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.

The lawsuit was filed Jan. 30, as reported here 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) 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.” 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 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)

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., 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.

At first glance, the consolidated data reportreleased Thursday by the N.C. Department of Instruction seemed to be brimming with good news about improvements, with declines in the state’s dropout rate, long-term and short-term suspensions.

But troubling facts still remain.

Here are just a few of the statistics plucked from the 145-page report being submitted to the Joint Legislative Education Oversight Committee.

• One out of every seven North Carolina high school students had a short-term suspension in the 2010-11 school year. The average length suspension was for 6 days.
• Boys were more than two times as likely to be suspended than girls, and black students had disproportionately high rates of suspension, followed by Native Americans.
• Two school districts – Robeson and Columbus – made up 60 percent of the 891 instances of corporal punishment statewide. (Only 17 school districts reported any instances of hitting as a form a discipline). Robeson had 40 percent of the total, and Columbus had  22 percent of instances of corporal punishment. (Most school districts have banned physically hitting children as acceptable forms of classroom punishment, according to a September report by N.C. Action for Children).
• The bulk of physical punishment was metered out in elementary schools, with 3^rd and 4^th grades seeing the most.  White students, followed by Native Americans, received the brunt of the punishment.
• Disabled children were the recipients of corporal punishment in one out of every five instances.
• 15,342 students dropped out of high school last year, a decrease of 9 percent from the year before and part of a four-year decrease in dropout rates.
• Hispanic students had the highest high school dropout rate (4.7 percent of all Hispanic students), followed by black (4.3%), Native American (4.12 %) and multi-racial students (3.14%). White students had a 2.9 percent dropout rate, while 1.4 percent of all Asian high school students dropped out of school.

Want to skim the numbers for yourself? The DPI report is available here.

The News & Observer posted a copy this morning of a confidential ethics opinion state Rep. Stephen LaRoque received after asking it was okay from him to sponsor pro-billboard industry legislation while owning billboards of his own.

(We first reported LaRoque’s financial connections to the billboard industry last week, in this post about a law passed last year that allows billboard owners to cut down wider swatches of publicly-owned trees around privately-owned billboards, without having to replant the trees. Billboard owners will have to get permits from NC DOT.)

LaRoque told the N&O that the opinion cleared him to move forward on the legislation, and it appears to do that, but the actual opinion written by commission attorney Kathleen Edwards isn’t as clear-cut as one might think.

From Edwards’ letter to LaRoque (read the whole thing over at the N&O’s Under the Dome):

 It appears that this bill would provide a reasonably foreseeable financial benefit to you because it would increase the usability and value of those billboards in which you have a financial interest. Therefore, in the event you conclude that there is indeed a financial benefit and that benefit would impair your independence of judgment, you would otherwise be required to decline to participate in any legislative action with respect to that bill.

Read More…

State Rep. Stephen LaRoque had financial connections to the billboard business when he pushed and voted for a controversial law last year drastically expanding billboard companies’ abilities to chop down trees on public roadsides, according to records obtained by N.C. Policy Watch.

The law, S.B. 183/S.L 397,  led to the passage of temporary rules last week that created a path for billboard owners to cut down publicly-owned trees on highway roadsides in order to make the advertisements more visible to motorists. Roadsides of major highways in the mountainous western part of the state stand to have the most trees chopped down (see photo illustrations at end of post) from the legislation pushed by the billboard industry and opposed by environmental groups. The law, as passed, doesn’t require that new trees be planted to replace those that are cut down.

LaRoque, a Kinston Republican and member of NC House Speaker Thom Tillis’ leadership team, was a sponsor of a House version of similar pro-billboard industry legislation, and was a significant player in the N.C. House as the Senate legislation made its way into law. His signature appears here on a conference committee report from June about the law.

He also owns billboards — $37,609 to $52,250 worth, according to a December 2010 balance sheet for LaRoque Management Group, a for-profit company he owns.

Read More…

Roadways in North Carolina could very well end up looking a lot more barren and clipped, once the effects of the pro-billboard industry law passed by the N.C. General Assembly last year go into effect this spring.

Today, the N.C. Rules Review Committee (a slightly obscure rule-approving group in the N.C. Office of Administrative Hearing)  approved temporary rules to allow clear-cutting of tens of thousands of trees in publicly-owned roadsides in order to make billboards more visible, according to the N.C. Sierra Club, which has been a chief opponent of the legislation.

The changes will be particularly disastrous in Western North Carolina, where many of the interstates are flanked by old-growth forests, said Molly Diggins of the N.C. Sierra Club. The new rules also don’t require replanting of trees.

Here’ssome before and after shots that the Sierra Club obtained from the N.C. Department of Transportation through a public records request , showing what the new rules would mean on a stretch of highway in Hendersonville. (DOT will be the state agency to issue permits for the tree cutting).

Before:

After:

The cutting could begin as early as this spring. DOT estimates that $12 million worth of trees owned by the public on publicly-owned roadsides could be chopped down, according to Diggins. And, she said, the state already spends $5 to $6 million beautifying its highways, an effort that will be drastically undercut by the new laws passed by the GOP-led state legislature last year.

(With update) N.C. Health and Human Services Secretary Lanier Cansler resigned from his position as head of the state’s health department this afternoon, according to several sources high up in state government.

Cansler, who has appointed to his position in 2009 by NC Gov. Bev Perdue, has had plenty of controversy to deal with lately.

(Updated version following) The governor’s office says Cansler will return to the private sector but will also chair the new Commission on an Affordable Healthcare System for North Carolina.

The new acting head for NCDHHS will be Al Delia, currently the governor’s senior policy adviser. Delia will take over in February.

The governor’s press office could not immediately confirm Cansler’s resignation late Friday afternoon, but indicated an announcement about Cansler will be forthcoming.

The agency has also struggled with a $139 million Medicaid shortfall created by unrealistic savings demanded by the state legislature. His department was the subject of a critical audit released earlier this week about the state’s $265 million contract with Computer Sciences Corporation, the company contracted to overhaul the database for how Medicaid processing claims.

From Lynn Bonner’s article Wednesday about the audit in the News & Observer:

The audit found that the contract cost will increase from $265.2 million to $494.9 million, that work was 22 months behind schedule, state oversight was lax, and calculations leading to a $10 million damage payment by CSC were not properly documented.

Legislators reacted fiercely last month to a report prepared by their own staff raising similar points and criticized the manager overseeing the contract. U.S. Rep. Virginia Foxx, a Watauga County Republican, denounced the increased costs from the floor of the U.S. House, using them as an example of government waste.

Lanier Cansler, the secretary of health and human services, defended the project’s progress at the legislative committee meeting, saying that other states have similar problems because the claims systems are so complex.

His written response was more fiery.

The audit team did not have enough experience with contracts and computer technology, Cansler said. “We disagree with much of the report,” he wrote. “This audit has been an unproductive 11-month exercise.”

Here’s the full text of Perdue’s press release about Cansler’s resignation:

RALEIGH – Gov. Bev Perdue today named Al Delia as Acting Secretary of the N.C. Department of Health and Human Services.  Delia, who currently serves as the Governor’s senior adviser for policy, will assume the new post in early February.

Secretary Lanier M. Cansler, who has served in that post since the beginning of the Perdue administration, will return to the private sector. He has agreed to chair the Governor’s new Commission on an Affordable Healthcare System for North Carolina.

“Governor Perdue is a tremendous leader,” Cansler said. “I am honored to have served on her team as she steered the state through incredibly difficult times and stabilized North Carolina’s fiscal house. We cut spending, eliminated waste and consolidated agencies – all to make state government more efficient without neglecting our core mission of serving the people.”

“I could always depend on Lanier to help find the best answer for the people of North Carolina,” Gov. Perdue said. “I will miss his calm, wise advice; the state is better for his service. He remains a friend and I will continue to rely on his counsel.”

Delia, a former associate vice chancellor at East Carolina University, has served as Gov. Perdue’s chief policy adviser since 2009.

“Al has an incredible depth of understanding of health care policy and the challenges we face,” Gov. Perdue said. “I have every confidence in his ability to lead the department at this critical time.”

The mandate of the commission on affordable health care is, over several months, to develop a vision to help make North Carolina’s healthcare system more affordable and sustainable, including proposed changes in the law, regulations and the financial reimbursement process, as well as proposals for encouraging individual North Carolinians to live healthier lifestyles.

Cansler was appointed by Perdue to head up DHHS in January 2009.  Under his leadership, he renewed the commitment of the department to enhance public confidence in the agency’s ability to successfully meet the challenges and address the needs of North Carolina’s citizens.  He shared the Governor’s focus of strengthening the agency with more open management, transparency and with a goal of achieving greater effectiveness and efficiency in the delivery of vital services to all North Carolinians.

Cansler, a native of Catawba County, who moved to Asheville, is a certified public accountant who was elected to four terms in the state legislature representing the 51st House District, before serving as Deputy Secretary of DHHS from 2001 to 2005.

(Note: The post has been updated from its initial version to reflect a correction. The initial post reported that the Medicaid shortfall was $139, not the actual shortfall of $139 million. Apologies for the mistake.)