SPECIAL REPORT: K12 Sued for Lack of

Performance – By Shareholders

By Mary McCarthy

"A significant number of K12 students failed to meet federal and state standards of academic achievement.”

A few weeks ago my local paper, The Reflector, printed an article
announcing a new K12 affiliate near me. It is named Local River
Academy (LRA) (name changed). There was no mention that the public school
district is serving as “Host.” I checked my facts, found out LRA is a
public school and dutifully wrote one of my favorite editors explaining
that Local River Academy is a public school and to advertise “with
families looking for other home school option in the area, it’s only
right that we open our doors to them” is misleading. Public schools are
governed by one set of laws in my state and homeschooling by another
completely separate set of laws, so it is questionably fraudulent to
infer that a public school is homeschooling.

Homeschooling Families Who Use K12 Affected

Okay, time passes, it’s June already, and watching my fantasy stock
portfolio I notice LRN (K12) is doing well, so I checked the K12
financial news. I found some interesting information that homeschoolers
might want to be aware because it affects every child enrolled in a K12 Program.

For the newcomers, K12 is a public traded, for profit company that
operates academies in 27 states as well as offers curriculum packages
to parents who are homeschooling. K12 operates in such a way that
parents in many states pay nothing for their K12 programs. They are
public schools, “hosted” by a public school in states where they
operate and where they receive the local, state and federal funding designated for
each child in the public school system. K12 is located in Herndon,
Virginia.

Back to the news: In December of 2011, the New York Times published an
article, “Profits and Questions at Online Charter Schools,” which
primarily focused on K12 and its problems with the failing Agora Cyber
Charter School in PA, its largest. Information discovered during the
Times investigation is shocking. At Agora, 60% of the students are
behind grade level in math; 50% in reading. One third do not graduate
on time and hundreds withdraw within months of enrollment. The Times
found that “a portrait emerges of a company that tries to squeeze
profits from public school dollars by raising enrollment, increasing
teacher workload and lowering standards. The Times also found that K12
used high-pressure recruitment strategies to increase student enrollment
at all K12 schools, that K12 teachers were pressured to pass students
despite poor academic performance and that a significant number of K12
students failed to meet federal and state standards of academic
achievement.” (Stephanie Saul, “Profits and Questions at Online Charter
Schools”, New York Times, December 12, 2011.)

See also Standardized Tests Becoming Education’s Biggest Boondoggle. Ever.

Stockholders, Not Parents, Sue K12

On the heels of these stunning revelations, stockholders realized they,
too, had been misled by glowing reports of K12’s success. K12’s stock
tumbled from a high of $28.79 on December 9, 2011 to a low of $18.46 per
share by December 16, 2011.(eschool news: Online learning providers K12
faces class-action lawsuit. March 2,2012)

Perhaps it is that little voice in the back of shareholders’ minds
reminding them that K12 was created by Junk Bond King and convicted felon
Michael Milken who remains an investor, and by February a class-action
lawsuit had been filed on behalf of K12 shareholders.

Here is a link to read the entire complaint:
http://www.scribd.com/doc/79992722/Class-action-suit-against-K12-Inc

The complaint, filed in U.S. District Court for the Eastern District of
Virginia by The Shuman Law Firm of Boulder, Colorado, alleges that K12,
its CEO Ron Packard and CFO Harry Hawks, and unnamed directors violated
federal securities laws by issuing false and misleading statements
regarding K12’s business and prospects. Specifically, it is alleged
that K12 “had engaged in improper and deceptive recruiting and sales
strategies, aimed at enrolling students regardless of their ability to
successfully compete the curriculum; K12 failed to disclose
administrative pressure from upper management to pass students, despite
poor or nonexistent academic performance, so as to maintain high
enrollment levels and continued government funding; and K12 failed to
maintain its students’ math and reading performance at statewide
grade-level performance and/or according to various academic benchmarks,
K12 students chronically underperformed their peers at traditional
schools.” (Reuters: The Shuman Law Firm Announces Class Action Lawsuit
Against K12, Inc. February 24, 2012.)

It also appears a similar class action lawsuit was filed in February by
another law firm making similar allegations.(Reuters: Lieff, Cabraser,
Heimann & Bernstein LLP Announces Class Action Lawsuit Against K12 Inc.

Three additional law firms are listed on the complaint filed with the
Court.

If there is any truth in either the New York Times article or the class
action lawsuits, then parents whose children are enrolled in K12 may not
be progressing as well as their parents are being led to believe they are.

If taxpayers are paying for this deception, then they are also being
misled. According to the New York Times article, following a state audit,
Colorado Virtual Academy was ordered to reimburse the state $800,000 it had paid for
students who were not attending the school.

I think it might have been summed up best in the New York Times article
with a quote from Alex Molnar, a research professor at the University of
Colorado Boulder School of Education who remarked, “These folks [K12]
are fundamentally trying to do to public education what the banks did
with home mortgages.”

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