For-Profit School Can’t Put Fraud Case to Bed

(CN) - For-profit college operator Education Management Corp. cannot put to rest allegations that it lied to snag more than $11 billion of U.S. student aid for which it was ineligible, a federal judge ruled.

The dispute stems from a False Claims Act suit Lynntoya Washington, a former admissions worker for the Art Institute of Pittsburgh, filed against EDMC in April 2007.

Nearly 126,000 students were enrolled as of October 2013 in the 110 career programs that the Pittsburgh-based EDMC operates across North America, according to its website.

The federal government, 11 states, and the District of Columbia chose to intervene in August 2011, claiming that EDMC has obtained more than $11 billion in federal student aid since July 2003, under the false pretense that it was complying with the Higher Education Act of 1965's ban on paying admissions personnel incentives to recruit new students.

In hopes of upping student enrollment from 4,500 in 2006 to 50,000 in 2011, EDMC accepted all potential students who completed an application, regardless of their high school grades or the quality of their written essay, the intervenor complaint states.

EDMC's annual intake of federal student aid funds in turn increased rapidly, from $656 million in 2003-04 to $2.578 billion in 2010-11, the government claims.

In an October 2011 motion to dismiss that case and two similar suits filed in Minnesota and Washington, D.C., EDMC argued that its compensation regime complied with the Education Department's 2002 "Safe Harbor" regulation.

The plan takes into consideration factors that the department allegedly deemed "appropriate and permissible," including enrollment and job-performance figures, EDMC said.

Uncle Sam countered that EDMC's compensation system "is driven entirely by student enrollment numbers and adjusts compensation based solely on the number of students recruited."

U.S. District Judge Terrence McVerry refused to dismiss the four suits against EDMC in May 2012, finding that the plan is compliant "as written," but not "as implemented."

He summarized the claim as alleging that "EDMC has used the written compensation plan as a sham or cover-up for its actual implementation of a compensation system based solely on quantitative factors, thereby violating the Incentive Compensation Ban."

McVerry last week refused to grant EDMC summary judgment that he noted could put "an end to this massive, complex and expensive litigation."

"The court shares EDMC's concerns regarding the time and expense of discovery in this case, and it is certainly possible that EDMC has properly compensated its assistant directors of admissions ('ADAs') in compliance with all government requirements," the 11-page opinion states. "Unfortunately, the instant summary judgment motion - prior to the close of discovery and based on EDMC's proffered 'statistical evidence' - cannot provide that avenue for finality.

"The design and structure of the federal student loan program ... is fundamentally flawed," McVerry continued, noting that the risk of defaults falls on students, not institutions.

Though EDMC said its salary-worksheets database reflect the values that were used to calculate actual salary adjustments for each admission director, McVerry said this argument "proceeds from a flawed fundamental premise - namely, that the data in its salary worksheets is real."

In addition to the possibly invalid underlying data, EDMC failed to defend the accuracy of that quality-factor ratings on salary worksheets, the court found.

EDMC's expert "took the data from the face of the salary worksheets, but he did not conduct any analysis to verify whether that data reflected the honest and accurate evaluation," McVerry wrote.

Discovery on those claims must proceed at this time, the ruling states.

In a related case in which the government did not intervene, McVerry last year advanced claims filed by another former EDMC admissions counselor.

Goldman Sachs and Providence Equity Partners acquired EDMC and its 70 schools for $3.4 billion in 2006.

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