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A Plea to the Justice Department: Don’t Let EDMC Off Easy

Published:  May 19, 2011
Issues:  

The recent decision by the U.S. Justice Department (DOJ) to join a whistleblower lawsuit accusing a major for-profit higher education company of deliberately violating the federal incentive compensation ban is an extremely welcome development -- but only if federal prosecutors stand firm and refuse to settle the case.

At issue is a False Claims lawsuit brought by two former Education Management Corporation (EDMC) employees that accuses the country’s second largest for-profit school chain of defrauding the government of financial aid funds by defying a federal law prohibiting colleges from compensating recruiters based on their success in enrolling students. “In direct violation of the ban on incentive compensation, Defendants created a ‘boiler room’ style sales culture, in which they not only pay incentive compensation, but they make the recruitment of students to their schools the sole focus of their compensation regime,” the lawsuit states.

As a result, the whistleblowers allege, the company puts a tremendous amount of pressure on its recruiters to get students in the door and signed up for classes and financial aid, even if they know full well that many of these individuals have little chance of succeeding. Unsurprisingly, EDMC officials deny these allegations, saying that the case is “unwarranted and without merit.”

If this case sounds familiar, that’s because in recent years similar lawsuits have been filed against many of the nation’s largest for-profit higher education companies. But none of these lawsuits have ever gone to trial and been heard by a jury. Many, in fact, have ended in settlement agreements, in which the companies agree to pay a fine but do not have to admit any wrongdoing.

For example:

  • In 2007, the then-California Attorney General Jerry Brown settled a deceptive practices lawsuit that his office brought against Corinthian Colleges. The lawsuit charged Corinthian with misleading prospective students about its schools’ job placement rates and the starting salaries of their graduates; running 11 sub-standard programs, and falsifying records provided to the government. The settlement agreement required the company to pay a $6.5 million fine, provide some restitution to students, and close down the sub-standard programs. But it otherwise left the company off the hook.
  • In 2009, the Justice Department cut a deal with the for-profit college chain Alta Colleges (the parent company of Westwood College)  to settle allegations that were raised in a False Claims lawsuit that its Texas campuses had engaged in practices “designed to mislead prospective students and to misrepresent material facts to them.” Among other things, the government found that school recruiters had lied to prospective students about their job placement rates (saying that they were more than 90 percent when they actually were just over 50 percent) and about their ability to transfer credits to other schools (even though no other accredited college in Texas would take them). While the government could have demanded the schools return all of the federal financial aid funds they had received, the DOJ settled the case for just $7 million.
  • Also in 2009, the Apollo Group, the owners of the University of Phoenix, agreed to pay $78.5 million to settle a False Claims lawsuit brought by former recruiters that accused the giant for-profit higher education chain of routinely violating the incentive compensation ban. The settlement allowed the company "to avoid what would have been a high-profile trial and the potential of a much larger payout given the size of the school and allegations the practices have gone on for years and continue today,” the Arizona Republic wrote at the time.

These settlements amount to little more than a slap on the wrist for these extremely lucrative companies that otherwise would be in jeopardy of being expelled from the federal student aid programs. The fines are all too often seen as simply being the cost of doing business, and they seldom lead companies to change their behavior. For example, allegations of serious recruiting abuses continue unabated at Corinthian and Westwood Colleges. And while University of Phoenix officials have made major changes to the schools'  recruiting practices in recent years, it’s unclear whether they would have done so if a friendlier administration was in the White House.

What’s more, the settlements have not only given cover to the individual companies but to the for-profit higher education sector as a whole. The fact that nobody has been found guilty of anything has allowed the industry, as well as its backers on Capitol Hill and Wall Street, to remain in denial about the extent of the abuses that have occurred and the damage that has been done. Instead, it has made it infinitely easier for career college leaders and lobbyists to portray themselves as innocent victims of a partisan witch hunt, as they try to fend off efforts by the Obama administration and Senate Democrats to rein in the worst players and practices in the industry.

The federal and state prosecutors who offered these deals were, for the most part, well intentioned. They undoubtedly thought they could get concessions from these corporations, without threatening the viability of the companies. Unfortunately, this approach has clearly backfired, as these companies have generally refused to change their ways, and students continue to be harmed.

That’s why we at Higher Ed Watch believe it’s absolutely vital that the Justice Department see its case against EDMC through to its conclusion. For the good of students and taxpayers alike, this lawsuit deserves its day in court.

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