Citron Releases the Document that The Apollo Group (NASDAQ:APOL) Does Not Want You or the US Government to See.


Last week, The Apollo Group reported what appeared to be strong quarterly operating profits in their for-profit education business, which is primarily derived from operating the for-profit University of Phoenix (UOP below).  But before investors get too excited, Citron recommends people read the 10-Q details, which indicate the growth is more of a one-time bump than a sustainable trend.  More importantly, the company discloses a lawsuit with some troubling implications for the near future.

It seems like just another piece of every day litigation.  According to the Q:

On December 9, 2008, three former University of Phoenix students filed a complaint against Apollo Group, Inc. and The University of Phoenix, Inc. in the United States District Court for the Eastern District of Arkansas. The complaint alleges that with regard to students who dropped from their courses shortly after enrolling, University of Phoenix improperly returned the entire amount of the students’ federal loan funds to the lender. The students purport to be bringing the complaint on behalf of themselves and a proposed class of similarly-situated student loan borrowers.”


Apollo Class Action (PDF)

What seems to be merely a lawsuit against the institution by some disgruntled students is actually MUCH MORE MATERIAL and cannot be overlooked.   Here’s why:
Before discussing, it is important to note that Title IV loans are the backbone of the revenue stream for the entire for-profit education industry.  Apollo derives over 77% of their revenue from these loans, and is the largest single recipient of student loan funds in the country.

As such, institutions receiving Title IV funding are required to meet a variety of regulations, including a cap on the ratio of government loan funds to cash revenue (the “90% – 10% rule”), limits on defaulted loans extended to their students (the so-called Cohort Default Rate), and other regulatory requirements on financial status and academic standards.  Institutions that violate these requirements risk losing their Title IV accreditation, which for a company like Apollo, could be devastating by their own admission.

This class action represents a group of students who withdrew shortly after enrolling at The University of Phoenix.  Each student was enrolled long enough to incur pro-rata tuition and costs that UOP should have been paid from the student’s already-approved federal student loan.  In each case, although UOP had already received the student’s loan proceeds, they refunded 100% of it to the government, and opted instead for the far less lucrative path of trying to collect directly from the student, employing such tactics as collection agents and credit report dunning, while pressing for accelerated terms far more onerous than the terms of the student’s government-backed loan had been.

So here’s the question:  why would the UOP surrender cash in hand that is rightfully theirs, in exchange for a hard-to-collect receivable, plus collection costs and risks?  Why would UOP intervene in a lender/borrower relationship that they actually helped facilitate? 

Lets get this straight – the action UOP chooses here is financially worse for the company, worse for their students, and better for the US Government … in stark contrast to all the prior lawsuits and consumer complaints, you could at least see the company was acting in its own interests to increase its profits. 

Has anyone ever heard of a company voluntarily giving up money in hand for a questionable receivable?

This lawsuit lays out a rationale that describes how in the actions in question, UOP is not only trying to deceive their clients, but more importantly, the Department of Education and investors through manipulation of their reported numbers.  By removing these early-withdrawing students from their loan rolls, this lawsuit suggests understatement of Cohort Default Rates, plus other impacts on enrollments, retentions, and revenue ratios are implied.  As stated in the lawsuit

“By returning the money to the government, they are effectively prohibiting that person from being factored in their cohort default rate.  This manipulation is a clear violation of the mandates of HEA.”

Now we don’t know the full explanation of the company’s motives for this clearly illegal policy.  Nor is Citron suggesting that APOL is at immediate risk of losing their Title IV eligibility (an event which would cause devastating changes to the company’s business model.)  We can speak from experience in saying that when a business forgoes profits, it is time for investors to pay attention.

Citron also notes that according to its most recent 10-K, APOL’s current Title IV eligibility status is on a month-to-month basis, with review pending for the last year and a half.  As far as we can verify, none of their competition in the for profit education space is on the same month to month basis.

“University of Phoenix was recertified in June 2003 and its current certification for the Title IV programs expired in June 2007. However, in March 2007, University of Phoenix submitted its Title IV program participation recertification application to the Department of Education. We have been collaborating with the Department of Education regarding the University of Phoenix recertification application. Although we have submitted our application for renewal, we are continuing to supply additional follow-up information based on requests from the Department of Education. Our eligibility continues on a month-to-month basis until the Department of Education issues its decision on the application”

A third possible reason for the manipulation of numbers is the current qui tam lawsuit where the US Government accuses Apollo of false claims that costs taxpayers $500 million a year. For those who think the suit is old news and done with, we refer you to a November 10, 2008 court document which shows the government has requested that discovery demands Apollo made under the Freedom of Information Act, be denied as litigation has become a real possibility

Apollo Nov 10 (PDF)

The third, and in the opinion of Citron, most probable reason for the potential of manipulation of numbers is the fear of a new administration.  During the past 8 years under the Bush administration, Wall St. and corporate America has been able to set the regulatory agenda at the current expense of the taxpayers.  This includes private education — it is no secret to insiders that the Bush era education team has been favorable to for-profit education.  In fact, the Assistant Secretary for Post Secondary Education, the highest ranking official overseeing private for-profit schools, has been Sally Stroup, an 8 year lobbyist for the University of Phoenix. 

Count on the Obama administration to take a fresh, critical look — as the largest single recipient of Student loans in this country is a for-profit institution whose insiders have sold hundreds of millions of dollars of stock while collecting over 75% of their revenue from government guaranteed loan funds, while delivering an education of questionable value amid a history of unsavory business practices.

We’re In the Money

Thorough analysis of the company’s revenue mix and trends is a topic for a future report.  For now, we’ll just identify that the “one time bump” comes from the event described in the 10-Q:

“in May 2008, the Act increased the annual loan limits on federal unsubsidized student loans by $2,000 for undergraduate students, and also increased the aggregate loan limits on total federal student loans.”

This was a bonanza for Apollo, both in terms of revenue per student (they increased tuition immediately following the government action) as well as allowing them to increase enrollment among even more financially marginal students allowed under the higher aggregate loan limits.  Back out these effects, and “organic growth” shrinks to a fraction of the reported numbers.  The sustainability of this growth is topic one for the rest of this report.


It is the goal of Corporate America to deliver profits.  While it’s intriguing to speculate about the various theories that explain the company’s acts, the bottom line isn’t their motives, but their actions.  As fun as it might to be speculate as to why they might be employing this policy is irrelevant.  When it comes to the law, it is the action not the explanation that investors should turn their focus. When a company opts to leave easy money on the table, especially when executing company policy that’s explicitly in violation of the laws it operates under, Citron suggests that it might be prudent to look under the table.

Cautious investing to all.