Company violated federal student-aid rules under McKernan, U.S. says

Posted Aug. 08, 2011, at 9:47 p.m.
Last modified Aug. 09, 2011, at 5:08 p.m.

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Former Maine Gov. John R. McKernan speaks at a convention in May 2002. Education Management Corp., the second-largest U.S. for-profit college chain, used improper recruitment practices to secure more than $11 billion in U.S. student aid partly while being run by McKernan, prosecutors said in a civil lawsuit.
Pat Wellenbach | AP
Former Maine Gov. John R. McKernan speaks at a convention in May 2002. Education Management Corp., the second-largest U.S. for-profit college chain, used improper recruitment practices to secure more than $11 billion in U.S. student aid partly while being run by McKernan, prosecutors said in a civil lawsuit.

Education Management Corp., the second-largest U.S. for-profit college chain, used improper recruitment practices to secure more than $11 billion in U.S. student aid partly while being run by former Maine Gov. John McKernan, prosecutors said in a civil lawsuit.

Education Management, 41 percent owned by Goldman Sachs Group Inc. funds, illegally paid recruiters based on the number of students signed up, a violation of rules for colleges that get U.S. student grants and loans, the Justice Department said today in a complaint filed in federal court in Pittsburgh.

Prosecutors spelled out their case against the company for the first time since May, when the Justice Department joined an employee whistle-blower suit. Colleges that receive federal aid are barred from paying recruiters incentives tied to enrollment because it may encourage companies to register unqualified students. The government claimed Education Management enrolled students who appeared to be under the influence of drugs.

Education Management “fraudulently induced” the Education Department to make the company eligible for more than $11 billion in federal grants and loans since 2003, according to the complaint. “Each and every one of the claims it submitted or caused a student to submit violated” the U.S. False Claims Act, the government said.

McKernan, the chairman of the board, 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 from 1983 to 1987. He is the husband of U.S. Sen. Olympia Snowe, R-Maine, and remains an active part of Republican politics in Maine.

McKernan is not named individually as a defendant in the lawsuit.

In a statement sent out in May on behalf of McKernan, who is chairman of the board of directors at Education Management Corp., the company said the lawsuit was “unwarranted and without merit.”

The industry has been under scrutiny by Congress, state lawmakers and attorneys general who are investigating sales practices and students’ debt loads. Illinois, Florida, California and Indiana have also intervened in the case, and filed today’s suit along with the Justice Department.

Education Management, based in Pittsburgh, denied violating government rules.

“The pursuit of this legal action by the federal government and a handful of states is flat-out wrong,” Bonnie Campbell, a former Iowa attorney general who is advising Education Management, said in an emailed statement. The company’s compensation plan “followed the law in both its design and implementation,” she said.

Charles Miller, a spokesman for the Justice Department, declined to comment.

Lynntoya Washington, a former assistant director of admissions for Education Management, filed her whistle-blower complaint under seal in 2007. Michael Mahoney, director of training for the company’s online division and a former car salesman, joined her.

Whistle-blower lawsuits let private citizens file complaints that may be joined by the government.

The citizens collect a share of any recovery.

Education Management fell $2.18, or 11 percent, to $17.21 at 4 p.m. New York time in Nasdaq Stock Market trading. The shares have dropped 4.9 percent this year.

The company, which enrolls almost 140,000 students, operates the Art Institute chain, Argosy University, Brown Mackie College and South University. The company reported $2.89 billion in revenue in the year that ended June 30.

Echoing the whistle-blower complaint, the Justice Department and four states said recruiters worked in a “boiler-room” atmosphere where metrics other than enrollment weren’t considered in compensation and top salespeople received trips to Las Vegas and the Mexican resorts of Puerto Vallarta and Cancun.

Education Management instructed recruiters to enroll students “regardless of their qualification,” according to the complaint. Some were unable to write coherently or appeared to be under the influence of drugs, while others who registered for online courses didn’t have computers, prosecutors said.

The Education Department in July moved to make all incentive compensation for college recruiters illegal, removing 12 types of exemptions or “safe harbors” that were put into place under President George W. Bush. The exceptions allowed the practice when recruiters weren’t paid solely on the basis of enrollments.

Education Management’s pay plan for recruiters in July of 2003 was designed to comply with these “safe harbors,” said Campbell, the company adviser.

At least 27 whistle-blower 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 LLP, which defends companies against such complaints.

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

In 2009, Apollo Group Inc., operator of the University of Phoenix and the nation’s largest chain of for-profit colleges, agreed to pay $78.5 million to settle a whistle-blower lawsuit also alleging that the company tied employee compensation to enrollment. The government didn’t join that case.

Phoenix-based Apollo admitted no wrongdoing.

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