Education Management Corp. (EDMC), one of the nation’s largest operators of mostly online for-profit colleges, filed a legal defense Feb. 6 of its scrutinized compensation program for recruiters who were paid according to how many students they roped into classes and school loans.
Pittsburgh-based EDMC, which manages more than 100 private for-profit colleges attended by 158,000 students across the U.S., said in a court briefing that compensating student recruitment officers wasn’t illegal because the federal government had yet to institute regulations against the practice.
The U.S. Department of Education (ED), along with whistleblowers, Washington, D.C., and five states, has charged that EDMC violated clearly-states federal laws that prohibit colleges and universities from linking recruiters’ pay to the number of students they enroll.
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The legal action against EDMC looks to recover some of the more than $11 billion the company has received in federally-backed student aid “obtained through false statements and which enriched the company, its shareholders and executives at the expense of innocent individuals seeking a quality education,” according to a Justice Department statement.
Attorneys for EDMC wrote in the company’s defense that ED’s 2011 declaration that all forms of enrollment-based recruiter compensation had been outlawed “explicitly acknowledging in the process that the regulation in this case allowed salaries bases in part on enrollment success.”
EDMC’s filing claims that before the federal crackdown on recruiter compensation, recruiter pay could be at least partly linked to the number of students who were signed up for loans and classes.
As long as compensation wasn’t based entirely on recruitment, EDMC was within legal boundaries, the company argued. Bonnie Campbell, an attorney for EDMC, said in a statement that “the case should be dismissed with prejudice” and that the government’s case is “legally flawed and factually insufficient.”
“The court should dismiss all claims against EDMC before further harm is done to students and their schools, who did nothing but comply with the law,” Campbell said.
EDMC was one of the fastest growing for-profit education companies over the past decade as online course offerings have grown, and until last year’s “gainful employment” rules instituted by ED, few regulations have been placed on the sector.
Federal officials said they would continue to draw attention to the alleged violations of student recruitment laws that were once an accepted practice in parts of higher education.
“Colleges should not misuse federal education funds by paying improper incentives to admissions recruiters,” said Tony West, assistant attorney general for the Civil Division of the Department of Justice. “Working with the Department of Education, we will protect both students and taxpayers from arrangements that emphasize profits over education. … Federal tax dollars must be protected from abuse.”
If federal officials can prove that EDMC recruiters knowingly submitted false claims, the government can recover three times the damages that resulted from the allegedly illegal recruitment practices, along with a penalty of up to $11,000 per claim.
Once boasting consistently high stock prices alongside several large for-profit operators, EDMC’s shares took a sharp decline Feb. 2 when the company adjusted its earnings predictions amid declining enrollment numbers.
EDMC stock prices dropped by 22 percent when the latest financial outlooks were released while lawmakers and ED officials continued to pressure the for-profit college giant. The company slashed 400 jobs from its online department in late January.
EDMC is now among for-profit college companies that have taken considerable financial hits while the Obama administration and the Government Accountability Office (GAO) release reports and statistics exposing unscrupulous practices throughout the industry.
In December 2009, a day after ED released a report showing skyrocketing loan default rates among for-profit college students, Apollo Group Inc.—the University of Phoenix’s parent company—agreed to a $78.5 million settlement after a six-year court battle that started when former university employees filed a lawsuit claiming recruiters were paid based on the number of students they enrolled, a practice that violates federal law.
Apollo Group denied the former plaintiffs’ allegations, dismissing them as disgruntled former employees and claiming the school’s recruiting practices were within federal guidelines.
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