In re Grand Canyon Education, Inc. Securities Litigation

Court: United States District Court for the District of Delaware
Case Number: 1:20-cv-00639-MN-CJB
Class Period: 01/05/2018 - 01/27/2020
Case Leaders: Katherine M. Sinderson, Gregory V. Varallo
Case Team: Robert Kravetz, Michael Mathai

On May 12, 2020, Bernstein Litowitz Berger & Grossmann filed a class action lawsuit on behalf of its client, Fire and Police Pension Association of Colorado (“Lead Plaintiff”) for violations of the federal securities laws in the U.S. District Court for the District of Delaware against Grand Canyon Education, Inc. (“Grand Canyon”) and certain of Grand Canyon’s senior executives (collectively, “Defendants”) on behalf of investors in Grand Canyon common stock between January 5, 2018, and January 27, 2020, inclusive (the “Class Period”).The case is captioned In re Grand Canyon Education, Inc. Securities Litigation, No. 1:20-cv-00639-MN-CJB (D. Del.).

As alleged in the complaint, Defendants inflated Grand Canyon’s financial results by spinning off its formerly for-profit university, Grand Canyon University, (“GCU”) as a purportedly non-profit university, New GCU, which it used as an off-balance-sheet entity to which Grand Canyon was able to funnel expenses and costs in exchange for a disproportionate amount of revenue. Defendants repeatedly made false and misleading statements to investors describing New GCU as a “non-profit” and “independent” institution, misstating Grand Canyon’s role as a third-party provider of education services, and misstating the Company’s financial results. In addition, the Company failed to disclose to investors that it had received repeated communications from the U.S. Department of Education (“DOE”) putting the agency’s approval of the spinoff in doubt. 

The truth emerged through a series of disclosures beginning on November 6, 2019, when Grand Canyon announced that it had received a letter from the DOE denying its application for designation of New GCU as a non-profit. That denial was based on the DOE’s finding, through an examination of several confidential analyses of the transaction commissioned by Grand Canyon’s Board of Directors, that New GCU was Grand Canyon’s “captive client” and that New GCU “is not the entity actually operating [GCU].” The DOE concluded that the relationship between Grand Canyon and New GCU violated “the most basic tenet of nonprofit status—that the nonprofit be primarily operated for a tax-exempt purpose and not substantially for the benefit of any other purpose or entity.” Then, on January 28, 2020, financial analyst Citron Research published a second report expanding on the DOE’s findings, citing hundreds of pages of non-public supporting documentation from Grand Canyon that Citron obtained through a Freedom of Information Act request. That report described Grand Canyon as the “educational Enron,” using a “captive non-reporting subsidiary” to “dump expenses and liabilities, while receiving a disproportionate amount of revenue at inflated margins in order to artificially inflate the stock price.” As a result of these disclosures, the price of Grand Canyon common stock declined precipitously.

On December 21, 2020, Defendants moved to dismiss the Complaint. Plaintiffs opposed that motion on February 19, 2021. Defendants filed their reply on March 22, 2021. The Court held oral argument on the motion to dismiss on May 26, 2021 and dismissed Plaintiffs’ complaint on August 9, 2021. Plaintiffs filed an amended complaint on January 21, 2022. Defendants filed their motion to dismiss the amended complaint on March 15, 2022. Plaintiffs filed their opposition to that motion on May 6, 2022, and Defendants filed their reply in further support of their motion on June 3, 2022. Oral argument on the motion was held on October 25, 2022.

On February 17, 2023, Magistrate Judge Christopher J. Burke issued a Report and Recommendation to deny Defendants’ motion to dismiss the Complaint. On February 27, 2023, Defendants filed objections to the Report and Recommendation and, on March 9, 2023, Plaintiffs filed their response to Defendants’ objections. On March 28, 2023, after oral argument, the Court overruled Defendants’ objections and adopted the Report and Recommendation, denying Defendants’ motion to dismiss the Complaint.

The case has proceeded into discovery.