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A lawsuit filed by a Florida pension plan alleges that Phoenix-based Grand Canyon Education Inc. artificially inflated its stock price through financial dealings with a university that it continued to control even after selling the institution.

The suit by the Hialeah Employees’ Retirement System said the corporation purportedly spun off Grand Canyon University as an independent institution yet continued to funnel expenses to and collect disproportionately high revenue from the school. The complaint echoes a prior report from an activist investor alleging wrongdoing. The class-action lawsuit was filed May 12 in U.S. District Court in Delaware.

Grand Canyon Education, one of Arizona’s most valuable corporations, has denied the allegation and vows to defend itself against the lawsuit, which it called “unfounded.”

University relationship in dispute

The pension lawsuit cited a critical report from Citron Research as well as a U.S. Department of Education ruling that denied a request to convert Grand Canyon University to nonprofit status. The department concluded that the school’s former corporate parent and its shareholders are still “the primary beneficiaries” of university operations and that the university remains a “captive client” of the company.

The lawsuit claims Grand Canyon Education falsely told investors that the university would be independent. In reality, the suit alleges, GCU functions as an off-balance-sheet entity to which the corporation has been able to “funnel expenses and costs in exchange for a disproportionate amount of revenue, thereby inflating (the corporation’s) financial results,” with senior corporate executives continuing to manage the university.

In a statement sent to The Arizona Republic, Grand Canyon Education didn’t address specific allegations in the lawsuit but said the underlying Citron report “evidences a great misunderstanding of the July 1, 2018, transaction by which Grand Canyon University separated from the company.”

The company said the report failed to understand a service agreement and related contracts between the two entities, the independent governance of the university and other aspects.

“It also places material emphasis on a number of factual statements that are simply false,” the company said.

A more detailed response can be found on the Grand Canyon Education website at investors.gce.com.

Citron Research is a short-selling investment firm that has sought to benefit from declines in the stock price of Grand Canyon Education.

LOPE stock down from peak

According to the lawsuit, the Hialeah pension fund bought Grand Canyon Education stock at “artificially inflated prices and suffered damages” as a result of what it claims were two violations of federal securities law. The suit also names Brian Mueller, CEO of Grand Canyon Education, and Daniel Bachus, the company’s chief financial officer. Mueller is also president of Grand Canyon University.

The Hialeah pension fund said it bought more than 2,200 shares in 2018 and 2019 at prices ranging from roughly $90 to nearly $124 a share. It sold most of the shares by July 2019. The class-action lawsuit was brought on behalf of investors who purchased the stock between Jan. 5, 2018 and Jan. 27, 2020.

Grand Canyon Education stock, which trades under the symbol LOPE, closed Thursday at $96.05 a share, roughly where it started 2020. The stock traded as high as $132.72 last August. The company’s stock-market capitalization or worth is around $4.5 billion, placing it among the two dozen or so top Arizona-based corporations.

Reach the reporter at russ.wiles@arizonarepublic.com.

Republic reporter Rachel Leingang contributed to this article.

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