Kaplan Colleges Can’t Kill False Claims Suits

His co-plaintiff Carlos Urquilla-Diaz sued Kaplan for firing him in 2005, after Diaz notified it that he would expose Kaplan's method of recruiting students and other violations to federal and state authorities.

Seitz ruled in that case that the plaintiffs may sue Kaplan under the False Claims Act if they could prove Kaplan applied for federal funds while knowing it was not in compliance with the Higher Education Act.

But Seitz dismissed several claims, finding that the plaintiffs had failed to plead them with particularity.

"While the second amended complaint alleges that grades were inflated in order to maintain eligibility to receive Title IV funding, which requires satisfactory academic progress, relators have not set out how the alleged grade inflation violates any rules or regulations," Seitz wrote. "Furthermore, the regulation applies to a student's eligibility to receive HEA funds, not an institution's eligibility."

Seitz applied the same reasoning to the plaintiffs' incentive compensation claim. While the plaintiffs acknowledged that Kaplan's retention bonuses, cash bonuses and other incentives paid to student recruiters were based on various factors, they argued that Kaplan took into account only student enrollment numbers. Seitz dismissed that argument as "bare conclusions."

The plaintiffs also argued that Kaplan violated the 90/10 Rule, which bars an eligible institution from receiving more than 90 percent of its revenue from federal funds for tuition and student fees. They claimed that Kaplan rerouted federal loan money to its employees, who paid tuition at Kaplan and received tuition tax credits from the IRS.

But Seitz ruled that the plaintiffs had failed to show how Kaplan's accounting practices violated the 90/10 Rule.

Seitz also found that the whistle-blowers' claims of false statements and false documents failed for lack of specificity.

In its motion to dismiss, Kaplan claimed that Gillespie had argued nonexistent violations of the Rehabilitation Act. Kaplan said these issued cannot serve as the basis for a fraud claim under the False Claims Act.

Seitz disagreed. She noted that in 2007 the Department of Education's Office of Civil Rights concluded that Kaplan was in violation of the Rehabilitation Act, and directed the school to correct specific violations.

"All of the violations listed by OCR were system-wide violations, not violations arising from the treatment of a specific individual," Seitz wrote.

Gillespie may pursue alleged violations of the Rehabilitation Act only until the moment when Kaplan corrected the violations, as acknowledged by the DOE's Office of Civil Rights.

The court also upheld Diaz's retaliation claim, since Kaplan knew Diaz was notifying federal and state authorities of its noncompliance when it fired him.

Seitz dismissed a third complaint against Kaplan, which also alleged that the school violated the Higher Education Act's ban on incentive compensation.

Jorge Torres, a former director of admissions at Kaplan's Milwaukee-based campus, claimed that Kaplan paid bonuses to its student recruiters based on enrollment and financial aid numbers and conditioned its admission staff's continued employment on the number of students they recruited.

Torres claimed that Kaplan caused students and private lenders to make false claims to the government, because Kaplan was not eligible to receive federal funds.

But Seitz ruled that Kaplan's policy of conditioning continued employment on minimum enrollment numbers did not violate the Higher Education Act.

Seitz dismissed Torres' additional claims, finding they were duplicative of the claims in the Pennsylvania and Florida actions.

In August 2010, Kaplan was one of 15 for-profit universities subjected to a Senate hearing on the schools' alleged misleading practices, such as manipulating job-placement statistics to boost student enrollment and increase federal funding. A scorching Government Accountability Office report that month found violations at every one of more than a dozen for-profit chain colleges the GAO investigated.

Many of the profit-seeking colleges then faced shareholder class actions when their stock prices dropped.

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.

Email *

Submit