Boca Raton Firefighters and Police Pension Fund, Et Al. V. DEVRY, Inc

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. - 1 - Case: 1: 1 0-cv-07031 Document #: 27 Filed: 03/07/11 Page 6 of 178 PageID #:218 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 - 2 - Case: 1: 1 0-cv-07031 Document #: 27 Filed: 03/07/11 Page 7 of 178 PageID #:219 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.

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