March 28, 2023

Court Upholds Securities Fraud Claims Against Grand Canyon Education, Inc. in Accounting Irregularities Suit

Firm News

On March 28, 2023, after full briefing and oral argument before both the Magistrate Judge and the U.S. District Judge presiding over the case, the Court rejected Grand Canyon Education, Inc.’s attempt to escape liability for alleged misstatements about the reasons for and ultimate success of Grand Canyon’s spin-off of the for-profit Grand Canyon University (GCU) as a purported non-profit entity. 

Factual Background

Barrack, Rodos & Bacine clients Oakland County Employees’ Retirement System and Oakland County Voluntary Employees’ Beneficiary Association Trust are serving as Court-appointed Lead Plaintiffs, and BR&B is serving as a Co-Lead Counsel, in the securities class action captioned In re Grand Canyon Education, Inc. Securities Litigation, Case No. 1:20-cv-00639-MN-CJB, pending in the U.S. District Court for the District of Delaware.  The case is brought on behalf of purchasers of Grand Canyon Education, Inc. common stock between January 5, 2018, and January 27, 2020, against the company, its chief executive officer, and its chief financial officer.

As alleged in the operative complaint, defendants inflated Grand Canyon’s financial results by spinning off GCU, its formerly for-profit university, as a purportedly non-profit university, New GCU.  The complaint alleges that Grand Canyon used New GCU as an off-balance-sheet entity to which the company funneled expenses and costs in exchange for a disproportionate amount of revenue. Defendants repeatedly made alleged false and misleading statements to investors describing New GCU as a “non-profit” and “independent” institution, stating that New GCU would have no “dual role” employees other than Grand Canyon’s CEO.  Defendants also failed to disclose to investors repeated communications from the U.S. Department of Education putting the agency’s approval of the spinoff in doubt, while they attributed the DOE’s delay in approving the spinoff to DOE “understaff[ing].”

The truth began to emerge on November 6, 2019, when Grand Canyon announced that it had received word that the DOE had denied its application for designation of New GCU as a non-profit. As later revealed in the DOE’s denial letter, DOE denied the application because an examination of several confidential analyses of the transaction had revealed to the DOE that New GCU was Grand Canyon’s “captive client” and that New GCU “is not the entity actually operating [GCU].” The DOE concluded that the relationship between Grand Canyon and New GCU violated “the most basic tenet of nonprofit status—that the nonprofit be primarily operated for a tax-exempt purpose and not substantially for the benefit of any other purpose or entity.”

Then, on January 28, 2020, financial analyst Citron Research published a report expanding on the DOE’s findings, citing among other things documents that Citron obtained through a Freedom of Information Act request. The Citron report revealed that Grand Canyon was using a “captive 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.”  As a result of the November 6, 2019 and January 28, 2020 disclosures, the price of Grand Canyon common stock declined precipitously.

The Litigation

In August 2021, the Magistrate Judge issued a report and recommendation granting defendants’ motion to dismiss Lead Plaintiffs’ initial complaint.  In response to the Magistrate Judge’s report and dismissal of the initial complaint, Co-Lead Counsel conducted a further investigation and included new factual allegations in an Amended Complaint filed on January 21, 2022, which Defendants also moved to dismiss.  After full briefing by the parties and an oral argument held on October 25, 2022, the Magistrate Judge issued a comprehensive 68-page report and recommendation on February 17, 2023, which recommended that the Court deny the motion to dismiss and sustain the Amended Complaint in its entirety. 

The Magistrate Judge found that, based on well-pleaded allegations in the Amended Complaint, defendants made “relevant, actionable false and misleading statements and/or omissions,” through which they misrepresented (1) GCU’s purported independence from Grand Canyon, in statements made both before and after the spinoff; (2) the risks of DOE denial of the request for non-profit status for GCU; (3) the spinoff’s similarity to other transactions; and (4) Grand Canyon’s accounting and compliance with GAAP.  The Magistrate Judge also found that the Amended Complaint alleges a cogent basis upon which the Court could find that Defendants acted either knowingly or recklessly (i.e., with “scienter”) in making the alleged false and misleading statements, and in concealing certain adverse facts and developments known to them but not to the public.

On March 28, 2021, District Judge Maryellen Noreika, following oral argument on the Defendants’ objections to the R&R, issued a ruling from the Bench, overriding the objections and adopting the R&R in its entirety. 

BR&B looks forward to continuing the prosecution of this litigation on behalf of the Oakland County funds and the putative Class.  BR&B partners Jeff Golan (, Rob Hoffman (, and Chad Carder ( and associate Jordan Laporta ( are litigating the Grand Canyon case and are available to provide additional information upon request.