U.S. charges for-profit college with huge fraud

WASHINGTON — The Obama administration and four states are accusing a private, for-profit college of illegally paying recruiters to enroll students in an $11 billion fraud, the latest action in a long-running examination of the industry's recruitment techniques and an allegation the company called "flat-out wrong."

The Justice Department and the attorneys general of California, Illinois, Florida and Indiana on Monday intervened in a whistleblower lawsuit against Pittsburgh-based Education Management Corp. Their complaint says the company broke a 1992 law prohibiting for-profit colleges from paying recruiters incentive compensation.

The law was passed in response to reports of overly aggressive sales procedures in the industry that led to the enrollment of unqualified students and high student loan default rates. It was the first time the federal government intervened in a suit alleging a violation of the ban.

The governments' complaint says the company, which offers classes online and at 105 locations in 32 states and Canada, repeatedly made false statements to conceal its practices and receive $11 billion in federal and state financial aid — nearly all of the company's revenue. The complaint alleges that student enrollment was the sole focus of its compensation system, and the company instructed recruiters to use high-pressure sales techniques like playing on an applicant's psychological vulnerabilities and inflating claims of career placement opportunities to enroll students regardless of their qualifications.

U.S. attorney David J. Hickton in Pittsburgh, where the suit was filed, said in a statement that Education Management's practices "enriched the company, its shareholders and executives at the expense of innocent individuals seeking a quality education."

A statement issued by Education Management said federal regulations issued in 2002 allowed companies to consider enrollment in admission officer compensation as long as it wasn't the sole factor considered. The statement said the company's plan required consideration of five "quality factors" along with enrollment numbers to determine salary.

"The pursuit of this legal action by the federal government and a handful of states is flat-out wrong," said the statement from Bonnie Campbell, a former Iowa attorney general and member of the state Board of Regents who is an adviser to the college's legal counsel. "EDMC's 2003 compensation plan followed the law in both its design and implementation."

Education Management offers undergraduate and graduate programs as well as diplomas in trades such as design, media arts, health sciences, culinary, fashion, business, education, legal and information technology.

"EDMC's colleges are accredited institutions offering career-focused academic degrees to it students, many of whom would not otherwise attend college, and EDMC's combined graduation rate is better than other schools serving similar student populations, whether those schools are public, private or proprietary," Campbell's statement said.

The 2007 lawsuit was filed by former Education Management employees Michael Mahoney and Lynntoya Washington. If the Justice Department can prove its case, Education Management could be forced to repay three times the damage, plus penalties, with the whistleblowers able to collect 15 percent to 25 percent of the recovery.

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