The City of Hialeah Employees’ Retirement System in Hialeah, Florida, has filed a class action lawsuit against Grand Canyon Education Inc. alleging the education services company artificially inflated its stock price through financial dealings with a university that it continued to control even after selling the institution.
The suit alleges that Grand Canyon made misrepresentations and omissions concerning the July 2018 spin-off of its education assets into Grand Canyon University (GCU). The lawsuit accuses the company of inflating Grand Canyon’s financial results by using nonprofit independent entity GCU as an off-balance-sheet entity into which Grand Canyon was able to funnel expenses and costs in exchange for a disproportionate amount of revenue.
According to the complaint, Grand Canyon Education repeatedly made false and misleading statements to investors describing GCU as a nonprofit and independent institution that misstated Grand Canyon’s role as a third-party provider of education services. The suit claims that as a result of the alleged misrepresentations, shares of Grand Canyon’s common stock traded at artificially inflated prices during the class period, which dates from Jan. 5, 2018 to Jan. 27, 2020.
The suit cites a September 2019 report from short seller Citron Research that said the company is “stuffing” GCU with expenses to inflate its own profitability and as a result was bankrupting GCU.
“Grand Canyon has been both incompetent and deceitful in its ability to transform the school to adapt to the rapidly changing for-profit education space,” the Citron report said. “Management has failed to deliver on any of the promises of innovation to Wall Street and it has finally caught up to them.”
The complaint claims that in response to the disclosure, the price of Grand Canyon stock declined approximately 5% intraday on Sept. 9, 2019, to a low of $104.20 per share, and it closed at $109.62 per share the following day.
“Then, after the close of market on November 6, 2019, the company announced that it had received a letter from the US Department of Education denying its application for designation of GCU as a nonprofit,” the complaint said. “In response to this disclosure, the price of Grand Canyon stock declined approximately 4% to close at $88.08 per share on November 7, 2019.”
In January 2020, Citron published another report calling Grand Canyon the “educational Enron” using a non-reporting subsidiary to “dump expenses and liabilities, while receiving a disproportionate amount of revenue at inflated margins in order to artificially inflate the stock price.” The complaint says that following the report, Grand Canyon shares declined approximately 8% to close at $84.07 per share on Jan. 28, 2020.
However, shares of Grand Canyon have since risen to $103 as of Wednesday, and the company rebuffed the claims made in the lawsuit.
“Citron makes much of the [Education] department’s decision to continue to treat GCU as a proprietary institution for Title IV purposes, a status that GCU has operated under since 2004,” Grand Canyon said in a statement. “Citron fails to mention, however, that the department approved the transaction and granted GCU a PPPA [provisional program participation agreement] that permits it to participate in Title IV programs through September 30, 2022.”
The company also said that “the report evidences a great misunderstanding of the July 1, 2018, transaction by which Grand Canyon University separated from the company. … It also places material emphasis on a number of factual statements that are simply false.”
Grand Canyon has also taken issue with the claim that it is going bankrupt, saying that it has made publicly available its financial statements for the year ended June 30, 2019, which it says showed the university had over $325 million in cash on its balance sheet, net assets of over $387 million, and cash flow of over $123 million.