Ernst & Young, For-Profit School Still Face Lawsuit

(CN) - The 9th Circuit on Friday revived a whistle-blower lawsuit alleging that for-profit Corinthian Colleges illegally collected billions of dollars in federal education funds with the help of auditor Ernst & Young.

The federal appeals court in Pasadena reversed a lower court's dismissal of the case, ruling that the two Californians who brought the action, known as relators, should get at least one chance to amend their allegations.

Nyoka Lee and Talala Mshuja sued Corinthian Colleges Inc., members of Corinthian's board of directors, and Ernst & Young in California's Central District Court. Corinthian operates for-profit vocational schools throughout the country and "receives billions of dollars from the federal government" in education funding, according to the ruling. In their whistle-blower complaint on behalf of the U.S. government, Lee and Mshuja claimed that Corinthian College had violated the Higher Education Act's ban on paying recruiters. They also alleged that Corinthian violated the False Claims Act when it collected federal education funds while knowingly violating the law, and that Ernst & Young did the same when it certified Corinthian's compliance.

The complaint claimed that Corinthian pays bonuses to recruiters based on the number of students they recruit, and that it fires admissions officers who fail to meet recruiting quotas - all in violation of federal law.

U.S. District Judge Philip Gutierrez dismissed the case with prejudice, ruling that the school's recruiter-compensation program complied with the safe-harbor provision of education law, which allows some payments to recruiters as long as they are not based solely on quotas.

The judge also found that the plaintiffs had failed to show that Corinthian and Ernst & Young had acted with malicious intent.

In a unanimous ruling, the three-judge appellate panel reversed and gave the plaintiffs an opportunity to amend their complaint, finding that the lower court had "dismissed with prejudice the complaint without considering whether additional facts could cure any deficiencies."

"Here, we can conceive of additional facts that could, if formally alleged, support the claim that Corinthian made false statements to the DOE," Judge Betty Fletcher wrote for the panel, referring to the Department of Education. "As previously discussed, relators could allege that the Corinthian employee performance rating system is merely a proxy for employee recruitment numbers, or that the system is based merely on those basic requirements that any employee would be required to meet.

"In addition, relators repeatedly insist in their briefs that, in practice, Corinthian recruiters were expected to meet enrollment quotas and understood that this was the basis on which they would receive promotional salary increases. relators could additionally or alternatively allege that, despite the Compensation Program's purported or documented reliance on something other than recruitment numbers, these salary increases are in practice determined on the sole basis of recruitment numbers. It is Corinthian's implementation of its policy, rather than the written policy itself, that bears scrutiny under the HEA, and such allegations would require additional discovery."

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