Analysis: San Francisco 49ers CEO Faces Insider Trading Allegations in Chegg Lawsuits
San Francisco 49ers’ chief executive Jed York stands accused of insider trading and violating federal securities laws in two lawsuits against the leadership of a Silicon Valley online education firm.
Defendants include the officers and board of directors of Chegg Inc., where York has served as a director since 2013. The lawsuits contend that York and the other Chegg directors concealed from shareholders that the firm enabled and profited from academic cheating during the pandemic when college students used its service to obtain real-time answers while they were in the middle of taking online examinations.
According to the lawsuits, when students learned that a Chegg subscription account would provide them with answers to test questions during their exams in real time, the firm’s revenue skyrocketed. But as soon as colleges resumed administering tests in person and students couldn’t cheat on their exams by using Chegg’s services, company revenues cratered and the stock price tumbled.
The civil litigation alleges that Chegg’s executives and board members lied to investors by claiming that the firm’s soaring revenues were part of a long-term growth trend brought about by their skillful and conscientious management. Court documents assert that instead, the leadership team knew the real reason behind the earnings growth was widespread test cheating—enabled by the firm’s products during a temporary and time-limited period when almost all college students were required to take their hourly and final examinations online.
The lawsuits also allege that Chegg’s executive team deceived investors about the extent of cheating enabled by Chegg’s platform and the long-term sustainability of the firm’s revenues. Then these leaders sold millions of dollars worth of stock shares to enrich themselves at inflated prices, even going so far as to stage a February 2021 secondary public offering before the truth was disclosed.
These two shareholder derivative lawsuits (Choi v. Rosensweig et. al. and Robinson v. Rosensweig, et. al.) had been filed in the U.S. District Court for the Northern District of California in December 2021 and March 2022, then consolidated early in 2023. Even though York had been listed as a defendant on both lawsuits’ original complaints, the San Francisco Chronicle broke this story in August 2023 after “connecting the dots” that the consolidated suits against Chegg’s directors also target the 49ers’ chief executive officer.
The earlier Choi complaint claims breach of fiduciary duty, unjust enrichment, abuse of corporate control, gross mismanagement, and waste of corporate assets. The suit also claims that York and the other defendants violated Section 14 of the Exchange Act because they made false and misleading statements or omissions in Securities and Exchange Commission filings and written proxies supporting stock sales (17 C.F.R. § 240.14a-9).
The consolidated litigation asks the court to compel Chegg to comply with securities regulations after replacing its board of directors. The suits also argue that the court should “pierce the corporate veil” and hold the defendants personally liable for damages.
What is Chegg?
Chegg has appeared all over the headlines recently, and the firm is no stranger to our readers here at OnlineEducation.com. A few months ago, we published this profile:
The Santa Clara, California education company earned $767 million in 2022 by selling subscriptions to its online platform that offers college students help with homework and exam preparation, along with value-added services like online tutoring. The firm’s database reportedly contains more than 79 million solved problems and model answers—potentially the largest collection of such academic data in existence—including popular step-by-step solutions to commonly asked questions.
OnlineEducation first covered Chegg in May 2023 after the company’s stock plummeted 50 percent in one day following the CEO’s admission that ChatGPT was hurting Chegg’s business. That disclosure was historic because it marked the first time any company disclosed that its revenue was suffering because of an artificial intelligence platform.
Then, OE published another Chegg analysis a few weeks later in June following the Federal Trade Commission’s crackdown on the firm for lax data integrity practices. The FTC had required Chegg to negotiate that consent decree because of Chegg’s online security breaches that exposed confidential customer and employee data openly on the internet.
Who is Jed York?
Forty-two-year-old John Edward “Jed” York is the son of Denise DeBartolo York and John York, and he’s also the nephew of Edward DeBartolo Jr., who had owned San Francisco’s National Football League team for 23 years. DeBartolo transferred the franchise to his sister in 2000 after the NFL barred him from control over the 49ers for a year following his criminal conviction in the 1998 Edwin Edwards political corruption scandal. President Donald Trump then pardoned DeBartolo in 2020.
After graduating with a BA in finance and history from the University of Notre Dame 20 years ago, York worked on Wall Street as a financial analyst at Guggenheim Partners but left after one year. Soon, his parents’ football team hired him as a director of strategic planning, then promoted him to vice president in 2005, to president in 2008—and finally to CEO in 2012, a role he’s served in ever since.
Chegg hired him as a board member in June 2013, eighteen months after the 49ers appointed him as chief executive officer. York currently serves as chairman of the board’s Compensation Committee and as a member of its Governance and Sustainability Committee.
In fiscal year 2020, he received $270,000 in compensation and owned $9.4 million worth of Chegg’s stock. The Chronicle reports that since 2013, he’s earned $7 million from Chegg: $2 million from his part-time director’s job, and almost $5 million through selling Chegg’s stock. On average, that works out to about $700,000 per year.
Designed to Cheat?
In a jaw-dropping passage that kicks off the Choi complaint, plaintiff Rak Joon Choi alleges that Chegg’s defendants—including York—had deliberately created the firm’s products to help college students cheat:
Chegg’s online platform was designed, inter alia, to help students cheat on exams and other assignments. The shift to online learning, including the online administration of exams and other assignments previously administered in person, created new opportunities for students using Chegg’s platform to cheat.
During and prior to the Relevant Period, the Individual Defendants enabled the Company to monetize off its platform’s capacity to assist in academic cheating, including by providing Chegg users answer sets to copyrighted questions produced by textbook manufacturers, like Pearson Education, Inc. (“Pearson”), without permission (the “Copyright Infringement Misconduct”), (collectively, the “Cheating Misconduct”).
In September 2021, Pearson PLC—the world’s largest educational publisher—also filed a lawsuit against Chegg in the U.S. District Court for the District of New Jersey. Because Chegg allegedly continues “to reprint [Pearson’s] end-of-chapter questions in connection with its study guides and solutions” without the publisher’s permission, Pearson claims in the Pearson v. Chegg lawsuit that Chegg is openly violating its copyrights and damaging its brand.
The shareholder complaints also allege that York and other defendants, including Chegg’s CEO Dan Rosensweig, engaged in insider trading in violation of federal law. The filings argue that the defendants unjustly enriched themselves by selling their shares of stock at artificially inflated prices before the market learned about the full extent of Chegg’s cheating scandal. Specifically, according to court documents and SEC data, York sold 10,000 shares of Chegg stock on July 1, 2020, at $68 per share, earning $680,400. Twelve weeks later on October 1—when the stock price had been “artificially inflated” up to $73.38 per share—York sold another 10,000 shares and received $733,800, earning $1.4 million from the two sales.
The lawsuits claim that York had been tipped off through access to material, nonpublic information about the widespread extent of Chegg’s cheating problem and its potentially devastating effect on the firm’s future revenues. Then he sold his shares only months before the company’s public misstatements and omissions were first exposed, according to the complaints.
For example, the Choi complaint points out that multiple news outlets across the nation first reported in December 2020 that Texas A&M University officials had recognized that students were using Chegg to cheat during their online examinations. Roughly 12 months later, the university’s tracking software detected “on a very large scale” that by using Chegg, many students “were completing exams so quickly that it was not possible for them to have been reading the questions.” The Texas Tribune then quoted the director of the college’s honor code office, who said that “hundreds of examples” of these “Chegging” students existed.
The Chronicle also points out that professors and officials not only at Texas A&M but also at Duke, Purdue, Boston University, Virginia Tech, Georgia Tech, and the University of Nebraska had contacted Chegg directly “about the extensive cheating.” That fact had appeared in the complaint for a closely related shareholder class-action fraud lawsuit against Chegg titled Leventhal v. Chegg, Inc. that is also ongoing.
On November 1, 2021, Chegg announced its financial results for the quarter ended on September 30. This period encompassed the start of the first semester since Covid’s onset, in which online education had been significantly curtailed. The firm at last disclosed an abrupt deterioration in the company’s growth, which CEO Rosensweig acknowledged had been known internally since September, almost eight weeks prior.
On this news, the stock price tanked. The price plummeted almost 50 percent, from $62.76 per share on November 1 to $32.12 per share the following day. The plaintiffs in the Choi and Leventhal actions filed their shareholder lawsuits approximately two months later.
Reactions from York and Chegg
On August 19, York downplayed the allegations in a joint interview with the San Jose Mercury News and KNTV-TV, the San Francisco Bay Area’s NBC affiliate in San Jose. “It’s 18 months old. It’s a completely frivolous lawsuit,” York said. “I think they’re grasping at straw[s] to bring this out publicly now.”
“I’m proud of our work with Chegg, proud of my work on the board and with its scholarship program,” he added. “I have no doubt this will be taken care of in no time. I wish I could say more, but I will let the process play out.”
Meanwhile, a Chegg spokesperson said that the litigation has no merit and that the company is vigorously defending itself from these lawsuits: “Chegg takes academic integrity very seriously and has invested significant resources to protect it. Chegg has been helping millions of students learn and thrive for many years, including during the pandemic, creating a transformative digital learning platform to improve outcomes.”
Currently, as we go to press in early October 2023, the consolidated cases—now retitled as In RE Chegg, Inc. Derivative Litigation—have been delayed. They appear to be waiting for a ruling on a complex confidential evidence issue raised by Chegg in the Leventhal class action fraud case, along with a ruling in the Pearson copyright infringement case.