The U.S. District Court for the Southern District of California recently certified a class of shareholders for their securities fraud action against Bridgepoint Education, Inc. (In Re Bridgepoint Education, Inc Securities Litigation, 2015 U.S. Dist. LEXIS 5137) Bridgepoint is a for-profit post-secondary education company that owns and operates Ashford University. Ashford depends on Title IV funds for operations and must maintain accreditation with a recognized accreditor to receive funds. In 2010, Ashford’s main accreditor announced a new requirement, whereby the institution was required to have the majority of its business operations located within the accreditor’s jurisdiction. Ashford did not meet this requirement, because most of Bridgepoint’s business operations took place in San Diego. As a result, Bridgepoint applied for accreditation with a western-based accreditor and released a statement that indicated student retention in the institution improved.
Bridgepoint was ultimately denied accreditation and filed two Form 8-K statements explaining the denial. Both caused the company’s stock value to drop. The accreditation denial dealt specifically with Bridgepoint’s student retention and progress tracking, contradicting the statement released by Bridgepoint beforehand. Plaintiffs filed a complaint for violations of §10(b) and Rule 10b-5, §20(a), and §20A of the Securities Exchange Act. Bridgepoint moved to dismiss for failure to state a claim, but the Court concluded that the allegations supported misrepresentations regarding student retention.
Plaintiffs then moved to certify a class of persons purchasing Bridgepoint stock from the initial statement for accreditation to the release of the later Form 8-K. Bridgepoint only challenged the predominance requirements under Fed. R. Civ. P. 23(b)(3). Bridgepoint argued that the second Form 8-K was unrelated to student retention, the first Form 8-K fully revealed the extent of the misrepresentation, and the plaintiffs could not certify the class after the date of the first disclosure.
The Court rejected the argument. Although defendants may rebut the fraud on the market presumption with proof that the stock was not affected, the Court held that the defense cannot rebut the presumption at the class certification stage because the defense addresses the misrepresentation’s materiality, thereby affecting the merits and not predominance.
The Court found all certification requirements met, appointed class representatives and counsel, and certified the class.