Grand Canyon Education’s stock price drops after critical report from investment firm

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The stock price of Phoenix-based Grand Canyon Education has lost more than 10% of its value since an investment firm published a critical report of the company late last month that alleges securities-law fraud.

Grand Canyon Education — one of the more valuable corporations headquartered in Arizona and the former parent of Grand Canyon University — followed with its own rebuttal of several of the criticisms in the report, which it called “inaccurate and misleading.”

The report from Citron Research, whose founder is seeking to profit from weakness in the shares of Grand Canyon Education, cited a U.S. Department of Education ruling in early November as one of a series of “red flags” for the Phoenix company.

Grand Canyon Education sold Grand Canyon University to a nonprofit group in mid-2018 but remains affiliated with it. The department denied a request to convert Grand Canyon University to nonprofit status, concluding that the former parent corporation and its shareholders are still “the primary beneficiaries” of university operations. The department described the university as a “captive client” of the corporation. The decision means the university can’t advertise itself as a nonprofit.

“Being a nonprofit would have given (the university) more credibility,” said Andrew Left, founder of Citron Research, in an interview. There’s a “stigma” attached to for-profit universities, he added.

Regardless, Grand Canyon University’s tax-exempt status, granted earlier by the Internal Revenue Service, wasn’t affected.

Stock market reaction

Grand Canyon Education’s stock closed Feb. 4 around $77 a share, down from about $93 shortly before the Citron report came out Jan. 28. It rebounded a bit Feb. 5, closing around $82.50. The Phoenix company ranks among the couple dozen or so most valuable corporations headquartered in Arizona with a capitalization or stock-market worth of nearly $4 billion.

In its report, Citron said it believes the former parent corporation is using the university to manipulate earnings in violation of federal law and cover up for the headwinds faced in providing online education for a profit.

“They use the private university to dump expenses and liabilities, while receiving a disproportionate amount of revenue at inflated prices,” the report states. The Citron report also asserts the company and university remain closely intertwined.

In its response to Citron’s allegations, Grand Canyon Education said the university is financially healthy, isn’t a captive subsidiary and has expanded its assets by nearly $388 million over a recent 12-month period, adding that the former parent’s balance sheet and income-statement numbers “would be even stronger” if all the results were consolidated or combined.

Citron also criticized what it considers improper overlap among the board members of Grand Canyon Education and Grand Canyon University. The former, in its rebuttal, described the university as “an independent entity with an independent board subject to fiduciary duties.” The Department of Education letter also cited “conflicting loyalties” among senior executives for both the company and university.

Left confirmed that he has shorted Grand Canyon Education’s stock, without disclosing the number of shares.

In short selling, a person with a negative view of a company borrows some of the firm’s shares from a brokerage and sells them now, to lock in what it considers a high price relative to where the stock might wind up. If the shares do indeed tumble, the short seller can later buy the stock at a lower price, repay the brokerage loan and close out the position at a profit.

It’s the reverse of the more normal transaction where investors buy now and sell later at what they hope will be a higher price. In short selling, investors sell now and buy later at what they hope will be a lower price.

Enron parallel alleged

The Citron report drew a parallel between Grand Canyon Education and that of Enron Corp., the Houston-based energy company that collapsed almost two decades ago amid fraud charges.

Like Enron, Grand Canyon University uses a captive subsidiary, the university, that doesn’t report its own audited financial statements and thus is able to hide debts and other financial details, Citron charged in its report.

“This does not mean its core business (the university) is fraudulent but rather that the financials they report to Wall Street are fraudulent,” the Citron report said.

Citron charged that the company is taking a 60% cut of all university revenue, not just that for online tuition, while allocating nearly all expenses to the university. The arrangement is fraudulent because of “improper expense allocation and revenue recognition,” according to Citron’s report.

Citron further alleged that Grand Canyon Education can cover up this arrangement by extending credit to the university through private loans and other means.

According to Citron, another indication that Grand Canyon’s stock is “grossly overvalued” are profit margins that it says are much higher than those of competitors in the for-profit education industry.

But among various rebuttals, Grand Canyon Education countered that it provides services to the university, such as transcript evaluation, financial-aid processing, accounting and human resources, that justify its revenue-sharing arrangement.

The company hasn’t disclosed any investigations by the federal Securities and Exchange Commission, and it said audited financial reports for the university are available on a website run by the Federal Audit Clearinghouse.

Reach the reporter at russ.wiles@arizonarepublic.com or 602-444-8616.

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