A subsidiary of the New Oriental Education & Technology Group, Inc. helps students in the People’s Republic of China apply to foreign universities. But according to the complaint for this class action, this subsidiary actually writes application materials and handles the whole application process, sometimes fabricating information. This is fraud, the complaint claims, and not disclosing it violates the Securities Exchange Act of 1934 and affects the value of the entire company.
The class for this action is all persons and entities who acquired New Oriental American Depositary Shares (ADSs) between September 28, 2016 and December 1, 2016.
New Oriental offers educational services in China that help with access to overseas opportunities, such as English language instruction and preparation for non-Chinese standardized tests. Its subsidiary Beijing New Oriental Vision Overseas Consulting Company, Ltd., (EDU Overseas) helps Chinese students apply to foreign universities.
EDU Overseas is an important part of the company, providing about 10% of the company’s revenues, operating at margins nearly double the rest of the company’s, and growing rapidly.
In its public Securities and Exchange Commission (SEC) filings, the company claims that EDU Overseas consults with Chinese to assist them to apply to schools. Also, EDU Overseas is a member of the American International Recruitment Council (AIRC), which is a standards organization that requires that its members discourage ghost-written application materials. Chinese standards also forbid agencies from fabricating application materials.
However, the complaint claims that, after consulting with a student and obtaining the answers to a questionnaire, EDU Overseas ghost-writes the entire application:
In fact, the complaint claims that the company invents e-mail addresses to be used for correspondence with the foreign school so that applicants never have to actually communicate with it themselves.
The complaint claims that former employees of EDU Overseas have confirmed this process and that the plaintiffs have an executed contract that specifies prices for services, including ghost-writing the personal essay and requesting the right to open the student’s e-mails with the universities.
According to the complaint, Reuters has also published an article claiming that EDU Overseas ghost-wrote personal statements and essays and says that AIRC is investigating. After this article was published, New Oriental’s stock price fell by more than 14%.
The complaint says that on December 5, 2016, analysts from Nomura, SWS Research, Credit Suisse, Deutsche Bank, HSBC, Jeffries, JP Morgan, Macquarie, and Barclays issued special reports based on the Reuters article and what it might mean for New Oriental if EDU Overseas is found to have engaged in what one analyst called “systematic academic fraud.”