January 23, 2019

DeVos-Backed Deal Would Allow Secretive Non-Profit to Enrich Related For-Profit

DeVos-Backed Deal Would Allow Secretive Non-Profit to Enrich Related For-Profit

The mysterious non-profit foundation that has, with the blessing of Betsy DeVos’s Department of Education, just acquired many of the former EDMC career education schools, is tied to the for-profit company that is slated to provide contract services to those same taxpayer-supported schools; both, Republic Report has learned, are connected to a Wall Street investment firm that once financed many of the Internet’s top pornography websites.

Yet it appears that no one has publicly disclosed this potential conflict of interest — not the buyers, or sellers, or the DeVos Department — and public descriptions of the deal by participants have been misleading at best.

The Education Principle Foundation last week acquired many of the remaining campuses of the Art Institutes, as well as all of South University, from Dream Center Education Holdings, another non-profit that a year ago purchased those schools and others from the collapsing for-profit Education Management Corporation, or EMDC.

Last Friday night, the Education Principle Foundation issued a press release stating that the foundation would be acquiring some DCEH schools but providing little information about the foundation other than a vague mission statement. The release adds: “The Foundation, unlike DCEH, is not a servicing organization. The Foundation will not be involved in the operations of The Arts Institutes or South University. Each university system will be governed by a Board of Trustees comprised of a majority of independent members.”

But EPF, according to a Delaware state filing, was called the Colbeck Foundation until it applied to change its name at 5:57 pm on New Year’s Eve. And all four of the Colbeck Foundation’s corporate officers or board members, according to the foundation’s most recent (2017) IRS filing, are also the top officials of the New York- and Los Angeles-based investment firm Colbeck Capital Management: Colbeck managing partner Jason Beckman, a former official at Deutsche Bank and Goldman Sachs, is the foundation’s chairman of the board; Colbeck managing partner Jason Colodne, formerly at Goldman Sachs and Morgan Stanley, is the foundation president; Colbeck managing director David Aho is the foundation’s senior vice president; and Colbeck chief operating officer Morris Beyda is the foundation’s treasurer.

From IRS filings going back to its formation in 2013, it doesn’t appear that the Colbeck Foundation has hired any employees, received much or any revenue, or provided any grants.

Colbeck is also tied to Studio Enterprise, a for-profit company that, under the DeVos-approved agreement, will provide services to the schools transferred to EPF, as well as other schools still retained by troubled DCEH, which was placed in financial receivership last week.

An email last week to Art Institutes staff from Claude Brown, system president of those schools, revealed that EPF would be acquiring the schools and also that Studio Enterprise, a company that has been in discussions with DCEH for months, will provide “some of our non-academic services … via a standard managed services agreement.”

Brown told staff, “Studio Enterprise does not have any ownership interest or control over The Art Institutes or EPF.”

But the Los Angeles-based for-profit Studio Enterprise describes itself as a provider of services to the also-LA-based for-profit Studio School. A person close to DCEH management told me that Colbeck Capital Management is a key investor in the Studio School and Studio Enterprise. That person reaffirmed Tuesday night, “Colbeck owns Studio.” Echoing that information, a 2015 article in Variety about the Studio School, then called Relativity School, states that investors in the school “include Colbeck Capital, one of Relativity’s major lenders.” Colbeck leaders Beckman and Colodne previously served on the Relativity board.

Colbeck, under Beckman and Colodne, also lent $362 million to help finance the giant Internet pornography aggregation company Manwin (later called MindGeek), then the operators of sites including Pornhub, YouPorn, and Redtube.

So, to sum up so far: (1) the top Colbeck Capital Management officials have been the sole officers of the Education Principle Foundation; (2) Colbeck has been an investor in, or major lender to, at least the Studio School and likely the related business Studio Enterprise; and (3) for-profit Studio Enterprise is now slated to provide services to the schools owned by the non-profit Education Principle Foundation — and thereby receive many of the taxpayer dollars flowing from the Department of Education to the Education Principle Foundation.

A source close to DCEH management says that this entire arrangement “was dictated by” officials of the DeVos Department of Education.

Yet apparently no one — not the Education Principle Foundation, nor Studio Enterprise, nor Colbeck, nor DCEH, nor the DeVos Department of Education — has disclosed this potentially conflicted arrangement to the public. If they all believe it is acceptable for this for-profit company to get paid by a taxpayer-funded school tied to the owners of the for-profit company, why have they all so far concealed the facts?

The Department of Education has acknowledged my request to discuss this matter but has not provided a response. Colbeck Capital Management has not yet responded. Nor has Robin Von Bokhorst, the contact person listed on the EPF press release. (I don’t know who Robin Von Bokhorst is; there is a New York corporate finance lawyer with a very similar name.) If I hear from any of them, I will add their comments. [UPDATE 02-19-19: EPF has a new board, consisting of New York corporate finance lawyer Robin van Bokhorst; New Yorker John D’Agostino, managing director of the fund governance firm DMS; and Los Angeles-based Andrew Florin-Smith, partner at the commercial real estate firm iBorrow.]

Hundreds of millions of taxpayer dollars have flowed annually to the EDMC schools for decades, as the Art Institutes, a once-model for-profit institution, with quality instruction that continues in many respects today, descended into predatory practices and was ultimately called a “high pressure recruitment mill” by U.S. attorney general Loretta Lynch when, in 2015, it paid nearly $200 million to settle fraud charges.

Students and taxpayers have a right to know where that federal aid money is now going. Despite numerous campus shutdowns in the past year, tens of thousands of students still attend the former EDMC schools — the Art Institutes, South, and Argosy University.

Until recently, many of the biggest career education chains have been publicly traded corporations, a status that has sometimes seemed to push predatory recruiting and financial aid practices, but at least required a measure of transparency: Public companies must disclose key moves and personnel and ownership changes in filings with the Securities and Exchange Commission. Betsy DeVos’s Department of Education, which has radically tilted policies in ways that benefit predatory schools, has blessed a series of deals in which big for-profit schools have been converted to sham non-profits with associated for-profit arms or have been sold to shadowy private equity-backed operations. And the DeVos Department has failed to provide the public, interested members of Congress, and others with vital information about these deals, even as more and more career school chains are collapsing under the weight of abuses and mismanagement, and the futures of students, and school faculty and staff, across the country hang in the balance.

The recent and proposed conversions of for-profit schools have included Kaplan/Purdue Global, Bridgepoint, CollegeAmerica, and Grand Canyon, as well as the DCEH purchase of the EDMC schools. Those deals allow a school chain to advertise itself as non-profit, thus evading the stigma created by the predatory behavior of many for-profit schools. It also lets a school avoid the federal regulations that apply only to for-profit schools, such as the prohibition on receiving more than 90 percent of revenue from Department of Education aid, and aspects of the gainful employment rule, a measure that penalizes programs for leaving graduates with excessive debt. (DeVos is seeking to cancel the latter rule, but it remains on the books.) At the same time, DeVos has approved newly-converted non-profit schools allowing for-profit companies connected to those schools to make big profits off students and taxpayers. Such hybrid institutions retain incentives, at least, to act in a predatory manner: high prices, deceptive recruiting, low spending on instruction, former students — single moms veterans, immigrants — left hopelessly buried in debt, their career dreams crushed.

As Republic Report has detailed in articles since last May, non-profit DCEH appeared to be seeking to leverage its operation of the former EDMC schools to provide revenue to for-profit schools — including Woz U and Southern Careers Institute — and other businesses tied to DCEH CEO Brent Richardson, his family members, and his long-time associates. DCEH also falsely told students that some of its campuses remained accredited, when its accreditor had suspended that status.

DCEH, which closed many of the former EDMC campuses late last year, blames its problems largely on EDMC and EDMC executives, whom it says concealed the depths of the schools’ financial woes at the time of the sale a year ago. And a source close to DCEH management says that DeVos Department officials directed it to misstate the accreditation status.

This same source says that Diane Auer Jones, DeVos’s top higher education aide, broke commitments to Richardson as she moved to put Colbeck in charge of the former DCEH schools. The source says Jones was listening to Michael Lau, CEO of hedge fund Candlewood Investment Group, which held much of the schools’ debt, and Jones ultimately did not release enough cash to give Richardson’s plans a chance to succeed. While each of the schools acquired by the Colbeck-linked Education Principle Foundation will indeed have its own board of directors, Colbeck will manage access to the federal student grants and loans that are the prize of these operations. This DCEH-associated source described Jones and another DeVos aide involved in the deal, Wayne Johnson, as “incompetent… over their heads.” And, pointing to the latest round of layoffs at the former EDMC schools, over 1000 people yesterday, this source said of the newly restructured operation, “It’s slash and burn with no regard for the human factor.”

For current and former faculty and staff at the former EDMC schools, who have now seen a series of greedy CEOs and owners, including Goldman Sachs and private equity firms, that is a familiar sentiment.

Brent Richardson resigned last week as DCEH’s CEO, and DCEH obtained protection from its many creditors when a federal judge in Ohio, at DCEH’s request, placed the non-profit in receivership, a status that, unlike bankruptcy, allows the remaining DCEH schools, including Argosy University, to continue receiving federal student grants and loans. According to a DCEH court filing, an Ohio community college is interested in acquiring Argosy. But over the weekend Argosy’s accreditor, WASC, directed Argosy to show cause why its accreditation should not be withdrawn.

In the recent Grand Canyon and Bridgepoint conversions, the brazen conflicts of interest in having connected for-profit and non-profit entities was at least disclosed up front. With the Colbeck-EPF-Studio deal, as with Richardson’s conflicted DCEH operation, the facts were hidden (until publication in Republic Report).

There are other connections that remain to be fully explored.

The key lawyer for Colbeck on the deal for the DCEH schools is John Altorelli, a colorful former partner at the demised and disgraced corporate law Dewey & LeBoeuf, later at DLA Piper, and now at Aequum Law, LLC in New York.

In addition, Colbeck-owned Studio School describes itself as a “branch campus” of another for-profit school, Hussian College, so in a previous article I stated that Colbeck is an investor in Hussian. That prompted Jeremiah Staropoli, president and CEO of Hussian College Group, to email me on Friday, writing, “Colbeck is neither a current nor past investor in Hussian College, so we would appreciate your correcting that misstatement when you next update your story. For additional clarification, Studio Enterprise is a service provider to Hussian’s West Coast campus, Studio School, but Hussian is not a party to the services agreement between Studio Enterprise and AI that was made public this week.” I wrote back asking Staropoli for clarification, in light of information that Colbeck has been an investor in Studio School and Staropoli’s acknowledgment that Studio School is a Hussian campus. I haven’t heard back from Staropoli yet, either.

Staropoli, by the way, is also on the management team of a coding boot camp operation, AcademicIQ, and, according to his LinkedIn page, is president of the Kentucky-based The Keeling Group, an IT consulting firm “specializing in custom software development, cloud consulting, network integration and higher education regulatory compliance solutions.” Hussian College and AcademicIQ share a building on Spring Garden Street in Philadelphia with a campus of non-profit Harrisburg University. David Figuli, a lawyer who describes himself on LinkedIn as the “Owner & Chairman” of Hussian College, serves on the Harrisburg University board of trustees and also on the AcademicIQ team with Staropoli.

In November 2018, Hussian College took over for-profit Daymar College, which in 2015 had agreed to a $12.4 million settlement to end a lawsuit, alleging deceptive practices, brought by Kentucky’s attorney general. Daymar traces its origins to Draughons Practical Business College, a southern career chain school established in the late 1800’s by one John Draughon. Remarkably, as last week’s Education Principle Foundation press release notes, the former DCEH-EDMC school South University, just acquired by EPF, “traces its heritage to 1899, when Dr. John Draughon established Draughon’s Practical Business College in Savannah, Georgia.” Now, it seems, the two strains of John Draughon’s career college empire are tied together again.

UPDATE 03-08-19 8:00 am: The New York Times notes today that Republic Report “has closely tracked Dream Center’s unraveling.” That’s true. For our complete coverage, go here.