In a federal lawsuit that was unsealed last week, a former employee of a for-profit education company that runs several colleges and online programs in California claims the company illegally compensated recruiters based on how many students they enrolled.
In the July 2007 lawsuit, Brian T. Buchanan of Squirrel Hill, Pa., claimed he saw his employer, South University Online, pay admissions representatives based on the number of students they signed up for courses, according to the Pittsburgh Tribune-Review. That's a violation of a federal law that applies to any university that disburses federal student loans.
Flickr photo by stevendepolo
South University Online is a subsidiary of Education Management Corp., a Pittsburgh-based for-profit company. The company also runs Western State University College of Law in Fullerton, the Art Institutes and Argosy University – both of which have several locations throughout California.
The July 2007 lawsuit was filed under the False Claims Act, which allows whistleblowers to bring a lawsuit on behalf of the federal government. After a lawsuit is filed, the Department of Justice can choose whether to intervene in the case.
If the lawsuit is successful, the whistleblower can received 15 to 30 percent of the proceeds won by the government, according to a 2008 Congressional Research Service report. The law is seen as a powerful tool for the government to recover losses due to fraud.
The lawsuit was unsealed last week but the government has said it may still intervene in the case.
In the suit, Buchanan claimed South University Online allowed students to take admissions tests over and over again until they passed – even though prospective students are only supposed to be able to take the test up to three times a year.
To reward employees who drummed up the biggest enrollment numbers, the company gave away iPods, free trips and gift cards, according to the newspaper's account of the lawsuit's claims.
The case is similar to one filed in 2003 by two former University of Phoenix enrollment counselors who said the university was doing essentially the same thing – paying recruiters with incentives based on enrollment numbers. In that False Claim Act fraud case, the government did not intervene but the plaintiffs won a $78.5 million settlement this past December.
The Tribune-Review reports that if Buchanan prevails in court, the company would be liable for three times the amount it defrauded plus additional fines.
Education Management Corporation last week filed a written communication with the Securities and Exchange Commission informing shareholders of the lawsuit.
"The Company believes the claims to be without merit and intends to defend this action vigorously," it reads.