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Apollo Group Rejected by High Court on $300 Million Award

The probe was triggered by a lawsuit by two University of Phoenix counselors who said they were paid based on the number of students they enrolled. Photographer: Joshua Lott/Bloomberg
The probe was triggered by a lawsuit by two University of Phoenix counselors who said they were paid based on the number of students they enrolled. Photographer: Joshua Lott/Bloomberg

March 7 (Bloomberg) -- The U.S. Supreme Court refused to question a jury verdict that may force Apollo Group Inc., the owner of the University of Phoenix, to pay more than $300 million for deceiving shareholders.

The justices today rejected an appeal from Apollo, accused of withholding an Education Department report that said the company was illegally paying recruiters on the basis of enrollment numbers. Apollo, the largest U.S. for-profit college operator, said the suing shareholders didn’t show that the eventual release of the report’s details caused the company’s prices to fall.

Exactly how much Apollo must pay will depend on how many shareholders file claims. An expert witness for the suing shareholders testified at trial that the verdict might affect as many as 50 million shares, meaning Apollo would owe $277.5 million, plus interest.

Phoenix-based Apollo has set aside $179 million to cover damages, interest and other litigation costs. The company said in a regulatory filing in January that it estimates damages will be between $127 million to $228 million.

The company said in an e-mailed statement that it “has already fully accrued the estimated liability in relation to this litigation.” Apollo fell 22 cents to $44.07 at 5:20 p.m. New York time in composite trading on the Nasdaq stock market.

In a court filing in August, the company said the jury verdict “could result in a total payment of an amount between $200 and $300 million.” That range represents a “worst-case scenario,” said Manny Rivera, a company spokesman.

Falling Shares

The dispute stems from an Education Department report delivered to the company privately in February 2004. The report said the company needed to make “substantial and comprehensive changes to the salary compensation system for its recruiters and their direct supervisors.”

Apollo agreed to revamp its compensation system and on Sept. 7, 2004, the company announced it was paying $9.8 million to resolve the Education Department’s investigation. The company revealed the existence of the report, without providing details.

The following day, the company’s shares fell from $82.72 to $82.07, a drop the suing shareholders said would have been greater had the company been upfront about the report. By Sept. 21, after a series of newspaper articles provided more details and a securities analyst had downgraded the stock, shares had fallen to $72.00.

Apollo officials said during the case that they didn’t disclose the report because their lawyers told them it was preliminary and flawed.

Appeals Court

Jurors concluded that Apollo, former Chief Executive Officer Todd Nelson and former Chief Financial Officer Kenda Gonzales had tried to hide the report’s contents from investors. The jury awarded $5.55 per share as compensation.

Apollo at one point was poised to escape the jury’s conclusions. A federal trial judge in 2008 overturned the verdict, saying shareholders hadn’t proven they lost money as a result of the company’s deceptions.

The San Francisco-based 9th U.S. Circuit Court of Appeals reversed that ruling in June, saying the jury could have reasonably held the company responsible for the decline in share prices.

The Education Department’s probe was triggered by a California lawsuit by two University of Phoenix counselors who said they were paid based on the number of students they enrolled. Federal law bars schools whose students receive federally guaranteed tuition loans from paying staffers a commission, bonus or other incentive payment based on the number of students they enroll.

The case is Apollo Group v. Policeman’s Annuity and Benefit Fund of Chicago, 10-649.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net.

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net.

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