Feds join whistleblower suit against company run by former Gov. McKernan

Posted May 05, 2011, at 4:08 p.m.
Last modified May 05, 2011, at 6:09 p.m.

The Justice Department has joined an employee whistleblower suit against Education Management Corp., a business that, until recently, was run by former Maine Gov. John McKernan.

The Justice Department’s actions mark the first time the federal government has intervened in the student recruitment practices at for-profit colleges. The suit alleges that Pittsburgh-based Education Management Corp., 40 percent owned by Goldman Sachs funds, illegally paid recruiters based on the number of students they enrolled, the company said in a Securities and Exchange Commission filing Monday. The government, in most cases, forbids such incentive compensation for colleges accepting federal aid because of concern the practice will encourage companies to enroll unqualified students.

McKernan is the chairman of the board of directors of Education Management Corp. McKernan was CEO of the company from Sept. 2003 until 2007. He first joined the company in 1999 as vice chairman and a member of the board, according to the company.

McKernan, 62, was the governor of Maine from 1987 until 1995, and was one of the state’s congressmen in the 1970s. He is the husband of U.S. Sen. Olympia Snowe, R-Maine, and remains an active member of politics in Maine, having been a keynote speaker at the State Republican Convention last year.

Neither McKernan’s Portland office nor Snowe’s Senate office had an immediate comment for this story.

The Justice Department action in federal court in Pittsburgh follows scrutiny by Congress and the federal Education Department of sales practices, student-loan defaults and job placement claims at for-profit colleges, which can receive as much as 90 percent of their revenue from federal financial aid. Several states intend to join the Justice Department’s civil action in federal court, Education Management said.

“The design of the compensation plan was based on advice of counsel that the plan complied with exceptions to federal law banning incentive compensation,” the company said in its filing. “The company intends to vigorously defend itself.”

The company, which enrolls more than 148,000 students, operates the Art Institute chain, Argosy University, Brown Mackie College and South University. Analysts project the company will report revenue of $2.89 billion in the year ending in June, according to the average of estimates compiled by Bloomberg News.

In whistleblower lawsuits, private citizens file fraud complaints on behalf of the federal government. If the government joins a case, the whistleblower may get 15 percent to 25 percent of any money recovered.

Lynntoya Washington, a former EDMC employee, filed her whistleblower complaint under seal in 2007, according to an online docket entry in district court in Pittsburgh. By mid-morning Monday, the case was still under seal.

At least 27 whistleblower cases have been filed against for-profit colleges under the U.S. False Claims Act since the 1990s, primarily alleging violations of federal incentive compensation rules, according to a December 2009 article by law firm Gibson, Dunn & Crutcher, which defends companies against such complaints.

In all but one case, the Justice Department declined to intervene, the article said. In that case, prosecutors joined the suit to address a different issue.

In 2009, Apollo Group Inc., operator of the University of Phoenix, the nation’s largest chain of for-profit colleges, agreed to pay $78.5 million to settle a whistleblower lawsuit also alleging that the company tied enrollment to employee compensation. In that case, the government didn’t join the case. The Phoenix-based company admitted no wrongdoing.

Education Management faces another whistleblower complaint alleging incentive-compensation violations filed by Brian Buchanan, a former admissions representative. His suit, also filed in Pittsburgh, was unsealed in May 2010. In securities filings, Education Management calls the claims “without merit.” The Justice Department declined to intervene in that case.

The Education Department plans, in July, to make all incentive compensation for college recruiters illegal, removing 12 types of exemptions, or “safe harbors” that were put into place in 2002 under President George W. Bush. The exceptions allowed the practice when recruiters weren’t paid solely on the basis of enrollments. EDMC’s pay plan for admissions representatives in July of 2003 was designed to comply with these “safe harbors,” the company said in its SEC filing Monday.

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