Corinthian Defeats California Bid for Warning to Students

Corinthian Colleges Inc. persuaded a judge not to force it to post warnings on its websites about the company’s dire financial condition after telling him that notices would scare off prospective students and buyers and put it into a “death spiral.”

The for-profit owner of career schools defeated a bid by California Attorney General Kamala Harris for a court order forcing it to disclose that it’s at risk of financial collapse and will sell or close schools.

California Superior Court Judge Curtis Karnow in San Francisco, after listening to two hours of arguments from both sides, said he didn’t see any basis to force the company to add or delete language on the company’s Web pages about its condition and future prospects.

Corinthian, which serves 72,000 students through its Everest, Heald and WyoTech brands, reached an agreement with the U.S. Education Department July 3 on a plan to sell or shut its 107 campuses in the U.S. and Canada. Corinthian said it would put 85 of its U.S. schools up for sale, including all schools in California, as well as its campuses in Canada, and gradually close operations at 12 other U.S. locations as students complete their programs.

Harris alleges Corinthian’s websites and ads contain misleading or false information that the schools are stable and permanent, which will lure students into signing up for schools that could ultimately go out of business.

‘Misleading Statements’

“The harm shown by the AG is also relatively low,” Karnow said. “No one would be signing up based on misleading statements, no money would be changing hands based on those statements.”

The government will provide $35 million in student aid so the company can continue classes for existing students who choose to continue their studies, the Education Department said in a statement.

On June 19, the Education Department imposed a 21-day waiting period for the company to draw on the federal student aid that accounts for almost all its revenue. The agency released $16 million on June 23, enough for Corinthian to survive for about a week, the company said. Even with federal money, the company said it wouldn’t be able to fund operations without additional bank financing, which it said it has been unable to obtain.

Harris’s proposed changes to Corinthian’s websites were vague, difficult to enforce and too general, the judge said. Forced disclosures would put the company’s workers at risk of being held in contempt of court, he said.

Permanent Order

Karnow said he’ll revisit the matter when he considers the state’s request for a permanent order to post warnings. He scheduled a hearing for Aug. 13.

“Attorney General Harris strongly believes that Corinthian must provide current and prospective students with the same information it shares with Wall Street investors,” Nick Pacilio, a spokesman for Harris, said today in an e-mail. “We look forward to presenting our case to the court at the full evidentiary hearing next month.”

John Hueston, Corinthian’s attorney, said the ruling “is a victory for due process” and the company’s students.

“If you wind up calling it wrong here, the schools go down and the students are harmed” and there would be a “death spiral” if a “black box” warning is required, he told Karnow at the hearing.

The case is People of the State of California v. Heald Colleges LLC, CGC-13-534793, California Superior Court, San Francisco County.

Before it's here, it's on the Bloomberg Terminal.