As alleged in the underlying class action complaint, Defendants artificially inflated Grand Canyon’s financial results by spinning off its formerly for-profit university, as a purportedly non-profit university, which it used as an off-balance-sheet entity to which Grand Canyon was able to funnel expenses and costs in exchange for a disproportionate amount of revenue. Defendants repeatedly made false and misleading statements to investors describing New GCU as a “non-profit” and “independent” institution, misstating Grand Canyon’s role as a third-party provider of education services, and misstating the Company’s financial results. In addition, the Company failed to disclose to investors that it had received repeated communications from the U.S. Department of Education (“DOE”) putting the agency’s approval of the spinoff in doubt.

The DOE ultimately concluded that the relationship between Grand Canyon and New GCU violated “the most basic tenet of nonprofit status—that the nonprofit be primarily operated for a tax-exempt purpose and not substantially for the benefit of any other purpose or entity.” Then, on January 28, 2020, financial analyst Citron Research published a report expanding on the DOE’s findings and citing hundreds of pages of non-public supporting documentation from Grand Canyon that Citron obtained through a Freedom of Information Act request. That report described Grand Canyon as the “educational Enron,” using a “captive non-reporting subsidiary” to “dump expenses and liabilities, while receiving a disproportionate amount of revenue at inflated margins in order to artificially inflate the stock price.” As a result of these disclosures, the price of Grand Canyon common stock declined precipitously.

Unlike a class action, brought on behalf of damaged investors, a shareholder derivative action is an action brought by a shareholder of a public company on behalf of and for the benefit of the company itself against the directors and/or officers of that company. In a derivative action, shareholders “step into the shoes” of the directors and officers of a company and bring litigation that the board would be unwilling to pursue on its own.