Pomerantz Appointed Lead Counsel in K12 Securities Litigation
On February 17, 2021, U.S. District Judge Liam O’Grady of the Eastern District of Virginia appointed Pomerantz LLP as Lead Counsel on behalf of Lead Plaintiff James Boykin in In re K12 Inc. Securities Litigation, 20-cv-1419 (E.D. Va.), a securities action brought on behalf of a class of defrauded investors concerning allegations that K12 Inc. (“K12” or the “Company”) misled investors regarding its ability to meet the increased technological, administrative and infrastructure demands on its online educational platform during the COVID-19 global pandemic despite touting its capabilities and preparedness to provide remote learning services to students, parents and teachers.
K12 is a technology-based education company that provides proprietary and third-party educational curriculum, teacher training, administrative support, information technology support, software systems, and educational services. The Company operates virtual learning systems worldwide. As a provider of online content and educational services, K12’s success and financial and operational well-being are critically dependent on its technical capability and ability to provide and maintain well-functioning and operational information technology systems and infrastructures.
The Complaint alleges that, from April 27, 2020 to September 18, 2020, Defendants failed to disclose to investors that: (i) K12 lacked the technological capabilities, infrastructures, and expertise to support the increased demand for virtual and blended education necessitated by the global pandemic; (ii) K12 lacked adequate cyberattack protocols and protections to prevent the disabling of its computer system; (iii) K12 was unable to provide the necessary levels of administrative support and training to teachers, students, and parents; and (iv) based on the foregoing, Defendants lacked a reasonable basis for their positive statements about the Company’s business, operations, and prospects and/or lacked a reasonable basis and omitted facts.
Beginning in March 2020, the global pandemic has forced school districts across the country to close in-class instruction and shift all learning activities to online and blended instruction. K12, which had a history of reporting disappointing financial results during the 10-month period prior to the school closures, saw a unique opportunity to revamp itself by seizing a large stake in the rapidly growing market for online education. Accordingly, almost immediately following the nationwide closure of in-class instruction, K12 embarked on an intensive campaign to convince the market that it was well-positioned and technologically capable to accommodate and service the massive surge of students, parents, and teachers who were turning to online education. To do that, Defendants disseminated dozens of false and misleading statements in which they touted the technological wherewithal of the Company’s online learning platforms, cybersecurity protocols, preparedness for large volumes of students, as well as the administrative support and training that K12 would provide to students, parents, and teachers.
K12’s self-promoting campaign worked well. In reliance on K12’s false and misleading statements, the investing community expected K12 to experience a great boost in its financials and successfully capitalize on the opportunities presented to it by the global pandemic. For example, on July 15, 2020, when K12 common shares traded at around $43 per share, Citron Research published a $100 price target for K12. Citron Research’s prediction was based on its belief that K12 was “best positioned to take advantage of [the] megatrend [of shifting to full online education].” Similarly, securities analysts gradually increased K12’s rating, based on the Company’s executives’ commentary regarding present enrollment trends. As a result of K12’s self-promoting campaign, the price of K12 shares skyrocketed to its all-time high closing price of $51.60 per share on August 5, 2020, a surge that was unmatched by any of K12’s competitors.
In reality, however, and unbeknownst to the investing public, K12 was not ready to take on the increased load and lacked the technological capabilities to support and service the massive increase in traffic on its website and its learning platforms. Indeed, K12 lacked adequate infrastructures to enable thousands of students and teachers to logon to their systems and utilize the audio and video features necessary for remote instruction. Additionally, despite K12’s representations to the contrary, its cybersecurity measures and protocols were so weak that a 16-year-old high school junior successfully breached the network on which K12 was critically dependent, and thereby crippled K12’s online platform, and the provision of its services for hundreds of thousands of students for several days. The issues relating to the functionality and support of K12’s platforms were only compounded by the lack of training and instruction provided to teachers and parents, who received little support and insufficient hands-on experience and training prior to the platform’s launch.
Contrary to the facts asserted by K12, reports began to surface that K12’s training for teachers in Miami-Dade County, one of the nation’s largest school districts, had been woefully inadequate. For example, on August 26, 2020, teachers in Miami-Dade County School District reported that the training provided by K12 was ineffective and “unacceptable” as they lacked the instruction necessary to utilize K12’s platform.
On this news, the price of K12 common shares sharply fell by 7% over the course of two trading days, to close at $37.70 per share on August 27, 2020, on unusually high volume.
Once classes began on August 31, 2020, the situation worsened. K12 experienced major technical issues and disruptions with teachers and students of Miami-Dade County being unable to even log into the platform and utilize its contents, which prompted local officials to publicly scold K12 for being “not ready” for the opening of the school year. By the third day of classes, September 2, 2020, Miami-Dade County students and teachers reported numerous additional technical issues and a total of twelve intermittent cyberattacks that led to K12’s learning platform effectively being dysfunctional. In response to the overwhelming number of complaints by outraged parents, Miami-Dade County School District called a Board meeting to discuss K12’s many failures. During the meeting, Miami-Dade County Public Schools Superintendent Alberto Carvalho revealed that he never signed the $15.3 million no-bid contract with K12 and the school district had never paid K12 for the provision of its services and products.
On this news, the price of K12 common shares fell 10.5% over the course of two trading days, to close at $34.89 per share on September 3, 2020.
A week later, after another Board meeting that lasted for over 13 hours and included 400 speakers, the Miami-Dade County Public Schools Board voted to terminate their $15.3 million contract with K12 on September 10, 2020.
On this news, the price of K12 common shares again fell drastically, by 11.5%, to close at $30.55 per share on September 10, 2020, on unusually high trading volume.
Meanwhile, the Beaufort County School District in South Carolina engaged K12 to provide virtual learning programs for their students. However, the introduction of the program had to be delayed until the second week of instruction. Soon after, Beaufort County School District board member John Dowling stated that he had lost confidence in K12’s ability to provide educational solutions for the district and moved to terminate the contract, which happened two days later.
On this news, the price of K12 common shares fell 4.9%, to close at $27.21 per share on September 18, 2020, on unusually high trading volume.
Pomerantz’s K12 litigation is led by Of Counsel Brenda Szydlo.