This week’s Department of Justice “Catch of the Week” goes to Education Management Corp. (EDMC), the second-largest for-profit education company in the country. On Monday, the company agreed to pay $95.5 million to resolves allegations it violated the federal False Claims Act and several state False Claims Acts by falsely certifying it was in compliance with Title IV of the Higher Education Act and parallel state statutes. The Pittsburgh-based company operates nationwide and enrolls more than 100,000 students under four post-secondary school brands: the Art Institutes, South University, Argosy University and Brown-Mackie College. See DOJ Press of Release.
Under Title IV of the Higher Education Act, schools are prohibited from paying recruiters based on their success in securing enrollments. The government alleged EDMC violated this so-called Incentive Compensation Ban by running a high pressure boiler room where admissions personnel were paid based purely on the number of students they enrolled. Specifically, the government claimed that from 2003 to the present, EDMC falsely certified to the US Department of Education and various state offices of higher education that it was complying with the ban. It needed to certify compliance to be eligible for federal grants and loans which comprise the majority of EDMC’s revenue. In reality, however, the company was allegedly running a high pressure sales business and paying its recruiters based only on the number of students they enrolled.
As the government put it:
EDMC’s alleged conduct resulted in exactly the problems that Congress sought to curtail when it enacted the Incentive Compensation Ban: 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.
In addition to the False Claims Act claims, the settlement also 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.
In announcing the settlement, a cadre of government enforcers, led by Attorney General Loretta E. Lynch, emphasized the government’s “deep commitment to protecting precious public resources; to defending American consumers; and to standing up for those who are vulnerable to mistreatment, abuse, and exploitation.” The Attorney General added that “EDMC’s actions were not only a violation of federal law but also a violation of the trust placed in them by their students – including veterans and working parents – all at taxpayer expense.” US Education Secretary Arne Duncan sent out a special warning to other career colleges: “We will not stand by while you profit illegally off of students and taxpayers. The federal government will continue to work tirelessly with state attorneys general to ensure that all colleges follow the law.”
The allegations first arose in series of whistleblower lawsuits filed under the qui tam provisions of the False Claims Act. They will collectively receive a whistleblower award of $11.3 million from the proceeds of the government’s recovery. Constantine Cannon Of Counsel Harry Litman, lead counsel for the whistleblowers, told the New York Times the evidence collected revealed “a real parade of horrible anecdotes . . . but the most vivid victims here are students who were reeled in with high-pressure tactics and wound up often defaulting with outsized loans that they can’t discharge in bankruptcy. It’s pretty tragic.”
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