February 26, 2019

DeVos Fiddles, Schools Burn

DeVos Fiddles, Schools Burn

While Trump education secretary Betsy DeVos and her lieutenants have worked to free the worst-behaving predatory colleges from all meaningful accountability rules, they also have spectacularly mismanaged the affairs of schools that have faltered. Exhibit A, in court right now, are the three chains of schools — the Art Institutes, Argosy University, and South University — formerly owned by the disgraced predatory company EDMC. A new document filed in federal court in Ohio underscores the ongoing abuses by shady companies who now have access to the taxpayer dollars going to those schools, courtesy of DeVos and her top higher education aide, Acting Under Secretary Diane Auer Jones.

In 2017, DeVos and Jones, a former top executive at predatory Career Education Corp., allowed a new non-profit enterprise, Dream Center Education Holdings, to acquire the EDMC schools, and then DeVos and Jones sat back as DCEH executives, led by Brent Richardson, former CEO of for-profit Grand Canyon University, improperly mixed the non-profit operation with for-profit businesses they run. The DeVos Department also watched, or even assisted, as DCEH concealed from students the loss of accreditation of some campuses, and failed to comply with the federal gainful employment rule, which is aimed at protecting students from predatory abuses.

When DCEH faltered, amid financial problems and revelations of its misconduct, and started closing campuses, Jones picked a new suitor to run many of the DCEH schools, a Wall Street investment firm called Colbeck, and stood by, when the deal was announced in January, as Colbeck failed to explain that it was behind both (1) a secretive non-profit group, Education Principle Foundation, that would own the schools and (2) a for-profit business, Studio Enterprise, that would be paid to service the schools.

Meanwhile, Richardson resigned and DCEH managed, through a trumped-up lawsuit, to get a federal judge in Ohio to appoint its chosen man, Mark Dottore, as receiver for the failing operation. Late last week, Dottore sought an emergency order from the court to force Studio and EPF to pay the receiver some $6 million that Dottore claims was improperly obtained from federal aid to the schools still owned by DCEH. Otherwise, Dottore warns, the schools “will be unable to meet payroll, its computer system will shut down, and the Ai University System, Argosy University System and the South University System will collapse, leaving tens of thousands of students out in the cold.” Dottore also wants the judge to void the various DeVos-backed deals that DCEH made with Studio, on the grounds that they are “unconscionable,” that Colbeck paid nothing for the assets acquired, that Colbeck has not performed the services required under the deal, and that Colbeck has not paid DCEH amounts owed.

Dottore claims that DCEH “was forced into the transaction,” that “the Studio deal was presented by the Department of Education as a ‘Take it, or we’ll cut off your funding today’ prospect.”

[UPDATE 02-26-19 8:00 pm: Today, Studio filed its response, seeking to shift blame to Dottore for the upheaval and missing funds. Studio and Dottore are going to spend a lot of money fighting about who is a less deserving guardian of taxpayer dollars and students’ futures — DCEH or Colbeck. Neither seems worthy. The Department of Education has completely screwed this up. Unlike Corinthian, ITT, or Kaplan, I think many of the EDMC schools were worth saving, and it’s too bad they weren’t sold to a better operator.]

Through this crisis, while shady Wall Street operators suck taxpayer millions out of a failing school system, as students struggle without stipends to pay rent and fear for their futures, and faculty and staff lose their jobs, DeVos and Jones have said virtually nothing to the students or the general public. Jones and her team have spent tons of time behind closed doors negotiating deals regarding the schools with executives and armies of corporate lawyers. But DeVos, as well as Jones, the self-styled architect of the Department’s plans to end accountability in the name of innovation, the honored keynote speaker at every higher education conference, have never met with DCEH students to reassure them, or hear their stories. They’ve only just expressed any concern for students and posted a web page focused on the important, but relatively narrow, issue of credit balance refunds. They’ve failed to act on the growing stacks of applications from DCEH, and other, students who have exercised their rights under the law to have their federal loans cancelled in the event of school abuses. They’ve refused to answer repeated inquiries from Democratic members of Congress regarding the DCEH debacle, and now some of those members have called for an investigation.

DeVos and Jones should resign over their mishandling of the DCEH matter and the for-profit college disaster generally. So should Deputy Secretary Mick Zais, who blatantly disregarded his duties in pressuring the Department’s acting inspector general, Sandra Bruce, to curb an investigation of Jones’s restoration of the negligent for-profit college accreditor ACICS, and then acted to replace Bruce with a Department of Education lawyer, before that firing was reversed. Members of Congress are now investigating Zais’s abuses as well.

Students, taxpayers, and honest institutions deserve much better than the incompetent, unethical mess that DeVos, Jones, and Zais have made of the already intolerable for-profit college fiasco.


NOTE: We are posting regular updates on the Dream Center collapse below.


UPDATE 02-27-19 4:05 pm: The Department of Education today sent a letter notifying Argosy University that it was cutting off federal student aid to all Argosy schools, effective immediately. The Department, again appearing to side with Studio/Colbeck over DCEH/Dottore, cited Argosy’s financial problems and, in particular, its alleged failure to pay students the credit balances, or stipends, they are owed. The end of federal student grants and loans, unless reversed, almost certainly means the end of Argosy University, spelling serious hardship for students, faculty, and staff.

UPDATE 02-27-19 8:45 pm: Also today, Argosy’s accreditor, WASC, acted to continue the Show Cause order it has issued to the school and to set another hearing for March 15, 2019, to decide whether WASC should terminate accreditation.

UPDATE 03-04-19 5:00 pm: Receiver Dottore filed a report with the Ohio court that, among other things, reported a settlement of his lawsuit against Studio, under which “Studio will downstream necessary cash to keep the DCEH computers and support services intact. Studio also wire transferred immediate cash to the Receivership to keep operations running in the near term.”

Dottore also levels serious charges against DCEH, the operation that brought him in to the matter: “What both the Receiver and the DOE did not know was that DCEH and Argosy were altering their submissions to the DOE to reflect that the Student Stipend had been paid when in fact it had not been paid. Based upon these submissions, DOE advanced all of the student’s Title IV money. Once the money was received, Argosy and DCEH voided their bookkeeping entries that showed the student had been paid and paid operating expenses with the money rather than paying the Student Stipend.” Dottore adds that he “requires time to complete a proper, detailed investigation, including the timing of the initial defalcations, who signed the requests and requisitions for the money, who knew about the situation, the exact uses of the money, and a final total amount.”

Dottore further reports he “has taken immediate and drastic steps to preserve assets and improve his cash position. First, the Receiver has laid off over 1,100 employees, closed the vast Phoenix facility, and cut virtually every other expense.” Dottore says further that “has actively pursued discussions” with 15 potential purchasers of the DCEH schools and “is also trying to transition the students who are stranded by the financial dysfunction” of the schools.

UPDATE 03-04-19: California’s oversight agency ordered Dream Center to stop enrolling students at the state’s Argosy, Art Institutes, and Western State College of Law campuses.

UPDATE 03-06-19 11:00 pm: Clearly alarmed by what he’s learned, U.S. Magistrate Judge Thomas M. Parker has ordered the various parties in the DCEH bankruptcy dispute to court for a hearing next Monday before him and U.S. District Judge Dan Aaron Polster. At the hearing, Parker ordered, the court will require DCEH, receiver Mark Dottore, and Digital Media Solutions, the lead generation company/DCEH creditor that filed the trumped-up lawsuit, to show cause why the court shouldn’t cancel the receivership order entirely. Parker also ordered that representatives be present from the Department of Education, Studio Enterprise, and from U.S. Bank and Flagler Master Fund, who represent DCEH’s major creditors. Parker expressed particular concern that Dottore never provided the court with a copy of the Department’s February 27 letter cutting off federal aid to Argosy and accusing Dottore of breach of fiduciary duty; Parker noted that Dottore referenced the letter in a court filing but “downplayed its significance” and says “the text of the letter came to the court’s attention in connection with a motion to vacate the receivership filed by student intervenors.” Parker also noted that he was advised today with an hour’s notice that Dottore “was intending to put in motion a series of meetings that would announce the closing or sale of various Argosy campuses” and that only after the judge inquired did Dottore file a motion seeking approval for such action. Parker concluded by expressing concern that “the current receivership is doing more harm than good.”

One party whom Parker did not order into court, but who might well show up, is lawyer Thomas Perrelli, the monitor engaged by 40 state attorneys general to oversee their 2015 settlement of fraud charges with EDMC, the former owner of the schools; Perrelli last week filed a motion to intervene in the case, alleging that Dottore failed to meet his assurances that his receivership filings would reflect DCEH’s obligations to the states and former students under the settlement.

Meanwhile, stripped off its federal aid, Argosy appears on the verge of closing its campuses unless a buyer suddenly emerges.

UPDATE 03-08-19 9:00 am: In another filing with the Ohio court, yesterday, Dottore states, “With this Court’s approval, the Receiver plans to transition, close or teach out most of the Argosy campuses.” In a second filing yesterday, Dottore asks the court to approve an agreement that would allow Argosy students in certain academic programs to transfer to South University. Dottore explains, “South’s proposal may be appealing to Argosy students because South uses the same computer platform as Argosy, and therefore, the transition would be made easier for students.” He adds, “South also may hire Argosy faculty members and acquire Argosy curriculum for the programs that are listed in the Articulation Agreement.” And the Department of Education has finally posted a broad information page for DCEH school students.

Argosy University closed.

UPDATE 03-09-19:

Magistrate Judge Parker held a previously scheduled hearing Friday, in advance of Monday’s bigger court showdown. According to a press release from the National Student Legal Defense Network, which represents a group of students who were misled by DCEH about its lack of accreditation, at the hearing receiver Mark Dottore “was still unable to account for the whereabouts of the $13 million that Argosy students have yet to be paid.” In addition, “The court was also unable to learn more from the Department of Education, because Dottore failed to invite it to attend, despite being ordered to do so.” Judge Parker had issued an order February 28 that directed Dottore “to invite a representative of the Department of Education with knowledge of how student stipends might be paid to participate in the March 8, 2019 status conference either in person or by telephone.” According to a person present in the courtroom, when no one appeared in court Friday to represent the Department, Parker asked Dottore’s counsel if the receiver had alerted the Department as ordered. Counsel replied, “yes, with an explanation,” and then stated that the Department has access to the court’s PACER online filing system, so it must have known.

Dottore, through his lawyers Mary Whitmer and Robert Glickman, also told the court Friday that the receiver first learned of DCEH’s alleged bookkeeping fraud on February 20 from two DCEH employees, whom the lawyers declined to name. This would have been a full two weeks before Dottore disclosed  the scheme in his First Receiver Report, dated March 4.

Shortly after the hearing, Judge Parker issued an order, requiring “the DCEH employee(s) with knowledge” of the alleged accounting scheme to appear at Monday’s hearing, as well as a representative of the Department of Education with knowledge of the matter.

A few hours later, Dottore filed his response to the Department of Education’s February 27 letter cutting off federal student aid to Argosy. Among other things, Dottore charges: that the Department “had adopted a cold … outright antagonistic, approach” to him; that he did not know about alleged financial misrepresentations made by DCEH before the receivership was created; that he was party to pre-receivership discussions about a potential deal with Eastern Gateway Community College but he did not know about the Colbeck/Studio deal until after it was executed; that the Studio deal was crafted by Studio, DCEH’s lenders, and the Department without DCEH’s involvement until DCEH was told to take the deal or lose access to federal aid; that his firing of 1,700 Argosy employees did not, as alleged, include dragging professors out of classrooms or otherwise cutting full teaching positions; that the chancellor of Argosy, Cynthia Baum, asked seven times to be fired, ultimately stating “Just [expletive] terminate me!” until Dottore finally did so; and that “the failure of the Argosy system was pre-determined before I was appointed Receiver.”

UPDATE 03-11-19:

In advance of today’s federal court hearing, Receiver Mark Dottore this morning filed an emergency motion to allow him to enter into “articulation agreements” to explore allowing Argosy system students to transfer to schools of non-profit TCS Education System, which operates schools including Pacific Oaks College & Children’s School; Saybrook University; The Chicago School of Professional Psychology; and The Santa Barbara & Ventura Colleges of Law. It’s not clear how the transfer would work, in particular, for the students at Argosy’s California-based Western State College of Law, which is accredited by the American Bar Association, whereas the California-based Santa Barbara & Ventura Colleges of Law are not; students who graduate from non-ABA-accredited schools are not permitted to sit for the bar exam in most states (although they are in California). TCS’s president, Michael Horowitz, received $1,317,000 in annual compensation for the year ending in May 2017, according to the operation’s most recent IRS 990 form.

The U.S. Department of Education, represented by Justice Department lawyers, filed a response to Judge Parker’s show cause order, and the Department argues that the DCEH receivership should be vacated. The Department contends: that the receivership lawsuit was not a real dispute but a trumped-up collusion between DCEH and the lead generation operation that sued it; that bankruptcy is the more appropriate means of addressing DCEH’s financial distress; that the loss of federal student aid that comes with bankruptcy is less of a concern now that most of the schools DCEH still owns have shut down.

UPDATE 03-11-19 6:55 pm:

In the Ohio court today, Judge Polster decided, against the wishes of both the Department of Education and a group of students, to keep DCEH receiver Mark Dottore in place for up to six more months.

According to people present in the courtroom: Polster initially suggested he had been blindsided appointing the receiver without being apprised of all the facts.  But the argument in favor of keeping the receiver that seemed to carry the day for Polster — an argument pressed by both Dottore’s team and John Altorelli, the lead lawyer for Studio — is that the surviving South University and Art Institutes schools needed the old EDMC/DCEH technical platform to continue operating. It was unclear why Dottore, who only entered the picture this year, was needed to keep the platform going.

The hearing also failed to get to to the bottom of the alleged diversion of student funds.  Dream Center Education Holdings chair Randall Barton appeared in court and said he had no expertise in the relevant accounting issues, while DCEH’s head of student accounts described the financial mechanics but had no explanation of what happened to the money.  Michael Frola, the Department of Education official who signed the letter cutting off Argosy’s funding, citing in part the missing money, also discussed mechanics of federal aid but had no answers.

Polster indicated that extending Dottore’s term would also allow the receiver to keep investigating the missing money, notwithstanding that the Department of Education has accused Dottore himself of mismanagement.

In other matters:

— The parties explained that the two South University campuses retained by DCEH/receivership would be taught out by South campuses now operated by EPF/Studio. With the landlords for those campuses demanding to be paid, it’s unclear how the logistics of that arrangement would work out.

— Western State College of Law, part of Argosy, says it has financial support from lenders to meet payroll long enough to allow this year’s third-year students to graduate. Studio also indicated it might seek to take over the law school.

— There is a local effort to keep alive The Art Institute of Las Vegas, which is part of the receivership.

— There was no mention of plans for Ohio’s Eastern Gateway Community College to take over pieces of Argosy, Ai online, or anything else.

The hearing signaled yet another reshuffling of alliances in this mess. The Department, which had anointed Studio the savior of DCEH schools, forcing the arrangement on DCEH, is now aligned with the lawyers for students in urging the cancellation of the receivership. Studio is on the other side of the Department, aligned on this issue with receiver Dottore, who was DCEH’s pick for the role. DCEH, according to a source close to management, is somewhere in between but for now prefers receivership to bankruptcy.

Dottore has now pointed fingers at both Studio and DCEH, while Studio has blamed Dottore, and the Department has blamed DCEH and Dottore. DCEH has blamed the Department and the prior owner of the schools, EDMC, as well as Studio and Michael Lau, the chief representative of DCEH’s creditors.

Caught in the middle of all these complicated folks and their hordes of lawyers are all the faculty and staff losing their jobs, the taxpayers who will be forced to cover a huge bailout, and the students whose futures are very much at risk.

UPDATE 03-16-19 11:30 am:

On Wednesday, March 13, judges Polster and Parker issued an order memorializing and expanding on decisions they made at the March 11 hearing, as described above.

The court this week also granted the motion of Thomas Perrelli, the monitor representing state attorneys general, to intervene in the case.

DCEH staff across the country report that their employee benefits have been cut off and / or that they have not received their paychecks, in many cases their final paychecks; staff got apology letters from receiver Dottore on Thursday. Judge Polster has indicated that he has heard from numerous staff and has ordered Dottore to report by Monday on the missing pay.

Argosy and Art Institute students face not only the closing of their campuses but also evictions and other immediate financial crises from the diversions of their stipends.

A letter to the court from Joseph Harbaugh, the sole remaining board member of Argosy University, described problems with student transfer options and asked the court to keep some Argosy staff on board to help students transfer. Dottore on Friday filed a response to that letter saying that the money to pay those staff just isn’t available to him, but that if Harbaugh is able to obtain funding, including from the Department of Education, he would be pleased to cooperate.

Studio, which at the Monday hearing expressed an interest in acquiring Argosy’s Western State College of Law, told the court in a filing on Friday that it “will not be able to acquire” the law school “despite its best efforts.” According to Studio’s filing, the Department of Education has stated that because the law school, as part of Argosy, “relied on the Title IV eligibility of Argosy,”  the Department “will not approve a sale of the Law School as a freestanding institution with its own Title IV eligibility.” In the wake of Studio’s filing, the court ordered the Department of Education to produce an official to participate in a hearing set for Monday that is to address the settlement between Studio and the receiver.

The dean of the law school wrote to the court on Thursday seeking a modification of the court’s rulings in order to allow more of the students to graduate or complete the current semester.

In short, due to the filing in January of the trumped-up DCEH receivership lawsuit, and extraordinary mismanagement and misconduct by multiple parties, including the DeVos Department of Education, a federal district judge in Cleveland is now essentially running a collapsing national college system, with the fate of some 26,000 students at stake.

UPDATE 03-19-19 9:15 pm:

After a hearing today, Judges Polster and Parker issued an order with the latest directions for the school system they’re now running.  Among many other things, the Court ordered the receiver to continue funding the law school through May 29, 2019.

The DCEH employees really need a lawyer in the receivership case, now that the judge is calling the shots. Fired employees haven’t received a final paycheck. Employee benefits have been cut. Receiver Dottore says the medical plan is “on hold” and that DCEH will stop withholding benefit deductions.

UPDATE 04-01-19 1:15 pm:

March 28 order from judges Polster and Parker: “The court will allow two weeks (or until 4:00 p.m. EDT on April 11, 2019) for the receiver, Studio and South University to negotiate any changes to the parties’ existing agreements that are needed to effect the separation of South University and the Art Institutes from the IT Platform not later than September 11, 2019. Should they fail to agree, the plan of reorganization will likely fail, thereby dooming South University and the Art Institutes. In the event the parties do not reach a final agreement by that deadline, the court will likely terminate the receivership and refer the case to the bankruptcy court for further proceedings.”

UPDATE 04-12-19 1:15 pm:

Receiver Dottore yesterday filed papers asking the court to hold in contempt Studio and Studio’s lawyer, John Altorelli, whom Dottore calls “the person who is in control of Studio.” According to Dottore, Studio has been making job offers to DCEH employees “who are critical to the operation of the Shared IT Platform or to ensuring compliance with the EDMC Consent Judgment. Studio has also been negotiating with the landlord of the premises at which the Shared IT Platform is located, in another step meant to displace the Receiver. Studio has further made efforts to abscond with very valuable IP assets within DCEH’s control.”

Studio’s response:

“South University and the Arts Institutes were offered the opportunity to posit questions to the Receiver and Studio about their respective plans, and Studio asked each of South University
and the Arts Institutes to inform the group as to which plan they prefer. Both South University
and the Arts Institutes informed the group that they each would like to move forward with
Studio’s Separation Plan….

Studio informs the Court that it is doubtful – given the continuous egregious behavior of the Receiver – that Studio actually would be allowed to execute Studio’s Separation Plan with the Receiver in place. The Receiver’s behavior has only become more desperate and detrimental to the survival of South University and the Arts Institutes, as evidenced by the blatantly false assertions in his frivolous Emergency Motion of the Receiver for an Order Requiring Studio Enterprise Manager, LLC and John J. Altorelli to Show Cause Why They Should Not be Held in Contempt of this Court for their Violations of the Injunctions Contained in the Amended Order Appointing Receiver, filed today (Docket No. 252). Consequently – and especially given the support of both the Arts Institutes and South University for Studio’s Separation Plan – Studio believes the best solution is for this Court to terminate the receivership at the earliest possible date, allowing Studio, the Arts Institutes, and South University to move forward with Studio’s Separation Plan without the interference of the Receiver.”

It’s heartwarming to consider that our taxpayer-funded Title IV aid is going to pay lawyers and private equity guys to fight over control of predatory Dream Center schools, rather than going to students for quality educations.

UPDATE 04-26-19 3:40 pm:

Judges Polster and Parker today terminated the DCEH receivership because “not enough
remains of DCEH to justify having a receivership.” (On April 24, the judges had denied the receiver’s contempt motion against Studio and Altorelli.)