thurman ross, by and on behalf of himself and civil action no....

Case: 1:12-cv-00276 Document #: 33 Filed: 05/03/12 of 115 PageID #:365

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS

THURMAN ROSS, by and on behalf of himself and all others similarly situated,

Civil Action No. 12 C 276 Plaintiff,

Hon. Matthew F. Kennelly vs.

CAREER EDUCATION CORPORATION, GARY E. McCULLOUGH, and MICHAEL J. GRAHAM, JURY TRIAL DEMANDED

Defendants.

CONSOLIDATED CLASS ACTION COMPLAINT

Jay W. Eisenhofer Joseph F. Rice Geoffrey C. Jarvis James M. Hughes Jeffrey A. Almeida David P. Abel Christine M. Mackintosh Meghan S. B. Oliver GRANT & EISENHOFER P.A. MOTLEY RICE LLC 123 Justison Street 28 Bridgeside Blvd. Wilmington, DE 19801 Mt. Pleasant, SC 29464 Telephone: (302) 622-7000 Telephone: (843) 216-9000 Facsimile: (302) 622-7100 Facsimile: (843) 216-9450 Co-Lead Counsel for the Lead Co-Lead Counsel for the Lead Plaintiffs Plaintiffs

Paul E. Slater (ARDC 2630567) Scott F. Hessell (ARDC 6275119) SPERLING & SLATER, P.C. 55 West Monroe Street Suite 3200 Chicago, IL 60603 Telephone: (312) 641-3200 Facsimile: (312) 641-6492 Liaison Counsel for Lead Plaintiff


TABLE OF CONTENTS

Page

I. NATURE AND SUMMARY OF THE ACTION.............................................................. 1

II. JURISDICTION AND VENUE.........................................................................................5

III. THE PARTIES.................................................................................................................... 6

A. CO-LEAD PLAINTIFFS ..............................................................................................6

B. DEFENDANTS ...........................................................................................................7

IV. FACTUAL BACKGROUND........................................................................................... 11

A. BACKGROUND OF CECO .......................................................................................11

B. THE IMPORTANCE OF TITLE IV FUNDING AND ACCREDITATION TO CAREER

EDUCATION ’ S BUSINESS ........................................................................................14

C. CECO’ S HISTORY OF FRAUD , DECEPTION AND NON-COMPLIANCE WITH

TITLE IV REGULATIONS ......................................................................................... 17

D. A NEW MANAGEMENT REGIME PURPORTS TO USHER IN A NEW CULTURE

OF REGULATORY COMPLIANCE .............................................................................. 23

E. THE SENATE HELP COMMITTEE INVESTIGATES THE FOR-PROFIT

EDUCATION INDUSTRY AND PROPOSES AND ADOPTS “GAINFUL

EMPLOYMENT” REGULATIONS ............................................................................... 28

F. CECO INSTITUTIONS INFLATED THEIR PLACEMENT RATES TO

ACCREDITATION AGENCIES AND INVESTORS .........................................................32

V. THE TRUTH IS REVEALED.......................................................................................... 42

VI. FALSE AND MISLEADING STATEMENTS................................................................ 48

A. CECO MADE FALSE STATEMENTS CONCERNING ITS PLACEMENT RATES .............48

B. CECO FAILED TO DISCLOSE THAT ITS SCHOOLS ’ ACCREDITATIONS WERE

PREMISED ON FALSIFIED PLACEMENT RATES ........................................................63

C. DEFENDANTS FALSELY STATED THAT CECO WAS IN COMPLIANCE WITH

ALL APPLICABLE LAWS AND REGULATIONS .......................................................... 72

D. ANALYSTS ’ NEGATIVE REACTIONS TO THE DISCLOSURE OF CECO’ S

PLACEMENT RATE IMPROPRIETIES UNDERSCORE THE MATERIALITY OF THE

FOREGOING FALSE STATEMENTS ........................................................................... 83

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VII . LOSS CAUSATION......................................................................................................... 89

VIII. ADDITIONAL ALLEGATIONS OF SCIENTER........................................................... 93

A. DEFENDANTS KNEW ABOUT, ENCOURAGED AND CONDONED CECO’ S

FRAUDULENT PLACEMENT RATE PRACTICES ......................................................... 93

B. THE SWIFT “RESIGNATIONS” OF HIGH-RANKING MEMBERS OF CECO MANAGEMENT UPON THE RELEASE OF THE RESULTS OF THE DEWEY & LEBOEUF INVESTIGATION SUPPORTS AN INFERENCE OF SCIENTER ........................ 98

C. CECO’ S CHECKERED REGULATORY PAST PUT DEFENDANTS ON

HEIGHTENED ALERT TO THE POSSIBILITY OF FRAUD ...........................................100

D. GOVERNMENT INVESTIGATIONS INTO RAMPANT MISCONDUCT IN THE FOR-PROFIT EDUCATION SECTOR PUT DEFENDANTS ON HEIGHTENED ALERT TO

THE POSSIBILITY OF FRAUD .................................................................................101

E. THE FACT THAT THE FRAUD RELATES TO CECO’ S CORE OPERATIONS

SUPPORTS AN INFERENCE OF SCIENTER ...............................................................101

IX. CLASS ACTION ALLEGATIONS...............................................................................103

X. PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE...........105

A. RELIANCE SHOULD BE PRESUMED WITH RESPECT TO DEFENDANTS ’ OMISSIONS ........................................................................................................... 105

B. RELIANCE SHOULD BE PRESUMED UNDER THE FRAUD-ON-THE-MARKET

DOCTRINE............................................................................................................ 105

XI. INAPPLICABILITY OF STATUTORY SAFE HARBOR...........................................106

XII. CLAIMS FOR RELIEF..................................................................................................107

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1. Co-Lead Plaintiffs KBC Asset Management NV (“KBC”), the Oklahoma Police

Pension & Retirement System (“OPPRS”), and the Oklahoma Law Enforcement Retirement

System (“OLERS”) (together, “Plaintiffs”), by their undersigned Co-Lead and Liaison Counsel,

bring this federal securities class action under the Securities and Exchange Act of 1934 (the

“Exchange Act”), on behalf of themselves and all other persons and entities who purchased

common stock of Career Education Corporation (“CECO” or the “Company”) between February

19, 2009, and November 21, 2011, inclusive (the “Class Period”). This action alleges that CECO

and certain of its current and former executive officers (“Defendants”) made false and

misleading statements relating to CECO’s business and financial condition, and otherwise

concealed material information relating to its fraudulent business practices, all of which had the

effect of artificially inflating the prices of CECO common stock during the Class Period.

2. The allegations in this Complaint are based upon information and belief, except as

to allegations specifically pertaining to Plaintiffs, which are based on personal knowledge.

Plaintiffs base their belief upon information uncovered through an investigation conducted by,

and under the supervision of, Co-Lead Counsel. This investigation included, among other

things, interviews with confidential witnesses, review and analysis of annual and quarterly

reports, publicly-filed documents, press releases, news articles, analysts’ statements and reports,

conference call transcripts and presentations, and transcripts from speeches and remarks given by

the Defendants. Plaintiffs believe that substantial additional evidentiary support will exist for the

allegations set forth herein after a reasonable opportunity for discovery.

I. NATURE AND SUMMARY OF THE ACTION

3. This action asserts violations of Sections 10(b) and 20(a) of the Exchange Act, 15

U.S.C. §§ 78j(b) and 78t(a); and Rule 10b-5, 17 C.F.R. 240.10b-5, promulgated thereunder.


4. CECO is in the business of providing “for-profit” educational programs and

services through the colleges and schools it operates throughout the United States and abroad.

During the Class Period, Defendants consistently misled investors with false statements and

material omissions about the job placement rates and other “gainful employment” data relating to

graduates of CECO-owned and operated schools in violation of the Exchange Act.

5. CECO’s placement rates were a key metric closely followed by analysts and

investors due to their importance to CECO’s business. In addition to providing CECO with

competitive marketing advantages to prospective new students, placement rates were also critical

because they allowed CECO-owned schools to maintain accreditation and access to federal

student loan funding (a.k.a. “Title IV funding”), which was CECO’s primary source of revenue.

In its fiscal years 2010 and 2011, for example, CECO derived approximately 82% and 83%,

respectively, of its U.S.-based revenue from Title IV funding. CECO’s business, therefore, was

highly dependent on placement rates for marketing and selling its services, and for purposes of

maintaining full accreditation and unfettered access to its overwhelmingly important Title IV

student loan revenue stream.

6. Historically, CECO reported that its institutions met or exceeded accreditation

agency placement rate requirements every year, which are typically 65% or 70%, depending on

the accreditor involved. During the Class Period, however, with the economy struggling and

unemployment soaring, Defendants were unwilling to be truthful to the market about CECO’s

inability to effectively place large numbers of its students. Instead, Defendants designed a

number of fraudulent and manipulative means to present strong (but intentionally inflated)

placement numbers, all of which were sanctioned and approved by senior members of CECO’s

management. These false, inflated placement rates were substantially higher than the actual

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placement rates at a large number of CECO-operated schools, and effectively concealed from

investors the significant risk to CECO that many of its schools would lose accreditation and their

access to federal aid in deriving revenues.

7. Defendants not only communicated robust, but false, placement rates to analysts

and investors, but at the same time they assured investors that CECO was conducting its business

in full compliance with all accrediting regulations, and that its operating systems and reporting

procedures ensured the protection of its access to Title IV revenues. The affirmative

misstatements made by Defendants regarding its placement rates and its strong focus on legal

and regulatory compliance throughout the Class Period were materially false and misleading

when made, and were either known by Defendants to be false or were made by Defendants in

reckless disregard of their falsity. At all material times, Defendants knew but failed to disclose

that the Company’s purported placement rates and accreditations were achieved only through an

improper course of conduct and through other manipulative means that placed the Company’s

primary source of revenue in jeopardy.

8. The Defendants’ ruse began to unravel on May 19, 2011, when it was hinted that

CECO was one of five for-profit education companies being investigated by the Attorney

General of the State of New York (the “NYAG”). On May 24, 2011, in a Form 8-K filing with

the Securities and Exchange Commission (the “SEC”), CECO confirmed that it had received a

subpoena from the NYAG, dated May 17, 2011, in connection with the NYAG’s investigation

into whether the Company and certain of its schools complied with certain New York state

consumer protection, securities, finance and other laws.

9. The NYAG investigation set in a motion a chain of events that led to the gradual

exposure of what had been, until that time, a well-concealed fraud. On August 3, 2011, the

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Company reported on a Form 8-K that it had found “improper practices at certain of its health

education segment campuses relating to the determination of reported placement rates.”

According to the release, the Company had “recently discovered these practices” and so the

Company’s Board of Directors “directed outside independent legal counsel Dewey & LeBoeuf to

undertake a thorough investigation . . . of student placements at all of the [C]ompany’s domestic

schools.” In response to this announcement, CECO’s stock price plummeted, dropping more

than 15% on high volume on the date of this disclosure. CECO’s stock fell another 13% over the

subsequent two-day period.

10. In connection with CECO’s August 3, 2011 8-K, however, CECO continued to

hide the true extent of the problem, and comforted investors with the false reassurance of

CECO’s CEO Gary McCullough (“Defendant McCullough”), who was quoted in the release and

attributed the placement rate problems to rogue employees as opposed to a Company-wide issue.

11. On November 1, 2011, however, the preliminary results of the internal

investigation by Dewey & LeBoeuf LLP (the “Dewey Report”) were more fully revealed in a

press release issued by the Company. The investigation found that CECO was broadly inflating

career placement statistics for its Health Education and Art & Design schools at numerous

campuses across the country. The investigation found “certain placements that lacked sufficient

supporting documentation or otherwise did not meet applicable placement guidelines established

by the Company.” According to the release, the investigation showed that only 13 of the

Company’s 49 accredited Health Education and Art & Design schools met the 65% placement

rate standards set by their accreditor – the Accrediting Counsel for Independent Colleges and

Schools (“ACICS”). Defendant McCullough was ousted, tendering his resignation on October

31, 2011, as were other key senior executives at the Company. Again, these revelations caused

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CECO stockholders to suffer massive losses. CECO’s stock lost 54% of its value over the

course of the two trading days following the announcement of Dewey & LeBoeuf’s findings.

Several CECO stock analysts severely downgraded the stock.

12. Finally, on November 21, 2011, CECO announced that it had received a letter

from the ACICS – one of CECO’s most important national accreditors – demanding that it show

cause as to why, due to insufficient “administrative practices and controls relative to the

Company’s reporting of placement rates to the ACICS,” the accreditations of its 49 ACICS-

accredited institutions in the Health Education and Art & Design segments should not be

“withdrawn by way of suspension.”

13. Each of these corrective disclosures – beginning with the May 2011

announcement of the NYAG investigation and culminating with the announcement of the ACICS

“show cause” letter – caused significant declines in CECO’s stock price, with investors suffering

massive losses as the truth about CECO’s fraudulent practices was revealed. Between the first

corrective disclosure of the fraud in May 2011 and the final corrective disclosure on November

21, 2011, CECO stock price declined 67%, wiping out approximately $1.16 billion in of

stockholder wealth. CECO’s stock price has never recovered. From its Class Period high of

over $35 per share, CECO now trades in the $6 to $8 range, largely due to the massive regulatory

risks now impacting the Company on account of this fraud.

II. JURISDICTION AND VENUE

14. The claims herein arise under Sections 10(b) and 20(a) of the Exchange Act, 15

U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5, 17 C.F.R. 240.10b-5, promulgated thereunder.

15. This Court has jurisdiction over the subject matter of this action pursuant to

Section 27 of the Exchange Act, 15 U.S.C. § 78aa; and 28 U.S.C. §§ 1331 and 1332.

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16. Venue is proper in this District pursuant to Section 27 of the Exchange Act, and

28 U.S.C. § 1391(b), because CECO is headquartered in this District and most of the untrue

statements and omissions were made in or issued from this District. Many of the acts and

transactions giving rise to the violations of law complained of occurred in this District.

17. In connection with the acts alleged in this Complaint, Defendants, directly or

indirectly, used the means and instrumentalities of interstate commerce, including, but not

limited to, the United States mail, interstate telephone communications, and the facilities of a

national securities exchange and market.

III. THE PARTIES

A. CO-LEAD PLAINTIFFS

18. KBC is a Belgian investment company responsible for managing institutional

funds, private funds, and mutual funds in Europe, the United States, and throughout the world.

As of December 31, 2010, KBC had approximately $206 billion of assets under management.

KBC purchased CECO common stock at artificially inflated prices during the Class Period and

sustained losses when the truth about the Company was revealed.

19. OPPRS is an institutional investor based in Oklahoma that was established

January 1, 1981, to provide pension and other specified benefits for members who are qualified

police officers and/or their beneficiaries of the participating municipalities in Oklahoma.

OPPRS had net assets of approximately $1.8 billion as of June 30, 2011. OPPRS purchased

CECO common stock at artificially inflated prices during the Class Period and sustained losses

when the truth about the Company was revealed.

20. OLERS is an institutional investor based in Oklahoma that administers retirement,

survivor retirement, and medical benefits for members of the law enforcement profession of the

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State of Oklahoma and their families. OLERS had net assets of approximately $710 million as

of June 30, 2011. OLERS purchased CECO common stock at artificially inflated prices during

the Class Period and sustained losses when the truth about the Company was revealed.

B. DEFENDANTS

21. CECO is a Delaware corporation founded in 1994. It maintains its principal

executive offices at 231 Martingale Road, Schaumburg, Illinois. CECO is one of the largest

providers of for-profit education in the United States. CECO-operated schools provide programs

for doctoral, master’s, bachelor’s, and associate’s degrees, as well as diploma and certificate

programs through online, campus-based, and hybrid learning environments, in such areas as

business studies, visual communications and design technologies, film and video production,

photography, health technology and education, information technology, criminal justice, fashion

and design, and luxury goods. In addition, CECO offers culinary arts programs and hotel and

restaurant management in a classroom, kitchen, or online setting. Its schools include, among

others, American InterContinental University, Brooks Institute, Colorado Technical University,

Harrington College of Design, INSEEC Group Schools, International University of Monaco,

International Academy of Design & Technology, Le Cordon Bleu North America, and Sanford-

Brown Institutes and Colleges. Approximately 100,000 students are matriculated in CECO

schools, spread across 90 campuses, located primarily in the United States, but also in Canada,

England, the United Arab Emirates, and Monaco.

22. Defendant Gary E. McCullough (“McCullough”) was at relevant times the

President and Chief Executive Officer (“CEO”) of CECO, before being ousted on October 31,

2011, a day before the release of the preliminary results from Dewey & LeBoeuf’s internal

investigation. McCullough replaced CECO’s founder and CEO John M. Larson (“Larson”) in

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March 2007, following Larson’s own abrupt resignation in September 2006 amidst a host of

investigations and lawsuits challenging the Company’s legal and regulatory compliance. During

the Class Period, McCullough knew about all material aspects of the Company’s operations,

accreditation processes, finances, financial condition, and present and future business prospects,

including, but not limited to, certain material allegations contained in this Complaint. Further,

McCullough assisted in the preparation and/or final approval of CECO’s SEC filings, including,

but not limited to, CECO’s Forms 8-K, 10-K and 10-Q. McCullough signed, inter alia, the

following Class Period SEC filings: Form 10-K for the fiscal year ended December 31, 2008,

filed with the SEC on February 20, 2009 (the “2008 10-K”), Form 10-K for the fiscal year ended

December 31, 2009, filed with the SEC on February 25, 2010 (the “2009 10-K”), and Form 10-K

for the fiscal year ended December 31, 2010, filed with the SEC on February 22, 2011 (the

“2010 10-K”). McCullough also executed Sarbanes-Oxley § 302 certifications confirming that

the Company’s Forms 10-K “d[id] not contain any untrue statement of a material fact or omit to

state a material fact necessary to make the statements made, in light of the circumstances under

which such statements were made, not misleading.”

23. Defendant Michael J. Graham (“Graham”) was at all relevant times the Executive

Vice President and Chief Financial Officer (“CFO”) of CECO, a role he first assumed in

September 2007. During the Class Period, Graham knew about all material aspects of the

Company’s operations, accreditation processes, finances, financial condition, and present and

future business prospects, including, but not limited to, the allegations contained in this

Complaint. Further, Graham assisted in the preparation and/or final approval of CECO’s SEC

filings, including, but not limited to, CECO’s Forms 8-K, 10-K and 10-Q. Graham also executed

Sarbanes-Oxley § 302 certifications confirming that the Company’s Forms 10-K “d[id] not

8


contain any untrue statement of a material fact or omit to state a material fact necessary to make

the statements made, in light of the circumstances under which such statements were made, not

misleading.”

24. Defendants McCullough and Graham are collectively referred to herein as the

“Officer Defendants.”

25. During the Class Period, the Officer Defendants, by virtue of their senior

executive positions at CECO, were privy to confidential and proprietary information concerning

CECO and its operations, financial condition, and present and future business prospects. The

Officer Defendants had access to such information via access to internal corporate documents,

conversations and connections with other corporate officers and employees, attendance at

meetings with management and/or the board of directors or committees thereof, and via reports

and other information provided to them by CECO employees. Among other information, the

Officer Defendants had access to materially adverse non-public information concerning CECO’s

inflation of its placement rates and reports of inflated placement rates to analysts, investors, and

various accrediting agencies.

26. The Officer Defendants knew about, participated in designing and approving,

directed CECO employees to implement, and otherwise condoned the fraudulent placement rate

practices described herein. Because of their possession of such information, and their

participation in the acts, practices, and conduct alleged herein, the Officer Defendants knew or

recklessly disregarded that the adverse facts specified herein had not been disclosed to, and were

being concealed from, the investing public. Additionally, by specifically speaking about

CECO’s placements rates and its compliance with regulations critical to CECO’s business, the

9


Officer Defendants assumed a duty to be both accurate and complete – duties that they breached

in this case.

27. The Officer Defendants, because of their positions with the Company, controlled

and/or possessed the authority to control the contents of its reports, press releases, and

presentations to securities analysts. The Officer Defendants were provided with copies of the

Company’s SEC filings, reports, press releases, and other statements alleged herein to be false

and misleading prior to or shortly after their issuance, and had the ability and opportunity to

prevent their issuance or cause them to be corrected. Thus, the Officer Defendants had the

opportunity to prevent, as well as to commit, the fraudulent acts alleged herein.

28. Moreover, as set forth below, the Officer Defendants signed the SEC filings that

are alleged herein to be false and misleading in material respects. By signing these SEC filings,

the Officer Defendants personally attested to the accuracy of their content and assumed a duty to

disclose adverse facts that undermined the statements contained herein.

29. As senior executives of a publicly traded company whose common stock is

registered with the SEC pursuant to the Exchange Act and is traded on the NASDAQ and

governed by the federal securities laws, the Officer Defendants had a duty to promptly

disseminate accurate and truthful information with respect to CECO’s financial results, growth,

operations, and present and future business prospects and to correct any previously issued

statements that were or had become materially misleading or untrue, so that the market price of

CECO’s common stock would be based upon truthful and accurate information. The Officer

Defendants’ misrepresentations and omissions during the Class Period violated these specific

requirements and obligations.

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IV. FACTUAL BACKGROUND

A. BACKGROUND OF CECO

30. CECO (NASDAQ: CECO) operates a string of for-profit professional schools and

colleges, and is presently one of the largest for-profit educational concerns in the United States.

CECO offers over 100 programs at 95 schools in 23 states and 5 countries, including Canada,

England, the United Arab Emirates, and Monaco. It also offers over 500 courses and over 80

degree programs online.

31. CECO was founded in January 1994 by Larson, who embarked on an aggressive

growth-by-acquisition strategy. CECO acquired a number of established schools that it planned

to make more profitable through facility improvements and the addition of new course offerings.

32. In early 1998, CECO issued 2.85 million shares of stock on the NASDAQ in an

initial public offering (“IPO”), raising more than $45 million for the Company. Subsequent to its

IPO, CECO increased the pace of its expansion through acquisition by acquiring licensing rights

to open U.S.-based Le Cordon Bleu culinary schools and by purchasing Georgia-based EduTrek

International, Inc., which owned and operated American InterContinental University (“AIU”),

which had some 4,700 students at campuses in Atlanta, Los Angeles, Ft. Lauderdale,

Washington, D.C., London, and Dubai.

33. By fiscal year 2000, CECO’s income hit a record $325.3 million, with profits of

$21.4 million. By 2002, after only eight years in business, CECO was proving phenomenally

successful, its revenues having grown more than 40-fold.

34. On July 1, 2003, CECO merged with competitor Whitman Education Group, Inc.,

gaining control over the latter’s Sanford-Brown Colleges, Ultrasound Diagnostic Schools (now

known as the Sanford-Brown Institute), and Colorado Technical Universities. As of February

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27, 2012, CECO schools included Le Cordon Bleu Culinary Institute, California Culinary

Academy, Brown College (Minnesota), the Harrington College of Design, the Brooks Institute of

Photography, Brooks College, the Katharine Gibbs Schools, AIU, Colorado Technical University

(“CTU”), Sanford-Brown Institutes and Sanford-Brown Colleges, Collins College, Lehigh

Valley College, Missouri College, Briarcliffe College, International Academy of Design and

Technology, and Western School of Health and Business Careers.

35. For financial reporting purposes, CECO currently organizes its schools into six

segments: (1) CTU, (2) AIU, (3) Art & Design, (4) Health Education, (5) Culinary Arts, and (6)

International (as defined below).

36. The “CTU” Schools include those falling under the Colorado Technical

University umbrella. They offer programs in the so-called “career-oriented” disciplines of


photography, health education, information technology, criminal justice, and education.

37. The “AIU” Schools include those falling under the American InterContinental

University umbrella. They also offer programs in the so-called “career-oriented” disciplines of


photography, health education, information technology, criminal justice, and education.

38. The “Art & Design” Schools include the International Academy of Design &

Technology (“IADT”), Harrington College of Design, Collins College, and Brooks Institute

Schools. They offer programs in the so-called “career-oriented” disciplines of business studies,

visual communications and design technologies, film and video production, and photography.

39. The “Health Education” Schools include the Sanford-Brown schools (with dozens

of locations), Brown College, Briarcliffe College, Missouri College, and Gibbs College-Boston

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MA. They offer so called “career-oriented disciplines” of health education, business studies, and

information technology.

40. The “Culinary Arts” Schools include the Le Cordon Bleu (“LCB”) schools that

offer so-called “career-oriented” disciplines of culinary arts, baking and pastry arts, and hotel

and restaurant management.

41. The “International” schools include INSEEC Group (“INSEEC”) schools,

International University of Monaco (“IUM”), and Sup de Pub schools located across Europe,

which offer so-called “career-oriented” disciplines of business studies, health education, fashion

and design, communications, advertising and technologies, and luxury goods and services.

42. CECO advertises that its schools offer “high-quality education to a diverse

student population of more than 100,000 students across the world in a variety of career-oriented

disciplines through online, on-ground and hybrid learning offerings.” CECO claims to be “an

industry leader” with global recognition. CECO further claims that it is “committed to providing

high-quality education, enabling students to graduate and pursue rewarding career

opportunities.”

43. CECO states that its mission is premised on a purported belief that “individuals,

to compete successfully in today’s demanding workplace, benefit significantly from a solid

education that provides them with the foundation of knowledge and skills they can use on the job

and to build meaningful careers.” Its “business and operating strategy are focused on educating

students for jobs in specific fields.” CECO further claims that its curricula “have traditionally

provided quality employment opportunities for well-prepared graduates.”

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B. THE IMPORTANCE OF TITLE IV FUNDING AND ACCREDITATION TO CAREER EDUCATION ’ S BUSINESS

44. The schools owned and operated by CECO rely upon federal funding as their

primary revenue source. Such funding is governed by Title IV of the Higher Education Act of

1965 (“HEA”), 20 U.S.C. §§ 1001, et seq. (“Title IV”). In order to be eligible to accept tuition

payments obtained via Title IV funding, institutions must be accredited by a national accrediting

organization certified by the Department of Education (“DOE”). See 20 U.S.C. §§ 1001,

1094(a)(21), and 1099(j).

45. CECO’s entire business model is premised on its ability to enroll students who

pay their tuition with the benefit of Title IV funding. In fact, over the last two fiscal years CECO

has reported that between 82% and 83% of its U.S. schools’ cash receipts and revenues are

derived from Title IV funding. Therefore, without its ability to obtain Title IV funding, many of

CECO’s U.S.-based schools would cease to exist.

46. In order to qualify for HEA Title IV funding, CECO must be accredited by an

accreditation agency recognized as valid by the DOE. Accreditation is a process of qualitative

review of an educational institution conducted by peers and designed to ensure that the

institution is fulfilling its academic mission. CECO regularly provides investors with its

accreditation statistics in public filings and alerts investors about material risks to CECO’s

financial well being if its schools were to face adverse accreditation actions.

47. CECO’s 2010 Form 10-K lists 16 CECO institutions that it purports are

accredited by one of the following accreditation agencies: Accrediting Commission of Career

Schools and Colleges (“ACCSC”); ACICS; Middle States Association of Colleges and Schools,

Commission on Higher Education; and North Central Association of Colleges and Schools,

14


Higher Learning Commission (“HLC”). Approximately 82% of CECO’s schools are accredited

by ACCSC or ACICS, which are the two primary accrediting bodies covering CECO schools.

48. In order to be accredited, a school must demonstrate to the accreditation agencies

that it is in compliance with certain minimum standards including, inter alia, achieving certain

placement rates for its graduates and certain retention rates. Institutions are required to report

such data to the accreditation agencies on a regular basis. Placement rates generally may only

take into account graduates whose jobs required the degree they received. In other words, if an

individual was trained as a chef and graduated from one of CECO’s Culinary Arts schools, and

was later employed as a cashier at a fast food restaurant, the position should not be counted

toward the placement rate because, even though the graduate works in the food services industry,

being a cashier does not require a degree as a chef from a culinary arts institution.

49. In recent years, for-profit schools, including those run by CECO, have “become

big business in the United States, especially as the unemployed seek a way back into the work

force.” Michael Barbaro, New York Attorney General Is Investigating Trump’s For-Profit

School , NY Times (May 19, 2011), http://www.nytimes.com/2011/05/20/nyregion/trumps-for -

profit-school-said-to-be-under-investigation.html?pagewanted=all.

50. Enrollment in for-profit schools has dramatically grown over the last decade,

increasing approximately 225%, according to DOE data. The share of Title IV federal student

aid taken in by the for-profit education sector has also grown rapidly. According to the DOE,

$4.3 billion in Pell grants and $19.6 billion in federal Stafford loans flowed to for-profit schools

in 2008-2009, approximately double what these schools received in 1999-2000. While for-profit

schools, like CECO, enroll only about 10% of all higher education students, they receive

approximately 23% of all Title IV funds. They can collect this outsized share of Title IV funds

15


because they actively target and recruit primarily low-income or disadvantaged prospective

students.

51. Because Title IV funds are technically provided to students, there is no restriction

on how the Title IV-based revenues taken in by for-profit schools may be used. Unlike public or

private institutions of higher learning, however, for-profit schools spend disproportionately small

shares of their Title IV revenues on actual education. Many for-profit schools spend heavily on

television, print, and web-based advertising and marketing, while devoting substantial additional

resources to student “recruitment.” These disproportionate spending patterns have raised

significant questions about whether sufficient resources are being spent by for-profit schools,

like CECO, to ensure that their students receive a quality education that results in increased job

opportunities. After all, this is the purpose of Title IV funding, and the government, therefore,

has been increasingly demanding a better return on its multi-billion-dollar Title IV investment in

schools operated by public companies in the for-profit education sector.

52. Students at for-profit schools, like CECO, also pay (on average) higher tuition

than students at community colleges or public four-year schools, according to DOE data. For-

profit education students also take on disproportionately more debt and default in greater

percentages than their peers at public or non-profit schools. With increasing numbers of for-

profit students leaving school saddled with debt and without meaningful job prospects on

account of the poor quality of the education, state and federal regulators have become

increasingly focused on placement rates and “gainful employment” data published by schools or

companies operating in the for-profit education sector. This increased regulatory focus on

placement rates has spawned governmental investigations, legislative activities, and a litany of

16


private lawsuits questioning the misleading marketing tactics employed by the for-profit sector

as a whole, and by CECO in particular.

53. Additionally, because of this increased regulatory and litigation risk, analysts and

investors have been acutely focused on placement rates and corporate compliance due to concern

that for-profit schools could lose their accreditations and access to Title IV revenues.

C. CECO’ S HISTORY OF FRAUD, DECEPTION , AND NON-COMPLIANCE WITH TITLE

IV REGULATIONS

54. CECO has a checkered history of fraud and deception, and has, until more recent

years, been a portrait of all that was wrong with the for-profit education sector.

55. Prior to the Class Period, CECO faced a number of lawsuits accusing the

Company of misleading its students and regulators about job placement rates, starting salaries,

the quality of its teaching staff and training equipment, the transferability of its course credits,

and the accreditation of certain of its programs. For example, in November 2003, CECO was

sued by a former Director of Career Services at Gibbs College, in New Jersey, who claimed that

students who had not completed required courses or internships were allowed to graduate, and

that students were being presented to potential employers as good candidates even though they

had not completed the required coursework or had received failing grades.

56. In December 2003, Cam Van Wingerden, a former registrar of CECO’s Brooks

Institute of Photography in Santa Barbara, California, filed a complaint with the ACICS accusing

CECO of tampering with student records to ensure that the Institute’s then-new Ventura campus

could pass inspections by accreditors. Van Wingerden alleged, among other things, that CECO

management had asked staff members “to commit forgery, fraud, perjury or whatever else is

necessary to [permit the school] to pass [accreditation] audit inspections.”

17


57. In response to the disclosure of VanWindergen’s complaint, CECO’s stock

dropped 28%, wiping out more than $1.5 billion in market capitalization. Commenting on the

dramatic stock drop, Barrington Research Associates’ Director of Research Alexander Paris, Jr.

pointedly noted, “The issue here, and the reason why we’re seeing such a response, is that this

isn’t the first time [CECO had been accused on wrongdoing]. Now that this comes out . . . [it] is

sort of too much for certain people to handle.”

58. Van Wingerden’s complaint trigged an investigation by the California Bureau for

Private Postsecondary and Vocational Education (the “Bureau”), a division of California’s

Department of Consumer Affairs. The Bureau, following an undercover investigation, found

that Brooks engaged in “a pervasive pattern of misrepresentation” by routinely inflating claims

of its graduates’ success in order to draw new students. In response to an inquiry from the

Bureau, one Brooks graduate stated that “any job was counted as a placement, even if it had

nothing to do with photography.” The Bureau found the conduct at Brooks so egregious that it

threatened to deny the Company the right to continue operating in California if it did not address

nine concerns detailed in a blistering report issued in November 2004. In addition to making

restitution to students, the Bureau’s report said that Brooks should stop enrolling students until it

tracked down and verified job placement information for each 2003 graduate to counter claims of

inflated career placements, that Brooks should be required to inform every prospective student in

writing that it “was found to be in violation of the statutes and regulations” governing education

in California, and that the Bureau had determined that “it [was] not in the public interest” to issue

Brooks an unconditional permit to operate.

59. The falsification of records at CECO schools was common knowledge to

Company’s Board and executive management as early as April 2003. During a meeting held in

18


April 2003, for example, the Company’s Audit Committee discussed Van Wingerden’s calls to

the Board regarding the widespread falsification of records concerning student enrollment,

retention, and graduation at Brooks College. The Committee determined that an investigation

should commence, and in May 2003, the internal investigation confirmed the allegations of

student record falsification.

60. The Company’s shenanigans at Brooks were also included in a “60 Minutes”

exposé of deceptive practices at for-profit schools in 2005, which caused a significant

reputational hit to the Company. Throughout 2004 and 2005, several derivative lawsuits were

filed in connection with the Brooks College allegations, which culminated in a decision, in

December 2008, to close Brooks College down.

61. In 2004, CECO was sued for securities fraud in the United States District Court

for the Northern District of Illinois (the “2004 Securities Fraud Action”). In the 2004 Securities

Fraud Action, CECO was accused, among other things, of “regularly falsifying student records in

order to increase graduation rates and enrollment, [and] conceal problems that could have

threatened the accreditation of its schools.” In the 2004 Securities Fraud Action, a former CECO

Employee Relations Manager who was interviewed by counsel for plaintiffs accused CECO of

achieving its touted 98% placement rate for graduating students by resorting to “loopholes” – for

example, if a student had been in the military while he was enrolled in a CECO program, CECO

would consider his ongoing military service following graduation as a job placement; a graduate

who enrolled in a new CECO program was also counted as placed. After years of litigation,

CECO paid millions to settle these allegations.

62. In December 2005, the Commission on Colleges of the Southern Association of

Colleges and Schools placed all AIU campuses on probation for “failure to correct deficiencies

19


of significant non-compliance.” A year later, the Commission extended the probation for

another 12 months. In a scathing January 2007 report, the Commission determined, among other

things, that AIU:

• Had fundamental issues with “integrity in all operations.”

• Failed to offer degree programs that “embody a coherent course of study and are compatible with the institution’s purpose.”

• Did not have an adequate number of full-time faculty or qualified administrative and academic officers.

• Lacked “institutional effectiveness.”

63. In its Form 10-K for the fiscal year ended December 31, 2007, filed with the SEC

on February 28, 2008, CECO disclosed that it had agreed to pay a total of $12.4 million to settle

three actions (namely, Thurston, et al. v. Brooks College, Ltd., et al. ; Nilsen v. Brooks Institute of

Photography, et al. ; Outten, et al. v. American InterContinental University, Inc. ), which had

alleged that Brooks College, Brooks Institute of Photography, and American InterContinental

University, respectively, violated the California Business and Professions Code and Consumer

Legal Remedies Act by misleading potential students (in years prior to this 10-K filing)

regarding, among other things, placement statistics.

64. On June 23, 2008, a class action was filed in state court in California alleging that

CECO’s California School of Culinary Arts (“CSCA”) lured prospective students via, among

other things, falsified placement rates ( Vasquez v. California School of Culinary Arts, Inc. , Case

No. BC393129 (Cal. Super. Ct.)). The Vasquez complaint alleges, inter alia, that CSCA

represented to prospective students that CSCA had job placement rates in the 80-90% range but

failed to disclose “that these ‘placements’ [were] defined by CSCA as any individual who

obtained a position in the food services industry or a related position. Thus, a graduate who

20


obtained a position as a barista at Starbucks, or an $8 an hour prep cook, or operated a hot dog

stand, would be considered to have been ‘placed’ for purposes of these statistics.”

65. On November 3, 2010, CECO reported that it had agreed to pay $40.8 million to

settle lawsuits filed by students (in 2007) from certain of CECO’s culinary schools who alleged,

inter alia, that CECO had published falsified placement rates to induce students to enroll at its

California Culinary Academy (“CCA”). The operative complaint in one of these actions –

namely, Amador, et. al. v. California Culinary Academy, Inc., et. al. , CGC-07-467710 (Cal.

Super. Ct. Sept. 28, 2007)) – details a fraudulent scheme to induce students to enroll in CCA via

falsified placement rates. For example, Amador plaintiff Matt Foist alleged that the 97%

placement rate he relied upon in deciding to enroll in CCA was a “lie” because:

[w]hen Defendants calculated that rate, they included placements that could not legally be counted under the [California Private Postsecondary and Vocational Education Reform Act of 1989] because they were not jobs to which CCA training was represented to lead. In addition, neither the catalog nor the addendum disclosed: (1) that the placement statistics included non-professional entry level jobs like prep cooks, $8-$12 an hour line cooks, and Starbucks baristas; (2) that a culinary degree was not a pre-requisite or even relevant for many of the included jobs; (3) that the wages paid to the substantial majority of graduates included in the placement statistics were $12/hour or less; (4) that while years of experience might qualify someone for a Chef job, a CCA degree would not; and (5) that a very small percentage of CCA culinary arts graduates would ever become Chefs . . . .

Despite having paid over $40 million to settle the Amador action, the misconduct challenged

therein was strenuously denied by CECO.

66. In addition to the massive drag on the Company and its growth prospects created

by the financial drain of private litigation before the start of the Class Period, CECO’s repeated

misconduct began to draw the heavy attention of state and federal regulators, which also served

to severely hamper the Company’s business and financial performance.

21


67. In 2004, for example, the Company was the subject of a criminal grand jury

investigation launched by the U.S. Department of Justice (“DOJ”), which remained open until

April 2007.

68. In June 2005, the DOE informed CECO that, pending program reviews at several

CECO schools, it would not approve any new school acquisitions or applications for additional

branch campuses of existing CECO institutions. Citing “a history of non-compliance” with

government financial standards and misrepresentations about the employment rates of its

graduates, CECO was essentially banned from expansion – a ban that remained in effect until

January 2007. This DOE ban crippled CECO’s performance and growth prospects during this

time period.

69. In 2005, CECO was investigated by the SEC for various non-compliance issues,

including allegations that student records had been falsified at certain of its institutions to

maintain access to Title IV funding. This investigation was not fully resolved until 2008.

70. Early in 2006, the DOE forced CECO to return nearly $500,000 in federal

financial student aid to the federal government to resolve claims that some of its students were

not eligible for Title IV government loans.

71. In May 2006, the Company was advised of a civil investigation, launched again

by the DOJ, into allegations that certain of its schools may have submitted false claims or

statements to the DOE.

72. Numerous state Attorneys General have also investigated CECO for a variety of

legal and compliance failures under state consumer protection and education laws.

73. For years in the early- to mid-2000s, the Company’s shareholders watched as the

onslaught of legal and regulatory compliance issues and investigations contributed to a mediocre

22


stock performance. Stock analysts regularly punished CECO’s stock for the repeated compliance

failures and the apparent recidivism of CECO’s management under then-CEO Larson. Indeed,

most analysts echoed the sentiments of Matthew Litfin, an analyst at William Blair & Co. in

Chicago, who in a November 7, 2005 research note, recommended against buying CECO shares

in part because of the “potential outcome of current and future regulatory matters” that regularly

dogged the Company.

74. Fed up with the Board’s apparent unwillingness to make necessary changes,

several shareholders by May 2005 had had enough, and in a letter to the Board called for the

resignation of Board members and for a “reinvigorated and independent Board” to be appointed

to “mitigate any potentially negative outcome” from the many “black clouds” hanging over the

Company.

75. One of the most outspoken critics was shareholder Steve Bostic, who alleged in

2005 that “CECO’s Board has allowed management to lose sight of the Company’s primary

mission of providing quality education services; under these directors, CECO management has

sacrificed the quality of student programs, resulting in the severe escalation of student attrition –

all for the sake of a ‘top-line growth strategy’ that cannot be sustained.”

D. A NEW MANAGEMENT REGIME PURPORTS TO USHER IN A NEW CULTURE OF

REGULATORY COMPLIANCE

76. Shortly after Bostic’s 2005 shareholder letter, and a widely publicized shareholder

fight at the Board level, the Company co-founder, President, and CEO Larson resigned in

September 2006. Larson’s twelve year tenure came to an end at a time when the Company was

at the legal and regulatory crossroads. A September 25, 2006 Morgan Stanley & Co. analyst

report stated:

Mr. Larson indicated that he was stepping down to focus on various strategic initiatives, but we believe that the downward

23


spiral of the company’s core business and the mounting legal and regulatory issues called for drastic action, including a management change.

* * *

[W]e believe a leadership change is good for the company as it will possibly take CECO in a new and more positive direction.

77. Interim CEO Robert Dowdell echoed the need to change the operational focus of

CECO by ushering in new management: “We are confident that a strengthened, broader

executive leadership team will successfully move the company forward in addressing

opportunities and challenges, and in pursuing strategies to deliver high quality education and

value for all our stakeholders.”

78. CECO’s decision to oust its founder and CEO Larson was lauded by investors as

evidence that CECO intended to reform and bring its past behavior into line with proper

regulatory compliance. Shares of CECO stock climbed immediately upon CECO’s

announcement that Larson’s management team was out, with the stock soaring $2.84, or 13%, to

$23.99 on the NASDAQ in midday trading, and with analysts noting that his resignation had

opened up opportunities for the type of broad organizational improvements that CECO needed.

79. After conducting a search for new leadership, on March 6, 2007, CECO

announced that Defendant McCullough had joined the Company as President and CEO. When

McCullough took the helm, CECO remained a Company in distress. A Chicago Tribune article

aptly summarized the situation into which McCullough was stepping when he was hired on

March 6, 2007:

Career Education Corp. said Tuesday that it has named former Abbott Laboratories executive Gary McCullough to serve as president and chief executive, filling the vacancy created when company founder John Larson resigned unexpectedly from both posts in September . . ..

24


* * *

McCullough will face a number of challenges as [CECO] attempts to emerge from a turbulent period marked by regulatory problems and unrest among some shareholders.

Larson, who founded the company in 1994 and took it public in 1998, was at the helm during the brief period when Wall Street was infatuated with Career Education’s growth prospects early in this decade.

But investor enthusiasm waned quickly after the company disclosed it was under investigation by federal authorities, and shareholders alleged in a lawsuit that Career Education had falsified student records to bolster its enrollment and job-placement statistics.

Early in 2006, Career Education returned nearly $500,000 in federal financial student aid to the Education Department to resolve its claims that some students weren’t eligible for government assistance.

Even as the company appeared to be on track to resolving most of its remaining regulatory and legal issues, however, an unhappy shareholder launched a highly publicized campaign to win a spot on Career Education’s board.

Steven Bostic, who had sold his education business to Career Education in exchange for company stock, publicly challenged Larson’s integrity.

In a May shareholder vote, however, institutional holders backed Larson’s team, and Bostic’s dissident slate was defeated. A month after his defeat, Bostic sold his holdings, saying he had “zero confidence” in the company’s ability to clear up its difficulties.

In August, Career Education sent its share price into a tailspin by reporting unexpectedly weak earnings. Six weeks later, Larson resigned, calling it “the right decision at the right time.”

80. McCullough was hired for the express purpose of cleaning up CECO. Robert

Dowdell candidly noted during a March 13, 2007 Credit Suisse Group Global Services

Conference, “The issues that surrounded Career Education got so heavy that the Board and [co-

25


founder] Jack [Larson] and I decided that it was time to make a transition” that “culminated” in

McCullough’s retention.

81. Commenting on the decision to hire McCullough, Tom Lally, Chair of the

Nominating and Governance Committee of the Board, said, “Gary has the critical qualities we

were looking for in an individual to lead Career Education: a proven ability to successfully build

brand value and a highly regarded record in guiding a regulated organization that places a

premium on controls and procedures. Gary’s leadership and experience will be a tremendous

asset to Career Education moving forward.”

82. Soon after McCullough’s hiring, the Company went to great lengths to present to

investors and analysts that its regulatory problems and compliance failures were a thing of the

past. In a February 24, 2009 Credit Suisse Global Services Conference presentation, a slide

entitled “An Inflection Point in Our History” was discussed by Defendant McCullough.

McCullough maintained that the “Legal/Regulatory Issues” were behind CECO and that the

“[m]ajor transformation work” was complete. With its troubles allegedly behind it, CECO

claimed that 2009 and 2010 were to be years of accelerated growth and “high performance”:

26


83. Similarly, at a June 8, 2010 UBS Global Technology and Services Conference,

Graham presented a slide emphasizing that 2009 had been a “Watershed Year” during which

CECO had “accelerate[d] growth” following the alleged “strengthen[ing] [of its] foundation”

that purportedly occurred in 2007 and 2008:

"Watershed" "...an important point or transition between two phases, conditions, etc.'

Recognize> Redefine> Reach

Strengthen Accelerate foundation growth

Revenue

iii

+11%

I I I

2005 2006 2007 2008 2009

27


84. McCullough and Graham, in this way and through other public statements to

investors, touted the purported “culture of quality and compliance” that they brought to the

Company in order to assure investors that this new regime was breaking with the past and

operating differently so as to drive shareholder value without the constant regulatory and

compliance issues bogging down CECO’s growth prospects and financial results.

E. THE SENATE HELP COMMITTEE INVESTIGATES THE FOR-PROFIT EDUCATION INDUSTRY AND PROPOSES AND ADOPTS “GAINFUL EMPLOYMENT” REGULATIONS

85. While McCullough and Graham were purportedly cleaning up CECO and

consistently touting the “culture of compliance” that they brought to the Company, government

and regulatory investigations into the for-profit education sector intensified when, in June

2010, the U.S. Senate’s Health, Education, Labor and Pensions (“HELP”) Committee

commenced an investigation regarding the federal government’s investment in for-profit

institutions of higher education. During the first HELP Committee hearing on June 24, 2010,

the Committee chairman, Senator Tom Harkin of Iowa, commented that “[t]here are growing

questions about whether all students – and taxpayers by extension – are receiving value for

their educational dollar” at for-profit institutions.

86. In conjunction with the June 24 hearing, the HELP Committee issued a report

entitled “Emerging Risk?: An Overview of Growth, Spending, Student Debt and Unanswered

Questions in For-Profit Higher Education,” calling for increased oversight of the for-profit

education industry, where “schools charge higher tuition than comparable public schools,

spend a large share of revenues on expenses unrelated to teaching, experience high dropout

rates, and, in some cases, employ abusive recruiting and debt-management practices.” During

the June 24 hearing, Senator Harkin outlined some of the HELP Committee report’s key

findings, including that a whopping 98% of these institutions’ students borrowed money to pay

28


their tuition (compared to 38% of community college students), that for-profit students are

eight times more likely than community college students to graduate with student loan debt

exceeding $20,000, and that for-profit college students are more likely to default on their loans

than their peers at non-profit schools.

87. The HELP Committee also heard testimony on June 24 from the DOE Inspector

General – who disclosed that her office’s investigations had identified several types of fraud

involving for-profit institutions, including miscalculation and manipulation of numbers to create

the illusion of compliance – and from a former CECO student, Yasmine Issa, who testified that

attending a career college (CECO’s Sanford-Brown Institute) had left her unable to find a job in

her field and saddled with debt. Ms. Issa stated that she was steered into an accelerated program

that purportedly would help her earn an ultrasound certificate in just 18 months at a cost of

$27,000, and testified that she was promised that Sanford-Brown’s placement service would

guide her into a well-paying job. After taking on substantial loans and completing the program,

however, Ms. Issa learned that although Sanford-Brown was accredited, the program in which

she enrolled was not.

88. Responding to Ms. Issa’s allegations, though outside of the HELP Committee

hearings, CECO strongly denied any wrongdoing. CECO’s senior vice president Jeff Leshay

insisted that students at its approximately 90 campuses are getting high-quality training. “We

wouldn’t be growing the way we are if students and employers didn’t see the value of the

education we’re offering,” he said, adding that “hundreds and hundreds” of Sanford-Brown

graduates have found ultrasound jobs. Leshay further stated that CECO had always scrutinized

the quality of its schools, again emphasizing that “[CECO’s] focus has shifted more and more

heavily toward student success.”

29


89. During the HELP Committee’s June 24 hearings, Senator Harkin expressed grave

concerns about whether these Title IV dollars were being spent wisely, particularly given the

lack of transparency regarding student graduation, withdrawal and job placement rates, and the

evidence of “huge student turnover” at for-profit institutions.

90. On August 4, 2010, the HELP Committee conducted another hearing. In

connection with that hearing, the Government Accountability Office (“GAO”) issued a report

(“GAO Report”) – which was leaked to the press on August 3 – outlining the results of its

undercover investigation into the student recruitment practices at fifteen (mostly unnamed) for-

profit universities. The report indicated that personnel at all fifteen schools had made “deceptive

and questionable” statements to investigators, while four of them had actively encouraged the

prospective students to commit fraud when applying for financial aid.

91. Although none of the schools mentioned in the GAO Report were owned by

CECO, the GAO Report and the ensuing fallout caused investors to focus even more heavily on

the potential regulatory risks facing the Company.

92. On August 13, 2010, the DOE released data on estimated student loan repayment

rates, which demonstrated the for-profit sector to be broadly underperforming its peers in non-

profit education. Put simply, graduates of for-profit schools were not getting meaningful jobs in

sufficient numbers to repay the massive student loan debts that they incurred to enroll in for-

profit educational programs.

93. As a result of HELP Committee hearings and calls for reform by the Obama

Administration, the DOE proposed new “gainful employment” rules, under which for-profit

educational providers will fully qualify for federal aid only if either (1) more than 45% of their

former students are paying off principal on loans, or (2) the debt burden of former students is

30


below 8% of their total income or below 20% of their discretionary income. Accordingly,

schools will be eligible for federal loans only if they prepare their student for “gainful

employment in a recognized occupation” under the HEA. Schools whose repayment rates are

below 35% or whose students’ debt burden is above 12% of total income and 30% of

discretionary income will lose their eligibility for federal loans.

94. These regulations were designed to ramp up over a three year time horizon, giving

colleges time to reform while protecting students and their families from exploitative programs.

“These new regulations will help ensure that students at these schools are getting what they pay

for: solid preparation for a good job,” Secretary of Education Arne Duncan said when

announcing the new regulation. “We’re giving career colleges every opportunity to reform

themselves but we’re not letting them off the hook, because too many vulnerable students are

being hurt.” The new regulations, once adopted, were viewed as a significant regulatory victory

for the for-profit sector in general, and for CECO in particular, because, among other things,

companies like CECO had extensive time to fix any problems to comply with the expected

regulations.

95. Because of its poor compliance history under past management and the more

recent scrutiny of CECO in the wake of HELP Committee investigations and the GAO Report,

CECO and the Officer Defendants should have been particularly vigilant in monitoring and

overseeing its schools’ operations, and. in particular, its regulatory compliance. They also

should have been particularly careful about warning investors of their regulatory risks, and

providing investors with accurate information with which to assess these regulatory risks.

Instead, however, the Officer Defendants misled investors with extremely optimistic statements

31


regarding the Company’s new “culture of compliance,” which included false statements about

the robust placement rate figures that the Company purportedly achieved.

96. Such statements (false as they were) misled investors into believing that CECO

might be insulated from the types of regulatory risks facing others in the for-profit sector. In

addition, for investors it signaled a potential marketing advantage for CECO against its

competitors, capable of driving new student starts and revenues. Unbeknownst to investors,

however, CECO’s new management continued “business as usual” from the prior regime, and

despite the Defendants’ statements to the contrary, CECO continued to engage in the untoward

practices that Dewey & LeBoeuf would only uncover a year later.

F. CECO INSTITUTIONS INFLATED THEIR PLACEMENT RATES TO

ACCREDITATION AGENCIES AND INVESTORS

97. During the Class Period, CECO management led investors to believe that the

Company was operating in full compliance with existing regulations and that the fraudulent

placement rate practices employed by CECO were a thing of the past. In reality, however,

CECO’s new management did very little, if anything, to improve the Company’s compliance or

its regulatory risk profile. Instead, the Officer Defendants continued to perpetuate a fraud by

inflating the Company’s reported placement rates. CECO’s motivation to falsify these

placement rates was two-fold.

98. First, CECO engaged in a deliberate and systematic effort to lure students into

enrolling in its programs by inflating its placement rates. Not surprisingly, when prospective

students are led to believe that graduation from a CECO program will enhance their ability to get

a job in their chosen field of study, they will be more likely to sign up for the program and to pay

CECO the high tuition it demands. Thus, by improperly employing these fraudulent tactics,

CECO was able to present, and did present, investors with a picture of growing revenues and

32


profits, while at the same time concealing from investors that such revenues and profits were

only achieved through improper and manipulative means.

99. Second, accreditation agencies and federal regulators take placement rates into

account when determining whether a given institution should be accredited and therefore entitled

to participate in Title IV federal student loan programs. In particular, ACICS requires that at

least 65% of former students be employed upon graduation, and ACCSC requires that at least

70% be employed upon graduation. Other accreditors, like HLC, require an institution to

“affirm[] that those degree or certificate programs it represents as designed to prepare students

for advanced study or employment accomplish these purposes,” while MSA considers placement

rates as indirect evidence of an institution’s efficacy. Accreditation leads to the ability to

participate in Title IV programs. Therefore, since CECO depends so heavily on Title IV

funding, which in turn requires accreditation by an approved agency, CECO has a very powerful

incentive to inflate failing placement rates in order to preserve its most significant source of

revenue.

100. The need to meet placement rate goals was extensively communicated to CECO-

operated schools by senior executives at CECO – including Defendant McCullough and, upon

information and belief, Defendant Graham. Career Services Directors at CECO-affiliated

schools were under intense pressure during the Class Period to hit their placement numbers by

obtaining appropriate percentages of job placements in order to prevent the Defendants’ business

model from unraveling.

101. Several Confidential Witnesses interviewed by Plaintiffs have confirmed the

intense pressure emanating from “corporate” to keep the placement rates up. For example:

(i) Confidential Witness No. 1 (“CW1”), a former Career Services Representative at a Sanford-Brown Institute location in New Jersey from

33


2006 to 2009, and then the Director of Career Services in 2009 through December 2011, attests that there was tremendous pressure put on him/her daily to find jobs for graduates or to put CECO graduates on “waivers,” meaning they were no longer looking for employment due to circumstances like pregnancy or military service.

(ii) Confidential Witness No. 2 (“CW2”) was a Career Services Representative at a Sanford-Brown Institute school in Wisconsin from January 2008 through September 2011. CW2 was also promoted for a short time to a “managerial level” position in Career Services. CW2 states that a significant amount of pressure was put on him/her and other Career Services Representatives, including those at the Director level and corporate level, to maintain positive placement rates. According to CW2, this pressure was applied despite being those individuals being provided with very little support or training on how to achieve placements.

(iii) Confidential Witness No. 3 (“CW3”), a former Career Services Advisor for a Sanford-Brown Institute in Maryland from September 2009 through February 2010, stated that he/she refused a full-time position in Career Services, choosing instead to work only part-time, because he/she was uncomfortable with the pressure placed on the team to make job placement goals. While CW3 was employed, the school was having trouble meeting their placement rates, adding that during his/her tenure “The Director was under a lot of stress. It was like a sales job. If you didn’t make your numbers, you’re eventually out of a job.”

(iv) Confidential Witness No. 4 (“CW4”), a former Director of Career Services at a Sanford-Brown Institute in Wisconsin for approximately four and half years before leaving the position in July 2011, attests that the “constant pressure” placed on him/her and others to maintain high placement numbers was “tough,” emanating from the campus president and Corporate-level Career Services employees. If placement numbers were not met, there were policies in place to “punish” staff by requiring employees with low numbers to perform additional work. Employees who met their numbers, however, were given “perks,” according to CW4, like not having to sit in on training sessions or participate in extra conference calls.

(v) Confidential Witness No. 5 (“CW5”) was a former President of Gibbs College from July 2004 until January 2010. CW5 states placement rate numbers could have been skewed, mainly because employees in the Company’s Career Services division were under tremendous pressure to produce high placement rates because these rates were critical to the school’s accreditation and eligibility for Title IV funding. “It’s pounding pressure,” CW5 stated, “When there is that much pressure, people make bad decisions.” Regional offices would lead “weekly beat up meetings” to

34


scrutinize placement numbers, and if a regional manager was performing poorly, he would get “beat up” by the national director of Career Services.

(vi) Confidential Witness No. 6 (“CW6”), a former President of Sanford-Brown in New York from 2005 through 2011, also states that there was tremendous pressure from corporate-level employees at the Company to keep placement rates up, and that “campus level folks did what they needed to do with the policies and guidelines that were available to them” to hit their goals, suggesting that the “corporate team” provided guidance and encouragement to engage in certain activities now deemed to be improper.

102. Because of the intense pressure from CECO management throughout the Class

Period, CECO regularly reported high placement rates in accordance with the various accrediting

agencies’ standards. In turn, CECO reported in its public filings that it was in compliance with

all accrediting agencies’ requirements and with all other requirements necessary for it to accept

Title IV funding as tuition. Indeed, CECO repeatedly touted to investors, as set forth below,

false and inflated placement rates of its member institutions and their full compliance with

accreditation and Title IV regulations.

103. The placement rates reported by the Defendants, however, were a sham because

they had been manipulated by the Defendants with the express purpose of meeting the figures

required by the accreditation agencies and expected by Wall Street.

104. The techniques used to manipulate the placement rates were not the work of a

handful of rogue employees. On the contrary, the policies, practices, and procedures for

determining placement rates were devised, directed, and encouraged by those at the very highest

level of the Company, including the Officer Defendants, and the placement rate practices that are

now admitted to be “improper” by the Company were, at all relevant times during the Class

Period, a matter of accepted corporate policy.

35


105. During monthly “strategy calls,” for example, in which CW1 would regularly

participate, Laura Forth, the Division Director of Career Service for the Northeast Region, and

other executives, encouraged Career Services Directors to “think outside the box” in placing

students in jobs in order to meet their placement goals and to count as many job placements as

possible, according to CW1. According to CW1, this “thinking outside the box” included

counting a pharmaceutical technician’s job boxing up medication to be confirmed placement,

even though CW1 disagreed with that assessment.

106. Also according to CW1, Career Services Directors were routinely encouraged to

count, and did count, short-term jobs at community health fairs as confirmed job placements.

These “placements,” according the CW1, included positions with On Site Health Services Inc.,

and involved students being hired for $18 an hour to take blood tests and measure blood pressure

at community health fairs. These jobs lasted from one to twelve days, and in some cases for as

little as a few hours. Despite this, according to CW1, CECO reported these placements to the

accreditation agencies as legitimate placements and they were subsequently counted as part of

CECO’s reported placement rate figures.

107. As confirmed by Plaintiffs’ CW6, moreover, if a graduate worked for as little as

four hours in a job related to his or her course of study at a health fair, during which (for

example) blood was drawn and analyzed, the graduate was considered a confirmed placement,

and the “corporate team” at the Company encouraged and sanctioned employees to confirm

placements based on these rules.

108. Moreover, according to CW1, while the Company recorded the short-term

placements differently than it did legitimate, longer-term placements internally, it did not

36


differentiate between genuine placements and short-term placements when reporting them to the

accreditation agencies.

109. Plaintiffs’ investigation has also revealed that these short-term placement rate

practices were done with the knowledge of “everyone” at the Company, including Forth, Kara

Killeen Look, the Vice President of Career Services; Lorraine Rowe, then-Regional Director of

Compliance; and, most tellingly, Defendant McCullough, the CEO who was specifically brought

in to change such fraudulent practices. According to CW1, “all the campuses knew. Gary

McCullough knew” that short-term placements only lasting a day were counted in order to

calculate placement rates. This policy, according to CW1, had been in place as early as 2006,

when he/she began working at Sanford-Brown. Some schools, according to CW1, would take

advantage of this policy to inflate their placement rates through health fairs by reporting as many

as 50 to 60 graduates working at one community fair.

110. According to CW1, Career Services Directors discussed these temporary

placements at health fairs on weekly conference calls in which they were encouraged and

condoned. In addition, CW1 reports that short-term placements at community health fairs were a

topic of discussion at a three-day conference of Career Services Directors at the Company’s

Schaumberg, Illinois headquarters in September 2010. The most notable attendee at this

conference was McCullough, who (according to CW1) personally spoke with the Career

Services Directors about the success of placing students in short-term jobs at community health

fairs. According to CW1, McCullough specifically encouraged this practice, telling the Career

Services Directors assembled what a “great job” they were doing with the short-term placements.

McCullough therefore specifically knew that these short-term “health fair” placements were

37


being improperly reported to the accreditation agencies and to investors as legitimate

placements.

111. Furthermore, Plaintiffs’ CW1 states that, in 2010, he/she prepared and presented a

PowerPoint presentation about short-term job placements at health fairs for Diane Englehardt,

the Divisional Director responsible for overseeing all of the Presidents at CECO’s colleges.

Englehardt told CW1 that the presentation was “fabulous,” and did not raise any questions or

objections to counting these short-term jobs in the Company’s reported placement rates.

112. CW1 further confirms that the reason he/she regularly found students jobs at these

health fairs was because he/she was “directed” to do so by his/her superiors. According to CW1,

he/she was directed by Forth and Look to count these short-term health fair placements as

confirmed placements, and this policy to do so went “all the way up” the Company’s corporate

ladder. According to CW1: “I didn’t make that call. I was directed by the regional director and

her bosses. It goes all the way up.” CW1 also recounts a May 3, 2010 e-mail he/she sent to

Terri Herschlag, then Director of Career Services for Sanford-Brown in New York City,

indicating that Herschlag was giving CW1 the option to send graduates to work at a health fair in

New York. Englehardt was also copied on this email.

113. CW5 also confirms that he/she was made aware that CECO schools in the New

York area were running “health fairs” at which CECO students would provide free services for

the day. According to CW5, CECO counted these graduates as having been placed and, in fact,

held these “health fairs” just so it would be able to report the graduates who worked at such fairs

for free as having been “placed.”

114. The specific wrongdoing of counting short-term placements of one day or less as

confirmed placements was by no means limited to the health care fairs or community health

38


screenings. On the contrary, other fraudulent practices designed to manipulate placement rates

permeated many of the Company’s schools.

115. For example, Plaintiffs’ CW1 states that officials at Sanford-Brown College in

New York were paying employers to hire students in order to achieve job placement goals. CW1

reports that during the 2009-2010 school year, the Sanford-Brown campus in New York City had

a placement rate of 60% or less in August or September. However, two weeks later, the school

reported that it had made approximately 160 placements, a feat that CW1 described as

“impossible.” CW1 stated that in these 160 new placements were approximately 60

stenographers, a course of study for which it was very difficult to place graduates. CW1 spoke

via telephone with that campus’s Director of Career Services, Terri Herschlag, about the

campus’s placement of such a large number of students in a short period. Herschlag stated that

in order to place many of the students she went to representatives of a church in a low income

area to organize a health fair. Herschlag admitted to CW1 that she used school funds to pay

participants involved with the health screening to hire the graduates, who in turn worked short-

term at the health fair and were paid by the doctors and/or the church. CW1 reported that it was

easy for a Director of Career Services to access funds for such a scheme, possibly from what

were known as “education contribution funds” made available to a school, or a donation that had

been made to a church or facility.

116. Confidential Witnesses also confirm other manipulative methods through which

CECO-operated schools would inflate placement numbers. For example, CW1 detailed another

method that Defendants utilized to further inflate CECO’s placement rates, which was through

the misuse of “waivers.” Waivers were used for graduates who were not looking for jobs due to

circumstances such as pregnancy or military service (and who were therefore exempt from

39


placement rate reporting). According to CW1, instead of ending the graduates’ waiver status

upon termination of the particular circumstances (as was required), CECO’s schools kept the

graduates on waiver status for inordinate amounts of time to mask the lack of a placement.

According to CW1, this allowed the schools to subtract the names of these graduates from the

list of graduates who had to be placed, thus artificially inflating the percentage of graduates who

had found jobs. Some schools had as many as 20% to 40% of their graduates on waiver status,

according to CW1.

117. CW1 states that the “waiver issue” is “bigger deal than the health fairs” because

there was so much pressure to put students on waivers without the proper documentation

required to confirm that a graduate was eligible for waiver status. According to CW1, this

practice allowed some CECO schools to falsely inflate their placement rates.

118. Further in this regard, CW1 states that some CECO-owned schools were only

using social media, such as Facebook, to verify that a student had a job. The schools would take

the information directly from Facebook and confirm the job placement without independently

verifying it by calling the graduate’s employer, as was required by the rules. Although this was

“not a legitimate verification,” CW1 reports that “Corporate allowed that, too.” CW1 states that

he/she was directed by Forth to review social media websites such as Facebook to determine if

an individual was eligible for waiver status, and according to CW1 this practice was widely

accepted at CECO. CW1 sent an e-mail to Lorraine Rowe, the Regional Director of Compliance,

in which he/she expressed his/her concerns about using social media websites to confirm

waivers, and approximately a week later CW1 was fired.

119. Placement rates were also falsely inflated by CECO by the use of loose practices

under which the Company would determine a placement to be “related” to the graduate’s field of

40


study. According to CW4, for example, there were two types of placements, one of which was

“in-field,” which meant the graduate had to be in a field directly related to their course of study,

and another of which was called a “related” placement, meaning the graduate used 20% of the

skills he or she learned during their course of study in the work place. According to CW4, the

CECO policies for “related” placements were “nebulous” and “vague,” and answers to questions

about whether a related placement qualified as a confirmed placement differed according to

which corporate-level or regional-level Career Services managers you asked. CW4 further

stated, however, that if there was any way to justify that a student was using skills learned from a

CECO class on the job, the student would be designated as a placement. According to CW4, it

was only in 2011 that a new, stricter policy for determining related placements was put in place,

the result of which was that his/her staff could no longer “use as many related placements.”

120. CW1 verifies and adds to CW4’s statements about the disparate treatment – at

least internally – between “in field” and “related” placements. According to CW1, CECO

maintained two different placement forms – one for “traditional” placements and another for

“non-traditional” placements. The “traditional” placement forms were used for graduates that

were hired into full-time positions, while the “non-traditional” placement forms were for

graduates who were hired on a part-time or per-diem basis. CW1 and his/her team were directed

by Forth and Look to use the “non-traditional” placement forms to record placements for

students who worked only between one and twelve days at health fairs or health screenings.

Graduates who were placed in “non-traditional” jobs were required to sign “non-traditional”

placement forms that stated that the CECO school in question would continue to assist the

graduate in their job search after placing the graduate in the short-term job – making clear that

CECO itself did not in any way consider these graduates truly “placed.” Again, according to

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CW1, CECO made no distinction between “traditional” and “non-traditional” placements in

reporting their placement rates. Accordingly, even students who had signed forms indicating

that CECO would continue to assist them in locating jobs were counted as “placed” in the

placement rates reported by the Company.

121. Importantly, the foregoing are only some of the manipulative and fraudulent

practices employed by CECO, and devised and condoned by CECO management, to artificially

boost placement rates for purposes of satisfying accreditors and investors. The Dewey Report,

which has not yet been made public, is expected to further corroborate these allegations, and may

also expose additional fraudulent tactics used by CECO to fraudulently inflate its placement rate

figures.

V. THE TRUTH IS REVEALED

122. On May 17, 2011, CECO received a subpoena duces tecum (the “Subpoena”)

from the NYAG in connection with the NYAG’s investigation of whether, inter alia, CECO’s

reported placement rates complied with certain New York state consumer protection, securities,

finance, and other laws.

123. The NYAG requested from CECO and certain of its schools documents

concerning a broad range of business practices, including marketing and advertising, student

recruitment and admissions, education financing, training and compensation of admissions and

financial aid personnel, programmatic accreditation, student employment outcomes, placement

rates, and other disclosures made to graduates. The NYAG investigation sought documents

dating from May 17, 2005, to the present.

124. On May 19, 2011, the Subpoena was mentioned offhandedly in a New York Times

article that focused on the NYAG’s investigation of the for-profit university owned by Donald

42


Trump. In an aside, the article mentioned that CECO was one of four other companies that

received subpoenas from the NYAG. No additional information regarding the NYAG

investigation of CECO was mentioned.

125. On May 24, 2011, the Company confirmed the NYAG’s investigation and

disclosed the existence of the Subpoena in a Form 8-K filed with the SEC. The Company stated:

Career Education Corporation (the “Company”) has received from the Attorney General of the State of New York (“Attorney General”) a Subpoena Duces Tecum (“Subpoena”) dated May 17, 2011, relating to the Attorney General’s investigation of whether the Company and certain of its academic institutions have complied with certain New York state consumer protection, securities, finance and other laws. Pursuant to the Subpoena, the Attorney General has requested from the Company and certain of its academic institutions documents and detailed information on a broad spectrum of business practices for the time period May 17, 2005 to the present.

126. On August 3, 2011, CECO revealed, in an 8-K filing to investors, that it had

determined that certain of the Company’s Health Education schools engaged in “improper

practices” when calculating placement rates for the 2010-2011 academic year, which it claimed

to have discovered in connection with preparing a response to the NYAG Subpoena. While

CECO did not disclose the nature of the improprieties identified in the August 3, 2011 statement,

the price of CECO common stock declined 15%, from $21.87 per share to $18.51 per share.

127. In response to the improprieties discovered in responding to the NYAG

Subpoena, CECO’s Board of Directors retained Dewey & LeBoeuf to conduct an internal

investigation. In particular, Dewey was hired to review the reported placement rates at CECO’s

Health Education segment schools and to review the methods used to determine those rates, as

well as the placement rates reported at other, CECO-operated, domestic schools.

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128. In a November 1, 2011 press release to announce its quarterly earnings, CECO

reported that Dewey had completed its investigation into the placement rate practices at the

Health Education and Art & Design segment schools. The press release stated:

Counsel’s investigation confirmed the existence of improper placement determination practices at certain of the Company’s Health Education segment schools, and, for the Company’s Health Education and Art & Design segment schools, Dewey LeBoeuf identified certain placements that lacked sufficient supporting documentation or otherwise did not meet applicable placement guidelines established by the Company.

* * *

Based on their recently reported 2010-2011 placement rates, 13 of the Company’s 49 ACICS-accredited Health Education and Art & Design segment schools met ACICS’s 65% minimum placement rate standard for the 2010-2011 reporting period. ACICS could determine that additional schools do not meet its minimum placement rate standard. The Company has scheduled a meeting with ACICS to address these reported rates.

129. High-ranking members of CECO management resigned immediately upon

disclosure of Dewey & LeBoeuf’s findings. Effective October 31, 2011, McCullough was

ousted as President, CEO, and member of the Board of Directors. Brian R. Williams, Senior

Vice President of Culinary Arts, Thomas G. Budlong, Senior Vice President of International and

Chief Administrative Officer, and Thomas A. McNamara, Senior Vice President of Art &

Design, also “resigned.” Numerous other Career Services and Compliance personnel were

terminated.

130. In response to the November 1 revelations, the price of CECO’s common stock

fell from $15.95 per share at the close on November 1, 2011, to $7.37 per share at the close on

November 3, 2011, a drop of 54%.

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131. Driving home the severity of the situation, the ACICS stated the following in a

November 8, 2011 press release:

A school’s career placement rate is one of the accountability standards required to attain and maintain accreditation by ACICS. The threshold indicates that any school which does not place at least 65 percent of its graduating students in a job in their field of study (or a related field) is at risk of losing their grant of accreditation.

AGIGS takes any misrepresentation in placement rates – whether intentional or unintentional – very seriously. As an independent auditor, we do not tolerate misconduct or misleading statistics from schools reporting on job placement rates . When a school is not in compliance with ACICS’ standards and policies, we take appropriate enforcement action.

We are currently conducting an internal review of our processes for evaluating placement rates, including a review of data collected from site visits and audits of Career Education Corporation from the last few years, to determine why those problems were not detected.

(Emphasis added).

132. On November 21, 2011, CECO announced that it had received a letter from

ACICS directing the Company to show cause as to why the accreditations of its 49 ACICS-

accredited institutions in the Health and Art & Design segments should not be “withdrawn by

way of suspension.” The “show cause” directive related “to the adequacy of the administrative

practices and controls relative to the Company’s reporting of placement rates to ACICS.”

Following this announcement, CECO stock fell 6.2%, dropping from $7.69 at the close of

trading on November 18, 2011 (the last trading day before the November 21, 2011

announcement ), to $7.21 at the close of trading on November 21, 2011.

133. At a show cause hearing before the ACICS in December 2011, CECO failed to

convince the ACICS that the accreditations of its Health Education and Art & Design schools

should not be withdrawn. Among other things, the ACICS rejected the methodology employed

45


by CECO to purportedly correct its fraudulent reporting because, among other things, CECO’s

investigators did not examine employment information for each graduate resulting in a purported

placement. Instead, they only reviewed – and purported to correct – a “statistically valid”

sample. Albert C. Gray, executive director of the ACICS determined “[I]t’s not enough – you

need to do a better, deeper, broader analysis than that . . . . You need to have a much fuller

analysis of the data than a statistical sample.” Further, in temporarily rejecting CECO’s

application, Gray concluded, “The council was not satisfied with the depth and breadth of [the

data submitted by CECO] and did not think it represented a strong enough case for the accuracy

of that data.” The ACICS continued the hearing until April 2012, at which time CECO again

fought to maintain accreditation for 49 of its schools. At the time of this filing, a decision by

ACICS is pending.

134. In addition to CECO’s efforts to hide the full extent of the fraud by investigating

only “statistical samples” of placements before the ACICS, the information disclosed to date is

also only limited to the present 2010-2011 reporting years. Notably, CECO has indicated that it

does not intend to investigate issues relating to conduct occurring before 2010. When asked on

CECO’s third quarter earnings conference call, on November 10, 2011, about the accuracy of

prior years’ reporting, CECO’s CFO Michael Graham stated, “The focus was on the current year

and current data” and that he “wouldn’t speculate on the data going backward.” Graham stated

that CECO “know[s] the issue and [it has] given the new data to ACICS, and [it will] go forward

with the plan to get above 65 percent this year.” While this approach may have passed muster

with analysts on the call, the ACICS did not accept this half-hearted attempt to ferret out the

misconduct responsible for CECO’s false reporting, and is requiring CECO to analyze data from

the previous year to see if those job placement rates were inflated during that period as well.

46


135. Additionally, there is insufficient information regarding whether the severe abuses

found in the Health Education and Art & Design segments have occurred at the Company’s other

operating units, including American InterContinental University, Colorado Technical University,

and the Culinary Schools. Thus, CECO’s failure to investigate its historical placement rate

reporting practices before 2010 and to fully investigate and report on abuses at other institutions,

leaves unaddressed the fact that scores of students were misled into enrolling at CECO schools

based upon inflated placement rates. While some of these students have chosen to sue CECO

and its schools directly, it is likely that the bigger shoe is still to drop in the form of additional

investigations and fines by various state and federal regulators, or by Congress.

136. For example, on December 8, 2011, U.S. Senator Dick Durbin called on CECO to

refund tuition to students if their program of study loses accreditation in light of the findings

detailed in the Dewey Report. Senator Durbin stated that while he “was pleased that [CECO

has] taken the initiative to disclose the inaccuracy,” he remained “deeply concerned for the more

than 100,000 students attending [CECO] schools.” He called on CECO to “perform internal

audits of other programs and schools” and to make this information public so that future students

can make informed decisions. Senator Durbin further added that for those programs that lose

accreditation, “it would only be fair to refund tuition paid by the students and return federal aid

used to the [DOE].”

137. Senator Durbin did not stop there. On the same day, December 8, 2011, he also

wrote to Dr. Gary R. Carlson, head of the ACICS, urging him to audit additional schools and

programs operated by CECO to ensure that CECO’s students had accurate information, and to

the Honorable Arne Duncan, Secretary of Education, urging him to consider taking enforcement

action against CECO for violating the DOE’s program integrity regulations, which prohibit

47


“false, erroneous, or misleading statements . . . in regards to educational programs, its financial

charges, or the employability of its graduates.” According to Senator Durbin, “[i]nflating job

placement rates seems to be in direct violation of this regulation. Based on the facts disclosed to

date, CECO appears to have violated this requirement for eligibility for Federal student aid.”

138. In light of the ongoing and expanding investigations, it is clear that the full

ramifications of the misconduct at CECO – and therefore the full ramifications that this

misconduct will have on CECO’s stock price and its public shareholders – have yet to fully

manifest themselves.

VI. FALSE AND MISLEADING STATEMENTS

139. Throughout the Class Period, CECO made a number of materially false and

misleading statements and omitted to disclose material information needed to make the

statements it did make not misleading. Specially, CECO made false statements concerning

(1) its placement rates; (2) its schools’ accreditations; and (3) its compliance with applicable

laws and regulations. As a result of these false statements, CECO’s stock traded at artificially

inflated prices throughout the Class Period. When the truth about the Company was revealed,

the artificial inflation was removed causing Plaintiffs and the Class to suffer substantial harm.

A. CECO MADE FALSE STATEMENTS CONCERNING ITS PLACEMENT RATES

140. Throughout the Class Period, the investment community focused heavily on

CECO’s student placement rates as an indicia of the Company’s financial strength and low

exposure to regulatory risks. At all relevant times, CECO was well aware of the primacy the

investment community afforded its reported placement rates, and the importance of placing its

students in meaningful careers to the Company’s ongoing success. For example, in its 2008 and

2009 10-Ks, CECO stated:

48


We place a high priority on assisting our students in graduating from their programs of study and securing employment in their careers of choice. We believe that the gainful employment of our students in their field of study is a key indicator of the success of our schools and the fulfillment of our educational mission . Our schools share with each student the responsibility for the student’s long-term success. Our emphasis on providing personal support and assistance to our students is a hallmark of our educational model.

(Emphasis added). Likewise, in its 2010 10-K, CECO stated:

We believe that the employment of our students in their field of study is a key indicator of the success of our schools and the fulfillment of our educational mission.

(Emphasis added).

141. Because CECO recognized the importance the investing community ascribed to

its placement rates – not only because it provided a competitive advantage through increased

marketing opportunities, but also because it lowered the Company’s regulatory risk profile –

CECO took care to perpetrate the appearance that it was succeeding in placing its students in

meaningful jobs. During the Class Period, the Company on several occasions publicly reported

its placement rates, as set forth below. On each of these occasions, the reported numbers were

artificially inflated by the fraudulent practices described above and admitted in the Dewey

Report.

142. On February 19, 2009, the start of the Class Period, CECO announced results for

its fourth quarter 2008, where they handily beat First Call consensus, by reporting $0.43/earnings

per share versus $0.248/earnings per share consensus. In the Company’s press release,

McCullough stated: “2008 was a year of progress for our organization and I am proud of our

results.... We exceeded our 2008 earnings and cash flow objectives while executing on our

fundamental strategy of positioning the company to deliver our previously communicated 2010

49


milestones.” During CECO’s fourth quarter 2008 earnings call held on February 20, 2009, Sarah

Gubins, an analyst from Bank of America Merrill Lynch, asked McCullough pointedly for “an

update on job placement trends for [CECO] graduates.” McCullough reassured the market that,

despite the challenging economic times, CECO’s students were continuing to be in high demand:

We obviously think that this is an issue that we’ve got to be concerned about as an industry, and not just education given what’s going on in the macro environment. To date we haven’t seen significant changes in demand for our graduates but it’s something we’re keeping an eye on. We continue to experience our strongest placements in our Culinary business, where job placements are in excess of 90% in most cases . . . .

(Emphasis added).

143. In connection with the publication of CECO’s second quarter 2009 results, the

Company again convened analysts and investors on a teleconference to present their earnings on

August 6, 2009. During the question and answer portion of the call, McCullough was again

asked, this time by Trace Hill, an analyst with the Signal Hill Group, about placement trends and

quantitative placement rates across CECO’s various segments. McCullough reassured the

market that its ability to place its students was strong despite the challenging environment:

[W]e haven’t seen any significant declines in our placement rates and so we feel good about that. We’re very mindful, one of the things that I am concerned about and I know that we are concerned about in the industry, given what’s happening broadly, is our ability to continue to place students. But we have not seen, up til now, a significant [dis]integration [sic] in our ability to place students.... We have continued to place students with the companies that we have relationships with at a pretty steady rate.

144. During CECO’s third quarter 2009 earnings call held on November 5, 2009, Bank

of America Merrill Lynch analyst Sarah Gubins again asked McCullough to discuss “outcomes,”

including “job placement trends” for CECO graduates. Defendant McCullough again took steps

50


to reassure the market that the demand for CECO students remained high despite the challenging

economic climate, stating:

One of our concerns as we come into this marketplace is will we continue to see demand employer demand and we really have worked hard to increase the resources we have available from both a corporate and SVU basis to aid our graduates [in] finding jobs. We have not seen and I have been asking this question a lot internally. We have not seen any significant degradation in demand for our students. We, through the course of this year, have helped and placed 9000 graduates into jobs and we did not see that abate during the third quarter. We continue to see strong placement trends in outcomes in our culinary business. We are able to track these things we feel very, very good about what we see and the continued demand.

(Emphasis added).

145. On February 18, 2010, CECO hosted an Analyst and Investor Day to discuss the

Company’s annual performance. During this presentation, Defendant McCullough purported to

quantify the precise placement rates reported across CECO’s various segments, stating that

CECO’s University segment (consisting of American InterContinental University, Colorado

Technical University, and Art & Design) had a placement rate of 73% and that its Career-

focused segment (consisting of the Sanford-Brown Institute and Le Cordon Bleu) had a

placement rate of 81%. CECO specifically represented that these placement rates pertained to

students “who have obtained employment in their field or a related field.” Further, these

placement rates were touted as “Enablers for Growth,” as CECO stressed to investors that the

Company’s regulatory risks were low due to its high graduation and placement rates in an

otherwise difficult economy:

51

42% Graduation

Rate ,

57% Graduation

Rate /1

73% Placement

Rate 12

81% Placement

Rate /2


A Simplified View of Complicated Metrics

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2010 Analyst and Investor Day

146. On February 19, 2010, relying upon the placement rates publicly disclosed by

CECO, Sterne, Agee & Leach reported in an analyst report that CECO had a “42% graduation

rate and 73% placement rate for University segment; 57% graduation rate and 81% placement

rate for career focused segment.”

147. Also on February 19, 2010, relying upon placement rates disclosed by CECO,

Morgan Stanley stated the following in an analyst report:

CECO hosted an analyst day to discuss its updated long-term outlook. We raise our 2010 operating income estimate to $358M, within the company’s new $350 - $370M goal range. We have less confidence in longer-term targets for a number of reasons. For instance, the company’s outlook assumes some benefit from advertising costs, partly as a result of higher referral rates. In our view, low placement rates (management’s measure yields 73% for University and 84% for the balance of CECO’s schools) along with a firming ad market may limit this tailwind.

52


148. A February 19, 2010 William Blair report, similarly relying upon placement rates

disclosed by CECO, stated the following:

University placement rate (defined as percentage of students who graduated between July 2008 and June 2009 who had jobs in their field of study by December 2009) of 73%; career focused placement rate of 81%.

(Emphasis added).

149. A February 19, 2010 Credit Suisse analyst report also repeated the University

placement rate of 73% and the Career Focused placement rate of 81% disclosed by CECO.

150. On February 23, 2010, CECO participated in the Credit Suisse Group Global

Services Conference. During this conference, CECO’s CFO Graham reported strong placement

rates, as follows:

So first about quality. There’s been a lot of discussion about transparency and disclosing graduation rates and placement rates. Our company has historically not done that because of the complexity of the measure over states, over accreditors, over program accreditors, regional accreditors, national accreditors, a basis of presentation was difficult to do. So here we’ve laid it out, a very simple model.

From a graduation standpoint we look back at our cohorts who started at the beginning of the program and who, at the end of 150% of the normal tenure, six years for a bachelors, three years for an associates, has graduated. We graduate 42% of our students out of the University and 57% out of our career focused institutions.

And remember, we have a retention rate of about 70% after our first year. So if you think about taking these numbers and dividing them by 0.7, to get the real graduation rates of students that are serious and have made it through the program, we’re pretty proud of those graduation rates.

Our placement rates are in the mid-70s to low 80s, we think those stack up with everyone else’s and are very fine numbers especially when you consider this is data from 2009. With 10% unemployment we’re still placing 75% to 80% of our students

53


today in a tough economy. So we think we can grow through quality.

(Emphasis added).

151. Graham made similar statements during the Baird Business Solutions Conference

on February 25, 2010, again making statements to investors about the importance of placement

rates, among other things, as a driver for growth at the Company:

So for us as we grow, we see four drivers of growth; new programs, our technology platform, quality education, and geographic expansion. These four growth drivers exist for 2010 and as we go forward. Let me talk briefly about each of these drivers.

First quality, there’s a lot of discussion in our industry about transparency, transparency about graduation rates, transparency about placement rates. We have quality outcomes in our institution. Historically, we have never disclosed our placement or graduation rates, because it’s a very complex measure. Placement rates are measured by a regional accreditor, a national accreditor, a programmatic accreditor, and a state. Graduation rates are measured on a first-time, full-time or other basis. Those are very complicated. We have put out a simple model for people to follow that basically says those people starting in the institution; how many finished; and those that finished, how many were placed?

You can see here our graduation rates for university in the low 40’s and for the career-focused schools in the high 50’s. Again, as you think through this, remember that in our industry and our Company, about 30% of your students leave in the first year, just through natural attrition, through family issues, not ready for school. So if you look at these graduation rates and think after the first year, divide that number by 0.7, very strong outcomes.

Our placement rates in the middle 70’s and low 80’s, are very strong placement rates. And these are 2009 placement rates. So these are for graduates that graduated at the end of June and have been placed by end of December, in an economy with 10% unemployment. We’re placing almost 80% of our students and they’re getting jobs .

54


(Emphasis added). Graham also presented the same slide used in the February 18, 2010

presentation, as discussed above.

152. On April 21, 2010, Barclays – relying on the placement rates publicly disclosed

by CECO – noted in an analyst report that “the [C]ompany released graduation rates of 42% and

57%, and placement rates of 73% and 81%, at University and Health, respectively.”

153. On June 3, 2010, CECO presented at the RBC Capital Markets Consumer &

Retail Conference. During this presentation, CFO Graham stated:

[W]e are a career focused institution from our ground campuses. We also have our online universities. We went out in our Investor Day – and I encourage you to look at the presentation on our website – and defined our placement rates within six months in the field of study. Take look at those. Our university groups, our regional credit groups on average placement rates are just under 75% and our ground-focused career schools are just under 80%.

(Emphasis added).

154. During the UBS Global Technology and Services Conference a few days later on

June 8, 2010, Graham similarly reported:

We really see four things that are existing in the marketplace and in the Company that will enable growth – quality, new programs, a great technology platform and getting more campuses on the ground. Let me talk about each of those.

First, quality – again, we’re all about graduating students, retaining students and placing students. There are a lot of measures of placement rates and a lot of measures of graduation rates in our industry, state accreditors have rules, regional accreditors have rules, national accreditors have rules, we have our own rules.

So we took a simplified view and we shared this with everyone at our investor day in February. I encourage you to look at our website and take a look at our investor day presentation which talks about our company. But our graduation rates are right in line with the industry. Our university graduates about 42% of their students and career focused schools about 57% of their students

55


within about 150% of the time of a normal degree. So an associate over three years, a bachelors over five to six.

Please recognize that we are an open enrollment institution. You have to have a high school graduate level degree to get into our institutions, but we let people in, and we let people get a chance. In the first year about 30% of our students do drop, for lifetime reasons, they can’t keep up with the academic progress, for a lot of different causes. So if you think about these graduation metrics after 30% of the students in the first year drop out for their reasons, very strong outcomes for the students.

And placement rate is the same way. Again, these are placement rates through the end of the year and you can see that with 10% unemployment in the country, within six months of graduation over 75% of the students leaving our school in the recession got placed in jobs. It speaks to the quality of our programs.

* * *

[W]e change lives through education, we believe we’ll have graduated 1 million students and roughly a 75% placement rate, 750,000 people working through our institutions and hopefully from there the share price follows because of the good things we’re doing for students.

(Emphasis added). Again, Graham presented the same February 18, 2010 presentation slide

discussed above.

155. On June 15, 2010, during the William Blair & Company 30th Annual Growth

Stock Conference, Graham again discussed CECO’s purportedly strong placement rates:

We have been in existence for about 15 years as a Company. We have now graduated 467,000 students. And our placement rates currently average around 75%, so we have over 350,000 Americans working because of what we do. As of today we are educating 116,000 students, 10,000 of those in Europe and the rest are in America.

* * *

Most of our students, 41%, are over 30 years old. They are reentering the workforce, reeducating themselves, working on different careers, working on jobs. Our job is to educate students, place the students and elevate the students up.

56


* * *

Our placement rates are for December 31, 2009. So this is the percentage of our population that we placed in a 10% unemployment rate. So across-the-board almost 75% to 80% of all of our students graduating in the back half of last year received jobs within six months, which speaks high to our quality and our programs.

(Emphasis added).

156. During the Company’s second quarter 2010 earnings call on August 5, 2010,

McCullough again touted the Company’s placement rates, stating:

Our sector meets the needs of students that are simply not met by the traditional education system.

In 2009, our company graduated nearly 50,000 students and as we presented our investor day, we placed approximately 78% of those who graduated by June 30th of last year within their field of study or related field by December 31st of 2009 . All of this was accomplished in a 10% unemployment economy. We are proud of that.

(Emphasis added).

157. In response to a question from Morgan Stanley Analyst Suzi Stein concerning the

78% placement rate disclosed during the second quarter 2010 earnings call, Graham clarified

that:

[W]hat we said the investor day was, given the number of different placement rates from national accreditors, the way we measure it, that it was pretty complicated to give total Company, so we gave the total Company with the 81%, and career focus schools a 73%, and the University schools blending to the 78%. So far this year, on the [cohort] that we’ve seen graduating, we are not seeing material change against those numbers. We are not going to update those numbers specifically because of the cohort and the calculations that we go through, but from a trend standpoint so far in this first six months, for the cohort graduating 12-31-09, we have not seen a material change in the placement data.

57


(Emphasis added).

158. On August 9, 2010, Barclays – relying on the placement rates CECO disclosed to

the investing public – reported the following in an analyst report: “CECO stated that its job

placement trends remain on track with the most recent disclosure, which was that 78% of

graduates as of June 30, 2009 were placed in jobs within 6 months of their graduation (81% of

career focused grads and 73% of University grads, for blended 78%).”

159. On September 16, 2010, McCullough spoke at the BMO Capital Markets Back to

School Education Conference. During this conference, McCullough again represented that

CECO schools had strong placement rates, stating:

Our employment placement rates in the six months that ended June 30 of last year, which is our most recent data, we were about 78% across the Company. Again, we are proud of the work that we do in making sure that our students go out and get jobs.

(Emphasis added). The following slide, reporting the placement rates, was presented to investors

at the conference:

58


Focus Continue Culture of

Quality and Compliance

Intentional Portfolio Choices

Improve Marketing

Effectiveness

Improve Human Capital

Management

• New Student Orientation Programs • College Preparatory Course • 98% AIU/CTU Faculty have Masters/Doctoral Degrees • Employment placement of 78% within 6 months after end of

Academic Year (June 30) • 15% increase in Career Services personnel since 2009 • Low risk Institutional Self-Assessment ranking - the number of

low-risk institutions more than tripled since 2007 • CEC institutions comprise 25% of ACICS 2009 Honor Roll • 6,500 Faculty dedicated to serving students

160

During the fourth quarter 2010 earnings call on February 18, 2011, McCullough

stated:

We also continue to focus on improving students outcomes. As you may recall, at our Investor and Analyst Day in February 2010, we shared our placement statistics for university and career focused schools. While placement can be measured in a number of ways due to accreditation rules and varying definitions, we’ve continued to use the same definition for placement; the percentage of students seeking employment, who graduated during a 12-month period ended June 30, who had jobs in their field of study or related field by December 31.

You may recall that in 2009 our career focused schools achieved a placement rate of 81% while the university schools were at 73%. In 2010, our career focused school placement rate fell slightly to 78% while our university placement rate increased slightly to 75%.

(Emphasis added).

161. On February 22, 2011, relying upon placement rates disclosed by CECO, Credit

Suisse reported the following in an analyst report:

59


Placement Rates

Management provided new placement rate information which measures the percent of students seeking employment who graduated during the 12-month period ended June 30, 2010 and had jobs in their field of study or a related field by December 31, 2010. For the University segment (which includes AIU, CTU, and Art & Design) the placement rate rose to 75% from 73% as similarly calculated last year. Career focused schools’ (including Sanford-Brown and Culinary) placement rate registered at 78% versus last year’s 81%.

(Emphasis added).

162. In the Company’s 2010 Annual Report dated April 1, 2011, McCullough stated

the following concerning the Company’s placement rates in his letter to the Company’s

stockholders:

In 2010, as the national unemployment rate hovered near 10 percent, we invested in our Career Services and Academic teams, increasing the number of team members by 21 and 17 percent, respectively. As a result, our University 2010 job placement rate was 75 percent, up 200 basis points from the prior year, while our Career Focused 2010 placement rate was a solid 78 percent, down slightly from 81 percent the prior year. While job placement can be measured a number of ways due to accreditation rules and varying definitions, we continue to define placement as the percentage of students seeking employment during a 12-month period ending June 30 who had jobs in their field of study or a related field by Dec. 31 . Given the ongoing economic difficulties in today’s job market, I’m pleased with our job placement results. But we will continue to place emphasis on this key area of student success.

(Emphasis added).

163. On May 12, 2011, Gary McCullough spoke at the Barclays Capital, Inc. Global

Services Conference. During this presentation, McCullough stated:

In terms of the last 12 months, we’ve done a number of things. Of course, like others, with given what’s gone on in the industry, we are very focused on ensuring that we are doing what’s in the best interest of our students. To that end, we’ve invested in career

60


services personnel, and in academics over the last 12 months, up in terms of headcount 14% in the – in career services, and academics by 12%, and that’s really helped us with regard to both making sure the out-comes are there and make sure our students continue to find jobs. Our placement rates in 2010, were inline with 2009. We think that’s a win in light of what was happening in the macroeconomic environment.

(Emphasis added).

164. On August 5, 2011, relying upon placement rates disclosed by CECO

management, Citigroup Global Markets published the following placement rates for Sanford-

Brown campuses in an analyst report on CECO:

Sanford-Brown Employment Rates Degrees Offered

ASSOCIATE'S

Anesthesiologist Assistant

Cardiovascular Technology/Technologist

Diagnostic Medical Sonography/ Sonographer and Ultrasound Technician

Clinical/Medical Laboratory Technician

CERTIFICATE

Medical Insurance Specialist/Medical Biller

Medical/Clinical Assistant

Pharmacy Technician/Assistant


Surgical Technology/Technologist

Diagnostic Medical Sonography/Sonographer and Ultrasound Technician

Massage Therapy/Therapeutic Massage

Campus Employment Rate

66.7%

62.5%

63.2%

100.0%

77.3%

80.2%

75.8%

79.4%

76.9%

55.2%

96.2%

61


DIPLOMA

Dental Assisting/Assistant

Medical Insurance Specialist/Medical Biller

Medical/Clinical Assistant

Pharmacy Technician/Assistant


Surgical Technology/Technologist

Diagnostic Medical Sonography/Sonographer and

Ultrasound Technician

Massage Therapy/Therapeutic Massage

Weighted Average

91.6%

86.0%

87.5%

90.2%

73.8%

91.7%

86.5%

91.2%

81.4%

Source: Company Data, Citi Investment Research and Analysis

165. The placement rates CECO reported in the foregoing statements contained in

Section A, above, were materially false and misleading for at lease the following reasons:

(i) As exposed by the Dewey Report, CECO was reporting false, inflated

placement rates in its Health Education and Art & Design segments, which

also caused its total reported placement rates to be false and overstated;

and,

(ii) CECO knew, but failed to disclose, that these placement rates were

inaccurate, and artificially inflated by way of the fraudulent practices and

scheme described hereinabove, which was designed, approved, and

condoned by management.

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B. CECO FAILED TO DISCLOSE THAT ITS SCHOOLS ’ ACCREDITATIONS WERE

PREMISED ON FALSIFIED PLACEMENT RATES

166. Throughout the Class Period, CECO recognized that its schools needed to

maintain their accreditations if the Company were to operate successfully. As explained above,

the overwhelming majority of the students who enrolled in CECO schools relied upon funds

obtained under Title IV to finance their CECO educations. Because only accredited institutions

have access to Title IV funds, CECO knew that its ability to attract students who could pay their

tuition depended on its schools’ maintaining their accreditation. In fact, the Risk Factors CECO

identified in its Forms 10-K and 10-Q filed during the Class Period were replete with warnings

of the dire consequences that would befall the Company were its schools to lose their

accreditations. For example, each of CECO’s Class Period Forms 10-K warned:

If our U.S. schools fail to comply with the extensive federal regulatory requirements for school operations in the educational services industry, we could incur financial penalties, restrictions on our operations, loss of federal and state financial aid funding for our students, or loss of our authorization to operate our U.S. schools . . . .

* * *

A significant portion of our U.S. —based students rely on student aid and loan programs under Title IV . . . and we derive a substantial portion of our revenue and cash flows from Title IV Programs.

All of our U.S. schools participate in Title IV Programs and so are subject to extensive regulation by [the Department of Education], various state agencies and accrediting commissions. To participate in Title IV Programs, a school must receive and maintain authorization by the appropriate state education agencies, be accredited by an accrediting commission recognized by [the Department of Education], and be certified by [the Department of Education] as an eligible institution. . . . For the fiscal year ended December 31, 2010, approximately 90% of the Company’s U.S.—based students who were in a program of study at any date during that year participated in student aid and loan programs

63


under Title IV, which resulted in cash receipts recorded by the Company of approximately $1.88 billion.

(Emphasis in original).

167. CECO’s Class Period Forms 10-K similarly warned:

If one or more of our schools fails to maintain institutional accreditation, if one or more of our accrediting agencies loses recognition by [Department of Education], or if certain of our programs cannot obtain or maintain programmatic accreditation, our schools could lose their ability to participate in Title IV Programs, and our growth prospects, reputation and financial condition could be materially adversely affected.

* * *

If one of our schools or programs were to be placed on probationary accreditation status or failed to qualify for or maintain accreditation, we would likely experience adverse publicity, impaired ability to attract and retain students and substantial expense to obtain unqualified accreditation status. Any loss of institutional accreditation would result in a loss of Title IV Program funds for the affected school and its students. Such events could have a material adverse impact on our business, financial condition, results of operations and cash flows.


168. In light of the critical importance of maintaining accreditation to the Company’s

ability to operate, analysts and investors were sharply focused on the accreditation status of

CECO’s schools. Recognizing this, the Company repeatedly emphasized throughout the Class

Period that each of its schools was accredited. In each of its Forms 10-K filed during the Class

Period, CECO proudly reported that “All of our U.S. campuses are accredited by accrediting

agencies recognized by the [Department of Education].” (Emphasis added). The Company’s

Forms 10-K detailed its schools’ accreditations as follows: 1

1 Plaintiffs cite only to the 2010 10-K Accreditation Table as an illustrative Class Period example.

64


CECO Accreditation Table

Year of School, Main Campus Location Accreditation (where accreditation information varies according to Accreditor2 Expiration3 Campus location, those locations have been listed separately)

American InterContinental University HLC 2014 Briarcliffe College MSA 2011 Brooks Institute ACICS 2016

Brown College ACCSC 2012 California Culinary Academy ACCSC 20104 Colorado Technical University HLC 2012 Gibbs College of Boston, Inc., a private two-year college ACICS 2014 Harrington College of Design (3) HLC 2015 International Academy of Design & Technology Chicago, IL ACICS 2012 Tampa, FL ACICS 2014 Le Cordon Bleu College of Culinary Arts

Austin, TX ACICS 2017 Pasadena, CA ACICS 2012 Portland, OR ACICS 20145 Scottsdale, AZ ACCSC 20106

Le Cordon Bleu College of Culinary Arts in Chicago HLC 2018 Le Cordon Bleu Institute of Culinary Arts ACCSC 20157

Pittsburgh, PA Missouri College ACCSC 2011 Sanford-Brown College

Atlanta, GA ACICS 2014 Dallas, TX ACICS 2013 Farmington, CT ACICS 2011 Fenton, MO ACICS 2011

2 The abbreviations used in the table are as follows: (1) ACCSC – Accrediting Commission of Career Schools and Colleges; (2) ACICS – Accrediting Council for Independent Colleges and Schools; (3) MSA – Middle States Association of Colleges and Schools, Commission on Higher Education; (4) HLC – North Central Association of Colleges and Schools, Higher Learning Commission. 3 Status as of February 15, 2011. Institutions seek renewal of accreditation during the year noted. 4 Accreditation has been extended while the institution completes the reaccreditation process. 5 Accreditation for the Tucker branch campus, which expired in 2010, has been extended while the institution completes the reaccreditation process. 6 Accreditation has been extended while the institution completes the reaccreditation process; accreditation for Las Vegas branch campus expires in 2015.. 7 Accreditation for the Miramar branch campus expires in 2011.

65


Year of School, Main Campus Location Accreditation (where accreditation information varies according to Accreditor2 Expiration3 Campus location, those locations have been listed separately)

McLean, VA ACICS 2015 Sanford-Brown Institute

Cranston, RI ACICS 20108 Jacksonville, FL ACICS 2011 Pittsburgh, PA ACCSC 2014 White Plains, NY ACICS 2013

SBI Campus – an Affiliate of Sanford-Brown Melville, NY ACICS 2014

169. In addition to reporting the accreditations of its schools in its Forms 10-K, CECO

executives repeatedly touted its schools’ accreditations at investor conferences and during

earnings conference calls throughout the Class Period. During the Credit Suisse Global Services

Conference on February 23, 2010, Graham noted that AIU and CTU were “both regionally

accredited.”

170. During the Baird Business Solutions Conference on February 25, 2010, Graham

stated:

[O]ur diversification is key to our model. And we have a lens that looks at our businesses three different ways; our university businesses, our career-focused businesses and our international businesses. University is our biggest business, serving right now about 60,000 students through 3 institutions; American Intercontinental University, Colorado Tech University, and our Art & Design unit. Art & Design unit is the International Academy of Design and Technology and four legacy colleges that the Company has owned. These businesses are primarily regionally accredited.

You can see the focus of business, health and technology in the unit. Our two career-focused schools, Sanford-Brown and Health and Le Cordon Bleu, the nations’ premiere culinary brand; 24,000 students in health, 32 campuses, primarily located west in the

8 In process of merging with SBI Campus – an Affiliate of Sanford-Brown; awaiting final approval from ED.

66


eastern side of the United States from St. Louis to the east, mostly entry-level degrees, a Certificate and Associates. Le Cordon Bleu has 18 campuses, nationally accredited, degree-offering programs.

(Emphasis added).

171. During CECO’s earnings call for the first quarter of 2010 on May 6, 2010,

McCullough noted that the HLC of North Central Association of Colleges granted Harrison

College of Design regional accreditation. According to McCullough, “Regional accreditation

combined with Harrington’s accreditation from the council for interior design accreditation, or

CIDA, provides the school and university with additional vehicles for future growth.”

172. During the Bank of America Merrill Lynch Services Conference on May 25,

2010, McCullough stated:

Our organization is comprised of a couple different types of institutions. We speak to university-type institutions, which is comprised of Colorado Technical University based in Colorado Springs, American Intercontinental University, which is based in the Chicago area, and art & design business which has become part of the university recently, which is comprised of several schools. We serve in that business almost 67,000 students. The majority of those students we serve in an online context, although we do have almost 30 campuses in our university business. We are regionally accredited at AIU and CTU. And we have parts of our art & design organization - Harrington College being one that is also regionally accredited; the rest are nationally accredited. . . .

* * *

And, from a career-focused point of view, we have two significant business units in our career-focused part of our organization. At Sanford-Brown, it’s the primary institution that we have that’s primarily in the healthcare business. This has been a business that’s grown nicely for us over the last couple of years. About 20,000 in that business with just over 30 ground-based campuses. Only a small part of our business there is online. The vast majority, again, is served through our on-ground campuses. Primarily, national accreditation . . . .

* * *

67


In the next part of our career-focused organization, we have our culinary arts business, which is comprised of about 17 schools going under the name of Le Cordon Bleu. We serve just over 12,000 students in that business across 18 campuses; again, nationally accredited.

(Emphasis added).

173. During the William Blair & Company 30th Annual Growth Stock Conference on

June 15, 2010, Graham stated:

[O]ur model is a very diversified institution. We offer degrees to many different students. And as the market allows, we are there to serve them. We break it up into three groups. A university team, our career focus teams, and our international teams.

University, primarily online, about 70%. 67,000 students today are learning with us in programs in business, IT, some health, protective services, graphic design, interior design and other programs. Regionally accredited, primarily bachelor’s and associate degrees.

Our career-focused institutions are short-term programs, anywhere from 9 to 24 months in duration. Focused on educating a student in a career passion and moving them right into the workplace. Sanford-Brown, our health institution, has almost 30,000 students teaching allied health, dental hygiene, medical assisting, medical billing and coding, sonography, surgical technicians. Nationally accredited with 38 campuses, almost all in St. Louis or East.

* * *

We have also taken our Briarcliffe Institution, which is regionally accredited in Long Island, and added it into our health business to allow it to move up towards regional degrees on a bachelor’s level, get into program like nursing or the higher degree to further differentiate our model.

* * *

One of our [ac]creditors, ACICS, a national [ac]creditor. 25% of all schools on their honor roll this year were schools that Career Education owned.

68


(Emphasis added).

174. During CECO’s second quarter 2010 earnings call on August 5, 2010,

McCullough, in response to a question about programmatic accreditation, pointedly noted, “ Of

course, all of our schools are accredited.” (Emphasis added).

175. During the BMO Capital Markets Back to School Education Conference on

September 16, 2010, McCullough specifically noted that CECO’s schools were accredited,

stating:

In terms of our business, we have several different business units. Our University business is comprised of primarily Colorado Technical University and American InterContinental University. We also have an Art & Design business as part of our University business. . . . And our institutions, AIU and CTU, are regionally accredited institutions. . . .

We have a couple of what we call career-focused institutions as well. This one, our healthcare schools, are comprised primarily of Sanford-Brown Institutions, which serves at this point almost 30,000 students. Those students are looking at a variety of healthcare-related fields, and they are nationally accredited.

And of course we have culinary programs that primarily are served under the Cordon Bleu schools, that would serve approximately 12,000 students. They are, again, nationally accredited programs.

(Emphasis added).

176. Similarly, during the Barclays Capital Inc. Global Services Conference on May

12, 2011, McCullough stated:

From a career focus point of view, we have a number of institutions. . . . In the health care sector, Sanford-Brown, who teaches allied health programs has got sort of students of – just over 31,000 students. And you can see here, we don't do a lot online in our Sanford-Brown business. It is locally based. We have about 39 campuses at this point in two – point in time. And it’s a nationally accredited group of schools.

69


I forgot to mention that our other two large online and on-ground institutions in the US are regionally accredited institutions .

Le Cordon Bleu, is our brand in the culinary business. Again, you can see here that we have 18 schools. That’s 17 ground campuses and an online campus, nationally accredited, and primarily associate degrees and certificate programs in our culinary business.

We have a range of art and design schools. Predominant brand there is the International Academy of Design and Technology. But we have a number of schools. And we’ve got a mix there of both nationally and regionally accredited institutions, serving almost 12,000 students.

(Emphasis added).

177. The above statements contained in Section B, above, were materially false and

misleading for at least the following reasons:

(i) CECO knew, but failed to disclose, that the placement rates it reported to

accreditation agencies were artificially inflated throughout the Class

Period and that, were the truth known, its schools’ accreditations would

have been placed in jeopardy – if not immediately suspended and/or

revoked; and,

(ii) CECO risk disclosures were materiality false and misleading because the

risks about which CECO purported to warn were imminent risks that the

Company was deliberately exposing itself to by the acts, practices, and

policies designed, employed, and condoned by Defendants.

178. Furthermore, because CECO’s 2008, 2009, and 2010 Forms 10-K contained

materially false and misleading statements concerning the accreditation of the Company’s

schools, the certifications signed by McCullough and Graham pursuant to § 302 of the Sarbanes-

Oxley Act (the “Section 302 Certifications”) included in the Company’s 2008, 2009, and 2010

70


Forms 10-K were also materially false and misleading. In the Section 302 Certifications,

McCullough and Graham certified as follows:

1. I have reviewed this Annual Report on Form 10 —K of Career Education Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a−15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d— (f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure

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controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

(Emphasis added). The Section 302 Certifications signed by McCullough and Graham and

appearing in CECO’s 2008, 2009, and 2010 Forms 10-K were similarly false and misleading,

because McCullough and Graham certified that CECO’s Forms 10-K “d[id] not contain any

untrue statement of a material fact or omit to state a material fact necessary to make the

statements made, in light of the circumstances under which such statements were made, not

misleading.”

C. DEFENDANTS FALSELY STATED THAT CECO WAS IN COMPLIANCE WITH ALL

APPLICABLE LAWS AND REGULATIONS

179. Throughout the Class Period, Defendants were well aware that CECO operated in

a heavily-regulated industry and that failure to comply with applicable laws and regulations

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would have a dire impact on its business. In each of its Class Period Forms 10-K, CECO

warned, using substantially similar language, as follows:

Government agencies, regulatory agencies and third parties may conduct compliance reviews and audits, bring claims or initiate litigation against us based on alleged noncompliance with, or violations of, the extensive regulatory requirements applicable to us, and could require us to refund amounts received under Title IV Programs or state financial aid programs or impose monetary damages, sanctions or impose significant limitations on our operations. We may be required to expend significant resources to defend against those claims.

Government and regulatory agencies and third parties may bring actions against us based on alleged violations of the extensive regulatory requirements applicable to us, alleged misrepresentations and other claims . . . .

While we believe that our schools operate in substantial compliance with applicable statutes and regulations, we cannot predict the outcome of these matters, and any unfavorable outcomes could have a material adverse effect on our business, results of operations, cash flows and financial position.

Any failure to comply with state and regulatory requirements, or new state legislative or regulatory initiatives affecting our schools, could have a material adverse effect on our student population, results of operations, financial condition and cash flows.

Our schools are subject to extensive state —level regulation and oversight by state licensing agencies, whose approval or exemption is necessary to allow an institution to operate and grant degrees or diplomas. State laws vary from state to state, but generally establish standards for faculty qualifications, the location and nature of facilities, financial policies, new programs and student instruction, administrative staff, marketing and recruitment and other operational and administrative procedures. Any failure of one of our U.S. schools to maintain state authorization would result in that school being unable to offer educational programs and students attending the campus being ineligible for Title IV Programs. State legislatures often consider legislation affecting regulation of postsecondary educational institutions; enactment of this legislation and ensuing regulations, or changes in interpretation of existing regulations, may impose substantial costs

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on our schools and require them to modify their operations in order to comply with the new regulations.


180. Given the importance of regulatory compliance to its continued operations,

particularly in light of the severe and growing regulatory risks that CECO faced on account of

the expanding regulatory scrutiny brought to bear on the entire for-profit education industry by

Congress, CECO took steps throughout the Class Period to assure the market that the Company’s

regulatory house was in order, and that was a fully compliant organization. Such representations

were critical given CECO’s checkered past – a fact the Company itself acknowledged. During a

February 24, 2009 Credit Suisse Group Global Services Conference, McCullough flatly

acknowledged CECO’s checkered regulatory past and took steps to reassure the marketplace that

the Company had put these troubles behind it:

Through the early part of this decade, we developed a number of issues that frankly we needed to address over time. Beginning in 2004, we had a series of regulatory and compliance issues that have hampered the Company, they began to hamper the company in terms of its progress going forward. I joined the organization about two years ago, in March of 2007, so it’s almost two years exactly as I stand before you. We spent much of the last two years working through some of the issues that we had as a result of those legal and regulatory issues, and I am happy to say that the most significant issues are behind us at this point in time.

(Emphasis added).

181. On February 26, 2009, CECO participated in the Robert W. Baird & Co., Inc.

Business Solutions Conference. During this conference, CECO CFO Michael Graham echoed

these sentiments, stating:

It’s an important inflection point right now for our company, a 14- year history. You’ve probably read a lot about Career Education Corp. We were founded through private equity and we built the company through a series of very rapid acquisitions and a very

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high growth model. The company was fortunate to have one of the leading online platforms from a technology standpoint and was an early entrant in the online business. As part of that growth we added a very high cost structure and a very significant investment in our real estate.

In 2004-2005 that growth proved to be unsustainable. The company ran into a series of legal issues and compliance issues that stopped the growth trajectory, none related to academic issues, more related to sales and marketing and other efforts. So from 2004 to 2007 it was retrenchment period. Margin pressure happened on the company, populations dropped and the company found itself needing to restructure.

The Board of Directors brought a new management team in, in 2007, Gary McCullough, our CEO joined the company in March of 2007. Gary comes from Proctor & Gamble, Wrigley Company and Abbott Laboratories. Gary brought in a combination of compliance experience from Abbott and consumer products experience for the great brands that we have to help turn around the company. I joined six months after and most of our management team is new.

We spent a lot of time strengthening the foundation of the company. We’ve put almost all the legal issues behind us . We’ve improved the quality of the education. We’ve improved the marketing processes and now we’re shifting our company from a great year in 2008 into a growth year in 2009 and 2010, and to make sure we have sustainable growth both on the top line and the bottom line, leading to double-digit margins in 2010.

(Emphasis added).

182. On September 17, 2009, McCullough spoke at the BMO Back to School

Education Conference. During this Conference, McCullough again spoke to the time the

Company had devoted to overcoming its checkered past, stating:

[W]hen I came in the business, . . . we had a number of issues facing the business. We had issues with the SEC. We had issues with the Department of Justice. We had some accreditation issues that were facing the business, and we had some lawsuits that we had to work our way through. And we’ve eliminated virtually all of those overhangs at this point in time. So we spent some time instilling in the organization a set of core values, what we

75


expected, how we expected our employees to behave, and how we are going to operate going forward.

(Emphasis added).

183. At the Company’s February 18, 2010 Analyst and Investor Day, McCullough

stressed again to those in attendance that CECO’s new management team had strengthened its

foundations by creating “Culture of Quality and Compliance,” which would, among other things,

assure “accuracy, consistency and timeliness” in CECO’s annual reporting to accreditors, as

follows:

• Solutions-oriented business partners

• Conduct proactive internal and external assessments to identify and correct risks early

• Standardized policies, processes, and forms

• Centralized annual reporting to accreditors for accuracy, consistency and timeliness

2009 Institutional Self- Assessment Ranking The number of/ow-risk

institutions more than tripled since 2007

Company institutions comprise one quarter of 2009 ACICS Honor Roil

Schools

210AriIyt and lnwmar Day

184. During the February 25, 2010 Baird Business Solutions Conference, Graham

again touted the Company’s record of compliance, stating:

At the same time we’re going to focus, and we focused through our turnaround. We focused to give you the numbers that we’ve-- deliver the numbers you’ve seen up there. We’ll continue to focus on our culture of quality and compliance. I talked about the quality measures of our student outcomes, our placement rates and our graduation rates. Our quality of compliance in the Company is very, very strong. In fact, ACICS, one of the national accreditors,

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25% of all honor roll schools on their list this year are our schools.

(Emphasis added).

185. During the UBS Global Technology and Services Conference on June 8, 2010,

Graham stated:

We think this is a strong growth business now. The market trends are there for proprietary institutions. We are well-positioned in the fastest-growing areas. The new program development, doubling our new programs just in the last three years should help our topline growth. We have one of the best technology platforms, innovative technology like I talked about in health, much different than the competitors have. We believe that helps our students and helps grow our company.

We are one of the largest players in the space and because of that we have the advantage of scale and as we grow our operating leverage increases. And we have the opportunity from tuck-in M&A, but more importantly the health geographic expansion to grow the business.

That said, I said we did a turnaround and we accomplished a lot in the turnaround. Now we’re going to sustainable growth. Because of that we’ve had a great increase in our culture in terms of compliance and quality. We’re not going backwards on that. The Company has had its issues in the past, a lot of those are behind us. We’ve done a great job now positioning the Company for success so we don't go backwards.

(Emphasis added).

186. During the second quarter 2010 earnings conference call on August 5, 2010,

McCullough stated, “We will maintain and continue to improve the culture of compliance we’ve

nurtured during my tenure at the company.” McCullough also noted that CECO’s “leadership

challenge over the last several months” had been on “ensuring that our organization remains

focused on doing the right thing for students and living our purpose of changing their lives

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through education. We’ll continue to do that. We are fully engaged in the external processes

that are going on around us . . . I can tell you that I believe we’re doing the right things.”

187. Further, during this conference McCullough took steps to distance CECO from

the findings uncovered in the GAO Investigation and to assure that market that the Company was

doing all it could to ensure that it was not breaking the law, stating in response to a question

about video clips shown at Congressional hearing showing untoward recruitment practices:

Well, I would say that I can’t say with 100% certainty that we don’t [engage in untoward recruitment practices]. Here’s what I can tell you. We have made great strides in our company at laying out expectations, at being clear at every one of our schools and admission sites about what the expectations are, what they can do, and not do to make sure that we are compliant and we are overt with students around what our programs are.

And based upon what we have done and what we have attempted to model in the Company, I can say that I sincerely hope that we don’t have them.

We mystery shop. We will continue to do that, probably step up our mystery shopping to make sure that we don’t have these activities.

Where we find things that are [non-compliant], we take action against those individuals, and in many cases dismiss them from the Company .

I can’t sit here and say with 100% certainty across 90 plus campuses and in our online environment that we don’t, periodically, have someone that does something like that.

We have been as clear as we can possibly be and we will step up the effort to be clear to make sure that they don’t do these types of things and that they understand that the types of things that we saw on those tapes are inappropriate in our industry and in our company.

* * *

78


I think the other thing to add to that, on the back end, in terms of the process, we have very, very broad and wide ranging disclosures for the student.

So, hopefully in the unlikely event that something may not have been said the proper way at the front end, we ask the student upon enrollment to go through comprehensive set of disclosures,... acknowledge what they understand the agreements to be to make sure from the back end control process that everything is in line before they start their classes.

One additional comment I would make on those disclosures is that when we sat down, this is probably 18 months ago, to look at things that happened in the Company in the past or allegedly happened in the past and think through what we could do to ensure that we were doing the right thing on the front end . There was significant discussion and there was concern that the disclosures, which took things to a completely different level, would negatively impact our ability to enroll.

Yet, we still went forward with that, at that point in time, at a time when we were being pushed for growth because we believed it was the right thing to do to make sure that we’re clear with students about what to expect in our schools .

(Emphasis added).

188. During the BMO Capital Markets Back to School Education Conference on

September 16, 2010, McCullough stated:

In terms of operational focus, a lot of my attention over the last couple of years is to make sure that we have fostered a culture of quality and a compliance in the organization . There was a point in time when our organization was subject to a lot of the external scrutiny, not unlike what is happening in the industry right now. And we have worked hard to ensure that we put things on the right track, that we were doing the right things for our students.

(Emphasis added).

189. During CECO’s November 3, 2010 earnings conference call for the third quarter

of 2010, McCullough noted, “[W]e are maintaining and improving upon the compliance culture

we developed over the past few years.”

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190. In is 2008 and 2009 10-Ks, CECO reported:

We are committed to maintaining an industry-leading compliance program . We have developed rules, policies and standards to guide the conduct of our employees. Our compliance objectives include the development of processes and controls to help ensure compliance with applicable rules, standards and laws. We believe that a key to meeting these objectives is our continued emphasis on individual and organizational responsibility for compliance. Additionally, we have utilized technology to improve the design and operation of our network of compliance controls and to develop tools that enable our corporate and school personnel to proactively monitor their overall compliance environment for indicators of potential compliance issues.

(Emphasis added).

191. In its 2010 10-K, CECO additionally reported:

[W]e are continuing to focus on strengthening our foundation in regulatory compliance through our emphasis on individual and organizational responsibility and accountability. We have achieved a high level of compliance through several initiatives, which included conducting proactive internal and external assessments to identify and correct risks early, standardizing policies, processes and forms, and centralizing annual reporting to accreditors to ensure accuracy, consistency and timeliness.

(Emphasis added).

192. In a May 1, 2011 article in The San Francisco Chronicle discussing the settlement

of an action against CECO’s California Culinary Academy, brought over, inter alia, false and

inflated placement rates, “company spokesman” Mark Spencer defended the Company’s

methodology for determining and reporting placement rates. Mr. Spencer was quoted as follows:

CEC denies the allegations and agreed to settle the suit only because it was “distracting to our mission and extraordinarily expensive to litigate,” Mark Spencer, a spokesman for the company, said in a statement.

“Since these allegations were made, we have carefully reviewed and modified our policies and practices for reporting job placement rates, admissions and advertising,” he wrote. “While we believe

80


our previous practices were legal, we have been very conservative in modifying our policies and procedures to ensure that students understand that we are not promising any specific job outcomes or salaries.”

193. The foregoing statements in Section C, above, were materially false and

misleading for at least the following reasons:

(i) Defendants knew or should have known that the practices, policies, and

procedures for determining and reporting placement rates were improper

and not in compliance with accreditor, state or federal standards;

(ii) Defendants knew about, but condoned, non-compliant practices in

determining placement rates to publicly report to investors and to

accreditors; and

(iii) CECO reported fraudulently inflated placement rates to its accreditors

throughout the Class Period, and maintained its accreditations via these

falsified placement rates. In doing so, Defendants exposed the Company

to severe regulatory risks. Under these circumstances, Defendants

statements were materially false and misleading, because there was no

basis for Defendants to assert, inter alia, that they were strengthening

CECO’s foundation in regulatory compliance as a whole, or that they had

created or were creating a “culture” of legal and regulatory compliance at

CECO.

194. Because CECO’s 2008, 2009, and 2010 Forms 10-K contained materially false

and misleading statements concerning the Company’s regulatory compliance, the Section 302

Certifications signed by McCullough and Graham included in the Company’s 2008, 2009, and

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2010 Forms 10-K were also materially false and misleading. In the Section 302 Certifications,

McCullough and Graham certified as follows:

1. I have reviewed this Annual Report on Form 10 —K of Career Education Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a−15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d— (f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure

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controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

(Emphasis added). The Section 302 Certifications signed by McCullough and Graham and

appearing in CECO’s 2008, 2009, and 2010 Forms 10-K were similarly false and misleading, to

the extent that McCullough and Graham certified that the Forms 10-K “d[id] not contain any

untrue statement of a material fact or omit to state a material fact necessary to make the

statements made, in light of the circumstances under which such statements were made, not

misleading.”

D. ANALYSTS ’ NEGATIVE REACTIONS TO THE DISCLOSURE OF CECO’S

PLACEMENT RATE IMPROPRIETIES UNDERSCORE THE MATERIALITY OF THE

FOREGOING FALSE STATEMENTS

195. The importance of the aforementioned false statements and material omissions to

investors cannot be overstated. As details concerning the depth of CECO’s fraudulent scheme

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emerged, analysts steadily lowered their expectations of CECO’s performance on account of the

imminent regulatory risks now facing the Company. In addition to expressing concerns that the

revelation of the improper placement rate reporting would negatively impact the price of

CECO’s stock for the foreseeable future, analysts expressed dismay that, contrary to CECO’s

past assurances that it had taken steps to put its regulatory house in order, the Company was still

secretly continuing to flout the rules, thereby imperiling its schools’ accreditations and the

Company’s continued access to the Title IV funds that drove the Company’s revenues.

196. On August 3, 2011, as analysts anticipated CECO’s upcoming August 4, 2011

conference call, Suzanne E. Stein and Thomas Allen of Morgan Stanley stated:

We expect shares of CECO to trade off tomorrow as investors come to terms with the company’s disclosure that it uncovered improper practices related to reporting of placement rates in its Health Education segment. The Health segment has been CECO’s most consistent strong performer and the company was continuing to invest in opening new locations. While it’s unclear what the potential impact could be from the investigation, it is likely to remain an overhang for the foreseeable future, especially as the independent counsel looks into the company’s other segments.

(Emphasis added). The Morgan Stanley analysts further noted that they would “pay close

attention to any further details with regard to the risks associated with the investigation, with

hopefully additional disclosures given on tomorrow’s call at 10 am.”

197. Other analysts echoed Morgan Stanley’s sentiments. On August 3, 2011, Ariel

Sokol and Denny Galindo of UBS Securities LLC noted that CECO’s stock would “likely” be

“down tomorrow on ‘improper practices’ at health campuses” discovered by CECO “in

preparing response to subpoena issued by NY Attorney General.”

198. Also on August 3, 2011, in anticipation of the next day’s earnings call, RBC

Capital Markets analysts Robert C. Wetenhall and Steven Bachman stated that “CECO . .

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announced that it has identified improper reporting of placement rates within its health education

segment,” and that they “believe[d] that the stock will likely trade down materially as a result of

this announcement.” (Emphasis added). The RBC analysts further noted their belief that

“investors will be concerned about the negative impact that this announcement will have on the

company’s image in an increasingly competitive environment.”

199. Similarly, Peter Appert and George K. Tong of Piper Jaffray stated on August 3,

2011:

In connection with the earnings release, CECO announced that while preparing for its response to the previously disclosed NY AG subpoena, it discovered improper practices at certain of its health education segment campuses related to the determination of reported placement rates. CECO has retained outside counsel to investigate these practices and review how placement rates are determined at all of its domestic schools. This development adds to the regulatory uncertainty already weighing on the company.

(Emphasis added).

200. News that the Company had discovered improper job placement practices was

particularly concerning to analysts against the backdrop of CECO’s reported commitment to

moving beyond its checkered past. Sara Gubins and David Chu of Bank of America Merrill

Lynch stated in their August 4, 2011 report that news that CECO “found improper practices at

some of its health education campuses (21% of 2010 revenue) around job placement rates as it

was preparing its response to the NY Attorney General investigation” was “a disappointment as

CECO has been working to improve its regulatory picture over the last several years [and] it adds

incremental uncertainty.” The Bank of America Merrill Lynch analysts also stated in their report

that although they “appreciate[d] the rapid response to this issue . . . it is still disappointing for a

company that has been working to improve its regulatory issues over the past several years.”

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201. Morgan Stanley analysts also recognized the broader implications of CECO’s

falsified job placement rates, including an expected impact on CECO’s ability to market and sell

its services going forward, stating in an August 4, 2011 report that “ common sense would suggest

that if job placement rates are adjusted downward to more accurately reflect real placement

rates, new enrollments are going to suffer; especially considering the Department of Education

now requires institutions to display this information to prospective students .” (Emphasis added).

202. Similarly, Brandon Dobell and Thomas Dillon of William Blair noted in their

August 4, 2011 report that CECO’s news of “irregularities in certain health schools regarding

graduated student placement rates” would “not sit well with investors, given the information will

be easy for state attorney generals to use in their investigations to prove misbehavior by Career

Ed (which will grease the skids for material financial penalties).”

203. The Morgan Stanley analysts also suggested that investors craved additional

information from CECO management regarding the potential fallout of the news about improper

job placement rate practices at its Heath Education segment campuses. For example, they stated

that “[m]anagement has not quantified nor given any indication regarding the severity of these

findings.”

204. Likewise, UBS analysts noted that investors still needed additional information,

stating in their August 4, 2011 report that “management on the call was unable to provide detail

regarding ‘improper practices’ identified at health education schools relating to placement rates,”

and that they could not “at this time determine the extent of the risk associated with such

practices and whether issues emerge from 1) accreditors; 2) state attorney generals; and 3)

current and potential civil litigants.”

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205. James Sanford and Ashwin Shirvaikar, analysts at Citigroup Global Markets

(“Citi”), also expressed desire for more information, noting in an August 5, 2011 report that:

CECO reported identifying ‘improper practices’ related to the calculation of placement rates at Sanford-Brown (SB). Per management, the discovery came when efforts were undertaken to comply with the subpoena from the New York Attorney General. While not providing specifics, the company insisted that it has the appropriate processes and procedures in place but that ‘people didn’t do the right thing’ and the company promises to investigate the issue thoroughly. We look forward to getting more clarity on what went wrong, but until then, the already fragile reputation of the Healthcare segment has been pulled back into the spotlight.

(Emphasis added).

206. CECO stock analysts also acted with universal, negative sentiments in response

to CECO’s November 1, 2011 announcement of the results of Dewey & LeBouef’s investigation,

which further underscores the materiality of the Company’s false statements concerning

CECO’s inflated placement rates. In its November 1, 2011 report, Bank of America Merrill

Lynch reported:

Last quarter CECO announced that it found improper practices at some of its health education campuses (21% of 2010 revenue) around job placement rates as it prepared a response to the NY Attorney General investigation, and it had begun an investigation of all CECO job placement rates. Independent counsel has reviewed the Health & Art & Design (12% of revenue) schools & found improper placement determination practices in some Health schools. Both segments had placements that didn’t meet guidelines or have the right documentation. Only 13 of 49 schools accredited by national accreditor ACICS met ACICS’ 65% minimum placement rate for 2010-2011. Aside from being worrisome from a corporate governance perspective, this also poses a risk around potential heightened oversight, growth limitations, or loss of accreditation by AGIGS . CECO began corrective action in 3Q. The release isn’t clear, but our impression is that the review of other segments is not yet complete.

(Emphasis added).

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207. While analysts likely expected there to be some negative news coming from

CECO management, they were not prepared for what was ultimately disclosed on November 1,

2011. In a November 2, 2011, report titled “Triple Whammy: Improper Placement Rate Issue

Worsens, CEO Resigns, Earnings Miss,” Credit Suisse expressed surprise that there were

improper practices at the Art & Design schools “ in addition to Health schools” (Emphasis in

original). Furthermore, Credit Suisse reiterated the potentially broad implications of these

improper practices, pointedly noting that “[a]s a result, certain schools could face sanctions,

including potential loss of accreditation. As the investigation is ongoing, we worry this could

spill over to other segments, and cause broader regulatory scrutiny of whether CECO and peers

are misrepresenting their value propositions to students.” (Emphasis added).

208. Analysts at Morgan Stanley noted that the news was particularly troubling given

CECO’s “history of accreditation issues” and further opined that “in the current environment, in

which accrediting bodies have been under pressure to better police the industry,” they did “not

expect this to be handled with leniency.”

209. In a November 2, 2011 report, Citi analysts expressed disappointment in the news

of improper job placement rate practices in light of their mistaken belief that CECO had been

making efforts to be in compliance with all regulations:

In our opinion, CECO has gone from a manageable turnaround story to a multifaceted deteriorating asset. While we appreciate that the incoming interim CEO has been with the company as a board member since 2006, and has seen CECO through prior turnarounds, we believe the rapidly declining enrollment trends coupled with the accreditation issues make this a multi-year challenge for whoever takes over the helm. We look to prior margin deterioration trajectory from 2006 to 2008, when operating margins slid from 18% to below 7%, as a reasonable proxy for where CECO estimates can go from here.

(Emphasis added).

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210. Analysts at Barclays Capital echoed these sentiments in their November 3, 2011

report, stating:

The Company is clearly focused on rapidly improving its processes and controls so that it can alleviate the issues resulting from the placement rate problems, while reducing the likelihood of other compliance issues occurring in the future. This is a difficult task, in our view, with a senior management team that is short several leaders (recent departures include the heads of CECO’s Culinary, Art/Design, and International segments), and has an interim CEO in place. In addition, we believe that the negative findings regarding placement reporting at the Health and Art/Design segments poses real risks at these segments, and could result in the decision by the company to close several underperforming schools (especially those that were improperly recording replacement rates). If this occurs, it would likely be a 2-3 year process in which the company winds down the affected schools, and hurts its profits and cash flows in the process.

(Emphasis added).

211. The news of McCullough’s “resignation” also stunned the market. Piper Jaffrey

analysts expressed in a November 2, 2011 report a “sense” that “McCullough resigned at the

request of the Board, as it sought to assign accountability for the company’s underperformance

and recent regulatory and legal issues.”

212. Taken together, the swift, negative reaction of the analyst community to the

disclosure of the placement rate improprieties underscores the materiality of the Company’s false

statements concerning this critical nature of compliance and regulatory risks to a Company like

CECO.

VII. LOSS CAUSATION

213. Plaintiffs and the putative Class suffered substantial damages as a direct and

proximate result of Defendants’ fraudulent conduct as alleged herein.

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214. During the Class Period, Defendants made or caused to be made a series of

materially false and misleading statements about CECO’s placement rates, its schools’

accreditations, and its compliance with all laws and regulations applicable to its business. These

material misstatements and omissions had the purpose and effect of creating in the market an

unrealistically positive assessment of CECO and its business prospects, thus causing the

Company’s securities to be overvalued and artificially inflated at all relevant times. Defendants’

materially false and misleading statements during the Class Period resulted in Plaintiffs

purchasing the Company’s common stock at artificially inflated prices. But for Defendants’

misrepresentations and fraudulent acts, Plaintiffs would not have purchased CECO common

stock, or would not have purchased it at the artificially inflated prices at which it was priced

during the Class Period.

215. While the Company was touting its strong placement rates, its full compliance

with all laws and regulations applicable to its business, and its schools’ accreditations by various

accrediting agencies, the Company was – unbeknownst to the investing public – reporting

placement rates to its accreditors that were fraudulently inflated via the scheme detailed herein.

This scheme prevented the investing public from discovering that the accreditations of CECO’s

schools – and its concomitant access to the Title IV funds that were the lifeblood of its revenue –

were in significant jeopardy. As the truth about CECO began to be revealed, the artificial

inflation was eventually removed from the prices of CECO’s stock.

216. On May 17, 2011, CECO received the Subpoena from the NYAG seeking

information about the Company’s placement rates. A May 19, 2011 New York Times article

revealed that CECO was one of several schools to have received a subpoena from the NYAG.

On May 24, 2011, CECO confirmed in a Form 8-K that it had received the Subpoena. In

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response to the disclosures concerning the Subpoena, CECO’s stock dropped nearly 5.16%,

falling from its close at $22.87 on May 16, 2011 (the day before the Company received the

Subpoena) to its close at $21.69 on May 25, 2011 (the day after the Company admitted that it

had received the Subpoena).

217. After the close of the market on August 3, 2011, CECO announced in a Form 8-K

that it had found “improper practices at certain of its health education segment campuses relating

to the determination of reported placement rates.” In response to this announcement, CECO’s

stock price plummeted, dropping $3.36 from its $21.87 close on August 3, 2001 to its $18.51

close on August 4, 2011 – a drop of nearly 15.4% .

218. As the market continued to digest the Company’s announcement that it had

discovered improper practices concerning its placement rate calculations, CECO’s stock

continued to fall. CECO closed at $17.71 on August 5, 2011, down from its $18.51 close on

August 4, 2011, a further 4.32% decline. By the end of trading on August 8, 2011 (the next

trading day after August 5, 2011), CECO had fallen to $16.11, another 9% decline. All told, in

the three trading days following the August 3, 2011 post-market-close disclosure of the improper

placement rate practices, CECO’s stock fell 26.3%, dropping from $21.87 at the close of trading

on August 3, 2011 to $16.11 at the close of trading on August 8, 2011.

219. After the close of the market on November 1, 2011, CECO announced the results

of Dewey & LeBoeuf’s investigation. In response, CECO’s common stock fell precipitously

from $15.95 per share at the close on November 1, 2011, to $8.32 per share at the close on

November 2, 2011, and again to $7.37 per share at the close on November 3, 2011, a drop of

54% over two trading days.

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220. Finally, on November 21, 2011, CECO announced in a Form 8-K release before

the markets opened that it had received a “show cause” letter from the ACICS demanding that it

show cause as to why, due to insufficient “administrative practices and controls relative to the

Company’s reporting of placement rates to the ACICS,” the accreditations of its 49 ACICS-

accredited institutions in the Heath and Art & Design segments should not be “withdrawn by

way of suspension.” CECO’s stock closed at $7.21 that day, down $0.48 from its $7.69 close on

November 18, 2011, the last trading day before the announcement of the show cause letter.

221. Together, these disclosures revealed to the market that the Company had been

systematically misrepresenting and inflating its placement rates in its reports to accrediting

agencies – and that this scheme was imperiling its schools’ accreditations. Such revelations

exposed the truth – i.e., that the Company’s fraudulent manipulation and publication of

placement rates jeopardized the accreditations of CECO-operated schools and the Company’s

continued access to the Title IV funding that was so essential to the Company’s financial results.

222. Each of these corrective disclosures caused significant declines in CECO’s stock

price, causing investors to suffer massive losses as the truth about CECO’s fraudulent practices

was revealed. Between the first corrective disclosure of the fraud in May 2011 and the final

corrective disclosure on November 21, 2011, CECO stock price declined 67%, wiping out

approximately $1.16 billion of stockholder wealth. CECO’s stock price has never recovered.

From its Class Period high of over $35 per share, CECO now trades in the $6 to $8 range, largely

due to the massive regulatory risks now impacting the Company on account of this fraud.

223. The declines in the Company’s stock prices following the revelations of fraud set

forth above, and the resulting losses suffered by Plaintiffs and the other members of the Class,

are directly attributable to the market’s reaction to the disclosure of information that had

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previously been misrepresented or concealed by Defendants, and to the market’s adjustment of

the Company’s stock price to reflect the newly emerging truth about the Company.

224. Defendants’ conduct, as alleged herein, proximately caused foreseeable losses to

Plaintiffs and the other members of the Class.

VIII. ADDITIONAL ALLEGATIONS OF SCIENTER

A. DEFENDANTS KNEW ABOUT, ENCOURAGED AND CONDONED CECO’S FRAUDULENT PLACEMENT RATE PRACTICES

225. During the Class Period, each of the Defendants knew about, encouraged, and

condoned the deceptive and manipulative placement practices described above, and thus had

actual knowledge throughout the Class Period that when they disclosed and disseminated

CECO’s inflated placement rate figures, they were misleading the market. Defendants

participated in a scheme to defraud and engaged in acts, practices, and a course of business that

operated as a fraud or deceit on purchasers of CECO common stock during the Class Period.

226. Plaintiffs’ counsel have conducted interviews with numerous former CECO

employees that support a strong inference that the Defendants knew about or were reckless in

failing to discover CECO’s fraudulent placement rate reporting.

227. CW1 was employed by CECO throughout the entire Class Period, and was among

15 CECO employees fired for improperly counting and calculating placement rates for CECO

graduates of Sanford-Brown Institutes in New York, New Jersey, Florida, and Georgia.

228. CW1 was able to detail a number of fraudulent practices that CECO employed to

fraudulently boost its reported placement rates. These fraudulent practices, as set forth in detail

herein, included (1) sponsoring and even paying for short-term community health fairs for the

express purpose of getting CECO graduates a few hours or more of in-field work that CECO

would then report as a legitimate “placement”; (2) paying employers to hire CECO graduates; (3)

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placing students “on waiver” – i.e., fraudulently certifying that certain students were not seeking

employment so that the percentage of students who had been placed would appear to comprise a

larger percent of the graduating class; (4) keeping students who had legitimately been on waiver,

on waiver – even after they did begin to seek employment – to perpetuate the illusion that a

larger percent of graduates had been placed; (5) stretching the definition of “related to” the field

of study so that any job even arguably “related” would be counted as a placement, no matter how

tangential the actual relationship between the field of study and the obtained job; and (6) relying

on social media alone, such as Facebook, to verify placements, and/or otherwise failing to

properly verify and document placements.

229. CW1 also provided specific information demonstrating that officers at CECO’s

highest ranks – all the way up to McCullough himself – knew about the questionable practices

that were being used to inflate the placement rates that were reported to accrediting agencies and

disseminated to the investing public.

230. According to CW1, he/she and other Career Services Directors routinely counted

short-term jobs at community health fairs as confirmed placements. CW1 knew about this

practice, because CW1 himself/herself arranged job placements for Sanford-Brown graduates at

community health fairs held by OnSite Services, Inc., with the blessing, approval, and

encouragement of his/her superiors.

231. CW1 specifically states that “everyone” at CECO was aware of this practice of

counting short-term jobs at community health fairs as confirmed “placements” in the placement

rates that the Company reported. Specifically, according to CW1, McCullough himself knew

about this treatment of short-term health fair jobs as confirmed placements, because when

attending a three-day conference in CECO’s home office in Illinois, CW1 and other Career

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Service Directors spoke to McCullough directly about their success in placing students in short-

term jobs at community health fairs. According to CW1, “[McCullough] told us what a great job

we did.”

232. CW1 informed Forth and his/her fellow Career Services Directors about this

practice during weekly conference calls with, among others, Look and the Senior Vice President

of CECO’s Health Education Strategic Business Unit, George Grayeb. During these calls,

according to CW1, Forth, Look, and Grayeb all discussed and approved the short-term stints at

health fairs that were being reported as “placements” to the accreditors. With the approval of

Forth, moreover, CW1 was aware that other Sanford-Brown locations in the South, including in

at least Georgia and Florida, began arranging short-term health fair placements for graduates that

were included in the Company’s reported placement rates.

233. CW1 stated that CECO Regional Director of Regulatory Operations Lorraine

Rowe also knew that temporary job placements of 1 to 12 days at community health fairs were

being counted as legitimate “placements” in the Company’s reported placement rates.

According to CW1, Rowe never questioned this practice.

234. Emails in CW1’s possession demonstrate that the “health fair” scheme extended

beyond the geographic regions of CECO with which CW1 dealt directly. In a January 2011

email, Look asked CW1 to provide her with the name of a lead at a health screening company so

that Look could provide the name of this lead to a CECO career services employee named

MaryAnne at the Hillsdale school in Illinois. CW1’s subordinate, Dana, later provided the lead

to Look at a company called Worksite Health Solutions.

235. In 2010, CW1 also prepared and presented a PowerPoint about job placements at

health fairs to Diane Engelhardt, the Divisional Director responsible for overseeing the

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Presidents at all of CECO’s colleges. According to CW1, Engelhardt “heard the presentation

and thought it was fabulous.” Engelhardt did not raise any objections to counting these short-

term jobs in the confirmed placement rates reported by the Company. Like McCullough,

Engelhardt knew that these short-term placements were being included in the Company’s

reported placement rates because she had been informed about the health fair placements by

CW1 and others.

236. CW1 also states that he/she felt “directed” by Forth and Look to find graduates

jobs at health fairs and to count them in the Company’s placement rates. “I didn’t make that

call,” CW1 states. “I was directed by the regional director and her bosses. It goes all the way

up. We relied on the regional director and the vice president to tell us how to follow the rules.”

According to CW1, the “policy” of counting placements at short-term community health fairs as

“placements” for purposes of the placement rates reported to the accreditation agencies had been

approved by the Company as early as 2006 when he/she first started working at Sanford-Brown.

237. In addition to the health fair scheme, CW1 also states that at a Sanford-Brown

College in New York, CECO was found to be falsifying its placement rates by actually paying

employers to hire CECO students.

238. Further, CW1 states that some CECO schools used only social media, such as

Facebook, to verify placements. This improper practice was “allowed” by CECO corporate

management, according to CW1.

239. CW1 also states that he/she informed the Company’s investigators that he/she was

directed by his/her superiors to put as many people as possible on waivers, and that he/she felt

tremendous pressure to place students on waivers in order to boost placement rates. CW1 further

states that very little documentation was required to confirm that graduates were actually eligible

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for waivers, and that he/she was directed by Forth to review social media such as Facebook to

determine eligibility for waiver status. CW1 emailed CECO Regional Director of Regulatory

Operations, Lorraine Rowe, expressing his/her concerns about the use of social media to verify

waiver status, and CW1 was fired a week later.

240. CW6, President of a Sanford-Brown Institute in New York from 2005 to 2011,

believes that “in his/her opinion” he/she was the one who brought the information forward to

Dewey & LeBoeuf about the improper placement rate practices that precipitated the November

2011 press release. According to CW6, the “corporate team” at the Company, especially Look

and Forth, encouraged and sanctioned employees to confirm short-term placement as legitimate

placements. CW6 stated that if someone graduated from his/her school and worked for four

hours as a contract worker during a health fair, the graduate was considered a confirmed

placement by the Company. According to CW6, representatives at the CECO corporate offices

would have considered these to be an acceptable form of placement, and CW6 was adamant that

the placement rate practices found to be improper were sanctioned by the Company.

241. Interviews with another Confidential Witness, CW7, who had been with the

CECO since 1999, and was most recently a Senior Vice President of Regulatory Compliance

until March 2012, also confirms that the placement rates reported by the Company were

erroneous and looked higher than they were in reality. CW7 joined CECO in 1999 as a Senior

Operations Controller. In January 2002, CW7 became Director of Divisional Finance. In 2003,

CW7 was promoted to Vice President of Student Finance, and in September 2004, CW7 became

Vice President of Compliance. In March 2011, CW7 became CECO’s Senior Vice President for

Regulatory Compliance and Academic Integrity, reporting directly to CECO’s General Counsel.

CW7 admits that a graduate who works at a health fair for a day or a few days should not be

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counted as a job placement, and further admits that CECO’s “assessment program wasn’t

extensive enough to have identified the error.” CW7 states that he/she was faulted, and fired, for

failing to make the compliance audits more rigorous. “I could have demanded more

information,” CW7 states, “I could have dug deeper. I just couldn’t imagine people falsifying

information to achieve their goals.”

242. The information gleaned via interviews with former CECO employees makes

clear that the Company was improperly inflating the placement rates it was reporting to the

accrediting agencies and to investors as a matter of “corporate policy,” and that the highest

echelons of CECO management, including McCullough and Graham, were either directly aware,

or should have been aware, of the improper inflation and reporting of placement rates to

accrediting agencies and investors alike.

B. THE SWIFT “RESIGNATIONS” OF HIGH-RANKING MEMBERS OF CECO MANAGEMENT UPON THE RELEASE OF THE RESULTS OF THE DEWEY & LEBOEUF INVESTIGATION SUPPORTS AN INFERENCE OF SCIENTER

243. McCullough, as noted above, joined CECO in March 2007. He

“resigned” immediately before the disclosure of Dewey & LeBoeuf’s findings that the Company

had falsified its placement rates on November 1, 2011, which is powerful evidence of scienter

with respect to McCullough.

244. McCullough’s immediate termination (i.e., forced resignation) strongly supports

the inference that the Dewey Report revealed evidence (corroborated by the CWs above) that

McCullough knew about, encouraged, and condoned the Company’s fraudulent placement rate

practices, and was asked to resign, and did resign, rather than face the unwelcome prospect of a

public ouster.

245. Numerous analysts commenting on McCullough’s resignation clearly attributed

the “resignation” to the disclosure of the improper placement rate reporting and questioned the

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extent to which McCullough left of his own volition. For example, William Blair analysts noted

the following in a November 2, 2011 analyst report:

In our view, the compliance issues were probably the main driver behind the CEO resignation; the poor start performance while problematic was fixable, in our view, and probably did not change the perception of the CEO as a manager or leader. An issue with compliance and honesty, particularly given Mr. McCullough’s background, was probably more than the board was willing to tolerate and more than Mr. McCullough was willing to stand for.

(emphasis added). Credit Suisse, for its part, noted, “We believe this transition was a Board

decision” – a polite way of signaling to the market Credit Suisse’s belief that McCullough was

fired.

246. Similarly, Piper Jaffray’s November 2, 2011 report referred to a

“CEO [o]uster” and stated its conclusion that the “[i]mproper practices used to calculate

placement rates in the Health Ed and Art & Design segment resulted in” McCullough’s

departure.

247. McCullough was not the only high-ranking member of CECO management to

lose his job in the wake of the disclosure of Dewey & LeBoeuf’s findings. Culinary Arts Senior

Vice President Brian Williams, Senior Vice President of International and Chief Administrative

Officer Thomas Budlong, and Senior Vice President of Art & Design Thomas McNamara joined

McCullough in his swift flight for the exit. Others – including several CWs with firsthand

knowledge and involvement in the improper practices uncovered, in part, in the Dewey Report –

were similarly terminated. These immediate firings and forced resignations support an inference

that high-ranking members of CECO management – whose knowledge is imputable to the

Company – knew about CECO’s fraudulent practices, or at a minimum, should have known, and

that they chose to resign rather than face the ignominy of a public firing.

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C. CECO’ S CHECKERED REGULATORY PAST PUT DEFENDANTS ON HEIGHTENED

ALERT TO THE POSSIBILITY OF FRAUD

248. For years pre-dating the Class Period, as set forth in greater detail above, CECO

suffered from having a checkered reputation with respect to its legal and regulatory compliance.

Among other things, the Company faced a series of private lawsuits and governmental

investigations in the early to mid-2000s, several of which alleged significant irregularities with

the Company’s reporting and disclosure of placement rates. This period of legal and regulatory

turmoil caused CECO to suffer substantial financial and reputational harm, and caused the

Officer’s Defendants predecessors to lose their jobs.

249. CECO and the Officer Defendants were thus well aware of the toll that adverse

regulatory actions and compliance issues could take on the Company. The threat of such adverse

regulatory actions should have been particularly clear to McCullough and Graham, because, as

set forth above, McCullough had been hired for the express purpose of “cleaning house,” and

both he and Graham consistently touted to analysts and investors that that was exactly what they

had brought to CECO. Both McCullough and Graham, therefore, should have been on

heightened alert to ensure regulatory compliance, including the proper, accurate disclosure of

placement rates, and further should have been on heightened alert about the possibility that the

Company would continue to engage in improper conduct, including the deliberate falsification of

placement rates.

250. Notably, securities analysts found Defendants’ misrepresentation of placement

rates, and their failure to ferret out and stop the fraudulent placement rate reporting, to be

particularly vexing in light of McCullough’s charge as CEO. As Wunderlich Securities

pointedly noted in a November 3, 2011 analyst report:

The question of how this misrepresentation [concerning CECO’s placement rates] could continue undetected and be so widespread

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begs questions of regulatory controls, corporate communication and incentives, and corporate culture. The question is particularly vexing because Mr. McCullough was originally hired to address all three.

(emphasis added).

251. CECO’s longstanding history of regulatory violations, and the myriad accusations

that the Company had long been engaged in the very fraudulent reporting of placement rates at

issue, supports the strong inference of scienter. After all, these were the very “front and center”

issues that the Officer Defendants had to address and assured investors they were addressing

head on throughout the Class Period.

D. GOVERNMENT INVESTIGATIONS INTO RAMPANT MISCONDUCT IN THE FOR- PROFIT EDUCATION SECTOR PUT DEFENDANTS ON HEIGHTENED ALERT TO THE

POSSIBILITY OF FRAUD

252. While McCullough was purportedly cleaning up CECO, the increased

governmental investigations and scrutiny into the for-profit education sector by the HELP

Committee investigations also served to put the Officer Defendants on heightened alert with

respect to CECO’s regulatory compliance, in general, and CECO’s compliance with

accreditation standards and placement rate reporting, in particular.

253. The GAO Report led to a public outcry against the entire for-profit sector and

raised the specter of serious, systemic fraud at these institutions. Under these circumstances,

CECO and the Officer Defendants should have been particularly vigilant in overseeing CECO’s

schools’ operations and controls. Instead, unbeknownst to the investing public, CECO continued

to engage in the untoward practices that Dewey & LeBoeuf would uncover the following year.

E. THE FACT THAT THE FRAUD RELATES TO CECO’ S CORE OPERATIONS

SUPPORTS AN INFERENCE OF SCIENTER

254. During the Class Period, Title IV funding accounted for more than 80% of

CECO’s revenue. Accordingly, ensuring continued access to Title IV funding was critical to

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success, and preserving the Company’s access to this revenue stream was part of CECO’s core

operations. As set forth above, only accredited schools are entitled to access Title IV funding –

and only schools that place a certain percentage of its students in jobs after graduation can

maintain their accreditation. Complying with the placement rate requirements of the accrediting

agencies was essential to CECO’s business. Because the reporting of placement rates relates to

the core of CECO’s operations, the Officer Defendants, as CECO’s senior-most executive

officers, are presumed to have been aware of all matters bearing on the reporting of placement

rates.

255. Because the achievement of placement rates and the accurate reporting of

placement rates were such a critical part of CECO’s business, the Defendants should have

ensured the accurate and truthful reporting of placement rates, and should have instituted

sufficient controls and procedures designed to ensure the accurate reporting of CECO’s

placement rates to accreditors and investors alike.

256. The fact that CECO’s fraud relates to the Company’s core business operations

supports an inference that the Officer Defendants – as the Company’s senior-most executive

officers – either knew about or were reckless in failing to discover the fraud. This point was not

lost on securities analysts. Again, as Wunderlich Securities noted in an August 19, 2011 report:

The placement rate fraud cited by the company at certain Sanford-Brown schools is more disconcerting. We would have expected such abuse in such an obvious area would have been stopped by better controls.

(Emphasis added).

257. The Officer Defendants also were, at a minimum, reckless in failing to uncover

the issues with placement rate reporting. McCullough assured investors that he was keeping a

close eye on placement rates throughout the Class Period, and CWs confirm that each of the

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Officer Defendants had access to CECO’s “campus view” database, where placement rate data

and reports were stored. According to CW4, his/her staff was responsible for entering placement

data into the Company’s “campus view” software system, and campus presidents and corporate

managers all had access to the “campus view” software system, including the placement numbers

and data that had been entered on that system. CW5 further confirms that information about

placement rates of individual students was available via an internal database that was accessible

to employees at CECO headquarters.

IX. CLASS ACTION ALLEGATIONS

258. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a Class consisting of all those who purchased common

stock of CECO between February 19, 2009, and November 21, 2011, inclusive, and who were

damaged thereby (the “Class”). Excluded from the Class are Defendants, the officers and

directors of the Company during the Class Period, members of their immediate families and their

legal representatives, heirs, successors, or assigns, any entity in which Defendants have or had a

controlling interest, and Defendants’ insurers.

259. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, CECO’s common shares were actively traded on

the NASDAQ exchange. As of October 31, 2011, CECO had 75,854,861 shares of stock issued

and outstanding. While the exact number of Class members is unknown to Plaintiffs at this time

and can only be ascertained through appropriate discovery, Plaintiffs believe that there are

thousands of members in the proposed Class who are geographically dispersed throughout the

United States and abroad. Members of the Class may be identified from records maintained by

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CECO or its transfer agent and may be notified of the pendency of this action by mail, using the

form(s) of notice customarily used in securities class actions.

260. Plaintiffs’ claims are typical of the claims of the members of the Class, because

all members of the Class were similarly affected by Defendants’ wrongful conduct in violation of

federal law that is complained of herein.

261. Plaintiffs will fairly and adequately protect the interests of the members of the

Class and have retained counsel competent and experienced in class and securities litigation.

262. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

numerous questions of law and fact common to the Class are:

a. whether the federal securities laws were violated by Defendants’ acts as alleged herein;

b. whether statements made by Defendants to the investing public during the Class Period misrepresented or omitted to disclose material facts;

c. whether Defendants acted with scienter;

d. whether reliance upon Defendants’ alleged false and misleading statements can be presumed pursuant to the fraud-on-the-market doctrine;

e. whether the Officer Defendants were “control” persons of CECO;

f. whether and to what extent the market price of CECO’s stock was artificially inflated during the Class Period as a result of Defendants’ violations of the securities laws; and

g. to what extent the members of the Class have sustained damages resulting from Defendants’ violations of the federal securities laws and the proper measure of damages.

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263. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy because joinder of all members is impracticable. Furthermore,

because the damages suffered by individual Class members may be relatively small, the expense

and burden of individual litigation make it impossible for many members of the Class to

individually redress the wrongs done to them. There will be no difficulty in the management of

this action as a class action.

X. PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE

A. RELIANCE SHOULD BE PRESUMED WITH RESPECT TO DEFENDANTS ’ OMISSIONS

264. Throughout the Class Period, Plaintiffs and the members of the Class justifiably

expected the Defendants to disclose material information in connection with the offering and sale

of the Company’s stock. Plaintiffs and the members of the Class would not have purchased the

Company’s stock at artificially inflated prices if Defendants had disclosed all material

information, including CECO’s true placement rates. Thus, reliance by Plaintiffs and the Class

members should be presumed with respect to Defendants’ omissions of material information.

B. RELIANCE SHOULD BE PRESUMED UNDER THE FRAUD-ON-THE-MARKET

DOCTRINE

265. Throughout the Class Period, the Company’s stock traded in an efficient market

that promptly digested current information with respect to the Company from all publicly-

available sources and reflected such information in the prices of the Company’s stock.

266. The following facts demonstrate that the market for CECO’s common stock was

efficient at all time during the Class Period:

a. CECO’s common stock met the requirements for listing, and was listed and actively traded on the NASDAQ, a highly efficient and automated market;

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b. as a regulated issuer, CECO filed periodic public reports with the SEC and the NASDAQ;

c. CECO regularly communicated with public investors via established market communication mechanisms, including through regular disseminations of press releases on the national circuits of major newswire services and through other wide-ranging public disclosures, such as communications with the financial press and other similar reporting services; and

d. CECO was followed by a number of securities analysts employed by major brokerage firms who wrote reports that were distributed to the sales force and customers of their respective brokerage firm(s). Each of these reports was publicly available and entered the public marketplace.

267. As a result of the foregoing, the market for CECO common stock promptly

digested current information regarding CECO from all publicly available sources and reflected

such information in the stock price.

268. Plaintiffs and the other Class members relied on the integrity of the market price

for the Company’s stock and are entitled to a presumption of reliance on Defendants’ material

misrepresentations and omissions during the Class Period.

XI. INAPPLICABILITY OF STATUTORY SAFE HARBOR

269. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint.

Many of the specific statements pleaded herein were not identified as “forward-looking

statements” when made.

270. To the extent there were any forward-looking statements, there were no

meaningful cautionary statements identifying important factors that could cause actual results to

differ materially from those in the purportedly forward-looking statements. Alternatively, to the

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extent that the statutory safe harbor does apply to any forward-looking statements pleaded

herein, Defendants are liable for those forward-looking statements because at the time each of

those forward-looking statements was made, the particular speaker knew that the statement was

false, and/or the statement was authorized and/or approved by an executive officer of CECO who

knew the statement was false when made.

XII. CLAIMS FOR RELIEF

COUNT ONE Violation Of Section 10(b) Of The Exchange Act

And Rule 10b-5 Promulgated Thereunder (Against Defendant CECO and the Officer Defendants)

271. Plaintiffs repeat and reallege each and every allegation contained above as if fully

set forth herein.

272. This Count is asserted against all Defendants pursuant to Section 10(b) of the

Exchange Act and Rule 10b-5 promulgated thereunder.

273. As alleged herein, throughout the Class Period, CECO and the Officer

Defendants, individually and in concert, directly and indirectly, by the use of the means or

instrumentalities of interstate commerce, the mails and/or the facilities of a national securities

exchange, made untrue statements of material fact and/or omitted to state material facts

necessary to make the statements made not misleading, in violation of Section 10(b) of the

Exchange Act and Rule 10b-5(b) promulgated thereunder.

274. CECO’s and the Officer Defendants’ false and misleading statements and

omissions were intended to, and did, as alleged herein, (i) deceive the investing public, including

Plaintiffs and the other members of the Class; (ii) artificially inflate and maintain the market for

and market price of the Company’s stock; and (iii) cause Plaintiffs and the other members of the

Class to purchase the Company’s stock at inflated prices.

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275. CECO and the Officer Defendants were each individually and collectively

responsible for making one or more of the statements and omissions alleged herein, by virtue of

having made false or misleading verbal statements during the quarterly earnings call and during

analyst conferences, or by virtue of having prepared, reviewed, commented on, approved, signed,

and/or disseminated documents which contained untrue statements of material fact and/or

omitted facts necessary to make the statements therein not misleading.

276. As described above, CECO and the Officer Defendants made the false statements

and omissions knowingly and intentionally, or in such an extremely reckless manner as to

constitute willful deceit and fraud upon Plaintiffs and other members of the Class who purchased

CECO stock during the Class Period.

277. CECO’s and the Officer Defendants’ false statements and omissions were made

in connection with the purchase or sale of the Company’s stock.

278. In ignorance of the false and misleading nature of the Company’s and the Officer

Defendants’ statements and omissions, and relying directly or indirectly on those statements

and/or upon the integrity of the market price for CECO stock, Plaintiffs and the other members

of the Class purchased CECO stock at artificially inflated prices during the Class Period. But for

the fraud, they would not have purchased the stock at artificially inflated prices.

279. The market price for CECO stock declined materially upon the public disclosure

of the facts that had previously been misrepresented or omitted by CECO and the Officer

Defendants, as described above.

280. Plaintiffs and the other members of the Class were substantially damaged as a

direct and proximate result of their purchases of CECO stock at artificially inflated prices and the

subsequent decline in the price of that stock when the truth was disclosed.

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281. By reason of the foregoing, Defendants violated Section 10(b) of the Exchange

Act and Rule 10b-5(b) promulgated thereunder, and are liable to Plaintiffs for damages suffered

in connection with Plaintiffs’ transactions in CECO’s common stock during the Class Period.

COUNT TWO For Violation Of Section 20(a) Of The Exchange Act

(Against The Officer Defendants Based On CECO’s Violation Of Section 10(b))

282. Plaintiffs repeat and reallege each and every allegation in the foregoing

paragraphs of this Complaint as if fully set forth herein.

283. This Count is asserted against the Officer Defendants under Section 20(a) of the

Exchange Act.

284. As alleged above, CECO violated Section 10(b) and Rule 10b-5, promulgated

thereunder, by making false and misleading statements in connection with the purchase or sale of

securities. This fraudulent conduct was undertaken with scienter because CECO is charged with

the knowledge and scienter of the Officer Defendants and others who knew of or recklessly

disregarded the falsity of the Company’s statements and of the fraudulent nature of its scheme.

285. Plaintiffs and the other members of the Class suffered damages in connection with

their purchases of CECO stock as a direct and proximate result of those violations of Section

10(5) and Rule 10b-5 by CECO.

286. The Officer Defendants were controlling persons of CECO within the meaning of

Section 20(a) of the Exchange Act by reason of their positions as senior executive officers and/or

directors of CECO, their ability to approve the content and issuance of CECO’s public

statements, and their control over CECO’s day-to-day operations. The Officer Defendants had

the power and authority to direct and control, and did direct and control, directly or indirectly,

the decision-making of the Company as set forth herein. Each of the Officer Defendants had

direct and supervisory involvement in the day-to-day operations of the Company and, therefore,

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is presumed to have had the power to control or influence the conduct giving rise to the

violations of the federal securities laws alleged herein, and exercised the same.

287. The Officer Defendants prepared, signed, and/or approved the Company’s press

releases and SEC filings that contained material false and misleading statements or omitted

material facts. They were provided with or had unrestricted access to copies of those statements

prior to and/or shortly after these statements were issued and had the ability to prevent the

issuance of the statements or cause the statements to be corrected.

288. The Officer Defendants did not act in good faith in connection with the conduct

at issue in this Claim.

289. The Officer Defendants are culpable for participation in the matters alleged

herein, because they acted with knowledge that the Company’s public statements were materially

false or misleading, or omitted material information, or they acted with reckless disregard for the

truth.

290. By virtue of their positions as controlling persons of CECO, the Officer

Defendants are jointly and severally liable to Plaintiffs pursuant to Section 20(a) of the Exchange

Act for CECO’s violations of Section 10(b).

JURY DEMAND

Plaintiffs demand a trial by jury as to all issues so triable.

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PRAYER FOR RELIEF

WHEREFORE, Plaintiffs, on behalf of themselves and the Class, pray for relief and

judgment in their favor and against Defendants as follows:

A. Determining that this action is a proper class action and certifying Plaintiffs as the

class representatives under Rule 23 of the Federal Rules of Civil Procedure;

B. Awarding compensatory damages in favor of Plaintiffs and the other members of

the Class against all of the Defendants for all losses and damages suffered as a result of

Defendants’ wrongdoing alleged herein, and for all damages sustained as a result of wrongdoing

by persons controlled by Defendants and/or for whose conduct Defendants are responsible

pursuant to principles of respondeat superior, in an amount to be determined at trial, together

with interest thereon;

B. Awarding Plaintiffs and the other members of the Class rescission and/or

rescissionary damages;

C. Awarding punitive damages against CECO and in favor of Plaintiffs and other

members of the Class;

D. Awarding Plaintiffs and the Class their fees and expenses incurred in this action,

including attorneys’ fees and expert fees;

E. Awarding Plaintiffs and other members of the Class prejudgment interest and/or

opportunity cost damages; and

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F. Granting such other and further relief as the Court may deem just and proper.

Dated: May 3, 2012 Respectfully submitted,

By: s/Geoffrey C. Jarvis Jay W. Eisenhofer Geoffrey C. Jarvis Jeffrey A. Almeida Christine M. Mackintosh GRANT & EISENBOFER P.A. 123 Justison Street Wilmington, DE 19801 Telephone: (302) 622-7000 Facsimile: (302) 622-7100 Email: [email protected]

[email protected] [email protected]

Co-Lead Counsel for the Lead Plaintiffs

Joseph F. Rice James M. Hughes David P. Abel MOTLEY RICE LLC 28 Bridgeside Blvd. Mt. Pleasant, SC 29464 Telephone: (843) 216-9000 Facsimile: (843) 216-9450 Email: [email protected]

[email protected] [email protected]

Co-Lead Counsel for the Lead Plaintiffs

Paul E. Slater (ARDC 2630567) Scott F. Hessell (ARDC 6275119) SPERLING & SLATER, P.C. 55 West Monroe Street Suite 3200 Chicago, IL 60603 Telephone: (312) 641-3200 Facsimile: (312) 641-6492 Email: [email protected]

[email protected] Liaison Counsel for Lead Plaintiffs

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