PITTSBURGH (CN) – A massive False Claims case over $11 billion in student aid is proceeding against one of the nation’s largest providers of post-high school education.
Education Management Corporation, the Pittsburgh-based operator of over 100 schools, including Art Institutes across the country, couldn’t convince a federal judge to dismiss four suits over the company’s employee-compensation structure, which, officials say, violates the Higher Education Act of 1965’s ban on paying admissions personnel incentives to recruit new students.
That alleged impropriety means that since July 2003, Education Management obtained over $11 billion from federal student-aid programs under the false pretense that it was complying with the Act’s so-called incentive compensation ban, officials say.
According to the Government Accountability Office, the ban aims “to eliminate abusive recruiting practices in which schools enrolled unqualified students who then received federal student aid funds.”
In August 2011, the federal government, 11 states and the District of Columbia said in a suit that Education Management “created a ‘boiler room’ style sales culture and has made recruiting and enrolling new students the sole focus of its compensation system.”
In that suit, the United States elected to intervene in another False Claims suit, filed in April 2007 by Lynntoya Washington, a former admissions worker for the Art Institute of Pittsburgh.
Washington’s suit remained sealed for over four years while the federal government considered intervening; Minnesota and the District of Columbia later filed their own suits.
Education Management asked U.S. District Judge Terrence McVerry in October 2011 to dismiss claims from all four complaints, arguing that its compensation regime, as written, complied with a 2002 “Safe Harbor” regulation promulgated by the Department of Education, which detailed certain compensation practices that do not violate the incentive compensation ban.
Education Management’s compensation plan “falls squarely within the Safe Harbor,” the company argued.
“The Plan took into consideration not only enrollment figures, but also standard evaluative factors, such as qualitative factors of job performance, including professionalism, customer service, and business practices and ethics, that DOE has, even in its most recent revisions to the Safe Harbor regulation, recognized as appropriate and permissible,” it said in a brief.
But, the United States argued, “In practice, EDMC’s so-called ‘quality factors’ are nothing more than window-dressing, used to camouflage a compensation system that, in reality, is driven entirely by student enrollment numbers and adjusts compensation based solely on the number of students recruited.”
In a 50-page opinion filed Friday, Judge McVerry characterized the allegations against Education Management as “a massive and complex case.”
“It is certainly possible that EDMC has properly compensated its… [admissions workers] in compliance with all government requirements,” he wrote.
He ruled that plaintiffs failed to plead a plausible False Claims Act case concerning the company’s written employee-compensation plan, and dismissed claims based on the plan “as written.”
But, the judge said, plaintiffs’ case centers not on the plan as it was written, but as it was implemented.
“Plaintiffs’ primary contention is that EDMC failed to implement its Plan in accordance with the HEA,” he wrote.
“Under the ‘as implemented’ theory…Plaintiffs allege a knowing decision by EDMC executives to perpetuate a company-wide ‘sham’ Plan to cover up for prohibited compensation practices,” he noted.
“To put it starkly, Plaintiffs allege a coordinated, multi-billion dollar corporate-wide fraud,” the judge wrote.
For those allegations, plaintiffs are entitled to take discovery, McVerry found.
Defendants’ answers are due June 11.