Cases & Deals

Education Management Corporation wins motion to dismiss securities class action

Client(s) Education Management Corporation

Jones Day represented Education Management Corporation ("EDMC") and certain of its directors and officers in a securities class action lawsuit (dismissed) filed in the U.S. District Court for the Western District of Pennsylvania. Also named as defendants in the lawsuit were thirteen investment banks that served as underwriters of EDMC's IPO.

Plaintiffs' lawsuit sprang from a decline in EDMC's stock price after the proprietary education sector came under increased congressional scrutiny in summer 2010, leading to a decline in the stock prices of companies across the industry. Led by court-appointed lead plaintiff the Oklahoma Police Pension and Retirement System, plaintiffs brought claims under Sections 11 and 12(a)(2) of the Securities Act and Sections 10(b) and 20(a) of the Exchange Act, alleging that defendants issued a materially false and misleading registration statement and prospectus in connection with an October 1, 2009 initial public offering and that defendants made other material misrepresentations or omissions during the class period.

Plaintiffs claimed, among other things, that EDMC's enrollment success was due to the kinds of improper practices that were revealed in the 2010 congressional investigations and that EDMC failed to adequately disclose the risk that the federal government could enact changes to the rules applicable to EDMC and its schools.

EDMC and the individual defendants argued that plaintiffs failed to present any credible evidence of regulatory violations or scienter; that plaintiffs failed to establish loss causation because an industry-wide decline in stock prices cannot give rise to a fraud claim against all industry members; that EDMC had no duty to speculate as to the outcome of congressional rulemaking of which the market was fully aware; and that EDMC had properly disclosed in its securities filings that it operated in a highly-regulated industry, in which regulatory changes could impact financial results.

The U.S. Magistrate Judge agreed with EDMC, and on August 30, 2011, recommended that the lawsuit be dismissed in its entirety, without leave to amend. On September 29, 2011, the District Court Judge adopted the Magistrate Judge's report and recommendation, and issued an order granting defendants' motions to dismiss.

Douglas N. Gaer v. Education Management Corp., et al., No. 2:10-cv-01061-NBF-RCM, W.D. Pa.