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Chegg, Inc.

Case Details

Class Period: May 5, 2020 - November 1, 2021
Date Filed: December 22, 2021
Case Number: 5:21-cv-9953
Jurisdiction: Northern District of California
icon-casetype Case Type: Securities Case

Case Summary

Saxena White was appointed Co-Lead Counsel in the securities fraud class action against Chegg and certain of its senior executives for violations of the Securities Exchange Act of 1934. The Complaint alleges that Chegg made materially false and misleading statements and failed to disclose material adverse facts about the Company’s business, operations, and prospects, thus artificially inflating the Company’s stock price and causing investors to suffer substantial losses when the truth eventually emerged.

Chegg is an online learning platform that provides educational resources such as online tutoring, study materials, and textbook rentals. Chegg purports to “help students master their subjects, better understand their course material, and have better outcomes on their learning journey.” In particular, Chegg features an “Expert Q&A” service that allows subscribers to ask a pool of approximately 100,000 experts for an “instantaneous step-by-step solution” to “homework” questions.

The Complaint alleges that during the relevant time period, Chegg misled investors by failing to disclose: (1) that Chegg’s increase in subscribers, growth, and revenue had been a temporary effect of the COVID-19 pandemic that resulted in remote education for the vast majority of students in the United States; (2) that once the pandemic-related restrictions eased and students returned to campuses nationwide, Chegg’s extraordinary growth trends would end; and (3) that Chegg’s subscriber and revenue growth were largely due to students using the platform to cheat, rather than the strength of Chegg’s business model or the acumen of its senior executives and directors. As a result, Chegg’s business metrics and financial prospects during the relevant time period lacked a reasonable basis and were not nearly as strong as Chegg had led the market to believe.

As alleged in the Complaint, the truth began to emerge on November 1, 2021, when Chegg reported its third-quarter results—the first quarter that most students had returned to in-person learning—and disclosed a 10% decline in subscribers. Chegg also issued fourth-quarter revenue guidance that was more than 20% below market expectations, and entirely postponed issuance of revenue guidance for 2022. In response, Chegg’s stock price plunged an astounding nearly 50%, from $62.76 per share on November 1, 2021, to $32.12 per share on November 2, 2021—wiping out a staggering $4 billion in shareholder market capitalization in a single day.

On September 7, 2022, over significant competition from top law firms in our industry, the Court appointed Saxena White as Co-Lead Counsel and Pompano Beach Police & Firefighters’ Retirement System and KBC Asset Management NV as Lead Plaintiffs. The Court specifically noted that Saxena White is “highly qualified and experienced in securities class litigation,” citing the Firm’s impressive track record for securing significant recoveries for investor classes.

On December 8, 2022, Lead Plaintiffs filed their consolidated class action complaint for violations of the federal securities laws. On February 16, 2023, Defendants filed their motion to dismiss the consolidated complaint.

On March 4, 2024, the Court issued an opinion denying Defendants’ motion to dismiss in its entirety, sustaining every false statement alleged in the consolidated complaint. The Court held that the consolidated complaint sufficiently alleged, through Lead Plaintiffs’ comprehensive, multi-faceted investigation, that Defendants’ misrepresented student usage of Chegg’s website to cheat during the COVID pandemic, and concealed that cheating during the period that distance learning was driving the Company’s revenue growth.

First, the Court found that Lead Plaintiffs’ empirical analysis provided a “particularized showing” and “present[ed] compelling evidence of substantial cheating” on Chegg’s platform during the class period. Second, the Court found the accounts of multiple former Chegg employees interviewed by Lead Plaintiffs further supported that “there was cheating on Expert Q&A, and that such cheating was tied to both subscriber and revenue growth for Chegg.” Third, the Court cited documents obtained through public records requests from universities nationwide asserting that student cheating was rampant on Chegg during the COVID-19 pandemic, which were further buttressed by “statements from high-level university officials that Chegg was informed about this rampant cheating on several occasions.” According to the Court, this “comprehensive evidence from various universities and faculty” further supported that “cheating occurred nationwide using Chegg.” Moreover, the Court rejected Defendants’ argument that their statements were inactionable as a matter of law, finding little support for the notion that statements such as Chegg is a “learning site” and that “only a tiny fraction of users” cheat on Chegg were merely “aspirational,” promotional statements, or opinions, that investors should not have relied on—but rather were actionably false statements.

Next, the Court found that Lead Plaintiffs sufficiently alleged that all Defendants acted with scienter, or fraudulent intent, in issuing their alleged false and materially misleading statements to investors. In holding that Plaintiffs had met “the high bar for pleading scienter at this stage,” the Court cited “[t]he extensive communications between university officials and Chegg about rampant cheating on the platform” and “detailed former employee testimony” Plaintiffs alleged in the complaint.

Finally, the Court fully accepted Plaintiffs’ loss causation arguments, noting that both securities analysts and mainstream media outlets, such as Forbes, specifically attributed Chegg’s disappointing growth rates to students returning to campus to a learning environment that made it harder for students to easily use Chegg to cheat. As a result, there is nothing in the Court’s ruling that could be understood to reduce the class’s damages, a resounding victory for the Plaintiffs.

The case will now proceed to the discovery phase.