Editor’s note: Trevor Aaronson is with the Florida Center for Investigative Reporting.
Executives for K12, the nation’s largest for-profit online educator, discovered in May that the Florida Department of Education had launched an investigation of the company’s practices in Seminole County. The state probe was examining whether K12 employees in Florida used teachers with improper certifications, a violation of state law, and then asked employees to cover this up.
At that time, the Virginia-based online educator launched an internal investigation. But K12, a publicly traded company, did not disclose the state investigation to its investors.
Under U.S. Securities and Exchange Commission regulations, publicly traded companies must disclose what is known as material information — any information that would affect a reasonable investor’s decision to buy, sell or hold a stock. Publicly traded companies notify investors of changes or outside developments, such as investigations or lawsuits, through an SEC public disclosure document known as a Form 8-K.
K12 did not inform investors of the Florida investigation because company officials did not believe the information was material.
Responding to a question from Florida Center for Investigative Reporting and StateImpact Florida, K12 spokesman Jeff Kwitowski issued the following statement:
The Company did not file a Form 8-K because there was no material information to report. Seminole County never brought these allegations directly to our attention or filed a complaint, nor did we receive a notice of a formal investigation by the Florida Inspector General. When we learned about the matter we proactively conducted our own internal investigation, contacted the Inspector General’s office and reported our results–which concluded that the allegations were not supported by the facts. The IG is in the process of conducting a review, and unless and until any material issues arise, it would be improper to file an 8-K. The statement issued yesterday was in response to media reports and allegations we do not believe are accurate.
But on the day FCIR and StateImpact Florida released a story documenting the scope of the state investigation of K12, the company’s stock dropped 13 percent.
Gary Aguirre, a California lawyer who was formerly an SEC investigator, said there isn’t an “iron-clad rule” about information disclosure. A company’s requirement to brief investors depends on whether the information could be considered material, a subjective process to some degree. But Aguirre said the market’s reaction Tuesday sent a clear message that the Florida investigation should have been disclosed to investors.
“If the story was accurate and the stock dropped 13 percent, the market is screaming, ‘That’s material,’ ” Aguirre said.
If government regulators suspect K12 violated securities laws, the SEC can pursue civil actions in federal court or penalties through administrative hearings.
In January, a shareholder filed a lawsuit alleging K12 provided false information to investors about student performance.