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We determine our course breakage rate based upon estimates developed from historical student attendance patterns. Based on our historical information, we can determine the likelihood of an expired course remaining unattended. Moreover, we determined that we do not have a legal obligation to remit the value of expired courses to relevant taxing jurisdictions.


These statements regarding the Company’s revenue recognition policies

were materially false and misleading when made because, in truth, Defendants recorded as revenue all “educational” packages sold within one year of the contract purchase date at the latest, despite failure in many instances to finish delivering all services and products that the customer purchased within that time

period, including one year of post-class coaching services, camps, and events and follow-up with Advisors. For this reason alone, the Company improperly recognized revenue in violation of GAAP and SEC rules.


The Company arbitrarily designated “Coaching” services as an immediate

revenue item, while “Mentoring” or other similar services – necessarily provided at a later date –were classified as Deferred Revenues. The intentional misclassification of “Coaching” as immediate revenue enabled Defendants to wrongfully recognize tens of millions of dollars in additional revenues that should

have been reported only when such Coaching services were supplied.


At all times during the Class Period, unbeknownst to investors,

Defendants had materially overstated the Company’s profitability by failing to properly account for the Company’s results of operations and by artificially inflating the Company’s financial results – primarily as a result of Defendants’

manipulation of deferred revenue accounting and Whitney’s abuse of its Refund Policy. Instead of properly characterizing what was actually deferred income, the Company designated some revenue as immediate, allowing the Company to prematurely and improperly realize tens of millions of dollars in additional revenues. The Company also designed a hard-line, difficult-to-defeat (and eventually non-existent) refund policy which made it virtually impossible for unsatisfied customers to recoup their money from the Company, and forced customers instead to turn to the credit card companies for fraud protection, which

meant revenue was inflated when announced and unsustainable.


The Whitney Defendants argue that the CAC is deficient as to this theory

because the allegations do not give rise to a strong inference of scienter. The Court

agrees. As an initial matter, plaintiff’s allegation that defendants’ accounting practices


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