In re ITT Educational Services, Inc. Securities & Shareholder Derivatives Litigation
859 F. Supp. 2d 572
S.D.N.Y.2012Background
- Federal securities class action against ITT Educational Services, Inc. (ESI) and executives alleging misrepresentations under §10(b) and §20(a); lead plaintiff is Wyoming Retirement System.
- Defendants are ESI’s CEO Kevin M. Modany and CFO Daniel M. Fitzpatrick.
- The court analyzes a PSLRA pleadings standard after preliminary dismissal and grants the motion to dismiss.
- Plaintiff asserts misrepresentations and omissions about enrollment practices, business focus, graduate placement, and Title IV compliance.
- Alleged scienter rests on defendants’ access to nonpublic information and incentive structure; loss causation tied to mid-2010 disclosures.
- Court dismisses the consolidated complaint for failure to plead a viable misstatement/omission claim or scienter; case to be closed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the complaint pleads cognizable securities fraud claims under Rule 10b-5. | Wyoming contends misstatements/omissions misled investors. | ESI argues the allegations are not sufficiently particular under Rule 9(b) and PSLRA. | No viable misstatement/omission claims; pleadings insufficient. |
| Whether the complaint meets Rule 9(b)/PSLRA pleading requirements for fraud. | Plaintiff asserts pattern of misleading statements with reasons. | Defendants contend overbroad block quotes and insufficient specificity. | Insufficient specificity; fails PSLRA requirements. |
| Whether the complaint adequately pleads scienter. | Defendants knew/should have known due to management positions. | No showing of intent or recklessness tied to specific statements. | No pleaded scienter; fails to show knowing/m reckless deception. |
| Whether loss causation is established by disclosed information. | Disclosures caused price drops tied to investigations and reports. | Dramatic disclosures insufficient to prove causation. | Loss causation not adequately pled. |
| Whether control-person liability claims survive. | Allegations of control and participation. | No underlying primary violation to support control liability. | Control-person claim failed with failure of primary claims. |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (pleading plausibility standard under Rule 12(b)(6))
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (pleading standard requires plausible claims)
- ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (particularity and PSLRA demands in fraud pleadings)
- In re Time Warner Inc. Sec. Litig., 9 F.3d 259 (2d Cir. 1993) (omission duty and accuracy of statements when speaking)
- In re Initial Public Offering Sec. Litig., 383 F.Supp.2d 566 (S.D.N.Y. 2005) (court assesses pleading sufficiency in IPO-related claims)
- Plumbers’ Union Local No. 12 Pension Fund v. Swiss Reinsurance Co., 753 F.Supp.2d 166 (S.D.N.Y. 2010) (duty to be accurate and complete when speaking to markets)
- In re Marsh & McLennan Cos., Inc., 501 F.Supp.2d 452 (S.D.N.Y. 2006) (no general duty to disclose mismanagement; omissions must be connected to disclosures)
- Ballan v. Wilfred Am. Educ. Corp., 720 F.Supp.2d 241 (E.D.N.Y. 1989) (puffery generally not actionable)
- ECA & Local 134 IBEW Joint Pension Trust of Chicago v. JPMorgan Chase & Co., 553 F.3d 187 (2d Cir. 2009) (corporate puffery not actionable)