Add This to a LONG List of Reasons to Avoid APOL Stock

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Just when you think nothing else can possibly go wrong for Apollo Education Group (APOL), the market dishes out a surprise. The for-profit school is facing a whole new hurdle today, courtesy of the Federal Trade Commission.

APOL, APOL stock, Apollo EducationIn short, the FTC is finally digging deeper into Apollo Education’s marketing practices, leaving no stone unturned. The commission has asked for information regarding everything from enrollment to recruiting to financial aid awards.

While the APOL stock price fell as much as 9% on this morning’s news, impressively, it’s since bounced back to near-breakeven levels. Then again, down 60% year-to-date in the shadow of a mountain of problems — the least of which is waning revenue — the worst-possible-case scenario may have already been baked into the price of APOL stock.

And yet, there’s still plenty of room for things to get worse over the long-run.

Here We Go Again

News of the FTC’s interest became public knowledge this morning when Apollo Education disclosed it in an SEC filing. The notice simply stated:

“Apollo Education Group, Inc. (“Apollo” or the “Company”) announced that it received yesterday a Civil Investigative Demand from the U.S. Federal Trade Commission (the “FTC”). The Demand indicates that it relates to an investigation to determine if certain unnamed persons, partnerships, corporations, or others have engaged or are engaging in deceptive or unfair acts or practices in or affecting commerce in the advertising, marketing, or sale of secondary or postsecondary educational products or services or educational accreditation products or services. The Demand requires Apollo to produce documents and information regarding a broad spectrum of the business and practices of its wholly-owned subsidiary, University of Phoenix, Inc., including in respect of marketing, recruiting, enrollment, financial aid, tuition and fees, academic programs, academic advising, student retention, billing and debt collection, complaints, accreditation, training, military recruitment, and other compliance matters, for the time period of January 1, 2011 to the present.”

It’s important to understand that a request for information isn’t an accusation. On the other hand, owners of APOL stock should know the FTC doesn’t go nosing around unless it’s pretty sure it’s got a reason to do so.

If it seems like a rehash of news that surfaced a year and a half ago regarding closer scrutiny of Apollo Education and other for-profit schools, it isn’t. At that point, the Department of Justice, the SEC, the Department of Education, as well as several states’ attorney generals were all scrutinizing the industry to various degrees, making it clear something was amiss.

This is the first time the Federal Trade Commission has sunk its teeth into APOL like this, though. And incredibly enough, it’s the FTC that may end up being able to do the most damage to the school’s business model.

The FTC Has the Biggest Stick

In some (surprising) ways, the FTC of all agencies could create the biggest of problems for the for-profit schools as we know then today.

The matter of how these businesses operate would seemingly fall under the jurisdiction of the Department of Education. And, in many regards it still does. The recently-enacted “Gainful Employment” rule established by the DOE could be wiped away after President Obama leaves office. In the meantime, though it’s not likely, the wording of spending bills under consideration could effectively declaw the Department of Education’s ability to enforce its new rules.

As for the SEC, it can fine for-profit schools for false or misleading financial statements, but it has no jurisdiction regarding what happens in the classroom or after graduation; the SEC can’t hold student loan funding over any school’s head. Unless APOL decides to get creative with its accounting, the SEC is powerless here.

The Federal Trade Commission, however, is funded to have a broad reach. It can ultimately dictate how APOL and its peers operate specifically because of its authority that in most regards doesn’t first require a court case.

The FTC’s authority is rather clear:

“The basic consumer protection statute enforced by the Commission is Section 5(a) of the FTC Act, which provides that ‘unfair or deceptive acts or practices in or affecting commerce…are…declared unlawful.’ (15 U.S.C. Sec. 45(a)(1)). Safe Web amended Sec. 5(a) ‘unfair or deceptive acts or practices’ to include such acts or practices involving foreign commerce that cause or are likely to cause reasonably foreseeable injury within the United States or involve material conduct occurring within the United States.

‘Unfair’ practices are defined as those that ’cause[] or [are] likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition’ (15 U.S.C. Sec. 45(n)).”

Moreover, the Federal Trade Commission does have the authority to make specific rules as deemed necessary…

“In lieu of administrative adjudications against individual respondents, the Commission may use trade regulation rules to remedy unfair or deceptive practices that occur on an industry-wide basis. Under Section 18 of the FTC Act, 15 U.S.C. Sec. 57a, the Commission is authorized to prescribe ‘rules which define with specificity acts or practices which are unfair or deceptive acts or practices in or affecting commerce’ within the meaning of Section 5(a)(1) of the Act. The statute requires that Commission rulemaking proceedings provide an opportunity for informal hearings at which interested parties are accorded limited rights of cross examination. Before commencing a rulemaking proceeding the Commission must have reason to believe that the practices to be addressed by the rulemaking are ‘prevalent’ (15 U.S.C. Sec. 57a(b)(3))”

Though the decisions and rulings the FTC makes are subject to appeal, the last thing Apollo Education and owners of APOL stock want is time in the spotlight in a courtroom, where sales practices become a matter of public record.

Bottom Line for APOL Stock

This isn’t to say the FTC’s interest is completely damning. But, if the FTC chooses to pursue its finding further and do something about it, there’s little that can be done to prevent it… unlike the new Gainful Employment rules, which may or may not stick.

Just add it to the lengthening list of reasons bargain-hunting investors may still not want to get anywhere APOL.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/apollo-education-group-apol-stock-ftc-request/.

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