SEC v. DAVOL, No. 2:19-cv-01374, Central District of California (Feb. 25, 2019) — Complaint

COMPLAINT 1

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JANIE L. FRANK (Texas Bar No. 07363050)
Email:  [email protected]
U.S. Securities and Exchange Commission
801 Cherry Street, Suite 1900, Unit #18
Fort Worth, Texas 76102
Telephone: (817) 900-6478
Facsimile: (817) 978-4927

Local Counsel:
U.S. Securities and Exchange Commission
Douglas M. Miller, California Bar No. 240398
Email:  [email protected]
444 South Flower Street, Suite 900
Los Angeles, California 90071
Telephone:  (323) 965-3837
Facsimile:  (213) 443-1904

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

SECURITIES AND EXCHANGE
COMMISSION,

Plaintiff,

vs.

JACK D. MASSIMINO and ROBERT
C. OWEN,

Defendants.

 Case No.

COMPLAINT

Plaintiff Securities and Exchange Commission (“SEC”) alleges:

JURISDICTION AND VENUE

1. The Court has jurisdiction over this action pursuant to Sections 20(b),

20(d)(1) and 22(a) of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. §§

77t(b), 77t(d)(1) & 77v(a), and Sections 21(d)(1), 21(d)(3)(A), 21(e) and 27(a) of the

COMPLAINT 2

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Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. §§ 78u(d)(1),

78u(d)(3)(A), 78u(e) & 78aa(a).

2. Corinthian Colleges, Inc.’s (“Corinthian”) common stock was offered

and sold pursuant to Form S-8 offerings and was a security under Section 2(a)(1) of

the Securities Act [15 U.S.C. § 77b(a)(1)] and Section 3(a)(10) of the Exchange Act

[15 U.S.C. § 78c(a)(10)].

3. Defendants have, directly or indirectly, made use of the means or

instrumentalities of interstate commerce, of the mails, or of the facilities of a national

securities exchange in connection with the transactions, acts, practices and courses of

business alleged in this complaint.

4. Venue is proper in this district pursuant to Section 22(a) of the Securities

Act, 15 U.S.C. § 77v(a), and Section 27(a) of the Exchange Act, 15 U.S.C. § 78aa(a).

because certain of the transactions, acts, practices and courses of conduct constituting

violations of the federal securities laws occurred within this district.

SUMMARY

5. Defendants were formerly key senior executives at Corinthian, a

publicly held company that operated for-profit schools in the United States and

Canada.  Corinthian is now defunct.  For most of the period from November 2004

until August 2015, Massimino was Corinthian’s Chief Executive Officer (“CEO”).

Owen joined Corinthian in 2003 as the Controller, became its Chief Accounting

Officer (“CAO”) in 2005, and was promoted to Executive Vice President and Chief

Financial Officer (“CFO”) in 2011.

6. On August 16, 2013, shortly after the end of Corinthian’s 2013 fiscal

year (“FY 2013”)1, the U.S. Department of Education (“ED”) warned Corinthian that,

for FY 2011, ED found it had artificially inflated a key regulatory metric that

determined if and under what terms Corinthian could access federal student loan

1 1   Corinthian’s fiscal years (“FY”) ended on June 30 of any given year and started
on July 1.  For example, its FY 2013 began July 1, 2012, and ended June 30, 2013.

COMPLAINT 3

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funds.

7. To receive federal student loans and grants, Corinthian submitted an

annual financial report to ED.  ED then calculated the metric, called the “Composite

Score,” which determined the timing and conditions of Corinthian’s access to the

federal student aid funds.  Corinthian needed a Composite Score of at least 1.5 to

receive unqualified access to Title IV Funds.  It also needed a Composite Score of at

least 1.5 to meet requirements imposed by its commercial banks (the “Banking

Syndicate”), which funded Corinthian’s $145 million long-term line of credit.  Under

ED’s methodology, increases in long-term debt effectively increased Corinthian’s

Composite Score.

8. According to ED, Corinthian had inflated its long-term debt immediately

before its fiscal year-end on June 30, 2011, and then repaid those loans immediately

after the next fiscal year started.  In its August 16, 2013 letter, ED formally notified

Corinthian that the company’s practice of inflating its Composite Score by borrowing

on its long-term credit facility and immediately paying down such debt after the

beginning of the next fiscal year was a “questionable accounting treatment” under ED

regulations.   ED removed such borrowings from the long-term debt category under

ED regulations, gave effect to some other corrections, and calculated Corinthian’s

2011 Composite Score as 0.9, well below the 1.5 Corinthian needed to continue its

unqualified access to federal student aid funds and to satisfy its Banking Syndicate.

After receiving ED’s August 16, 2013 letter, Corinthian filed a Form 8-K (to

announce a material event) with the SEC on August 20, 2013, and a Form 10-K (its

annual report for FY 2013) on September 3, 2013.  Both forms reported ED’s

Composite Score finding for FY 2011 and referenced ED’s August 16, 2013 letter.

However, Corinthian’s disclosures in both public filings were misleading and

incomplete.

9. Corinthian failed to disclose in both filings that it had employed a

similar year-end borrowing practice—which it characterized as long-term debt—to

COMPLAINT 4

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inflate its Composite Scores for FY 2012 and FY 2013.  Further, although Corinthian

disclosed in both filings that it disagreed with ED’s regulatory conclusion as to its

year-end borrowing practice, it failed to disclose that any continuation of that practice

created substantial risk for Corinthian’s continued access to federal student loan

funding, which constituted approximately 80% of its revenues, as well as its access to

its long-term line of credit from its Banking Syndicate.  As a result, Corinthian faced

severe financial and regulatory risks, which it did not properly disclose.  Based on

this failure to disclose these material facts and the resulting regulatory risks,

Corinthian’s filings on Form 8-K and Form 10-K were materially misleading.

10. Massimino and Owen helped cause this deficiency.  Each reviewed and

approved these public filings.  As Corinthian’s CEO and CFO, respectively,

Massimino and Owen both signed the misleading Form 10-K, and Owen signed the

misleading Form 8-K.  They knew facts that should have led each of them to take

steps to ensure that Corinthian’s disclosures accurately described the regulatory risk

the company faced, but instead each signed a disclosure that failed to do so.  After

Corinthian filed these misleading reports, it received cash proceeds from the issuance

of common stock related to the company’s employee stock purchase plan.  Those

shares were issued pursuant to Forms S-8 that incorporated these misleading filings.

11. Less than a year later, ED slowed Corinthian’s access to Title IV funds

for unrelated reasons.  As a result, Corinthian curtailed its operations and, in May

2015, filed for bankruptcy.

12. The Commission brings this action to obtain permanent injunctive relief

and a civil money penalty against each Defendant.

THE DEFENDANTS

13. Jack D. Massimino, 69, is presently a resident of Oregon. He was the

CEO and a director of Corinthian at all times relevant to this Complaint.  Among

other things, Massimino reviewed and approved for filing the reports filed by

Corinthian with the Commission and signed the company’s 2013 Form 10-K.

COMPLAINT 5

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14. Robert C. Owen, 57, formerly a resident of California but now a resident

of Michigan, was Corinthian’s Chief Accounting Officer in 2011 and its CFO from

2011 until August 2015.  Among other things, Owen reviewed and approved for

filing the reports filed by Corinthian with the Commission and signed the August 20,

2013 Form 8-K and the 2013 Form 10-K.

THE ALLEGATIONS

A. Corinthian Was Heavily Dependent on Federal Funds.

15. Corinthian was a publicly held company with executive offices in Santa

Ana, California.  Its common stock was registered with the Commission pursuant to

Section 12(b) of the Exchange Act [15 U.S.C. § 78l(b)] and was traded on the

NASDAQ stock exchange.  In 2013, Corinthian operated approximately 125 for-

profit, post-secondary campuses in the United States and Canada, at which it offered

courses, certifications, and degrees.  At the end of its 2013 fiscal year, Corinthian

reported net revenues of $1.6 billion.

16. Approximately 80% of Corinthian’s revenues came from the federal

government in the form of proceeds of student loans and grants under Title IV of the

Higher Education Act of 1968 (“Title IV Funds”).

B. The Education Department Sets Standards, Reflected in a “Composite

Score,” for Title IV Funds Eligibility.

17. To qualify for Title IV Funds, companies such as Corinthian that

operated for-profit schools were required, among other things, to submit certain

information, including audited financial statements, to ED on an annual basis.  Using

the submission by the company to determine various financial ratios, ED computed a

company’s “Composite Score.”  Under ED’s methodology, long-term debt increased

an institution’s Composite Score.  Companies with a Composite Score of 1.5 or

higher were afforded unqualified access to Title IV Funds.  Companies with a

Composite Score below 1.5 faced heightened scrutiny from ED and possible delays in

receiving Title IV Funds.  Under certain circumstances, such as a company receiving

COMPLAINT 6

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a Composite Score below 1.5 for three consecutive years, ED could require a hefty

letter of credit, or declare a company ineligible to receive Title IV Funds.

Corinthian’s Banking Syndicate also required Corinthian to maintain a Composite

Score with ED of 1.5 or higher.

C. Corinthian Borrowed Money to Boost Its Composite Score.

18. To achieve a Composite Score of 1.5 or higher—and thereby remain

eligible for unqualified access to federal funds—Corinthian had for years engaged in

a practice of borrowing millions of dollars from its long-term line of credit (the

“Credit Facility”) shortly before its fiscal year-end, on June 30th.  However, ED

concluded that Corinthian did not use those loan proceeds for long-term capital

purposes, because shortly after its next fiscal year began, on July 1st, Corinthian

repaid the debt.  By borrowing at the end of one fiscal year and repaying after the

start of the next fiscal year, ED concluded that Corinthian’s fiscal year-end borrowing

from its long-term credit facility served no long-term purpose.  But, by characterizing

these borrowings as “long-term,” this practice inflated Corinthian’s Composite Score,

keeping it at or above 1.5.

19. In its last three years, for FY 2011 through FY 2013, Corinthian engaged

in the following transactions, which increased its Composite Score:

 On June 29, 2011, the day before the end of its FY 2011, Corinthian

borrowed $43 million.  Two days later, on July 1, 2011, the start of its

FY 2012, Corinthian repaid $25 million of the loan.  Several days later,

on July 6, 2011, it repaid the remaining $18 million.

 On June 28, 2012—two days before the end of its fiscal year—

Corinthian borrowed approximately $58.2 million.  Within two weeks,

after the start of its FY 2013, Corinthian fully repaid the loan, paying

$40 million on July 2, 2012, and approximately $18.2 million on July

12, 2012.

 For its FY 2013, ending June 30, 2013, Corinthian borrowed $25 million

COMPLAINT 7

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on June 12, 2013, $40 million on June 24, 2013, and $46,132,196 on

June 26, 2013, for a total of $111,132,196.  After its next fiscal year

began on July 1, 2013 (FY 2014), Corinthian repaid the entirety of those

loans on seven different dates, between July 3, 2013 and August 1, 2013.

Without the bulk of those borrowings, which Corinthian reported to ED

as long-term debt for purposes of calculating its Composite Score, the

company’s Composite Score would have dropped below 1.5,

jeopardizing its unqualified access to Title IV Funds.

D. ED Finds Corinthian’s Composite Score Was Inflated.

20. On August 16, 2013, ED sent Corinthian a letter informing Corinthian,

among other things, that $43 million borrowed at the end of FY 2011 was incorrectly

included within “long-term debt” for Composite Score purposes and that, as a result,

Corinthian’s Composite Score for 2011 was improperly inflated.  ED concluded that

Corinthian’s borrowing in June 2011 and prompt repayment in July 2011

... constituted a short term transaction that was undertaken for the

purpose of artificially raising (Corinthian’s) financial composite

score.  (ED) deems this to be a questionable accounting treatment

for purposes of the composite score analysis and is excluding the

amount from long term debt.

21. Accordingly, ED excluded from long-term debt in the Composite Score

calculation the $43 million Corinthian borrowed in June 2011.  As a result,

Corinthian’s Composite Score for FY 2011 dropped to 0.9.

22. As for Corinthian’s FY 2012 financial report, ED stated in its August 16,

2013 letter that it had determined Corinthian’s Composite Score for FY 2012 was 1.5,

but noted it was still reviewing an issue unrelated to Corinthian’s year-end

borrowings.

E. Corinthian Files Misleading and Incomplete Filings.

23. Corinthian filed a Form 8-K (on August 20, 2013) and its 2013 Form 10-

COMPLAINT 8

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K annual report (on September 3, 2013), both of which mentioned ED’s decision.

The filings also reported that Corinthian disagreed with ED that its borrowings were

improperly applied to the Composite Score calculation.  These reports further

estimated that the company would receive a “passing” FY 2013 score of 1.5, and

warned that ED might further dispute Corinthian’s scoring.

… We believe our calculations of the financial responsibility score

(of 1.5 for 2013) are correct, however, the calculation is subject to

uncertainty as to the manner that ED will interpret the applicable

regulations in its review of our calculation.  If ED were to take a

different interpretive position than we have with regard to this

calculation, it could negatively impact the Company’s composite

score on a consolidated basis.  The Company cannot provide any

assurances that it will not have additional disagreements with ED

regarding any other determinations ED may make regarding the

Company’s composite score for completed or future fiscal years.

24. Massimino and Owen failed to ensure that the filings disclosed the

present fact that, for FY 2012 and FY 2013, Corinthian had engaged in the same

borrowing practices that ED had found improper in FY 2011, both to achieve a

passing score to satisfy ED and to comply with the terms of the Credit Facility.  (See

supra, ¶ 19).  Corinthian’s 2013 Form 10-K disclosed only the theoretical possibility

that it and ED might disagree over the Composite Score calculation, in spite of the

fact that ED had expressly advised Corinthian that it would disallow such year-end

borrowings intended to artificially inflate the Composite Score.  The generalized

warnings in Corinthian’s 2013 Form 10-K were insufficient.  This omission of the

present facts for FY 2012 and FY 2013 was misleading because investors were not

told about the financial and regulatory risks facing Corinthian.

25. Instead, and contrary to ED’s express statements, Massimino and Owen

continued to mistakenly and incorrectly interpret the Composite Score regulations as

COMPLAINT 9

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allowing them to give effect to the year-end borrowings and to project a “passing”

Composite Score of 1.5 in the 2013 Form 10-K.  They each knew or should have

known that if Corinthian’s year-end borrowings from FY 2012 and FY 2013 were

excluded from Corinthian’s Composite Score calculations, such scores would have

fallen below 1.5.  If that happened, Corinthian’s eligibility for continuing to have

unqualified access to federal funds, on which it was so heavily dependent, would be

compromised, and the company’s existence as a “going concern” could be in

jeopardy.

F. Corinthian Issues Stock After the Misleading Publicly Filed Reports.

26. Massimino obtained cash proceeds for Corinthian from S-8 securities

offerings that incorporated the misleading statements found in the August 2013 Form

8-K and the 2013 Form 10-K.   In Corinthian’s Form 10-Q report for the quarter

ending March 31, 2014, Corinthian reported that it received cash proceeds from the

issuance of common stock related to the company’s employee stock purchase plan.

Those shares were issued pursuant to Forms S-8 that incorporated the misleading

August 2013 Form 8-K and 2013 Form 10-K.2  Corinthian thereby misled investors

regarding the regulatory and financial risks facing the company, and, as a result,

regarding its cash and liquidity.

G. ED Imposes Restrictions on Corinthian, Ultimately Leading to Its

Bankruptcy.

27. On June 12, 2014, before ED completed its review of Corinthian’s

Composite Scores for FY 2012 and FY 2013, ED imposed a timing restriction—a 21-

day hold on the release of Title IV Funds for Corinthian.  ED imposed this hold

because of an unrelated issue—Corinthian’s failure to satisfy ED’s requests for

2 Corinthian’s Form S-8 filed February 1, 2013 with the SEC incorporated the
company’s subsequently filed statements, such as the August Form 8-K and the 2013
Form 10-K.   Corinthian’s Form S-8 filed February 6, 2014 incorporated the
company’s previously filed statements.

COMPLAINT 10

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graduate placement data.

28. Uncertain that Corinthian could pay its expenses as they came due once

Title IV funds were delayed, Massimino entered into an agreement on July 3, 2014

with ED that authorized Corinthian to close or sell its campuses.  While this

development was unrelated to Corinthian’s questionable accounting practice ED

found related to the company’s year-end borrowings, it demonstrates the fact that

Corinthian’s unqualified access to Title IV funds – which was at risk due to ED’s

scrutiny of Corinthian’s repeated year-end borrowing practices (as detailed in this

Complaint) – was critical to its viability.

29. After July 2014, Corinthian ceased filing periodic and other reports

required of publicly held companies.  NASDAQ delisted its stock in February 2015.

Corinthian sought Chapter 11 bankruptcy protection on May 4, 2015, and its assets

are now being liquidated.

30. On May 11, 2015, ED notified Corinthian that it was removing the year-

end borrowings that Corinthian had classified as long-term debt from that category in

its Composite Score calculations for FY 2012 and FY 2013.  ED recalculated

Corinthian’s Composite Scores at 1.2 for each year.  Scores that low would have

allowed ED to delay or halt Corinthian’s access to Title IV funds and would have

violated the terms of its Credit Facility.  Since Corinthian had essentially ceased

operations by May 11, 2015, and was no longer receiving Title IV funds, ED did not

require the filing of any security or other action.

FIRST CLAIM FOR RELIEF

Violations of Section 17(a)(3)

of the Securities Act [15 U.S.C. §§ 77q(a)(3)]

(against Defendant Massimino)

31. The SEC realleges and incorporates by reference paragraphs 1 through

30 above.

32. By negligently engaging in the conduct described above, Defendant

COMPLAINT 11

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Massimino, directly or indirectly, singly or in concert with others, in the offer or sale

of securities and by use of the means and instrumentalities of interstate commerce or

by use of the mails, engaged in transactions, practices, and courses of business which

operated or would operate as a fraud and deceit upon the purchasers of securities.

33. By reason of the foregoing, Massimino has violated and, unless

enjoined, will continue to violate Section 17(a)(3) of the Securities Act [15 U.S.C. §§

77q(a) (3)].

34. With respect to violations of Section 17(a)(3) of the Securities Act,

Massimino was negligent in his actions described above.

SECOND CLAIM FOR RELIEF

Aiding and Abetting Corinthian’s Violations of Section 13(a)

of the Exchange Act and Rules 12b-20, 13a-1 and 13a-11 Thereunder

(Against Defendants Massimino and Owen)

35. The SEC realleges and incorporates by reference paragraphs 1 through

30 above.

36. Corinthian, as a public company with common stock registered with the

Commission pursuant to Section 12 of the Exchange Act [15 U.S.C. § 78l], was

required to file annual and current reports in accordance with Section 13(a) of the

Exchange Act [15 U.S.C. § 78m] and Rules 13a-1 and 13a-11 thereunder [17 C.F.R.

§§ 240.13a-1, and 240.13a-11]. Exchange Act Rule 12b-20 [17 C.F.R. §§ 240.12b-

20] requires that reports contain the information expressly required to be included in

the statement or report and that there shall be added such further material

information, if any, as may be necessary to make the required statements, in light of

the circumstances under which they were made, not misleading.

37. By reason of the foregoing, Massimino and Owen aided and abetted, and

unless enjoined will continue to aid and abet, Corinthian’s violations of Section 13(a)

of the Exchange Act [15 U.S.C. § 78m], and Rules 12b-20, 13a-1, and 13a-11

thereunder [17 C.F.R. §§ 240.12b-20, 240.13a-1, and 240.13a-11].

COMPLAINT 12

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PRAYER FOR RELIEF

WHEREFORE, the SEC respectfully requests that the Court:

I.

Permanently enjoin Massimino from violating Section 17(a)(3) of the

Securities Act [15 U.S.C. §§ 77q(a)(3)].

II.

Permanently enjoin Massimino and Owen from aiding and abetting violations

of Section 13(a) of the Exchange Act [15 U.S.C. § 78m], and Rules 12b-20, 13a-1,

and 13a-11 thereunder [17 C.F.R. §§ 240.12b-20, 240.13a-1 and 240.13a-11].

III.

Order Massimino to pay a civil penalty in the amount of $80,000, pursuant to

Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d) of the

Exchange Act [15 U.S.C. § 78u(d)] for the violations alleged herein.

IV.

Order Owen to pay a civil monetary penalty of $20,000, pursuant to Section

21(d) of the Exchange Act [15 U.S.C. § 78u(d)] for the violations alleged herein.

Dated:  February 25, 2019

 /s/ Douglas M. Miller
DOUGLAS M. MILLER
Attorney for Plaintiff
Securities and Exchange Commission

Complaints and Other Initiating Documents

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

Notice of Electronic Filing

The following transaction was entered by Miller, Douglas on 2/25/2019 at 8:02 AM PST and filed on
2/25/2019

Docket Text:
COMPLAINT No Fee Required - US Government, filed by Plaintiff Securities and Exchange
Commission. (Attorney Douglas M Miller added to party Securities and Exchange
Commission(pty:pla))(Miller, Douglas)

2:19-cv-01374 Notice has been electronically mailed to:

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The following document(s) are associated with this transaction:

2:19-cv-01374 Securities and Exchange Commission v. Massimino et al

Case Name: Securities and Exchange Commission v. Massimino et al
Case Number: 2:19-cv-01374
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Document Number: 1

Document description:Main Document
Original filename:F:\marcelom\Massimino\Complaint.pdf
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[STAMP cacdStamp_ID=1020290914 [Date=2/25/2019] [FileNumber=27166998-0
] [ad543d9250e21e6ce7705ff7f3c0219824e024ffa0f5f403fd4117ccc1b3733a0b8
d010200c2c1694a3406798391d5d3a5f14ae707b848df7d9305dd146d51d0]]

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COMPLAINT 1  

 

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JANIE L. FRANK (Texas Bar No. 07363050) 
Email:  [email protected] 
U.S. Securities and Exchange Commission 
801 Cherry Street, Suite 1900, Unit #18 
Fort Worth, Texas 76102 
Telephone: (817) 900-6478 
Facsimile: (817) 978-4927 
 
Local Counsel: 
U.S. Securities and Exchange Commission 
Douglas M. Miller, California Bar No. 240398 
Email:  [email protected] 
444 South Flower Street, Suite 900 
Los Angeles, California 90071 
Telephone:  (323) 965-3837 
Facsimile:  (213) 443-1904 

UNITED STATES DISTRICT COURT 

CENTRAL DISTRICT OF CALIFORNIA 

 

SECURITIES AND EXCHANGE 
COMMISSION, 

Plaintiff, 
 

vs. 

JACK D. MASSIMINO and ROBERT 
C. OWEN, 

Defendants. 
 

 Case No. 
 
 
COMPLAINT 
 

 
 
 

Plaintiff Securities and Exchange Commission (“SEC”) alleges: 

JURISDICTION AND VENUE 

1. The Court has jurisdiction over this action pursuant to Sections 20(b), 

20(d)(1) and 22(a) of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. §§ 

77t(b), 77t(d)(1) & 77v(a), and Sections 21(d)(1), 21(d)(3)(A), 21(e) and 27(a) of the 

Case 2:19-cv-01374   Document 1   Filed 02/25/19   Page 1 of 12   Page ID #:1



 

COMPLAINT 2  

 

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Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. §§ 78u(d)(1), 

78u(d)(3)(A), 78u(e) & 78aa(a). 

2. Corinthian Colleges, Inc.’s (“Corinthian”) common stock was offered 

and sold pursuant to Form S-8 offerings and was a security under Section 2(a)(1) of 

the Securities Act [15 U.S.C. § 77b(a)(1)] and Section 3(a)(10) of the Exchange Act 

[15 U.S.C. § 78c(a)(10)].  

3. Defendants have, directly or indirectly, made use of the means or 

instrumentalities of interstate commerce, of the mails, or of the facilities of a national 

securities exchange in connection with the transactions, acts, practices and courses of 

business alleged in this complaint.  

4. Venue is proper in this district pursuant to Section 22(a) of the Securities 

Act, 15 U.S.C. § 77v(a), and Section 27(a) of the Exchange Act, 15 U.S.C. § 78aa(a). 

because certain of the transactions, acts, practices and courses of conduct constituting 

violations of the federal securities laws occurred within this district.   

SUMMARY 

5. Defendants were formerly key senior executives at Corinthian, a 

publicly held company that operated for-profit schools in the United States and 

Canada.  Corinthian is now defunct.  For most of the period from November 2004 

until August 2015, Massimino was Corinthian’s Chief Executive Officer (“CEO”).  

Owen joined Corinthian in 2003 as the Controller, became its Chief Accounting 

Officer (“CAO”) in 2005, and was promoted to Executive Vice President and Chief 

Financial Officer (“CFO”) in 2011. 

6. On August 16, 2013, shortly after the end of Corinthian’s 2013 fiscal 

year (“FY 2013”)1, the U.S. Department of Education (“ED”) warned Corinthian that, 

for FY 2011, ED found it had artificially inflated a key regulatory metric that 

determined if and under what terms Corinthian could access federal student loan 

                                           
1 1   Corinthian’s fiscal years (“FY”) ended on June 30 of any given year and started 
on July 1.  For example, its FY 2013 began July 1, 2012, and ended June 30, 2013. 

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COMPLAINT 3  

 

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funds.   

7. To receive federal student loans and grants, Corinthian submitted an 

annual financial report to ED.  ED then calculated the metric, called the “Composite 

Score,” which determined the timing and conditions of Corinthian’s access to the 

federal student aid funds.  Corinthian needed a Composite Score of at least 1.5 to 

receive unqualified access to Title IV Funds.  It also needed a Composite Score of at 

least 1.5 to meet requirements imposed by its commercial banks (the “Banking 

Syndicate”), which funded Corinthian’s $145 million long-term line of credit.  Under 

ED’s methodology, increases in long-term debt effectively increased Corinthian’s 

Composite Score.    

8. According to ED, Corinthian had inflated its long-term debt immediately 

before its fiscal year-end on June 30, 2011, and then repaid those loans immediately 

after the next fiscal year started.  In its August 16, 2013 letter, ED formally notified 

Corinthian that the company’s practice of inflating its Composite Score by borrowing 

on its long-term credit facility and immediately paying down such debt after the 

beginning of the next fiscal year was a “questionable accounting treatment” under ED 

regulations.   ED removed such borrowings from the long-term debt category under 

ED regulations, gave effect to some other corrections, and calculated Corinthian’s 

2011 Composite Score as 0.9, well below the 1.5 Corinthian needed to continue its 

unqualified access to federal student aid funds and to satisfy its Banking Syndicate.  

After receiving ED’s August 16, 2013 letter, Corinthian filed a Form 8-K (to 

announce a material event) with the SEC on August 20, 2013, and a Form 10-K (its 

annual report for FY 2013) on September 3, 2013.  Both forms reported ED’s 

Composite Score finding for FY 2011 and referenced ED’s August 16, 2013 letter.  

However, Corinthian’s disclosures in both public filings were misleading and 

incomplete.   

9. Corinthian failed to disclose in both filings that it had employed a 

similar year-end borrowing practice—which it characterized as long-term debt—to 

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COMPLAINT 4  

 

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inflate its Composite Scores for FY 2012 and FY 2013.  Further, although Corinthian 

disclosed in both filings that it disagreed with ED’s regulatory conclusion as to its 

year-end borrowing practice, it failed to disclose that any continuation of that practice 

created substantial risk for Corinthian’s continued access to federal student loan 

funding, which constituted approximately 80% of its revenues, as well as its access to 

its long-term line of credit from its Banking Syndicate.  As a result, Corinthian faced 

severe financial and regulatory risks, which it did not properly disclose.  Based on 

this failure to disclose these material facts and the resulting regulatory risks, 

Corinthian’s filings on Form 8-K and Form 10-K were materially misleading.  

10. Massimino and Owen helped cause this deficiency.  Each reviewed and 

approved these public filings.  As Corinthian’s CEO and CFO, respectively, 

Massimino and Owen both signed the misleading Form 10-K, and Owen signed the 

misleading Form 8-K.  They knew facts that should have led each of them to take 

steps to ensure that Corinthian’s disclosures accurately described the regulatory risk 

the company faced, but instead each signed a disclosure that failed to do so.  After 

Corinthian filed these misleading reports, it received cash proceeds from the issuance 

of common stock related to the company’s employee stock purchase plan.  Those 

shares were issued pursuant to Forms S-8 that incorporated these misleading filings.  

11. Less than a year later, ED slowed Corinthian’s access to Title IV funds 

for unrelated reasons.  As a result, Corinthian curtailed its operations and, in May 

2015, filed for bankruptcy.  

12. The Commission brings this action to obtain permanent injunctive relief 

and a civil money penalty against each Defendant. 

THE DEFENDANTS 

13. Jack D. Massimino, 69, is presently a resident of Oregon. He was the 

CEO and a director of Corinthian at all times relevant to this Complaint.  Among 

other things, Massimino reviewed and approved for filing the reports filed by 

Corinthian with the Commission and signed the company’s 2013 Form 10-K.  

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COMPLAINT 5  

 

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14. Robert C. Owen, 57, formerly a resident of California but now a resident 

of Michigan, was Corinthian’s Chief Accounting Officer in 2011 and its CFO from 

2011 until August 2015.  Among other things, Owen reviewed and approved for 

filing the reports filed by Corinthian with the Commission and signed the August 20, 

2013 Form 8-K and the 2013 Form 10-K.  

THE ALLEGATIONS 

A. Corinthian Was Heavily Dependent on Federal Funds.  

15. Corinthian was a publicly held company with executive offices in Santa 

Ana, California.  Its common stock was registered with the Commission pursuant to 

Section 12(b) of the Exchange Act [15 U.S.C. § 78l(b)] and was traded on the 

NASDAQ stock exchange.  In 2013, Corinthian operated approximately 125 for-

profit, post-secondary campuses in the United States and Canada, at which it offered 

courses, certifications, and degrees.  At the end of its 2013 fiscal year, Corinthian 

reported net revenues of $1.6 billion.   

16. Approximately 80% of Corinthian’s revenues came from the federal 

government in the form of proceeds of student loans and grants under Title IV of the 

Higher Education Act of 1968 (“Title IV Funds”).  

B. The Education Department Sets Standards, Reflected in a “Composite 

Score,” for Title IV Funds Eligibility. 

17. To qualify for Title IV Funds, companies such as Corinthian that 

operated for-profit schools were required, among other things, to submit certain 

information, including audited financial statements, to ED on an annual basis.  Using 

the submission by the company to determine various financial ratios, ED computed a 

company’s “Composite Score.”  Under ED’s methodology, long-term debt increased 

an institution’s Composite Score.  Companies with a Composite Score of 1.5 or 

higher were afforded unqualified access to Title IV Funds.  Companies with a 

Composite Score below 1.5 faced heightened scrutiny from ED and possible delays in 

receiving Title IV Funds.  Under certain circumstances, such as a company receiving 

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COMPLAINT 6  

 

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a Composite Score below 1.5 for three consecutive years, ED could require a hefty 

letter of credit, or declare a company ineligible to receive Title IV Funds.   

Corinthian’s Banking Syndicate also required Corinthian to maintain a Composite 

Score with ED of 1.5 or higher.  

C. Corinthian Borrowed Money to Boost Its Composite Score.  

18. To achieve a Composite Score of 1.5 or higher—and thereby remain 

eligible for unqualified access to federal funds—Corinthian had for years engaged in 

a practice of borrowing millions of dollars from its long-term line of credit (the 

“Credit Facility”) shortly before its fiscal year-end, on June 30th.  However, ED 

concluded that Corinthian did not use those loan proceeds for long-term capital 

purposes, because shortly after its next fiscal year began, on July 1st, Corinthian 

repaid the debt.  By borrowing at the end of one fiscal year and repaying after the 

start of the next fiscal year, ED concluded that Corinthian’s fiscal year-end borrowing 

from its long-term credit facility served no long-term purpose.  But, by characterizing 

these borrowings as “long-term,” this practice inflated Corinthian’s Composite Score, 

keeping it at or above 1.5.  

19. In its last three years, for FY 2011 through FY 2013, Corinthian engaged 

in the following transactions, which increased its Composite Score:    

 On June 29, 2011, the day before the end of its FY 2011, Corinthian 

borrowed $43 million.  Two days later, on July 1, 2011, the start of its 

FY 2012, Corinthian repaid $25 million of the loan.  Several days later, 

on July 6, 2011, it repaid the remaining $18 million.  

 On June 28, 2012—two days before the end of its fiscal year—

Corinthian borrowed approximately $58.2 million.  Within two weeks, 

after the start of its FY 2013, Corinthian fully repaid the loan, paying 

$40 million on July 2, 2012, and approximately $18.2 million on July 

12, 2012.   

 For its FY 2013, ending June 30, 2013, Corinthian borrowed $25 million 

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COMPLAINT 7  

 

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on June 12, 2013, $40 million on June 24, 2013, and $46,132,196 on 

June 26, 2013, for a total of $111,132,196.  After its next fiscal year 

began on July 1, 2013 (FY 2014), Corinthian repaid the entirety of those 

loans on seven different dates, between July 3, 2013 and August 1, 2013.  

Without the bulk of those borrowings, which Corinthian reported to ED 

as long-term debt for purposes of calculating its Composite Score, the 

company’s Composite Score would have dropped below 1.5, 

jeopardizing its unqualified access to Title IV Funds. 

D. ED Finds Corinthian’s Composite Score Was Inflated.  

20. On August 16, 2013, ED sent Corinthian a letter informing Corinthian, 

among other things, that $43 million borrowed at the end of FY 2011 was incorrectly 

included within “long-term debt” for Composite Score purposes and that, as a result, 

Corinthian’s Composite Score for 2011 was improperly inflated.  ED concluded that 

Corinthian’s borrowing in June 2011 and prompt repayment in July 2011  

... constituted a short term transaction that was undertaken for the 

purpose of artificially raising (Corinthian’s) financial composite 

score.  (ED) deems this to be a questionable accounting treatment 

for purposes of the composite score analysis and is excluding the 

amount from long term debt. 

21. Accordingly, ED excluded from long-term debt in the Composite Score 

calculation the $43 million Corinthian borrowed in June 2011.  As a result, 

Corinthian’s Composite Score for FY 2011 dropped to 0.9. 

22. As for Corinthian’s FY 2012 financial report, ED stated in its August 16, 

2013 letter that it had determined Corinthian’s Composite Score for FY 2012 was 1.5, 

but noted it was still reviewing an issue unrelated to Corinthian’s year-end 

borrowings. 

E. Corinthian Files Misleading and Incomplete Filings. 

23. Corinthian filed a Form 8-K (on August 20, 2013) and its 2013 Form 10-

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COMPLAINT 8  

 

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K annual report (on September 3, 2013), both of which mentioned ED’s decision.  

The filings also reported that Corinthian disagreed with ED that its borrowings were 

improperly applied to the Composite Score calculation.  These reports further 

estimated that the company would receive a “passing” FY 2013 score of 1.5, and 

warned that ED might further dispute Corinthian’s scoring.  

… We believe our calculations of the financial responsibility score 

(of 1.5 for 2013) are correct, however, the calculation is subject to 

uncertainty as to the manner that ED will interpret the applicable 

regulations in its review of our calculation.  If ED were to take a 

different interpretive position than we have with regard to this 

calculation, it could negatively impact the Company’s composite 

score on a consolidated basis.  The Company cannot provide any 

assurances that it will not have additional disagreements with ED 

regarding any other determinations ED may make regarding the 

Company’s composite score for completed or future fiscal years. 

24. Massimino and Owen failed to ensure that the filings disclosed the 

present fact that, for FY 2012 and FY 2013, Corinthian had engaged in the same 

borrowing practices that ED had found improper in FY 2011, both to achieve a 

passing score to satisfy ED and to comply with the terms of the Credit Facility.  (See 

supra, ¶ 19).  Corinthian’s 2013 Form 10-K disclosed only the theoretical possibility 

that it and ED might disagree over the Composite Score calculation, in spite of the 

fact that ED had expressly advised Corinthian that it would disallow such year-end 

borrowings intended to artificially inflate the Composite Score.  The generalized 

warnings in Corinthian’s 2013 Form 10-K were insufficient.  This omission of the 

present facts for FY 2012 and FY 2013 was misleading because investors were not 

told about the financial and regulatory risks facing Corinthian. 

25. Instead, and contrary to ED’s express statements, Massimino and Owen 

continued to mistakenly and incorrectly interpret the Composite Score regulations as 

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COMPLAINT 9  

 

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allowing them to give effect to the year-end borrowings and to project a “passing” 

Composite Score of 1.5 in the 2013 Form 10-K.  They each knew or should have 

known that if Corinthian’s year-end borrowings from FY 2012 and FY 2013 were 

excluded from Corinthian’s Composite Score calculations, such scores would have 

fallen below 1.5.  If that happened, Corinthian’s eligibility for continuing to have 

unqualified access to federal funds, on which it was so heavily dependent, would be 

compromised, and the company’s existence as a “going concern” could be in 

jeopardy.  

F. Corinthian Issues Stock After the Misleading Publicly Filed Reports.   

26. Massimino obtained cash proceeds for Corinthian from S-8 securities 

offerings that incorporated the misleading statements found in the August 2013 Form 

8-K and the 2013 Form 10-K.   In Corinthian’s Form 10-Q report for the quarter 

ending March 31, 2014, Corinthian reported that it received cash proceeds from the 

issuance of common stock related to the company’s employee stock purchase plan.  

Those shares were issued pursuant to Forms S-8 that incorporated the misleading 

August 2013 Form 8-K and 2013 Form 10-K.2  Corinthian thereby misled investors 

regarding the regulatory and financial risks facing the company, and, as a result, 

regarding its cash and liquidity. 

G. ED Imposes Restrictions on Corinthian, Ultimately Leading to Its 

Bankruptcy. 

27. On June 12, 2014, before ED completed its review of Corinthian’s 

Composite Scores for FY 2012 and FY 2013, ED imposed a timing restriction—a 21-

day hold on the release of Title IV Funds for Corinthian.  ED imposed this hold 

because of an unrelated issue—Corinthian’s failure to satisfy ED’s requests for 

                                           
2 Corinthian’s Form S-8 filed February 1, 2013 with the SEC incorporated the 
company’s subsequently filed statements, such as the August Form 8-K and the 2013 
Form 10-K.   Corinthian’s Form S-8 filed February 6, 2014 incorporated the 
company’s previously filed statements. 

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COMPLAINT 10  

 

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graduate placement data. 

28. Uncertain that Corinthian could pay its expenses as they came due once 

Title IV funds were delayed, Massimino entered into an agreement on July 3, 2014 

with ED that authorized Corinthian to close or sell its campuses.  While this 

development was unrelated to Corinthian’s questionable accounting practice ED 

found related to the company’s year-end borrowings, it demonstrates the fact that 

Corinthian’s unqualified access to Title IV funds – which was at risk due to ED’s 

scrutiny of Corinthian’s repeated year-end borrowing practices (as detailed in this 

Complaint) – was critical to its viability. 

29. After July 2014, Corinthian ceased filing periodic and other reports 

required of publicly held companies.  NASDAQ delisted its stock in February 2015.  

Corinthian sought Chapter 11 bankruptcy protection on May 4, 2015, and its assets 

are now being liquidated.   

30. On May 11, 2015, ED notified Corinthian that it was removing the year-

end borrowings that Corinthian had classified as long-term debt from that category in 

its Composite Score calculations for FY 2012 and FY 2013.  ED recalculated 

Corinthian’s Composite Scores at 1.2 for each year.  Scores that low would have 

allowed ED to delay or halt Corinthian’s access to Title IV funds and would have 

violated the terms of its Credit Facility.  Since Corinthian had essentially ceased 

operations by May 11, 2015, and was no longer receiving Title IV funds, ED did not 

require the filing of any security or other action.   

FIRST CLAIM FOR RELIEF 

Violations of Section 17(a)(3)  

of the Securities Act [15 U.S.C. §§ 77q(a)(3)] 

(against Defendant Massimino) 

31. The SEC realleges and incorporates by reference paragraphs 1 through 

30 above. 

32. By negligently engaging in the conduct described above, Defendant 

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COMPLAINT 11  

 

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Massimino, directly or indirectly, singly or in concert with others, in the offer or sale 

of securities and by use of the means and instrumentalities of interstate commerce or 

by use of the mails, engaged in transactions, practices, and courses of business which 

operated or would operate as a fraud and deceit upon the purchasers of securities. 

33. By reason of the foregoing, Massimino has violated and, unless 

enjoined, will continue to violate Section 17(a)(3) of the Securities Act [15 U.S.C. §§ 

77q(a) (3)].  

34. With respect to violations of Section 17(a)(3) of the Securities Act, 

Massimino was negligent in his actions described above.  

SECOND CLAIM FOR RELIEF 

Aiding and Abetting Corinthian’s Violations of Section 13(a)  

of the Exchange Act and Rules 12b-20, 13a-1 and 13a-11 Thereunder  

(Against Defendants Massimino and Owen) 

35. The SEC realleges and incorporates by reference paragraphs 1 through 

30 above. 

36. Corinthian, as a public company with common stock registered with the 

Commission pursuant to Section 12 of the Exchange Act [15 U.S.C. § 78l], was 

required to file annual and current reports in accordance with Section 13(a) of the 

Exchange Act [15 U.S.C. § 78m] and Rules 13a-1 and 13a-11 thereunder [17 C.F.R. 

§§ 240.13a-1, and 240.13a-11]. Exchange Act Rule 12b-20 [17 C.F.R. §§ 240.12b-

20] requires that reports contain the information expressly required to be included in 

the statement or report and that there shall be added such further material 

information, if any, as may be necessary to make the required statements, in light of 

the circumstances under which they were made, not misleading. 

37. By reason of the foregoing, Massimino and Owen aided and abetted, and 

unless enjoined will continue to aid and abet, Corinthian’s violations of Section 13(a) 

of the Exchange Act [15 U.S.C. § 78m], and Rules 12b-20, 13a-1, and 13a-11 

thereunder [17 C.F.R. §§ 240.12b-20, 240.13a-1, and 240.13a-11]. 

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COMPLAINT 12  

 

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PRAYER FOR RELIEF 

WHEREFORE, the SEC respectfully requests that the Court: 

I. 

Permanently enjoin Massimino from violating Section 17(a)(3) of the 

Securities Act [15 U.S.C. §§ 77q(a)(3)]. 

II. 

Permanently enjoin Massimino and Owen from aiding and abetting violations 

of Section 13(a) of the Exchange Act [15 U.S.C. § 78m], and Rules 12b-20, 13a-1, 

and 13a-11 thereunder [17 C.F.R. §§ 240.12b-20, 240.13a-1 and 240.13a-11]. 

III. 

Order Massimino to pay a civil penalty in the amount of $80,000, pursuant to 

Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d) of the 

Exchange Act [15 U.S.C. § 78u(d)] for the violations alleged herein.  

IV. 

Order Owen to pay a civil monetary penalty of $20,000, pursuant to Section 

21(d) of the Exchange Act [15 U.S.C. § 78u(d)] for the violations alleged herein. 

 

Dated:  February 25, 2019  

 /s/ Douglas M. Miller 
DOUGLAS M. MILLER 
Attorney for Plaintiff 
Securities and Exchange Commission 
 

 
 

Case 2:19-cv-01374   Document 1   Filed 02/25/19   Page 12 of 12   Page ID #:12



Complaints and Other Initiating Documents 

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

Notice of Electronic Filing

The following transaction was entered by Miller, Douglas on 2/25/2019 at 8:02 AM PST and filed on 
2/25/2019 

Docket Text:
COMPLAINT No Fee Required - US Government, filed by Plaintiff Securities and Exchange 
Commission. (Attorney Douglas M Miller added to party Securities and Exchange 
Commission(pty:pla))(Miller, Douglas)

2:19-cv-01374 Notice has been electronically mailed to: 

Douglas M Miller     [email protected], [email protected], [email protected], [email protected], 
[email protected] 

2:19-cv-01374 Notice has been delivered by First Class U. S. Mail or by other means BY THE 
FILER to : 

The following document(s) are associated with this transaction:

2:19-cv-01374 Securities and Exchange Commission v. Massimino et al

Case Name: Securities and Exchange Commission v. Massimino et al
Case Number: 2:19-cv-01374
Filer: Securities and Exchange Commission
Document Number: 1

Document description:Main Document 
Original filename:F:\marcelom\Massimino\Complaint.pdf
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[STAMP cacdStamp_ID=1020290914 [Date=2/25/2019] [FileNumber=27166998-0
] [ad543d9250e21e6ce7705ff7f3c0219824e024ffa0f5f403fd4117ccc1b3733a0b8
d010200c2c1694a3406798391d5d3a5f14ae707b848df7d9305dd146d51d0]]

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