Judge allows lawsuit against for-profit college firm linked to ex-Gov. McKernan to continue

Posted May 31, 2013, at 7:16 p.m.
Last modified June 01, 2013, at 8:22 a.m.
Former Maine Gov. John McKernan applauds his wife, Olympia Snowe, at a press conference in Portland last year.
Former Maine Gov. John McKernan applauds his wife, Olympia Snowe, at a press conference in Portland last year. Buy Photo

AUGUSTA, Maine — A federal judge in Pennsylvania has rejected a bid to dismiss a lawsuit against Education Management Corp., a for-profit college corporation with 14-year ties to former Maine Gov. John McKernan.

U.S. District Judge Terrence McVerry on Friday concurred with a previous court decision to let a lawsuit against the company continue. The suit brought by a former EDMC employee alleges that the corporation and its affiliates engaged in a scheme to maximize profits from financial aid programs administered by the U.S. Department of Education.

EDMC said in a prepared statement Friday afternoon that “we continue to believe the entire case is without merit.”

The complainant in the case, Jason Sobek, who worked as an admissions director for EDMC in Pittsburgh from June 2008 through November 2010, alleges that the firm falsified information given to the Department of Education that indicated they were in compliance with the loan programs’ eligibility requirements. In testimony that provided the basis for the lower court’s decision last October, Sobek alleged that EDMC operated a “carefully crafted and widespread for-profit education scheme [in which] defendants have defrauded the United States and its taxpayers out of millions of dollars in the form of federally backed student loans and grants.”

Sobek first made the allegations in January 2010. The federal government has been investigating the allegations but is not involved in the suit.

Sobek’s allegations initially led to six allegations against EDMC for providing false information on a range of issues, including a nursing program accreditation, job placement rates, costs of programs, student progress statistics, employee payment issues and the status of students who should have been dropped from the school’s enrollment rolls.

The order filed Friday, which resulted from an appeal by EDMC to dismiss the entire case, allows three of the six original allegations to move forward, just as Judge Magistrate Cynthia Reed Eddy ruled in October. The allegations that were preserved include falsification of job placement rates, accreditation data and satisfactory academic progress reporting.

McVerry, who is presiding over a separate whistleblower lawsuit filed by the U.S. Department of Justice and 11 states, had to approve Eddy’s recommendation.

EDMC’s attorneys argued that Sobek’s allegations were not specific enough under federal guidelines and that the regulations EDMC is accused of violating aren’t specific or objective enough to make the corporation liable for fraud.

“EDMC may be able to avoid liability by showing that the United States would not have refused payment even if it had known of EDMC’s alleged violations of the regulations at issue,” wrote McVerry. “However, such a defense is fact-intensive and would not justify dismissal at the pleading stage.”

Jacquelyn Muller, a spokeswoman for EDMC, said the company will vigorously defend itself, is committed to maintaining high ethical standards and adhering to legal and regulatory requirements.

“It is important to note that today’s order was a ruling on a motion to dismiss,” wrote Muller. “Procedurally, the court was required to assume that all pleaded facts were true. While this decision will allow the case to proceed, we continue to believe the case is without merit.”

Former Gov. McKernan, who is married to former U.S. Sen. Olympia Snowe, has been a director of EDMC since 1999 and was board chairman from June 2006 through August 2012. He was the corporation’s CEO from September 2003 through February 2007. He originally was named a defendant in the lawsuit but his name since has been dropped. The remaining defendants are Education Management LLC, South University LLC, Argosy Education Group Inc., The Art Institutes International LLC, and Education Management Corp.

Between 2003, when McKernan became CEO of EDMC, and March 2012, the firm received $11 billion in federal grants and loans that students have used to pay their tuition, according to the complaint filed for the federal whistleblower case. Under the federal False Claims Act, the government can recoup three times the amount of money collected through false claims.

McVerry ordered the defendants to file responses to the three preserved allegations against them by June 14.

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