On March 4, 2024, Saxena White secured a major victory with a significant decision issued by the Honorable P. Casey Pitts of the Northern District of California, in Leventhal v. Chegg, Inc., No. 21-cv-09953-PCP (N.D. Cal.), in which Judge Pitts denied in its entirety Defendants’ motion to dismiss Lead Plaintiffs’ consolidated complaint. The case concerns serious allegations regarding rampant student use of Chegg’s online “learning platform” to cheat during the COVID pandemic, and the Company’s related misrepresentations to investors about the sources of Chegg’s skyrocketing growth and the sustainability of its business model. When the truth about Chegg was revealed, the Company’s stock price plunged by nearly 50%, wiping out a staggering $4 billion in shareholder market capitalization in a single day.
Chegg markets itself as an “online learning” company 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’s platform 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.
Lead Plaintiffs’ consolidated complaint alleges that throughout the class period, Chegg misled investors by minimizing student use of Chegg’s website to cheat and by failing to disclose that Chegg’s skyrocketing subscriber and revenue growth had been a temporary effect of the COVID-19 pandemic, which made it easier for students to use Chegg’s platform to cheat while distance learning, and that once the pandemic-related restrictions eased and students returned to campuses nationwide, Chegg’s extraordinary growth trends would end. As a result, Chegg’s business model was not sustainable and financial forecasts lacked a reasonable basis in fact.
In the Court’s order denying Defendants’ motion to dismiss, Judge Pitts sustained every false statement alleged in Plaintiffs’ complaint. Highlighting Lead Plaintiffs’ comprehensive, multi-faceted investigation, the Court concluded that “the evidence cited in plaintiffs’ complaint, including plaintiffs’ empirical analysis, former employee testimony, university interviews, and faculty statements, provides sufficient factual support for plaintiffs’ allegations of falsity.” Judge Pitts also agreed with the Plaintiffs that the Defendants’ statements were not merely “aspirational,” promotional statements, or opinions, that investors should not have relied on, but rather were actionably false and misleading.
The Court further concluded that Lead Plaintiffs sufficiently alleged Defendants’ fraudulent intent, or scienter, which is typically the most difficult element to plead and prove in a federal securities fraud case. Among other things, Judge Pitts highlighted “[t]he extensive communications between university officials and Chegg about rampant cheating on the platform combined with detailed former employee testimony” obtained by Lead Plaintiffs were sufficient to “meet the high bar for pleading scienter at this stage.”
The case will now proceed to the discovery phase.
