The U.S. Justice Department joined an employee whistle-blower suit against Education Management Corp., intervening for the first time in the student recruitment practices at for-profit colleges.
The suit charges that Pittsburgh-based Education Management, 40 percent owned by Goldman Sachs Group Inc. 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.
The Justice Department action in federal court in Pittsburgh follows scrutiny by Congress and the U.S. 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."
Education Management, the second-largest U.S. operator of for-profit colleges, fell 97 cents, or 5.2 percent, to $17.58.
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 whistle-blower, or qui tam, lawsuits, private citizens file fraud complaints on behalf of the federal government. If the government joins a case, the whistle-blower may get 15 percent to 25 percent of any money recovered.
Lynntoya Washington, a former EDMC employee, filed her whistle-blower complaint under seal in 2007, according to an online docket entry in district court in Pittsburgh. The case was still under seal.
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, 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 whistle-blower lawsuit also alleging that the company tied enrollment to employee compensation. In that case, the government didn't join the case. The Phoenix-based firm admitted no wrongdoing.
Education Management faces another whistle-blower 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.