Education firm chaired by McKernan presses to have federal multibillion-dollar fraud suit dismissed

Sen. Olympia Snowe waves goodbye while her husband, former Maine Gov. John McKernan, applauds on Friday, March 2, in Portland, Maine.
Sen. Olympia Snowe waves goodbye while her husband, former Maine Gov. John McKernan, applauds on Friday, March 2, in Portland, Maine. Buy Photo
Posted March 08, 2012, at 1:16 p.m.
Last modified May 06, 2012, at 1:33 p.m.

Lawyers representing a for-profit education company chaired by former Maine Gov. John McKernan continued last week to argue that a federal lawsuit against the firm should be thrown out, describing the government’s case as “fictions that lack any plausible support.”

In a brief filed March 2 in federal court in Pittsburgh, Education Management Corp. continued to argue that the lawsuit being pursued by the Department of Justice and 11 states should be dismissed. The government’s claims against EDMC are without merit, the company said, because between 2003 and the end of June 2011, at which point federal regulations changed, the regulations clearly allowed the company to include enrollment incentives in its compensation system for recruiters.

“The claims against EDMC fail because [the] plaintiffs rely exclusively on speculation and naked assertions to bridge the chasm between compensation that complied with the plain meaning of the law and a billion-dollar fraud claim,” the company’s lawyers wrote in the brief.

According to the Department of Justice complaint against EDMC, it has been and still is against federal law for educational institutions to pay recruiters, in part or in full, based on the number of students the recruiters persuade to enroll in their programs.

Last year the department joined a whistle-blower lawsuit against Pittsburgh-based EDMC, where McKernan now serves as chairman of the company’s board of directors. McKernan, the husband of U.S. Sen. Olympia Snowe, was the company’s CEO from 2003 until 2007 and originally was named personally as a defendant in the lawsuit. He has since been dropped as a defendant.

EDMC learning institutions include Argosy and South universities, Art Institute and Brown Mackie College campuses nationwide.

The Justice Department alleges that EDMC violated federal law by paying recruiters based on the number of students the recruiters successfully encouraged to enroll in EDMC schools. In addition, EDMC is accused of submitting “knowingly false or fraudulent claims for student grants and loans” to various governmental agencies.

The Department of Justice claimed in a brief filed last month that EDMC misconstrued the so-called “Safe Harbor” regulations, which were in effect from 2002 through last June. In addition, they wrote, federal law on the issue superseded the now-defunct regulations and clearly states that “any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments” is prohibited.

Harry Litman, a former federal attorney representing the whistle-blowers in the case, wrote Wednesday in an email to the Bangor Daily News that, between 2003 and 2011, EDMC assured federal and state officials that it was following the law with its compensation practices.

“The complaint — which the federal and state governments brought jointly after a multi-year investigation — paints a detailed portrait of a massive fraud scheme that defrauded the taxpayers out of billions of dollars, virtually all of EDMC’s revenues during that time,” Litman wrote. “It includes extensive and concrete allegations that EDMC repeatedly promised that it did not pay its recruiters incentive compensation while knowing that’s exactly what it was doing.”

Since 2003, when McKernan became CEO of EDMC, the firm has received $11 billion in federal grants and loans that students have used to pay their tuition, according to the complaint. If the case goes to trial and EDMC loses, it could be ordered to pay “treble damages,” or $33 billion, to the plaintiffs.

According to the required Senate financial disclosure report that Snowe filed for 2010 — the most recent year that is available — Snowe and McKernan own between $2 million and $10 million worth of EDMC stock.

EDMC’s most recent brief was filed days after Snowe announced that she would not seek a fourth term in office. Scott D’Amboise, who had expected to run against Snowe in the Republican primary, traded barbs with her last May over the lawsuit. But Snowe insists that the lawsuit was not a factor.

“The lawsuit against the company my husband works for had nothing to do with my decision,” Snowe wrote Tuesday in a prepared statement. “The case was filed almost a year ago, so if that had been a consideration I would have made the decision on whether to seek another term in the Senate much sooner.”

Through an employee at his Portland office, McKernan declined on Tuesday to comment about the lawsuit or on Snowe’s decision not to run again.

Follow BDN reporter Bill Trotter on Twitter at @billtrotter

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