Apollo Group Ordered to Pay $280M
Wednesday January 16, 6:26 pm ET
By Chris Kahn, AP Business Writer

Apollo Group Ordered to Pay About $280 Million in Fraud Case

PHOENIX (AP) -- Apollo Group Inc., the for-profit company that owns the University of Phoenix, fraudulently misled investors in 2004 about its student recruitment policies, a federal jury decided Wednesday. The panel ordered the company to pay shareholders about $280 million.

Jurors said Apollo officials "knowingly and recklessly" made false statements in a press release, a filing with the Securities and Exchange Commission, and four conference calls with market analysts. By doing so, jurors said, Apollo violated federal securities laws.

The verdict, which comes after a two-month trial in U.S. District Court in Phoenix, specified that the company pay certain investors $5.55 a share. Phoenix-based Apollo, which reported $780.7 million in revenue in the first quarter, said it hasn't decided whether to appeal. "It's a shock, but we'll see where we go," said Apollo's Chief Financial Officer Joe D'Amico said as he left the courtroom.

Shareholders claimed Apollo misled investors four years ago when it kept secret a Department of Education report that criticized the University of Phoenix's recruitment policies. The report, which was issued on Feb. 5, 2004, concluded that the University of Phoenix paid enrollment counselors "solely based on (the) recruiters' success in securing enrollments," which violated federal regulations.

It added that the university systematically keeps its incentive-based recruitment practices hidden from the Department of Education. "Any reasonable investor, I assure you, would have wanted to know the existence of this report," Stephen R. Basser, an attorney representing shareholders with the policemen's annuity and benefit fund of Chicago, told jurors last week in closing arguments.

The shareholders singled out former CEO Todd S. Nelson and former CFO Kenda B. Gonzales as the Apollo officials who failed to inform investors about the Department of Education's report. Nelson and Gonzales both left the company in 2006.

Investors had demanded $5.55 a share in restitution, an amount company officials estimated would add up to $280 million. The jury agreed after only two days of deliberation. Jurors said the company should be responsible for 60 percent of the restitution.

Nelson should be responsible for 30 percent and Gonzales should be responsible for 10 percent. It was unclear Wednesday whether indemnity agreements would require the company to pay Nelson and Gonzales' share.

The lawsuit covers Apollo investors who owned stock between Feb. 27, 2004, the date of the company's first misleading press release, and Sept. 14, 2004, when news broke of the Department of Education report. Basser said investors will be repaid up to $5.55 per share depending on how long they held the stock after Sept. 14, 2004.

Apollo investors have been notified of the lawsuit, and the plaintiffs will appoint an administrator to supervise individual claims, he said. The Policeman's Annuity and Benefit Fund of Chicago was the lead plaintiff in the case. Chicago Police Lt. James P. Maloney, a fund trustee and commanding officer with the department's financial crimes unit, said he hopes this teaches Apollo a lesson about corporate responsibility. "We deal with fraud, and this is what this was," Maloney said after the verdict.

Apollo argued that the Department of Education report was largely false and based on anecdotal evidence. Therefore, the company said, its failure to disclose its existence to investors was not misleading.  

Nevertheless, the University of Phoenix agreed in September 2004 to pay the department $9.8 million to settle the matter. When news of the report was made public later that month, Apollo's stock dropped significantly. Wayne W. Smith, a lawyer for Apollo, told jurors in closing arguments that the report was "seriously flawed" and made the university look like a diploma mill.

Last week, Smith showed jurors company documents that suggested the university's recruiters were not paid directly in relation to the number of students they signed up. The company said a number of factors determine recruiter salaries, including how well recruited students do in school, the retention rate of their students and how well the recruiter works with other school advisers.

Smith also disputed claims by shareholders that the university was turning to unqualified students to keep their enrollment numbers high. "There's no benefit to the university for people who can't hack it," Smith told jurors. "They just take one class at a time, and if they drop out, they get a prorata refund."

U.S. District Judge James A. Teilborg is expected to issue a judgment based on the jury's verdict. Apollo's lawyers have 10 days to ask Teilborg to throw out the verdict and order a new trial. Apollo stock dropped $1.36, or 1.7 percent, to $78.57 in trading Wednesday. They have traded in a 52-week range of $40.63 to $81.68.

http://www.apollogrp.edu