Educational Platform Firm Is Sued in Securities Exchange Class Action

Online education platform company 2U and three executives made materially false and misleading statements and failed to disclose material adverse facts about business operations from February 2022 to February 2024, alleged a Securities Exchange Act class action (docket 8:24-cv-01723) Thursday in U.S. District Court for Maryland in Greenbelt.

The suit names individual defendants Christopher Paucek, who resigned as CEO on Nov. 16; Paul Lalljie, who had been chief financial officer and assumed the CEO role on Paucek’s departure; and Matt Norden, chief legal officer and CFO since Nov. 16.

Michael Beaumont of Quebec filed the case on behalf of class members who bought 2U shares between Feb. 9, 2022 and Feb. 12 of this year. On Nov. 9, the Lanham, Maryland, company announced it was winding down a 15-year collaboration with the University of Southern California for two programs that represented 15% and 21% of its revenues; USC would pay about $40 million in connection with the exit, said the complaint.

2U also announced it would recognize $80 million in Q4 of that year related to partners seeking a negotiated exit from certain degree programs, which it referred to as “portfolio management activities,” that it said would offset a 21% drop in full course-equivalent enrollment, the complaint said. That move was driven by the impact of the company’s transition to a “new marketing framework” in mid-2022, it said. Financial results for the fiscal quarter showed degree program revenue was flat year on year, that total revenue decreased by 1% and that the alternative credential segment revenue fell 3%, the complaint said. On that news, 2U’s stock price plummeted 56.7% to close at $1.03 on Nov. 10, it said.

Three months later, 2U disclosed after market close that due to its debt, there was “substantial doubt about its ability to continue as a going concern,” the complaint said. It disclosed it recognized $88 million of revenue from portfolio management activities, which the complaint described as “fees negotiated for early partnership contract termination.” It expected to assume another $10 million from such activities in Q1 and at least $15 million for this full fiscal year. It also announced full-year 2023 revenue of $946 million, “significantly missing” its guidance of $965 million to $990 million on decreases in two segments and total revenue, the complaint said.

Also on the call, 2U gave 2024 revenue guidance, projecting a decline from $946 million to $805 million-$815 million. The next day, Feb. 13, the share price plummeted 59% to 37 cents “on unusually heavy trading volume,” alleged the complaint.

During the class period, the defendants made false or misleading statements, including that 2U was unable to sustain relationships with key universities and organizations; certain degree programs and partnerships failed to materialize or were canceled; its transition to a platform company would lead to a decrease in full course equivalent enrollments; the company had “overstated the stability and/or longevity of its contractual agreements and/or revenue sources”; and that as a result, their positive statements about business, operations and prospects “were materially misleading and/or lacked a reasonable basis,” alleged the complaint.

As a result of the dissemination of the materially false and/or misleading information and/or failure to disclose material facts, "the market price of 2U’s securities was artificially inflated" during the class period, alleged the complaint.

The defendants acted with scienter because they knew that the public documents and statements issued or disseminated in the name of 2U were materially false or misleading; they knew that such statements or documents would be issued or disseminated to the investing public; and they knowingly and substantially participated or acquiesced in the issuance or dissemination of such statements or documents as primary violations of the federal securities laws, said the complaint.

Beaumont seeks for himself and the class members compensatory damages as a result of the defendants' wrongdoing, interest and reasonable attorneys' fees and legal costs.