Halperin Questions Civil Settlements with For Profit Colleges

Law enforcement officials this week reached a global settlement with Education Management Corp. (EDMC), the second-largest for-profit education company in the country.

David Halperin

David Halperin

The $95.5 million settlement resolves allegations that EDMC violated federal and state False Claims Act (FCA) provisions by falsely certifying that it was in compliance with Title IV of the Higher Education Act (HEA) and parallel state statutes.

David Halperin, a lawyer and critic of for-profit colleges, questioned the settlement agreement.

“There are now scores of federal and state law enforcement investigations of big for-profit colleges, but most remain on the civil side, and in recent months the Justice Department, Federal Trade Commission (FTC) and a number of state attorneys general have settled civil cases with major for-profit colleges for very small amounts of money,” Halperin said. “EDMC was getting as much as $1.8 billion a year from taxpayers, and it settled for $95 million its False Claims Act case, which alleged $11 billion in ill-gotten gains by illegally paying sales commissions to its recruiters.”

“At the same time, EDMC settled all of the fraud investigations against it by 39 state Attorneys General — charging the company had deceived prospective students for many years — by agreeing not to collect about $100 million in private loans to its broke former students; but these were loans EDMC was never going to collect anyway.  EDMC also committed to tell the truth going forward. But why should a company that behaved and performed so badly continue to get federal student aid and continue to enroll students?”

“To avoid major penalties, EDMC claimed poverty, but where did all that money go?” Halperin asked.

“Former CEOs John McKernan, Todd Nelson, and Edward West, were all well-compensated,” Halperin said. “To my knowledge, the government hasn’t pursued them, or the three private equity outfits that owned much of EDMC during the period of abuses — Goldman Sachs, Providence Equity Partners, and Leeds Equity Partners.  All of those people ought to have plenty of cash on hand, even if EDMC says it’s poor.”

“Meanwhile, two Miami strip mall for-profit college execs — of FastTrain College and Dade Medical College, which were only getting tens of millions a year from taxpayers — are facing federal criminal cases in Miami.  Those owners committed serious abuses, but if the Justice Department is pursuing them criminally, why are the owners of Wall Street-backed firms like EDMC getting off easy?  The concern with lax enforcement and light penalties is that deception of students and taxpayers will remain a reasonable cost of doing business — crime will continue to pay.”

The primary allegation against EDMC was that the company unlawfully recruited students, in contravention of the HEA’s Incentive Compensation Ban (ICB), by running a high pressure boiler room where admissions personnel were paid based purely on the number of students they enrolled.

In addition to resolving these and other FCA claims, the global settlement also encompasses an investigation by a consortium of state Attorneys General, of consumer-fraud allegations involving deceptive and misleading recruiting practices.

EDMC, which is headquartered in Pittsburgh, Pennsylvania, operates nationwide under four post-secondary school brands: the Art Institutes, South University, Argosy University and Brown-Mackie College.

Student enrollment across EDMC’s school brands exceeds 100,000 students.

The settlement resolves four separate FCA lawsuits filed in federal court in Pittsburgh, Pennsylvania, and Nashville, Tennessee, under the qui tam, or whistleblower, provisions of the act, which permit private individuals to sue on behalf of the government for false claims and to share in any recovery.

The United States and five states intervened and actively litigated one of those four whistleblower lawsuits, United States ex rel. Washington, in the Western District of Pennsylvania.

The United States’ complaint in intervention alleged systemic violations of Title IV of the HEA’s ICB and parallel state provisions, which prohibit schools from paying recruiters based on their success in securing enrollments.

The United States and the plaintiff states claimed that from 2003 to the present, EDMC falsely certified to the U.S. Department of Education and various state offices of higher education that it was complying with the ICB, in order to be eligible to receive the federal grant and loan dollars that compose the majority of EDMC’s revenue.

In reality, according to the United States’ complaint in intervention, EDMC was running a high pressure sales business and paid its recruiters based only on the number of students they enrolled.

As a result of these allegedly false certifications, EDMC improperly enriched itself for more than 10 years with federal and state grant and loan dollars.  More broadly, EDMC’s alleged conduct resulted in exactly the problems that Congress sought to curtail when it enacted the ICB:  the enrollment of students in programs for which they lacked the necessary skills and qualifications, unsustainable student debt and default rates and schools’ pursuit of profits ahead of a legitimate educational mission.

The global settlement with EDMC also resolves three additional federal FCA lawsuits in which the government did not intervene, all involving various violations of Title IV of the HEA by EDMC.

The global settlement resolves a consumer fraud investigation by a consortium of 40 state Attorneys General, into EDMC’s deceptive and misleading recruiting practices.

The consumer fraud settlement requires EDMC to undertake various compliance obligations, including detailed disclosure obligations to students; prohibitions on deceptive or misleading recruiting practices and oversight by an administrator to ensure compliance.

The global settlement amount of $95.5 million reflects EDMC’s financial condition and current ability to pay.

The settlement proceeds will be shared among the United States, the co-plaintiff states and the whistleblowers and their counsel in the four FCA cases, and includes funds allocated for the compliance expenses of the state consumer fraud settlement, including the costs of the administrator and the acquisition and use of a sophisticated voice analytics system to record and analyze recruiters’ calls with students.

The United States will receive $52.62 million from the settlement, and will pay $11.3 million collectively to the relators in the four qui tam cases.

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