U.S. Sues For-Profit College Chain for $11 Bil.

PITTSBURGH (CN) - The federal government and 11 states claim the nation's second-largest for-profit chain college, Education Management Corp., defrauded states and the nation of $11 billion in financial aid.

Education Management Corp. (ECM) has about 105,000 students in more than 100 schools that operate under the names of Art Institute, Argosy University, Brown Mackie College and South University. It is based in Pittsburgh.

This is the latest in a slew of class actions that accuse profit-making chain colleges of abusing state and federal loan programs by recruiting students with false promises about accreditation, tuition, classes, faculty, and other things, to get ahold of the student loans.

Students have claimed, in dozens of class actions, that the colleges, many of them online colleges, essentially dumped them, and sometimes closed shop, after getting their hands on the loan money.

Online colleges were deregulated under the George W. Bush administration.

The federal complaint claims ECM paid recruiters illegal incentives to enroll students, whether they were qualified or not.

ECM got more than $2.2 billion in federal financial aid in fiscal year 2010, which accounted for more than 89 percent of its income, according to the 122-page complaint.

The complaint states: "From July 1, 2003, to the present, EDMC and/or students enrolled in its institutions received over eleven billion dollars ($11,000,000,000.00) in federal funds through Title IV, HEA [Higher Education Act] programs.

"Because EDMC's compensation system bases changes in admissions personnel

compensation upon the number of students recruited by each admissions employee, EDMC's compensation system, as designed, violates Title IV of the HEA's incentive compensation ban. In addition, EDMC's compensation system is not eligible for Title IV of the HEA's regulatory safe harbor, because the compensation awarded under EDMC's system does not constitute 'fixed compensation' within the meaning of the regulatory safe harbor. Instead, the compensation EDMC awards constitutes a form of incentive payments. Because EDMC's compensation system as designed violates Title IV of the HEA's incentive compensation ban and is not eligible for the regulatory safe harbor, and because EDMC misrepresents to the federal government its compliance with Title IV's incentive compensation ban, EDMC is liable to the United States under the common law theories of unjust enrichment and payment by mistake of fact.

"Even if EDMC's compensation system, as designed, was eligible for the regulatory safe harbor, which it is not, EDMC's compensation system, as implemented, does not

comply with the incentive compensation ban or regulatory safe harbor. In practice, the sole factor that determines changes to the compensation of admissions personnel is the number of students the admissions employee recruited during the previous twelve months. Furthermore, in practice, the compensation awarded under EDMC's system does not constitute fixed compensation within the meaning of the regulatory safe harbor. Despite knowing that its compensation system, as implemented, does not comply with Title IV of the HEA and its regulatory safe harbor, EDMC falsely represents and certifies to the federal government its compliance with Title IV of the HEA and submits, or causes EDMC students to submit, claims for payment pursuant to Title IV programs. Accordingly, EDMC's conduct violates the FCA."

The USA demands treble damages and civil penalties under the False Claims Act.

Joining as plaintiffs, also demanding treble damages, are California, Florida, Illinois, Indians, Massachusetts, Minnesota, Montana, New Jersey, New Mexico, New York, Tennessee and the District of Columbia.

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