California is one of two states to join a whistleblower lawsuit against Education Management Corporation, a for-profit college company that operates 14 campuses in the state under the Argosy University and Art Institute brands.
California's notice to intervene, filed April 29 and recently unsealed, comes on the heels of an announcement earlier this month that the U.S. Department of Justice would join the case. The state of Illinois will also intervene, court records show.
The lawsuit alleges that Pittsburgh-based Education Management Corporation illegally paid admissions employees based on the number of students they recruited. The Higher Education Act prohibits colleges and universities that participate in the federal financial aid program from paying commissions, bonuses or other incentive payments to recruiters based directly or indirectly on their success in securing enrollments.
It's unclear exactly how much money is at stake, but the lawsuit claims that the majority of the public money Education Management Corporation received from 2003 to present was obtained fraudulently, said Harry Litman, an attorney representing the former Education Management Corporation employees who made the claims.
In California, those public funds would also include Cal Grants, Litman said.
According to the lawsuit, Education Management Corporation received $2.2 billion in federal financial aid in just one year – the fiscal year ending in June 2010. That was about 89 percent of the company's net revenue in that period, the complaint states.
Argosy University and Art Institute of California campuses were offered $16 million in Cal Grant awards in the 2007-08 year, according to the most recent data posted online by the California Student Aid Commission (see chart below). Education Management Corporation also runs Western State University College of Law in Fullerton.
The Justice Department is supposed to file a complaint by June 2, records show. The lawsuit was brought on behalf of 11 states and the District of Columbia, but only California and Illinois have joined the suit.
California's intervention means the state will also file its own complaint alleging specific ways in which Education Management Corporation defrauded California taxpayers and will seek damages, Litman said.
A spokesman for the California attorney general's office declined to comment on the details of the case, saying the agency is currently investigating the matter.
Litman described the intervention of the United States Department of Justice and the states of California and Illinois as a key development.
"It's something that we believe augurs well for return to the taxpayers of a substantial portion of the allegedly ill-gotten gains," he said.
Although more than two dozen whistleblower lawsuits have been filed against for-profit colleges under the False Claims Act, this is the first such case in which the Department of Justice has intervened, according to an article by Timothy J. Hatch of Gibson, Dunn & Crutcher, one of the attorneys representing Education Management Corporation in the case.
Hatch's article called the intervention "both disappointing and disturbing."
Under the False Claims Act, an individual can bring a lawsuit on behalf of the government for civil fraud committed against the government.
If the government joins in the lawsuit, the individual is eligible to receive between 15 and 25 percent of the money recovered. Since 1986, the False Claims Act settlements and judgments have totaled over $12 billion, according to Taxpayers Against Fraud, a nonprofit organization that promotes use of the act.
In this case, two former Education Management Corporation employees filed suit in 2007, records show. Lynntoya Washington was assistant director of admissions at the Art Institute of Pittsburgh Online Division from 2004 to 2007, and Michael T. Mahoney was director of training for the company's Online Higher Education Division from 2006 to 2007.
The lawsuit cites documents and statements from plaintiffs, saying the company created a "boiler-room" style sales culture where recruitment of students was the sole focus. A guide for assistant directors of admissions includes a points-based salary chart, described internally as "the matrix." The chart rewards a set number of points for each type of student recruited in one year.
The company relentlessly monitors each recruiter's enrollment statistics, the complaint states. Admissions personnel who recruited the most students in a year won all-expenses-paid "President's Club" trips to Puerto Vallarta, Cancun and Las Vegas.
The company's recruiters get reports three times a day updating them as to whether their students have confirmed their enrollment, the complaint says. If not, recruiters are expected to call the student and even walk him or her through the confirmation process on the company's website.
And in a 2006 e-mail, Director of Admissions Gregg Schneider reprimanded recruiters for not hitting their goals for October: "This number is not a casual level that I want you to be at but rather a number that you must hit to have a good review, get promoted or keep your position here," the e-mail said.
A news release earlier this month from Education Management Corporation said that the company denies any allegation of misconduct and plans to present a vigorous defense. The statement said the company had received an opinion from outside counsel that its 2003 admissions compensation plan referenced in the claim was lawful.
|Cal Grant award offers, 2007-08|
|Argosy University - San Francisco||$89,845|
|Argosy University - Santa Monica||$200,330|
|Argosy University - Orange County||$317,724|
|Argosy University - San Bernardino||$301,420|
|The Art Institute of California - Inland Empire||$1,113,148|
|The Art Institute of California - Los Angeles||$6,350,006|
|The Art Institute of California - Orange County||$2,579,496|
|The Art Institute of California - Sacramento||$26,108|
|The Art Institute of California - San Diego||$3,077,776|
|The Art Institute of California - San Francisco||$2,764,348|
|Source: California Student Aid Commission|