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Pearson Textbook Returns and Digital Problems Securities Class Action

Pearson College Physics Textbook Cover

Educational publisher Pearson, PLC seems to have been slow in learning its lessons. According to the complaint for this class action, the company lagged in replacing physical textbooks with digital materials, and when it ran into problems, it tried to hide them, in violation of the Securities Exchange Act of 1934.

The class for this action is all persons or entities who acquired American Depository Shares (ADSs) of Pearson, PLC between January 21, 2015 and January 17, 2017.

Pearson is a British multinational education company which focuses on the education and consumer publishing markets. Its North American segment brings in roughly 65% of its annual sales.

During the class period, changes were occurring in the higher-education textbook market. College enrollment was declining, and students were looking for cheaper alternatives to high-priced paper textbooks. According to the complaint, retailers were returning more and more textbooks to Pearson, but rather than recording this, Pearson deferred the charge, waiting until it transitioned to the digital market.

But the complaint says that Pearson was years behind competitors in moving to digital and had to rush to market products that were “not ready for prime time.” Defects ranged from problems with answer inputs to server issues that made texts inaccessible. Because of this, the complaint says, customers returned the product or would not buy it, leading to lower than expected income and high product returns.

When Pearson missed its financial projections, the complaint says, it still did not disclose these problems. Instead, it says, it made false or misleading statements:

  • It overstated goodwill and expected earnings.
  • It spoke of “growth in North America” and “strength” in digital services.
  • It claimed that the problems were declining US college enrollments and UK Qualifications, that these factors would stabilize by the end of 2017, and that revenues would “grow modestly thereafter helped by new product launches.”

Also, the complaint says, in not adequately assessing goodwill, the company violated accounting standards, which in turn meant that its internal controls over reporting were not adequate.

On October 21, 2015, the company admitted to “higher returns affecting the US higher education market…” The company’s ADS price fell by 17%, but there were more revelations to come.

On October 17, 2016, Pearson revealed that “inventory correction” was more widespread than it had said, causing an 8% ADS price decline. On January 18, 2017, it admitted that US sales were down, for the fourth quarter of 2016 by 30%, and that it would not meet its 2018 operating profit forecast. This led to a loss in its ADS price of 28%.

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