 23.6% over the prior year.
239. Discussing recruiting and compensation practices, the Form 10-K misrepresented the
legality of the Company’s practices, stating, in part:
Certain states and Canadian provinces require advisors and student recruiters to be licensed or authorized by a particular regulatory agency. Regulations governing student participation in U.S. federal financial assistance programs prohibit schools from paying commissions, bonuses, or incentives to student recruiters based directly or indirectly on the number of students they enroll. DeVry believes that its compensation practices were designed to be in compliance with current regulations.
In May 2008, the U.S. Department of Justice, Civil Division, working with the U.S. Attorney for the Northern District of Illinois, requested that DeVry voluntarily furnish documents and other information regarding its policies and practices with respect to recruiter compensation and performance evaluation. The stated purpose of
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the request was to examine whether DeVry may have submitted or caused the submission of false claims or false statements to the U. S. Department of Education in violation of the False Claims Act. DeVry made a timely production of documents and continues to offer its full cooperation to the government in carrying out its inquiry. DeVry believes that its compensation practices were designed to be in compliance with current regulations.
240. The Form 10-K also misled investors concerning the purported employment of its
graduates and how the information was used to boost enrollment:
DeVry University believes that the employment of its graduates is essential to its ability to attract and retain students. Career services professionals located at DeVry University undergraduate campuses work with students to choose careers, craft resumes, and prepare for job interviews. The staff also maintains contact with local and national employers to proactively identify job opportunities and arrange interviews. In many cases, company hiring representatives conduct interviews at DeVry University campuses.
DeVry University attempts to gather accurate data to determine how many of its undergraduates, both at the associate and bachelor’s degree levels, are employed in positions related to their program of study within six months following graduation. To a large extent, the reliability of such data depends on the quality of information that graduates self-report.
For the three undergraduate classes that ended in calendar year 2007, there were 6,692 graduates from DeVry University’s U.S. undergraduate degree and diploma programs eligible for career service assistance, excluding the one-year post- baccalaureate information technology program (this excludes students continuing their education, students from foreign countries legally ineligible to work in the United States, and others ineligible for employment). From that pool of graduates, 6,012 actively pursued employment or were already employed. Within six months of graduation, 5,578, or 92.8% of those graduates were employed in positions related to their program of study. This compares to 91.9% who were employed in positions related to their program of study for the three classes that ended in calendar year 2006, and 88.1 % who were employed in positions related to their program of study for the three classes that ended in calendar year 2005.
241. The Form 10-K for year ending June 30, 2008, also provided enrollment data, which
included the following “key trends:” at DeVry University, total undergraduate enrollment by term for summer 2006 to summer 2007 through summer 2007 to summer 2008 increased by between
9.8% and 12.6%. Likewise, new student enrollment increased for summer 2006 to summer 2007
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through summer 2007 to summer 2008 by between 9.7% and 19.3%, and graduate coursetaker enrollment for July 2006 to July 2007 through July 2007 to July 2008 increased by between
11.1 % and 15.7% per session. 14
242. The statements referenced in ¶¶232-241 were materially false and misleading when made as they represented and/or omitted facts which then existed and disclosure of which was necessary to make the statements not false and/or misleading, for reasons set forth in ¶203 and ¶218 above, and as evidenced by the factual detail contained throughout this Complaint. In addition, the statements referenced in ¶¶232-241 were materially false and misleading when made because they represented and/or omitted adverse facts which then existed and disclosure of which was necessary to make the statements not false and/or misleading. The true facts, which were known to or recklessly disregarded by each of the Defendants, were:
• In response to an investigation by the Department of Justice, Defendants continued to mislead the market and hide the existence of its systemically predatory business model by telling investors that DeVry’s recruiter compensation practices were in compliance with all governing rules and regulations. In reality, DeVry was engaged in improper and abusive recruiting and financial aid practices and employed an improper incentive compensation system that was in violation of Title IV.
• DeVry’s incentive compensation system was in direct violation of Title IV. Although, DeVry claimed to base its performance evaluations on a variety of factors, including TEACH values, these subjective factors were merely a pretext used in order to allow Defendants to tell the market they were in compliance with Title IV. In reality, advisors’ salaries, bonuses, promotions, demotions and terminations were based solely on hitting the student enrollment quotas that DeVry provided to them. DeVry, put simply, was interested in sales – not students.
• Although Defendants represented that academic quality was up in all divisions, Defendants significantly and intentionally watered down the quality of the education at DeVry in an attempt to keep in class the unqualified students that the Company had accepted. Defendants’ motivation was simple: to maintain and increase the flow of federal financial aid to DeVry that was generated by its students.
14 Attached as Exhibit F are the relevant portions of the 10-K for year ending June 30, 2008.
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• The Company’s high school “recruiting” was nothing more than “outside sales,” with any purported improvement in high school recruiting the result of Defendants’ systemically predatory business model.
• As a result of the foregoing, Defendants lacked a reasonable basis for their positive statements about the Company, the Company’s Class Period revenue and enrollment numbers, as well as DeVry’s future business prospects.
243. On October 21, 2008, DeVry issued a press release announcing that the U.S.
Department of Justice had informed the Company that it declined to intervene in a lawsuit alleging
DeVry submitted false claims to the DOE in violation of the False Claims Act that was pending in
the Northern District of Illinois. The decision not to intervene came after the Department of Justice
concluded its previously-announced inquiry into the allegations. In approximately March of 2010,
DeVry settled the underlying case for $4.9 million.
244. On October 27, 2008, DeVry issued a press release reporting the Company’s financial
results for its first quarter 2009. The Company reported a 29.8% increase in net income to $34.8
million, a 21.3% increase in revenue to $303.7 million, a 38.1 % increase in operating income to
$46.8 million and fully diluted earnings per share of $0.48, or a 29.7% increase compared to the same quarter a year ago. For its September 2008 session, the Company reported a 12.2% increase
in DeVry University graduate coursetakers, (including the graduate students at KGSM). DeVry
further reported that its DeVry University segment exceeded its 90/40 goal for June 2007, October
2007 and February 2008 with a 92.1 % employment placement rate and an average salary of
$44,422. The press release also touted increased enrollment, stating in part:
“Our strong results in the first quarter of fiscal 2009 demonstrate that we are executing our strategic plan – increasing enrollment through improved marketing and recruiting, as well as further diversifying our offerings with the completion of the U.S. Education acquisition,” said Daniel Hamburger, DeVry’s president and chief executive officer. “We continue to show sustained growth and believe that even in tough economic times, our diversified portfolio positions us well to achieve our long term growth goals and to maximize shareholder value.”
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245. Also on October 27, 2008, DeVry hosted a conference call to discuss its first quarter
2009 financial results and operations. Gunst and Hamburger participated in the call on behalf of the
Company. During the call, numerous false and misleading statements regarding DeVry’s financials and future business prospects were made that were designed to and did artificially inflate the
Company’s stock price. Hamburger discussed the Company’s first quarter 2009 results and enrollment, stating in part:
During the first quarter we continued to execute our strategic plan, delivering strong financial results and increases in enrollment. At the same time, we invested in future growth through enhanced academic quality, continued diversification and investments in recruiting, marketing and technology.
246. During the conference call, Gunst discussed how the Company’s first quarter results and operations were boosted by enrollment growth, stating in part:
As you have all seen on our press release, we delivered very strong results in the first quarter of fiscal 2009.
* * *
First, the DeVry University segment revenue was up 18.4% versus prior year, driven by the strong summer enrollment growth coming from continued online expansion and improved on-site enrollments.
247. Hamburger further misled the market by highlighting discussed enrollment numbers and DeVry’s bloated employment statistics, stating in part:
Let me begin the operations review at DeVry University, including its Keller Graduate School of Management where, for the September 2008 session, total graduate course takers were up 12.2% versus the same period in 2007. As we do every year, we’ll report DeVry University fall 2008 undergraduate enrollment and November session graduate enrollment in early December.
* * *
Academic quality continued to be strong at DeVry University. For the past year, 92% of our graduates in the active job market were employed in their field of study within six months of graduation, and this at an average starting salary of over $44, 000 a year.
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* * *
Our strong first quarter results were driven by solid enrollments across all our operations, both on-site and online and our earnings benefited from continuing operating leverage. We welcome the newest member of the DeVry family through the acquisition of US Education, and our strategy of diversified growth is serving us well despite the economic downturn.
248. Later in the call, Gunst again tied the Company’s financial results to enrollment
trends, stating in part:
Well, I think the revenue growth was really an outgrowth of enrollments that we saw last summer and the revenue per student numbers that came through, it was a little bit better and the operating expense timing. We are not perfect on this, and we try and estimate what we think the operating expenses are going to be. We came in within a couple percent in terms of the growth rate, and the difference is due to timing of spending on advertising and some project spending that occurred in the fourth quarter that didn’t repeat in the first quarter.
249. On November 6, 2008, DeVry filed its quarterly report on Form 10-Q for the quarter
ended September 30, 2008, which confirmed the Company’s previously announced financial results
and was signed by Gunst and Hamburger (the “First Quarter 2009 10-Q”). The First Quarter 2009
10-Q contained required Sarbanes-Oxley certifications signed by Gunst and Hamburger stating that
the Form 10-Q did not include any material misrepresentations. Nevertheless, the First Quarter 2009
10-Q did contain several false and misleading statements regarding DeVry’s financials and future business prospects, including the following statements which linked DeVry’s financial results to
enrollment growth:
Total consolidated revenues for the first quarter of fiscal year 2009 increased 21.3% to $303.7 million versus the prior year quarter. Revenues increased at all three of DeVry’s business segments as a result of continued growth in student enrollments and tuition price increases as compared to the year ago period.
DeVry University
For the first quarter of fiscal year 2009, DeVry University segment revenues increased 18.4% to $230.7 million as compared to the year ago period driven by strong enrollment growth. While DeVry University accounted for the majority of the revenue increase in this segment, revenues at Advanced Academics Inc., which
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was acquired on October 31, 2007, also contributed to segment revenue growth. DeVry University tuition revenues are the largest component of total revenues in the DeVry University segment. The two principal factors that influence tuition revenues are enrollment and tuition rates.
250. The First Quarter 2009 10-Q also provided enrollment data, which included the
following “key trends”: at DeVry University, total undergraduate enrollment by term for fall 2006
to fall 2007 through summer 2007 to summer 2008 increased by between 10.3% and 12.6%.
Likewise, new student enrollment increased for fall 2006 to fall 2007 through summer 2007 to summer 2008 by between 10.7% and 19.3 %, and graduate coursetaker enrollment for July 2007 to
July 2008 through September 2007 to September 2008 increased by between 12.2% and 14.2% per session. 15
251. Further perpetuating Defendants’ fraud and purporting to describe the reasons behind
increased enrollments and financial performance, the First Quarter 2009 10-Q continued:
Management believes the increased undergraduate student enrollments were most significantly impacted by improved marketing and recruiting efforts, continued strong demandfor DeVry University’s online programs and a heightened focus on the retention of existing students.
252. In response to Defendants’ false and misleading statements, the price of DeVry
common stock rose $3.50 per share, or 8.09%, from a closing price of $43.25 on October 23, 2008 to
close at $46.25 per share on October 24, 2008, on heavy trading volume, as set forth in the chart below:
15 Attached as Exhibit G are the relevant portions of the First Quarter 2009 10-Q.
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Case: 1:10-cv-07031 Document #: 27 Filed: 03/07/11 Page 101 of 178 PageID #:313
3500000 60
3000000 -
- 55
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- 50 2000000 -
^ Volume Price
1500000 - - 45
1000000 -
- 40
500000 -
0 35 ^o`ry^ti^ ^o`ry^^tio^^ ^o\ry^ti^ ^o`ry^^,^ ^o\^^ti^ ^o`^o^ti^ ^o`^^^ti^ ^^^^o^^ ^^\^ti^ ^^\^^ti^ ^^^^ti^ ^^^^ti^
253. The statements referenced in ¶¶244-251 were materially false and misleading when
made as they represented and/or omitted facts which then existed and disclosure of which was
necessary to make the statements not false and/or misleading, for reasons set forth in ¶203 and ¶218
above, and as evidenced by the factual detail contained throughout this Complaint. In addition, the
statements referenced in ¶¶244-251 were materially false and misleading when made because they
represented and/or omitted adverse facts which then existed and disclosure of which was necessary
to make the statements not false and/or misleading. The true facts, which were known to or
recklessly disregarded by each of the Defendants, were:
• To the extent Defendants touted enrollment results and reported revenues that were tied to improved marketing and recruiting, Defendants omitted the critical fact that such “improvements,” in reality, translated to nothing more than increases in the intensity of the Company’s manipulative and abusive recruitment practices, illegal compensation structure (which depended solely upon meeting sales quotas), and false claims to students regarding not only the cost of attending DeVry and the requisite
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amounts of financial aid required, but also bloated and misleading employment statistics.
254. On December 4, 2008, DeVry issued a press release announcing fall 2008 enrollment
results at DeVry University, noting a 19.7% increase in new undergraduate student enrollment and
a 16.9% increase in total undergraduate enrollment. The Company also reported a 13.7% increase
in graduate coursetakers enrolled in its master’s degree programs at DeVry University, (including
graduate students at KGSM) for the November 2008 session. The total of undergraduate and graduate coursetakers increased 25.5% compared to the same session from the year before. The press release further stated in part:
“We delivered outstanding enrollment results at DeVry University in a challenging economic environment, driven by our focus on academic quality,” said Daniel Hamburger, president and chief executive officer of DeVry Inc. . . . We plan to continue to make investments to support DeVry University’s strategy of improving student retention through academic quality and customer service, increasing real estate utilization and enhancing marketing and recruiting.”
255. In response to Defendants’ false and misleading statements, the price of DeVry
common stock climbed $2.28 per share, or 4.06%, from a closing price of $56.09 on December 4,
2008 to close at $58.37 per share on December 5, 2008.
256. The statements referenced in ¶254 were materially false and misleading when made
as they represented and/or omitted facts which then existed and disclosure of which was necessary to
make the statements not false and/or misleading, for reasons set forth in ¶206 above, and as
evidenced by the factual detail contained throughout this Complaint.
257. On January 27, 2009, DeVry issued a press release reporting its financial results for
the second quarter of 2009 and six months ended December 31, 2008. The Company reported a
19.7% increase in net income to $42.9 million, a 35.0% increase in revenue to $369.6 million, a
33.3% increase in operating income to $62.5 million, and fully diluted earnings per share of
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$0.59, a 20.4% increase from the same quarter a year ago. The press release further misled the
market by pointing to enrollment gains and supposed high employment statistics, stating in part:
“In these turbulent times, we are especially pleased to report these results, which were driven by enrollment gains in the fall and our continued focus on academic outcomes,” said Daniel Hamburger, DeVry’s president and chief executive officer. “There is one key measure of our success that cannot be found on our income statement or balance sheet – it is the employment rate of our graduates. A remarkable 92 percent of recent graduates from DeVry University were employed in their field of study within six months of graduation despite the weakening job market.”
258. Following issuance of the press release on January 27, 2009, after the market closed,
DeVry hosted a conference call to discuss its second quarter 2009 financial results and operations.
Gunst and Hamburger participated in the call on behalf of the Company. During the call, numerous
false and misleading statements were made regarding DeVry’s financials and future business prospects. These statements were made designed to artificially inflate the Company’s stock price.
For example, Hamburger touted enrollment growth without revealing the truth behind those
numbers, stating in part:
We’re pleased to report that we delivered strong academic outcomes and financial results this quarter, driven by several factors. And of course, first among them was the double-digit enrollment growth in the fall at DeVry University.
As the call continued, Gunst discussed the Company’s second quarter 2009 financial results, stating in part:
The headline is that we continue to deliver solid top line and bottom line performance results, while making appropriate and prudent investments for future growth.
* * *
Now, with that let me walk you through some of the key highlights of our operating segment results, which are further detailed in the earnings release. First, revenue within DeVry University’s segment was up 18.9% versus prior year in the quarter and 18.7% year-to-date, driven by the strong enrollment growth, coming both from continued online expansion and improved on-site enrollments. DeVry University’s segment operating income increased by 23.4% in the quarter and 26.5% year to date, excluding discrete items. This improvement was driven by gross margin
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leverage, offset somewhat by the higher marketing and recruiting spending versus last year.
259. During the call, Hamburger once again misleadingly touted DeVry’s so-called
employment statistics, stating in part:
We’ve got the latest three-term average now, and even in the midst of the weak job market, I’m pleased to report that 92.1% of DeVry University graduates were employed in their field of study within six months of graduation, and at an average starting salary of over $45,000.
260. When questioned later in the call regarding whether there had been a change in
employment statistics, instead of revealing the truth, Hamburger continued to mislead the market and
stated:
Sure. It’s pretty consistent. A year ago it was about 92/42 I think. We always talk about the 90/40 at DeVry University, sort of the minimum expectation is of 90% employees, at a salary of $40,000, and we’ve been running ahead of that. We’ve been overdelivering on that value proposition for some time. So last year, I think around 92/42, now it’s about 92 or 92.1 and the $45,000 salary.
261. When questioned regarding proposed regulatory changes, Hamburger misled the
market by pointing to DeVry’s false employment statistics and the purported “return on investment”
or “ROI” that DeVry students were achieving by attending DeVry. Specifically, Hamburger stated:
No. Sorry to cut you off, but no. I’m so emphatic, no. The answer is no. We look at the competitive environment, and that’s -- and we also look at -- we’re constantly recalibrating and recalculating the return on educational investment, the ROI, that our students achieve. And so as that continues to improve, and that is exemplified for example by the 90/40 or in this case, 92/45, that is what in the long run underpins the ability to -- you know, we do -- it’s not cheap to go to DeVry University, for example. It’s not cheap to go to the Chamberlain College of Nursing, it’s not cheap to go to Ross University School of Medicine or School of Veterinary Medicine. We understand that. But as long as that is underpinned by the value proposition that the students are achieving, then -- then it works.
262. Continuing, Hamburger misled investors by touting how the Company was
counseling students to help them graduate sooner so they could achieve the so-called ROI provided by a DeVry education, stating:
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Yes, and what we’re talking about there, it’s -- it’s more color in that -- it’s not like A times B equals exactly C. It’s a little bit less. So a student who, for example, may have previously taken four courses -- I’m making up an example -- maybe now they’re taking three courses. It’s not all students, not across the board. But we’re seeing a little bit more of that, as one -- probably the main impact of the economy that we’ve seen, just taking a little bit lighter academic load at DeVry University, you know, undergraduate in particular. So we’re active on that. We’re counseling students on the benefits of taking a heavier courseload in order to graduate sooner and achieve that value proposition, the 90/40 and the 92/45 now, helping to advise them on achieving co-borrowers and many other things to counteract that. But that is one piece of color that we wanted to provide.
263. On February 3, 2009, while the price of DeVry stock was artificially inflated,
Hamburger sold 39,999 shares of DeVry stock at $57.50 per share, for trading proceeds of
$2,299,943.
264. On February 6, 2009, DeVry filed its quarterly report on Form 10-Q for the quarter ended December 31, 2008, which confirmed the Company’s previously reported financial results and was signed by Gunst and Hamburger (the “Second Quarter 2009 10-Q”). The Second Quarter 2009
10-Q contained the required Sarbanes-Oxley certifications signed by Gunst and Hamburger stating that the Form 10-Q did not include any material misrepresentations. Despite that, the Second
Quarter 2009 10-Q did indeed mislead the market, and contained false statements regarding the
Company’s revenue growth, which was tied to enrollment increases, stating in part:
Total consolidated revenues for the second quarter of fiscal year 2009 increased 35.0% to $369.6 million versus the prior year quarter. For the first six months of fiscal year 2009, total consolidated revenues increased 28.5% to $673.3 million compared to the same period a year ago. For both the second quarter and first six months of fiscal year 2009, revenues increased at all three of DeVry’s business segments as a result of continued growth in student enrollments and tuition price increases as compared to the year ago period. In addition, U.S. Education, which was acquired on September 18, 2008, contributed to the revenue growth in the second quarter and first six months of fiscal year 2009.
DeVry University
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DeVry University segment revenues increased 18.9% to $253.7 million in the second quarter, and rose 18.7% to $484.3 million for the first six months of fiscal 2009 as compared to the year ago periods driven by strong enrollment growth. While DeVry University accounted for the majority of the revenue increase in this segment, revenues at Advanced Academics Inc., which was acquired on October 31, 2007, also contributed to segment revenue growth. DeVry University tuition revenues are the largest component of total revenues in the DeVry University segment. The two principal factors that influence tuition revenues are enrollment and tuition rates.
265. The Second Quarter 2009 10-Q also provided enrollment data, which included the
following “key trends”: at DeVry University, total undergraduate enrollment by term for spring
2007 to spring 2008 through fall 2007 to fall 2008 increased by between 10.3% and 16.9%.
Likewise, new student enrollment increased for spring 2007 to spring 2008 through fall 2007 to fall 2008 by between 12.1 % and 19.7%, and graduate coursetaker enrollment for July 2007 to July
2008 through November 2007 to November 2008 increased by between 12.2% and 14.2% per session. 16
266. Further perpetuating Defendants’ fraud and purporting to describe the reasons behind
increased enrollments and financial performance, the Second Quarter 2009 10-Q continued:
Management believes the increased undergraduate student enrollments were most significantly impacted by improved marketing and recruiting efforts, continued strong demandfor DeVry University’s online programs and a heightened focus on the retention of existing students.
267. The statements referenced in ¶¶257-262; 264-266 were materially false and
misleading when made as they represented and/or omitted facts which then existed and disclosure of
which was necessary to make the statements not false and/or misleading, for reasons set forth in
¶203 and ¶218 above, and as evidenced by the factual detail contained throughout this Complaint. In
addition, the statements referenced in ¶¶257-262; 264-266 were materially false and misleading
16 Attached as Exhibit H are the relevant portions of the Second Quarter 2009 10-Q.
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when made because they represented and/or omitted adverse facts which then existed and disclosure of which was necessary to make the statements not false and/or misleading. The true facts, which were known to or recklessly disregarded by each of the Defendants, were:
• Defendants’ systemically predatory business model was not focused on academic outcomes, but rather on enrolling as many students as possible, and making sure those students obtained (and handed over to DeVry) the maximum financial aid available to them.
• The exceedingly high cost of a DeVry “education” was not underpinned by the value proposition provided by DeVry to students. Indeed, the small percentage of DeVry enrollees who ultimately graduated from a DeVry degree program were typically unprepared and unqualified to obtain the high paying job that DeVry had promised them in persuading them to enroll.
• As a result of the foregoing, Defendants lacked a reasonable basis for their positive statements about the Company, the Company’s Class Period revenue and enrollment numbers, as well as DeVry’s future business prospects.
268. On February 24, 2009, Hamburger participated at the Credit Suisse Group Global
Services Conference on behalf of the Company. During the conference, Hamburger made numerous false and misleading statements while purportedly discussing the Company’s operating philosophy and most recent financial results, stating in part:
Now, if you could summarize DeVry’s operating philosophy, in a sense it would be that quality leads to growth. Our focus on academic quality leads to strong student success, as well as ultimately financial success. So let me give some examples from this past year. At DeVry University one of the measures of student success is the employment results that our graduates achieve. And in this most recent reporting period, which includes this troubled economic time that we’re in, over 92% of our graduates found employment in their career field of study within six months of graduation, and this at a start- -- at an average salary of over $45, 000 a year. This includes the bachelor’s and the associate degree graduates at DeVry University. It does not include the Keller Graduate School of Management.
The other part that’s driving up that line a little bit is an investment in branding. With that strong DeVry University value proposition, over 90% employed in their field of study, we need to do a better job of telling that story. And it’s got to be as automatic as “four to five dentists recommend Trident for their patients who chew gum. ” It’s got to be that engrained -- 90% plus of DeVry University graduates are employed.
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And that’s where we’re going with this new campaign geared toward, “We major in careers at DeVry University.”
So that’s the first priority, is achieving the full potential of DeVry University. And the strategy is working, with enrollment gains of over 19% in new students and total enrollment of over 16% in the last reporting period.
269. On February 26, 2009, Gunst participated at the Robert W. Baird & Co., Inc.
Business Solutions Conference on behalf of the Company. During the conference, Gunst misleadingly discussed DeVry’s so-called employment statistics, stating in part:
First talk about the student success. One measure of success is what’s happened to our graduates and within DeVry University undergrad we have over 90% of our students, actually 92.1 % in the most recent 12 month period, getting jobs within their field of study within six months of graduation earning over $45, 000 a year. We call it the 90/40 and actually it’s now 92/45.
270. As the conference continued, Gunst further misled investors while discussing the
Company’s investments in marketing and recruiting, stating:
And we’ve been investing in marketing and recruiting. In order to continue the success we need to make sure we’re making the investments that are going to drive growth in the future. And our market is 90/40. It’s a big part of our focus and our current campaign within DeVry University is we major in careers. So students that come to DeVry are very career focused and our education is focused on giving them the programs they need to succeed once they graduate and get jobs in their field of study.
And that’s resulted in good improvement in enrollments. This shows you the last three years of enrollments. The blue bars being the new student growth, the gold bars being total student enrollment improvement and see the focus on new student growth has paid off. We saw almost 20% growth last year reporting periods and total enrollment, which is a combination of the new students coming in and the other eight semesters of students that are along with them have been catching up growing to almost 17% growth in the most recent reported period.
271. On April 23, 2009, DeVry issued a press release reporting the Company’s “record revenues driven by favorable enrollment trends” and financial results for its third quarter 2009 and nine months ended March 31, 2009. The Company reported a 32.8% increase in net income to
$50.9 million, a 34.7% increase in revenue to $391.9 million, a 42.0% increase in operating
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income to $71.8 million, and fully diluted earnings per share of $0.70, a 32.1 % increase from the same quarter a year ago. DeVry further reported that its DeVry University segments exceeded its
90/40 goal for October 2007, February 2008 and June 2008, with a 92.1 % employment placement
rate and an average salary of $45,376. The press release further touted enrollment growth, stating:
“We continued to see significant gains in enrollment, as prospective students are attracted by our strong track record of high quality education and career outcomes,” said Daniel Hamburger, DeVry’s president and chief executive officer. “I am very pleased with the progress we have made in improving academic quality across all of our schools, growing enrollment, and further diversifying our offerings. Our strong enrollment and improved retention are providing a quality base of revenue, which we expect will help propel future growth.”
272. The April 23, 2009, press release gave additional, misleading detail on the
Company’s enrollment results. DeVry University reported a 15.1% increase in new spring
enrollment, an 18.8% increase in total student enrollment, a 12.1 % increase in graduate
coursetakers enrolled in its master’s degree programs, (including graduate coursetakers at
KGSM) for its January 2009 session, and a 13.8% increase for its March 2009 session. For online
undergraduate and graduate coursetakers for its March 2009 session, DeVry University reported a
27.0% increase compared to the same session a year ago. Concluding, the press release falsely
described the Company’s so-called philosophy, stating in relevant part:
“We believe our philosophy of putting our students first and focusing on excellent academic and career outcomes is paying off,” said Hamburger. “We remain optimistic about DeVry’s future prospects. Our focus on a strategy of diversification, integrity, and a commitment to quality academic outcomes should help us achieve steady financial performance during all economic cycles.”
273. Following issuance of the press release on April 23, 2009, after the market closed,
DeVry hosted a conference call to discuss its third quarter 2009 financial results and operations.
Gunst and Hamburger participated in the call on behalf of the Company. During the call, numerous
false and misleading statements regarding DeVry’s financials and future business prospects were
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made that were designed to and did artificially inflate the Company’s stock price. For example,
Hamburger misled investors by boasting about continued enrollment growth, stating:
We are pleased to report that DeVry delivered solid academic results this quarter, and as a result, we saw strong and steady enrollment growth at all of our schools.
* * *
Despite the economic difficulties, DeVry is weathering the storm better than most with steady growth in enrollment, revenues and cash flows and a solid balance sheet. This performance, together with our diversified platform, gives us the ability to sustain investments in growth and quality for the long-term during good times and bad.
274. Gunst discussed the Company’s third quarter 2009 financial results, attributing them to enrollment growth and stating, in part:
We continued to deliver very strong results once again in the third quarter as the excellent results with our DeVry University and medical and healthcare segments offset the continued softness within the professional and training segments.
* * *
First, revenue growth within DeVry University segment continued at a strong pace, up 18.7% versus prior year for the quarter and year-to-date. This growth is being driven by continued online expansion and improved on-site enrollments.
275. Again misleading the market by praising the Company’s enrollment results,
Hamburger stated:
Let me start here with DeVry University, including our Keller Graduate School of Management where we experienced excellent academic outcomes and very strong enrollment growth this quarter. At DeVry University new undergraduate student enrollment increased 15%, while total student enrollment was up almost 19%.
276. Commenting on new students enrollments for the fall quarter versus spring quarter, and the reason for a slowdown in growth rates, Hamburger stated that “I think it is noise in the machine.” Gunst added:
Yes, we have a chart that is attached in the press release that gives you the absolute and the growth rates on new students, as well as total students, and I think the seasonality really is what you’re looking at. The growth rate is 15% in this term on
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top of a 19% growth the previous year. So I think the rate of growth is the same, and it has been pretty consistent.
277. Responding to a question regarding whether the “persistence rate” at DeVry
University for undergraduate students was a result of the economy, Hamburger downplayed any economy-specific influence and touted how the Company was succeeding “upfront” with its students, stating in part:
It is -- there is a little bit of a lift that we’re getting from the economy. It is, like my main point of hey, we are not as countercyclical as you think. That is a little bit of a lift there, but it is far superseded by the internal efforts of our team to do a better job of packaging students properly upfront, to help with the student finance issues, which are one of the root causes of dropouts, and academic advising with better resources. We have changed some aspects of the curriculum, some of the early courses, to improve retention. There is just a whole multipoint plan for improving retention, and we are seeing some good results of that, and there’s still more opportunity in front of us.
278. In response to Defendants’ false and misleading statements, the price of DeVry common stock rose $2.91 per share, or $7.16%, from a closing price of $41.46 on April 23, 2009, to close at $44.46 per share on April 24, 2009, as set forth in the chart below:
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3500000 45
—44.5 3000000 —
— 44 2500000 —
— 43.5
2000000 —
Volume — 43 —0—Price
1500000 —
42.5
1000000 — — 42
500000 — — 41.5
0 41 4/23/2009 4/24/2009
279. On May 7, 2009, DeVry filed its quarterly report on Form 10-Q for the quarter ended
March 31, 2009, which confirmed the Company’s previously announced financial results and was
signed by Gunst and Hamburger (the “Third Quarter 2009 10-Q”). The Third Quarter 2009 10-Q
contained the required Sarbanes-Oxley certifications signed by Gunst and Hamburger stating that the
Form 10-Q did not include any material misrepresentations. Nevertheless, the Third Quarter 2009
10-Q did contain several false and misleading statements regarding DeVry’s financials and future business prospects, including the following statements linking revenue to “continued growth in
student enrollments”:
Total consolidated revenues for the third quarter of fiscal year 2009 increased 34.7% to $391.9 million versus the prior year quarter. For the first nine months of fiscal year 2009, total consolidated revenues increased 30.7% to $1,065.2 million compared to the same period a year ago. For both the third quarter and first nine months of fiscal year 2009, revenues increased at the respective DeVry University and Medical and Healthcare business segments as a result of continued growth in
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student enrollments and tuition price increases as compared to the year ago period.
DeVry University
DeVry University segment revenues increased 18.7% to $264.3 million in the third quarter, and rose 18.7% to $748.7 million for the first nine months of fiscal 2009 as compared to the year ago periods driven by strong enrollment growth. While DeVry University accounted for the majority of the revenue increase in this segment, revenues at Advanced Academics Inc. also contributed to segment revenue growth. DeVry University tuition revenues are the largest component of total revenues in the DeVry University segment. The two principal factors that influence tuition revenues are enrollment and tuition rates.
280. The Third Quarter 2009 10-Q also provided enrollment data, which included the
following “key trends”: at DeVry University, total undergraduate enrollment by term for summer
2007 to summer 2008 through spring 2008 to spring 2009 increased by between 12.6% and 18.8%.
Likewise, new student enrollment increased for summer 2007 to summer 2008 through spring
2008 to spring 2009 by between 15.1% and 19.7%, and graduate coursetaker enrollment for July
2007 to July 2008 through March 2008 to March 2009 increased by between 12.1 % and 14.2% per session. 17
281. Further perpetuating Defendants’ fraud and purporting to describe the reasons behind
increased enrollments and financial performance, the Third Quarter 2009 10-Q continued:
Management believes the increased undergraduate student enrollments were most significantly impacted by DeVry’s strong track record of high-quality education and career outcomes, improved marketing and recruiting efforts, continued strong demand for DeVry University’s online programs and a heightened focus on the retention of existing students.
282. The statements referenced in ¶¶268-277; 279-281 were materially false and
misleading when made as they represented and/or omitted facts which then existed and disclosure of
17 Attached as Exhibit I are the relevant portions of the Third Quarter 2009 10-Q.
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which was necessary to make the statements not false and/or misleading, for reasons set forth in
¶203 and ¶218 above, and as evidenced by the factual detail contained throughout this Complaint. In
addition, the statements referenced in ¶¶268-277; 279-281 were materially false and misleading
when made because they represented and/or omitted adverse facts which then existed and disclosure
of which was necessary to make the statements not false and/or misleading. The true facts, which
were known to or recklessly disregarded by each of the Defendants, were:
• DeVry’s “operating philosophy” was anything but “quality leads to growth.” In reality, DeVry’s operating philosophy was to maximize enrollments at all costs and to run roughshod over any regulations or ethical boundaries (including the Company’s own code of ethics) that stood in the Company’s way.
• DeVry’s “We Major in Careers” campaign was based on inaccurate and misleading information. For instance, Defendants knew that the campaign attracted prospective students based on the misconception that a job was all but guaranteed upon completion of DeVry’s programs, when this could not be farther from the truth. Indeed, Defendants knew that the so-called “value proposition” of a DeVry education was minimal, and existed for only a small minority of DeVry’s students.
• By use of marketing campaigns such as “We Major in Careers,” DeVry was recruiting prospective students that were often the first in their families to enroll in college and as a result were uneducated about the length of time needed to obtain a degree, as well as the difficulty of the courses, and were unfamiliar with financial aid and accompanying obligations. Rather than assisting these first-time students, DeVry took advantage of them by misrepresenting to them everything from the cost of an education at DeVry to the availability of online classes.
• The Company was solely focused on increasing enrollment numbers at any cost, without regard to students’ academic success or preparedness for employment following graduation.
• As a result of the foregoing, Defendants lacked a reasonable basis for their positive statements about the Company, the Company’s Class Period revenue and enrollment numbers, as well as DeVry’s future business prospects.
283. On June 10, 2009, Hamburger and Gunst participated at the William Blair &
Company Growth Stock Conference on behalf of the Company. During the conference, Hamburger
discussed DeVry’s strategy and operations, and made several false and misleading statements,
including the following:
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I wanted to focus on our strategy, but just before I do let me talk about our operating philosophy, which if I could summarize in a sentence would be “quality leads to growth.” Because by focusing on academic quality what do you get? You get happy students, you get wonderful students outcomes, employment results, passing the board scores in medical school, nursing school and there for what you get you are meeting societies needs for the doctors, the accountants, the nurses, the veterinarians that we produce, the engineers and happy employers. And thus this in turn leads to improved student retention. You see that light at the end of the tunnel. It make [sic] it easier to recruit more students because we have referrals and then, that in turn leads to financial results. That is a bi-product. Financial results give us, that’s our endowment. That’s the capital that we need to invest and we put it right back into academic quality. It all starts with that focus on academic quality.
I would like to give you a couple of examples of how that leads to wonderful student outcome. For example, at DeVry University, one of the ways that we measure that success is shown here is employment results, the employment results of our graduates, these are the latest three term statistics we do a rolling three term average and this is the latest, 90.8% employed in their fields of study within six months of graduation at an average salary of over $45,000 a year. There’s another way of measuring the student outcomes at DeVry University and in other schools and that’s how are we serving those who have not been served traditionally by upper education. This is of the top ten, not of football, not of basketball but top ten producers of computer science graduates among [H]ispanic [A]mericans and you can see DeVry University occupies two of those top ten spots. We are more proud of this than if we did have a football or basketball team and if you try to have two of top ten spots in football or basketball they would probably put you on probation anyway. That’s what’s great about this list you can be in more than one spot.
284. Further misleading the market as to the reasons behind DeVry’s growth, Hamburger stated in part:
What’s driving that is the growth, enrollment, also the operating leverage that’s inherent in the economics of the education world, and pretty good expense management as well.
Third, to do a better job of telling the world what we are doing as we complete that turn around process, we are now investing more in marketing and recruiting with the confidence we are getting the return on those investments and that’s this focus on the number one career oriented university based on those wonderful statistics of nine out of ten DeVry graduates employed in the field of study. You can see that the investments we are making there have been paying off. The most recent statistic the blue shows the growth in new students year over year for DeVry University undergraduate at 15.1% last reporting period, the yellow showing the total
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enrollment growth at 18.8%. So it’s working and we are going to continue that focus on achieving the full potential at DeVry.
285. During the June 10, 2009 conference call, when asked to compare DeVry to the some
other for-profit education companies, such as Strayer and the University of Phoenix, Hamburger pointed to DeVry’s misleading employment statistics, stating in part:
So if I was a student at various universities, you mean Strayer, University of Phoenix, DeVry University, others, how would the hours compare, how would the outcomes compare and so forth. I don’t have a real, I don’t think there’s a big distinction in number of hours. It’s typical that credit hours for a Bachelor’s Degree would be 128 to 132, somewhere in there credit hours. That’s pretty standard at University of Michigan, go Blue, or at DeVry University, or most schools. In terms of what you see at the end as you asked, you wouldn’t have a career services office at the other two schools that you named. They are really focused on working adults and they do a wonderful job. They don’t really focus so much like DeVry University does on the career services. So, where we have 120 or 130 career services officers across 90 locations helping you with resume preparation, mock interviews, how to dress for an interview, every detail and actually publish these statistics that you saw 90% plus employed in the field of study within six months of graduation and that’s an average, by the way that extends back to 1975. So through four recessions and now into a fifth from 1975 to today the average ofthat statistic is 90.3%. That is not something that, not to finds a criminal one versus the other the difference, others focused just on working on DeVry University would focus on working adults and traditional college age students. So. Those are some compare and contrast. Yes.
286. Near the end of the call, Hamburger addressed the possibility of changes to incentive
compensation for Admission Advisors being considered by the DOE. In his statements, Hamburger
misled the market regarding DeVry’s compensation structure, and stated in part:
Then in terms of how we incentivize the admission advis[or]s, through training, through management from that a compensation perspective which I’m sure is the other part of where you are going. They have a base salary and their salary can be adjusted twice a year up or down. This is part of what’s known as the Safe Harbor Rubric that the Department of Education put in place back in 2002. Is there going to be a mandate to have there, their evaluation be also driven by the retention of the students that they recruit. Not just recruit a new student, but how do they retain, and graduation. That’s not mandated but it is allowed and we already do that. So we do evaluate the job that they do based on the retention and the graduation of the students. So we actually track that on a per recruiter basis haven’t that data and that’s part of the evaluation as well. No, we don’t expect any impact on our ability to recruit students as a result of any changes that might come about. If there are any changes.
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We don’t know if there will be changes. We just know that the Department has said, these rules were put in place back in 2002. Haven’t really been examined since then, time to take a fresh look. That’s a normal part of how the department of education and every other department does business. They do these sessions on an ongoing basis. By the way, we just completed two of these, they call negotiated rule making sessions, one on student finance and one on accreditation and by the way our organization had representatives appointed to both the those bodes [sic] which is very unusual. So we have very good relationships, very productive ongoing dialogue with all the key players at the Department of Education, as well as in Congress and so forth. So. Good. Thanks for that. Okay. Well, listen, I really would like to thank you very much for your interest in DeVry and we will see you next year. Thank you.
287. On August 13, 2009, DeVry issued a press release reporting its “record” earnings for
its fourth quarter 2009 and full-year ended June 30, 2009. The Company reported a 50.7% increase
in net income to $37 million, a 43.1 % increase in revenues to $396.2 million, a 73.5% increase in
operating income to $53.7 million, and fully diluted earnings per share of $0.51, a 50.0% increase
compared to the same quarter a year ago. For the full-year 2009, the Company reported a 31.9%
increase in new income to $165.6 million, a 33.9% increase in revenue to $1,461.5 million, a
44.7% increase in operating income to $234.8 million, and fully diluted earnings per share to
$2.28, a 31.8% increase compared to the same period a year ago. DeVry further reported that its
DeVry University segment exceeded its 90/45 goal for February 2008, June 2008, and October
2008, with a 90.8% employment placement rate and an average salary of $45,486. The press
release again touted enrollment growth and financial results, while omitting key information, and
stated in pertinent part:
“Fiscal 2009 was a year of accomplishment for DeVry,” said Daniel Hamburger, DeVry’s president and chief executive officer. “We made great strides in executing our strategic plan and expanding into educational areas that are in high demand. We also continued investing in our brands, programs and infrastructure. As a result, we experienced strong enrollment growth, improved retention throughout the year, and delivered record financial results.”
288. The August 13, 2009, press release also reported enrollment results for DeVry
University, (including graduate coursetakers at KGSM) and USEC. DeVry University reported a
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14.8% increase in new undergraduate enrollments and a 21.9% increase in total student
enrollment compared to the prior year. Total graduate enrollment, (including graduate
coursetakers at KGSM), increased 13.8% for its May 2009 session, and a 12.3 % for its July 2009 session, compared to the same sessions from the year before. Additionally, the total number of
online undergraduate and graduate coursetakers increased a record 26.6% for its July 2009 session compared to the same session from the year before.
289. Also on August 13, 2009, DeVry issued a press release announcing that it recently
renamed and repositioned its segments. The four reporting segments changed to: (1) Business,
Technology and Management, which includes DeVry University and KGSM; (2) Medical and
Healthcare, which includes Chamberlain College of Nursing, Ross University, and U.S. Education,
including Apollo College and Western Career College; (3) Professional Education; and (4) Other
Educational Services, which includes Advanced Academics and Fanor.
290. Following issuance of the press release on August 13, 2009, after the market closed,
DeVry hosted a conference call to discuss its fourth quarter 2009 and full-year financial results and
operations. Gunst and Hamburger participated in the call on behalf of the Company. During the
call, numerous false and misleading statements were made regarding DeVry’s financials and future business prospects that were designed to and did artificially inflate the Company’s stock price. For
example, Hamburger discussed the Company’s fourth quarter and full-year financial results and
stated, in part:
This was truly a year of accomplishment at DeVry. We continued to enhance academic quality, which led to outstanding enrollment growth and, in turn, improved financial performance.
291. Gunst discussed the Court’s recent dismissal of a lawsuit against DeVry, stating,
“finally, and most importantly, DeVry did nothing wrong, did not violate the False Claims Act,
and our recruiter compensation system has been and continues to be fully compliant.”
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292. Gunst further misled the market when he discussed the Company’s fourth quarter results, stating:
Revenue growth within the Business Technology and Management segment was up 18.8% versus last year -- for the year, and 21.6% in the fourth quarter, driven by continued online expansion and improved on-site enrollments. Operating income was up about 57% for the year and nearly 150% in the quarter, excluding the discrete items, driven primarily by improved operating leverage from enrollment growth.
293. As the call continued, Hamburger again touted the Company’s enrollment growth and the so-called value of a DeVry education, stating in part:
I won’t reiterate the enrollment figures that are found in the press release. Let me simply say that the very strong enrollment growth across all of our schools demonstrates the value that prospective students see in the education they receive at one ofDeVry’s institutions. And moreover, we saw improved retention, which showed that the quality of our programs is meeting or exceeding our students’ expectations.
Part of the value of a DeVry University education is its reputation among employers. They tell us how our graduates are making significant contributions to their companies, and have the skills and work ethic to succeed.
As you can see from the data in the press release, 90.8% of our undergraduate students at DeVry University are employed in their field of study within six months of graduation, with an average salary of more than $45,000.
294. Near the end of the call, Hamburger again touted misleading graduation and enrollment rates, stating in part:
Okay. At US Education, both Apollo College and Western Career College, the graduation and employment statistics -- we don’t say placements; we say employment statistics -- are well in excess of the industry average, the career college average, and the benchmarks set by the industry and by creditors.
So we feel very comfortable with that.
295. On August 26, 2009, DeVry filed its annual financial report on Form 10-K for the year ending June 30, 2009. The financial results reported in the Form 10-K were substantially
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similar to those reported in the Company’s prior press releases. The Form 10-K was signed by
Gunst and Hamburger and contained required Sarbanes-Oxley certifications sign by Gunst and
Hamburger stating that the Form 10-K did not include any material misrepresentations.
Nevertheless, the Form 10-K did contain several false and misleading statements regarding DeVry’s
financials and future business prospects, including the following statements regarding enrollment
trends:
Total undergraduate enrollment in summer 2009 reached a record high of 55,979 students, an increase of 21.9% compared to 45,907 in the previous summer. There were 17,991 coursetakers for the summer 2009 term in DeVry University’s graduate programs, including its Keller Graduate School of Management, representing an increase of 12.3% over the prior year. Coursetaker enrollment in DeVry University online program offerings in summer 2009 was 56,321, an increase of 26.6% over the prior year. The term coursetaker refers to the number of courses taken by a student. Thus, one student taking two courses is counted as two coursetakers.
296. Discussing student recruiting and admissions, the annual report falsely claimed
DeVry’s compensation practices for Admission Advisors satisfied applicable regulations:
Certain states and Canadian provinces require advisors and student recruiters to be licensed or authorized by a particular regulatory agency. Regulations governing student participation in U.S. federal financial assistance programs prohibit schools from paying commissions, bonuses, or incentives to student recruiters based directly or indirectly on the number of students they enroll. DeVry University’s compensation practices have been designed to be in compliance with current regulations.
297. The Form 10-K also, included false and misleading statements regarding employment placement rates, including the following:
DeVry University believes that the employment of its graduates is essential to its ability to attract and retain students. Career services professionals located at DeVry University undergraduate campuses work with students to choose careers, craft resumes, and prepare for job interviews. The staff also maintains contact with local and national employers to proactively identify job opportunities and arrange interviews. In many cases, company hiring representatives conduct interviews at DeVry University campuses.
* * *
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For the three undergraduate classes that ended in calendar year 2008, there were 6,658 graduates from DeVry University’s U.S. undergraduate degree and diploma programs eligible for career service assistance, excluding the one-year post- baccalaureate information technology program (this excludes students continuing their education, students from foreign countries legally ineligible to work in the United States, and others ineligible for employment). From that pool of graduates, 6,001 actively pursued employment or were already employed. Within six months of graduation, 5,460, or 91 % of those graduates were employed in positions related to their program of study. This compares to 92.8% who were employed in positions related to their program of study for the three classes that ended in calendar year 2007, and 91.9% who were employed in positions related to their program of study for the three classes that ended in calendar year 2006.
298. Tying revenue growth to enrollment, the Form 10-K continued:
Total consolidated revenues for fiscal 2009 of $1,461.5 million increased $369.6 million, or 33.9%, as compared to last year. Revenues increased at all four of DeVry’s business segments as a result of continued growth in total student enrollments, improved student retention and tuition price increases. In addition, U.S. Education, which was acquired on September 18, 2008, and Fanor, which was acquired on April 1, 2009, contributed a total of $150.7 million of revenue growth in fiscal year 2009. The revenue growth rate for Becker Professional Education slowed significantly during fiscal year 2009 due to the economic downturn.
Business, Technology and Management
During fiscal year 2009, Business, Technology and Management segment revenues increased by 18.8% to $989.5 million as compared to fiscal year 2008 driven primarily by strong enrollment growth. The Business, Technology and Management segment is comprised solely of DeVry University. The two principal factors that influence revenues are enrollment and tuition rates.
299. The Form 10-K for year ending June 30, 2009, also provided enrollment data, which
included the following “key trends”: at DeVry University, total undergraduate enrollment by term for summer 2007 to summer 2008 through summer 2008 to summer 2009 increased by between
12.6% and 21.9%. Likewise, new student enrollment increased for summer 2007 to summer 2008
through summer 2008 to summer 2009 by between 15.1 % and 19.7%, and graduate coursetaker
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enrollment for July 2007 to July 2008 through July 2008 to July 2009 increased by between
12.1 % and 14.2% per session. 18
300. Purporting to describe the reasons behind increased enrollments and financial performance, the Form 10-K for year ending June 30, 2009 continued:
Management believes the increased undergraduate student enrollments were most significantly impacted by DeVry’s strong track record of high-quality education and career outcomes, improved marketing and recruiting efforts, continued strong demand for DeVry University’s online programs and a heightened focus on the retention of existing students.
301. The statements referenced in ¶¶283-288; 290-300 were materially false and
misleading when made as they represented and/or omitted facts which then existed and disclosure of
which was necessary to make the statements not false and/or misleading, for reasons set forth in
¶203 and ¶218 above, and as evidenced by the factual detail contained throughout this Complaint. In
addition, the statements referenced in ¶¶283-288; 290-300 were materially false and misleading
when made because they represented and/or omitted adverse facts which then existed and disclosure
of which was necessary to make the statements not false and/or misleading. The true facts, which
were known to or recklessly disregarded by each of the Defendants, were:
• DeVry’s “operating philosophy” was anything but “quality leads to growth.” In reality, DeVry’s operating philosophy was to maximize enrollments at all costs and to run roughshod over any regulations or ethical boundaries (including the Company’s own code of ethics) that stood in the Company’s way.
• Defendants lacked any legitimate basis by which to reassure the market that they did not expect new regulations to impact the Company’s compensation of its Admission Advisors. Defendants knew that DeVry’s incentive-compensation policy already violated existing Title IV regulations, meaning that it would definitely violate any of the more stringent regulations that were proposed. Indeed, as alleged throughout this Complaint, DeVry was a sales machine that operated on the basis of quotas and incentive compensation for its sales force that was solely tied to meeting or
18 Attached as Exhibit J are the relevant portions of the 10-K for year ending June 30, 2009.
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exceeding quotas. As detailed by numerous confidential witnesses here in, the only method by which Admissions Advisors were evaluated was whether they met or exceeded quotas, and if quotas were not met, those Admissions Advisors knew they would be fired.
• As a result of the foregoing, Defendants lacked a reasonable basis for their positive statements about the Company, the Company’s Class Period revenue and enrollment numbers, as well as DeVry’s future business prospects.
302. On September 17, 2009, Hamburger participated at the BMO Capital Markets School
Education Conference on behalf of the Company. During the conference, Hamburger misled the market as he discussed DeVry’s inflated graduate employment statistics, stating in part:
And let me give you some examples of this focus on academic quality leading to excellent student outcomes in this past year, fiscal ‘09, which wrapped up at June 30th. And the first example would be at DeVry University, where our three-term average, our average for the year was in excess of our internal goal of 90/40. That is 91 % of our graduates were employed in their field of study within six months of graduation. We hold ourselves accountable for these outcomes. And average salaries were over $45,000 a year. That’s one way of measuring outcomes.
303. Describing how DeVry was superior to “traditional academia,” Hamburger misleadingly continued:
Secondly, and hand in hand with that, is delivering world-class customer service. I don’t know about you but I went to the University of Michigan, which is great, but when I asked about customer service they said stand in line, take a number for registration. There is no concept of customer service in traditional academia and one of the things that we’re doing is differentiating and helping our students to retain and to graduate by providing all the surrounding student services that are so key along with the excellent academics to student success, retention and graduation.
And then to increase our investments in marketing and recruiting and tell the world about the success of DeVry University emphasizing the fact that DeVry is the career University, those statistics that I mentioned earlier. And the strategy is working. At DeVry University our enrollment was up a little over 21 % this past year on the undergraduate side about 12% at the Keller Graduate School of Management. So that’s strategy number one.
304. On October 15, 2009, while the price of DeVry stock was artificially inflated,
Hamburger sold 1,200 shares of DeVry stock at $57.52 per share for trading proceeds of $69,024.
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305. On October 27, 2009, DeVry issued a press release reporting “record” earnings for its
first quarter 2010 and enrollment results for Ross University and DeVry University. The Company
reported a 57% increase in net income to $54.7 million, a 42% increase in revenues to $431
million, a 70% increase in operating income to $79.4 million, and diluted earnings per share of
$0.76, a 58% increase. DeVry University reported a 15.2% increase in total graduate coursetakers
at DeVry University, (including graduate coursetakers at KGSM). DeVry further reported that its
DeVry University segment missed its 90/40 goal for June 2008, October 2008, and February 2009,
with an 88.8% employment placement rate and an average salary of $45,364. The press release
further touted enrollment growth and stated in part:
“Our financial results this quarter were driven largely by exceptional revenue growth,” said Daniel Hamburger, DeVry’s president and chief executive officer. “Our institutions continue to experience strong enrollment and student retention, as evidenced by our results at Keller, Ross and Fanor. These financial results provide the resources for us to continue to make investments that enhance academic quality, improve student services, and expand access to education.”
306. Following issuance of the press release on October 27, 2009, after the market closed,
DeVry hosted a conference call to discuss its first quarter 2010 financial results and operations.
Gunst and Hamburger participated in the call on behalf of the Company. During the call, numerous
false and misleading statements regarding DeVry’s financials and future business prospects were
made that were designed to and did artificially inflate the Company’s stock price. For example,
Hamburger misleadingly discussed the Company’s “focus on academic quality” and increased
enrollment numbers, stating in part:
Now, during the first quarter our focus on academic quality continued to pay off in the form of higher student enrollment and increased retention. From a financial perspective margins increased largely as a result of the strong revenue growth and we continued to invest for the future in online and geographic expansion as well as in recruiting and branding and in technology.
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307. Expanding on the Company’s financial results and enrollment numbers, Gunst stated in part:
However, at the same time, revenue and associated earnings and margins came in stronger than anticipated, thanks primarily to DeVry University. Here, as we entered the fiscal year, we have seen a bit of softness in application volume for the September class. Due to some hard work at DeVry University and improved conversions, start rates and retention, we managed our way back to our plan and even exceeded it. We also had some delayed timing on certain marketing activities, further helping DeVry University margins in the quarter.
In addition, Apollo College and Western Career College enrollment results continued to benefit from the softer economy, leading to the upsides.
308. Later in the call, Hamburger again touted the Company’s misleading employment statistics, stating in part:
Let me begin the operations review with our Business Technology and Management segment. DeVry University and its Keller Graduate School of Management or, as many of you may have seen on prime time television and online social media of late, DeVry University launched a new awareness campaign in September. Over the past few years we’ve worked hard to grow DeVry University’s curriculum and to enhance student services, including career services. The new communications are designed to emphasize the diversity of DeVry University’s academic offerings and our positioning as the career university. In line with that positioning, we reported an 88.8% average graduate employment rate for the last three trimesters. And, while this is the first time we have reported results below 90% in quite a while, we believe we are holding up very well, given the job market, which is a true testament to the value that employers place in the DeVry University education, as well as to the hard work of our graduates in achieving their career aspirations. Given the job market, we are making investments to help our students find jobs in their field of study, once they graduate.
* * *
And so, as you can see, our focus on academic quality and student service has led to strong student outcomes as well as good financial results and we made solid strides this quarter in executing on growth and diversification strategy.
309. Discussing DeVry’s cohort default collections, Hamburger falsely claimed that the
Company made every effort to educate its students regarding their financial aid obligation, stating:
Yes. Our focus there, Jeff, is to ensure that we do the best job that we possibly can helping to advise the students and educate students on their responsibility to repay
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the student loans that they may be taking out. So we’ve put an increased emphasis on that. We’ve added a lot of resources at some of the investments that we keep talking about, have been investments in this area of student finance and financial aid services and advising. So students know and families know, the parents know very well the obligations that they are taking on and the responsibilities that they’re taking on, and that it’s all very, very clear to the students and to their families. And that’s an important part of managing that process.
And another part of managing that is just continuing to keep a focus on and an increased focus on student retention, staying in school and student success. And so the more successful students are in their endeavors and their educational endeavors and their career endeavors, the better their performance is going to be there.
310. On October 28, 2009, while the price of DeVry stock was artificially inflated,
Hamburger sold 15,432 shares of DeVry stock at $57.56 per share, for trading proceeds of $888,266.
311. On November 5, 2009, DeVry filed its quarterly report on Form 10-Q for the quarter ending September 30, 2009, which confirmed the Company’s previously reported financial results and was signed by Gunst and Hamburger (the “First Quarter 2010 10-Q”). The First Quarter 2010
10-Q contained the required Sarbanes-Oxley certifications signed by Gunst and Hamburger stating that the Form 10-Q did not include any material misrepresentations. Nevertheless, the First Quarter
2010 10-Q misleadingly touted revenue and enrollment increases, stating:
Total consolidated revenues for the first quarter of fiscal year 2010 of $431.1 million increased $127.4 million, or 41.9%, as compared to the year-ago quarter. Revenues increased at DeVry’s respective Business, Technology and Management; Medical and Healthcare; and Other Educational Services segments as a result of continued growth in total student enrollments, improved student retention and tuition price increases. In addition, U.S. Education, which was acquired on September 18, 2008, and Fanor, which was acquired on April 1, 2009, contributed to the revenue growth in the first quarter of fiscal year 2010. Professional Education segment revenues declined during the quarter due to the impact of the economic downturn on the accounting and finance professions.
Business, Technology and Management
During first quarter of fiscal year 2010, Business, Technology and Management segment revenues increased by 23.9% to $283.5 million as compared to the year- ago quarter driven primarily by strong enrollment growth and improved retention. The Business, Technology and Management segment is comprised solely of DeVry
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University. The two principal factors that influence revenues are enrollment and tuition rates.
312. The First Quarter 2010 10-Q also provided enrollment data, which included the
following “key trends”: at DeVry University, total undergraduate enrollment by term for fall 2007
to fall 2008 through summer 2008 to summer 2009 increased by between 16.9% and 21.9%.
Likewise, new student enrollment increased for fall 2007 to fall 2008 through summer 2008 to summer 2009 by between 14.8% and 19.7%, and graduate coursetaker enrollment for July 2008 to
July 2009 through September 2008 to September 2009 increased by between 12.3% and 15.2% per session. 19
313. Purporting to describe the reasons behind increased enrollments and financial performance, the First Quarter 2010 10-Q continued:
Management believes the increased undergraduate student enrollments were most significantly impacted by DeVry’s strong track record of high-quality education and career outcomes, continued strong demand for DeVry University’s online programs and improved retention of existing students.
314. The statements referenced in ¶¶302-303; 305-309; 311-313 were materially false and
misleading when made as they represented and/or omitted facts which then existed and disclosure of
which was necessary to make the statements not false and/or misleading, for reasons set forth in
¶203 and ¶218 above, and as evidenced by the factual detail contained throughout this Complaint. In
addition, the statements referenced in ¶¶302-303; 305-309; 311-313 were materially false and
misleading when made because they represented and/or omitted adverse facts which then existed and
disclosure of which was necessary to make the statements not false and/or misleading. The true
facts, which were known to or recklessly disregarded by each of the Defendants, were:
19 Attached as Exhibit K are the relevant portions of the First Quarter 2010 10-Q.
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• As a result of Defendants’ systemically predatory business model, DeVry’s students were routinely unaware of their financial aid obligations, due to misrepresentations made to them by DeVry advisors and also because of the fact that the Company failed to advise and educate its students on financial aid obligations. For example, prospective students were often unaware of the costs they would incur while enrolled and the necessity of paying financial aid back to the government.
• Regardless of the amount of money Defendants purportedly invested in the areas of student finance, financial aid, and advisement, the Company’s primary focus remained on enrolling students through any means necessary, and causing those students to maximize the amount of financial aid they accepted, not their retention (beyond the first two weeks of each semester) or their success.
• As a result of the foregoing, Defendants lacked a reasonable basis for their positive statements about the Company, the Company’s Class Period revenue and enrollment numbers, as well as DeVry’s future business prospects.
315. On November 29, 2009, the Associated Press Online, published an article entitled,
“AP Impact: For-Profit colleges haul in gov’t aid.” The article discussed the surge in income that the for-profit sector was receiving from the U.S. government as a result of the increase in the enrollment of low-income students. The article stated, in relevant part:
Last year, the five institutions that received the most federal Pell Grant dollars were all for-profit colleges, collecting over $1 billion among them. That was two and a half times what those schools hauled in just two years prior, the AP found, analyzing Department of Education data on disbursements from the Pell program, Washington’s main form of college aid to the poor.
This year, the trend is accelerating: In the first quarter after the maximum Pell Grant was increased last July 1, Washington paid out 45 percent more through the program than during the same period a year ago, the AP found. But the amount of dollars heading to for-profit, or “proprietary,” schools is up even more about 67 percent.
* * *
But critics say the increased federal aid has unleashed a new gold rush. They complain the industry has too many incentives simply to enroll students and tap the spigot from Washington and not enough to make sure students succeed.
The industry is “an aggressive sales operation that has a voracious appetite for recruiting the poorest students,” said Barmak Nassirian, associate executive director of AACRAO, a group representing admissions officers and registrars at traditional colleges. “The victims here are the students themselves and the taxpayers, who have to pick up the tab.”
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Regardless of how AP’s findings are interpreted, they underscore the extent to which the United States has ramped up its support for low-income college students in recent years, but increasingly outsourced the job to the private sector.
Last year, Washington paid out a record $18.3 billion in Pell Grants, which typically go to families earning under $40,000. Proprietary colleges collected about $4.3 billion of that, or about 24 percent roughly double the proportion a decade ago.
In the first quarter of the current academic year, for-profit colleges collected $1.65 billion, or 67 percent more than in the same period a year ago. On July 1, the government made more students eligible for Pell grants and increased the maximum award by $600 to $5,350.
For-profits are also grabbing a growing share of loans subsidized by the government to help low-income students. They collected about $7 billion in subsidized Stafford loans in 2008-2009, up from $4.7 billion two years before. Taxpayers subsidize the interest rate and take the hit when students default. Nearly one-quarter of students at for-profit schools default within four years, more that double the rate of other schools.
Overall, the sector enrolled about 2.7 million students in 2007-2008, the latest year with complete federal data available. That was only about 10 percent of total enrollment in higher education, but it’s about 2 million more than a decade before.
The numbers are even more striking for low-income students: The number of Pell recipients enrolled in for-profit schools is 50 percent higher than two years ago.
* * *
Critics acknowledge for-profit schools can be a good match for some. But they point out median graduation rates of just 38 percent (for-profit colleges counter they’re taking on less well prepared kids, and say they actually do much better than community colleges with two-year programs).
Students who don’t graduate will be hard pressed to repay their debts. On average, for-profit schools cost five and a half times the price of community colleges. Virtually all students must borrow some money, and even among graduates of for- profit four-year programs, the average borrower ends up owing $33,000, according to the latest government data analyzed by Mark Kantrowitz of the Web site finaid.org . That’s about $5,000 higher than even private nonprofit four-year colleges.
The sector also can’t seem to shake recurring allegations it’s accepting underqualified students just to secure their federal aid, dooming them to failure. Phoenix has set aside $80.5 million to cover a possible settlement of a whistleblower lawsuit alleging it illegally compensated recruiters based on how many students they enrolled. Other complaints include a lawsuit against privately held Westwood College of Colorado alleging students were misled about fees and tricked into signing high-interest loans. Westwood denies the allegations.
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316. On December 8, 2009, DeVry issued a press release reporting DeVry University enrollment results for fall 2009. The Company reported a 22.7% increase in total enrollment, a
19.4% increase in new student enrollment, a 16.5% increase in coursetakers at KGSM, and a
22.5% increase an online undergraduate and graduate takers for the November 2009 session.
Hamburger commented on the results, in pertinent part, as follows:
“ We are quite pleased with the enrollment growth and retention for all of our schools, which experienced strong demand across all programs, from technology to business to healthcare, and delivery modalities, from campuses to online” said Daniel Hamburger, president and chief executive officer of DeVry Inc. “We expect that DeVry’s diversified array of educational offerings will continue to serve us well in both good and bad economic times.”
Hamburger added, “We are not only proud of our results, but also of the fact that we are providing access to education to many students, who achieve quality outcomes, and who otherwise would not have had the opportunity to advance their education.”
317. The statements referenced in ¶316 were materially false and misleading when made as they represented and/or omitted facts which then existed and disclosure of which was necessary to make the statements not false and/or misleading, for reasons set forth in ¶206 above, and as evidenced by the factual detail contained throughout this Complaint.
318. In response to Defendants’ false and misleading statements, the price of DeVry common stock rose $2.94 per share, or 5.42%, from a closing price of 54.29 per share on December
8, 2009, to close at $57.23 per share on December 9, 2009, as set forth in the chart below:
- 126 -
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2500000 58
- 57 2000000 -
- 56
1500000 -
Volume - 55 Price
1000000 -
- 54
500000 - - 53
0 52 12/4/2009 12/7/2009 12/8/2009 12/9/2009
319. From December 9, 2009 through December 14, 2009, while the price of DeVry stock
was artificially inflated, Hamburger sold 50,188 shares of DeVry stock at prices between $57.50 per
share, and $57.78 per share, for trading proceeds totaling $2,891,885.
320. On January 26, 2010, DeVry issued a press release reporting results for its second
quarter 2010 and six months ended December 31, 2009. The Company reported a 69% increase in
net income to $72.5 million, a 28% increase in revenues to $473 million, and diluted earnings per
share of $1.00, a 69% increase from the same quarter a year ago for the second quarter of 2010.
Hamburger commented, in pertinent part, as follows:
“At a time when state budget cuts and shrinking endowments are making it difficult for colleges and universities to meet the increasing demand for quality education in this country, the private sector is playing an important role in helping to educate our country’s workforce and ensuring that we remain competitive in the global marketplace,” said Daniel Hamburger, DeVry’s president and chief executive officer.
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“We are proud to be a part of the solution and are committed to helping our students meet their career aspirations.”
321. Concluding, the press release touted “strong student outcomes,” further misleading
the market:
“We are pleased with our continued solid performance and acknowledge the significant contributions of our 17,000 colleagues around the world in executing our growth and diversification strategies,” said Hamburger. “As we enter the new calendar year, our primary focus will remain on achieving strong student outcomes. We will continue to put our students first by prudently investing in high quality educational programs and services to help them succeed in their chosen careers.”
322. Following issuance of the press release on January 26, 2010, after the market closed,
DeVry hosted a conference call to discuss its second quarter 2010 financial results and operations.
Gunst and Hamburger participated in the call on behalf of the Company. During the call, numerous
false and misleading statements regarding DeVry’s financials and future business prospects were
made that were designed to and did artificially inflate the Company’s stock price. For example,
Hamburger discussed DeVry’s increased enrollments while omitting key information, stating in part:
So we are pleased to announce that the continued execution of our growth and diversification strategy and our focus on investing in academic quality has produced successful student outcome and another quarter of strong financial results. The increase that we saw in enrollments in December translated into exceptional revenue growth in the quarter, which drove margin improvement and record earnings. At the same time, we continued to invest in our program in student services to drive future growth.
* * *
Our confidence is bolstered by two factors. The first, our operating philosophy, namely that quality leads to growth. At DeVry our institutions educate students for positions across a variety of industries, but they have one thing in common. Each provides high-quality programs and services to our students. And as we continue to invest in quality, academic outcomes improve. This continued success of our students drives enrollment and retention, which leads to financial growth.
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323. Gunst further touted how the Company’s results were “driven by excellent
enrollment growth and retention results across our schools . . . .”
324. Continuing, Gunst linked the Company’s financial performance to enrollment growth,
stating in part:
First, the business technology and management segment achieved very strong top- and bottom-line results. Revenue was up 26% versus prior year in the quarter and 25% year-to-date, driven by the strong enrollment growth and increased retention driven by our focus on student services. Segment operating income of $78 million in the quarter and $134 million year-to-date more than doubled versus prior year. This improvement was driven by revenue growth and the resulting operating leverage.
325. Discussing how the Company’s enrollment results had positioned the Company’s
future business prospects for 2010, Hamburger stated:
Let me begin the operating review with our Business, Technology and Management segment, which is DeVry University, and its Keller Graduate School of Management. And since we didn’t have a conference call in December when we reported the fall enrollment, I would like to comment on the strong growth that DeVry University experienced during that period with new undergraduate enrollment of more than 19% and total undergraduate enrollment rising nearly 23%. These results and our continued strong execution position us well for the remainder of 2010.
* * *
At Keller Graduate School of Management, total course takers in the November session increased more than 16.5% from a year ago.
* * *
So to summarize, as you can see, our diversification strategy and our focus on investing in quality continue to lead to growth, strong student academic outcomes and another quarter of solid financial results. Investments we have talked about over the last couple of years are paying off.
326. As the call continued, Hamburger addressed the Negotiated Rulemaking proceedings,
specifically gainful employment and the Company’s debt service to income ratio, and misled the
market by pointing to the so-called high ROI DeVry claimed to provide for its students, stating in part:
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In terms of the debt loads and the value proposition, we feel very good about the value proposition that our students achieve at our school, at DeVry’s school.
So we’ve done an ROI, a return on educational investment analysis, of that, and it comes out to about 28% return on educational investment over a 30-year career. That is a very strong value proposition. I don’t know about you, but other than DeVry I don’t have anything in my portfolio where I expect that kind of a return.
327. Also during the conference call, Hamburger revealed the Company would only report
employment statistics on an annual basis going forward.
328. In response to Defendants’ false and misleading statements, the price of DeVry
common stock rose $7.15 per share, or 12.7%, from a closing price of $56.17 on January 26, 2010,
to close at $63.32 per share on January 27, 2010, on heavy trading volume, as set forth in the chart below:
5000000 64
4500000 — — 63
4000000 — — 62
3500000 — — 61
3000000 — — 60
^ Volume 2500000 — _ 59 Price
2000000 — — 58
1500000 — — 57
1000000 — — 56
500000 — — 55
0 54 1/21/2010 1 /22/2010 1/25/2010 1/26/2010 1/27/2010
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329. On February 4, 2010, DeVry filed its quarterly report on Form 10-Q for the second
quarter ended December 31, 2009, which confirmed the Company’s previously reported financial
results and was signed by Gunst and Hamburger (the “Second Quarter 2010 10-Q”). The Second
Quarter 2010 10-Q contained the required Sarbanes-Oxley certifications signed by Gunst and
Hamburger stating that the Form 10-Q did not include any material misrepresentations.
Nevertheless, the Second Quarter 2010 10-Q misled the market as to DeVry’s financial results and
the reasons behind enrollment growth. For example, it stated:
Total consolidated revenues for the second quarter of fiscal year 2010 of $473.0 million increased $103.4 million, or 28.0%, as compared to the year-ago quarter. For the first six months of fiscal year 2010, total consolidated revenues increased 34.3% to $904.1 million compared to the same period a year-ago. For both the second quarter and first six months of fiscal year 2010, revenues increased at DeVry’s respective Business, Technology and Management; Medical and Healthcare; and Other Educational Services segments as a result of continued growth in total student enrollments, improved student retention and tuition price increases. In addition, U.S. Education, which was acquired on September 18, 2008, and Fanor (DeVry Brasil), which was acquired on April 1, 2009, contributed to the revenue growth in the first six months of fiscal year 2010. Professional Education segment revenues declined during both the second quarter and first six months of fiscal year 2010 due to the impact of the economic downturn on the accounting and finance professions.
Business, Technology and Management
Business, Technology and Management segment revenues increased 25.6% to $313.3 million in the second quarter and rose 24.8% to $596.8 million for the first six months of fiscal year 2010 as compared to the year-ago periods driven primarily by strong enrollment growth, improved retention and tuition price increases. The Business, Technology and Management segment is comprised solely of DeVry University. The two principal factors that influence revenues are enrollment and tuition rates.
330. The Second Quarter 2010 10-Q also provided enrollment data, which included the
following “key trends”: at DeVry University, total undergraduate enrollment by term for spring
2008 to spring 2009 through fall 2008 to fall 2009 increased by between 18.8% and 22.7%.
Likewise, new student enrollment increased for spring 2008 to spring 2009 through fall 2008 to
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fall 2009 by between 14.8% and 19.4%, and graduate coursetaker enrollment for July 2008 to July
2009 through November 2008 to November 2009 increased by between 12.3% and 16.5% per session. 20
331. Purporting to describe the reasons behind increased enrollments and financial performance, the Second Quarter 2010 10-Q continued:
Management believes the increased undergraduate student enrollments were most significantly impacted by DeVry’s strong track record of high-quality education and academic outcomes, continued strong demand for DeVry University’s online programs and improved retention of existing students.
332. The statements referenced in ¶¶320-326; 329-331 were materially false and
misleading when made as they represented and/or omitted facts which then existed and disclosure of
which was necessary to make the statements not false and/or misleading, for reasons set forth in
¶203 and ¶218 above, and as evidenced by the factual detail contained throughout this Complaint. In
addition, the statements referenced in ¶¶320-326; 329-331 were materially false and misleading
when made because they represented and/or omitted adverse facts which then existed and disclosure
of which was necessary to make the statements not false and/or misleading. The true facts, which
were known to or recklessly disregarded by each of the Defendants, were:
• DeVry was anything but “part of the solution.” Rather than being “committed to helping [its] students meet their career aspirations,” Defendants were fully aware that DeVry was only committed to maximizing enrollment through the ongoing manipulation of its students and continuous implementation of its systemically predatory business model. Rather than disclose these disturbing facts to the market, defendants continued to engage in their fraudulent scheme of describing DeVry as a Company focused on achieving “strong student outcomes.” Indeed, DeVry represented not the solution, but the very heart of the problem.
• Contrary to statements by Defendants that they were “committed to helping [their] students meet their career aspirations,” DeVry provided little help to students post
20 Attached as Exhibit L are the relevant portions of the Second Quarter 2010 10-Q.
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graduation. For example, once a student obtained a job, even if only for one day following completion of their degree, DeVry provided no further career services and no follow-up with that graduate.
• As a result of the foregoing, Defendants lacked a reasonable basis for their positive statements about the Company, the Company’s Class Period revenue and enrollment numbers, as well as DeVry’s future business prospects.
333. On February 8, 2010, Gunst participated at the Deutsche Bank Securities Small and
Mid Cap Conference on behalf of the Company. During the conference, Gunst misled the market as he discussed the Company’s growth strategy and employment statistics, stating in part:
But again the operating philosophy at DeVry is quality leads to growth. By focusing on academic quality that will really drive the overall results of the business because by focusing on academic quality that leads to superior student outcomes. And superior student outcomes in terms of students going there, graduating, getting jobs in their field of study drives benefits to society and meets the employer needs by providing them the employees that they need to help succeed as corporations.
It also helps the society overall. That leads to improved enrollment and retention because students that are coming in and students that are in school see the success of the graduates and therefore want to succeed themselves. All that leads to something I love, which is the financial results, which gives us the earnings to them plow back into the business to -- again focusing on quality -- that continues its virtual circle.
The student outcomes in one of the key parts and I will give you just a few examples here. Starting with DeVry University where we have touted the 90/40. I think many of you have heard this, but it’s 90% -- our target is 90% of students getting jobs within their field of study making over $40,000 a year.
Now this is the most recent information, which was a three-term average from the most recent period where it was 89%. A little bit lower than the 90% threshold but still very impressive making $45,000 a year for those graduates. So even during the soft economic times we are still keeping that measure very close to our benchmark.
334. As the conference continued, Gunst made additional false statements regarding the
Company’s enrollment growth, stating:
That is evidenced by some of our results of late within DeVry University. I think those are fall enrollments for the undergraduates, up 22.7%. That is our most recent period; 64,000 students across our 94 locations and online. Then at the graduate level over 20,000 students, course takers that is, which is almost a 17%
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increase over the prior -year level. So again by focusing on quality it has resulted in the strong growth we have been able to achieve.
335. Discussing recruiter compensation Gunst further misled the market stating:
Again I still think it’s premature to draw any conclusions as to how that has fully shaken out because I think the debate is still on. If you take it to it’s scenario that you paint where there is no correlation to the person’s job and how they get paid, I don’t know about you but that is not the way that you want to run your life.
I am a performance-driven guy myself so I think there has got to be some connection. We feel very comfortable that our performance in our programs in the past have been calling those regulations and we want to make sure that we followed them going forward. I think there is going to be some, again, commonsense approach to this when it’s all said and done.
If there is no correlation to a person’s performance but they just have to show up, whether that be for our private sector or the public sector, I will see how that plays out. I don’t even know how to speculate.
336. On February 23, 2010, Hamburger and Gunst participated at the Credit Suisse Group
Global Services Conference on behalf of the Company. During the conference, Gunst made false and misleading statements concerning enrollment growth and placement of graduating students, stating:
DeVry itself, DeVry Inc., we think is one of the most attractive options within the education space given our diversification, diversification of our schools and our offerings, the quality of our programs. That’s going to be the common theme here. Quality is a focus within DeVry. Quality in terms of our academics, quality in terms of our customer service, making sure, as the student comes in, they are delighted throughout their whole experience with their exposure to both faculty and staff, and quality in terms of the value proposition. Come in, get your education and get a career within your field of study. And also growth, growth in terms of enrollments, growth in terms of revenue and growth in terms of earnings growth over time.
* * *
But the key theme, as I said upfront, that you’re going to hear is about quality and how quality leads to growth. That’s the operating philosophy within DeVry and that’s one of the themes I’d like you to leave with today. And it’s best illustrated through this virtual circle, all starting with academic quality. By focusing on academic quality, that will lead to student outcomes in terms of graduation and employment in their field of study.
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By being successful in helping our students succeed, that leads to meeting society and employer needs. These students get jobs within their field of study and help society in the medical and healthcare field, business and technology. Students see that, existing students and potential students see that, so they stay in school. They want to be like Johnny who got that job at Hewlett-Packard or they want to be like their associate that became a doctor. So they stay in school and others who come in as new students want to emulate them as well.
So that leads to more enrollment growth and more retention, which leads to something that is near and dear to my part as CFO of the organization, the financial results, which give us the financial capability to reinvest in the business, to reinvest in academic quality to continue that virtual cycle.
337. Continuing, Gunst misled the market by touting artificially inflated employment statistics for DeVry’s students, stating:
So it all starts with the student outcomes and I’ll give you a few examples of the student outcomes across our business. First, DeVry University, 89/45. What does that mean? 89% of our students over the past 12-month period of time have gotten jobs within their field of study making over $45,000 a year. In fact, if you go back over the past 35 years when you audit this, the number is actually 90%, a little over 90% and match that up with any private sector or public sector school for that matter, and I don’t think many will be able to even come close. And so we talk about this as the 90/40. We are a little bit below the 90% given the soft economic times, but still a fraction below and actually at $45,000 rather than $40,000 a year.
Another example of superior student outcomes within Ross University. Within Ross University, after the fifth semester, they need to take the United States Medical Licensing Exam and happy to say that our students pass at a 93 % pass rate, which is on par with their peers here in the United States’ schools.
338. Later during the conference, Gunst claimed DeVry provided its students with “world- class” service, and that its efforts were paying off with increased enrollments. Rather than reveal the true reasons behind DeVry’s success, Gunst stated:
Also delivering world-class customer service, delighting the student from the time that they start, make the first contact with our Admissions Advisors to the time that they complete their education and then when they leave on graduation to become alumni. And trying to enhance our marketing to have DeVry University be the career university. When people think about pursuing jobs within these fields of business technology management, we want them to think of DeVry first and foremost.
And this focus on achieving the full potential of DeVry University is paying off. We have seen growth in our undergraduate enrollment of almost 23% in the most
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recent period, fall period to 64,000 students and comparable growth, a little bit lower, but 17% growth at the graduate level for Keller Graduate School of Management. So that’s achieving the full potential ofDeVry University.
339. Near the end of the call, Hamburger misled the market by claiming the Company
supported full disclosure regarding financing to its students, stating:
I think they are both important and consumer protection and full disclosure so that students know the cost of the programs that they are going into, students and family know what the average debt that students take on, they know what are the average salaries, what’s the value proposition over a lifetime, not just their starting salary, but their lifetime is very important. Students should definitely have access to that information. We completely support that.
340. Comparing DeVry’s false and bloated career statistics to those of major public
universities, such as The Ohio State University and Purdue University, Hamburger misleadingly
stated:
Yes, it’s tough to get the comparison points on career statistics. I mean I’ve got them, which I’ve shown sometimes. Ohio State is about 65%, Perdue is I think in the 50%s and then you show Art Institutes or DeVry in the 80%s and 90%s and it looks pretty good. And then I’ll get a lot of critique about, well, you can’t compare those, a lot of -- they are not comparable and so there’s debate on that one, but I take your point and that’s good feedback. I appreciate that.
341. Following the false and misleading statements made at the conference, the price of
DeVry common stock climbed more than 2%, from a closing price of $61.27 on February 23, 2010,
to $62.57 on February 24, 2010.
342. On April 22, 2010, DeVry issued a press release reporting results for its third quarter
2010 and nine months ended March 31, 2010. The Company reported a 60% increase in net
income to $81.2 million, a 29% increase in revenues to $504.4 million and diluted earnings per share of $1.12, a 60% increase from the same quarter a year ago. DeVry further reported that
DeVry University failed to meet its 90/40 goal for October 2008, February 2008, and June 2009,
with a 87.7% employment placement rate and an average salary of $44,186. Highlighting
enrollment growth, Hamburger commented, in pertinent part:
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“We continued to achieve favorable enrollment trends during this quarter, as students were attracted by the value proposition of our educational offerings, which includes high quality programs and services and a strong track record of academic outcomes for students,” said Daniel Hamburger, DeVry’s president and chief executive officer. “We remain committed to investing in quality and providing the access and capacity needed to educate our country’s workforce to compete in the midst of a tough economy.”
343. The April 22, 2010 press release also reported enrollment results for spring 2010.
DeVry University reported a 24.0% increase in new student enrollment, a 25.6% increase in total enrollment, a 16.5% increase in graduate coursetakers enrolled in its master’s degree program,
(including graduate coursetakers at KGSM) for its January 2010 session, and a 15.4% increase for its March 2010 session. Total online undergraduate and graduate coursetakers for its March
2010 session increased 21.5% compared to the same session a year ago. In conclusion, the press release stated:
“We will continue to invest in our programs, services and infrastructure to help our students succeed,” said Hamburger. “With 32 million more Americans expected to be insured by 2014 and employment figures showing early signs of recovery, our schools are well-positioned at the intersection of these two trends to help high school students and working adults obtain the skills they need to achieve their career aspirations.”
344. Following issuance of the press release on April 22, 2010, after the market closed,
DeVry hosted a conference call to discuss its third quarter 2010 financial results and operations.
Gunst and Hamburger participated in the call on behalf of the Company. During the call, numerous false and misleading statements were made that were designed to artificially inflate the Company’s stock price. For example, Hamburger discussed the Company’s strong third quarter performance, stating in part:
We are pleased to announce another quarter a very strong performance driven by the continued execution of our diversification strategy and by our operating philosophy, and namely, that is, that quality leads to growth. During the quarter total undergraduate enrollment for DeVry University was up nearly 26% from the year-ago period to a record of 66,909 students. These results flowed directly from the investments we’ve made in the quality of our programs and services.
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345. Next, Gunst discussed the Company’s financial results and operations and claimed
2010 would be a “breakthrough” year for DeVry, and stated in part:
So that concludes my comments on the strong results for the quarter and the first nine months of the year. Fiscal 2010 is going to be a breakthrough year for the organization, significantly surpassing our long-term financial goals, given the power of operating leverage.
346. Turning to enrollment figures, Hamburger further misled the market, stating in part:
Let me start with Business Technology and Management segment, which, of course, is DeVry University and its Keller Graduate School of Management. This was another strong quarter of positive academic outcome and excellent enrollment growth. We were especially pleased to see contributions across all curriculum areas, degree levels and delivery modes. Let me give you some color on that.
Total undergraduate enrollment in DeVry University’s business programs grew 22%. Technology programs grew 27%, and the Healthcare programs grew 46%. We’re also seeing significant enrollment growth at the graduate level as course takers rose 17% for the January session and more than 15% in March. 17% is the highest growth rate in total graduate course takers since 2003. We believe this demonstrates the strong return on the investments we’re making to raise awareness of the quality of our graduate degree programs.
The total number of online course takers at DeVry University in the March session -- this includes undergraduate and graduate together -- increased 21.5% from the prior year, and the campuses and centers grew nicely as well. So we are seeing contributions to our overall strong growth rates at DeVry University from all channels -- that is curriculum areas, degree levels and delivery modes.
DeVry University continues to position itself as the career university, and in line with this we’ve been making investments in expanding career services for our students and hiring more career advisors. The most recent employment rate for DeVry University graduates in the active job market who are employed within their field of study within six months of graduation remains steady at 87.7%. We believe this demonstrates that employers continue to see tremendous value in our graduates, despite the continued weakness in the job market.
347. As the call continued, Defendants were asked to discuss graduate completion rates for
each of the Company’s segments. In response, Hamburger revealed to the market – for the first time
– the Company’s graduation rates, stating:
We have graduation rates of 31 % at DeVry University, 30% at Chamberlain College and 57% at US Education. You have to bear in mind that that’s the way they are
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reported on a first-time, full-time basis. So that doesn’t include all the other students who come in with transfer credits, which is at this point probably the majority, many of our students, anyway.
And so I always urge caution in interpreting those. And also, we need to compare those two institutions who serve similar populations of students, often with several of the Department of Education defined risk factors and other factors like that. So those are the numbers that we have.
348. The statements referenced in ¶¶333-340; 342-346 were materially false and
misleading when made as they represented and/or omitted facts which then existed and disclosure of
which was necessary to make the statements not false and/or misleading, for reasons set forth in
¶203 and ¶218 above, and as evidenced by the factual detail contained throughout this Complaint. In
addition, the statements referenced in ¶¶333-340; 342-346 were materially false and misleading
when made because they represented and/or omitted adverse facts which then existed and disclosure
of which was necessary to make the statements not false and/or misleading. The true facts, which
were known to or recklessly disregarded by each of the Defendants, were:
• DeVry’s “operating philosophy” was anything but “quality leads to growth.” In reality, DeVry’s operating philosophy was to maximize enrollments at all costs and to run roughshod over any regulations or ethical boundaries (including the Company’s own code of ethics) that stood in the Company’s way.
• Defendants materially misled the market by comparing DeVry career statistics to those of established public universities such as the Ohio State University and Purdue University. Knowing that DeVry’s employment statistics were grossly inflated, defendants lacked any reasonable basis by which to make such comparisons and did so solely to deceive investors.
• Defendants lacked any reasonable basis by which to proclaim that fiscal 2010 would be a breakthrough year for DeVry. Defendants were well aware that increased scrutiny on the Company’s business practices threatened to expose Defendants’ fraud, compromise their ability to maintain their fraudulent scheme, and remove the artificial inflation from the price of DeVry stock. In short, DeVry’s best kept secret, its systemically predatory business model, was in jeopardy of being exposed.
349. In response to Defendants’ partial disclosure of poor graduation rates, the price of
DeVry common stock dropped $4.79 per share, or 6.45%, from a closing price of $74.25 on April
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22, 2010, to close at $69.46 per share on April 23, 2010 and then fell and additional $4.01 per share, or 5.77%, to close at $65.45 on April 26, 2010, as set forth in the chart below:
4000000 76
3500000 — — 74
3000000 — — 72
Volume 2500000 — — 70 ^ Price
2000000 — — 68
1500000 — — 66
1000000 64 4/22/2010 4/23/2010 4/26/2010
350. On May 6, 2010, DeVry filed its quarterly report on Form 10-Q for the third quarter ended March 31, 2010, which confirmed the Company’s previously reported financial results and was signed by Gunst and Hamburger (the “Third Quarter 2010 10-Q”). The Third Quarter 2010 10-
Q contained the required Sarbanes-Oxley certifications signed by Gunst and Hamburger stating that the Form 10-Q did not include any material misrepresentations. Nevertheless, the Third Quarter
2010 10-Q did contain several false and misleading statements regarding DeVry’s financial results and the reasons behind enrollment growth. For example, it stated:
Total consolidated revenues for the third quarter of fiscal year 2010 of $504.4 million increased $112.5 million, or 28.7%, as compared to the year-ago quarter. For the first nine months of fiscal year 2010, total consolidated revenues increased 32.2% to $1,408.5 million compared to the same period a year-ago. For
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both the third quarter and first nine months of fiscal year 2010, revenues increased at DeVry’s respective Business, Technology and Management; Medical and Healthcare; and Other Educational Services segments as a result of continued growth in total student enrollments, improved student retention and tuition price increases. In addition, U.S. Education, which was acquired on September 18, 2008, and Fanor (DeVry Brasil), which was acquired on April 1, 2009, contributed to the revenue growth in the first nine months of fiscal year 2010. Professional Education segment revenues increased slightly during third quarter, but declined in the first nine months of fiscal year 2010 due to the impact of the economic downturn on the accounting and finance professions.
Business, Technology and Management
Business, Technology and Management segment revenues increased 28.6% to $334.6 million in the third quarter and rose 26.1 % to $931.4 million for the first nine months of fiscal year 2010 as compared to the year-ago periods driven primarily by strong enrollment growth, improved retention and tuition price increases. The Business, Technology and Management segment is comprised solely of DeVry University. The two principal factors that influence revenues are enrollment and tuition rates.
351. The Third Quarter 2010 10-Q also provided enrollment data, which included the
following “key trends”: at DeVry University, total undergraduate enrollment by term for summer
2008 to summer 2009 through spring 2009 to spring 2010 increased by between 21.9% and 25.6%.
Likewise, new student enrollment increased for summer 2008 to summer 2009 through spring
2009 to spring 2010 by between 14.8% and 24.0%, and graduate coursetaker enrollment for July
2008 to July 2009 through March 2009 to March 2010 increased by between 12.3 % and 16.5% per session. 21
352. Purporting to describe the reasons behind increased enrollments and financial performance, the Third Quarter 2010 10-Q continued:
Management believes the increased undergraduate student enrollments were most significantly impacted by DeVry’s strong track record of high-quality education
21 Attached as Exhibit M are the relevant portions of the Third Quarter 2010 10-Q.
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and academic outcomes, continued strong demand for DeVry University’s online programs and improved retention of existing students.
353. The statements referenced in ¶¶350-352 were materially false and misleading when
made as they represented and/or omitted facts which then existed and disclosure of which was
necessary to make the statements not false and/or misleading, for reasons set forth in ¶203 and ¶218
above, and as evidenced by the factual detail contained throughout this Complaint.
354. On May 19, 2010, Defendant Hamburger participated at the Robert W. Baird Growth
Stock Conference on behalf of the Company. Commenting on the “biggest misunderstanding” about
the Company within the private sector, Hamburger described how the Company had the ability to
demonstrate that it was not “too aggressive in [its] recruiting.”
355. Commenting on demand trends for the undergraduate division at DeVry University,
Gunst touted how they had been “spectacular” and were the result of the Company’s “investments
... over the past three or four years,” and stated:
Yes, I mean our trends for new student enrollment obviously have been pretty spectacular for the past several terms. We have been reporting strong growth on top of strong growth from the prior year and exceeding our own internal expectations, quite frankly, I think largely due to the impact of a lot of the investments we have been making over the past three or four years. It starts with a high school program. Another reason why we believe that DeVry University undergrad is not as countercyclical as others is that we have got a big chunk of our enrollment that is tied to students graduating from high school continuing on in post- secondary.
356. The statements referenced in ¶355 were materially false and misleading when made
as they represented and/or omitted facts which then existed and disclosure of which was necessary to
make the statements not false and/or misleading, for reasons set forth in ¶206 above, and as
evidenced by the factual detail contained throughout this Complaint. In addition, the statements
referenced in ¶355 were materially false and misleading when made because they represented and/or
omitted adverse facts which then existed and disclosure of which was necessary to make the
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statements not false and/or misleading. The true facts, which were known to or recklessly disregarded by each of the Defendants, were:
• DeVry’s strong enrollment trends over the past several terms were not the result of so-called internal investments, but instead were the result of the Company’s established improper, unethical and illegal recruiting practices . . . nothing more than the same systemically predatory business model that had been implemented throughout the Class Period.
• As a result of the foregoing, Defendants lacked a reasonable basis for their positive statements about the Company, the Company’s Class Period revenue and enrollment numbers, as well as DeVry’s future business prospects.
357. On June 10, 2010, Senator Tom Harkin, chair of the U. S. Senate’s Health, Education,
Labor and Pensions Committee, announced that he would be holding a series of hearings to examine federal spending at for-profit colleges. The press release provided in pertinent part:
Senator Tom Harkin (D-IA), Chairman of the Health, Education, Labor and Pensions (HELP) Committee, today announced that he plans to hold a series of hearings to examine federal education spending at for-profit higher education institutions. The hearings will begin June 24th.
“In the past two years we have made major new investments to expand federal financial aid,” said Harkin. “Pell Grants and student loans now provide more than $20 billion to for-profit higher education companies every year. We need to ensure for-profit colleges are working well to meet the needs of students and not just shareholders. We owe it to students and taxpayers to make sure these dollars are being well spent.”
Between 1998 and 2008 the for-profit sector has grown from 550,000 students to 1.8 million, a 225 percent increase. Students at for-profit institutions are borrowing more, and more frequently, than their peers at non-profit schools, and according to the Department of Education, one in five students who left a for-profit college in 2007 defaulted on their loan within three years.
The Committee will examine a broad range of issues related to the growing role of the for-profit higher education sector, including the scope and rapid growth of the federal investment in for-profit higher education and the corresponding opportunities and risks for students and taxpayers. Details on the first hearing will be available in the coming weeks.
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358. On June 16, 2010, the DOE announced that it was proposing new tougher regulations
on the for-profit education industry designed to protect college students and taxpayers from abusive
or fraudulent practices.
359. On June 17, 2010, Hamburger participated at the William Blair & Company 30th
Annual Growth Stock Conference on behalf of the Company. During the Conference, Hamburger
misleadingly claimed that schools like DeVry would provide “educational capacity” without adding
to the country’s debt, and stated in part:
So how do we fund the additional educational capacity that we need without adding to the immense national debt? Fortunately, there is a solution that is already working -- market-driven, private-sector colleges and universities that are responding nimbly and with quality outcomes to our educational capacity needs and are providing access to underserved segments of our population.
360. The statement referenced in ¶359 was materially false and misleading when made as
it represented and/or omitted facts which then existed and disclosure of which was necessary to
make the statement not false and/or misleading, for reasons set forth in ¶203 and above ¶218, and as
evidenced by the factual detail contained throughout this Complaint.
361. On June 24, 2010, the United States Senate Committee on Health, Education, Labor,
and Pensions (the “HELP Committee”) held a hearing on the for-profit education industry. As part
of the hearing, the Committee released a report titled “Emerging Risk? An Overview of the Federal
Investment in For-Profit Education.”
362. The report noted that “[e]vidence suggests that for-profit schools charge higher tuition
than comparable public schools, spend a large share of revenues on expenses unrelated to teaching,
experience high dropout rates, and, in some cases, employ abusive recruiting and debt-management practices.” The report further noted “mounting reports of questionable practices” at for-profit
colleges. With regard to job-placement data provided by colleges in the for-profit education industry
to prospective students, the report found that “there is no agreed-upon definition of how placement
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in a relevant field is calculated. For example, a restaurant dishwasher or even a janitor might be considered a ‘placement’ by a culinary school.”
363. As a result of these and similar partial disclosures calling into question the practices of for-profit schools, by the end of June 2010, DeVry’s stock was trading at $52.49, down 29% from its Class Period peak of $74.25 on April 22, 2010.
364. On July 1, 2010, the Chicago Tribune Company published an article entitled,
“Senator critical of for-profit colleges; Durbin seeks more regulation for some school.” In the article, Senator Durbin discussed the need to for “legislation to strengthen regulation of for-profit schools” because the schools were leaving students with “worthless diplomas,” and “whopping levels of debt.” The article described how Senator Durbin specifically cited to large for-profit schools, including the University of Phoenix, Kaplan University and DeVry University.
365. On July 15, 2010, DeVry submitted responses to questions from the United States
Senate Committee on Health, Education, Welfare and Pensions, which were raised by Senate
Committee members regarding testimony given during the June 24, 2010 hearing on “Emerging
Risk? An Overview of the Federal Investment in For-Profit Education.” A true and correct copy of
DeVry’s complete responses are attached hereto as Exhibit N, and incorporated herein by reference.
366. Responding to a question from Chairman Tom Harkin, the Company discussed its graduate employment statistics for DeVry University in great detail. According to DeVry, the
Company offers lifetime employment assistance to its graduates and considers “education-related employment” to include any job that uses “degree-related” skills and knowledge obtained while enrolled at the University. Further, whether a job is “educationally related” to the graduate’s degree is determined by Career Services staff based on the position responsibilities reported by the graduate.
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367. Contrary to statements made by former DeVry employees, in DeVry’s response to a question from Ranking Member Mike Enzi, the Company stated that it provides “high levels of customer service to [its] students in order to help them achieve their educational and career goals.”
DeVry further stated, in relevant part:
Prospective students are assigned a student finance advisor immediately after completing their enrollment agreements. Student finance advisors explain financing options; provide technical assistance with completing financial aid and scholarship applications; and provide information about the various loan programs, their terms and repayment responsibilities. The studentfcnanceadvisor- student relationship is maintained for the duration of the student’s studies. The advisor is responsible for helping the student with their financial planning including providing debt counseling to minimize overall debt levels. Advisors also administer our $16 million dollar institutional scholarship programs, helping to target these programs to students with financial need.
At the hearing we were asked for best-practices that could be employed to help meet US educational goals. We believe that among the best practices being developed and implemented with our student finance advisors is the financial review that is conducted with students before they begin their studies. During this review process, the advisor determines each student’s financial aid eligibility and projects out the expected costs and method of financing with the student. The student is able to look at the cost of attending part-time versus full-time as well as determine the long-term ramifications of that decision. They are able to estimate the amount of debt they may have to take on to complete their studies and make decisions of how much to pay now versus how much they want to pay later (in repayment of student loans). This process not only gives the prospective student a long-range look toward graduation, it advances their financial literacy level which is helpful in other areas of their life.
368. The statements referenced in ¶367 were materially false and misleading when made as they represented and/or omitted facts which then existed and disclosure of which was necessary to make the statements not false and/or misleading. The true facts, which were known to or recklessly disregarded by each of the Defendants, were:
• Rather than meaningfully counseling students on financial aid issues, Defendants’ unitary purpose was to manipulate students into taking out the maximum amount of financial aid available, thus putting as much money in federal loan dollars as possible into Defendants’ pockets. DeVry simply did not engage in any level of legitimate counseling or educational programs to prepare students and “the prospective student a long-range look toward graduation.” As the factual detail in this Complaint makes
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clear, Defendants’ Class Period statements directly contradicted DeVry’s standard internal business practices.
369. On July 23, 2010, the stock prices of for-profit colleges, including DeVry, rallied in response to an announcement that the U.S. government was relaxing its proposal governing access to federal financial aid. The price of DeVry common stock rose $7.78 per share, or 15.10%, from a closing price of $51.51 on July 22, 2010, to close at $59.29 per share on July 23, 2010, on unusually heavy trading volume.
370. On August 3, 2010, news began to leak into the market concerning the findings from an undercover operation conducted by the U.S. Government Accountability Office (“GAO”) on recruiting techniques used in the for-profit higher education industry. For example, on August 3,
2010, The New York Times published an article entitled “For-Profit Colleges Mislead Students,
Report Finds,” stating in pertinent part, as follows:
Undercover investigators posing as students interested in enrolling at 15 for-profit colleges found that recruiters at four of the colleges encouraged prospective students to lie on their financial aid applications – and all 15 misled potential students about their programs’ cost, quality and duration, or the average salary of graduates, according to a federal report.
The report and its accompanying video are to be released publicly Wednesday by the Government Accountability Office, the auditing arm of Congress, at an oversight hearing on for-profit colleges by the Senate Committee on Health, Education Labor and Pensions.
The report does not identify the colleges involved, but it includes both privately held and publicly traded institutions in Arizona, California, Florida, Illinois, Pennsylvania, Texas and Washington, D.C. According to the report, the colleges in question were chosen because they got nearly 90 percent of their revenues from federal aid, or they were in states that are among the top 10 recipients of Title IV money.
The fast-growing for-profit education industry, which received more than $4 billion in federal grants and $20 billion in Department of Education loans last year, has become a source of concern, with many lawmakers suggesting that too much taxpayer money is being used to generate profits for the colleges, instead of providing students with a useful high-quality education.
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The report gave specific instances in which some colleges encouraged fraud. At one college in Texas, a recruiter encouraged the undercover investigator not to report $250,000 in savings, saying it was “not the government’s business.” At a Pennsylvania college, the financial representative told an undercover applicant who had reported a $250,000 inheritance that he should have answered “zero” when asked about money he had in savings – and then told him she would “correct” his form by reducing the reported assets to zero, a change she later confirmed by e-mail and voicemail.
At a college in California, an undercover investigator was encouraged to list three nonexistent dependents on the financial aid application.
In addition to the colleges that encouraged fraud, all the colleges made some deceptive statements. At one certificate program in Washington, for example, the admissions representative told the undercover applicant that barbers could earn $150,000 to $250,000 a year, when the vast majority earn less than $50,000 a year. And at an associate degree program in Florida, the report said, a prospective student was falsely told that the college was accredited by the same organization that accredits Harvard and the University of Florida.
According to the report, courses in massage therapy and computer-aided drafting that cost $14,000 at a California for-profit college were presented as good values, when the same courses cost $520 at a local community college.
Six colleges in four states told the undercover applicants that they could not speak with financial aid representatives or find out what grants and loans they were eligible for until they completed enrollment forms agreeing to become a student and paid a small application fee.
And one Florida college owned by a publicly traded company told an undercover applicant that she needed to take a 50-question test, and answer 18 questions correctly, to be admitted – and then had a representative sit with her and coach her through the test. A representative at that college encouraged the applicant to sign an enrollment contract, while assuring her it was not legally binding.
But in some instances, the report said, the applicants were given accurate and helpful information, about likely salaries and not taking out more loans than they needed.
371. As a result, on August 3, 2010, DeVry stock declined $2.26, or 4.15%, from a closing price of $54.50 per share on August 2, 2010, to a closing price of $52.24 per share on August 3,
2010. As more news leaked out concerning details of the government’s investigation and the
anticipated repercussions from the investigation on DeVry’s business and prospects, DeVry stock
continued to decline.
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372. On August 4, 2010, the GAO issued its report detailing its findings. At the request of
Congress, the GAO undertook its investigation to determine if for-profit colleges engaged in fraudulent, deceptive or otherwise questionable marketing practices. The GAO’s report cited many instances of abuse in the sector, finding that many of the companies in the industry employed fraudulent and deceptive practices in their student recruitment, targeting students who used federal financial aid to pay for their schooling. The study was presented at a Senate education hearing held on August 4, 2010, as part of the ongoing government inquiry into the for-profit education sector.
This was the second of the Senate’s hearings on the industry, and was entitled “For Profit Schools:
The Student Recruitment Experience.”
373. On August 6, 2010, DeVry announced that it had received a request for information from the HELP Committee relating to the Committee’s ongoing hearings in connection with private- sector colleges receiving Title IV financial aid. Specifically, the request sought information to more accurately understand how DeVry’s institutions use federal resources, including how they recruit and enroll students, set program price or tuition, determine financial aid including private or institutional loans, track attendance, handle withdrawal of students and return of Title IV dollars and manage compliance with the requirement that no more than 90% of revenues come from Title IV dollars. In addition, the request also sought information concerning the number of students who complete or graduate from programs offered by DeVry’s institutions, how many of those students find new work in their educational area, the debt levels of students enrolling and completing programs and how
DeVry tracks and manages the number of students who risk default within the cohort default rate window.
374. As a result, DeVry stock declined $3.13, or 6.14%, from a closing price of $50.96 on
August 5, 2010, to a closing price of $47.83 on August 6, 2010, on a 108% increase in trading
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volume. The chart below demonstrates the severe decline in the price of DeVry common stock between August 3, 2010 – when news regarding the GAO report broke – and August 6, 2010, during
which time the stock fell by more than 12%:
3000000 55
- 54
2500000 - - 53
- 52
2000000 - - 51
^ Volume Price
- 50 1500000 -
- 49
- 48 1000000 -
- 47
500000 46 8/2/2010 8/3/2010 8/4/2010 8/5/2010 8/6/2010
375. On August 12, 2010, DeVry issued a press release reporting financial results for its
fourth quarter 2010 and full-year ended June 30, 2010. The Company reported a 93.0% increase in
net income to $71.6 million, a 28.0% increase in revenues to $506.7 million, and fully diluted
earning per share of $0.99, a 94.0% increase compared to the same quarter a year ago. For the
full-year ended June 30, 2010, the Company reported a 69.0% increase in net income to $279.9
million, a 31.0% increase in fiscal 2010 revenues to $1,915 million and fully diluted earnings per share of $3.87, a 70.0% increase compared to 2007. DeVry also announced that it failed to reach
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its 90/40 goal for February 2009, June 2009, and October 2009, with an employment placement
rate of 88.3% and an average salary of $43,605. The press release further stated in relevant part:
“Fiscal 2010 was a strong year driven by our ongoing investments in quality,” said Daniel Hamburger, DeVry’s president and chief executive officer. “These solid financial results are an outgrowth of our strong academic results and will provide the resources to support our investments in academic quality, student services and capacity growth in the future.”
376. The August 12, 2010, press release also disclosed the Company’s enrollment results.
DeVry University reported a 9.9% increase in new student enrollment and a 22.0% increase in
total student enrollment compared to the prior year. Total graduate coursetakers, (including graduate coursetakers at KGSM) increased 17.4% for its May 2010 session, and 17.6% for its July
2010 session, while the total number of online undergraduate and graduate coursetakers increase
24.4% for July 2010. In conclusion, the press release stated:
“In fiscal 2011, we will continue to build upon the investments we made last year in academic quality and student services,” said Hamburger. “These investments will further enhance the strong value propositions of our schools in the years to come and help us to achieve our vision of becoming the leading global provider of career- oriented educational services.”
377. Following issuance of the press release on August 12, 2010, after the market closed,
DeVry hosted a conference call to discuss its financial results and operations. Gunst and Hamburger participated in the call on behalf of the Company. During the call, numerous false and misleading
statements were made regarding DeVry’s financials and future business prospects that were designed
to and did artificially inflate the Company’s stock price. For example, Hamburger discussed the
regulatory scrutiny facing the Company, proposed rulemaking, and the HELP Committee’s
activities, and made blatantly false statements concerning how DeVry’s Admissions Advisors were
compensated, stating in part:
Now the comment period on Part Two of the Gainful Employment Proposal is still open and we haven’t submitted our comments yet. One thing I will say is that we continue to believe that robust disclosure is the most important way to help
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prospective student consumers make informed decisions. We were pleased to see those provisions included in Part One of the proposed rule.
Now let me make a few comments on the so-called incentive compensation proposals. I say so-called, as there seems to be a misperception that the current Safe Harbor allow for employment-based bonuses, and that the supposed rules would ban them. It is not so. Such payments are already prohibited.
Now we support the Department’s efforts to refine regulations and to ensure Congress’ intent per the statute is carried out effectively. Consistent with current regulations, we don’t pay commissions or bonuses based on enrollment. We pay salaries to all of our employees, who also receive annual performance reviews and are rewarded on merit.
378. Continuing, Hamburger stated that “quantitative performance measurements should be permitted to play a least some part in the judgment that institutions make about base salary adjustments,” never disclosing that quantitative enrollment quotas were the only factor used to evaluate the Company’s Admissions Advisors ( i.e., sales force).
379. Discussing DeVry’s Senate testimony, Hamburger again touted the Company’s misleading employment statistics:
Let me also touch briefly on the Senate Health Committee activity. As you know, we were the only private sector organization invited to testify before the committee to date. We very much appreciated that opportunity to discuss your views with the committee. We think it is essential if the committee is going to get a balanced view of the sector for them to hear from institutions like DeVry that have a proven track record of delivering programs that lead to employment and long-term careers for our students.
380. As the call continued, Gunst discussed the Company’s financial results, touted increased enrollment, and stated in part:
Well, another fiscal year has come to a close, and we are very proud of our strong performance, driven by our focus on academic quality. Full -year revenue hit a record $1.915 billion, up approximately 31% versus prior year. Organic revenue growth was about 27% versus prior year, excluding the Carrington and DeVry Brasil acquisitions that occurred last fiscal year.
Net income for fiscal 2010 was $280 million, up 63% versus last year. And earnings per share were $3.87, up 64%, excluding last year’s discrete items.
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* * *
Fourth-quarter results were also very strong and reflect strong topline growth, continued operating leverage and a focus on reinvesting in academic quality and long-term growth initiatives.
Revenue of $507 million was up about 28% versus last year. This was all organic growth, as we have now overlapped the DeVry Brasil acquisition, which occurred April 2009.
Net income of $72 million was up 78% versus last year. And earnings per share of $0.99, up 77%, excluding last year’s discrete item. And our net income margin was 14.1 % in the quarter.
* * *
Now let’s move to some of the highlights of our segment results, which are further detailed in our release. The Business, Technology and Management segments had very strong results with total enrollment up 22%. As expected, new student enrollment has begun to moderate, but still up 10 % versus the tough comparison in the prior year.
* * *
Revenue in the segment was up about 32% versus last year in the quarter and 28% for the fiscal year, driven by continued online expansion and strong on -site enrollments.
Segment earnings which are, of course, pretax were up about 140% for the quarter and more than doubled for the year, excluding last year’s discrete items, driven primarily by improved operating leverage from the strong enrollment growth.
381. When further asked if DeVry was comfortable with the impact a change in gainful employment may have on the Company, Hamburger misleadingly touted the so-called value of a
DeVry education, and stated:
What I am saying is we are comfortable that we provide high quality value proposition for our students, which is what this whole thing is aimed at making sure that schools are doing. So we’re very comfortable with the value proposition and the employment and the career results that our students are achieving across all our schools.
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382. Commenting on the controls DeVry has in place to ensure that none of its admissions personnel are misrepresenting anything to students and how confident they are that those controls are preventing any such misrepresentations, Hamburger made numerous false statements:
DeVry does have a very robust, multilayered compliance program. We’ve had that for years and decades. The details of it go far beyond the time that we have available on this call.
Although we know our compliance program is very effective overall, we also know that exceptions can occur. That is true for any organization. So what is equally important is what we do when an error occurs or a problem occurs. The answer is we take immediate corrective action. We walk the walk and we talk the talk on that.
Many examples, and we talk about that explicitly within DeVry as part of continuing to maintain and enhance our culture of accountability and integrity. An example, a couple -- several years ago we became aware of an issue at one campus that related to this.
Once we investigated it, we promptly notify the Department of Education and terminated the employees that were responsible in that case. So we do the right thing, and we deal with it. And I think that is what any organization has to do.
* * *
So these things can happen, but the key is how you deal with that, and the key is how do you make sure you’ve got an overarching training and compliance program to ensure that it’s very much the exception and not the norm.
383. The statements referenced in ¶¶375-382 were materially false and misleading when
made as they represented and/or omitted facts which then existed and disclosure of which was
necessary to make the statements not false and/or misleading, for reasons set forth in ¶203 and ¶218
above, and as evidenced by the factual detail contained throughout this Complaint. In addition, the
statements referenced in ¶¶375-382 were materially false and misleading when made because they
represented and/or omitted adverse facts which then existed and disclosure of which was necessary
to make the statements not false and/or misleading. The true facts, which were known to or
recklessly disregarded by each of the Defendants, were:
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• Notwithstanding Defendants’ insinuation that predatory enrollment practices were only engaged in by rogue advisors at select campuses, in reality, Defendants created a systemically predatory business model at DeVry that directed advisors to prey on poor, uneducated and unsophisticated people through the use of high-pressure sales tactics, misrepresentations and psychological manipulation. Advisors were encouraged (and expected) by their supervisors to engage in these unethical and illegal practices. Further, if advisors did not meet their established enrollment quotas, which were achievable by engaging in these practices, they were terminated. Those who did meet or exceed their enrollment quotas were compensated with incentives in direct violation of Title IV.
• As a result of the foregoing, Defendants lacked a reasonable basis for their positive statements about the Company, the Company’s Class Period revenue and enrollment numbers, as well as DeVry’s future business prospects.
384. Following the earnings announcement, DeVry common stock declined $2.60, or
5.74% per share, from a closing price of $45.31 on August 12, 2010, to a closing price of $42.71 per share on August 13, 2010. Although Defendants were reporting seemingly positive financial results, as news continued to come out concerning details of the government’s investigation and the anticipated repercussions from the investigation on DeVry’s business and prospects, DeVry stock continued to decline, as set forth in the chart below:
4500000 46
— 45 4000000 —
— 44 3500000 — — 43
3000000 — — 42
2500000 — — 41
Volume
Price 2000000 — — 40
— 39 1500000 —
— 38 1000000 — — 37
500000 — — 36
0 35 8/12/2010 8/13/2010 8/16/2010
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IX. THE ULTIMATE TRUTH IS REVEALED
385. In addition to the partial disclosures regarding DeVry’s financials and future business prospects, as set forth in ¶¶ 348, 361-362 above, on August 13, 2010, after the market closed, the
DOE released data on student-loan repayment rates at the nation’s colleges and universities. The
data showed that the repayment rates were 54% at public colleges and universities, 56% at private
nonprofit institutions and 36% at for-profit colleges. The data showed that the repayment rates at
DeVry’s schools were just 38%.
386. In addition, the DOE proposed new regulations for programs to continue to be
eligible to receive federal financial aid. The tests for eligibility would be based on repayment rates
and debt-to-income loads. Under the proposed “gainful employment” regulations, programs would
need to have a repayment rate of at least 45% to continue to be eligible for federal financial aid. The
regulations if adopted will go into effect in July 2011. Based on the proposed regulations, many of
DeVry’s programs are in jeopardy of losing their financial aid status.
387. On this news, the price of DeVry stock decreased an additional $3.74, or 8.76%, from
a closing price of $42.71 on August 13, 2010, to a closing price of $38.97 on August 16, 2010, the
next trading day, on a 234% increase in trading volume.
388. Also on August 13, 2010, Sterne Agee published an analyst report discussing the
Company’s fourth quarter financial results and pointed to the slowdown in new undergraduate
student enrollment at DeVry University, which only posted a 10% increase compared to a 24%
increase in the previous quarter.
389. As a result of Defendants’ false statements and omissions, DeVry common stock
traded at artificially inflated prices during the Class Period. After the above revelations seeped into
the market, however, the Company’s shares were hammered by massive sales, sending them down
approximately 46% from their Class Period high.
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X. POST CLASS PERIOD EVENTS
390. Following the close of the Class Period, additional events reached the market and
further demonstrated not only the falsity of Defendants’ Class Period statements, but also the extent
to which DeVry’s financial performance and future business prospects depended upon their ability to
defraud both DeVry students and investors by continuing to implement DeVry’s systemically predatory business model. For example, on September 14, 2010, DeVry issued a press release
disclosing its federal fiscal year 2008 two-year cohort default rates as issued by the DOE for its
institutions. The Company announced that in accordance with Title IV, “DeVry University and
Carrington College California will experience a slight delay in the receipt of Title IV funds for new
students in their first term of study since these rates exceed 10 percent.”
391. The information revealed in the September 14, 2010 press release was confirmed by
CW 15, who stated that by October 2010, DeVry’s default rate had exceeded 10 percent. As a result,
DeVry was no longer allowed to disburse funds until 30 days after the students started each term.
Yet, advisors were instructed to tell students who inquired as to why there was a delay in receiving
their funds that the disbursement rules were always that way, and to conceal that this was in fact a
change due to DeVry’s high default rate. Previously, students could get refund checks in the first
two to three weeks of a semester. DeVry received approximately 56,000 incoming calls in October
2010 from students wondering where their refund checks were.
392. CW 15 provided data to her/his supervisors about the number of students she/he had
in default, but those numbers were not reflected in the quarterly numbers that DeVry circulated.
According to CW 15, if DeVry’s publicly reported numbers had been accurate, DeVry’s default rates
would have been even higher. For her/his portfolio of students, CW 15 calculated the two-year
cohort default rate and provided the data to her/his director – “I guarantee it was not 10.2 percent, it
was 13 or 14 percent.”
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393. There were students who owed DeVry money, but made arrangements to pay on student loans by obtaining private loans, which the students subsequently defaulted on. According to CW 15, those defaults were not reported as defaults for Title IV purposes even though DeVry was supposed to report all defaults at the school to the federal government. According to CW 15, the
Title IV default numbers were reported quarterly to the DeVry’s Board of Directors.
394. On September 30, 2010, the HELP Committee held a third hearing focusing on whether for-profit colleges were benefitting their students. As part of the hearing, and based in part on the documents that Chairman Harkin received in response to the August 2010 document requests that he submitted, the Committee released a report titled “[t]he Return of the Federal Investment in for-Profit Education: Debt without a Diploma.” 22
395. The report made a number of notable findings, including that student enrollment at for-profit colleges masks high withdrawal rates. For instance, fourteen out of sixteen schools analyzed recruited a greater number of new students than their entire starting enrollment in 2008-09, however their net enrollment only increased by 22 percent. The report also found that students at for-profit colleges leave without a diploma at an alarming rate. For example, while nine hundred and fifty nine thousand students enrolled at the 16 schools reviewed during 2008-09, five hundred and forty seven thousand, or 57 percent, withdrew by August 2010. The report also found that almost all students at for-profit schools take out student loans and they are likely to amass significant debt. For example, for 2008-09 students withdrawing from associates or bachelors programs, median attendance was approximately 20 weeks; a student who attended a for-profit college for that length of time would have to pay approximately $8,000 to $11,000 in tuition.
22 The report focused on information from the eight largest publicly traded and the eight largest privately held for-profit education companies that offer certificate, associates or bachelors programs.
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396. On October 26, 2010, DeVry issued a press release announcing its first quarter 2011 financial results and that it was expecting a decline in new undergraduate enrollment. The press release stated in pertinent part:
DeVry University expects to report a modest decline in new undergraduate student enrollments and growth in the mid-teens for total students. Keller Graduate School believes that total coursetaker enrollment will be similar to previous sessions.
397. On November 12, 2010, DeVry announced that it has been informed by the DOE that it would be conducting an onsite review of DeVry University’s administration of federal financial aid, specifically Title IV programs for which the Company participates. The review was scheduled for December 6, 2010 and would cover 2009-2010 and 2010-2011 financial award year.
398. On December 7, 2010, DeVry issued a press release announcing its fall 2010 enrollment at DeVry University, which included a 4.7% decline in new student enrollment.
399. On February 7, 2011, DeVry issued a press release commenting on its unofficial three-year cohort default rates issued by the DOE for its institutions for fiscal year 2008. The following table includes both the Company’s two-year and three-year cohort default rates:
Official Unofficial 2-Year Rate 3-Year Rate 2006 2007 2008 2006 2007 2008 DeVry University 7.3% 9.0% 10.2% 13.8% 17.1% 21.3% Keller Graduate School of Management 1.4% 2.7% 2.6% 3.5% 4.7% 5.6% Ross University - Medical School 0.1% 0.2% 0.2% 0.3% 0.6% 1.0% Ross University - Veterinary Medical School 0.1% 0.0% 0.0% 0.2% 0.0% 0.0% Chamberlain College of Nursing 1.8% 2.9% 1.7% 5.0% 4.1% 7.5% Carrington College 7.5% 7.2% 7.0% 22.7% 21.0% 22.3% Carrington College California 9.6% 10.2% 13.6% 23.8% 24.4% 31.5% DeVry Inc. Total 6.2% 7.8% 8.9% 13.8% 16.1% 19.5%
For comparison: 2006 2007 2008 2006 2007 2008
Public institutions 4.7% 5.9% 6.0% 7.7% 9.7% 10.8% Independent institutions 2.5% 3.7% 4.0% 4.5% 6.5% 7.6% Private-sector institutions 9.7% 11.0% 11.6% 18.8% 21.2% 25.0% Community colleges 8.4% 9.9% 10.1% 13.9% 16.2% 17.9%
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XI. DEFENDANTS MADE FALSE AND MISLEADING STATEMENTS REGARDING DEVRY’S BUSINESS CONDUCT AND ETHICS
400. During the Class Period, DeVry repeatedly discussed the Company’s commitment to
its reputation for integrity and quality. For example, the Company’s Form 10-K cited to DeVry’s published “Code of Business Conduct and Ethics,” (the “Code”). The Code contained a host of false
and misleading statements that were designed to mislead the market. For example, the Code states,
“[w]e strive to achieve the highest business and personal standards of conduct, as well as full
compliance with the laws and regulations that apply to our business.” The Code further states in pertinent part:
This Code is designed to promote:
• Honest and ethical conduct, including the handling of actual or apparent conflicts of interest between personal and professional relationships;
• Fair, full, accurate, timely, truthful and understandable disclosure in reports and documents compiled within DeVry that are filed with government regulatory and accreditation agencies and in other public communications made by DeVry;
• Full and complete compliance with all applicable laws and regulations;
• Prompt internal reporting of violations of this Code; and
• Accountability for adherence to this Code.
401. A reference to the Company’s Code was also made by Defendants in DeVry’s
responses to questions from the United States Senate Committee on July 15, 2010. More
specifically, DeVry claimed that the Company is “guided by its values, which include maintaining a
high standard of performance and integrity in all areas of operation.”
402. The business conduct and integrity of DeVry and its management are material to
investors. Contrary to statements made by Defendants during the Class Period, neither DeVry nor its
management were acting ethically or with integrity. Not only were Defendants in violation of
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multiple rules and regulations, such as Title IV, but they failed to adequately disclose their unethical,
abusive and fraudulent business practices to investors.
XII. ADDITIONAL SCIENTER ALLEGATIONS
403. As alleged herein, Defendants acted with scienter in that Defendants knew that the public documents and statements issued or disseminated in the name of the Company were
materially false and misleading; knew that such statements or documents would be issued or
disseminated to the investing public; and knowingly and substantially participated or acquiesced in
the issuance or dissemination of such statements or documents as primary violations of the federal
securities laws. As set forth elsewhere herein in detail, Defendants, by virtue of their receipt of
information reflecting the true facts regarding DeVry, their control over, and/or receipt and/or
modification of DeVry allegedly materially misleading misstatements and/or their associations with
the Company which made them privy to confidential proprietary information concerning DeVry, participated in the fraudulent scheme alleged herein.
404. Defendants knew and/or recklessly disregarded the falsity and misleading nature of
the information that they caused to be disseminated to the investing public. The ongoing fraudulent
scheme described in this complaint could not have been perpetrated over a substantial period of time,
as has occurred, without the knowledge and complicity of the personnel at the highest level of the
Company, including each of the Individual Defendants.
405. Further, during the Class Period, the Individual Defendants were motivated to
misrepresent the Company’s true financial condition and future business prospects so that they could
artificially increase the price of DeVry’s stock. To that end, and in the midst of orchestrating their
fraud, Hamburger sold 123,554 shares of DeVry stock at artificially inflated prices, generating proceeds of $7,094,805. Hamburger’s stock sales were unusual and suspicious in timing and
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amount. Indeed, Hamburger did not sell a single share of DeVry stock in the two years prior to the beginning of the Class Period.
406. Further, Hamburger took advantage of the artificial inflation created by Defendants’
fraud by selling DeVry shares immediately after making false and misleading statements. For
instance, Hamburger initially sold shares on April 25, 2008, the day after the Company’s third
quarter 2008 earnings conference call, on which the Defendants made numerous false and
misleading statements about DeVry’s enrollment numbers, recruiting process and employment
statistics. Hamburger also sold shares on February 3, 2009, seven days after the Company’s second
quarter 2009 earnings conference call, on which the Defendants made numerous false and
misleading statements about DeVry’s enrollment numbers and employment statistics.
407. Hamburger also sold shares on October 28, 2009, the day after the Company’s first
quarter 2010 earnings conference call, on which the Defendants made numerous false and
misleading statements about DeVry’s enrollment numbers, retention rates and employment statistics.
Finally, Hamburger also sold a significant number of shares during the five days beginning on
December 9, 2009, following DeVry’s December 8, 2009 press release which touted DeVry
University’s (inflated) enrollment results for fall 2009.
408. The Individual Defendants were further motivated to commit fraud by the Company’s
Management Incentive Program (“MIP”). During the Class Period, the Company’s MIP awarded
DeVry's executives annual bonuses when they met or exceeded individual performance goals and
Company financial objectives. In the case of Hamburger and Gunst, 70% of the incentive
compensation available to them during the Class Period through the Company’s MIP was tied to
earnings per share and revenue goals set by DeVry’s Compensation Committee – metrics which the
Individual Defendants ultimately manipulated to further their own interests. Indeed, by fraudulently
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inflating the Company’s financials, the Individual Defendants were able to greatly increase their compensation in each year of the Class Period, as set forth in the chart below:
Hamburger:
Year Base Salary MIP Bonus Pay-Out 2008 $675,322 $991,749 (147% of base salary) 2009 $734,116 $1,019,277 (139% of base salary) 2010 $751,689 $1,339,969 (178% of base salary)
Gunst:
Year Base Salary MIP Bonus Pay-Out 2008 $285,970 $212,127 (74% of base salary) 2009 $360,258 $260,440 (72% of base salary) 2010 $369,348 $343,742 (93% of base salary)
XIII. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE
409. At all relevant times, the market for DeVry common stock was an efficient market for the following reasons, among other things:
(a) DeVry stock met the requirements for listing, and were listed and actively traded on the NYSE, a highly efficient and automated market;
(b) As a regulated issuer, DeVry filed periodic public reports with the SEC; and
(c) DeVry regularly communicated with public investors via established market communication mechanisms, including through regular disseminations of press releases on the national circuits of major newswire services and through other wide-ranging public disclosures, such as communications with the financial press and other similar reporting services.
410. As a result, the market for DeVry common stock promptly digested current information regarding DeVry from all publicly-available sources and reflected such information in the price of DeVry stock. Under these circumstances, all purchasers of DeVry common stock during
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the Class Period suffered similar injury through their purchase of DeVry common stock at artificially
inflated prices and a presumption of reliance applies.
XIV. LOSS CAUSATION/ECONOMIC LOSS
411. During the Class Period, as detailed herein, Defendants engaged in a scheme to
deceive the market and a course of conduct that artificially inflated the value of DeVry common
stock throughout the Class Period. Defendants’ creation and implementation of a systemically predatory business model operated as a fraud or deceit on Class Period purchasers of DeVry
common stock by misrepresenting the Company’s financials and future business prospects, including but not limited to, misrepresenting the strength and source of the Company’s revenues, the volume
of student enrollments in DeVry’s degree programs, the employment statistics for graduates, and the
ability of the Company to meet its financial projections.
412. Defendants’ false and misleading statements had their intended effect and directly and proximately caused, or were a substantial contributing cause of DeVry’s common stock trading at
artificially inflated levels, reaching a Class Period high of $74.25 per share on April 22, 2010.
413. As a result of Defendants’ fraudulent conduct as alleged herein, the prices at which
DeVry common stock traded were artificially inflated, at varying levels, throughout the Class Period.
When Plaintiff and other members of the Class purchased their DeVry common stock, the true value
of such common stock was substantially lower than the prices actually paid by Plaintiff and the other
members of the Class.
414. During the Class Period, Defendants improperly concealed DeVry’s true financial
condition and future business prospects, failing to disclose DeVry’s systemically predatory business
model. Consequently, the price of its common stock was artificially inflated throughout the Class
Period. Defendants also misrepresented the reasons behind DeVry’s reported results and made
numerous false and misleading statements regarding many aspects of its business, including, but not
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limited to, the strength of the Company’s student enrollment numbers, the legality of the Company’s
recruiting practices and the quality of its degree programs. Later, however, when the truth regarding
DeVry’s true financial circumstances was revealed through a series of partial disclosures set forth in
detail above, and Defendants’ prior misrepresentations and fraudulent conduct became apparent to
the market, the price of DeVry common stock fell as the prior artificial inflation was removed. As a
result of their purchases of DeVry common stock during the Class Period at artificially inflated prices, Plaintiff and other members of the Class suffered economic loss, i.e., damages under federal
securities laws, when such artificial inflation dissipated.
415. By misrepresenting the success of the Company’s business and concealing its
improprieties, Defendants presented a misleading picture of DeVry’s financial condition and future business prospects. For example, Defendants’ consistent statements that the Company was achieving
strong and ever-increasing enrollment results, caused and maintained the artificial inflation in the price of DeVry common stock throughout the Class Period – even as negative news reached the
market – until the truth was finally an fully revealed at the close of the Class Period.
416. As a result of Defendants’ materially false and misleading statements and documents,
as well as the adverse, undisclosed information known to the Defendants, Plaintiff and other
members of the Class relied, to their detriment on such statements and documents, and/or the
integrity of the market, in purchasing their DeVry common stock at artificially inflated prices during
the Class Period. Had Plaintiff and the other members of the Class known the truth, they would not
have taken such actions.
417. As explained herein, these false statements directly or proximately caused, or were a
substantial contributing cause of, the damages and economic loss suffered by Plaintiff and other
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members of the Class, and maintained the artificial inflation in the prices of DeVry’s common stock throughout the Class Period until the truth leaked out and was partially revealed to the market, at which time the prior inflation came out of the stock. Defendants’ false and misleading statements had the intended effect and directly and proximately caused, or were a substantial contributing cause, of DeVry’s stock trading at artificially inflated levels throughout the Class Period.
418. Through a series of partial disclosure events regarding the Company’s financial outlook and future business prospects, which culminated in the revelations that, among other things, student-loan repayment rates at DeVry were only 38% – in contradiction of Defendants’ Class
Period statements regarding the Company’s financials and future business prospects – the artificial inflation came out of the price of DeVry common stock.
419. The events and partial disclosures during the Class Period, set forth more specifically above, included an April 22, 2010 disclosure of extremely poor completion rates DeVry University,
Chamberlain College and US Education, and a June 24, 2010 disclosure in a HELP Committee report indicating that for-profit schools experience high dropout rates and, in some instances, employ abusive recruiting and debt-management practices.
420. Defendants, however, mitigated or at least minimized the impact of these partial revelations of the truth in a further attempt to mislead the market’s expectations for the Company by, among other things, declaring that the high dropout rates did not take into account the majority of enrolled students in those classes, most of whom had purportedly enrolled as transfers, and by consistently declaring that the Company was not engaged in abusive recruiting practices. For a time,
Defendants were successful. Defendants’ false and misleading statements limited the declines and maintained the artificial inflation in DeVry’s common stock.
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421. Nevertheless, the market’s expectations were ultimately corrected on August 13,
2010, with the disclosure of DeVry’s low student loan repayment rate of 38% along with an
announcement by the DOE regarding its proposed new regulations governing an institution eligible
to receive federal financial aid. These partial disclosures had a dramatic effect on the price of DeVry
common stock. For example, it fell by 8.76%, or $3.74 per share, from a closing price of $42.71 on
August 13, 2010, to a closing price of $38.97 per share on August 16, 2010, the following trading
day, on heavy increase in trading volume. The cumulative impact of these declines was that the price of DeVry common stock fell 47.5% from its Class Period high, causing substantial harm to
investors who suffered losses as the artificial inflation generated by Defendants’ fraud was removed.
422. The timing and magnitude of the decline in DeVry common stock negates any
inference that the loss suffered by Plaintiff and other Class members were caused by changed market
conditions, macroeconomic factors or Company-specific facts unrelated to the Defendants’
fraudulent conduct. As a result of their purchases of DeVry common stock during the Class Period,
Plaintiff and other members of the Class suffered economic loss, i.e., damages, under the federal
securities laws when the above-described revelations reached the market and the artificial inflation
was removed.
XV. NO SAFE HARBOR
423. DeVry’s verbal “Safe Harbor” warnings accompanying its oral forward-looking
statements (“FLS”) issued during the Class Period were ineffective to shield those statements from
liability.
424. The Defendants are also liable for any false or misleading FLS pleaded because, at
the time each FLS was made, the speaker knew the FLS was false or misleading and the FLS was
authorized and/or approved by an executive officer of DeVry who knew that the FLS was false.
None of the historic or present tense statements made by Defendants were assumptions underlying or
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relating to any plan, projection or statement of future economic performance, as they were not stated
to be such assumptions underlying or relating to any projection or statement of future economic performance when made, nor were any of the projections or forecasts made by Defendants expressly
related to or stated to be dependent on those historic or present tense statements when made.
XVI. COUNT I: FOR VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5 PROMULGATED THEREUNDER AGAINST ALL DEFENDANTS
425. Plaintiff repeats and realleges the allegations set forth above as though fully set forth
herein. This claim is asserted against all Defendants.
426. During the Class Period, DeVry and the Individual Defendants carried out a plan,
scheme and course of conduct which was intended to and, throughout the Class Period, did: (i)
deceive the investing public, Plaintiff and other Class members, as alleged herein; (ii) artificially
inflate and maintain the market price of DeVry common stock; and (iii) cause Plaintiff and other
members of the Class to purchase DeVry common stock at artificially inflated prices. In furtherance
of this unlawful scheme, plan and course of conduct, DeVry and the Individual Defendants took the
actions set forth herein.
427. These Defendants: (i) employed devices, schemes, and artifices to defraud; (ii) made
untrue statements of material fact and/or omitted to state material facts necessary to make the
statements not misleading; and (iii) engaged in acts, practices, and a course of business which
operated as a fraud and deceit upon the purchasers of the Company’s common stock in an effort to
maintain artificially high market prices for DeVry’s common stock in violation of § 10(b) of the
Exchange Act and Rule 1 0b-5. These Defendants are sued as primary participants in the wrongful
and illegal conduct charged herein. The Individual Defendants are also sued as controlling persons
of DeVry, as alleged below.
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428. In addition to the duties of full disclosure imposed on Defendants as a result of their
making of affirmative statements and reports, or participating in the making of affirmative
statements and reports, to the investing public, they each had a duty to promptly disseminate truthful
information that would be material to investors in compliance with the integrated disclosure provisions of the SEC as embodied in SEC Regulation S-X (17 C.F.R. §210.01, et seq.) and S-K (17
C.F.R. §229.10, et seq.) and other SEC regulations, including accurate and truthful information with
respect to the Company’s operations, financial condition, future business prospects, and operational performance, so that the market prices of Company common stock would be based on truthful,
complete and accurate information.
429. DeVry and each of the Individual Defendants, individually and in concert, directly
and indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails,
engaged and participated in a continuous course of conduct to conceal adverse material information
about the business, business practices, performance, operations and future business prospects of
DeVry as specified herein.
430. These Defendants each employed devices, schemes and artifices to defraud while in possession of material adverse non-public information. These Defendants also engaged in acts, practices, and a course of conduct, as alleged herein, in an effort to assure investors of DeVry’s
value, performance, and financial and operational growth. These acts included the making of, or the participation in the making of, untrue statements of material facts and omitting to state necessary
facts in order to make the statements made about DeVry and its business operations and future business prospects in light of the circumstances under which they were made, not misleading, as set
forth more particularly herein, and engaged in transactions, practices and a course of business which
operated as a fraud and deceit upon the purchasers of DeVry common stock during the Class Period.
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431. Each of the Individual Defendants’ primary liability and controlling person liability
arises from the following facts: (i) each of the Individual Defendants was a high-level executive
and/or director at the Company during the Class Period; (ii) each of the Individual Defendants, by
virtue of her/his responsibilities and activities as a senior executive officer and/or director of the
Company, was privy to and participated in the creation, development and reporting of the
Company’s financial performance, projections and/or reports; and (iii) each of the Individual
Defendants was aware of the Company’s dissemination of information to the investing public, which
each knew or disregarded with recklessness was materially false and misleading.
432. Each of these Defendants had actual knowledge of the misrepresentations and
omissions of material facts set forth herein, or acted with reckless disregard for the truth in that each
failed to ascertain and to disclose such facts, even though such facts were available to each of them.
Such Defendants’ material misrepresentations and/or omissions were done knowingly or with
recklessness and for the purpose and effect of concealing DeVry’s operating condition and future business prospects from the investing public and supporting the artificially inflated price of its
common stock. As demonstrated by Defendants’ misstatements of the Company’s financial
condition and performance throughout the Class Period, each of the Individual Defendants, if he or
she did not have actual knowledge of the misrepresentations and omissions alleged, was reckless in
failing to obtain such knowledge by deliberately refraining from taking those steps necessary to
discover whether those statements were false and misleading.
433. As a result of the dissemination of the materially false and misleading information
and failure to disclose material facts, as set forth above, the market prices of DeVry common stock
were artificially inflated, at varying levels, throughout the Class Period. In ignorance of the fact that
market prices of DeVry common stock were artificially inflated, and relying directly or indirectly on
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the false and misleading statements made by Defendants, or upon the integrity of the market in which the common stock trades, and/or on the absence of material adverse information that was known to or disregarded with recklessness by Defendants but not disclosed in public statements by
Defendants during the Class Period, Plaintiff and the other members of the Class acquired DeVry common stock during the Class Period at artificially high prices and were damaged thereby, as evidenced by, among other things, the common stock price declines identified herein that released the artificial inflation from the price of DeVry common stock.
434. At the time of said misrepresentations and omissions, Plaintiff and other members of the Class were ignorant of their falsity, and believed them to be true. Had Plaintiff and the other members of the Class and the marketplace known of the true performance, future business prospects and intrinsic value of DeVry, which were not disclosed by Defendants, Plaintiff and other members of the Class would not have purchased or otherwise acquired their DeVry common stock during the
Class Period, or they would not have done so at artificially inflated prices which they paid.
435. By virtue of the foregoing, DeVry and the Individual Defendants have each violated
§ 10(b) of the Exchange Act, and Rule 1 0b-5 promulgated thereunder.
436. As a direct and proximate result of Defendants’ wrongful conduct, Plaintiff and the other members of the Class suffered damages in connection with their respective purchases and sales of the Company’s common stock during the Class Period, as evidenced by, among other things, the common stock price decline on or about February 11, 2009, that released the artificial inflation from
DeVry’s common stock.
XVII. COUNT II: FOR VIOLATIONS OF SECTION 20(a) OF THE EXCHANGE ACT AGAINST THE INDIVIDUAL DEFENDANTS
437. Plaintiff repeats and realleges the allegations set forth above as though fully set forth herein. This claim is asserted against the Individual Defendants.
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438. Each of the Individual Defendants acted as a controlling person of DeVry within the
meaning of §20(a) of the Exchange Act as alleged herein. By virtue of their high-level positions
with the Company, participation in and/or awareness of the Company’s operations and/or intimate
knowledge of the Company’s fraudulent financial reporting and actual performance, each of the
Individual Defendants had the power to influence and control and did influence and control, directly
or indirectly, the decision-making of the Company, including the content and dissemination of the
various statements which Plaintiff contends are false and misleading. Each of the Individual
Defendants was provided with or had unlimited access to copies of the Company’s reports, press
releases, public filings and other statements alleged by Plaintiff to be misleading prior to and/or
shortly after these statements were issued and had the ability to prevent the issuance of the
statements or cause the statements to be corrected.
439. In addition, each of the Individual Defendants had direct involvement in the day-to-
day operations of the Company and, therefore, is presumed to have had the power to control or
influence the particular transactions giving rise to the securities violations alleged herein, and
exercised the same.
440. As set forth above, DeVry and the Individual Defendants each violated § 1 0(b) and
Rule 1 0b-5 by their acts and omissions as alleged in this Complaint. By virtue of their controlling positions, each of the Individual Defendants is liable pursuant to §20(a) of the Exchange Act. As a
direct and proximate result of Defendants’ wrongful conduct, Plaintiff and other members of the
Class suffered damages in connection with their purchases of the Company’s common stock during
the Class Period when the artificial inflation was released from DeVry common stock, as detailed
herein.
WHEREFORE, Plaintiff prays for relief and judgment, as follows:
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Determining that this action is a proper class action and designating Plaintiff as class representative under Rule 23 of the Federal Rules of Civil Procedure;
(a) Awarding compensatory damages in favor of Plaintiff and the other Class members against all Defendants, jointly and severally, for all damages sustained as a result of
Defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;
(b) Awarding Plaintiff and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees; and
(c) Such other and further relief as the Court may deem just and proper.
XVIII. JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by jury.
DATED: March 7, 2011 WEXLER WALLACE LLP
s/ Kara A. Elgersma KARA A. ELGERSMA
Kenneth A. Wexler Edward A. Wallace Kara A. Elgersma 55 W. Monroe Street, Suite 3300 Chicago, IL 60603 Telephone 312/346-2222 312/346-0022 (fax) [email protected] [email protected] [email protected]
Liaison Counsel
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ROBBINS GELLER RUDMAN & DOWD LLP David J. George Robert J. Robbins 120 E. Palmetto Park Road, Suite 500 Boca Raton, FL 33432 Telephone: 561/750-3000 561/750-3364 (fax) [email protected] [email protected]
ROBBINS GELLER RUDMAN & DOWD LLP John K. Grant Post Montgomery Center One Montgomery Street, Suite 1800 San Francisco, CA 94104 Telephone: 415/288-4545 415/288-4534 (fax) [email protected]
ROBBINS GELLER RUDMAN & DOWD LLP David W. Hall 655 West Broadway, Suite 1900 San Diego, CA 92101 Telephone: 619/231-1058 619/231-7423 (fax) [email protected]
Lead Counsel for Plaintiff
SUGARMAN & SUSSKIND Robert A. Sugarman Pedro A. Herrera 100 Miracle Mile, Suite 300 Coral Gables, FL 33134 Telephone: 305/529-2801 305/447-8115 (fax) [email protected] [email protected]
Attorneys for Plaintiff
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Table of Contents
DeVry's financial position remained strong as it generated $138.8 million of operating cash flow during the first six months of fiscal year 2009, driven primarily by strong operating results. As of December 31, 2008, cash and short- and long-term investment balances totaled $262.9 million.
As described in Note 8 to the financial statements, DeVry executed sale/leaseback transactions in the first half of fiscal year 2008 which resulted in a loss on the sale of such facilities. The following table illustrates the effects of the loss on the sale of facilities on DeVry's earnings. The non-GAAP disclosure of net income and earnings per share, excluding these items, is not preferable to GAAP net income but is shown as a supplement to such disclosure for comparability to the year-ago period. The following table reconciles these items to the relevant GAAP information (in thousands, except per share data):
For the Six Months Ended December 31, 2008 2007 Net Income $ 77,695 $ 62,648 Earnings per Share (diluted) $ 1.07 $ 0.87 Loss on Sale of Assets (net of tax) -- $ 2,279 Effect on Earnings per Share (diluted) -- $ 0.03 Net Income Excluding the Loss on Sale of Assets (net of tax) $ 77,695 $ 64,927 Earnings per Share Excluding the Loss on Sale of Assets (diluted) $ 1.07 $ 0.90
RESULTS OF OPERATIONS
The following table presents information with respect to the size relative to revenue of each item in the Consolidated Statements of Income for the second quarter and first six months of both the current and prior fiscal year. Percentages may not add because of rounding.
For the Three Months For the Six Months Ended December 31, Ended December 31, 2008 2007 2008 2007
Revenue 100.0% 100.0% 100.0% 100.0% Cost of Educational Services 45.2% 45.3% 45.6% 46.7% Loss on Sale of Assets ------0.7% Student Services & Admin. Exp 37.9% 37.6% 38.2% 37.1% Total Operating Costs and Expenses 83.1% 82.9% 83.8% 84.6% Operating Income 16.9% 17.1% 16.2% 15.4% Interest Income 0.5% 1.1% 0.6% 1.0% Interest Expense (0.3%) (0.0%) (0.2%) (0.1%) Net Investment Loss (0.5%) -- (0.3%) Net Interest and Other (Expense) Income (0.3%) 1.1% 0.1% 0.9% Income Before Income Taxes 16.6% 18.2% 16.3% 16.4% Income Tax Provision 5.0% 5.1% 4.8% 4.4% Net Income 11.6% 13.1% 11.5% 12.0%
REVENUES
Total consolidated revenues for the second quarter of fiscal year 2009 increased 35.0% to $369.6 million versus the prior year quarter. For the first six months of fiscal year 2009, total consolidated revenues increased 28.5% to $673.3 million compared to the same period a year ago. For both the second quarter and first six months of fiscal year 2009, revenues increased at all three of DeVry's business segments as a result of continued growth in student enrollments and tuition price increases as compared to the year ago period. In addition, U.S. Education, which was acquired on September 18, 2008, contributed to the revenue growth in the second quarter and first six months of fiscal year 2009. Revenues also increased because of higher sales of DeVry University electronic course materials and Becker CPA review materials. However, the revenue growth rate for Becker CPA review courses and materials slowed significantly during the first six months of the year due to the economic downturn.
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Devry University
DeVry University segment revenues increased 18.9% to $253.7 million in the second quarter, and rose 18.7% to $484.3 million for the first six months of fiscal 2009 as compared to the year ago periods driven by strong enrollment growth. While DeVry University accounted for the majority of the revenue increase in this segment, revenues at Advanced Academics Inc., which was acquired on October 31, 2007, also contributed to segment revenue growth. DeVry University tuition revenues are the largest component of total revenues in the DeVry University segment. The two principal factors that influence tuition revenues are enrollment and tuition rates. Key trends in these two components are set forth below.
Total undergraduate enrollment by term:
• Increased by 10.3% from spring 2007 (40,637 students) to spring 2008 (44,814 students);
• Increased by 12.6% from summer 2007 (40,774 students) to summer 2008 (45,907 students); and
• Increased by 16.9% from fall 2007 (44,594 students) to fall 2008 (52,146 students). This was DeVry University's ninth consecutive period of positive total undergraduate student enrollment growth.
New undergraduate enrollment by term:
• Increased by 12.1% from spring 2007 (11,075 students) to spring 2008 (12,410 students);
• Increased by 19.3% from summer 2007 (13,906 students) to summer 2008 (16,595 students); and
• Increased by 19.7% from fall 2007 (13,204 students) to fall 2008 (15,811 students). The fall 2008 term was the twelfth consecutive term in which new undergraduate student enrollments increased from the year-ago level.
Total graduate coursetakers by session:
The term "coursetaker" refers to the number of courses taken by a student. Thus, one student taking two courses is counted as two coursetakers.
• Increased by 14.2% from the July 2007 session (14,023 coursetakers) to the July 2008 session (16,017 coursetakers);
• Increased by 12.2% from the September 2007 session (15,857 coursetakers) to the September 2008 session (17,799 coursetakers); and
• Increased by 13.7% from the November 2007 session (15,657 coursetakers) to the November 2008 session (17,803 coursetakers).
Tuition rates:
• Effective July 2008, DeVry University's undergraduate tuition ranges from $515 to $560 per credit hour for students enrolling in 1 to 11 credit hours. Tuition ranges from $310 to $330 per credit hour for each credit hour in excess of 11 credit hours. These tuition rates vary by location and/or program and represent an expected weighted average increase of approximately 4.3% as compared to the summer 2007 term.
• Effective July 2008, DeVry University's graduate program tuition per classroom course (four quarter credit hours) ranges from $1,845 to $2,100, depending on location. This represents an expected weighted average increase of 3.1%. The price for a graduate course taken online is $2,100, compared to $2,050 previously.
Management believes the increased undergraduate student enrollments were most significantly impacted by improved marketing and recruiting efforts, continued strong demand for DeVry University's online programs and a heightened focus on the retention of existing students. Management believes efforts to enhance the Keller Graduate School of Management brand awareness through improved messaging have produced positive graduate enrollment results. Also contributing to higher total revenues in the DeVry University segment was an increase in Other Educational Revenues from sales of educational materials.
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Partly offsetting the increases in revenue from enrollment growth and higher tuition rates was a decline in average course load per student driven by the continued mix shift toward online enrollments and economic conditions.
Medical and Healthcare
Medical and Healthcare segment revenues increased 130.1% to $98.0 million in the second quarter and grew 89.5% to $151.3 million for the first six months of fiscal year 2009 as compared to the year-ago periods. U.S. Education, which was acquired on September 18, 2008, contributed $42.5 million and $48.0 million of revenue growth in the second quarter and first six months of fiscal year 2009, respectively. In addition, increases in student enrollments and tuition rates at both Ross University and the Chamberlain College of Nursing ("Chamberlain") also contributed to segment revenue growth. Key trends for Ross University and Chamberlain in these two components are set forth below.
Ross University total enrollment by term:
• Increased by 7.0% from January 2007 (3,747 students) to January 2008 (4,011 students);
• Increased by 7.9% from May 2007 (3,767 students) to May 2008 (4,064 students); and
• Increased by 8.8% from September 2007 (3,876 students) to September 2008 (4,219 students).
Ross University new student enrollment by term:
• Increased by 11.1% from January 2007 (496 students) to January 2008 (551 students);
• Increased by 15.6% from May 2007 (416 students) to May 2008 (481 students); and
• Increased by 6.3% from September 2007 (572 students) to September 2008 (608 students).
Chamberlain College of Nursing total enrollment by term:
• Increased by 99.0% from July 2007 (1,089 students) to July 2008 (2,167 students).
Tuition rates:
• Effective September 2008, tuition and fees for the beginning basic sciences portion of the programs at Ross University's medical and veterinary schools are $13,650 per semester. This tuition rate represents an increase from September 2007 tuition rates of approximately 5.4%.
• Effective September 2008, tuition and fees for the final clinical portion of the Ross University programs are $15,000 per semester for the medical school, and $17,150 per semester for the veterinary school. These tuition rates represent an increase from September 2007 tuition rates of approximately 5.3% for the medical school and approximately 5.5% for the veterinary school.
• Effective July 2008, Chamberlain tuition is $546 per credit hour. Students enrolled on a full-time basis (between 12 and 17 credit hours) are charged a flat tuition amount of $6,552 per semester. This represents an increase of approximately 5% from July 2007.
Continued demand for medical doctors and veterinarians positively influenced career decisions of new students towards these respective fields of study. Management believes the increasing enrollments at Ross University for the past several terms resulted from enhancements made to its marketing and recruiting functions, as well as steps taken to meet increasing student demand such as adding faculty, classrooms, and a new student center and gymnasium.
The increase in student enrollments at Chamberlain was attributable to its growing RN-to-BSN online completion program and the opening of its Addison, Illinois, and Phoenix campuses in March 2008. These locations are co-located with existing respective DeVry University campuses.
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10-Q 1 forml0q.htm DEVRY INC IOQ 3-31-2009
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
Form 10-Q
(Mark One) E9 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2009
OR
q TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-13988 DeVry Inc. (Exact name of registrant as specified in its charter)
DELAWARE 36-3150143 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
ONE TOWER LANE, SUITE 1000, 60181 OAKBROOK TERRACE, ILLINOIS (Zip Code) (Address ofprincipal executive offices)
Registrant's telephone number; including area code: (630) 571-7700
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes qx No q
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes q No q
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer © Accelerated filer q Non-accelerated filer q (Do not check if a smaller reporting company) Smaller reporting q company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes q No q-
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REVENUES
Total consolidated revenues for the third quarter of fiscal year 2009 increased 34.7% to $391.9 million versus the prior year quarter. For the first nine months of fiscal year 2009, total consolidated revenues increased 30.7% to $1,065.2 million compared to the same period a year ago. For both the third quarter and first nine months of fiscal year 2009, revenues increased at the respective DeVry University and Medical and Healthcare business segments as a result of continued growth in student enrollments and tuition price increases as compared to the year ago period. In addition, U.S. Education, which was acquired on September 18, 2008, contributed to the revenue growth in the third quarter and first nine months of fiscal year 2009. Revenues also increased because of higher sales of DeVry University electronic course materials. The revenue growth rate for Becker CPA review courses and materials slowed significantly during the first nine months of the year due to the economic downturn.
DeVry University
DeVry University segment revenues increased 18.7% to $264.3 million in the third quarter, and rose 18.7% to $748.7 million for the first nine months of fiscal 2009 as compared to the year ago periods driven by strong enrollment growth. While DeVry University accounted for the majority of the revenue increase in this segment, revenues at Advanced Academics Inc. also contributed to segment revenue growth. DeVry University tuition revenues are the largest component of total revenues in the DeVry University segment. The two principal factors that influence tuition revenues are enrollment and tuition rates. Key trends in these two components are set forth below.
Total undergraduate enrollment by term:
• Increased by 12.6% from summer 2007 (40,774 students) to summer 2008 (45,907 students);
• Increased by 16.9% from fall 2007 (44,594 students) to fall 2008 (52,146 students); and
• Increased by 18.8% from spring 2008 (44,814 students) to spring 2009 (53,259 students). This was a record high enrollment at DeVry University and marked the tenth consecutive period of positive total undergraduate student enrollment growth.
New undergraduate enrollment by term:
• Increased by 19.3% from summer 2007 (13,906 students) to summer 2008 (16,595 students);
• Increased by 19.7% from fall 2007 (13,204 students) to fall 2008 (15,811 students); and
• Increased by 15.1% from spring 2008 (12,410 students) to spring 2009 (14,288 students). The spring 2009 term was the thirteenth consecutive term in which new undergraduate student enrollments increased from the year-ago level.
Total graduate coursetakers by session:
The term "coursetaker" refers to the number of courses taken by a student. Thus, one student taking two courses is counted as two coursetakers.
• Increased by 14.2% from the July 2007 session (14,023 coursetakers) to the July 2008 session (16,017 coursetakers);
• Increased by 12.2% from the September 2007 session (15,857 coursetakers) to the September 2008 session (17,799 coursetakers);
• Increased by 13.7% from the November 2007 session (15,657 coursetakers) to the November 2008 session (17,803 coursetakers);
• Increased by 12.1% from the January 2008 session (17,377 coursetakers) to the January 2009 session (19,475 coursetakers); and
• Increased by 13.8% from the March 2008 session (17,005 coursetakers) to the March 2009 session (19,357 coursetakers).
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Tuition rates:
• Effective July 2008, DeVry University's undergraduate tuition ranges from $515 to $560 per credit hour for students enrolling in 1 to 11 credit hours. Tuition ranges from $310 to $330 per credit hour for each credit hour in excess of 11 credit hours. These tuition rates vary by location and/or program and represent an expected weighted average increase of approximately 4.3% as compared to the summer 2007 term.
• Effective July 2008, DeVry University's graduate program tuition per classroom course (four quarter credit hours) ranges from $1,845 to $2,100, depending on location. This represents an expected weighted average increase of 3.1%. The price for a graduate course taken online is $2,100, compared to $2,050 previously.
Management believes the increased undergraduate student enrollments were most significantly impacted by DeVry's strong track record of high-quality education and career outcomes, improved marketing and recruiting efforts, continued strong demand for DeVry University's online programs and a heightened focus on the retention of existing students. Management believes efforts to enhance the Keller Graduate School of Management brand awareness through improved messaging have produced positive graduate enrollment results. Also contributing to higher total revenues in the DeVry University segment was an increase in Other Educational Revenues from sales of educational materials.
Partly offsetting the increases in revenue from enrollment growth and higher tuition rates was a decline in average course load per student driven by the continued mix shift toward online enrollments and economic conditions.
Medical and Healthcare
Medical and Healthcare segment revenues increased 128.9% to $105.0 million in the third quarter and grew 103.9% to $256.3 million for the first nine months of fiscal year 2009 as compared to the year-ago periods. U.S. Education, which was acquired on September 18, 2008, contributed $45.5 million and $93.5 million of revenue growth in the third quarter and first nine months of fiscal year 2009, respectively. In addition, increases in student enrollments and tuition rates at both Ross University and the Chamberlain College of Nursing ("Chamberlain") also contributed to segment revenue growth. Key trends for Ross University, Chamberlain and U.S. Education are set forth below.
Ross University total enrollment by term:
• Increased by 7.9% from May 2007 (3,767 students) to May 2008 (4,064 students);
• Increased by 8.8% from September 2007 (3,876 students) to September 2008 (4,219 students); and
• Increased by 7.8% from January 2008 (4,011 students) to January 2009 (4,323 students).
Ross University new student enrollment by term:
• Increased by 15.6% from May 2007 (416 students) to May 2008 (481 students);
• Increased by 6.3% from September 2007 (572 students) to September 2008 (608 students); and
• Increased by 10.9% from January 2008 (551 students) to January 2009 (611 students).
Chamberlain College of Nursing total enrollment by term:
• Increased by 99.0% from July 2007 (1,089 students) to July 2008 (2,167 students);
• Increased by 116.0% from November 2007 (1,485 students) to November 2008 (3,207 students); and
• Increased by 104.5% from March 2008 (1,820 students) to March 2009 (3,722 students).
Chamberlain College of Nursing new student enrollment by term:
• Increased by 104.7% from July 2007 (364 students) to July 2008 (745 students);
• Increased by 114.6% from November 2007 (635 students) to November 2008 (1,363 students); and http://www.sec.gov/Archives/edgar/data/730464/000114036109011347/form1Oq.htm 3/1/2011 Case: 1:10-cv-07031 Document #: 27-2 Filed: 03/07/11 Page 10 of 56 PageID #:427
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10-K I forml0k.htm DEVRY INC 10-K 6-30-2009
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K
(Mark One)
D ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: June 30, 2009
OR q TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-13988 DeVry Inc. (Exact name of registrant as specified in its charter)
DELAWARE 36-3150143 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
ONE TOWER LANE, SUITE 1000, 60181 OAKBROOK TERRACE, ILLINOIS (Zip Code) (Address of principal executive offices)
Registrant's telephone number; including area code: (630) 571-7700
Securities registered pursuant to section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered: Common Stock $0.01 Par Value NYSE, CSE Common Stock Purchase Rights NYSE
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes 0 No q
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes q No 0
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes 0 No q
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes q No q
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. qIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer 0 Accelerated filer q Non-accelerated filer q (Do not check if a smaller reporting company) Smaller reporting company q
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes q No 0
State the aggregate market value of the voting and non-voting common equity held by nonaffiliates as of the last business day of the Registrant's most recently completed second fiscal quarter computed by reference to the price at which the common equity was last sold. Shares of common stock held directly or controlled by each director and executive officer have been excluded. December 31, 2008 - $4,042,601,161
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. August 17, 2009 — 71,164,789 shares of Common Stock, $0.01 par value
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During the fourth quarter of fiscal year 2009 and in connection with the acquisition of Fanor, DeVry realigned its reporting segments and included a new segment All periods presented in Management's Discussion and Analysis of Financial Condition and Results of Operations have been revised to reflect the segment realignment. The four segments areas follows:
• Business, Technology and Management: previously named DeVry University segment and comprised of DeVry University and Advanced Academics. This segment is now comprised solely of DeVry University. • Medical and Healthcare: comprised of Ross University, Chamberlain College of Nursing and U.S. Education • Professional Education: comprised of Becker Professional Education • Other Educational Services: newly formed segment comprised of Advanced Academics and Fanor
FISCAL YEAR ENDED JUNE 30, 2009 VS. FISCAL YEAR ENDED JUNE 30, 2008
REVENUES
Total consolidated revenues for fiscal 2009 of $1,461.5 million increased $369.6 million, or 33.9%, as compared to last year. Revenues increased at all four of DeVry's business segments as a result of continued growth in total student enrollments, improved student retention and tuition price increases. In addition, U.S. Education, which was acquired on September 18, 2008, and Fanor, which was acquired on April 1, 2009, contributed a total of $150.7 million of revenue growth in fiscal year 2009. The revenue growth rate for Becker Professional Education slowed significantly during fiscal year 2009 due to the economic downturn.
Business, Technologv and Management
During fiscal year 2009, Business, Technology and Management segment revenues increased by 18.8% to $989.5 million as compared to fiscal year 2008 driven primarily by strong enrollment growth. The Business, Technology and Management segment is comprised solely of DeVry University. The two principal factors that influence revenues are enrollment and tuition rates. Key trends in these two components are set forth below.
Total undergraduate enrollment by term:
• Increased by 12.6% from summer 2007 (40,774 students) to summer 2008 (45,907 students);
• Increased by 16.9% from fall 2007 (44,594 students) to fall 2008 (52,146 students);
• Increased by 18.8% from spring 2008 (44,814 students) to spring 2009 (53,259 students); and
• Increased by 21.9% from summer 2008 (45,907 students) to summer 2009 (55,979 students). This was a record high enrollment at DeVry University and marked the eleventh consecutive term of positive total undergraduate student enrollment growth from the year-ago level.
New undergraduate enrollment by term:
• Increased by 19.3% from summer 2007 (13,906 students) to summer 2008 (16,595 students);
• Increased by 19.7% from fall 2007 (13,204 students) to fall 2008 (15,811 students);
• Increased by 15.1% from spring 2008 (12,410 students) to spring 2009 (14,288 students); and
• Increased by 14.8% from summer 2008 (16,595 students) to summer 2009 (19,057 students). The summer 2009 term was the fourteenth consecutive tern in which new undergraduate student enrollments increased from the year-ago level.
Graduate coursetaker enrollment, including the Keller Graduate School of Management:
The term "coursetaker" refers to the number of courses taken by a student. Thus, one student taking two courses is counted as two coursetakers.
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• Increased by 14.2% from the July 2007 session (14,023 coursetakers) to the July 2008 session (16,017 coursetakers);
• Increased by 12.2% from the September 2007 session (15,857 coursetakers) to the September 2008 session (17,799 coursetakers);
• Increased by 13.7% from the November 2007 session (15,657 coursetakers) to the November 2008 session (17,803 coursetakers);
• Increased by 12.1% from the January 2008 session (17,377 coursetakers) to the January 2009 session (19,475 coursetakers);
• Increased by 13.8% from the March 2008 session (17,005 coursetakers) to the March 2009 session (19,357 coursetakers);
• Increased by 13.8% from the May 2008 session (16,537 coursetakers) to the May 2009 session (18,822 coursetakers); and
• Increased by 12.3% from the July 2008 session (16,017 coursetakers) to the July 2009 session (17,991 coursetakers).
Tuition rates:
• Undergraduate program tuition increased by approximately 4.3% in July 2008 as compared to the prior year; and
• Graduate school program tuition increased by approximately 3.1% in July 2008 as compared to the prior year.
Management believes the increased undergraduate student enrollments were most significantly impacted by DeVry's strong track record of high-quality education and career outcomes, improved marketing and recruiting efforts, continued strong demand for DeVry University's online programs and a heightened focus on the retention of existing students. Management believes efforts to enhance the Keller Graduate School of Management brand awareness through improved messaging have produced positive graduate enrollment results. In addition, management believes that the economic downturn has had a small, but positive, impact on enrollments, as individuals have returned to post-secondary education for job re-tooling. Also contributing to higher total revenues in the DeVry University segment was an increase in Other Educational Revenues from sales of educational materials.
Partly offsetting the increases in revenue from enrollment growth and higher tuition rates was a decline in average course load per student driven by the continued mix shift toward online enrollments and economic conditions.
Medical and Healthcare
Medical and Healthcare segment revenues increased 113.6% to $362.7 million in fiscal year 2009 as compared to the prior year. U.S. Education, which was acquired on September 18, 2008, contributed $141.7 of revenue growth in fiscal year 2009. Excluding the impact of the acquisition, fiscal year 2009 segment revenues grew 30.1 % over the prior year. In addition, increases in student enrollments and tuition rates at both Ross University and Chamberlain College of Nursing ("Chamberlain") also contributed to segment revenue growth. Key trends for Ross University, Chamberlain and U.S. Education are set forth below.
Ross University total enrollment by term:
• Increased by 7.9% from May 2007 (3,767 students) to May 2008 (4,064 students);
• Increased by 8.8% from September 2007 (3,876 students) to September 2008 (4,219 students);
• Increased by 7.8% from January 2008 (4,011 students) to January 2009 (4,323 students); and
• Increased by 9.4% from May 2008 (4,064 students) to May 2009 (4,448 students).
Ross University new student enrollment by term:
• Increased by 15.6% from May 2007 (416 students) to May 2008 (481 students);
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10-Q 1 a6091608.htm DEVRY INC. 10-Q i UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
Form 10-Q
(Mark One)
0 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2009
OR
q TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-13988 DeVry Inc. (Exact name of registrant as specified in its charter)
DELAWARE 36-3150143 (State or otherjurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
ONE TOWER LANE, SUITE 1000, 60181 OAKBROOK TERRACE, ILLINOIS (Zip Code) (Address of principal executive offices)
Registrant's telephone number; including area code: (630) 571-7700
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 0 No q
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes q No q
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer 0 Accelerated filer q Non-accelerated filer q (Do not check if a smaller reporting Smaller reporting company q company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes q No 0
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: October 30, 2009 — 71,029,883 shares of Common Stock, $0.01 par value
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. DeVry's financial position remained strong generating $177.2 million of operating cash flow during the first quarter of fiscal year 2010, driven primarily by strong operating results and working capital improvements. As of September 30, 2009, cash, marketable securities and investment balances totaled $340.5 million and outstanding borrowings were $104.8 million.
RESULTS OF OPERATIONS
The following table presents information with respect to the relative size to revenue of each item in the Consolidated Statements of Income for the first three months of both the current and prior fiscal year. Percentages may not add because of rounding.
For the Three Months Ended September 30, 2009 2008
Revenue 100.0% 100.0% Cost of Educational Services 45.6% 46.0% Student Services and Administrative Expense 36.0% 38.6% Total Operating Costs and Expenses 81.6% 84.6% Operating Income 18.4% 15.4% Interest Income 0.1% 0.7% Interest Expense (0.1%) (0.1%) Net Investment Gain 0.2% Net Interest and Other (Expense) Income 0.2% 0.6% Income Before Income Taxes 18.6% 16.0% Income Tax Provision 6.0% 4.5% Net Income 12.7% 11.5% Add: Net Loss Attributable to Noncontrolling Interest 0.0 Net Income Attributable to DeVry Inc. 12.7% 11.5%
REVENUES
Total consolidated revenues for the first quarter of fiscal year 2010 of $431.1 million increased $127.4 million, or 41.9%, as compared to the year-ago quarter. Revenues increased at DeVry's respective Business, Technology and Management; Medical and Healthcare; and Other Educational Services segments as a result of continued growth in total student enrollments, improved student retention and tuition price increases. In addition, U.S. Education, which was acquired on September 18, 2008, and Fanor, which was acquired on April 1, 2009, contributed to the revenue growth in the first quarter of fiscal year 2010. Professional Education segment revenues declined during the quarter due to the impact of the economic downturn on the accounting and finance professions.
Business, Technology and Management
During first quarter of fiscal year 2010, Business, Technology and Management segment revenues increased by 23.9% to $283.5 million as compared to the year-ago quarter driven primarily by strong enrollment growth and improved retention. The Business, Technology and Management segment is comprised solely of DeVry University. The two principal factors that influence revenues are enrollment and tuition rates. Key trends in these two components are set forth below.
Total undergraduate enrollment by term:
• Increased by 16.9% from fall 2007 (44,594 students) to fall 2008 (52,146 students);
• Increased by 18.8% from spring 2008 (44,814 students) to spring 2009 (53,259 students); and
• Increased by 21.9% from summer 2008 (45,907 students) to summer 2009 (55,979 students). This was a record high enrollment at DeVry University and marked the eleventh consecutive term of positive total undergraduate student enrollment growth from the year-ago level.
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New undergraduate enrollment by term:
• Increased by 19.7% from fall 2007 (13,204 students) to fall 2008 (15,811 students);
• Increased by 15.1% from spring 2008 (12,410 students) to spring 2009 (14,288 students); and
• Increased by 14.8% from summer 2008 (16,595 students) to summer 2009 (19,057 students). The summer 2009 term was the fourteenth consecutive term in which new undergraduate student enrollments increased from the year-ago level.
Graduate coursetaker enrollment, including the Keller Graduate School of Management:
The tern "coursetaker" refers to the number of courses taken by a student. Thus, one student taking two courses is counted as two coursetakers.
• Increased by 12.3% from the July 2008 session (16,017 coursetakers) to the July 2009 session (17,991 coursetakers); and
• Increased by 15.2% from the September 2008 session (17,799 coursetakers) to the September 2009 session (20,496 coursetakers).
Tuition rates:
• Effective July 2009, DeVry University's U.S. undergraduate tuition ranges from $550 to $595 per credit hour for students enrolling in 1 to 11 credit hours. Tuition ranges from $330 to $355 per credit hour for each credit hour in excess of 11 credit hours. These tuition rates vary by location and/or program and represent an expected weighted average increase of approximately 6.6% as compared to the summer 2008 term. However, effective with the summer 2009 term, DeVry University consolidated several of its student fees including graduation, transcript, technology and student activity fees into a lesser student services charge. The effective weighted average tuition increase was approximately 5.5% when the fee reduction is taken into account.
• Effective July 2009, Keller Graduate School of Management program tuition per classroom course (four quarter credit hours) ranges from $1,995 to $2,200, depending on location. This represents an expected weighted average increase of 4.6%. The price for a graduate course taken online is $2,200, compared to $2,100 previously.
Management believes the increased undergraduate student enrollments were most significantly impacted by DeVry's strong track record of high- quality education and career outcomes, continued strong demand for DeVry University's online programs and improved retention of existing students. Management believes efforts to enhance the Keller Graduate School of Management brand awareness through improved messaging have produced positive graduate enrollment results. In addition, management believes that the economic downturn has had a small, but positive, impact on enrollments, as individuals have returned to post-secondary education for job re-tooling. Also contributing to higher total revenues in the DeVry University segment was an increase in Other Educational Revenues from sales of educational materials.
Medical and Healthcare
Medical and Healthcare segment revenues increased 119.9% to $117.2 million in the first quarter of fiscal year 2010 as compared to the year-ago quarter. U.S. Education, which was acquired on September 18, 2008, contributed $47.0 million of revenue growth in the current year quarter. In addition, increases in student enrollments and tuition rates at both Ross University and Chamberlain College of Nursing ("Chamberlain") also contributed to segment revenue growth. Key trends for Ross University, Chamberlain and U.S. Education are set forth below.
Ross University total enrollment by term:
• Increased by 7.8% from January 2008 (4,011 students) to January 2009 (4,323 students);
• Increased by 9.4% from May 2008 (4,064 students) to May 2009 (4,448 students); and
• Increased by 9.1% from September 2008 (4,219 students) to September 2009 (4,601 students).
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10-Q 1 a6166955.htm DEVRY INC. 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
Form 10-Q
(Mark One)
0 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 2009
OR
q TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-13988 DeVry Inc. (Exact name of registrant as specified in its charter)
DELAWARE 36-3150143 (State or otherjurisdiction of aR.S. Employer incorporation or organization) Identification No.)
3005 HIGHLAND PARKWAY 60515 DOWNERS GROVE, ILLINOIS (Zip Code) (Address of principal executive offices)
Registrant's telephone number; including area code: (630)515-7700
ONE TOWER LANE, SUITE 1000 60181 OAKBROOK TERRACE, ILLINOIS (Zip Code) (Former Address of principal executive offices, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 0 No q Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes q No q Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer 0 Accelerated filer q of check if a smaller reporting Smallleerr reporting Non-accelerated filer Ompancompany q
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes q No 0 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: January 31, 2010 — 71,163,768 shares of Common Stock, $0.01 par value
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RESULTS OF OPERATIONS
The following table presents information with respect to the relative size to revenue of each item in the Consolidated Statements of Income for the second quarter and first six months of both the current and prior fiscal year. Percentages may not add because of rounding. For the Three Months For the Six Months Ended December 31, Ended December 31, 2009 2008 2009 2008
Revenue 100.0% 100.0% 100.0% 100.0% Cost of Educational Services 42.3% 45.2% 43.8% 45.6% Student Services and Administrative Expense 34.7% 37.9% 35.3% 38.2% Total Operating Costs and Expenses 77.0% 83.1% 79.2% 83.8% Operating Income 23.0% 16.9% 20.8% 16.2% Interest Income 0.1% 0.5% 0.1% 0.6% Interest Expense (0.1%) (0.3%) (0.1%) (0.2%) Net Investment Gain (Loss) 0.1% (0.5%) 0.1% (0.3%) Net Interest and Other (Expense) Income 0.1% (0.30/.) 0.1% 0.1% Income Before Income Taxes 23.1% 16.6% 21.0% 16.3% Income Tax Provision 7.8% 5.0% 6.9% 4.8% Net Income 15.3% 11.6% 14.1% 11.5% Add: Net Loss Attributable to Noncontrolling Interest 0.0% 0.0% Net Income Attributable to DeVry Inc. 15.3% 11.6% 14.1% 11.5%
REVENUES
Total consolidated revenues for the second quarter of fiscal year 2010 of $473.0 million increased $103.4 million, or 28.0%, as compared to the year- ago quarter. For the first six months of fiscal year 2010, total consolidated revenues increased 34.3% to $904.1 million compared to the same period a year- ago. For both the second quarter and first six months of fiscal year 2010, revenues increased at DeVry's respective Business, Technology and Management; Medical and Healthcare; and Other Educational Services segments as a result of continued growth in total student enrollments, improved student retention and tuition price increases. In addition, U.S. Education, which was acquired on September 18, 2008, and Fanor (DeVry Brasil), which was acquired on April 1, 2009, contributed to the revenue growth in the first six months of fiscal year 2010. Professional Education segment revenues declined during both the second quarter and first six months of fiscal year 2010 due to the impact of the economic downturn on the accounting and finance professions.
Business, Technologv and Management
Business, Technology and Management segment revenues increased 25.6% to $313.3 million in the second quarter and rose 24.8% to $596.8 million for the first six months of fiscal year 2010 as compared to the year-ago periods driven primarily by strong enrollment growth, improved retention and tuition price increases. The Business, Technology and Management segment is comprised solely of DeVry University. The two principal factors that influence revenues are enrollment and tuition rates. Key trends in these two components are set forth below.
26
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Total undergraduate enrollment by term:
• Increased by 18.8% from spring 2008 (44,814 students) to spring 2009 (53,259 students);
• Increased by 21.9% from summer 2008 (45,907 students) to summer 2009 (55,979 students); and
• Increased by 22.7% from fall 2008 (52,146 students) to fall 2009 (64,003 students). This was a record high enrollment at DeVry University and marked the twelfth consecutive term of positive total undergraduate student enrollment growth from the year-ago level.
New undergraduate enrollment by term:
• Increased by 15.1%from spring 2008 (12,410 students) to spring 2009 (14,288 students);
• Increased by 14.8% from summer 2008 (16,595 students) to summer 2009 (19,057 students); and
• Increased by 19.4% from fall 2008 (15,811 students) to fall 2009 (18,878 students); The fall 2009 term was the fifteenth consecutive term in which new undergraduate student enrollments increased from the year-ago level.
Graduate coursetaker enrollment, including the Keller Graduate School of Management:
The term "coursetaker" refers to the number of courses taken by a student. Thus, one student taking two courses is counted as two coursetakers.
• Increased by 12.3% from the July 2008 session (16,017 coursetakers) to the July 2009 session (17,991 coursetakers);
• Increased by 15.2% from the September 2008 session (17,799 coursetakers) to the September 2009 session (20,496 coursetakers); and
• Increased by 16.5% from the November 2008 session (17,803 coursetakers) to the November 2009 session (20,734 coursetakers).
Tuition rates:
• Effective July 2009, DeVry University's U.S. undergraduate tuition ranges from $550 to $595 per credit hour for students enrolling in 1 to 11 credit hours. Tuition ranges from $330 to $355 per credit hour for each credit hour in excess of 11 credit hours. These tuition rates vary by location and/or program and represent an expected weighted average increase of approximately 6.6% as compared to the summer 2008 term. However, effective with the summer 2009 term, DeVry University consolidated several of its student fees including graduation, transcript, technology and student activity fees into a lesser student services charge. The effective weighted average tuition increase was approximately 5.5% when the fee reduction is taken into account.
• Effective July 2009, Keller Graduate School of Management program tuition per classroom course (four quarter credit hours) ranges from $1,995 to $2,200, depending on location. This represents an expected weighted average increase of 4.6%. The price for a graduate course taken online is $2,200, compared to $2,100 previously.
Management believes the increased undergraduate student enrollments were most significantly impacted by DeVry's strong track record of high- quality education and academic outcomes, continued strong demand for DeVry University's online programs and improved retention of existing students. Management believes efforts to enhance the Keller Graduate School of Management brand awareness through improved messaging have produced positive graduate enrollment results. In addition, management believes that the economic downturn has had a small, but positive, impact on enrollments, as individuals have returned to post-secondary education for job re-tooling.
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10-Q 1 form 1Oq.htm DEVRY INC IOQ 3-31-2010
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
Form 10-Q
(Mark One) t] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2010
OR
q TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-13988 DeVry Inc. (Exact name of registrant as specified in its charter)
DELAWARE 36-3150143 (State or other jurisdiction of incorporation or organization) (I. R. S. Employer Identification No)
3005 HIGHLAND PARKWAY 60515 DOWNERS GROVE, ILLINOIS (Zip Code) (Address of principal executive offices)
Registrant's telephone number; including area code: (630) 515-7700
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Z No q
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes q No q
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the defmitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer 0 Accelerated filer q Non-accelerated filer q (Do not check if a smaller reporting company) Smaller reporting q company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes q No qx
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: April 30, 2010 — 71,236,612 shares of Common Stock, $0.01 par value
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Table of Contents
RESULTS OF OPERATIONS
The following table presents information with respect to the relative size to revenue of each item in the Consolidated Statements of Income for the third quarter and first nine months of both the current and prior fiscal year. Percentages may not add because of rounding.
For the Three Months For the Nine Months Ended March 31, Ended March 31, 2010 2009 2010 2009
Revenue 100.0% 100.0% 100.0% 100.0% Cost of Educational Services 42.5% 45.5% 43.4% 45.5% Loss on Real Estate Transactions -- 1.0% -- 0.4% Student Services and Administrative Expense 33.3% 35.2% 34.6% 37.1% Total Operating Costs and Expenses 75.8% 81.7% 78.0% 83.0% Operating Income 241% 18.3% 22.0% 17.0% Interest Income 0.1% 0.2% 0.1% 0.4% Interest Expense (0.1%) (0.1%) (0.1%) (0.2%) Net Investment Gain (Loss) 0.0% 0.2% 0.1% (0.1%) Net Interest and Other (Expense) Income 0.0% 0.3% 0.1% 0.2% Income Before Income Taxes 272% 18.6% 22.1% 17.2% Income Tax Provision 8.2% 5.7% 7.4% 5.1% Net Income 16.0% 13.0% 14.8% 12.1% Add: Net Loss Attributable to Noncontrolling Interest 0.0% -- 0.0% Net Income Attributable to DeVry Inc. 16.1% 13.0% 14.8% 12.1%
REVENUES
Total consolidated revenues for the third quarter of fiscal year 2010 of $504.4 million increased $112.5 million, or 28.7%, as compared to the year-ago quarter. For the first nine months of fiscal year 2010, total consolidated revenues increased 32.2% to $1,408.5 million compared to the same period a year-ago. For both the third quarter and first nine months of fiscal year 2010, revenues increased at DeVry's respective Business, Technology and Management; Medical and Healthcare; and Other Educational Services segments as a result of continued growth in total student enrollments, improved student retention and tuition price increases. In addition, U.S. Education, which was acquired on September 18, 2008, and Fanor (DeVry Brasil), which was acquired on April 1, 2009, contributed to the revenue growth in the first nine months of fiscal year 2010. Professional Education segment revenues increased slightly during third quarter, but declined in the first nine months of fiscal year 2010 due to the impact of the economic downturn on the accounting and finance professions.
Business, Technology and Manazement
Business, Technology and Management segment revenues increased 28.6% to $334.6 million in the third quarter and rose 26.1 % to $931.4 million for the first nine months of fiscal year 2010 as compared to the year-ago periods driven primarily by strong enrollment growth, improved retention and tuition price increases. The Business, Technology and Management segment is comprised solely of DeVry University. The two principal factors that influence revenues are enrollment and tuition rates. Key trends in these two components are set forth below.
Total undergraduate enrollment by term:
• Increased by 21.9% from summer 2008 (45,907 students) to summer 2009 (55,979 students);
• Increased by 22.7% from fall 2008 (52,146 students) to fall 2009 (64,003 students); and
• Increased by 25.6% from spring 2009 (53,259 students) to spring 2010 (66,909 students). This was a record high enrollment at DeVry University and marked the thirteenth consecutive term of positive total undergraduate student enrollment growth from the year-ago level.
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Table of Contents
New undergraduate enrollment by term:
• Increased by 14.8% from summer 2008 (16,595 students) to summer 2009 (19,057 students);
• Increased by 19.4% from fall 2008 (15,811 students) to fall 2009 (18,878 students); and
• Increased by 24.0% from spring 2009 (14,288 students) to spring 2010 (17,715 students) The spring 2010 term was the sixteenth consecutive term in which new undergraduate student enrollments increased from the year-ago level.
Graduate coursetaker enrollment, including the Keller Graduate School of Management:
The term "coursetaker" refers to the number of courses taken by a student. Thus, one student taking two courses is counted as two coursetakers.
• Increased by 12.3% from the July 2008 session (16,017 coursetakers) to the July 2009 session (17,991 coursetakers);
• Increased by 15.2% from the September 2008 session (17,799 coursetakers) to the September 2009 session (20,496 coursetakers);
• Increased by 16.5% from the November 2008 session (17,803 coursetakers) to the November 2009 session (20,734 coursetakers);
• Increased by 16.5% from the January 2009 session (19,475 coursetakers) to the January 2010 session (22,679 coursetakers); and
• Increased by 15.4% from the March 2009 session (19,357 coursetakers) to the March 2010 session (22,343 coursetakers).
Tuition rates:
• Effective July 2009, DeVry University's U.S. undergraduate tuition ranges from $550 to $595 per credit hour for students enrolling in 1 to 11 credit hours. Tuition ranges from $330 to $355 per credit hour for each credit hour in excess of 11 credit hours. These tuition rates vary by location and/or program and represent an expected weighted average increase of approximately 6.6% as compared to the summer 2008 term. However, effective with the summer 2009 term, DeVry University consolidated several of its student fees including graduation, transcript, technology and student activity fees into a lesser student services charge. The effective weighted average tuition increase was approximately 5.5% when the fee reduction is taken into account.
• Effective July 2009, Keller Graduate School of Management program tuition per classroom course (four quarter credit hours) ranges from $1,995 to $2,200, depending on location. This represents an expected weighted average increase of 4.6%. The price for a graduate course taken online is $2,200, compared to $2,100 previously.
Management believes the increased undergraduate student enrollments were most significantly impacted by DeVry's strong track record of high-quality education and academic outcomes, continued strong demand for DeVry University's online programs and improved retention of existing students. Management believes efforts to enhance the Keller Graduate School of Management brand awareness through improved messaging have produced positive graduate enrollment results. In addition, management believes that the economic downturn has had a small, but positive, impact on enrollments, as individuals have returned to post-secondary education for job re-tooling.
Medical and Healthcare
Medical and Healthcare segment revenues increased 26.3% to $132.6 million in the third quarter and grew 46.6% to $375.6 million for the first nine months of fiscal year 2010 as compared to the year-ago periods. Higher student enrollments and tuition price increases at Ross University, Chamberlain College of Nursing ("Chamberlain") and U.S. Education contributed to the segment revenue growth. In addition, U.S. Education, which was acquired on September 18, 2008, contributed $64.0 million of revenue growth in the first nine months of fiscal year 2010. Key trends for Ross University, Chamberlain and U.S. Education are set forth below.
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EX-99.1 2 a6361777ex99-l.htm EXHIBIT 99.1 Exhibit 99.1
Questions for the Record for Sharon Thomas Parrott
Senate Committee on Health, Education, Labor and Pensions June 24, 2010 hearing "Emerging Risk?: An Overview of the Federal Investment in For-Profit Education"
Questions from Chairman Tom Harkin:
During the course of your testimony you volunteered that the Department of Education tracks student retention from one September to the next, i.e. that schools must report the number of the students enrolled in one September, and the following September must report how many of those remain enrolled, have graduated or completed a program, and how many have dropped out. You suggested that this data set accurately captures the number of students who withdraw from for profit colleges like DeVry and would be able to explain what is happening to the students indicated in green on the chart below:
Over 500,000 Students Departed Schools
School#1
School#5
School#4 1
School#6
0 100 200 300 400 500
Students (thousands)
Beginning Enrollment sNevkStudents M Departed Students n Ending EnFOUlrnent
Source: School 1, School 4, School 5, School 6 FY2009 annual filings with the Securities Exchange Commission. Departed students are calculated by adding beginning enrollment to new students and subtracting ending enrollment.
1. Isn't it correct that, contrary to your testimony, all students who have attended another post-secondary institution are excluded from this data set?
The Integrated Postsecondary Education Data System (IPEDS) retention rate is the percentage of first-time, bachelor-seeking students in the previous fall semester who are enrolled in the current fall semester.
The IPEDS retention rate does indeed exclude those who have attended another postsecondary institution as well as those seeking a degree other than a bachelor's.
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For further discussion of IPEDS retention rates, please see my response to Question 5.
My testimony was in reference to the undergraduate withdrawal rate furnished to compliance auditors as part of the annual Title IV audit required by the Department of Education for DeVry University and Chamberlain College of Nursing. The rate is calculated as the percentage of students enrolled at the start of the fall semester that had not graduated and were not enrolled the end of the following spring semester. It encompasses all undergraduate students, not just those who were first-time-to-college.
For Apollo College and Western Career College, the rate is calculated as the percentage of those enrolled between July 1 St and June 301h who withdrew for the remainder of the year.
The withdrawal rates provided as part of the Fiscal Year (FY) 2009 Title IV audit are as follows:
• Apollo College: 12-17% (across locations) • Chamberlain College of Nursing: 14% • DeVry University: 21% • Western Career College: 19.9%
Although it is not reported as such, the inverse of the withdrawal rate can be thought of as a retention measure. That is, fall through spring retention rates for DeVry University and Chamberlain College of Nursing were 79% and 86%, respectively. For Apollo College and Western Career College the retention rates were 83-88% (across locations) and 79%, respectively.
2. Isn't it also true that any student who enrolls in a school outside the September window is not captured by this data set unless they remain at the school until the following September?
No. Please see my response to Question 1. I referenced the Title IV audit withdrawal rate, which is a fall through spring measure. You may have been referring to the IPEDS retention rate, which is a fall-to-fall measure and is discussed in my response to Question 5.
3. Is it correct to say that large numbers of students attending schools owned and operated by DeVry enroll throughout the year, not just in the Fall?
Yes. Unlike typical traditional institutions that admit students once a year in the fall, DeVry University and Chamberlain College of Nursing accept new students in summer, fall and spring semesters throughout the year. Apollo College and Western Career College accept students on a rolling calendar throughout the year as well.
An increasing number of all college students are "non-traditional," including older, working adult students. Multiple start dates, along with evening/weekend programs and online courses are some of the ways we try to serve this growing need.
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4. For the year beginning September 1, 2008 and ending September 1, 2009 could you please provide the following information:
Although the September to September academic year in your question is a typical period for traditional institutions, it is not reflective of our academic calendar. DeVry's institutions operate on an academic calendar beginning July 1St and ending June 30t".
a. The total number of students enrolled in the 6 schools operated by DeVry on September 1, 2008.
Four of DeVry's schools have undergraduate enrollment and provide the proper context for the retention rates in the 2008-2009 IPEDs Fall Enrollment Survey.
Ross University and DeVry University's Keller Graduate School of Management are not included because neither admits students at the undergraduate level.
Below are the fall 2008 undergraduate enrollments as reported in the 2008-09 IPEDS Fall Enrollment Survey.
• Apollo College: 6,884 • Chamberlain College of Nursing: 3,203 • DeVry University (U.S.): 48,166 • Western Career College: 6,001
For Chamberlain College of Nursing and DeVry University, the fall 2008 semester began on October 27, 2008. The official census date was November 24, 2008. For Apollo College and Western Career College, the official fall reporting period began August 01, 2008 and ended October 31, 2008.
b. The number of those enrolled who were not first-time students?
Although the September to September academic year in your question is a typical period for traditional institutions, it is not reflective of our academic calendar. DeVry's institutions operate on an academic calendar beginning July 1 St and ending June 300'.
Of those undergraduate students counted in 4(a), the number who were not first-time degree/certificate-seeking is provided below, as reported in the 2008-09 IPEDS Fall Enrollment Survey.
• Apollo College: 5,038 • Chamberlain College of Nursing: 3,158 • DeVry University (U.S.): 39,560 • Western Career College: 4,485
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c. The number of students who enrolled between October 1, 2008 and August 1, 2009?
Although the September to September academic year in your question is a typical period for traditional institutions, it is not reflective of our academic calendar. DeVry's institutions operate on an academic calendar beginning July 1 St and ending June V11.
Below are the 2008-09 undergraduate headcounts for each institution, as reported in the 2009-10 IPEDS 12- month Enrollment Survey.
Apollo College: 12,818 Chamberlain College of Nursing: 5,701 DeVry University: 85,931 • Western Career College: 9,601
d. The number of students who enrolled between October 1, 2008 and August 1, 2009 but were no longer enrolled in September 2009?
Of those undergraduate students counted in 4(c), the number who had not graduated and were not enrolled in summer 2009 is provided below for DeVry University and Chamberlain College of Nursing. Because the requested data is not publicly available and has not been compiled in this manner before, our team is still conducting the analysis for Apollo College and Western Career College. We would like to provide the most accurate information possible, so with your permission we will follow up with the data for these two schools with our submission next week.
• Apollo College: data forthcoming • Chamberlain College of Nursing: 1,436 • DeVry University (U.S.): 33,745 • Western Career College: data forthcoming
5. With regard to the DeVry College of New York, the school reported that for the September 2007 to September 2008 period the retention rate for that particular campus was 30% for full-time students and 14% for part-time students. Do you believe that these numbers are consistent with the retention rates of schools described in the chart above? Why or why not? Do you believe the numbers for DeVry New York accurately reflect the retention rate of DeVry overall, and if not why not?
In New York, DeVry University operates as DeVry College of New York. The full-time retention rate for this location was 30% for full-time students and 14% for part-time students, as reported in the 2008-09 IPEDS Fall Enrollment Survey. In other words, 30% of first-time, bachelor-seeking students attending full-time at DeVry College of New York in fall 2007 were enrolled in fall 2008 (14% for those attending first-time, part-time in fall 2007).
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To provide context, the first-time bachelor-seeking cohort for the IPEDS retention rate covered only 54% of all new undergraduate students enrolled at DeVry College of New York in fall 2007.
But setting aside the limitations of the IPEDS measure, the retention rate for DeVry College of New York is not representative of DeVry University as a whole. Nationwide the first-time, full-time, bachelor-seeking student retention rate was 44% and the first-time, part-time bachelor-seeking student retention rate was 31%. Other examples include DeVry University-Ohio with a 50% first-time full-time bachelor-seeking student retention rate and a 31% first-time, part-time, bachelor-seeking student retention rate and DeVry University-California with a 53% first-time, full-time bachelor-seeking student retention rate and a 30% first-time, part-time bachelor-seeking student retention rate.
The first-time bachelor-seeking context applicable to DeVry College of New York is also applicable to DeVry University-California and DeVry University-Ohio. The first-time bachelor-seeking retention rate cohort covered only 47% of new undergraduates in fall 2007 at DeVry University-California and only 41% at DeVry University- Ohio. For DeVry University nationwide the first-time bachelor-seeking retention rate cohort accounted for only 38% of new undergraduates in fall 2007.
Additionally, I believe that in measuring colleges and universities, it is important to compare like institutions based on student profile and risk factors.
I am unable to speak to the retention rates in the provided chart because the institutions are not identified and do not appear to include any DeVry schools. Additionally, it is difficult for me to decipher a retention rate from the chart without knowing factors such as the length of the programs at the schools. If, for example, those schools have programs of less than one year, then the "departed students" may be graduates, rather than drop-outs. In any case, I would be very happy to meet with you or your staff to provide more information and analysis — it may be easier to clarify these questions in a meeting.
6. In your testimony you stated that DeVry spends 14% of revenues on advertising. Could you please also state, in similar percentage terms, how much DeVry spends on the following:
a. Direct recruiting (salary and costs of admissions representatives and managers); b. Marketing and Outreach Total including breakdown of: i. Advertising (television, radio, print, billboard and internet) ii. Telemarketing iii. Direct mail iv. Other promotional efforts
As stated in our Form 10-K filing (Attachment 1), DeVry Inc. advertising expense for the fiscal year ended June 30, 2009 was $179.4 million as compared to $669.7 million spent on educational services. Advertising expense represented 12.3% of total revenues of $1,461.5 million versus 45.8% for educational services. Advertising expense represents about 14.6% and educational services represent about 54.6% of total operating costs and expenses of $1,226.6 million.
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DeVry spent about $670 million on educational services, approximately 370% of the amount spent on advertising.
As a publically held organization DeVry discloses the financial information noted above in regular filing with the Securities and Exchange Commission (SEC). DeVry does not publicly disclose more specific details concerning operating costs for competitive reasons. If the Committee requires additional details, we would be happy to discuss how to provide them to you and your staff.
7. In your testimony you stated that the 54 percent of revenues that DeVry spends on education services is slightly higher than the amount spent by not-for profit or public schools. Please explain your methodology for this assertion and provide concrete examples to support it?
DeVry's educational services are 54.6% of total costs. Please allow me to clarify one point of potential confusion. At the hearing you mentioned that DeVry's educational services accounted for 54 % of costs rather than revenues, while in this question you mentioned it as a percent of revenues. The available comparisons are in terms of percent of costs, and I will proceed on that basis.
The benchmark for the comparison was from table 362 from the Depai linent of Education's 2009 Digest of Education Statistics (Attachment 2). The report on expenditures of public institutions shows the following percentage distribution on instructional costs:
Table One Calculation of Total Instructional Costs (as a % of Total Costs) Selected data from table 362
Total Academic Student Institutional Instructional Total Support Services Support Cost 2003-04 27.68% 6.64% 4.60% 8.22% 47.13% 2004-05 27.65% 6.61% 4.65% 8.09% 47.00% 2005-06 27.80% 6.75% 4.69% 8.18% 47.43% 2006-07 28.13% 6.83% 4.76% 8.36% 48.08%
Table 364 and 366 (Attachments 3 and 4) of the same digest provides information for private not-for profit/independent colleges and private for-profit/private sectors schools respectively. Weighting for enrollment, the expenditure allocation for education services for all publics and not-for-profits averages less than 52%.
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8. Information reported to the U.S. Department of Education is that the University of Northern Iowa, with 2008 enrollment of 12,098, spent 37.5% of its core expenses on instruction and 11.4% percent on academic support. DeVry University -- Illinois with enrollment of 19,417 reported 18.3 percent spending on instruction and 82.7% on academic support. Do you believe that DeVry typically spends more on instruction than public universities such as the University of Northern Iowa or comparable schools?
DeVry University's instructional expenditures are typically similar to comparable four- year public institutions. DeVry University-Illinois is not representative of DeVry University overall. The other 25 DeVry University locations had higher percentages more in line with like-type public institutions in the states in which we operate. The average was 30%. One reason DeVry University-Illinois appears to be lower is that online students and online expenses nationwide are reported at that IPEDS location.
DeVry University's instructional expenditures as a percentage of core expenditures are similar to comparable four- year public institutions. Table Two provides examples for seven of DeVry University's IPEDS locations.
Table Two
Instruction as a percentage Institution of core expenses, 2007-08 DeVry College of New York 29% Stony Brook University 34% DeVry University-California 30% California State University-Fresno 35% DeVry University-Florida 28% Florida Agricultural and Mechanical University 30% DeVry University-Georgia 29% Georgia Institute of Technology-Main Campus 23% DeVry University-Illinois 18% Northeastern Illinois University 31% DeVry University-Pennsylvania 32% Cheyney University of Pennsylvania 27% DeVry University-Texas 32% University of Houston 28%
9. You stated in your testimony that from the 1970's to date DeVry has averaged 90% employment of graduates who actively participated in a job search with DeVry in educationally related jobs. You agreed as well to produce that data as well as the methodology used in calculating those percentages. In addition to the underlying data and methodology, please answer the following to aid in our understanding of the data:
The graduate employment data provided during my testimony was for the years 1975 through 2008, the last calendar year for which the statistics were audited. The following terms are used in calculating and disclosing graduate employment statistics for DeVry University:
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Graduates eligible for career assistance: All graduates other than those continuing their education, foreign graduates legally ineligible to work in the United States or Canada, our own employees, national servicemen and women, foreign residents, graduates we are unable to locate and those ineligible for career assistance because of extreme circumstances. Extreme circumstances include death, suffering from a serious illness or medical condition, maternity/paternity leave, participation in religious mission work, incarceration or community service that prevent a graduate from obtaining employment during this time period.
We offer lifetime employment assistance and thus those graduates who are not included in this count due to current circumstances can take full advantage when/if they are able to resume their employment search.
Graduates who actively pursued employment: Net number of graduates eligible for career assistance who meet the requirements in (b) below.
Education-related employment: Requires the graduate to be using degree-related skills and knowledge they attained while attending DeVry University.
Employment rate: Percent of graduates who actively pursued and obtained employment and those who were already employed in education-related careers within 180 days or 26 weeks of graduation.
Employment Rate Calculation from 1975 through 2008
Total Graduates: 237,957 Graduates eligible for career assistance: 210,569 Graduates who actively pursued employment: 186,788 Graduates employed in education-related positions: 168,596 Employment Rate: 90.3%
a. What does it mean that a graduate "actively participated in a job search"?
Graduates who are actively engaged in a job search prior to graduation through 26 weeks following graduation, as well as those graduates who are already employed in an education related field at the time of graduation. Active participation includes resume preparation; willingness to interview; contacting and following—up on employment opportunities and bi-weekly contact with their assigned Career Services Advisor.
b. How many graduates each year participated in such a search?
The average percent of eligible graduates who pursued employment for the period from 1975 through 2008 was 88.7% (186,788/210,569).
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C. What are the categories of programs from which they graduated?
DeVry University offers undergraduate programs in business, technology and health care administration. For 2009 graduates earned degrees in the following programs:
Associate Degree Programs Bachelor Degree Programs Accounting Biomedical Engineering Technology Electroneurodiagnostic Technology Business Administration Electronics and Computer Technology Computer Engineering Technology Health Information Technology Computer Information Systems Network Systems Administration Electronics Engineering Technology Web Graphic Design Game and Simulation Programming Technical Management Network and Communications Mgt
d. For each category please describe all jobs that are considered "educationally related" for purposes of calculating the employment rates?
Please see the term definitions above. "Educationally related" is determined from position responsibilities as reported by the graduate. Career Services staff determines whether the position responsibilities are related to the graduate degree program based on their knowledge of the educational outcomes of each program.
Questions from Ranking Member Mike Enzi
1. How does DeVry help students manage their financial aid needs, and ensure that they understand their loans?
I believe that DeVry schools provide high levels of customer service to our students in order to help them achieve their educational and career goals.
Prospective students are assigned a student finance advisor immediately after completing their enrollment agreements. Student finance advisors explain financing options; provide technical assistance with completing financial aid and scholarship applications; and provide information about the various loan programs, their terms and repayment responsibilities. The student finance advisor-student relationship is maintained for the duration of the student's studies. The advisor is responsible for helping the student with their financial planning including providing debt counseling to minimize overall debt levels. Advisors also administer our $16 million dollar institutional scholarship programs, helping to target these programs to students with financial need.
At the hearing we were asked for best-practices that could be employed to help meet US educational goals. We believe that among the best practices being developed and implemented with our student finance advisors is the financial review that is conducted with students before they begin their studies. During this review process, the advisor determines each student's financial aid eligibility and projects out the expected costs and method of financing with the student. The student is able to look at the cost of attending part-time versus full-time as well as determine the long-term ramifications of that decision. They are able to estimate the amount of debt they may have to take on to complete their studies and make decisions of how much to pay now versus how much they want to pay later (in repayment of student loans). This process not only gives the prospective student a long-range look toward graduation, it advances their financial literacy level which is helpful in other areas of their life.
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2. What does DeVry do to hold itself accountable?
DeVry is guided by its values, which include maintaining a high standard of performance and integrity in all areas of operation. These values are articulated in DeVry's Code of Business Conduct and Ethics and detail key policies and procedures that help our employees to legally and ethically perform the tasks associated with their employment.
Like other higher education institutions — whether public or private — DeVry is governed by a wide variety of federal and state regulations. Our colleges and universities are accredited by U.S. Department of Education approved accrediting bodies.
In the United States, DeVry's institutions are regulated by the U.S. Department of Education and state regulatory bodies.
As a publically held organization, DeVry discloses financial and a host of qualitative information in regular filings with the Security and Exchange Commission (SEC). This creates a level of public disclosure and transparency not generally found among traditional higher education institutions.
DeVry holds itself accountable through clear internal operating procedures, internal quality controls, regular and standardized professional staff development, independent outside auditors and internal quality assurances. These compliance measures include dedicated regulatory and compliance personnel, standardized policies and procedures updated at least annually, extensive training and mentoring that is ongoing, peer review and internal and external audits.
We hold ourselves accountable to the academic outcomes that our students achieve. An example of this is exam results on the nursing licensure examination the NCLEX-RN. Recent graduates of Chamberlain College of Nursing have a first-time NCLEX-RN pass rate between 90-98% depending on the campus location.
Perhaps the ultimate measure of accountability is success in the career marketplace. As I detail in Chah man Harkin's question number nine, 90.3% of eligible graduates active in the job market were employed during the period from 1975 through 2008.
We appreciate this question as we believe that all schools, regardless of sector, must be held accountable for the quality of their academic outcomes.
3. What does DeVry do to help its students find employment?
Local and national advisory boards and faculty with experience and expertise in their profession help DeVry University to develop an academic curriculum that is relevant to workforce requirements. We regularly review entire programs of study to ensure that course materials and objectives continue to be rigorous and relevant. We provide capstone courses in each program to prepare students to enter the workforce through a team-based experience working in a real-world environment on assignments requiring students to apply their knowledge and skills. The final semesters of study include career development courses that reinforce presentation skills, self- assessment, goal-setting and career planning.
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Our 150 career service professionals develop and maintain relationships with employers (some of these relationships have persisted for decades) to keep abreast of employment needs and opportunities and share this information with staff. Career fairs are held on campuses throughout the year. Our career services professionals coordinate on-site interviews for employers. DeVry also maintains an interactive employer database that contains information on thousands of North American companies. This database is available to students and alumni and provides real-time access to current job leads, details on career events and other career-related information.
Questions from Senator Chris Dodd
1. Do you see any potential problem that schools sit on the same accreditation boards that provide the official legitimacy for their schools to operate? Do you see this as a potential conflict of interest? How can we ensure that this does not become a conflict of interest?
As explained by the Council for Higher Education Accreditation (CHEA) in its booklet, The Value of Accreditation (Attachment 5), "Accreditation in the United States is a means to assure and improve higher education quality, assisting institutions and programs using a set of standards developed by peers... Accreditation assures that a neutral, external party (the accrediting organization) has reviewed the quality of education provided and has found it to be satisfactory, based upon appropriate peer expertise." The participation of affiliated school representatives on accreditation boards is an integral part of the peer review method.
In the United States, accreditation operates as a democratic process. Members of the community volunteer to represent and lead. Because there is potential for a conflict of interest in any form of democracy, there are safeguards in place to ensure a process of integrity. It is standard practice among accrediting agencies that persons with potential conflicts of interest recuse themselves from voting on institution-specific decisions related to their own colleges or universities. At the Accrediting Council for Independent Colleges and Schools, for example, members of the Board of Directors who have a conflict of interest, or even the appearance of a conflict of interest, recuse themselves from voting and physically leave the room during the voting process for such institutions.
The U.S. Department of Education operates with appropriate oversight to prevent conflicts of interest in the accreditation community. According to The Criteria for Recognition of an Accrediting Agency for postsecondary students (Attachment 6), the basic eligibility requirements mandate: "At least one member of the agency's decision- making body is a representative of the public, and at least one-seventh of that body consists of representatives of the public" (602.14 b-2); and, "The agency has established and implemented guidelines for each member of the decision-making body to avoid conflicts of interest in making decisions" (602.14 b-3). The Criteria also require, "Clear and effective controls against conflicts of interest, or the appearance of conflicts of interest, by the agency's (i) Board members; (ii) Commissioners; (iii) Evaluation team members; (iv) Consultants; (v) Administrative staff; and (vi) Other agency representatives" (602.15 a-6). Additionally, it is required that any appeals panel, "is subject to the conflict of interest policy" (602.25 f-1-ii). These regulations demonstrate a thorough and effective policy throughout the accreditation community.
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To incorporate another safeguard for the integrity of the peer review process, the Council of Regional Accrediting Commissions, with assistance from CHEA, instituted a policy on interregional accreditation. As explained in the policy manual of the Higher Learning Commission (Attachment 7), "To preserve the values and practices of peer review and regional accreditation, the Commission's evaluation of affiliated institutions that deliver education at a physical site(s) in another region(s) within the U.S. or its territories will be undertaken with the participation of the host regional accrediting commission(s). This will include the joint (home/host) evaluation of the off-campus sites in a host region against the accreditation standards of that region." This policy is evaluated every three years, and ensures procedural respect among the regional, institutional accreditors.
When the Higher Learning Commission of the North Central Association of Colleges and Schools (HLC) conducted its comprehensive review of DeVry University in 2002, the process required an assessment of five campuses outside of its own region. The following accrediting agencies were invited to participate in the review process: the Middle States Commission on Higher Education, the Northwest Commission on Colleges and Universities, the Southern Association of Colleges and Schools Commission on Colleges, and the Western Association of Schools and Colleges Accrediting Commission for Senior Colleges and Universities. All four agencies participated in the process with HLC at their affiliate campus locations and submitted their reviews of the campuses with the HLC reviewer team report.
2. We agree that with the increased need for and importance of distance learning, coupled with President Obama's goal of 8.2 million additional graduates in 2020, for-profit schools serve a definite need in our education sector. As someone in the industry, what steps do you suggest we take in order to ensure that federal funding is not being used to raise stocks for bad actors, and instead that these important funds are directed to the good actors in the business?
We appreciate this question as we believe that all schools, regardless of sector, must be held accountable for the quality of their academic outcomes. The stewardship of student aid funds is applicable to all sectors of higher education. Government oversight and control is critically important to ensuring the integrity of the government financial aid system. Because private-sector schools serve a definite need in our education system, it is critical that we do not "throw the baby out with the bath water."
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We offer the following steps to ensure program integrity.
• Recognizing that over time, and with the best of intentions, we have built a complex and often conflicting set of rules and regulations — and that it is time for a regulatory reform package. We agree with the need for higher education regulation.
Key regulatory reform package elements should be:
• Measure of program completion rate
• Measure of graduate employment
• Measure of cohort default rate, adjusted for socio-demographic factors. Thus schools that serve students of lesser means should not be unfairly punished for doing so.
• Measure of pass rate on standard exams, where they exist (e.g. nursing)
• Robust disclosure regimen (Attachment 8)
We must also be careful to be specific when referring to "bad actors." To paraphrase Secretary Duncan, we need to hold bad actors accountable, regardless of sector. Further, we must have data and not only media anecdotes. Just last week we learned that one widely reported issue raised to the Secretary of Education was reported by someone paid by Wall Street short-sellers.
I would also like to note that student aid funds are not directed to schools but rather to students themselves. As you noted at the hearing, just like the GI Bill, the financial aid goes to the student and the student then votes with their feet — they can use their aid at any accredited school. This model of education funding has contributed to the strength of America's system of higher education, by promoting competition and accountability.
Questions from Senator Robert P. Casey, Jr.
1. The President has set the goal of the United States leading the world in college graduates by the year 2020. In your opinion, what is the role of for-profit colleges in trying to achieve this goal?
Private-sector colleges and universities play a critical role in reaching President Obama's 2020 education goals. An analysis by the National Center on Higher Education Management Systems (see page 4 of Attachment 9) estimates that the United States will need to produce an additional 8.2 million postsecondary degrees to meet these goals. With cuts in state higher education budgets forcing caps in enrollment and program cuts, it is impossible to imagine meeting the President's goals without the capacity being built by private-sector schools.
Public and independent schools have been shrinking enrollment for quite some time, even before the current budget issues forced state governments to cut higher education funding. Public-sector and independent colleges, for the last 10 years for which the data are available (1997-2007), have actually shrunk enrollments of bachelor's degree seeking students age 25+ by 50,000 students while the private sector has grown by 400,000 students (Attachment 10). And with public schools like the California State University System , projecting enrollment cuts of 40,000 students, the nation is clearly facing even greater capacity challenges (Attachment 11).
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From a capacity building perspective, the private sector is key in reaching the President's 2020 goals. The private sector is also critical as the growth we need in college attainment will come largely from "non-traditional" students. This includes working moms, first-in-family college-goers, recent immigrants and career changers. They represent 73% of current college and university attendees and are the new majority in higher education (Attachment 12).
Private-sector schools have proven to be especially nimble and innovative in meeting the needs of non-traditional students. Online learning was first developed and implemented by private-sector schools and is key to reaching this critical demographic. Public-sector and independent schools have gradually taken it up as well. Other innovative approaches have also been critical: flexible schedules, increased academic and career services support, year-round classes so that students can earn their Bachelor's degree in three years or their Associate's degree in 18 months, and closely following employment trends to develop courses that are quickly adaptable to the workforce. Innovations such as these, often led by private-sector colleges, are necessary to serve these "non-traditional" students.
But the private sector cannot make up all the additional degrees required to regain our leadership in college attainment. All sectors of higher education are needed and must work together. We need to share and embrace new technological approaches, adopt simple, long-overdue administrative changes like making transfers of credit hours between institutions easier, and relentlessly focus on the student and their desired career and learning outcomes. The United States has a system of higher education that is the envy of the world, due to its diversity of student choice among public-sector, private-sector, and independent colleges and universities.
2. What are for-profit schools currently required to report to the Department of Education around graduation rates and placement rates? How are placement rates tracked?
Graduation rates are reported to the Department of Education only for first-time, full-time students. These are done annually through the Integrated Postsecondary Education Data System (IPEDS). "Placement" or graduate employment rates are not reported to the Department. There is no placement rate calculation methodology defined for regionally-accredited colleges and universities. The Accrediting Council for Independent Colleges and Schools (ACICS), a national accreditor, which accredits Apollo College (as of June 30, 2010 renamed Carrington College) define a methodology for calculating placements and requires all schools to annually report placement data.
Placement data reported to ACICS includes: • Number of graduates • Number placed in field of study • Number placed in related field of study • Number placed out of field of study • Number of graduates not available for placement due to pregnancy, death, other health-related situations, continuing education, military service or because they are not eligible for placement in the United States • Number of graduates not working
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Many private-sector colleges and universities publicly report graduate employment data. To provide the information students need to be fully-informed consumers, we should hold all institutions, regardless of sector, to the same standards of accountability.
3. What, if any, statutory or regulatory changes should be made to strengthen the rules governing for-profit colleges? Are the penalties strong enough to hold these institutions accountable?
We appreciate this question as we believe that all schools, regardless of sector, must be held accountable for the quality of their academic outcomes. The stewardship of student aid funds is also applicable to all sectors of higher education. Government oversight and control is critically important to ensuring the integrity of the government financial aid system. Because private-sector schools serve a definite need in our education system, it is critical that we do not "throw the baby out with the bath water" or potentially proliferate the problem by limiting oversight to one sector over another.
We offer the following steps to ensure program integrity.
• Recognizing that over time, and with the best of intentions, we have built a complex and often conflicting set of rules and regulations — and that it is time for a regulatory reform package. We agree with the need for regulation of higher education.
Key regulatory reform package elements should be:
• Measure of program completion rate
• Measure of graduate employment
• Measure of cohort default rate, adjusted for socio-demographic factors. Thus schools that serve students of lesser means should not be unfairly punished for doing so.
• Measure of pass rate on standard exams, where they exist (e.g. nursing)
• Robust disclosure regimen (Attachment 8)
We must also be careful to be specific when referring to "bad actors." To paraphrase Secretary Duncan, we need to hold bad actors accountable, regardless of sector. Further, we must have data and not only media anecdotes. Just last week we learned that one widely reported issue raised to the Secretary of Education was reported by someone paid by Wall Street short-sellers.
I would also like to note that student aid funds are not directed to schools but rather to students themselves. As you noted at the hearing, just like the GI Bill, the financial aid goes to the student and the student then votes with their feet — they can use their aid at any accredited school. This model of education funding has contributed to the strength of America's system of higher education, by promoting competition and accountability.
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With the proper training, evaluation and enforcement, the Department of Education has very strong powers to hold institutions accountable. Please see Attachment 8 for further information. DeVry has been actively engaged throughout this year with both the Secretary of Education's Office and the Congress in an attempt to define problems and develop solutions targeted to these problems. We look forward to continuing to help analyze and test potential solutions to identified problems.
Currently, there is a broad array of penalties available to the Secretary for assessing in the event of noncompliance with federal regulations. These include limitation, suspension or termination of an institution's Title IV eligibility. Limitations can also include requiring the posting of letters of credit or payment of fines.
Questions from Senator Kay Hagan
1. Over the last several years Congress has had to make some very difficult choices regarding the spending of federal dollars, one of which was to devote a greater amount of federal resources to the Pell Grant program over other priorities with just as much need.
As you well know, federal Title IV loan and grant dollars now comprise close to 90 percent of total revenues at many for-profit institutions. In fact, Mr. Eisman's research states that the amount of federal dollars flowing to the for-profit industry is over $21 billion.
In a time in which budgets are very tight I strongly believe that it is critical for Congress to take a look at each and every dollar that we spend.
The bulk of your revenue comes from federal loans and grants but there is no assurance that you are providing the type of high quality education leading to a lucrative job that these students deserve and are paying for. This must change. Does DeVry, or the industry in general, have any accountability mechanisms in place that can demonstrate to us that you are making the most effective use of the federal dollars from student financial aid that you currently receive? If not, what steps are you willing to take to make that change?
DeVry is guided by its values, which include maintaining a high standard of performance and integrity in all areas of operation. These values are articulated in DeVry's Code of Business Conduct and Ethics and detail key policies and procedures that help our employees to legally and ethically perform the tasks associated with their employment.
Like other higher education institutions — whether public or private — DeVry is governed by a wide variety of federal and state regulations. Our colleges and universities are accredited by U.S. Department of Education approved accrediting bodies.
In the United States, DeVry's institutions are regulated by the U.S. Department of Education and state regulatory bodies.
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As a publically held organization, DeVry discloses financial and a host of qualitative information for regular filings with the Securities and Exchange Commission (SEC). This creates a level of public disclosure and transparency not generally found among traditional higher education institutions.
DeVry holds itself accountable through clear internal operating procedures, internal quality controls, regular and standardized professional staff development, independent outside auditors and internal quality assurances. These compliance measures include dedicated regulatory and compliance personnel, standardized policies and procedures updated at least annually, extensive training and mentoring that is ongoing, peer review and internal and external audits.
We hold ourselves accountable to the academic outcomes our students achieve. An example of this is exam results on the nursing licensure examination, the NCLEX-RN. Recent graduates of Chamberlain College of Nursing have a first-time NCLEX-RN pass rate between 90-98% depending on the campus location.
The ultimate accountability measurement for career-oriented education is whether our graduates, either entering or re-entering the workforce or maintaining their job continue to be employed and whether that employer continues to hire our graduates for futures positions. We have been measuring this for more than 35 years. Aside from employment rate, DeVry is measured much like every other institution. We report graduation, retention and withdrawal rates to the Department of Education, as well as cost and demographic information. The Depai lment calculates cohort default and financial aid participation rates and makes all this information available to consumers on its College Navigator website as well as to financial aid applicants at the time of application. While this may be useful information, its disaggregation from the enrollment process limits its effectiveness.
Subsequent to the conclusion of the recent negotiated rulemaking, we proposed (with two other schools) a robust disclosure process as an alternative to the Gainful Employment proposal discussed in the rulemaking sessions. This disclosure would provide specific program-level cost, indebtedness and repayment information that we think should be readily available for every student. This disclosure would help assure students are making informed decisions and using taxpayer assistance to best meet their educational objectives.
Since Mr. Eisman's testimony is cited, I would also like to note that Mr. Eisman is a Wall Street short-seller who has bet millions on seeing shares of publicly-held colleges decline. He is not merely predicting what will happen, he and other short-sellers have conducted a carefully orchestrated campaign to make it happen. Just last week we learned that one widely reported issue that was raised with the Secretary of Education was reported to him by someone paid by Wall Street short-sellers.
2. I read and I hear stories of students like Yasmine Issa -- our witness here today -- a motivated and working hard student simply ready and willing to work hard to accomplish her goals. But for many students, their goals have slowly diminished as the clock ticks and they are unable to find a job.
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I also understand that there are many stories of students who have attended a for -profit institution and have gone on to successful careers and are able to manage their student loan debt.
When you hear stories like Ms. Issas, how do you defend the institution you work on behalf of and its counterparts?
As you know, Ms. Issa did not attend one of our schools. Our students attend DeVry's schools to earn a degree or certificate that allows them to begin or advance in their careers and we work every day to ensure they leave our programs with the tools they need to succeed.
We hold ourselves accountable to the academic outcomes our students achieve. An example of this is exam results on the nursing licensure examination, the NCLEX-RN. Recent graduates of Chamberlain College of Nursing have a first-time NCLEX-RN pass rate of between 90-98% depending on the campus location.
As I detail in Chairman Harkin's question number nine, 90.3% of eligible graduates active in the job market were employed during the period from 1975 through 2008.
The ultimate accountability measurement for career-oriented education is whether our graduates, either entering or re-entering the workforce or maintaining their job continue to be employed and whether that employer continues to hire our graduates for futures positions. We have been measuring this for more than 35 years. Aside from employment rate, DeVry is measured much like every other institution. We report graduation, retention and withdrawal rates to the Department of Education, as well as cost and demographic information. The Department calculates cohort default and financial aid participation rates and makes all this information available to consumers on its College Navigator website as well as to financial aid applicants at the time of application. While this may be useful information, its disaggregation from the enrollment process limits its effectiveness.
Subsequent to the conclusion of the recent negotiated rulemaking, we proposed (with two other schools) a robust disclosure process as an alternative to the Gainful Employment proposal discussed in the rulemaking sessions. This disclosure would provide specific program-level cost, indebtedness and repayment information that we think should be readily available for every student. This disclosure would help assure students are making informed decisions and using taxpayer assistance to best meet their educational objectives.
As you point out, there are many successful graduates. The Arizona Republic ran a story last year on Bonnie Brown, a local DeVry student. She is a stay-at-home mother of three who wanted to get a degree in biomedical engineering technology and get back into the workforce. She graduated in 2009 in only three years, taking classes year round and now has a job at Phoenix Children's Hospital.
Ms. Brown received a quality education, in a field with growing capacity needs, on a schedule that fit her busy life. In the not so distant past, students like Ms. Brown might not have had the chance to go back and get a degree. But today, because of changes in technology, in how we offer classes to students, and our flexible, competitive higher education system, she can.
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Senator Hagan also offers these questions to any of the witnesses who would like to answer:
1. At the end of FY2010, there are estimated to be over $700 billion in outstanding, federally-backed student loans. Taxpayers are backing almost all of those loans.
I realize that this question can apply equally to non -profit institutions as well, but since we're talking about the for-profit industry today, could any of the witnesses tell me what specific, quantitative measurements we have across the industry to tell us what the taxpayers are getting for all that money? What sort of industry- wide performance measures are available to help us better understand the performance of institutions that survive on the largess of the taxpayer?
The National Center for Education Statistics (LACES) collects a wide variety of student performance and cost information from schools each year. They provide one-year snapshots of performance as well as longitudinal studies. For instance, from the 1996 Beginning Postsecondary Students Longitudinal Study (Attachment 13), 55.6% of all students starting at a for-profit, two-year school received a degree or certificate by 2001 (the last year data was collected for this study) versus 36.7% for students starting at public, two-year schools. Additionally, 52.8% of students starting at for-profit, four-year schools had received a degree by 2001 versus 60.5% at public schools.
We recognize that taxpayers make a significant investment in higher education. According the National Center for Education Statistics (LACES) 2008-2009 data (Table 3), federal, state, county and/or municipal governments contributed the following average tax subsidy to public-sector institutions per full-time student equivalent:
Public institutions: $13,920 Independent institutions: $7,546 Private sector institutions: $1,001
For-profit or private-sector institutions provide higher education that is worthwhile and far more cost efficient investment of taxpayer subsidies. Institutions like ours also help offset taxpayer subsidies to public institutions by returning to the government a significant portion of our earnings as federal, state, county and/or municipal taxes. As an example, DeVry will pay over $100M in tax this year. In the latest tax year.
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National Center for Educational Statistics. Table A-49-1. Total and per student revenue of public, private not-for-profit, and private for-profit degree-granting postsecondary institutions, by source of funds: Selected academic years, 1999-2000 through 2007-08
Total 2007- Revenue per FTE students Control of institution 08 and revenue Percentage distribution of total revenue (in constant 2008-09 dollars) (in 1999- 1999- source of funds millions) 2000 2003-04 2006-07 2007-08 2000 2003-04 2006-07 2007-08 Public institutions Total $273,109 - 100.0 100.0 100.0 - $ 27,702 $ 29,715 $ 28,432 Operating revenues 151,079 - 58.0 55.4 55.3 - 16,063 16,461 15,728 Tuition and fees2 48,070 - 15.8 16.7 17.6 - 4,388 4,954 5,004 Grants and contracts 42,054 - 19.2 17.3 15.4 - 5,312 5,153 4,378 Federal (excludes FDSL3) 25,523 - 13.0 11.5 9.3 - 3,605 3,406 2,657 State 7,832 - 3.0 2.8 2.9 - 822 842 815 Local 8,699 3.2 3.0 3.2 - 885 905 906 Auxiliary enterprises 20,488 - 7.7 7.6 7.5 - 2,121 2,257 2,133 Hospitals 25,183 - 8.8 8.4 9.2 - 2,445 2,498 2,622 Other operating revenues 15,284 - 6.5 5.4 5.6 - 1,797 1,599 1,591 Nonoperating revenues 105,254 - 36.6 38.5 38.5 - 10,137 11,434 10,958 Federal appropriations 1,850 - 0.7 0.7 0.7 - 200 211 193 State appropriations 68,375 - 24.3 23.5 25.0 - 6,727 6,993 7,118 Local appropriations 9,319 - 3.5 3.3 3.4 - 962 976 970 Government grants 12,109 - 1.6 1.6 4.4 - 450 474 1,261 Gifts 6,070 - 1.9 2.1 2.2 - 523 618 632 Investment income 5,279 - 3.2 5.8 1.9 - 894 1,725 550 Other nonoperating revenues 2,251 - 1.4 1.5 0.8 - 381 437 234 Other revenues 16,776 - 5.4 6.1 6.1 - 1,502 1,819 1,746
Private not-for-profit institutions Total 139,251 100.0 100.0 100.0 100.0 60,242 55,273 64,760 46,511 Tuition and fees 50,736 24.6 28.7 26.0 36.4 14,809 15,856 16,860 16,946 Federal government4 20,205 10.1 13.7 11.1 14.5 6,089 7,550 7,170 6,749 State governments 1,857 0.9 1.1 0.9 1.3 558 599 578 620 Local governments 528 0.5 0.4 0.3 0.4 290 200 191 177 Private gifts, grants, and contracts5 20,992 13.7 11.8 11.1 15.1 8,235 6,526 7,170 7,012 Investment return 6,447 31.3 23.0 30.7 4.6 18,860 12,723 19,852 2,153 Educational activities 4,850 2.4 2.5 2.3 3.5 1,431 1,355 1,458 1,620 Auxiliary enterprises 12,929 6.9 7.7 6.7 9.3 4,154 4,252 4,365 4,318 Hospitals 13,300 6.0 7.2 6.9 9.6 3,600 3,977 4,487 4,442 Other 7,407 3.7 4.0 4.1 5.3 2,217 2,236 2,630 2,474
Private for-profit institutions Total 16,084 100.0 100.0 100.0 100.0 14,248 16,027 15,579 15,825 Tuition and fees 14,030 86.1 89.5 88.2 87.2 12,267 14,350 13,742 13,804 Federal government 960 4.6 4.4 5.2 6.0 656 709 809 944 State and local governments 68 1.7 0.7 0.5 0.4 237 105 78 67
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Private gifts, grants, and contracts 5 # 0.1 # # 7 13 4 5 Investment return 65 0.4 0.2 0.3 0.4 61 30 54 64 Educational activities 290 1.6 1.5 1.8 1.8 233 248 274 285 Auxiliary enterprises 352 3.6 2.7 2.2 2.2 516 426 348 346 Other 315 1.9 0.9 1.7 2.0 271 146 270 310
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— Not available. # Rounds to zero. I Full-time-equivalent (FTE) enrollment includes full-time students plus the full-time equivalent of the part-time students. z Net of allowances and discounts. 3 Federal Direct Student Loans. 4 Includes independent operations. 5 Includes contracts and contributions from affiliated entities. NOTE: For more information on the Integrated Postsecondary Education Data System (IPEDS), see supplemental note 3. SOURCE: U.S. Department of Education, National Center for Education Statistics, 1999-2000 through 2007-08 Integrated Postsecondary Education Data System, "Fall Enrollment Survey" (IPEDS-EF:99) and Spring 2001 through Spring 2009.
2. Some say that the for-profit sector is highly regulated with oversight from the US Department of Education, state licensure agencies and accrediting bodies. Others may disagree, citing that much more needs to be done.
That said, what are your thoughts on how can we better align the goals of each of these agencies so that everyone is demanding the highest quality outcomes for every institution?
Without question, the for-profit or private-sector is highly regulated. In addition to the named entities, the sector is regulated by other federal and state agencies, including for some, the SEC. The question is whether the regulation adequately ensures that institutions are effectively delivering a quality product and service that meets the student and taxpayer's expectations. This is not a question just for the private -sector, but for all of higher education. In calling for an increase of 8.2 million college graduates, the President is not just telling us to throw open our doors and add more seats. He is telling us we need to first offer programs and services that meet the needs of the un-enrolled, and second, do a better job at seeing them through to graduation.
The Triad, consisting of the Depai lucent of Education, state licensing entities and accrediting bodies, needs to work effectively and cohesively to enable this expansion while at the same time being able to better measure individual institutional performance towards those goals. While none of these entities operates in a silo, they each bring different strengths and responsibilities to the table. They each must be accountable to increasing the level of execution of their own responsibilities. For example, if it is the state's role to ensure that institutions are responsive to student consumers, then they need to have a rapid response process that assures complaints are not only resolved for an individual student, but that the institution "learns" from the resolution and will advance its product and services as a result. The Department currently has the authority to spearhead this effort within its existing enforcement authority. It also has the authority and resources to gather and report on meaningful qualitative results.
Similarly, the Federal Negotiated Rulemaking process provides a meaningful opportunity for community input and serves as an integral part of engaging not only the Triad but the higher education community at large. As members of this community, DeVry staff has served as federal trainers, chairmen of Department of Education (USED) taskforces, on the National Academy Foundation student aid research projects, on USED focus groups to simplify student aid and the steering committee of NCES's National Postsecondary Education Cooperative which promotes better data for better decision making. We have also participated as members of associations including the American Council of Education, The College Board, and the National Association of Student Financial Aid Administrators. Most recently DeVry staff served as negotiators in negotiated rulemaking and has provided recommended regulatory language to USED aimed at strengthening student disclosures. DeVry has and will continue to engage with members of Congress on ways to improve educational opportunity and success for all students.
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3. Many of you in your testimony mention the "90/10 rule", the provision that requires proprietary institutions of higher education to have at least 10 percent of the institution's revenues from sources that are not derived from funds provided through federal financial aid.
Is there a way to more accurately track the percentage of Title IV dollars that schools receive?
Both the U.S. Department of Education and schools can accurately track the receipt of total Title IV dollars. However, the allocation of those dollars towards an institution's 90/10 calculation is problematic. Currently, the Department requires that all Title IV funds be counted first towards revenue. Many tuition-restricted scholarships, state grants and other 31a party assistance are excluded from the 90/10 calculation. Title IV loans are often used to pay for non-institutional charges. These loans, which most schools discourage use of, must be counted towards the 90% limit even though they were never used to pay institutional charges. We have three recommendations related to this concern:
1. Tuition-restricted funding should always count first (prior to Title IV assistance) towards the calculation of the 90/10 rate, and;
2. Schools should have the flexibility in their awarding policies to restrict borrowing for non-institutional costs.
3. To provide incentives to institutions to help reduce student debt by providing need-based institutional grants and scholarships. These should be allowed to count toward the 10% requirement.
4. As you know, the purpose of this hearing is for all of us to get a better sense of how well the for-profit education industry is serving students. We know that there are good actors as well as bad actors in the for-profit education industry.
For those of us who want to ensure that anyone who has the drive and desire to get a high -quality education is able to do so, how do you suggest we work together to better identify those schools that are getting the job done and those that aren't?
As I stated in my written testimony "Please make no mistake, when an institution does something wrong and in conflict with the best interests of students, they must be held accountable. However, I submit that rather than limiting oversight to one sector over another or one `actor' over the 'other', policymakers consider that there are `good acts' and `bad acts' of which no sector is immune."
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I have a few suggestions for working together to identify schools in all sectors that are getting the job done and those that are not.
Given the enormity of the task facing our country, educating 8.2 million additional postsecondary graduates by 2020, we must count on every single part of our higher education system to deliver high-quality opportunities to an exponentially diverse and growing student population.
Historically, American colleges and universities have not done the best job educating and graduating at-risk students. However, given the challenges we face, this has to change.
In measuring how colleges and universities heed this challenge, it is important to compare like institutions based on student profile and risk factors. There are a myriad of ways to measure like institutions but still hold the whole of higher education accountable for student outcomes. In fact DeVry is currently working with a few schools at the request of a member of Congress to come up with objective, risk-adjusted performance standards that can be used to measure institutional effectiveness.
I am also familiar with other examples; a notable one is found in the state of Texas. The Texas Higher Education Coordinating Board (THECB), the state authorizing body for degree-granting institutions, has a robust higher education accountability system that seeks to group like institutions based on a series of qualitative and quantitative measures (Attachment 14).
We are engaged with the Gates Foundation, Lumina Foundation and the Pell institute, along with other institutions of higher education, to determine ways of measuring success based on risk-based factors. We encourage the Congress to work with the broader community and the Department of Education to address this challenge.
Questions from Senator Lamar Alexander
1. What types of programs or assistance do you provide to your part time or transfer students to help ensure that they actually graduate or complete their program? Are there better ways we could track that information so that we can have a better understanding of college completion across all sectors.
DeVry provides high levels of support and service to all our students, whether part-time, transfer or first-time full- time students. Each of our incoming students is assigned a student success coach who is responsible for facilitating their successful transition into and through the first year of college. The coach works with his/her students to establish their degree completion plan and assists with course selection. Throughout the students tenure coaches stay in contact with their students providing proactive advisement and support. Student attendance is monitored and the coaches act as liaisons with other University departments on their students' behalf.
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In student finance, as discussed in an earlier question, each student is assigned an advisor who works with him/her setting up a personalized financing plan, including debt counseling and scholarship search options.
Finally, all graduating students are assigned a career services advisor to assist students with career planning and their job search. Even after a student graduates and begins their job, career services assistance is available as a life- long service to DeVry alumni.
With respect to tracking college completion, currently the Department relies on schools to track transfer rates and does not require tracking of part-time and transfer-in students for reporting graduation rates. This omits a huge and increasing number of students from performance monitoring. We believe that the Department has the ability to monitor transferring students as well as continue longitudinal studies on part-time enrollments. They should be encouraged to do so. All full-time students should be included in a school's calculation.
2. What reporting requirements do you think we should ask of institutions of higher education to report on to the Department of Education and the public to ensure the quality of the school? What should we be measuring instead of the boxes and boxes we currently gather?
I believe that all schools, regardless of sector, must be held accountable for the quality of their academic outcomes.
A robust regulatory reform package should include:
• Measure of program completion rate
• Measure of graduate employment
• Measure of cohort default rate, adjusted for socio-demographic factors. Thus schools that serve students of lesser means should not be unfairly punished for doing so.
• Measure of pass rate on standard exams, where they exist (e.g. nursing)
n Robust disclosure regimen (Attachment 8)
3. Could you tell us a little more about how the DeVry University Advantage Academy was created? Does DeVry intend to expand the Advantage Academy beyond Chicago and Columbus, OH?
The DeVry University Advantage Academy (DUAA) was created at the urging of Mayor Richard Daley, who asked his then CEO of the Chicago Public Schools (CPS), Arne Duncan, to work with DeVry to develop an innovative approach to help increase high school graduation rates and college attainment among CPS high school students. Together, DeVry and CPS developed a dual enrollment program that allowed high school students, beginning in their junior year, to take college courses in addition to their regular classes so that they could graduate with both their high school diploma and an Associate's degree. Launched in 2004, it has graduated 4 classes, and the 6 01 class matriculated in 2009.
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DUAA is geared not toward the super high achieving student, or the students with serious study and attendance issues. Students at either extreme of the educational spectrum typically get extra resources and attention. DUAA was created to help the "regular kids," students who come to school every day and want to learn and be challenged. And it has been very successful: The Chicago campus has a 92% graduation rate and the Columbus, Ohio, campus, launched in 2006 in partnership with Columbus City Schools, has a 100% graduation rate.
Building off these successes, DeVry will partner with America's Promise Alliance, the foundation created by General Colin Powell, to expand the DUAA program to another 10 cities over the next 3 years. America's Promise is on a 10-year campaign called "Grad Nation" to mobilize our country as never before to reverse the dropout crisis and enable our children to be prepared for success in college, work and life. DeVry and America's Promise will work together to identify cities where a DeVry Advantage Academy can help improve high school graduation rates and work with the local school district in each city to develop a program that meets the needs of local students.
DUAA is an innovative and successful approach that clearly works. DeVry would be honored to meet with members of the committee to talk more about the program and discuss how the DUAA approach could be applied in their home state school districts.
Questions from Senator Tom A. Coburn, M.D.
1. Can you please discuss the potential economic impact of the Gainful Employment regulations on the country?
This past spring, Professor Jon Guryan, an economist at the University of Chicago, conducted a comprehensive analysis of the potential impact of the Gainful Employment regulations as they were proposed during negotiated rulemaking (Attachment 15). His analysis came from data collected from 17 institutions on more than 640,000 students enrolled in more than 10,000 separate programs of study. He concluded that more than 18% of all programs of study at for-profit institutions would fail to meet the proposed Gainful Employment requirements. Furthermore, he concluded that more than 33% of all students enrolled in for-profit institutions were enrolled in programs that would be disqualified. The total estimated impact would be to displace more than 900,000 current students and 360,000 new students each year. The economic impact on the country would be tremendous. There is no capacity within public schools, and building this capacity would be time-consuming and beyond the ability of strained state budgets. If you conservatively assumed that 40% of the 900,000 currently affected students would have graduated and 70% of these would have entered the workforce with $30,000 a year jobs, the aggregate lost earnings would be $7.6 billion — in the first year alone.
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2. What actions does your company take when it encounters so-called "bad" actors that ultimately stigmatize this industry?
DeVry is a values-driven organization whose purpose is to empower our students to achieve their educational and career goals. We have a long history within higher education of working with industry partners to increase our accountability to students and taxpayers. We are helping to lead an initiative today to develop a Statement of Ethical Principles for our industry. When we hear about "bad acts" — whether intentional or the result of error or misunderstanding — we use them as teaching opportunities, to maintain our values and controls and to mitigate against these acts within our organization.
3. The testimony provided by Mr. Steven Eisman, Portfolio Manager of FrontPoint Financial Services Fund, discusses the amount that some for-profit colleges provision for losses on their respective institutional loans, sometimes in excess of 50 percent. In FY 2008 and FY 2009, how much (and what percentage of loans) did DeVry maintain for losses against its institutional loans? Please provide your perspective on why companies maintain considerable reserves for losses anticipated on their own loans?
Students incur debt to DeVry Inc. through either a tuition payment plan, which is to be repaid through the course of the term of studies and is similar to those offered by most institutions of higher education, or an institutional loan program which has a repayment period schedule of five years or longer depending on the program, beyond completion of their studies. The institutional loan program is designed to partially offset the impact of the credit crisis and loss of private loan availability. The amount of total indebtedness assumed by students through the institutional loan program comprises less than 2% of total DeVry Inc. revenue. The loss reserve established for the institutional loan program is based on the default experience on remaining tuition payment balances at the time a student withdraws or graduates. The total reserve for bad debt on institutional loans at the end of FY2009 was $6.3 million, representing 35.6% of the total balance owed to DeVry Inc. Since we had no institutional loan programs in FY2008, we had no reserve for bad debt. DeVry's perspective on why we maintain this level of reserve is that we tend to be conservative in our accounting. Nobody likes surprises, including us, and our reserve reflects that. It could be that the actual losses we experience are less than this reserve amount.
Since Mr. Eisman's testimony is cited, I would also like to note that Mr. Eisman is a Wall Street short-seller who has bet billions on seeing shares of publicly-held colleges decline. He is not merely predicting that will happen, he and other short-sellers have conducted a carefully orchestrated campaign to make it happen. Just last week we learned that one widely reported issue that was raised with the Secretary of Education was reported to him by someone paid by Wall Street short-sellers.
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4. In your testimony, you state that DeVry's net income margin for FY 2009 was 11 percent, and that substantially all of these revenues were retained to re-invest in the future. You call this your students' endowment and note that during the last fiscal year DeVry has invested more than $100 million in equipment and facilities, upgraded classrooms, the re-development of curricula, expanded academic offerings and additional staff. Can you expand on the importance of re-investing in your students? How does the amount that DeVry re-invests in students compare to the amount of endowment earnings that traditional schools re -invest in their student populations?
Last year's earnings become the resource for this year's capital investments. Our capital investments for FY2010 will be about $140 million. This represents 85% of our net earnings of $165 million from FY2009. These investments include increasing our enrollment capacity to meet increased student interest in our programs, such as building two new nursing campuses, one in Chicago and another across the river in Arlington. It also includes adding new computers across our network of more than 120 campuses to support business and technology programs, purchasing patient simulators that can cost $100,000 each for our nursing and medical programs and implementing new technology systems designed to improve classroom learning and student services. In addition to funding capital expenditures, we funded more than $16 million in scholarships this past year. This re-investing in our students is an integral part of our strategic plan. Investing in academic quality leads to better student outcomes. When students achieve better outcomes, it creates more interest in our programs. And this enables us to support further investment into the quality of our academic programs.
Although many universities rely on their endowment (instead of retained earnings) to fund capital investments, the difference in allocating funding is great. A traditional university's endowment consists of two components; the original endowment (or gift) received from individual donors and a component that is represented by the investment growth of that original endowment. CommonFund and National Association of College and University Business Officers (NACUBO) studies (Attachment 16) show that most schools target a spend rate for their endowments of 4.5 — 5.0%, which is typically less than the growth rate of the original endowment. This difference ensures a stabilization of the endowment to be used for generations in the future. Unlike an endowment, DeVry does not "lock up" its retained earnings and only use the income from those earnings to generate resources for capital investing and scholarships. We consistently use a substantial portion of prior year earnings to fund the current year's initiatives. But, similar to the stability that an endowment helps ensure for public and non-profit independent colleges, DeVry's long-term stability is secured with its direct reinvestment into initiatives that support student access and success.
5. In your testimony you discuss the amount of counseling and financial literacy training that your students must go through before being allowed to receive loan disbursements. Would you say your students, consequently, are fully informed of the debt obligations and the contract to which they are entering?
Students are fully informed of the estimated total cost of their program, how tuition charges are calculated each term and the cost of attendance used for financial aid calculations. Students are also fully informed of the terms and conditions for any loan program from which they may choose to borrow. Subsequent to the conclusion of the recent negotiated rulemaking, we, in addition to two other schools, proposed a robust disclosure process as an alternative to the Gainful Employment proposal discussed in the rulemaking sessions. This disclosure would provide specific program-level cost, indebtedness and repayment information that we think should be readily available for every student. Notwithstanding any rulemaking outcome, we will implement this process during the coming academic year at all of our schools.
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6. Do community colleges, public and nonprofit colleges and universities face capacity issues that limit their growth, and by consequence, limit opportunity for students — especially the most disadvantaged?
There are capacity issues facing community colleges, public and non-profit (independent) colleges that can limit their growth and, by extension, limit opportunities for disadvantaged students. Considering that 80% of all college attendees are enrolled in public-sector schools (both community colleges and 4-year schools), capacity issues have a significant impact on educational opportunity. This capacity issue translates into many of these schools becoming more selective in determining who is enrolled. As a result, the most impacted are those who have traditionally been left out of higher education and are the ones most in need of college access.
Publicly funded schools continue to face severe budget cuts that result in capping, and sometimes cutting, enrollment; eliminating courses; increasing class sizes; and laying off faculty and administrative staff. It is well known that the University of California System has proposed cutting 40,000 enrollments (Attachment 11). Arizona State University recently considered eliminated their Clinical Lab Science bachelor's degree program ("Closure of clinical lab sciences programs threatens healthcare industry." Healthcare Finance News. May 13, 2009, http://www.healthcarefinancenews.com/news/closure-clinical-lab-sciences-programs-threatens-healthcare- industry). DeVry University Phoenix just opened one.
An example of one capacity issue facing community colleges, public and nonprofit colleges and universities is our nation's projected nursing shortage. It is estimated that more than one million new and replacement nurses will be needed by 2020. Yet nearly 99,000 qualified students are turned away each year from U.S. nursing schools due to a lack of capacity. Thousands of people want to be nurses but can't because there are not enough seats in nursing schools.
Reductions in administrative staff and resources do affect those that get in the door at traditional schools. Disadvantaged and non-traditional students often have less experience with higher education. They may be the first in their family to go to college, or are older students already in the workforce, with children or other dependents. These non-traditional students typically need much more in the way of support services, such as financial aid counselors, career counselors, admissions advisors, and academic support. Reductions in these administrative resources further limit opportunities for success for disadvantaged students.
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Many publicly-funded schools have also been slow to adopt some of the innovations that the private sector has developed or embraced. Online courses were pioneered by the private sector, but many traditional schools have been slow to embrace this technology. Non-traditional students, many of whom work full time, often find online courses to be the only option flexible enough to allow them to pursue a degree. Offering classes year-round is also critical to meeting the needs of non-traditional students. They want to graduate quickly and need a full offering of courses over the summer.
Northern Virginia Community College President Robert Templin sums up the public education response to the current economic challenge in saying, "A significant portion of higher education is hunkered down, trying to wait out the storm. We've taken the approach that while things will get better, they will never get back to the way they were. We're going to have to find new ways to do our work." (Attachment 17).
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