A team of Shearman & Sterling litigators recently obtained a significant victory on behalf of Lincoln Educational Services Corp. (Lincoln) and certain of its officers and directors.
On September 6, 2011, the Honorable Stanley R. Chesler of the United States District Court for the District of New Jersey granted a motion to dismiss in its entirety a class action lawsuit asserting claims for securities fraud under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The case is captioned In re Lincoln Educational Services Corp. Securities Litigation, Civil Action No. 10-4160 (SRC) (D.N.J.).
The lawsuit was one of many filed against publicly-traded post-secondary educational companies in the wake of a report issued by the Government Accountability Office (GAO) that alleged certain for-profit colleges had engaged in fraudulent and deceptive recruiting practices. Lincoln was the first company in the sector to have its motion to dismiss decided.
Although his claims were initially based on the GAO report (which did not actually concern Lincoln), plaintiff abandoned that theory altogether when subsequent investigations by Congress, among others, failed to uncover any evidence that Lincoln had engaged in wrongdoing. Instead, plaintiff amended his complaint to allege fraud on the basis of the only other adverse event reported around the time the GAO released its report: a modest short fall in Lincoln's projected enrollment growth. According to plaintiff, defendants misrepresented to investors that Lincoln could meet short-term projections regarding student enrollment growth and revenue when they knew that the Company's recent decision to raise admissions standards—which represented an effort to proactively position the Company to comply with regulations that they expected the Department of Education to adopt in the future—made it impossible to meet those projections.
Defendants moved for dismissal on the ground that all of the alleged misstatements were “forward-looking” and fell squarely within the Private Securities Litigation Reform Act’s safe harbor. The Court agreed and dismissed all of plaintiff’s claims. In particular, the Court held that defendants’ “forward-looking” statements were either accompanied by cautionary language that expressly warned of the risks that materialized when the actual enrollment numbers did not hit the projected mark or were immaterial as a matter of law.
The litigation team consisted of partner Alan Goudiss (New York-Litigation) and associates Christopher Fenton (New York-Litigation) and Jennifer Rimm (New York-Litigation).