Investor Alleges NEC Sought to Inflate Stock Prices

An investor in National Education Corp. filed a lawsuit Wednesday accusing the Irvine-based educational training firm and its chairman of releasing false and misleading information about the company’s financial prospects.

The suit was filed by David Grobow, who bought stock in the company on May 30, four days after the company said its revenue and earnings would remain flat or begin to decline during the second quarter.

Grobow claimed in the suit that National Education and its chairman, H. David Bright, attempted to inflate stock prices until Monday of this week, when it released an even more discouraging announcement.

On Monday, National Education’s stock lost 18.5% of its value, falling $3.625 per share to close at $16 per share. It closed Wednesday at $17 a share, up 37.5 cents for the day.

The suit was filed in U.S. District Court in Los Angeles on behalf of investors who purchased National Education stock between May 26 and June 12. During the period, more than 3 million shares traded hands.

The suit said Grobow purchased 500 shares of stock at $20.375 per share for an investment of $10,750.

National Education’s general counsel Jeffrey Brill declined to comment on the charges. He said the company had not received a copy of the lawsuit. Bright was traveling and could not be reached for comment late Wednesday.

On May 26, National Education announced that its revenue and net income might be flat to lower for the three months ending June 30 as compared to the second quarter of 1988. The company said that sales at its Applied Learning subsidiary had been weak but that its revenue outlook for the entire year remained strong and it expected to make up any second quarter shortfall by year-end, the suit said.

National Education stock fell $2.375 per share on the day of the announcement to close at $21.125 per share.

On June 12, the company announced that disappointing results for May at the Applied Learning subsidiary indicated National Education’s second quarter revenue and earnings might be “substantially lower” than the second quarter of last year. It said that since its May release, revenue and expected revenue at Applied Learning had failed to meet earlier expectations.

The suit claims that the company was aware at the time of the May 26 release that the Applied Learning subsidiary would have disappointing preliminary results but that the May statement was worded in an overly optimistic way in an effort to prevent the company’s stock price from sliding.

The suit also said that between Jan. 1 and June 12, four current or former directors of the company sold a total of 131,000 shares of company stock.

Meanwhile, National Education’s debt securities were placed under review Wednesday by Standard & Poor’s Corp. The credit rating organization said it placed $57.5 million of National Education bonds on its “Credit Watch” because of weakened cash flow protection and concerns over the diminished earnings outlook of the firm.

S&P; said that National Education’s capital spending has risen sharply to fund expansion in recent years and that the company’s cash flow has been weakened. National Education’s total debt increased $48 million in the past year and was $122 million on March 31, S&P; said.