Jan. 16 (Bloomberg) -- Apollo Group Inc., owner of the for- profit University of Phoenix, lost a shareholder securities-fraud lawsuit claiming damages of as much as $277.5 million.

A jury today agreed with investors that Apollo, along with former Chief Executive Officer Todd Nelson and former Chief Financial Officer Kenda Gonzales, deceived shareholders and regulators by not disclosing a February 2004 U.S. Education Department report. The department accused the Phoenix-based company of violating a federal ban on paying staff based on the number of students they enroll.

The jury said Apollo is responsible for 60 percent of the plaintiffs' losses. Nelson's share is 30 percent and Gonzales's is 10 percent. The precise amount of damages the company will pay will be determined after eligible investors provide evidence to back up their claims.

``The jury saw things the same way we did and I congratulate them on their diligence,'' said James Maloney, a Chicago police officer and a trustee of the Policemen's Annuity and Benefit Fund of Chicago, the lead plaintiff. ``We wouldn't be here if there had been full disclosure.''

The jury set damages at $5.55 a share, the amount plaintiffs had sought. The claimed damages amount to about three quarters of Apollo's reported earnings of $408.8 million for the fiscal year that ended Aug. 31.

The verdict is the fourth time since 1996 that a federal jury found in favor of investors accusing companies of lying to them; five such juries have found in favor of companies.

`Extremely Disappointed'

``We're extremely disappointed,'' Apollo lawyer Wayne W. Smith of Gibson, Dunn & Crutcher said after the verdict. ``We didn't think any of the statements were false or misleading. We didn't think the plaintiffs proved their case.''

Apollo didn't mention the government report in a press statement, analyst calls or a filing with the U.S. Securities and Exchange Commission during the time the plaintiffs bought and held the company's stock, the jury said. The shareholders said the company disclosed previous audits and investigations by the Education Department going back to the 1990s.

``In not disclosing the report at issue, Apollo acted in good faith and in the best interests of its students, alumni, employees and shareholders, who could have been unfairly harmed by a premature disclosure,'' Smith said in a e-mailed statement.

Appeal Options

Smith said Apollo is evaluating its options, including a possible appeal.

Apollo had said that it didn't disclose the report because it was preliminary and flawed, that the company quickly resolved the issues raised, and that the report's subsequent disclosure didn't significantly affect Apollo's stock price.

Both Nelson and Gonzales testified as hostile witnesses for the plaintiffs. Gonzales said the company withheld the report to avoid news coverage of the allegations. Nelson said the company didn't agree with the report's allegations and lawyers advised against disclosing it. He also said he thought revealing it would cause the company's stock price to fall.

Seven months after receiving the report, Apollo settled the Education Department matter by paying a $9.8 million fine without conceding rules violations. After the settlement was announced, the contents of the report became public in news stories.

The University of Phoenix, which educates adult students, is the largest U.S. private university, ranked by enrollment. About 325,000 students seeking associate's, bachelor's, master's and doctoral degrees are enrolled at 256 University of Phoenix locations in 40 U.S. states, Canada, Mexico and the Netherlands, as well as online, according to the company.

$1 Billion Joint Venture

In October, Apollo formed a $1 billion joint venture with Washington-based private-equity firm Carlyle Group to invest in education programs worldwide.

The Apollo shareholder case is unusual because few securities class-action lawsuits go to trial. It's the 19th to do so since 1996, according to RiskMetrics Group, a financial analytics company. In addition to jury verdicts, some of the cases resulted in settlements during trials or in judges' dispositions.

From 1996 through the end of last year, 2,218 such cases were filed, according to Cornerstone Research, an economics consulting group. Most are thrown out or settled. Fueled by subprime-mortgage losses, last year investors sued 166 companies, 43 percent more than the 116 in 2006, a 10-year low.

$5.55 a Share

On Nov. 27, a federal jury in Oakland, California, cleared telecommunications-equipment maker JDS Uniphase Corp. and its former management team of misleading investors in a securities- fraud class action that sought as much as $20 billion in damages.

In the Apollo trial, which began Nov. 14, the Policemen's Annuity and Benefit Fund of Chicago sought $5.55 a share in damages on behalf of anyone who bought and held the company's stock from Feb. 27, 2004, to Sept. 14, 2004. A plaintiffs expert testified that he estimated the number of shares affected to be from 30 million to 50 million.

The Education Department's probe was triggered by a lawsuit filed in California in March 2003 by two University of Phoenix counselors who said they and their colleagues were paid based on the number of students they enrolled. A trial has been set for September 2009.

Under a 1992 statute, schools whose students receive federally guaranteed tuition loans can't pay enrollment counselors a commission, bonus or other incentive payment based on the number of students they enroll. Regulations later allowed for schools to include enrollments as one factor in compensation considerations.

Apollo fell $1.36 to $78.57 at 4:30 p.m. New York time in Nasdaq Stock Market composite trading.

The case is In re Apollo Group Inc. Securities Litigation, 04-2147, U.S. District Court, District of Arizona (Phoenix).

To contact the reporters on this story: Emily Heller in Phoenix federal court at emilyheller@cox.net; Thom Weidlich in Phoenix federal court at tweidlich@bloomberg.net.

Last Updated: January 16, 2008 17:03 EST