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Virtual charter school company with NC intentions slapped with class-action lawsuit

A NYC-based law firm has filed a class-action lawsuit in a federal court in Virginia against K12, Inc., the for-profit virtual school company, claiming that its top officials intentionally misled the public and investors about its quality of the education.

[1]The lawsuit was filed Jan. 30, as reported here [2] by the Washington Post.

The claims of fraud at the top levels of the company should be of particular interest here in North Carolina after the company, K12, Inc., (NYSE:LRN [3]) edged its way  into a partnership with the Cabarrus County school system to try and tap into state education dollars.

Stock for the virtual school company had been steadily rising (a high of $39.74 was reached last April) since its 2007 emergence on the market, but plummeted after a critical New York Times article late last year, “Online schools fare better on Wall Street than in classrooms [4].” The Times investigation found that the company pushed to bring in more profits while students were failing and falling far behind their traditional school peers.

K12 stock was trading at $21.63 a share [5] mid-day today.

Here’s a snippet from the lawsuit, showing the difference between what top K12 officials were saying to investors, and what was found to be the case by reporters. (A copy of initial pleadings are here [6])

On October 10, 2011, [CEO Ronald] Packard and several other members of K12’s management team held a conference call with members of the investment community to disclose the fourth quarter and full year 2011 earning.  Once again, Packard took the opportunity to tout K12’s academic performance relative to brick and mortar school. Packard stated:

“Our norm-based tests show that on average our students are progressing more than one year for every year they’re in the program. For example, the scores for the Aurora Virtual Charter School we manage in Pennsylvania were significantly higher than the typical school on state administered test for growth. We anticipate that as states move to measure academic efficiently with the gains approach, the benefits to be achieved from K12 learning system will become more visible.

But, the New York Times article that was published just two months after the investors call made by Packard, who had a $5 million compensation package last year, found a different reality at another virtual Pennsylvania school run by the company.

From that piece:

By almost every educational measure, the Agora Cyber Charter School is failing.

Nearly 60 percent of its students are behind grade level in math. Nearly 50 percent trail in reading. A third do not graduate on time. And hundreds of children, from kindergartners to seniors, withdraw within months after they enroll.

By Wall Street standards, though, Agora is a remarkable success that has helped enrich K12 Inc [7]., the publicly traded company that manages the school. And the entire enterprise is paid for by taxpayers.


Any deal to open a public charter school in North Carolina under K12 management (the pitch to Cabarrus school board members was that it would serve students statewide, and survive off of state, federal and local taxpayer money)  would have to approved by the N.C. State Board of Education. That’s not an immediate possibility, with no application filed yet at the state education department.

But records at the N.C. Secretary of State show the company is serious about doing business with North Carolina taxpayers —  the company hired several lobbyists from one of the state’s most prestigious law firms last fall.