Fourth Circuit Affirms Dismissal Of Suit Against Online Education Platform – Securities

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On November 22, 2022, the United States Court of Appeals for the
Fourth Circuit affirmed the dismissal of a putative class action
against an online education platform (the “Company”)
under Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and Securities and Exchange Commission Rule
10b-5.  Boykin v. K12, Inc., No. 21-2351, 2022
WL 17097453 (4th Cir. 2022).  Plaintiffs alleged that the
Company artificially inflated the cost of its shares by
misrepresenting the state of its business during the COVID-19
pandemic.  The district court found that plaintiffs failed to
plead falsity and scienter and granted the Company’s motion
to dismiss with prejudice.  The Fourth Circuit affirmed,
holding that plaintiffs failed to allege actionable
misrepresentations or facts giving rise to a strong inference of

Plaintiffs alleged that the Company misrepresented that it was
“position[ed] . . . well given how the education market [was]
likely to change” because of its technological “core
competency,” “expertise” and
“flexibility” in providing online learning
services.  Plaintiffs also alleged that the Company made
misrepresentations relating to a reported deal with a Florida
school district (the “School District”) when it stated
that it would “provide customized services, including
curriculum, assessment tools, teacher training and data
management” to the School District.  According to
plaintiffs, this was allegedly misleading because a contract was
never actually signed due to the Company’s services falling
“below the expectations [the School District] set.”

The Fourth Circuit held that most of the alleged
misrepresentations were non-actionable puffery, opinion statements
or forward-looking statements.  Specifically, the Court held
that the Company’s statements regarding its “core
competency” in online learning reflected “the kind of
general positivity” investors would not rely on, further
noting that “it is not actionable for a company to give
positive descriptions of what it reasonably believes to be its
strengths.”  Such statements also amounted to
non-actionable opinions, according to the Court, because the
Company consistently used the language “we believe”
when describing its competency.  The Court found that the
Company’s statement that it was well-positioned during the
pandemic was about the Company’s future economic performance
and thus a non-actionable forward-looking statement protected by
the PSLRA safe harbor.  The Court also rejected
plaintiffs’ claim that the Company misled investors into
believing that it had a fully executed contract with the School
District.  While the Court acknowledged the Company’s
statement about its partnership with the School District “was
imprecise, plaintiffs nowhere allege that [the Company] . . . ever
attested unambiguously to having a signed agreement.”

Finally, the Court held that plaintiffs did not plead facts
giving rise to a strong inference of scienter.  Specifically,
the Court noted that plaintiffs did not allege
“‘suspicious’ insider selling or other kinds of
self-dealing” nor did they “suggest that [the
Company’s executives] would personally benefit from a special
bonus or an impending performance review.”  According to
the Court, plaintiffs’ “theory that defendants would
undermine their long-term credibility—and risk considerable
bad press—just to pump up [the Company’s] share price
for a few months is unpersuasive.”

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