November 16, 2015

Unrepentant EDMC CEO Will “Push Back” Against Gainful Employment Rule


At a press conference this morning, the Justice Department, the Department of Education, and a group of state attorneys general announced what Attorney General Loretta Lynch called a “landmark settlement” of fraud charges against for-profit college company Education Management Corporation (EDMC).  The company will pay $95.5 million — the largest False Claims Act settlement ever with a for-profit college — to resolve a 2007 whistleblower lawsuit claiming the company illegally paid its recruiters based on the number of students signed up.

Lynch called the settlement “a historic step forward in our collective ongoing fight against fraudulent and abusive practices in the for-profit college industry.” She called EDMC “a high pressure recruitment mill.” Secretary of Education Arne Duncan added that EDMC “outright lied” to the government when it certified its compliance with the law prohibiting sales commissions.

The case is a tribute to the determination of whistleblowers who were represented by attorneys including Harry Litman, former United States Attorney for the Pittsburgh area, where EDMC is headquartered.  The Justice Department and a group of state attorneys general joined the case in 2011.

But although the officials’ words at today’s press conference were strong, and the penalty may have been unprecedented, the result was far from decisive.

At the very moment that Lynch and Duncan spoke in a Washington conference room, there were no doubt students across the country — single parents, veterans, and others struggling to build a future — being recruited to sign up for programs at EDMC schools: the Art Institutes, Argosy University, Brown Mackie College, and South University.  Such recruiting and enrollment continues despite this case, despite the exposure by Senator Tom Harkin’s investigation of widespread abuses and weak performance at EDMC schools, and despite the fact that more than a dozen state attorneys general have been investigating EDMC for a range of additional fraudulent recruiting practices.

The fact that federal aid is still available to go to EDMC schools and other predatory for-profit colleges serves as both a financial lure and a Good Housekeeping seal to draw these students in.

EDMC still operates 110 campuses in 32 states and Canada, as well as online. Its once-proud tradition of strong career education was undermined in recent decades when the Wall Street investors took over.

Last year EDMC took in about a billion dollars in taxpayer-provided student aid: $335 million in Pell Grants and $650 million in federal student loans. Those numbers dwarf today’s settlement amount, a disparity that Lynch chalked up to EDMC’s financial situation.

True, the previously-mighty company, with owners like Goldman Sachs and Park Avenue private equity man Jeffrey Leeds, now trades for 7 cents a share and is at the mercy of its creditors.

But if EDMC has behaved so badly, why does the Department of Education keep allowing students to enroll with our money — hundreds of millions in taxpayer dollars?

It makes matters worse that EDMC admitted no responsibility for its actions in the case. Indeed the company’s new CEO, Mark A. McEachen, issued a statement calling the lawsuit “without merit.”  And he went further, according to the Pittsburgh Post-Gazette:

He will continue to push back against another legal thorn in the company’s side: new standards passed by the U.S. Department of Education in July that tie federal funding for for-profit institutions to minimum thresholds of debt-to-income rates of their graduates. Mr. McEachen has sharply criticized the rules as unfair and creating inequities against some students to get the education.

He reiterated that position on Sunday, saying while the settlements were a positive step, the gainful employment rules are a separate issue.

The gainful employment rule, promulgated by the Obama Administration after a five year struggle against relentless lobbying by the for-profit college industry, basically says this: If your graduates, year after year, earn too little to be able to afford to pay down their student loans, your program may lose eligibility for federal aid. The industry lobbying resulted in a watered-down rule that will force only a small subset of the weakest for-profit college programs to reform or shut down. Two federal judges have now upheld the rule as an appropriate exercise of the Department of Education’s authority. Yet the for-profit college industry has appealed that decision, and, armed with the campaign contributions it regularly offers to politicians, it is lobbying intensely on Capitol Hill to get Congress to overturn the rule.

EDMC’s CEO thus seems completely unchastened by this lawsuit. He pledges to oppose a rule that would require his company to actually help students, rather than bury them in debt.

The lack of acceptance of guilt by EDMC in this lawsuit or of any judicial finding that EDMC engaged in systematic fraud also reduces the value of the case for former EDMC students who were deceived and are buried in debt; the Department of Education has indicated that it will rely on such findings or rulings in deciding what students may be eligible for blanket relief from their loans. Duncan at least said today that “where [EDMC] students were lied to, we want to have that conversation” about debt relief.

UPDATE 11-16-15 4:30 PM:  To settle the various claims that state AGs were pursuing against EDMC (separate from the whistleblower case), the company also agreed today to forgive about $103 million in loans that it made directly to some 80,000 of its own former students nationwide.  That’s about $13o0 per student. EDMC, however, likely did not expect to ever get much of this money back from its broke students, some of whom owe upwards of $100,000 in federal and private loans.

ECMC also agreed with the state AGs to a detailed series of requirements to reform its recruiting practices — pledges: (1) not to make various misrepresentations to prospective students, (2) to provide a single-page disclosure sheet to each prospective student that includes cost and debt estimates and job placement rates, (3) not to enroll students in programs that do not lead to state licensure when required for employment, (4) to require lead generators not to engage in certain deceptions, and more. Under the deal, Thomas Perrelli, a former top Justice Department official in the Obama Administration, will serve as an “independent monitor” of EDMC’s compliance for three years.

The state AGs did some good work here.  These kinds of provisions, if enforced, could do much to help protect students. But given the history of abuses and deception at EDMC, and at some other big for-profit colleges, I would still want my own child to look elsewhere for education, and I feel the same way regarding our investments as taxpayers.  I would rather we invest and direct our students to schools that did not have to be sued in order to commit to telling the truth.

The prohibitions on deceiving students already were part of state and federal law, but they haven’t been well enforced over the years. In the absence of real enforcement, sharp operators will continue to be drawn to the federal billions and will look for ways to short-change students. If all they will face in terms of financial penalties are like the modest ones that were imposed by today’s settlements, then deception will remain a reasonable cost of doing business — crime will continue to pay.

UPDATE 11-17-15 12:30 pm:

Some additional developments —

  • The settlement agreement in the whistleblower case is here.  In one of the most troublesome provisions (paragraph 13, pp. 18-19), the Department of Education has agreed that the settlement and the “Covered Conduct” “do not constitute a basis” for the Department to pursue a range of disciplinary actions against EDMC, such as finding the company to be financially irresponsible or administratively incapable.  The “Covered Conduct” is defined in Recital F (pp. 4-5) to refer to all the matters raised in the various whistleblower cases and related state attorney general claims. That seems to mean that the Department can’t use the allegations and evidence from the whistleblower cases to pursue what might well be justified administrative actions that might limit or cut off federal money to EDMC. One hopes that provision only relates to incentive compensation issues and not other EDMC abuses, but who knows that EDMC and even Department of Education lawyers might assert going forward — I am inquiring about that.
  • Senator Dick Durbin (D-IL) said, “EDMC’s ‘recruitment mill’ swindled federal taxpayers out of nearly $11 billion over the course of more than 10 years and lured thousands of students into taking on mountains of federal student loan debt for a worthless diploma.” He then appropriately asked, “Where’s the accountability for the executives who ran this scheme and ran away with our tax dollars?”
  • The AP reported that one of those executives, former EDMC CEO (and former Maine governor) John McKernan “says he’s not familiar with the $95.5 million settlement” with EDMC.  McKernan’s successor as EDMC CEO, Todd Nelson, is now the CEO of another predatory for-profit, Career Education Corp. Nelson’s successor, Edward West, stepped down in August. All were well-compensated.
  • The Miami Herald quoted Joe D’Angelo, a partner at Carl Marks Advisors, a New York restructuring firm that works with for-profit colleges: “Think about the numbers here. They settled for $100 million for the alleged crime of attracting three and a half billion in government revenue. What would you do? I’d go recruit and get another $3 billion in revenue… I don’t know that it was much of a deterrent at all.”
  • The New York Post interviewed Harry Litman, a lawyer for the whistleblowers, and reported: “Litman said the government never seriously considered expanding its investigation beyond EDMC to see if its private equity owners during the time of the alleged abuses — Providence Equity Partners and Goldman Sachs — were part of the scheme, even though those owners likely could have paid a much larger settlement.” The Post might also have mentioned the third enterprise involved in the 2006 private equity takeover of EDMC, Leeds Equity Partners, run by indignant private equity man Jeffrey Leeds, who himself has fought valiantly to get rid of the gainful employment rule.  As the Post suggests, all of those folks ought to have plenty of cash on hand, even if EDMC says it’s dirt poor.
  • Massachusetts attorney general Maura Healey urged the federal government to use the settlement money to pay down the debt of former EDMC students.
  • I updated my list of law enforcement investigations regarding for-profit colleges to reflect the EDMC settlements. The list, since I started it in spring 2014, has always been in order of estimated legal jeopardy among the biggest troublesome schools — Corinthian first, then EDMC, then ITT, then Career Education Corp., DeVry, University of Phoenix, Kaplan, and Bridgepoint. Corinthian is now down and out, but EDMC is down, but still getting our tax money, along with the rest.

This article also appears on Huffington Post