CHICAGO (CN) - Shareholders say Career Education Corp., which runs more than 90 colleges in the United States and Europe, juggled its student placement statistics to avoid losing accreditation and federal funding, which is the company's "principal stream of revenue."
Kharran Bangari sued Career Education and its directors in a shareholders' derivative complaint in Cook County Chancery Court.
Bangari says the for-profit chain college, one of the largest in the nation, is under investigation by the attorneys general of New York and Florida, and that its Board of Directors "misrepresented the percentage of graduates having found job placement in their field of study."
"The professional schools operated by CEC derive greater than 80 percent of their tuition revenue from federal Title IV programs," the complaint states. "In order for institutions of higher education to be eligible to receive Title IV funding, among other things, they must be accredited. To maintain their accreditation, certain of CEC's schools must place 65 percent of their graduating students in the jobs that their studies ostensibly prepared them for. As a result, if one of these schools fails to place 65 percent or more of students in such jobs, it faces loss of accrediation. Loss of accreditation means loss of Title IV funding and the loss fo CEC's principal stream of revenue."
Bangari says that for years the company "has effectively been lying to prospective students about their very reason for enrollment."
"According to the company, if any one of its campuses were to lose eligibility for Title IV funding, it would likely need to be closed. The CEC Board has a fiduciary duty to implement and maintain internal controls and systems in order to comply with accreditation requirements at its schools and prevent violations of same.
"As a result of the individual defendants' breaches of fiduciary duty set forth herein, the company is now faced with accusations that it falsely represented to students and accreditors that certain schools in its Health Education and Art & Design programs achieved a 65 percent post-graduate rate of employment within the field that students studied, when in reality, the placement rates were much lower. The company is being investigated by the Attorneys General of New York and Florida in connection with violations of state laws regulating unfair business practices."
Bangari says that in August this year an investigation revealed that 36 of CEC's 49 Health Education and Art & Design schools placed fewer than 65 percent of its graduates in their fields of study.
"In November 2011, the Accrediting Counsel for Independent Colleges and Schools ('ACICS') directed the company, on behalf of its 49 Health Education and Art & Design institutions, to show cause at ACICS' December 2011 meeting as to why the institutions' current grants of accreditation should not be withdrawn by way of suspension due to the company's having misrepresented the percentage of graduates having found job placement in their field of study," the complaint states.
"The company's accreditation issues risk the very foundation of the company's viability as a going concern: access to Title IV funds. However, even if the 49 schools ultimately do not face probation, suspension or loss of accreditation, the company has been irreparably damaged. CEC already faces declining enrollment due to various unrelated issues. The very reason that students attend CEC schools is to obtain a job in their chosen field of study. Moreover, this is not the first time the company has faced these allegations. The revelation that for years CEC has effectively been lying to prospective students about their very reason for enrollment puts CEC institutions at a serious competitive disadvantage.
"By its own admission, the company has lost and spent millions of dollars as a direct result of the post-graduate employment statistic investigations and allegations. By restricting the mandate of the August investigation to only a statistically valid sample of graduates of schools in CEC's Health Education and Art & Design programs, and not all graduates of all schools in all segments, the company has failed to fully investigate the wrongdoing or put in place measures that will prevent the same problems from occurring in other areas of its business. Moreover, the fact that the August investigation reported that only 36 Health Education and Art & Design schools had engaged in wrongdoing, while the ACICS has demanded that all 49 show cause why they should not lose their accreditation demonstrates the inadequacy of the investigation. Accordingly, CEC and its shareholders have been, and continue to be, severely damaged by the individual defendants' misconduct. Yet, incredibly, the Board has not commenced legal action, or taken other steps, to recover damages for CEC against its wayward fiduciaries,"
Named as defendants are CEC directors Steven Lesnik, Leslie Thornton, Dennis Chookaszian, David Devonshire, Patrick Gross, Gregory Jackson and Thomas Lally.
The chain college is based in Schaumburg, Ill.
Bangari seeks exemplary damages and restitution for breach of fiduciary duty and abuse of control.
Lead counsel is Norman Rifkind with Lasky Rifkind.
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.