Education Management Corporation Accused of Widespread Fraud

While the civil lawsuit is one of many raising similar charges against the expanding for-profit college industry, the case is the first in which the government intervened to back whistle-blowers’ claims that a company consistently violated federal law by paying recruiters based on how many students it enrolled. The suit said that each year, Education Management falsely certified that it was complying with the law, making it eligible to receive student financial aid.

“The depth and breadth of the fraud laid out in the complaint are astonishing,” said Harry Litman, a lawyer in Pittsburgh and former federal prosecutor who is one of those representing the two whistle-blowers whose 2007 complaints spurred the suit. “It spans the entire company — from the ground level in over 100 separate institutions up to the most senior management — and accounts for nearly all the revenues the company has realized since 2003.”

Education Management, which is based in Pittsburgh and is 41 percent owned by Goldman Sachs, enrolls about 150,000 students in 105 schools operating under four names: Art Institute, Argosy University, Brown Mackie College and South University.

In a statement Monday, the company denied any wrongdoing.

“The pursuit of this legal action by the federal government and a handful of states is flat-out wrong,” said Bonnie Campbell, a spokeswoman for the company’s legal counsel. “EDMC’s 2003 compensation plan followed the law in both its design and implementation, as EDMC’s response to the governments’ complaint will show.”

“Federal regulations issued in 2002 permitted companies to consider enrollments in admission officer compensation, so long as enrollments were not the sole factor considered,” the statement continued. “To ensure compliance with this regulation, EDMC worked closely with outside experts in both human resources and education law to develop a plan that required consideration of five quality factors along with enrollment numbers to determine salaries.”

The government’s incentive compensation ban was designed to stop companies from signing up unqualified students for their aid money. The False Claims Act, the basis for the government’s lawsuit, provides for triple damages, and since the complaint said all the government student aid came from such claims, the damages could be as much as $33 billion. As a practical matter, though, such huge cases are usually settled for far less than the maximum damages.

Since 1986, the government has recovered more than $25 billion in false-claim cases, many of them based on pharmaceutical company marketing, hospitals overbilling or defense contractor fraud. Given their explosive growth, for-profit colleges — which now serve more than 10 percent of the students enrolled in higher education, yet account for about half of all defaults on student loans — could become a new prime source for such cases.

According to the 122-page complaint, Education Management got $2.2 billion of federal financial aid in fiscal 2010, making up 89.3 percent of its net revenues.

The states joining in the suit are California, Florida, Illinois and Indiana.

The complaint said the company had a “boiler-room style sales culture” in which recruiters were instructed to use high-pressure sales techniques and inflated claims about career placement to increase student enrollment, regardless of applicants’ qualifications. Recruiters were encouraged to enroll even applicants who were unable to write coherently, who appeared to be under the influence of drugs or who sought to enroll in an online program but had no computer.

According to the suit, recruiters were also led to exploit applicants’ psychological vulnerabilities — for example, a parent’s hopes of moving a child out of a dangerous neighborhood.

Under the False Claims Act, individual whistle-blowers can file suits charging that the government has been defrauded, leaving the government the option to intervene. Either way, the government gets the majority of any money recovered; the whistle-blowers also get a share.

The Justice Department, which has declined to intervene in two dozen whistle-blower suits charging for-profit colleges with fraudulent recruiting practices, said in May that it would act against Education Management, four years after a complaint filed by two former employees: Lynntoya Washington, an assistant director of admissions at the Art Institute of Pittsburgh Online Division, and Michael T. Mahoney, the director of training for the Online Higher Education Division.

Publicly traded for-profit college companies have recently been a target both of government scrutiny and whistle-blower suits. In 2009, the Apollo Group, which owns the University of Phoenix, the largest for-profit college, settled a whistle-blower case for $78 million.

The complaint noted that Todd Nelson, the chief executive of Education Management, previously headed the University of Phoenix. At Phoenix, he signed a $9.8 million settlement with the Department of Education, which had found that Phoenix had “systematically and intentionally” violated federal rules against paying recruiters for students. Phoenix never admitted any wrongdoing in either that settlement or the larger whistle-blower settlement two years ago.

The Justice Department complaint said Education Management’s compensation system was similar to the one at Phoenix; company officials have said it was set up long before Mr. Nelson joined it in 2007.

In 2003, Education Management’s chief executive was Jock McKernan, a former governor of Maine who now serves as chairman of the board. Mr. McKernan is married to Senator Olympia J. Snowe, a Maine Republican whose 2010 financial disclosure form lists Education Management stock and options worth $2 million to $10 million.

via nytimes.com