Dozens of former employees claim that K12 Inc, a for-profit education company, used dubious and sometimes fraudulent tactics to mask astronomical rates of student turnover in its national network of cyber charter schools, court documents show.
K12 manages Agora Cyber Charter School, based in Wayne, Pa. The company is also involved in pending applications to open two new cybers in the state. The Pennsylvania Department of Education is expected to decide on the proposals later this month.
The former employees allege that K12-managed schools aggressively recruited children who were ill-suited for the company's model of online education. They say the schools then manipulated enrollment, attendance, and performance data to maximize tax-subsidized, per-pupil funding.
These claims by anonymous "confidential witnesses" are spelled out in court documents filed last June as part of a class-action lawsuit by the company's investors.
Allegations touch upon Agora
Many of the allegations come from people who worked for Agora, the second largest cyber charter in Pennsylvania. With more than 8,000 students, Agora enrolls roughly a quarter of the 32,000 Pennsylvania students that have opted to attend cybers, which are independently managed schools providing mostly online instruction.
In one example, a former Agora teacher said in court documents that the school continued to bill the home school district of one special education student who was absent for 140 consecutive days.
Pennsylvania requires that cyber charter students who miss 10 straight days be reported as withdrawn.
"What Agora does is keep the kid in inactive limbo and keep billing," said the anonymous former teacher in court documents.
The class action suit against K12, Inc. and its executives was filed last January, shortly after a critical article about the company appeared in the New York Times. The investors allege that the company committed securities fraud when senior officials, including CEO Ronald J. Packard, "concealed from the market" information about high rates of student withdrawal and poor academic performance.
"The core omission behind the Defendants' fraudulent success story was that K12 students were dropping out at staggering rates," reads the complaint.
An amended version of the complaint filed last June contains the allegations by the company's former employees.
The U.S. District Court in the Eastern District of Virginia has denied a request from K12 to dismiss the case.
A trial could take place this spring.
Jeff Kwitowski, K12's senior vice president of public affairs, said the company won't respond to every claim contained in the litigation, but is "vigorously defending" itself against the investor claims.
High rates of 'churn'
Based in Herndon, Va., K12 is the nation's largest for-profit operator of online schools.
The company's 59 full-time schools enroll more than 100,000 students in 29 states.
The vast majority of the company's $522 million in 2011 revenues came from "turnkey" management contracts with those virtual public charter schools.
In Pennsylvania, that arrangement involves a nonprofit board of directors holding the legal responsibility for the charter school. The nonprofit then contracts with K12 to provide management services ranging from providing curriculum to hiring school personnel.
K12's revenues vary according to the enrollment of the schools it manages. In Pennsylvania, cyber schools bill each of their student's home districts for the full per-pupil amount that would have otherwise been spent to educate that child.
That averages out to just over $11,000 per student, making Pennsylvania one of the most lucrative states in the nation for cybers to operate.
At the beginning of the 2010-11 school year, the K12-managed Agora Cyber Charter enrolled 5,353 students.
By the end of that year, the school's enrollment had increased to 6,475.
The overall increase masked a high "churn rate." Almost 2,400 students withdrew from Agora during the school year, but were replaced by newly recruited students.
Almost 2,700 students dropped out of Agora during the 2009-10 school year.
At the Ohio Virtual Academy, one of K12's other signature schools, the churn rate in 2009-10 was close to 50 percent.
Some of the turnover is likely due to the non-traditional nature of cybers, which often enroll students who have moved between states, are homebound due to illness or injury, or who have other temporary changes in their education plans.
The student withdrawal data is publicly available in annual reports filed by the cybers with their state departments of education.
In their lawsuit, however, the K12 investors contend that the company did not disclose the churn rates during conference calls with investors and in documents filed by the company. As a result, they say, the company's stock was traded at an artificially high price.
A vicious cycle?
According to anonymous former employees, the churn at Agora and the company's other cybers was part of a self-perpetuating cycle.
To increase revenues, the suit alleges, the company aggressively recruited as many students as possible, including some who weren't prepared to succeed in K12's full-time online schools.
When students struggled, the anonymous former staffers claim, company officials told teachers to keep the students on the schools' rolls by manipulating attendance data and inflating students' grades.
When students continued to drop out in considerable numbers, the complaint reads, K12 officials exerted pressure to enroll more students, even if they were less well-prepared for the company's online education model.
"It was as if you were trying to stop the bleeding but were still inflicting wounds at the same time," said a former market research manager at the company, identified in the complaint as "Confidential Witness 5."
The suit also cites former employees who described the company's "high-pressure" approach to student recruitment. Inside call centers, they said, "enrollment consultants" contacted parents from a list of sales leads provided each day and were awarded commissions and perks for hitting their "enrollment quotas."
The former employees also alleged that K12 aggressively "targeted inner-city and at-risk populations" even though a senior company official acknowledged that "the K12 curriculum wasn't built for 'inner-city kids.'"
The motive, according to the lawsuit, was "higher potential profit," mostly because the hard-to-serve students were more likely be chronically truant and would thus use fewer of the company's resources.
Kwitowski of K12 defended the company's recruitment practices.
"If a parent is interested in enrolling and they make an outreach to the school, the school is going to respond to them, just like any other public school district," said Kwitowksi.
"Parents determine whether it's the right fit for their child."
Attendance and performance data questioned
Former employees of K12 and its cyber charters also alleged that company and school officials encouraged manipulation of attendance and performance data.
A former teacher at K12's California Virtual Academy, for example, reported that staff at the school were directed to "contact parents prior to each attendance count day by the state and instruct the parents to retroactively log students' attendance for any missed days."
The same teacher also stated that his superiors routinely instructed him to pass students who should have failed.
A number of anonymous former Agora employees made similar complaints.
One confidential witness maintained that no Agora students could be withdrawn from the school without the approval of head of school Sharon Williams, a K12 employee.
The former teacher reported that "during the school year, Williams kept students enrolled who were not attending classes, but that immediately before year-end state testing Williams withdrew students that would have negatively impacted the school's academic performance."
Kwitowski said K12 schools "follow all the state regulations and policies."
"With online schools, it's about mastery of the content," he said. "[Attendance] is not defined in 40-minute class time periods, as it is in traditional schools."
K12's motivation for manipulating the numbers, according to the suit, was to keep billing traditional public school districts for as many students as possible.
According to the lawsuit, Packard, the K12 CEO, repeatedly described growing student enrollments as the company's "manifest destiny."
In Philadelphia, almost 5,000 Philadelphia students were enrolled in state cybers last year, resulting in almost $50 million in per-pupil payments from the District. District officials could not specify how much of that went to schools affiliated with K12.
As part of Philadelphia Superintendent William Hite's recently unveiled "Action Plan v1.0," he said the District would create its own virtual school option to lure students back from cyber charters.
If all eight proposed cybers under consideration in Pennsylvania are approved, they project to enroll as many as 10,000 students over the next five years, receiving a total of $350 million in taxpayer money along the way.