Plymouth Cnty. Ret. Ass'n ex rel. Situated v. Advisory Bd. Co.

370 F.Supp.3d 60

PLYMOUTH COUNTY RETIREMENT ASSOCIATION, on Behalf of Itself and All Others Similarly Situated, Plaintiff,

v.ADVISORY BOARD COMPANY, et al., Defendants.

Civil Action No.: 17-1940 (RC)

United States District Court, District of Columbia.

Signed March 29, 2019

Steven J. Toll, Cohen Milstein Sellers & Toll PLLC, Nancy Meredith Juda, Robbins Geller Rudman & Dowd LLP, Washington, DC, Samuel H. Rudman, Alan I. Ellman, Pro Hac Vice, David A. Rosenfeld, Pro Hac Vice, Robbins Geller Rudman & Dowd LLP, Melville, NY, for Plaintiff.

Jennifer L. Spaziano, Skadden, Arps, Slate, Meagher & Flom LLP, Washington, DC, Scott D. Musoff, Pro Hac Vice, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, for Defendants.

MEMORANDUM OPINION

RUDOLPH CONTRERAS, United States District Judge

GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS

I. INTRODUCTION

The co-lead plaintiffs in this class action, the City of Atlanta Firefighters' Pension Fund and the City of Atlanta Police Officers' Pension Fund, assert that The Advisory Board Company, its Chief Executive Officer, Robert W. Musslewhite, and its Chief Financial Officer, Michael T. Kirshbaum, violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by issuing a series of materially false and misleading public statements in 2015. Those statements concerned Advisory Board's acquisition of Royall & Company, and Royall's post-acquisition performance. According to Plaintiffs, Defendants publicly touted the Royall acquisition's success and Royall's 2015 performance, knowing that the acquisition and Royall's performance were unlikely to meet the market's expectations.

Defendants have asked this Court to dismiss Plaintiffs' complaint. Defendants argue that none of the challenged statements were materially false or misleading when made, even if the statements were wrong in hindsight. Defendants further argue that to the extent their statements were materially false or misleading, Defendants did not possess the state of mind necessary to hold them liable.

Having combed through Plaintiffs' voluminous allegations and the relevant record submissions, the Court agrees that most of Defendants' statements were not false or misleading. Plaintiffs' challenge of these statements amounts to inactionable "fraud by hindsight." On the other hand, certain statements about Advisory Board's projected 2015 revenues were rendered misleading by Defendants' failure to tell investors that shortly before the statements were issued, key executives had left the company. For the reasons set forth in greater detail below, the Court thus grants Defendants' motion in part and denies it in part.

II. FACTUAL BACKGROUND

A. Advisory Board and Royall

During the Class Period, Advisory Board was a publicly traded consulting company "that provided performance-improvement software and solutions to the healthcare and education industries." Am. Compl. ("FAC") ¶ 18, ECF No. 16.¹ Advisory Board's profits were driven by its healthcare business. Id. ¶ 97 (referencing Advisory Board's "core" healthcare business); Jan. 21, 2015 Advisory Board Prospectus at S-1 (noting that Advisory Board served over 3,900 health care organizations and approximately 600 colleges and universities), Defs.' Mem. Supp. Mot. to Dismiss ("Defs.' Mem.") Ex. 4, ECF no. 18-5.² That said, Advisory Board's higher education business was substantial: At the time of the Royall acquisition it had 700 unique clients with annual revenue of $ 57,000 per client. FAC ¶ 37. The business "supported colleges and universities in enrollment management; academic programming and student learning; faculty recruitment and retention; student advising and success; alumni affairs and advancement; and college and university operations." Id. ¶ 33.

Royall was a consulting company focused on higher education. See id. ¶ 36. Royall helped its college and university clients "strengthen[ ] [their] national reputations, broaden[ ] student enrollment, improv[e] overall academic profiles, and enhance[ ] revenue." Id. It typically executed multi-year engagements, in which it would optimize clients' enrollment programs over time. See id. When it was acquired, Royall had 200 unique clients with annual revenue of $ 400,000 per client. Id. ¶ 37. The nature of Royall's model—comprehensive, high-margin engagements with fewer clients—meant that client retention and development were vitally important on a year-to-year basis. See id. ¶¶ 64–66.

On January 9, 2015, Advisory Board finalized its acquisition of Royall for approximately $ 871 million; $ 750 million in cash and $ 121 million in Advisory Board stock. Id. ¶ 38. Of this purchase price, approximately $ 660 million was attributed to Royall's "goodwill."³ See id. ¶¶ 38, 72. It was the largest acquisition in Advisory Board's history. Id. ¶ 39. When Advisory Board announced the acquisition, it projected that Royall would produce $ 121 million to $ 124 million in revenue in 2015, on 15% to 18% growth from 2014 levels. Id. ¶ 40.

B. The Class Period⁴

Based in part on information supplied by two confidential witnesses, Plaintiffs allege that from January 21, 2015 through February 23, 2016 (the "Class Period"), id. ¶ 1, Defendants made a series of false or misleading statements and omissions regarding Royall's performance and its integration into Advisory Board's business. The touchstone of these allegations is that Defendants knew of certain developments that would cause Royall to underperform its revenue projections and fail to properly integrate with Advisory Board, at least in the short-term. Plaintiffs claim that Defendants delayed revealing these developments to investors, which caused Advisory Board's stock prices to remain higher than they would have been if the market had full information. When the other shoe dropped and the market caught wind of Royall's problems, Advisory Board's stock price plunged. Before evaluating the merits of Plaintiffs' amended complaint, the Court will describe the relevant Class Period statements and events.

1. January 2015 Stock Offering

On January 20 and 21, 2015, Advisory Board filed a registration statement and two prospectuses with the SEC, through which Advisory Board offered to sell several million shares of stock. Id. ¶¶ 70–72. These materials appended Royall's financial statements for the years ended June 30, 2012, June 30, 2013, and June 30, 2014, and for the period between June 30, 2014 and September 30, 2014. Id. ¶¶ 41, 73. The financial statements reflected Royall's revenue recognition practice described below, but Advisory Board's filing did not explain that practice to investors. Id. ¶ 74.

2. Fourth Quarter 2014

On February 11, 2015, Advisory Board issued a press release and held a conference call to discuss its financial results for the fourth quarter of 2014. Id. ¶¶ 76–77. In the press release, Advisory Board projected total 2015 revenues of $ 780 million to $ 800 million. Id. ¶ 76. Advisory Board further projected that $ 125 million to $ 135 million of that revenue would come from Royall. Id. During the conference call, Mr. Musslewhite touted the scalability of Royall's business model, stating that "[i]n general ... Royall is a very high-margin business. We spent a lot of time diligencing [sic] that to understand the sources of their margin power and how sustainable they were." Id. ¶ 78; Feb. 11, 2015 Earnings Call Tr. at 23, Defs.' Mem. Ex. 6, ECF No. 18-7. He also added, regarding the acquisition, that

in terms of culture, fit and integration, everything is going very well. John Nester, Royal & Company's CEO, has been great to work with and his team is strong. Obviously, we're only a few weeks in here, but there is a lot of positive momentum on both sides and we are confident that this combination is going to yield great success.

FAC ¶ 77. Mr. Kirshbaum echoed Mr. Musslewhite's comments, but noted that "the revenue synergies" and "cross-sell potential" of the Royall acquisition would not "have much impact in calendar ‘15." Defs.’ Mem. Ex. 6 at 23.

3. Early Royall-Related Issues

Soon after Advisory Board acquired Royall, cracks allegedly began to form in what Defendants hoped would be a seamless integration of the two companies. First, Royall's CEO and CFO unexpectedly left Advisory Board in or around April 2015. FAC ¶¶ 45, 47, 49. A former Royall Account Coordinator ("FE 1") corroborates this development, stating that he attended a meeting on April 15, 2015 during which the Royall CEO's successor addressed Royall's employees for the first time. Id. ¶ 45. Plaintiffs claim that several other high-level Royall employees, including the Chief Technology Officer, left around the same time. Id. ¶¶ 46,

Second, at some point, Advisory Board discovered a discrepancy between how Royall accounted for its revenue before the acquisition and how Advisory Board would account for Royall's revenue after the acquisition. As a private company, Royall regularly delayed closing its books for a given quarter so that it could recognize revenue for contracts for which work was performed that quarter, but were not signed or otherwise executed until the next quarter. See id. ¶¶ 88, 95.⁵ Advisory Board, as a public company, could not delay closing its books in the same manner. Id.¶¶ 88, 95. After the acquisition, Advisory Board corrected this discrepancy by recognizing $ 2 million of revenue in third quarter, 2015 that Royall would have recognized in second quarter, 2015. Id. ¶ 95. In other words, the revenue recognition difference was a timing issue that resulted in revenue shifting from one fiscal period to the next but, importantly, did not impact the amount of revenue that Advisory Board could ultimately recognize from Royall's work. See id. ¶¶ 88, 95.

4. First Quarter 2015

On May 5, 2015, Advisory Board issued a press release and held a conference call to discuss its financial results for the first quarter of 2015. In the press release, Advisory Board reaffirmed its earlier projection that total 20...