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Online learning provider K12 faces class-action lawsuit

K12 disputes the allegations against it and 'intends to vigorously defend itself,' the company said.

After a recent New York Times article implied that online learning giant K12 Inc. focuses more on its bottom line than student performance, the company now faces a class-action lawsuit alleging that it violated securities laws by issuing false and misleading statements regarding its business prospects.

On Dec. 12, 2011, the Times published an article describing numerous alleged improper practices at K12’s main virtual charter schools. After the article appeared, the price of K12 stock plunged from a high of $28.79 per share on Dec. 9, 2011, to a low of $18.46 per share on Dec. 16, 2011. The stock was trading at $21. 56 as of press time.

The lawsuit, aimed at the country’s largest operator of full-time public virtual schools, targets Harry T. Hawks, the company’s chief financial officer, and Ronald J. Packard, K12’s chief executive. It alleges that:

  • K12 engaged in improper and deceptive recruiting and sales strategies, aimed at enrolling students regardless of their ability to successfully complete the curriculum;
  • K12 failed to disclose administrative pressure from upper management to pass students, despite poor or nonexistent academic performance, so as to maintain high enrollment levels and continued government funding; and
  • According to various academic benchmarks, K12 students chronically underperformed their peers at traditional schools.

The complaint alleges that, as a result of these actions, K12’s statements regarding its academic performance, financial performance, and business and financial prospects were “materially false and misleading.”

The lawsuit was filed in the U.S. District Court for the Eastern District of Virginia by the Shuman Law Firm on behalf of purchasers of the common stock of K12 Inc. between Sept. 9, 2009, and Dec. 16, 2011.

“K12 disputes the allegations and intends to vigorously defend itself,” said Jeff Kwitowski, vice president of public affairs for K12, in an interview with eSchool News. “The company won’t comment on the pending litigation; however, it appears to repeat allegations made in a recent New York Times article.”

The Times article does make the same allegations, quoting numbers and anonymous teacher and administrative sources from K12 schools that caused a national stir in December.

Key among these allegations is that, although Packard stated that the test results from one of its largest online schools, Agora Cyber Charter, were “significantly higher than a typical school on state administered tests for growth,” data released weeks earlier showed “that 42 percent of Agora students tested on grade level or better in math, compared with 75 percent of students statewide. And 52 percent of Agora students had hit the mark in reading, compared with 72 percent statewide.”

The article suggested that students’ poorer performance was because K12 “tries to squeeze profits from public school dollars by raising enrollment, increasing teacher workload, and lowering standards.”

Other allegations said K12 doesn’t provide adequate support for students, yet it collects millions of dollars in profits from its schools. One anonymous source in the article states that “these folks are fundamentally trying to do to public education what the banks did with home mortgages.”

Both Agora Cyber Charter and K12 have released statements adamantly denying the Times’ allegations and calling the article “unfair and one-sided.”

Packard and K12 say the article aims to undermine virtual learning and its benefits to students. In a response posted on Flypaper, a blog for the Thomas B. Fordham Institute, Packard said:

  • Academic performance of virtual schools: K12 data show that a large and growing number of students coming into virtual schools are below grade level. The high growth rate of virtual schools means that a large portion of students taking the state tests are in their first year. This makes static test scores poor measures of a school’s overall performance, because students perform better on state tests the longer they are enrolled. To measure academic growth, K12 administers third-party, norm-referenced tests. Data from these tests show students are making positive academic gains relative to national norms.
  • Teachers: The stories in the Times article are atypical and misleading. K12-affiliated schools have multiple applicants for every teaching job, and few teachers leave voluntarily. Despite all of the sophisticated technology, teachers remain the most important part of student learning in virtual schools associated with K12. A school’s overall student-to-teacher ratio is determined by the public school boards and their budgets, not K12. The school cited in the Times article, Agora Cyber Charter School, has a total student-to-certified teaching staff of 25 to 1, not 250 to 1 as the Times suggested.
  • Ease of virtual schooling: The article implies that virtual schooling is easy. Nothing could be further from the truth. One of the main reasons parents cite for leaving a K12-affiliated school is because of the rigor and time commitment. Schools can improve their retention by “dumbing down” the curriculum, but this is something K12 would never even consider.
  • Savings to taxpayers and cost: Virtual schools are a significant savings to taxpayers, as they are reimbursed, on average, 60 percent of the per-pupil funding received by traditional schools on a per-pupil basis. To imply that a full-time public virtual school costs only $1,000 per pupil to operate is ridiculous. Teachers alone cost significantly more than that per child. K12 did not have income of $72M from Agora. K12’s global net income last year was only $12.8M.
  • Compliance with attendance: Virtual schools managed by K12 comply with all state laws and regulations and are regularly audited. Attendance regulations vary from state to state. The online schools follow all state policies and procedures and work closely with the state to ensure accuracy of attendance records and full compliance. The K12 software gives teachers and administrators visibility into student engagement in the lessons and material on a daily basis.

A full list of K12’s point-by-point defense against the Times article can be found here (PDF). Agora’s response can be found here.

The class action lawsuit was filed by the Shuman Law Firm on behalf of plaintiff David Hoppaugh of Cado Parish, La., who purchased shared of K12 between December 2010 and July 2011. The plaintiff, who wants a jury trial, is seeking compensatory damages and legal costs for himself and other shareholders.

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