Oklahoma Firefighters Pension & Retirement System, et al...

Case 1:14-cv-00108-AJT-JFA Document 1 Filed 01/30/14

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UNITED STATES DISTRICT COURT I y''.-

0 2011" EASTERN DISTRICT OF VIRGINIA

ALEXANDRIA DIVISION

OKLAHOMA FIREFIGHTERS PENSION & RETIREMENT SYSTEM, Individually And On Behalf Of All Others Similarly Situated,

Plaintiff,

Case No. / ./ L/((/1O(?

CLASS ACTION COMPLAINT

V. JURY TRIAL DEMANDED

K12, INC., NATHANIAL A. DAVIS, RONALD J. PACKARD, TIMOTHY L. MURRAY, HARRY T. HAWKS, and JAMES J. RI-IYU

Defendants.

Case 1:14-cv-00108-AJT-JFA Document 1 Filed 01/30/14 Page 2 of 44 PageID# 2

TABLE OF CONTENTS

PAGE SUMMARY OF THE ACTION............................................................................................2

JURISDICTION AND VENUE............................................................................................7

PARTIES.............................................................................................................................7

FACTUAL ALLEGATIONS AND DEFENDANTS' MATERIALLY FALSE AND MISLEADING STATEMENTS AND OMISSIONS ......................................9

A. K12 And Its Proprietary Business ..................................................................9

B. K12's Dependence On Student Enrollment In Managed Public Schools ......10

C. K12 Highlights "Three Vectors" That Were Purportedly Driving "Great Growth" In Fiscal 2014 ....................................12

D. K12 Touts "Higher Growth For Fiscal 2014" Than Fiscal 2013 ...................15

E. K12 Endorses Analysts' Consensus Estimates For Fiscal 2014 Guidance .... 18

F. K12 Reveals The Truth About "Serious Missteps" And Operational Deficiencies In The Company's Enrollment Processes......22

ADDITIONAL EVIDENCE OF SCIENTER......................................................................28

LOSSCAUSATION...........................................................................................................30

APPLICABILITY OF FRAUD ON THE MARKET PRESUMPTION...............................30

THE INAPPLICABILITY OF THE STATUTORY SAFE HARBOR.................................31

CLASS ACTION ALLEGATIONS ....................................................................................32

COUNT! ............................................................................................................................ 34

COUNTII ..........................................................................................................................37

PRAYERFOR RELIEF .....................................................................................................39

JURYTRIAL DEMAND ...................................................................................................39


Plaintiff Oklahoma Firefighters Pension & Retirement System ("Plaintiff" or the

"Oklahoma Firefighters"), by its undersigned counsel, brings this action on behalf of itself

and all other similarly situated persons or entities (the "Class"), other than Defendants and

their affiliates (described herein), who purchased or otherwise acquired the publicly traded

common stock issued by Ki 2, Inc. ("K 12" or the "Company"), between March 11, 2013 and

October 9, 2013, inclusive (the "Class Period"), for violations of the federal securities laws.

Plaintiff seeks to recover damages caused to the Class by Defendants' violations of Sections

10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"). The

allegations in this Complaint are based on Plaintiffs personal knowledge as to itself and on

information and belief (including the investigation of counsel and a review of publicly

available information) as to all other matters.

SUMMARY OF THE ACTION

1. This is a federal securities class action on behalf of investors in K12 common

stock. It involves material misstatements and omissions about K12 - one of the largest

private education management organizations in the United States - regarding its

"unprecedented" student enrollment and growth prospects for fiscal 2014, including

compliance with state regulations governing enrollment.' The revelation of the truth about

K12's enrollment and compliance practices caused a staggering 38.4% drop in the price of

K12 common stock and significant investor losses on the last day of the Class Period.

2. K12 is the dominant player in the operation and expansion of virtual schools

for students in kindergarten through 12th grade - or K-12. The Company currently enrolls

more than 110,000 public school students in 33 States and the District of Columbia, and also

'K12 operates on a fiscal year that ends June 30; with the first fiscal quarter ending September 30; the second fiscal quarter ended December 31; and the third fiscal quarter ending March 31.

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serves private school students in all 50 states and more than 110 countries. KI 2's revenues

are principally derived from the "turnkey" management of its virtual public schools, which

comprise the Company's "Managed Public School" segment. Operating those "Managed

Public Schools" generates approximately 90% of the Company's revenues annually.

3. Typically, in order to earn revenue in its Managed Public School segment,

K12 contracts with a school district or non-profit school board to provide across-the-board

services - including hiring and recruiting teachers, providing the curricula, laptops, software

systems, and handling all administrative duties. The vast majority of the students enrolled

in K12's Managed Public Schools attend by logging in to online lessons in a "cyber"

classroom. As a result, the majority of K12's Managed Public Schools enjoy all the

financial benefits of traditional brick-and-mortar schools, but without the need to supply

busing, athletics, meals, arts and music, etc., much less a physical building requiring upkeep

and maintenance.

4. Since its IPO in 2007, K12 has widely been valued by Wall Street for its rapid

and consistent growth. In the five-year period preceding the Class Period, K12's reported

revenues skyrocketed, increasing by approximately 35% annually. Significantly, K 12's

revenues depend primarily on student enrollment because states determine school district

funding levels based on student enrollment counts. Most states assess student enrollment at

a single point in time, or "count date," .jusually in October. Accordingly, K12 has

historically issued full-year revenue guidance only after reviewing fall enrollment data in -

October.

5. In the months preceding the Class Period, however, K12 became subject to

increasing criticism and regulatory scrutiny - with instances of low graduation rates

-3. -


reported by the National Education Policy Center (July 2012); news of teachers lacking the

requisite certifications leading to an investigation by the Florida Department of State

(September 2012), and a major school district in Colorado that tempered its partnership with

the Company (February 2013).

6. Against this backdrop, in order to reassure investors that K12 was weathering

these storms without hampering its ability to rapidly grow, during the Class Period the

Company broke from its own practice by endorsing analysts' consensus estimates for full

fiscal 2014 financial guidance and falsely touted its student enrollment prospects and

"serious" attention to regulatory compliance.

7. On March 11, 2013, the Company's Founder and CEO, Ronald Packard,

explained at an industry conference that K12 is a "rare" breed of "growth company" because

it has "no asymptote in sight." 2 Later that day and throughout the Class Period, Defendant

Packard continued to tout "great growth for the 2014 year," noting that the "business

development environment" for K12 was "as good as we've ever had it." Indeed, on May 3,

2013, Packard publicly emphasized that K12 was "on track to have one of the best business

development years" in the Company's history, which was supposed to "drive even higher

growth for fiscal 2014."

8. Furthermore, on August 29, 2013, Executive Chairman Nate Davis discussed

the Company's ongoing "significant marketing efforts" to "capture. . . new enrollments" for

fiscal 2014 in order to ensure year-over-year revenue growth. That same day, K12's newly

minted CFO, James Rhyu, expressed "comfort[]" with analysts' consensus estimates for

fiscal 2014 financial guidance. Significantly, analysts' consensus estimates included

2 The term "asymptote" means a straight line associated with a curve that moves along an infinite branch of the curve.

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estimated fiscal 2014 revenues of $986.8 million - translating to annual growth of 16.3% in

fiscal 2014.

9. Financial analysts immediately seized upon Defendants' positive statements

about fiscal 2014, interpreting them as endorsing aggressive enrollment estimates and a sign

that fiscal 2014 would be just as profitable for K12 as fiscal 2013. In fact, as a result of

Defendants' statements affirming consensus estimates for K12's fiscal 2014 financial

guidance on August 29, 2013, the Company's stock price increased by more than 11%,

reaching a Class Period high of $35.50.

10. However, just weeks later, K12 reversed course. In a press release filed with

the Securities and Exchange Commission (the "SEC") on a Form 8-K after the close of

trading on October 8, 2013 (the "October 8 Form 8-K"), the Company disclosed that its

actual fiscal 2014 revenue guidance was $905-$925 million - not the $986.8 million figure

endorsed weeks earlier - because 2014 "enrollments" were well "below" the levels that

investors were told to expect, due to critical operational and performance deficiencies at

enrollment centers that prevented the Company from converting student applications into

student enrollments for fiscal 2014.

11. In fact, as the Company only later admitted on a special conference call to

discuss its fiscal 2014 financial guidance (the "FY20 14 Guidance Call"), when Defendants

endorsed analysts' consensus estimates, they knew that K 12's fiscal 2014 guidance would

fall far short of those estimates due to "self-inflicted La., the "Company's.

inability to convert the increased volume of student applications into enrollments at a level

achieved during previous years due to performance in its enrollment centers." Specifically,

between March and June 2013, Defendants admitted that K12 received 9% fewer


applications than it had during that same period one year earlier - indicating substantially

lower fiscal 2014 student enrollments early in the enrollment season - and that the Company

had also "made some serious missteps" later in the "enrollment season."

12. In fact, K12 has now admitted that, during the Class Period, Defendants knew

their assurances about increasing enrollments in fiscal 2014 were misleading because they

had failed to timely invest in and commence promotional efforts to enroll new students. In

particular, K12 admitted that it "didn't have the correct staffing model in place at [its]

enrollment centers to handle the timing and the volume of [student] applications." This was

caused in part by the fact that K12's "own "promotional program started later than it should

have." Those admitted facts directly contradict the Company's prior representations about

K12 having effective and "significant marketing effort[s]" with the aim of capturing "new

enrollments" in fiscal 2014.

13. In addition, KI 2 has now admitted that the Company failed to "appropriately"

factor into its "capacity planning model for the enrollment centers" certain "new compliance

requirements" in "a number of states," meaning that there were additional steps regulators

imposed in the enrollment process that K12 improperly ignored. In other words, during the

Class Period, K12 was suffering from a self-described critical "management issue" that

required the Company to "dig" itself out of a deep "hole" because - in direct contrast to the

Company's Class Period representations that K12 was on track to meet the investment

community's expectations about student enrollment and growth - K12 did not maintain

sufficient controls to detect then-existing, material operational deficiencies at its enrollment

centers.

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14. As a result of the corrective disclosure about K12's fiscal 2014 financial

guidance in the October 8 Form 8-K, the Company's common stock plummeted by 38.4%,

declining to an eight-month low of $17.60 on October 9, 2013.

15. This action seeks to recover the damages caused by Defendants' misconduct.

JURISDICTION AND VENUE

16. The claims asserted herein arise under and pursuant to Sections 10(b) and

20(a) of the Exchange Act [15 U.S.C. §§ 78j(b) and 78t(a)] and Rule I0b-5 promulgated

thereunder by the SEC [17 C.F.R. § 240.1Ob-5]. This Court has jurisdiction over the subject

matter of this action pursuant to 28 U.S.C. § 1331 and Section 27 of the Exchange Act [15

U.S.C. § 78aa].

17. Venue is proper in this District pursuant to Section 27 of the Exchange Act,

and 28 U.S.C. § 1391(b).

18. In connection with the acts alleged in this Complaint, Defendants, directly or

indirectly, used the means and instrumentalities of interstate commerce, including, but not

limited to, the mails, interstate telephone communications, and the facilities of the national

securities markets.

PARTIES

19. Plaintiff Oklahoma Firefighters is a public pension fund that holds more than

$2 billion in net assets for the benefit of over 23,000 members who have actively

participated in firefighting activities in the state of Oklahoma since 1981. As set forth in the

certification attached hereto as Exhibit A, Plaintiff Oklahoma Firefighters purchased K12

common stock during the Class Period and suffered damages as a result of the violations of

the federal securities laws alleged herein.

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20. Defendant K12 is a technology-based education company incorporated in

Delaware, with corporate headquarters located at 2300 Corporate Park Drive, Herndon,

Virginia. During the Class Period, K12's common stock traded on the New York Stock

Exchange ("NYSE") under the ticker symbol "LRN."

21. Defendant Nathanial A. Davis ("Davis") joined K12 in June 2012 and served

as the Company's Executive Chairman at all relevant times during the Class Period.

Defendant Davis assumed his current responsibilities as Executive Chairman in January

2013, overseeing all operational and corporate functions of the Company. Defendant Davis

was a direct and substantial participant in the fraud.

22. Defendant Ronald J. Packard ("Packard") founded K12 in 2000 and served as

the Company's CEO at all relevant times during the Class Period. Defendant Packard was a

direct and substantial participant in the fraud.

23. Defendant Timothy L. Murray ("Murray") joined K12 in April 2012 and

served as the Company's President and Chief Operating Officer at all relevant times during

the Class Period. Defendant Murray was a direct and substantial participant in the fraud.

24. Defendant Harry T. Hawks ("Hawks") joined K12 in May 2010 and served as

the Company's Executive Vice President and CFO until his resignation effective June 30,

2013 (initially announced in April 2013). Following his resignation, Defendant Hawks

agreed to serve as a consultant through the new CFO's training, transition, and beyond.

Defendant Hawks was a direct and substantial participant in the fraud.

25. Defendant James J. Rhyu ("Rhyu") joined K12 in May 2013 and served as the

Company's Executive Vice President and CFO following Defendant Hawks' resignation as

of July 1, 2013. Defendant Rhyu was a direct and substantial participant in the fraud.


26. Defendants Davis, Packard, Murray, Hawks, and Rhyu are collectively

referred to herein as the "Individual Defendants." The Individual Defendants, together with

K12, are collectively referred to herein as the "Defendants."

FACTUAL ALLEGATIONS AND DEFENDANTS' MATERIALLY FALSE AND MISLEADING STATEMENTS AND OMISSIONS

A. K12 And Its Proprietary Business

27. K12 was founded by Defendant Packard in 2000 "to utilize advances in

technology to provide children with access to a high-quality public school education

regardless of their geographic location or socio-economic background." Given the

geographic flexibility of technology-based education, K12 supposedly pursues "this

mission [to] help address the growing concerns regarding the regionalized disparity in the

quality of public school education, both in the United States and abroad."

28. To further its purported "mission," K12 offers proprietary curriculum,

software systems, and educational services designed to facilitate individualized learning for

students primarily in kindergarten through 12 1h grade. Since the Company's inception, K12

has invested approximately $330 million to develop and, to a lesser extent, acquire

curriculum and online learning platforms that promote core concepts and skills for students.

This learning system combines the Company's curriculum and offerings with an

individualized learning approach that is designed for virtual and blended public schools,

school district online programs, public charter schools, and private schools that utilize

varying degrees of online and traditional classroom instruction, and other educational

applications.

29. In contracting with a virtual or blended public school, the Company typically

provides students with access to the K12 online curriculum, offline learning kits, and the

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use of a personal computer in certain cases, in addition to providing management services.

As of October 31, 2013, the Company provided management services to public schools in

33 states and the District of Columbia. 3 In addition, the Company works closely with a

growing number of public schools, school districts, private schools, and public charter

schools enabling them to offer their students an array of solutions, including full-time

virtual programs, semester courses, and supplemental solutions. The Company also

provides teacher training, teaching services, and other support services.

30. K12 provides the forgoing products and services through three lines of

business: (i) Managed Public Schools; (ii) Institutional Sales; and (iii) International and

Private Pay Schools. The Company's core operations and revenues, however, are heavily

concentrated in the Managed Public Schools segment. For instance, contracts with K12's

Managed Public Schools accounted for approximately of the Company's revenues in

fiscal 2013 (ended June 30, 2013). Accordingly, K12 acknowledges in its SEC filings that

the Company's revenues are concentrated in the Managed Public Schools segment and that

Managed Public Schools "will continue to represent the majority of [K 12's] total revenues"

for the foreseeable future.

B. K12's Dependence On Student Enrollment In Managed Public Schools

31. K12's revenues are directly linked to student enrollment at the Company's

Managed Public Schools. In the Company's Form 10-K for fiscal 2013 (ended June 30,

2013) filed with the SEC on August 29, 2013 (the "2013 Form 10-K"), the Company

These states include: Alaska, Arizona, Arkansas, California, Colorado, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New Mexico, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin, and Wyoming.

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"define[s] an enrollment as a student using [its] curriculum" and even "count[s] each half-

day kindergarten student as an enrollment."

32. Because sessions at K12's Managed Public Schools generally begin in

September and end in May, to ensure that all schools are reflected in K12's "measure of

enrollments," the Company considers "the number of students on the last day of September

to be [its] opening enrollment level, and the number of students enrolled on the last day of

May to be [its] ending enrollment level." Additionally, because K12's revenues are so

inextricably linked to student enrollment at its Managed Public Schools, K12 represents

that it "continually evaluate[s] [its] enrollment levels by state, by school and by grade" by

"track[ing] new student enrollments and withdrawals throughout the year."

33. Moreover, K12 represents that it "continually evaluate[s] [its] trends in

revenues by monitoring the number of student enrollments in total, by state, by school and

by grade, assessing the impact of changes in school funding levels and the pricing of [its]

curriculum and educational services." Given the close relationship between student

enrollment at K12's Managed Public Schools and the Company's revenues, the growth rate

of K12's Managed Public School enrollments generally tracks the Company's annual rate

of revenue growth.

34. As further described in the Company's 2013 Form 10-K, K12's "revenue

growth depends upon the following" factors, among others, all of which drive student

enrollment at K 12's Managed Public Schools: (i) "the number of states and school districts

in which [K12] operates"; (ii) the "restrictive terms of local laws or regulations, including

enrollment caps"; and (iii) the "effectiveness of [K12's] marketing and recruiting

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programs." As a result, investors and financial analysts closely follow the Company's

public statements about these issues.

C. K12 Highlights "Three Vectors" That Were Purportedly Driving "Great Growth" In Fiscal 2014

35. On the first day of the Class Period, March II, 2013, Defendant Packard

attended the Credit Suisse Global Services Conference (the "March 11 Conference"). At

the March 11 Conference, Defendant Packard highlighted K12's enrollment and growth

prospects for fiscal 2014. First, Packard explained how "K12 really grows" its "core

business," noting that there was not a single growth impediment - or "asymptote" - in

sight:

So we've had an excellent business development year. In the past year, we've added three new states. We've removed caps in several states and we've added some flex schools. And K12 really grows the core business three ways. One is by adding new states. One is by removing enrollment limitations in states we're currently operating in. And then, third is just organic same-state growth. So we have three vectors.

* * * One of the great things about K12, and at its heart, K12 is a growth company. And it's rare, I think, you see a growth company that has really no asymptote in sight.

36. Defendant Packard's statements at the March II Conference quoted in 135

were materially false and misleading. In reality, contrary to these public representations

about growth without an "asymptote in sight," K1 2's growth prospects were limited and

impeded by the Company's failure to timely invest in promotional efforts to enroll new

stud16e 0 t4. As the Company disclosed at the end of the Class Period, K12's

"own promotional program started later than it should have, and drove more leads and

applications later in the summer instead of early in the summer" when it was too late for the

Company to convert the applications into student enrollments for fiscal 2014. In addition,

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K12's growth prospects were hampered by the Company's failure to consider and adhere to

legal compliance requirements affecting student enrollment. As the Company further

acknowledged, K12 failed to "appropriately" consider increased compliancy requirements

that were applicable in certain states in the fiscal 2014 enrollment season.

37. After setting forth the "three vectors" at the March 11 Conference that drive

K12's supposedly limitless growth, Packard proceeded to assure investors that the Company

was "very optimistic" about "great growth for the 2014 year" in light of new schools, new

charters, and enrollment "cap expansion" in certain states. In particular, Packard stated the

following at the March 11 Conference:

And I mentioned our business development success. This coming fall - last year, we had a great year. Michigan has been raising its [enrollment] cap from 1,000 to 10,000, so in addition to our normal growth, we have that cap expansion. And that provides great growth for the 2014 year, for the 2013- 2014 year.

So we're very optimistic about the ability to continue to grow, both on organic growth, but also the business development environment.. . . We expect the New Jersey virtual school to open in the fall of 2014. We have six charters approved in Florida, so the business development environment is as good as we've ever had it.

38. Defendant Packard's statements at the March 11 Conference quoted in 137


about the business development environment being "as good as we've ever had it," K12's

growth prospects were limited and impeded by the Company's failure to timely invest in

promotional efforts to enroll new students in fiscal 2014. As the Company disclosed at the

end of the Class Period, K 2's "own promotional program started later than it should have,

and drove more leads and applications later in the summer instead of early in the summer"

when it was too late for the Company to convert the applications into student enrollments

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for fiscal 2014. In addition, K12's growth prospects were hampered by the Company's

failure to consider and adhere to legal compliance requirements affecting student

enrollment. As the Company further acknowledged, K12 failed to "appropriately" consider

increased compliancy requirements that were applicable in certain states in the fiscal 2014

enrollment season.

39. In addition to touting the Company's fiscal 2014 growth prospects at the

March 11 Conference, Packard also explained that K12 prescribed to a corporate culture that

took regulatory compliance "very seriously." Specifically, he noted that K12 operates in a

"highly, highly regulated environment," with schools "operating under 34 different state

auditing regimes with different rules and regulations, different standards," and emphasized

that K12 "is a Company that takes [] compliance very seriously and tries to be way above

the bar because of the [regulatory] scrutiny."

40. Defendant Packard's statements at the March 11 Conference quoted in ¶39


about taking compliance "very seriously" and K12 being "way above the bar," K12's

operations were significantly hindered by the Company's failure to adequately consider and

adhere to legal compliance requirements affecting student enrollment in numerous states.

As the Company acknowledged at the end of the Class Period, "there were some new

compliance requirements that [KI 2] did not factor" into its "capacity planning model for the

[Company's] enrollment centers" in fiscal 2014, even though Defendants were aware of

those increased enrollment requirements in numerous states. Despite these internally known

failures, however, Defendants continued to tout K 12's fiscal 2014 growth prospects.

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D. K12 Touts "Higher Growth For Fiscal 2014" Than Fiscal 2013

41. On May 3, 2013, K12 issued a press release reporting its financial results for

the third fiscal quarter of 2013 (ended March 31, 2013), which significantly beat analysts'

expectations. The Company reported revenues of $218 million, an increase of 22.3%;

EBITDA of $35.6 million, an increase of 35.9%; operating income of $19.4 million, an

increase of 67.2%; net income attributable to common and Series A stockholders of $12

million, an increase of 71.4%; and earnings per share ("EPS") of $0.31, an increase of

72.2%.

42. Later that day, K12 held an earnings conference call to discuss the

Company's financial results for the third fiscal quarter of 2013 (the "Q3FY2013 Call").

On the Q3FY2013 Call, Defendant Hawks - who had resigned the month before and was

slated to leave the following month - made positive statements about the Company's

revenue prospects for fiscal 2014. In particular, Packard noted that K12 was "on track to

have one of the best business development years" in the Company's history, which he

reinforced with data about "expansion" and increasing "enrollment caps."

43. More specifically, Packard stated the following on the Q3FY2013 Call:

We are on track to have one of the best business development years in our history. As many of you know, our growth rate can be significantly increased by new schools, and expansion of enrollment and caps in cap states.

For the upcoming fall, we have already secured cap expansion of 12,800 additional enrollment slots. This is dramatically larger than anything we have ever experienced previously, and amounts to 10% of this year's full-time enrollment in managed schools. Furthermore, we believe there is a strong possibility of additional cap expansion. While there is no guarantee that we will fill all of these slots, the pent up demand, referral network, and existing school infrastructure, make these slots easier to fill than slots for students in new states.

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With regard to new states, we anticipate New Jersey will open this fall, and we are still working on additional states. If we add more states, or experience additional cap expansion, this will impact our marketing spend in the fourth quarter of fiscal 2013 and drive even higher growth for fiscal 2014.

44. Defendant Hawks' statements on the Q317Y2013 Call quoted in ¶43 were

materially false and misleading. In reality, contrary to these public reassurances about the

"best business development year[] in [K]2's] history" driving "even higher growth for

fiscal 2014," K12's growth prospects were limited and impeded by the Company's failure

to timely invest in promotional efforts to enroll new students in fiscal 2014. As the

Company later disclosed, K12's "own promotional program started later than it should

have, and drove more leads and applications later in the summer instead of early in the

summer" when it was too late for the Company to convert the applications into student

enrollments for fiscal 2014. Indeed, as the Company only later disclosed, during the period

between March 2013 and June 2013, K12 received 9% fewer applications than it had

during that same timeframe one year earlier, representing a material decline in student

applications for fiscal 2014. In addition, K12's growth prospects were hampered by the

Company's failure to consider and adhere to legal compliance requirements affecting

student enrollment. As the Company further acknowledged, K12 failed to "appropriately"

consider increased compliancy requirements that were applicable in certain states in the

fiscal 2014 enrollment season.

45. Nevertheless, financial analysts reacted favorably to Defendant Hawks'

statements about the Company's "higher growth" prospects in fiscal 2014 based on

Defendants' misstatements. BMO Capital Markets analysts, for example, issued a research

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report later in the day on May 3, 2013, highlighting Hawks' statements on the Q3FY2013

Call, stating:

This note follows up on this morning's reported FY3QI3 EPS of $0.31 vs. $0.18 - well above the consensus $0.23 and our $0.21 estimates. . . . While we were a bit surprised as to the tempered guidance following such a strong FY3Q, much of it was explained by additional marketing spending in FY4Q 13, as the company ramps up for what management calls "one of the best business development years" in its history, with raised enrollment caps and potential new charters.

* * *

Business development for FY20 14. Management stated the company is on track to have one of the "best business development years" in its history, including:

• Enrollment caps are slated to rise in Michigan (from 1,000 to 10,000 students) and 2 other states, adding a total potential of 12,800 new seats.

• Six new charter applications have been approved where the company has a management contract in place and are waiting for final charter contracts with the applicable districts. Four of these are in Florida, and one each in South Carolina and Kansas.

• Management believes its New Jersey school which had been deferred should open for the FY20 13-14 school year.

46. Given the favorable market reaction to the forgoing statements on the

Q3FY2013 Call about K 2's growth rate being "significantly increased by new schools, and

expansion of enrollment and caps in cap states," Defendants continued to tout K12's fiscal

2014 enrollment and growth prospects, going so far as to endorse analysts' consensus

estimates of 16.3% annual revenue growth, even though the Company was aware of data

indicating a material decline in the number of fiscal 2014 student applications - including

the fact that, as of June 30, 2013, K12 had received 9% fewer applications than it had by

that time the preceding year.

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E. K12 Endorses Analysts' Consensus Estimates For Fiscal 2014 Guidance

47. On August 29, 2013, K12 issued a press release reporting "very strong"

financial results for the full fiscal 2013 year (ended June 30, 2013), which again beat

analysts' consensus estimates. The Company reported revenues of $848.2 million,

translating to nearly 20% annual growth, primarily due to an increase in average student

enrollments and an increase in average revenue per student in K12's Managed Public

Schools; EBITDA of $111.4 million, an increase of 28%; operating income of $45.7

million, an increase of 57.6%; net income attributable to common and Series A stockholders

of $28.1 million, an increase of 60.6%; and EPS of $0.72, an increase of 60%.

48. Later that day, K12 held its earnings conference call for the full fiscal 2013

year (the "FY2013 Call"). On the FY2013 Call, Defendants touted the Company's

"financial accomplishments" in fiscal 2013 - including revenue growth of nearly 20%,

primarily due to an increase in student enrollments. Thereafter, Defendant Packard

reiterated that he was "particularly pleased to report an extraordinary business development

year." In addition, with an eye to an even more profitable fiscal 2014 than fiscal 2013,

Defendant Packard provided new details about "unprecedented" student cap expansions

and new K12 school openings. Specifically, Packard stated the following on the FY2013

Call:

First and foremost we had an unprecedented year with regard to cap expansion. Between Michigan, Arkansas, Georgia and Texas, we secured cap expansions of close to 17,000 additional enrollment slots. While we do not expect to fill all thësc slots this fall, it speaks to the growth opportunity in future years. It is also important to note the magnitude of cap expansions in some of these states offer enrollment potential comparable to entry into a new state.

Second, we are opening 10 new schools this year. We currently have assigned management contracts in place with each of these charter schools and all charter contracts are either completed or we are currently assisting

18


the nonprofit boards in negotiating the charter contracts with the applicable school district. Florida is particularly exciting as we're adding new schools in Palm Beach, Broward, Pasco and Duval counties and we hope to launch Panela the next school year. Some of these counties have more children than a small state. Additionally, we've added new charters in Kansas, Michigan and South Carolina and also added a new Insight School in Ohio. Finally, we are launching the Colorado Preparatory Academy this fall, the third public school we are managing in Colorado this school year.

49. Defendant Packard's statements on the FY2013 Call quoted in 148 were

materially false and misleading. In reality, contrary to these public reassurances about the

"growth opportunity" in 2014, K1 2's growth prospects were limited and impeded by the

Company's failure to timely invest in promotional efforts to enroll new students in fiscal

2014. As the Company disclosed at the end of the Class Period, K12's "own promotional

program started later than it should have, and drove more leads and applications later in the

summer instead of early in the summer" when it was too late for the Company to convert

the applications into student enrollments for fiscal 2014. Indeed, as the Company only

later disclosed, during the period between March 2013 and June 2013, K12 received 9%

fewer applications than it had during that same timeframe one year earlier, representing a

material decline in student applications for fiscal 2014. Moreover, K12 did not have

adequate "school-by-school planning tools" or a "staffing model in place" at the

Company's enrollment centers sufficient "to handle the timing and the volume of' student

applications, hampering K12's ability to enroll students at its Managed Public Schools in

fiscal 2014. Furthermore, K 12's growth prospects were limited by the Company's failure to

consider and adhere to legal compliance requirements affecting student enrollment. As the

Company further acknowledged, K12 failed to "appropriately" consider increased

compliancy requirements that were applicable in certain states in the fiscal 2014 enrollment

season.

19


50. In addition to Defendant Packard's remarks about already-secured cap

expansion and new schools and charters, Defendant Rhyu also addressed K12 investors on

the FY2013 Call for the first time since taking over as CFO for Defendant Hawks.

Critically, Defendant Rhyu endorsed analysts' consensus estimates for K12's fiscal 2014

financial guidance - including estimated revenues of $986.8 million (indicating 16.3%

growth) - stating:

Now I want to provide you with some insight regarding our intentions related to fiscal 2014 guidance. As was the case last year, we plan to issue full-year guidance after reviewing fall enrollment data, likely the week of October 14.. .. And while we're not issuing guidance on the call today, we are comfortable with the fiscal 2014 estimates posted to First Call through yesterday as follows - revenue of $986.8 million: EBITDA of $133.5 million; EBIT of $62.8 million, net income of $36.2 million: and EPS of $0.95 a share. As you know, these estimates and our ability to achieve these figures are contingent on our final enrollment numbers which will not be available until October.

51. Defendant Rhyu's statements on the FY2013 Call quoted in 150 were

materially false and misleading. In reality, Defendants possessed data that directly

contradicted the analysts' consensus estimates that Rhyu publicly affirmed. Indeed, as K12

only later disclosed, during the period between March 2013 and June 2013, K12 received

9% fewer applications than it had during that same timeframe one year earlier, representing

a material decline in student applications for fiscal 2014. Moreover, as the Company only

later acknowledged, K12 did not have adequate "school-by-school planning tools" or a

"staffing model in place" at the Company's enrollment centers sufficient "to handle the

timing and the volume of' student applications, hampering K12's ability to enroll students

at its Managed Public Schools in fiscal 2014. Furthermore, K12 had also failed to

implement a sufficient "early warning system" to detect operational failures in the

enrollment process, prompting a "serious" deficiency in the Company's operational

20


controls. Defendants also knew that K1 2's growth prospects were limited and impeded by

the Company's failure to timely invest in promotional efforts to enroll new students in fiscal

2014. As the Company disclosed at the end of the Class Period, K12's "own promotional

program started later than it should have, and drove more leads and applications later in the

summer instead of early in the summer" when it was too late for the Company to convert the

applications into student enrollments for fiscal 2014.

52. Nevertheless, financial analysts and investors interpreted Defendant Rhyu's

express endorsement of analysts' estimates to mean that K12's fiscal 2014 revenues would

translate into 16.3% year-over-year revenue growth. For instance, BMO Capital Markets

analysts issued a report later in the day on August 29, 2013, raising their K12 estimates and

stating:

Management did not provide FY20 14, though stated it was comfortable with the following consensus estimates for FY2014:

. Revenues of $986.8 million, implying 16.3% v/v growth

. EBITDA of $133.5 million, implying margins of 13.5% versus 13.1% in FY20 12

. EBIT of $62.8 million, implying margins of 6.4% versus 5.4% in FY2012

• Net income of $36.2 million, implying margins of 3.7% versus 3.3% in FY2012

• EPS of $0.95, implying 32% y/y growth....

[W]e are raising our FY2014 EPS estimate to $0.95 from $0.93.

53. Similarly, analysts at Wells Fargo Securities issued a report after the FY2013

Call, highlighting the Company's endorsement of analysts' consensus estimates:

21


Management stated that it was comfortable with current FY20 14 consensus analyst estimates posted on First Call as follows: revenue of $986.8 million, EBITDA of $133.5 million, EBIT of $62.8 million, net income of $36.2 million and EPS of $0.95. The company's ability to achieve these estimates is contingent on final enrollment numbers, which will not be available until October.

* * *

Enrollment cap expansion should be a large driver of growth during FY20 14.

• The company has secured cap expansions of close to 17,000 additional enrollment slots. Management does not expect to fill all of those slots this fall.

• K12 plans to open 10 new schools this year, including four schools in Florida in Palm Beach, Broward, Pasco and Duval Counties. The company hopes to open a school in Pinellas County next year. New charters are also expected to open in Kansas, Michigan, South Carolina, Colorado and Texas, as well as a new Insight School in Ohio.

• During FY20 13, the company renewed contracts with more than 20 schools.

54. Six weeks after the market warmly received K 12's endorsement of analysts'

consensus estimates for fiscal 2014, the Company belatedly backtracked and disclosed

"serious missteps" and operational deficiencies in connection with its enrollment processes

in fiscal 2014.

F. K12 Reveals The Truth About "Serious Missteps" And Operational Deficiencies In The Company's Enrollment Processes

55. On October 8, 2013, K12 shocked the market when it disclosed that its actual

fiscal 2014 revenue guidance was $905-$925 million, not $986.8 million. Specifically, K12

disclosed the following in the October 8 Form 8-K:

The Company expects full fiscal year revenues in the range of $905 million to $925 million and full year operating income in the range of $53 million to $57 million....

jWJe believe the increase in Managed Public School enrollments fell short of internal expectations due to several factors, which include, among others:

22


• The Company's inability to convert the increased volume of student applications into enrollments at a level achieved during previous years due to performance in its enrollment centers and, to a lesser extent;

The delayed start of the open enrollment period for certain schools.

56. As a result of this news, K1 2's common stock dropped 38.4%. from a closing

price of $28.59 on October 8 to a closing price of $17.60 on October 9, 2013.

57. The news completely surprised the investment community, especially given

Defendants' endorsement of analysts' consensus estimates just weeks before. For instance,

Morgan Stanley analysts issued a report on October 9, 2013, entitled "Fall Enrollments

Disappoint, Cutting Estimates And Target," stating:

A miss on fall enrollments drives a disappointing F14 outlook. Though management had not yet provided formal guidance for F14, on August 29 it highlighted its comfort with consensus estimates, which at the time were $987M rev, $133.5M EBITDA and $62.8M EBIT. Yesterday's preannouncement is well below these figures and is attributed to weak conversion trends at enrollment centers and the delayed start of the open enrollment period, for certain schools.

58. Similarly, analysts at Wells Fargo Securities issued a report on October 10,

2013, entitled "Thoughts On Valuation, Response To A 38.4% Decline In Share Price,"

stating the following in relevant part:

LRN shares declined more than 38% yesterday (10/9) vs. a comparable 0.06% increase in the S&P in response to pre-announced managed school enrollment growth of 5.7% for the 2013-2014 school year, which was well below investor expectations. . . . The decline took place in an information vacuum; with management deferring all substantive questions until its Thursday (10/10) post-close conference call. .

On Thursday, management will likely be asked in particular to explain how the end enrollment result could differ so materially from expectations it articulated on a [August 29, 20131 investor call.

59. Two days later, the Company held the FY20 14 Guidance Call to provide

additional details. On the FY2014 Guidance Call, Defendants made damning admissions

23


that confirm their Class Period statements about enrollment growth and regulatory

compliance were materially false and misleading. As an initial matter, Defendant Davis

acknowledged that the Company had made "some serious missteps" in connection with the

enrollment process for the fiscal 2014 school year, stating:

2014 enrollments were well below our expectations, and we made some serious missteps this enrollment season. While I'm going to describe some of the issues, I want to be crystal clear about the message that I'm sending today. This is a management issue, not an issue of market demand, and we take full responsibility.

60. Subsequently, Defendant Davis elaborated on three reasons underlying these

"serious missteps."

61. First, Davis discussed the material declines in applications between March

2013 and June 2013, as well as the Company's inadequate staffing model and belated

marketing efforts for the fiscal 2014 year:

Let me highlight some of the operational issues we faced this year to convert our increased application volume into enrolled students.

First, we didn't have the correct staffing model in place at our enrollment centers to handle the timing and the volume of applications. During March to June of 2013, we received 9% fewer applications than we did during the timeframe one year earlier in 2012. However, from July to September, we received 25% more applications versus the same period in 2012. And to top it off, August was our strongest application month through those seasons.

Now, part of this was caused by the fact that our own promotional program started later than it should have, and drove more leads and applications later in the summer instead of early in the summer. In the face of that trend, we did not balance our resources appropriately. And we focused too much on converting leads, or family inquiries, to applications early in the process. And this shortened the time that we had to help parents with all of the documentation required to complete the enrollment.

62. Second, Defendant Davis explained on the FY2014 Guidance Call that the

Company's enrollment shortfall was due to a failure to account for "new compliance

24


requirements," stating: "Second, there were some new compliance requirements that we did

not factor in appropriately into our capacity planning model for the enrollment centers."

63. Third, Defendant Davis explained on the FY2014 Guidance Call that there

were internal operational failures affecting the Company's ability to sufficiently allocate

and reallocate resources where they were most needed during the fiscal 2014 enrollment

season, stating:

Third, we did not react quickly enough to changes that occurred during the enrollment season to effectively reallocate resources to states where we had the greatest capacity to accept new applications. For example, as the opening of one of our new schools became delayed by almost 3 months, we did not shift away in time to try and compensate for that delay in another school. Another example is that we spent enrollment center hours with over 1500 applications in a school that ultimately wasn't allowed to open this fall. In short, we spent too many hours in the wrong states.

64. In addition, Defendant Davis also noted on the FY2014 Guidance Call that,

even though the issues facing the Company were nothing new, they nevertheless had

"significant" negative impacts on the Company's bottom line:

All of these issues taken individually aren't new situations we haven't faced before. But it was the confluence of so many issues in a single enrollment season that caught us unprepared. The net impact of the lower conversion rate was significant.

65. Critically, moreover, Defendant Davis confirmed on the FY2014 Guidance

Call that the timing of the "operational issues" that plagued K1 2's enrollment processes

were ongoing at the time of the FY2013 Guidance Call, and that K12 was aware of "some

issues" even earlier than that:

Through the latter part of August, the last week in August, all the way through the end of September and into the first week in October, we were not able to get the conversion rate. And while we saw some issues early, those issues we thought were issues that we were correcting and would all be corrected in the September timeframe. And obviously that didn't happen.

25


It's convergence of all these factors that came together at the same time. Number one, we didn't spend as much on the promotional efforts and start the promotion efforts early enough in the year. And that pushed more enrollments and more applications and leads all into the August and September timeframe. And it overwhelmed us in that August and September timeframe. Our model just didn't have enough people and enough process in place to do that. . . . [The] process simply overwhelmed us this year. We did not have the right model. And, yes, there were changes at the top, so I take full responsibility. This is not on anybody else; it's on my leadership.

66. Echoing Defendant Davis, Defendant Rhyu also made the following

admission on the FY2014 Guidance Call: "And so we have a little bit of a hole we're

digging ourselves out of. Part of that hole relates to the self-inflicted problems that Nate

[Davis] described earlier."

67. In addition to the forgoing admissions on the FY2014 Guidance Call,

Defendant Davis discussed the corrective actions that were being taken to improve

application-to-enrollment conversion rates and to get out of the "hole" that was "self-

inflicted," stating:

So here are the actions we're going to take to improve the conversion rates. First, we will upgrade our school-by-school planning tools, matching the media and promotion with staffing in the enrollment centers so we don't overwhelm the enrollment center late in the enrollment season.

Second, we are instituting better tools and analytics to monitor the enrollment application, the workflow, on a continual basis, allowing us to better identify issues and implement corrective actions earlier in the season. In other words, we need a better early warning system, and we have to reallocate resources faster when the warning system tells us we're not meeting our objectives in a particular location.

68. After the FY2014 Guidance Call, financial analysts concluded that K12's

"enrollment shortfall" was due to management's failure to implement and ensure that

sufficient processes were in place to convert student applications into student enrollments.

For instance, analysts at BMO Capital Markets issued a report on October 11, 2013, stating:

26


To its credit, management "owned up" regarding the enrollment shortfall saying it came from management execution issues. Items cited generally related to weaker conversion rates because of imbalanced internal resources as well as an inability to process students in time to start this year owing to increased compliance requirements in some (we believe mainly new) locations.

* * *

Management blamed the enrollment shortfall almost entirely on internal issues, stating it was not an issue of market demand. Management essentially ascribed these results to two causes:

1. Weaker-than-expected conversion of leads to enrollments; and

2. Insufficient processes in place to process new applicants in time for start dates.

* * *

Management said applications surged later in the enrollment season this year and were up 25% y/y from July to September, relative to down 9% y/y from March to June. This was partially owing to a later start to its promotional programs, which drove more applications to come later in the summer. Management said this late-season surge overwhelmed LRN's processes, prohibiting some enrolled students from attending.

Additionally, management cited new and unexpected compliance issues in some states, which caused some processing issues. These new rules included further documentation of students and face-to-face interviews.

* * *

The company plans to improve its processes and nlytics over the year to ensure this does not reoccur again next year. Unfortunately, we will be unable to tell if these improvements have taken hold until this time next year.

69. Accordingly, in light of Defendants' admissions in the October 8 Form 8-K

and on the FY2014 Guidance Call, Defendants' Class Period statements about enrollment

prospects and regulatory compliance in fiscal 2014 were materially false and misleading

when made and at all relevant times, because they failed to disclose that the Company had

not adequately invested in promotional efforts to enroll new students in fiscal 2014 and had

also not adequately considered and adhered to legal compliance requirements. Indeed, K12

27


failed disclose the following material facts when addressing investors during the Class

Period:

(i) During the period between March 2013 and June 2013, K12 received 9% fewer applications than it had during that same timeframe one year earlier, representing a material decline in student applications for fiscal 2014;

(ii) K12 did not have adequate "school-by-school planning tools" or a "staffing model in place" at the Company's enrollment centers sufficient "to handle the timing and the volume of' student applications, hampering K12's ability to enroll students at its Managed Public Schools in fiscal 2014;

(iii) K 12's "own promotional program started later than it should have, and drove more leads and applications later in the summer instead of early in the summer" when it was too late for the Company to convert the applications into student enrollments for fiscal 2014;

(iv) K12 failed to "appropriately" consider increased compliancy requirements that were applicable in certain states in the fiscal 2014 enrollment season; and

(v) K12 failed to implement a sufficient "early warning system" to detect operational failures in the enrollment process, prompting a "serious" deficiency in the Company's operational controls.

ADDITIONAL EVIDENCE OF SCIENTER

70. As alleged herein, the Individual Defendants acted with scienter in that they

knew that the public documents and statements issued or disseminated in the name of the

Company were materially false and misleading; knew that such statements or documents

would be issued or disseminated to the investing public; and knowingly and substantially

participated or acquiesced in the issuance or dissemination of such statements or documents

as primary violations of the federal securities laws. As set forth herein, the Individual

Defendants, by virtue of their receipt of information reflecting the true facts regarding the

deficiencies in K 12's enrollment and school planning processes, their control over, and/or

receipt, and/or modification of K12's allegedly materially misleading misstatements and/or

28


their associations with the Company which made them privy to confidential proprietary

information concerning K12, participated in the fraudulent scheme alleged herein.

71. In addition, during the Class Period, Defendant Packard reaped the rewards of

Defendants' fraud while K12's stock price was artificially inflated. As shown in the tables

below, Packard sold 43% of his personally held K12 common stock during the seventh-

month Class Period (or 141,000 shares) for gross proceeds of approximately $6.4 million,

compared with only 14% of his total holdings (or 40,000 shares) for gross proceeds of

$788,400 in the immediate seventh-month period before the Class Period:

DEFENDANT PACKARD'S CLASS PERIOD STOCK SALES

Sale Date Number of Shares Price Transaction Value 07/15/2013 18,841 $29.94 $564,099.54 07/16/2013 6,159 $29.97 $184,585.23 07/17/2013 8,000 $29.96 $239,680.00 07/24/2013 8,000 $30.43 1 $243,440.00 07/31/2013 8,000 $30.84 $246,720.00 08/01/2013 2,000 $32.01 $64,020.00 08/07/2013 8,000 $31.09 $248,720.00 08/14/2013 8,000 $31.65 $253,200.00 08/21/2013 8,000 $30.71 $245,680.00 08/28/2013 10,000 $31.74 $317,400.00 08/29/2013 10,000 $35.01 $350,100.00 08/29/2013 7,000 $35.15 $246,050.00 09/04/2013 27,000 $36.74 $991,980.00 09/11/2013 17,000 $37.43 $636,310.00 09/11/2013 10,000 $37.41 $374,100.00 09/18/2013 13,000 $34.48 $448,240.00 09/18/2013 5,000 $34.68 $173,400.00 09/25/2013 10,000 $31.74 $317,400.00 10/02/2013 8,000 $31.1 $248,800.00 TOTAL 141,000 - $6,393,924.77

DEFENDANT PACKARD'S PRE-CLASS PERIOD STOCK SALES (August 2012-March 2013)

Sale Date Number of Shares I Price I Transaction Value 11/12/2012 40,000 $19.71 $788,400

29


LOSS CAUSATION

72. Plaintiff's claims for securities fraud are asserted under the fraud-on-the-

market theory of reliance, infra. The market prices of K12 common stock were artificially

inflated by the materially false and misleading statements and omissions complained of

herein, including the misstatements and omissions about K 12's enrollment progress,

regulatory compliance, and financial guidance. Defendants' false statements and omissions

inflated the prices of K12 common stock and maintained those prices at higher levels than

would have resulted from disclosure of the true condition of K12's operations.

73. The Class Period inflation in K12 common stock prices was removed when

the conditions and risks concealed by Defendants' scheme, or the financial, legal, and

operational impacts of the scheme, were revealed to the market after the close of trading on

October 8, 2013. The information was disseminated through one corrective disclosure that

revealed the nature and the true financial condition of the development programs during the

Class Period. This disclosure, more particularly described above, reduced the price of

K 12's publicly traded common stock, causing economic injury to Plaintiff and the other

members of the Class.

APPLICABILITY OF THE FRAUD-ON-THE-MARKET PRESUMPTION

74. The market for K12's common stock was, at all relevant times, an efficient

market that promptly digested current information with respect to the Company from all

publicly available sources and reflected such information in the prices of K12 common

stock.

75. During the Class Period, K12 common stock was traded on the NYSE. This

is a highly efficient market. The Company was consistently followed, before and

30


throughout the Class Period, by a number of securities analysts who published reports about

K12. The price of K12's common stock reacted promptly to the dissemination of new

information regarding the Company. K 12's common stock was actively traded throughout

the Class Period.

76. Accordingly, Plaintiff and other members of the Class relied upon, and are

entitled to have relied upon, the integrity of the market prices for K12's common stock, and

to a presumption of reliance on Defendants' materially false and misleading statements and

omissions during the Class Period.

77. A Class-wide presumption of reliance is also appropriate in this action under

the Supreme Court's holding in Affiliated Ute Citizens of Utah v. United States, 406 U.S.

128 (1972), because the Class' claims are grounded on Defendants' material

omissions. Because this action involves Defendants' failure to disclose material adverse

information regarding K12's growth prospects and operational controls - information

Defendants were obligated to disclose - positive proof of reliance is not a prerequisite to

recovery. All that is necessary is that the facts withheld be material in the sense that a

reasonable investor might have considered them important in making investment

decisions. Given the importance of financial guidance to the investment community's

expectations, and because K12's revenues are inextricably linked to student enrollment as

set forth above, that requirement is satisfied here.

THE INAPPLICABILITY OF THE STATUTORY SAFE HARBOR

78. The statutory safe harbor applicable to forward-looking statements under

certain circumstances does not apply to any of the false or misleading statements pleaded in

this complaint. First, many of the statements complained of herein were historical

statements or statements of current facts and conditions at the time the statements were

31


made. Second, to the extent that any of the false or misleading statements alleged herein

can be construed as forward-looking, the statements were not accompanied by any

meaningful cautionary language identifying important facts that could cause actual results to

differ materially from those in the statements. In fact, the only cautionary language in

K12's SEC filings regarding the enrollment process was generic. Such boilerplate risk

warnings were insufficient to provide meaningful cautionary language as to K12's

knowingly or recklessly misstated financial prospects and the progress achieved throughout

the fiscal 2014 enrollment process.

79. Alternatively, to the extent the statutory safe harbor otherwise would apply to

any forward-looking statements pleaded herein, Defendants are liable for those false and

misleading forward-looking statements because, at the time each of those statements was

made, the speakers knew the statement was false or misleading, or the statement was

authorized or approved by an executive officer of K12 who knew that the statement was

materially false or misleading when made.

CLASS ACTION ALLEGATIONS

80. Plaintiff brings this action on its own behalf and as a class action pursuant to

Rule 23(a) and Rule 23(b)(3) of the Federal Rules of Civil Procedure on behalf of all

persons or entities (the "Class") who purchased or acquired K12 common stock during the

period from March 11, 2103 and October 9, 2013, inclusive and suffered damages as a

result.

81. Excluded from the Class are: (i) Defendants; (ii) members of the immediate

family of each of the Defendants; (iii) any person who was an executive officer and/or

director of K12 during the Class Period; (iv) any person, firm, trust, corporation, officer,

director, or any other individual or entity in which any Defendant has a controlling interest

32


or which is related to or affiliated with any of the Defendants; and (v) the legal

representatives, agents, affiliates, heirs, successors-in-interest or assigns of any such

excluded party.

82. The members of the Class, purchasers of K12 common stock, are so numerous

that joinder of all members is impracticable. While the exact number of Class members can

only be determined by appropriate discovery, Plaintiff believes that Class members number

in the thousands, if not higher. As of August 22, 2013, K12 reported that it had 38,033,052

shares of common stock outstanding. Plaintiff's claims are typical of the claims of members

of the Class.

83. Plaintiff and all members of the Class sustained damages as a result of the

conduct complained of herein.

84. Plaintiff will fairly and adequately protect the interests of the members of the

Class and has retained counsel competent and experienced in class and securities litigation.

Plaintiff has no interests that are contrary to or in conflict with those of the members of the

Class that Plaintiff seeks to represent.

85. A class action is superior to other available methods for the fair and efficient

adjudication of this controversy. Because the damages suffered by individual Class

members may be relatively small, the expense and burden of individual litigation make it

virtually impossible for the Class members individually to seek redress for the wrongful

conduct alleged herein.

86. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual Class members. Among the

questions of law and fact common to the Class are:

33


a. Whether the federal securities laws were violated by Defendants' acts as alleged herein;

b. Whether documents, including the Company's SEC filings, press releases and other public statements made by Defendants, during the Class Period contained misstatements of material fact or omitted to state material facts necessary to make the statements made, in light of the circumstances under which they were made, not misleading;

c. Whether the market price of K12 common stock during the Class Period was artificially inflated due to the material misrepresentations and/or non-disclosures complained of herein;

d. With respect to Plaintiff's claims under Section 10(b) of the Exchange Act, whether Defendants acted with the requisite state of mind in omitting and/or misrepresenting material facts in the documents filed with the SEC, press releases, and public statements; and

e. With respect to Plaintiff's claims pursuant to Section 20(a) of the Exchange Act, whether the Individual Defendants named in those counts are controlling persons of the Company; and whether the members of the Class have sustained damages as a result of the misconduct complained of herein and, if so, the appropriate measure thereof.

87. Plaintiff knows of no difficulty that will be encountered in the management of

this litigation that would preclude its maintenance as a class action.

88. The names and addresses of the record owners of K12 common stock

purchased during the Class Period are obtainable from information in the possession of the

Company's transfer agent(s). Notice can be provided to such record owners via first class

mail using techniques and a form of notice similar to those customarily used in class

actions.

COUNT I

Violation of Section 10(b) of the Exchange Act And Rule lOb-S (Against Defendants K12, Davis, Packard, Murray, Hawks, And Rhyu

89. Plaintiff repeats and realleges each and every allegation set forth above as if

fully set forth herein.

34


90. This Claim is brought pursuant, to Section 10(b) of the Exchange Act and

Rule I Ob-5(b) promulgated thereunder, on behalf of Plaintiff and all other members of the

Class, against Defendants K12, Davis, Packard, Murray, Hawks, and Rhyu.

91. Throughout the Class Period, Defendants individually, and in concert, directly

and indirectly, by the use and means of instrumentalities of interstate commerce, the mails

and the facilities of a national securities exchange, employed devices, schemes and artifices

to defraud, made untrue statements of material fact and/or omitted to state material facts

necessary to make statements made not misleading, and engaged in acts, practices and a

course of business which operated a fraud and deceit upon Class members, in violation of

Section 10(b) of the Exchange Act and Rule 1 Ob-5(b) promulgated thereunder.

92. Defendants' false and misleading statements and omissions were made with

scienter and were intended to and did, as alleged herein: (i) deceive the investing public,

including Plaintiff and the other members of the Class; (ii) artificially create, inflate and

maintain, the market for and market price of the Company's common stock; and (iii) cause

Plaintiff and the other members of the Class to purchase K 12's common stock at inflated

prices.

93. By failing to inform the market of the misconduct alleged herein, including

making false statements and material omissions, Defendants presented a misleading picture

of K12's finances and prospects. This caused and maintained artificial inflation in the

trading prices of K12's common stock throughout the Class Period and until the truth came

out.

94. Defendants were individually and collectively responsible for making the

statements and omissions alleged herein, by virtue of having prepared, approved, signed


and/or disseminated documents which contained untrue statements of material fact and/or

omitted facts necessary to make the statements therein not misleading and/or making direct

statements to the investing public on the conference calls detailed herein.

95. During the Class Period, the Individual Defendants occupied executive level

positions at K12 and were privy to non-public information concerning the Company. Each

of them knew or recklessly disregarded the adverse facts specified herein and omitted to

disclose those facts.

96. As described herein, Defendants made the false statements and omissions

knowingly and intentionally, or in such an extremely reckless manner as to constitute willful

deceit and fraud upon Plaintiff and other members of the Class who purchased K12's

common stock during the Class Period. Throughout the Class Period, Defendants had a

duty to disclose new, material information that came to their attention, which rendered their

prior statements to the market materially false and misleading. There is a substantial

likelihood that the disclosure of these omitted facts would have been viewed by the

reasonable investor as having significantly altered the "total mix" of information available

about the prospects of the Company.

97. Defendants' false statements and omissions were made in connection with the

purchase or sale of Kl2's common stock.

98. In ignorance of the false and misleading nature of Defendants' statements

and/or upon the integrity of the market price for K12's common stock, Plaintiff and the

other members of the Class purchased KITs common stock at artificially inflated prices

during the Class Period. But for the fraud, they would not have purchased K12 common

stock at artificially inflated prices.

36


99. The market price for K12's common stock declined materially upon the

public disclosure of the facts that had previously been misrepresented or omitted by the

Defendants, as described above.

100. Plaintiff and the other members of the Class were substantially damaged as a

diiec and proximate result of their purchases of K12's common stock at artificially inflated

prices and the subsequent decline in the price of that stock when the truth was disclosed.

101. This claim was brought within two years after discovery of this fraud and

within five years of the making of the statements alleged herein to be materially false and

misleading.

102. By virtue of the foregoing, Defendants have violated Section 10(b) of the

Exchange Act and Rule I Ob-5 promulgated thereunder, and are liable to Plaintiff and the

members of the Class, each of whom has been damaged as a result of such violation.

COUNT II

Violation of Section 20(a) of the Exchange Act (Against Defendants Davis, Packard, Murray, Hawks, And Rhyu

103. Plaintiff repeats and realleges each and every allegation above as if set forth

fully herein. This Claim is brought pursuant to Section 20(a) of the Exchange Act against

the individual defendants on behalf of Plaintiff and all members of the Class who purchased

K12's common stock during the Class Period.

104. As alleged herein, K12 is liable to Plaintiff and the members of the Class who

purchased K12's common stock based on the materially false and misleading statements and

omissions set forth above, pursuant to Section 10(b) of the Exchange Act and Rule I Ob-5

promulgated thereunder.

37


105. Throughout the Class Period, the Section 20(a) Defendants were controlling

persons of K12 within the meaning of Section 20(a) of the Exchange Act, and culpable

participants in the K12 fraud, as detailed herein.

106. Each of the Section 20(a) Defendants exercised control over K12 during the

Class Period by virtue of, among other things, their executive positions with the Company,

the key roles they played in the Company's management, and their direct involvement in its

day to day operations, including its financial reporting and accounting functions.

107. In addition to the allegations set forth above, the following allegations

demonstrate the Section 20(a) Defendants' control over K12 during the Class Period.

108. Given their individual and collective responsibilities for managing K12

throughout the Class Period, the Section 20(a) Defendants were regularly presented to the

market as the individuals who were responsible for K12's day-to-day business and

operations, as well as the Company's strategic direction. These Section 20(a) Defendants

accepted responsibility for presenting quarterly and annual results, setting guidance for

future periods and assuring the market about the state of, and prospects for, the Company.

No one else at K12 exercised that degree of responsibility for, or control over, the

Company's activities and public statements.

109. As a result of the false and misleading statements and omissions alleged

herein, the market price of K12 common stock was artificially inflated during the Class

Period. Under such circumstances, the presumption of reliance available under the "fraud

on the market" theory applies, as more particularly set forth above. Plaintiff and the

members of the Class relied upon either the integrity of the market or upon the statements

38


and reports of the Section 20(a) Defendants in purchasing K12 common stock at artificially

inflated prices.

110. This claim was brought within two years after the discovery of this fraud and

within five years of the making of the statements alleged herein to be materially false and

misleading.

111. By virtue of the forgoing, each of the Section 20(a) Defendants are liable to

Plaintiff and the Class, each of whom has been damaged as a result of K 12's underlying

violations.

PRAYER FOR RELIEF

112. WHEREFORE, Plaintiff prays for relief and judgment, as follows:

a. Determining that this action is a proper class action under Rule 23 of the Federal Rules of Civil Procedure;

b. Awarding compensatory damages in favor of Plaintiff and the other Class members against all Defendants, jointly and severally, for all damages sustained as a result of Defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;

c. Awarding Plaintiff and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees; and

d. Such other and further relief as the Court may deem just and proper.

JURY TRIAL DEMAND

113. Plaintiff hereby demands a trial by jury.

39


e~A&- Wj -041)j9MLi1'- Steven J. Toll (Va. Bar No. 15300) Daniel S. Sommers Elizabeth Aniskevich (Va. Bar No. 81809) COHEN MILSTE1N SELLERS & TOLL PLLC 1100 New York Ave., N.W. Suite 500, West Tower Washington, DC 20005-3965 Telephone: (202) 408-4600 Fascimile: (202) 408-4699 [email protected] [email protected] [email protected]

Liaison Counsel For Plaintiff Oklahoma Firefighters Pension & Retirement System

Avi Josefson Stefanie J. Sundel BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP 1285 Avenue of the Americas New York, New York 10019 Telephone: (212) 554 1400 Facsimile: (212) 554 1444 [email protected] avib1bglaw.com stefanie.sundelb1bgIaw.com

Counsel For Plaintiff Oklahoma Firefighters Pension & Retirement System

40


CERTIFICATION PURSUANT TO THE FEDERAL SECURITIES LAWS

I, Robert E. Jones, Jr., on behalf of Oklahoma Firefighters Pension and Retirement System ("Oklahoma Firefighters"), hereby certify, as to the claims asserted under the federal securities laws, that:

1. I am the Executive Director of Oklahoma Firefighters. I have reviewed the complaint and authorize its filing.

2. Oklahoma Firefighters did not purchase the securities that are the subject of this action at the direction of counsel or in order to participate in any action arising under the federal securities laws.

3. Oklahoma Firefighters is willing to serve as a representative party on behalf of the Class, including providing testimony at deposition and trial, if necessary.

4. Oklahoma Firefighters' transactions in the K12 Inc. securities that are the subject of this action are set forth in the chart attached hereto.

5. Oklahoma Firefighters has sought to serve and was appointed as a lead plaintiff and representative party on behalf of a class in the following actions under the federal securities laws filed during the three-year period preceding the date of this Certification:

In re Finisar Corporation Securities Litigation, Case No. 1 l-cv-1252 (N.D. Cal.) In re Miller Energy Resources Securities Litigation, Case No. 11 -cv-386 (ED. Tenn.)

Oklahoma Firefighters Pension and Retirement System v. Student Loan Corporation, er al., Case No. 12-cv-895 (S.D.N.Y.)

In re Mako Surgical Corporation Securities Litigation, Case No. 12-cv-60875 (S.D. Fla.) Reinschmidt v. Zillow, Inc., et at., Case No. 12-cv-2084 (W.D. Wash.)

Chaudsy v. Microsoft Corp., et al., Case No. 1 3-cv-2038 (W.D. Wash.) In re Edwards Lfesciences Corp. Securities litigation, Case No. I 3-c v- 1463 (C.D. Cal.)


6. Oklahoma Firefighters has sought to serve as a lead plaintiff and representative party on behalf of a class in the following actions under the federal securities laws filed during the three-year period preceding the date of this Certification, but either withdrew its motions for lead plaintiff or was not appointed lead plaintiff:

William D. Wallace v. Intralinks Holdings, Inc., etal., Case No. I 1-cv-8861 (S.D.N.Y.) Hoppaugh v. K12 Inc.. et al., Case No. 12-cv-103 (E.D. Va.)

Sanders v. VeriFone Systems, Inc., et al., Case No. 1 3-cv- 1038 (N.D. Cal.) Mazzaferro v. Aruba Networks, Inc., etal., Case No. 1 3-cv-2342 (N.D. Cal.) Singh v. Orthofix International N.V., et al., Case No. 13-cv-5696 (S.D.N.Y.)

Rieckborn v. Velti plc, et al., Case No. I 3-cv-3889 (N.D. Cal.)

7. Oklahoma Firefighters is currently seeking to serve as a lead plaintiff and representative party on behalf of a class in the following action filed under the federal securities laws during the three years preceding the date of this Certification:

Lang v. Tower Group International, Ltd., et al., Case No. 13-cv-5852 (S.D.N.Y.) Felix Santore v. Ixia, etal., Case No. 13-cv-8440 (C.D. Cal.)

8. Oklahoma Firefighters will not accept any payment for serving as a representative party on behalf of the Class beyond Oklahoma Firefighters' pro rata share of any recovery, except such reasonable costs and expenses (including lost wages) directly relating to the representation of the Class, as ordered or approved by the Court.

I declare under penalty of perjury that !?day

foregoing is true and correct. Executed this of January, 2014.

ç

1bert E. Joie,d Jr. Executive Director Oklahoma Firefighters Pension and Retirement System


Oklahoma Firefighters Pension and Retirement System Transactions In K12

Transaction Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase Purchase

Date 3/28/2013 4/1/2013 4/2/2013 5/17/2013 5/20/2013 5/20/2013 5/2112013 5/2212013 5/22/2013 5/23/2013 5/24/2013 5/28/2013 5/28/2013 5/29/2013 5/29/2013 5/30/2013 5/30/2013 5/31/2013 7/3/2013 7/5/2013 7/5/2013 7/8/2013 7/8/2013 7/9/2013 7/9/2013 7/9/2013

7/10/2013 7/10/2013 7/11/2013 7/12/2013 7/15/2013 7/15/2013 7/16/2013 7/16/2013 7/17/2013 7/25/2013 7/26/2013 7/26/2013 7/26/2013 8/28/2013 8129/2013 8/29/2013

Shares 400

2,200 975 800 800 600 800 600 500 400

1,300 1,100 1,200 700

2,100 200 500 686 200

1,000 400

1,500 200 100 100

1,500 100 200 800 700 200 300

1,000

946 200 100 200 468 200

2,100 1,400

Price 23.8538 23.7347 23.7712 29.5761 29.7550 29.7849 30.4391 30.1423 30.6300 29.9205 29.7989 30.1800 30.3554 29.8866 30.2500 29.9245 29.9400 29.9821 27.2879 27.6400 28.5007 28.6236 29.1955 28.8411 29.0746 29.1900 29.2395 29.4008 29.9887 29.9526 29.8600 29.9168 29.8794 29.9983 29.9967 30.8919 30.5800 30.6590 30.6770 31.9969 36.0661 36.4660

Sale 8/112013 (200)

31.6742 Sale 8/13/2013 (100)

31.9214

Sale 8/29/2013 (6,100)

35.7770

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