The U.S. Department of Justice dealt a powerful blow this week to efforts by the student loan company Nelnet to derail a Federal False Claims lawsuit filed against the corporation and five other lenders that engaged in a scheme to bilk taxpayers by systematically overcharging the government for subsidy payments on federal loans they made to students. The lawsuit, brought by by Jon Oberg, the former Department of Education researcher who uncovered the 9.5 student loan scandal, seeks the return of approximately $1 billion to the government in overpayments these lenders improperly received.
On Monday, the Justice Department (DOJ) filed a brief with the U.S. District Court for the Eastern District of Virginia urging the court to reject a central argument that Nelnet has repeatedly made to try and get the judge to throw out the lawsuit -- namely that Oberg can't sue the company on behalf of the government because federal officials have already resolved the case.
At issue is the settlement agreement that the Department of Education [ED] reached with Nelnet in January 2007. Concurring at the time with the Department's Inspector General that the Nebraska-based loan company and other lenders had illegally grown the volume of loans that they claimed were eligible for the 9.5 subsidy rate, then-Education Secretary Margaret Spellings barred Nelnet from receiving any further 9.5 payments. She did not, however, require the loan company to return the overpayments it had already received. In addition, she included a statement in the settlement saying that "Nelnet and the Department agree that bona fide, good faith disputes and controversies exist between them concerning the matters described."
This declaration, Nelnet argues, provides proof enough that further action is not warranted in the case. "It is difficult to imagine that the agency charged with administration and enforcement of the HEA [Higher Education Act] and its implementing regulations could be the victim of fraud committed by a party having knowingly submitted a false claim, where that agency, with knowledge of the facts, acknowledges and agrees that the party submitting that claim did so (i) believing that it was authorized to do so, and (ii) in good faith and in the absence of any fraudulent intent," the company's lawyers wrote in a brief in October.
In a separate brief last month, Nelnet's counsel wrote that the Education Department's decision to let the company off without any damages means that "there can be no liability here." Oberg's claim "cannot succeed," the lawyers explained, because "for the Relator to advance an FCA [False Claims Act lawsuit] when ED has renounced similar claims would improperly 'supplant the regulatory discretion granted to the [government].'"
The Justice Department, however, dismissed Nelnet's arguments out of hand.
First, the DOJ notes in its brief that the Education Department made entirely clear in the settlement agreement that it did not, and could not, release Nelnet from future potential False Claim lawsuits related to the matter. "The Court need only read one provision of the Nelnet Agreement to reject Nelnet's motion on this point," the brief says, citing the following statement that was included in the settlement document:
The [Education] Department does not have the authority to, and this Agreement does not, waive, compromise, restrict or settle any past, present, or future violations by Nelnet, its officers, or employees of the criminal laws of the United States or any action against Nelnet, its officers or employees for civil fraud against the United States.
"The Nelnet Agreement carves out an FCA release and there is no defensible reading of that agreement that can make it mean the opposite thereof," the DOJ writes.
Second, even if the Education Department had not included the provision in the settlement agreement, federal law is clear that the U.S. Attorney General is the only government official who has the definitive authority to "resolve claims of fraud on behalf of the United States," the brief states. Since the Justice Department "was not a party to" the settlement, the loan company is wrong to state that the case has been fully resolved by the federal government. "To the best of Government's counsel's knowledge," the Justice Department writes, "no court has dismissed an FCA suit (intervened or declined) on the basis of an administrative settlement not approved by the Attorney General, and defendants are asking this Court to become the first to do so."
Sorry, Nelnet, but it looks like you're going to have to argue your case in court before a jury. The trial is scheduled to start in mid-August.
[Disclosure: Jason Delisle, the director of the Federal Education Budget Project in the New America Foundation's Education Policy Program, has agreed to serve as an expert witness on behalf of the relator Oberg in the case.]