Law & Courts

Investor Lawsuit Targets K12 Inc. and Stock Sales of Former CEO

By Sean Cavanagh — April 22, 2014 8 min read
Ronald J. Packard, center, whose resignation as K12 Inc.’s CEO was announced in January, celebrates the company’s initial stock listing on the New York Stock Exchange in 2007. With him are his son, Chase, and John F. Baule, then the company’s chief operating officer.

A recently filed federal lawsuit accuses the publicly traded company K12 Inc. of misleading investors by putting forward overly positive public statements during much of last year, only later to reveal that it had missed key operational and financial targets.

It also alleges that former CEO Ronald J. Packard “reaped the rewards” of the bullish projections by selling millions of dollars worth of stock in the months before an October announcement of disappointing news sent its price plummeting.

The legal action asserts that Mr. Packard sold 43 percent of his personally held K12 common stock for gross proceeds of $6.4 million during those months when the plaintiffs contend that the stock price for the Herndon, Va.-based company was “artificially inflated.”

Company officials and Mr. Packard declined interview requests, but in statements to Education Week, they strongly denied the claims laid out in the legal action, which seeks class-action status.

“It is an unfortunate, but not unusual, practice for plaintiffs’ law firms to file class-action lawsuits against publicly traded companies who experience a drop in their stock price, and then attempt to solicit potential clients to join the class,” company spokesman Jeff Kwitowski said in an e-mail. “We remain focused on our mission to provide high-quality education products and services to the students, parents, teachers, and schools we serve.”

He also said that Mr. Packard had been forthright about his trading through his creation of what is known as a rule 10b5-1 plan, a type of document established by the U.S. Securities and Exchange Commission. Such plans provide a legal process through which a company executive makes stock trades in circumstances where inside information “was not a factor in the decision” to make transactions, by the SEC’s description.

Following SEC Rules

In keeping with SEC rules, Mr. Packard’s plan was designed to set the timing of his sales in advance and to eliminate his discretion on when shares were bought or sold, Mr. Kwitowski said.

Mr. Kwitowski also said that the value of Mr. Packard’s stock sales was “significantly less” than the lawsuit claims, and that the idea that it represented 43 percent of his personally held K12 common stock was off the mark, too.

In July, K12 settled a lawsuit brought by a group of investors, including the Arkansas Teacher Retirement System, for $6.75 million. That legal action claimed the company had misled investors about its academic results and business practices. K12 agreed to the settlement but denied the allegations.

Stefanie J. Sundel, a lawyer representing the plaintiffs in the new lawsuit, brought by the Oklahoma Firefighters Pension and Retirement System, said the new legal filing was unconnected to the earlier case. She declined further comment on the suit, which was filed in January in the U.S. District Court in Alexandria, Va.

K12 is one of the biggest and most controversial names in for-profit education in the United States. The company manages schools in 30 states with a combined enrollment of about 125,000 students, and it has lobbied aggressively in state legislatures over the years for policies allowing expansion of online programs, a core business of K12.

The company announced Mr. Packard’s resignation as chief executive in January of this year.

But Trace A. Urdan, a senior analyst for Wells Fargo Securities in San Francisco, said that among professional investors, it was widely anticipated by mid-2013—the period targeted in the lawsuit—that management changes at the company were coming and that Mr. Packard would be leaving the post.

In that context, Mr. Packard’s sale of stock was not unusual and it fit the profile of an executive leaving a top corporate position, said the analyst, who conducts independent evaluations of K12 on behalf of Wells Fargo’s investor clients.

In all likelihood, “his stock sale was more related to his impending departure from the company and the management team,” Mr. Urdan said, rather than a desire to sell stock before bad news came to light.

Mr. Urdan did not think investors were likely to be rattled by the new legal action; they would probably expect it to get settled, he said. Investors are likely to pay closer attention, he argued, to K12’s performance as judged by its ability increase student enrollment, and other factors.

The new lawsuit cites a series of statements made throughout 2013 by company officials, including Mr. Packard and Nathaniel A. Davis, K12’s current CEO, voicing optimism about the company’s ability to grow.

For instance, Mr. Packard said in March of last year that the “business-development environment” for K12 was “as good as we’ve ever had it,” according to the lawsuit. In August, the complaint says, Mr. Davis touted “significant marketing efforts” to enroll more students.

But in an Oct. 8 statement filed with the SEC, K12 said that its fiscal 2014 revenue guidance was between $905 million and $925 million—lower than expectations—and that enrollment of students was also lower than expected.

Following those revelations, the company’s stock fell by 38 percent, to an eight-month low of $17.60, on Oct. 9, the lawsuit says. As a result, the plaintiffs say, they absorbed “significant investor losses.” (The company’s stock price has crept up since then, and, as of last week, it was trading at about $22 a share.)

The plaintiffs claim that K12’s explanations that inadequate promotional efforts were partly to blame for underwhelming enrollment were at odds with earlier statements that strong marketing was underway. The company ignored other factors that signaled it would miss its goals, the lawsuit contends.

Transparency Questions

It is not unusual to see lawsuits filed by investors who allege misleading information was put forward by companies before a sharp drop in stock prices, said Jesse M. Fried, a professor at Harvard University’s law school. And in those cases, it helps the plaintiffs if they can show a major selling of stock by company executives before the price fell, he said.

The SEC instituted rule 10b5-1 plans in 2000 to establish policies that would deter insider trading while also giving company officials the right to prearrange trades that are not based on insider information.

Simply creating a 10b5-1 plan does not provide an absolute defense for company officials against insider trading, the SEC has said. Those who file the forms must still meet various standards to show they acted properly. Establishing a plan “permits persons to trade in certain specified circumstances where it is clear that the information they are aware of is not a factor in the decision to trade, such as pursuant to a pre-existing plan, contract, or instruction that was made in good faith,” the SEC has explained.

But rule 10b5-1 plans have drawn criticism from those who say the process of creating and following them lacks transparency and does not offer adequate safeguards to prevent corporate executives from benefiting from inside information.

Critics note, for instance, that 10b5-1 plans are not required to be filed with the SEC, and so the details of those plans often remain hidden.

K12 company documents filed with the SEC reference Mr. Packard’s 10b5-1 plan, and say that his sales transactions follow it. Mr. Kwitowski, the company spokesman, said K12 and Mr. Packard would not disclose details of his 10b5-1, which would amount to revealing “future trading plans.” Keeping that information private is consistent with practices of other companies, the spokesman added.

Many 10b5-1 plans are created for legitimate reasons, said Mr. Fried, such as when an executive owns a lot of stock and wants to sell it but is afraid of essentially becoming “locked up” with stock because of fears of being accused of insider trading.

But it is hard to know whether executives build their plans to sell based on inside knowledge of negative information, he said. And in many situations, he said, there is a good chance the details of 10b5-1plans will never come to light.

In and of itself, “the mere fact that stock sales are executed pursuant to a 10b5-1 plan means absolutely nothing,” Mr. Fried said.

Available Options

In lawsuits such as the one brought against K12 by the Oklahoma firefighters’ pension system, he added, the plaintiffs will typically try to get the details of a 10b5-1 plan entered into the record to try to prove their case that investors were misled.

Mr. Kwitowski, in a statement, said that all of the shares Mr. Packard traded during the period in question and detailed in his 10b5-1 plan were older options awarded to him years earlier that were set to expire, and that non-option K12 shares he owned were not sold and were not part of his plan.

Mr. Kwitowski also said that the value that Mr. Packard received from the stock sales was much less than the $6.4 million stated in the lawsuit, because of the cost of exercising the options.

Upon facing the expiration of stock options, stockholders typically have alternatives that carry a variety of potential financial costs, said Barbara Baksa, the executive director of the National Association of Stock Plan Professionals, a membership association based in Concord, Calif.

It’s true that when options expire, a stockholder would lose the right, or the option, to buy and then sell that stock, and the options would have no value, said Ms. Baksa. So an executive could go ahead and exercise the right to buy, and then sell the stock, as Mr. Packard did.

Or, Ms. Baksa said, a shareholder could choose to exercise the options on the stock to keep a portion or all of it.

In either case, exercising the options “is a fairly expensive proposition,” she said, because of the costs of taxes, fees, and the price of purchasing the options.

A version of this article appeared in the April 23, 2014 edition of Education Week as Lawsuit Targets K12 Inc. and Stock Sales of Its Former CEO

Events

Jobs The EdWeek Top School Jobs Virtual Career Fair
Find teaching jobs and other jobs in K-12 education at the EdWeek Top School Jobs virtual career fair.
This content is provided by our sponsor. It is not written by and does not necessarily reflect the views of Education Week's editorial staff.
Sponsor
Mathematics Webinar
Engaging Young Students to Accelerate Math Learning
Join learning scientists and inspiring district leaders, for a timely panel discussion addressing a school district’s approach to doubling and tripling Math gains during Covid. What started as a goal to address learning gaps in
Content provided by Age of Learning & Digital Promise, Harlingen CISD
This content is provided by our sponsor. It is not written by and does not necessarily reflect the views of Education Week's editorial staff.
Sponsor
Curriculum Webinar
How to Power Your Curriculum With Digital Books
Register for this can’t miss session looking at best practices for utilizing digital books to support their curriculum.
Content provided by OverDrive

EdWeek Top School Jobs

Teacher Jobs
Search over ten thousand teaching jobs nationwide — elementary, middle, high school and more.
View Jobs
Principal Jobs
Find hundreds of jobs for principals, assistant principals, and other school leadership roles.
View Jobs
Administrator Jobs
Over a thousand district-level jobs: superintendents, directors, more.
View Jobs
Support Staff Jobs
Search thousands of jobs, from paraprofessionals to counselors and more.
View Jobs

Read Next

Law & Courts The Opioid Crisis Hit Schools Hard. Now They Want Drug Companies to Pay Up
School districts have collectively spent at least $127 billion on services for students affected by opioid addiction, recent court filings say.
12 min read
An arrangement of Oxycodone pills in New York, pictured on Aug. 29, 2018. A new study shoots down the notion that medical marijuana laws can prevent opioid overdose deaths. Chelsea Shover of Stanford University School of Medicine and colleagues reported the findings Monday, June 10, in Proceedings of the National Academy of Sciences.
The painkiller Oxycodone is among the opioids implicated in a health crisis that has school districts joining with states and municipalities in seeking damages from drug manufacturers.
Mark Lennihan/AP
Law & Courts High Court Asks Biden Administration Views on Harvard Affirmative Action in Admissions
Some had expected U.S. Supreme Court justices to jump at the chance to reconsider the practices in education, but that's delayed for now.
3 min read
In this Nov. 10, 2020 photo the sun rises behind the U.S. Supreme Court in Washington. The Supreme Court seemed concerned Tuesday, Dec. 1, about the impact of siding with food giants Nestle and Cargill and ending a lawsuit that claims they knowingly bought cocoa beans from farms in Africa that used child slave labor. The court was hearing arguments in the case by phone because of the coronavirus pandemic.
The U.S. Supreme Court is still weighing whether to hear a case challenging Harvard University's race-conscious admissions policies.
Alex Brandon/AP
Law & Courts If Critical Race Theory Is Banned, Are Teachers Protected by the First Amendment?
Bills to rein in how race and other controversial topics are taught have thrust K-12 teachers into a thicket of free speech issues.
10 min read
Image shows a teacher in a classroom.
skynesher/E+
Law & Courts Puerto Rico’s Former Education Secretary Pleads Guilty to Fraud Conspiracy
Julia Keleher pleaded guilty to federal fraud conspiracy charges, striking a felony plea bargain and potentially avoiding maximum jail time.
Syra Ortiz-Blanes, The Miami Herald
4 min read
In this Oct. 13, 2017 file photo, Education Secretary Julia Keleher gets a hug from a student at Ramon Marin Sola Elementary School, in Guaynabo, Puerto Rico.
In this Oct. 13, 2017 photo, Education Secretary Julia Keleher hugs a student at Ramon Marín Sola Elementary School, in Guaynabo, Puerto Rico. The former education secretary pleaded guilty to two federal fraud conspiracy charges for crimes committed during her time as Puerto Rico’s top education official.
Carlos Giusti/AP