Technology-based education firm K12, Inc., which hoped to be able to profit from the pandemic-related shift to virtual learning , has been hit with a securities class action lawsuit alleging that the company’s share price declined after school systems using its platform to address their online learning needs allegedly experienced disappointing results. A copy of the shareholder plaintiff’s November 19, 2020 complaint can be found here.
According to the complaint, beginning in March 2020, after the coronavirus outbreak forced school systems across the country to shift educational activities online, K12 “saw a unique opportunity to revamp itself by seizing a large stake in the rapidly growing market for online education.” The company 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.” The defendants, the complaint alleges, “disseminated dozens of false and misleading statements in which they touted” the company’s “technological wherewithal” including its “cybersecurity protocols, preparedness for large volumes of students, as well as administrative support and training.”
The complaint alleges that the company’s “self-promotion campaign worked well”; among other things, the company’s share price “skyrocketed” to its all time high of $51.60. At about the same time, in the company’s August 11, 2020 earnings call, Nathaniel Davis, the company’s CEO and Chairman “bragged about the company’s contract with one of the nation’s largest public school systems, the Miami-Dade County Public Schools, allegedly “reiterating” the company’s “readiness to service and administer online learning programs.”
The reality, the complaint alleges, is that the company “was not ready to take on the increased load and lacked the technological capabilities to support the massive increase in traffic” to its platform. The company “lacked adequate infrastructures to enable thousands of students and teachers to logon,” and weaknesses in its cybersecurity measures and protocols allowed hackers to “cripple” the online platform, problems that were “compounded by the lack of training and instruction provided to teachers and parents.”
The problems began to emerge in Miami/Dade County allegedly began to emerge even before the school system’s fall semester began. News reports began to circulate that teachers had complained that the company’s training was “ineffective” and “unacceptable,” resulting in a decline in the company’s share price.
Once classes began at the end of August, “the situation worsened,” as the company experienced “major technical issues and disruptions,” which allegedly “prompted local officials to publicly scold K12 for not being ready.” By the third day of classes in early September, students and teachers reported “additional technical issues and a total of twelve intermittent cyberattacks” causing the company’s online platform to be “dysfunctional.” The county’s school board convened a meeting to discuss the company’s “many failures.” The company’s share price declined an additional 10.5% over the course of two trading sessions on the news.
On September 9, 2020, the Miami/Dade County school board convened another meeting to discuss ongoing issues with the K12 platform. The meeting lasted 13 hours and featured 400 public speakers, and parents presented a wide range of complaints. The meeting “culminated” in a September 10, 2020 Miami/Dade County education board vote to stop using K12’s online learning platform. The company’s share price declined another 11.5% on the news.
The complaint further alleges that the problems were not limited to Miami/Dade County. The complaint alleges that on September 17, 2020, the Beaufort County School Board moved to terminate its contract with K12 because “the contractual obligations were not met.” The complaint alleges that following the vote the county’s Superintendent “cited his disappointment in K12’s ability to meet the Board’s expectations and fulfill its requirements under the contract.”
On November 19, 2020, a plaintiff shareholder filed a securities class action lawsuit against K12; its CEO and Chairman; and its Chief Financial Officer. The complaint purports to be filed on behalf of a class of K12 investors who purchased the company’s securities between April 27, 2020 and September 18, 2020.
The complaint alleges that that the defendants made false or misleading statements and 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 systems; (iii) K12 was unable provide [sic] 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.”
The complaint alleges that the defendants’ misrepresentations and omissions during the class period violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the plaintiff class.
The new complaint against K12 is merely the latest in a series of COVID-19-related securities class action lawsuits that have been filed since the coronavirus outbreak emerged in March 2020. By my count, the K12 lawsuit is the 22nd COVID-19-related securities lawsuit to be filed – although, to be sure, as time has gone by disagreements have emerged among various observers over whether or not various lawsuit are or are not in fact pandemic-related. Thus, my overall tally differs from that of other publicly available sources, such as, for example, the Stanford Law School Securities Class Action Clearinghouse (whose tally can be found here).
As the various coronavirus-related securities lawsuits have come in, I have found that the lawsuits tend to fall into one of three categories: first, the lawsuit filed against companies that experienced coronavirus outbreaks within the company’s facilities (such as cruise ship lines and private prison systems); second, companies that had sought to tout their ability to profit from the coronavirus outbreak (such as vaccine developers, diagnostic testing services, and manufacturers of personal protective equipment); and third, companies that experienced downturns in their operations or financial results due to the pandemic (for example, Hotel REITs and residential real estate development firms).
The new lawsuit against K12 clearly falls in the second of these two categories, as the company allegedly tried to portray itself as well positioned to take advantage of the pandemic-caused shift to online learning, and the lawsuit arose only after the company’s actual performance allegedly fell short of its claimed capabilities.
It is worth noting that in addition to being a COVID-19-related securities suit, the new lawsuit also is an example of another ongoing securities litigation phenomenon: that is, the lawsuit is also an example of a securities lawsuit arising in the wake of a cybersecurity incident. Here, the complaint alleges that the company attempted to portray its online learning platform as being undergirded by strong cybersecurity protocols, while also alleging that among the problems that emerged as the situation with the Miami/Dade County schools deteriorated was a series of cyber breaches that rendered the company’s platform “dysfunctional.”
While the K12 lawsuit is, as noted above, the latest in a series of pandemic-related securities lawsuits, it is worth noting that the filing pace on these kinds of lawsuits has definitely slowed as the months have progressed. Thus, for example, while quite a number of these kinds of lawsuits were filed earlier on this year, in recent months relatively few have been filed. By my count, there have only been two filed since the end of August, none at all being filed in September, only one in October, and only one (so far, at least) in November.
The COVID-19-related securities lawsuits have been an important phenomenon during 2020, and more of these lawsuits may yet be filed, but the lawsuits have not really developed into the kind of wave of litigation that emerged, for example, after the global financial crisis now more that 10 years ago.
All of that said, it seems likely that as the public health crisis phase of the coronavirus outbreak extends far longer than any of us imagined back in March, and as the latest phase show signs of being much worse that the earlier stages, the possibility that other companies might find themselves out of position with respect to earlier disclosure statements will continue, just as the continuing economic turbulence and renewed government closure orders will put further pressure on many company’s operations and financial results. The pace of COVID-19-related securities suits may have slowed in recent months, but these kinds of lawsuits seem likely to continue as we finish up the year and head into 2021.
Just FYI, on November 17, 2020, K12 announced that as of December 16, 2020 the company is changing its name to Stride, Inc.