February 19, 2019

Who’s Who In DeVos-Dream Center College Collapse?

With the Art Institutes, Argosy University, and South University chains of career colleges, and their operator Dream Center Education Holdings, in free fall, with students and staff in turmoil as campuses disintegrate or shut down, and with leading members of Congress demanding an investigation of the Betsy DeVos Department of Education’s role in the debacle, it’s an appropriate time to round up the major players — as someone once said, some that you recognize, some that you’ve hardly even heard of.

We hope this assembling of key actors in the DCEH drama — based on public records, internal documents, and interviews — will help those investigating and following the matter to understand what’s happened and who’s involved. (If we’re missing anyone, let us know at [email protected])

— EDMC’s Mark McEachen.

The final CEO of the troubled for-profit college chain Education Management Corp. (EDMC), McEachen took the helm just before the company, which had been receiving as much as $1.8 billion a year in taxpayer dollars, agreed to a $200 million-ish settlement of fraud charges with federal and state law enforcement. After EDMC, which engaged in deceptive and coercive recruiting and charged astronomical tuition, sold its schools to DCEH in 2017 and headed to bankruptcy, McEachen took a payout of more than $14 million, part of a $30 million parting gift for EDMC senior executives that was approved by the Betsy DeVos Department of Education. DCEH management claim that McEachen and his team, in negotiating the sale, presented them with deceptive information about the financial health of the schools.

DCEH’s Brent Richardson.

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 the Steve Wozniak-branded coding camp Woz U  — and other businesses tied to DCEH CEO Brent Richardson, his family members, and his long-time associates. In addition to this blatant but concealed-from-the-public conflict of interest, and other misdeeds, DCEH falsely told students that two of its schools remained accredited, when in fact its accreditor, Higher Learning Commissions, had suspended that status. Richardson, whose net worth is in the hundreds of millions, resigned as DCEH CEO last month, just before the company was placed in receivership by a federal court, and promptly showed up at Woz U, which he owns, to resume control there.

The DCEH “Cabinet.”

Richardson’s hand-selected 12-member executive team to run the non-profit DCEH included six people who previously worked at for-profit Grand Canyon University, where Richardson was CEO, and at least three others who had worked at rival for-profit giants DeVry and University of Phoenix. The Cabinet members were: Brent Richardson, Chief Executive Officer; John Crowley, Chief Operating Officer; Chad Garrett, Chief Financial Officer; Monica Carson, Chief Enrollment Officer; Melissa Esbenshade, Chief Marketing Officer; Shelley Gardner, Chief Student Services Officer and wife of Richardson’s nephew; Mike Lacrosse, Chief Technology Officer; Shelly Murphy, Chief Regulatory and Government Affairs Officer; Rob Paul, Chief Strategic Initiatives Officer; Christopher Richardson, General Counsel and Secretary, and Brent’s brother; Debbi Lannon-Smith, Chief Human Resources Officer; and Stacy Sweeney, Chief Academic Excellence Officer.

The DCEH Board of Managers.

Formed by the Los Angeles-headquartered, faith-oriented charity the Dream Center, DCEH created a board of Dream Center leaders and education executives. The board was charged with overseeing and approving Richardson’s moves, including his questionable plans to make business deals with for-profit entities he owned. The members: Brent Richardson, Co-Chairman; Randall K. Barton, a tax attorney and former chairman of the for-profit education business Significant Systems, Co-Chairman and Chief Development Officer; Rev. Matthew Barnett, co-Founder of the Los Angeles Dream Center; Timothy Slottow, former president of the for-profit University of Phoenix and former CFO of the University of Michigan; Rufus Glasper, Chancellor Emeritus of Maricopa Community College; and Jack DeBartolo, architect.

The Monitor: Thomas Perrelli.

Formerly the third-ranking official in the Obama Justice Department, Perrelli was hired in 2015 by the state attorneys general to serve as monitor of their settlement with EDMC. As the purchaser of EDMC schools, DCEH inherited the obligation to be monitored by Perrelli, a partner at Jenner & Block in DC. But DCEH management bristled at the oversight and argued at times they were not subject to its strictures. Perrelli traveled to Phoenix last June to attend a DCEH compliance “summit,” after DCEH had fired some of the more diligent compliance officials who were holdovers from EDMC; Perrelli said little but took notes. Perrelli issued a scathing report documenting, through October 1, abuses under DCEH, most of which Republic Report had exposed last May. Expect an announcement soon from the attorneys general as to whether they will exercise their right under the settlement to extend Perrelli’s term as monitor another six months, through this summer.

Department of Education: Betsy DeVos and Diane Auer Jones.

While overseeing the dismantlement of accountability rules for for-profit college operators, and allowing the sham conversion of several for-profit colleges to non-profit status, Trump education secretary DeVos and her top higher education official Diane Jones, a former for-profit college lobbyist, also have engaged in appalling mismanagement and malfeasance with respect to DCEH.

The DeVos Department blessed the DCEH purchase of EDMC schools and later gave tentative approval to treat the schools as non-profit, which would allow them to evade some regulations that apply only to for-profit schools. According to a source close to DCEH management, the Department officials directed DCEH to misstate its suspended accreditation status. DeVos’s team also changed a regulation to make it possible for some DCEH schools to have their accreditation restored retroactively. And it pushed DCEH to keep some campuses open, perhaps so the Department wouldn’t have to deal with the claims of students entitled to loan cancellation if their schools close.

Eventually, Jones soured on DCEH, narrowed Richardson’s access to capital, and finally turned the DeVos Department’s support away from DCEH and toward the investment firm Colbeck (see below) and related actors.

Trump appointee Wayne Johnson, regaining some influence after an earlier demotion, and career Department lawyer Steve Finley have been Jones’s key lieutenants in this effort.

While Jones and her team have engaged intensely with corporate executives and lawyers through various efforts to keep the DCEH schools afloat and taxpayer money flowing to them, they have provided almost no information to students and staff of DCEH schools or to the general public.

Senate Democratic Whip Dick Durbin (IL) and Rep. Rosa DeLauro (D-CT), chair of the House Appropriations Subcommittee that oversees the Department of Education, last week asked the Department’s inspector general late to investigate the Department’s handling of DCEH.

The Debt Holder: Michael Lau.

Lau is the CEO of Candlewood Investment Group, a hedge fund that holds much of the DCEH schools’ debt. Anxious to get his money back ahead of others, Lau has lobbied Jones relentlessly, and eventually pushed Jones to favor Colbeck (see below) over DCEH. See also Gary Lee, below.

Colbeck’s Jason Colodne and Jason Beckman.

Jasons Colodne and Beckman are the leaders of Colbeck Capital Management, a New York- and Los Angeles-based investment firm that focuses on making loans to corporations.

Last spring DCEH started talks with Colbeck about investing in the schools. In January, emails to staff from DCEH officials and a press release from something called the Education Principle Foundation (EPF) announced that EPF would be acquiring many of the Art Institutes campuses, as well as South University. At the same time, DCEH officials said that a company called Studio Enterprise would be hired to provide services to both the campuses being sold to EPF and those staying with DCEH. [Read: the Studio-DCEH framework agreement and EPF-DCEH purchase agreement.)

No one explained that Colbeck is behind both EPF and Studio; that was left for Republic Report to expose. Colbeck created the non-profit EPF, which until New Year’s Eve was called the Colbeck Foundation, and Colbeck is an investor in the for-profit Studio Enterprise. It’s not clear how Colbeck thought it was a good strategy to try to conceal this blatant conflict of interest.

Adding to the concerns here: A draft DCEH restructuring plan provided that Colbeck would offer DCEH’s management team the chance to “participate in the upside” of the Colbeck service contract. Translation: Officials of a non-profit educational organization, DCEH, were apparently negotiating, as part of the transfer of the organization’s assets, that they personally would get paid from the deal. To make it even worse, they would be paid mostly with the taxpayer dollars that make up most of the schools’ revenue.

The board of directors of the Education Principle Foundation, according it its IRS filings, have been Colodne, Beckman, and the two other top officials at Colbeck. But now, Republic Report has learned, 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. So, no longer the Colbeck management team, but another group of Wall Street types.

Ohio Governor Mike DeWine.

Newly-elected Ohio governor Mike DeWine served as the state’s attorney general until January and has been engaged in discussions about Ohio’s Eastern Gateway Community College acquiring Argosy from DCEH. The deal that DCEH proposed with Gateway would provide for a for-profit company to provide capital for the deal and then get paid to provide services to Gateway, an arrangement that DCEH described as comparable to the 2017 Kaplan-Purdue deal (a deal that was, from the perspective of many student advocates, highly troubling).

Higher Education Partners’ Michael Perik.

Perik is the CEO of Higher Education Partners, LLC, another education service company. Perik’s firm has worked for Ohio’s Eastern Gateway Community College to open new campuses, to help marketing, recruit, and enroll for online degrees, and to assist in designing online courses. In the original design of the Gateway-DCEH deal, Perik would get the servicing contract for Argosy after Eastern Gateway acquired it, and DCEH would get a piece of that action. DeVos’s team later insisted that the Eastern Gateway servicing contract, like the others, go to Colbeck, though Perik and others could get subcontracts.

The Receiver: Mark Dottore.

There’s the monitor, and there’s also the receiver; it sounds like you’re setting up a home theater.

An experienced court-appointed receiver for financially distressed companies, Dottore had been engaged by DCEH and then was picked as the company’s receiver in a trumped-up lawsuit in federal court in Ohio. Receivership allows DCEH protection from its many creditors — such as landlords, law firms, and lead generation companies — while avoiding bankruptcy, which would automatically end its eligibility for the federal student grants and loans that represent most of its revenue. Needing to account for millions in missing money, Dottore has publicly accused Studio Enterprise of already taking a big cut of the federal money without providing any services.

The receiver’s most recent filing, today, with the Ohio federal court indicates he is trying to find a solution that will cause the DeVos Department to release funds to cover stipends for students at the DCEH schools:

To be clear: the money to pay the Student Stipends is not missing. Under DOE regulations, the receivership has to have on hand $13 million to advance to students, and then the DOE reimburses the receivership. Because the receivership never had sufficient resources to pay the Student Stipends, it could not advance the money; because the funds could not be advanced, the DOE regulations state that it is under no obligation to reimburse. To put it bluntly, the payment of the Student Stipends is stalled over a “chicken and egg” debate.

The DOE and Receiver have been in discussions since the Receiver’s appointment, and in earnest discussions since February 7, 2019, both looking for a way to rectify this matter for those who matter most, the students of these institutions owed these funds. The institutions, the Receiver and state and regulatory agencies are fielding hundreds of calls a day from students facing eviction, impacted by repossession, unable to pay childcare and unable to provide for their families as a result of these funds not being released….

UPDATE 02-22-19 6:00 pm: Dottore filed another report with the court today, stating in part, “It appears that amounts improperly requested by [DCEH] and then advanced by the United States Department of Education were not remitted to students…. it was used to pay their operating expenses.”

The Accreditors.

DCEH’s challenges intensified as its accrediting agencies — notwithstanding DeVos and Jones’s decision to rehabilitate the nation’s most lax accreditor, ACICS — decided to get tough on DCEH schools. Three accreditors — Middle States Commission on Higher Education, Higher Learning Commission (HLC), and WASC — all suspended or threatened to withdraw approval of DCEH-operated campuses. As Executive Vice President for Legal and Governmental Affairs at HLC, Karen Solinski was involved in that accreditor demoting two Art Institutes campuses to unaccredited “candidate” status. DCEH responded by, as noted, misrepresenting its accreditation status to students — an action for which students have now sued DCEH. A source close to DCEH says Jones’ team directed DCEH to make the misrepresentation. DCEH also considered suing HLC, but put those plans on hold. Solinski has since left HLC.

The Lawyers.

While the losers in the DCEH saga are taxpayers, faculty, staff, and above all, students, the biggest winner may be corporate lawyers. One insider to the endless negotiations estimated that legal fees might exceed a hundred million dollars when all is done. “Every pig has been at the trough,” this person said. I didn’t say that.

Here are some of the attorneys who have been involved:

Ronald Holt. DCEH’s chosen regulatory lawyer, Holt, according to monitor Perrelli’s report, emailed an Education Department official with the news that DCEH schools would delete from their website the disclosures to students that for-profit colleges must make under the gainful employment rule — even though the Department had not formally approved DCEH’s conversion to non-profit status.

Dennis Cariello. DCEH added Cariello to the legal team when its officials came to believe that the for-profit college industry veteran, who was involved in preparing DeVos for her 2017 confirmation hearing, would be able to smooth the way with Diane Jones and Wayne Johnson.

Leo Beus. DCEH hired veteran litigator Beus to plan a lawsuit against EDMC.

Mike Goldstein. A senior lawyer on Cooley LLP’s busy for-profit college team, Goldstein has represented debt-holder Candlewood in this matter, while another Cooley lawyer, Katherine Lee Carey (see below) has represented Colbeck’s Studio Enterprise.

Gary Lee. Co-chair of the finance department at mega law firm Morrison Foerster, Lee heads a huge team of lawyers at his firm working for Candlewood. Lee, along with other MoFo lawyers and lawyers from the firm of Carpenter & Lipps in Columbus, Ohio, successfully moved to intervene in the receivership case, representing something called Flagler Master Fund SPC Ltd, alongside lawyers from big firm Winston & Strawn and from Cleveland’s Thompson Hine, who represent U.S. Bank. According to their joint court filing, “Flagler Master Fund SPC Ltd. (“Flagler”) is an investment fund managed by Candlewood Investment Group, LP (“Candlewood”). Flagler is a secured lender under the Defendants’ secured Credit Agreement and a beneficiary of a Second Lien Guaranty and Second Lien Pledge and Security Agreement. U.S. Bank is the administrative agent and collateral agent under the Credit Agreement and a secured party and beneficiary of each of the Second Lien Guaranty and the Second Lien Pledge and Security Agreement. In the aggregate, more than $115 million in secured obligations remain outstanding under the Credit Agreement, the Second Lien Guaranty, and the Second Lien Pledge and Security Agreement.” Got that? Flagler Master Fund is incorporated in the sunny Cayman Islands.

John Altorelli. A former partner at the demised and disgraced corporate law Dewey & LeBoeuf, later at DLA Piper, and now at Aequum Law, LLC in New York, Altorelli has been Colbeck’s lead lawyer in this matter.

Katherine Lee Carey. Carey, another lawyer at Cooley, has been representing Studio on the deal.

Jeffrey Potash, Peter Schwartz, and Amy Wollensack. Three New York-based partners at the giant corporate firm Covington & Burling, Potash, Schwartz, and Wollensack head another big team of lawyers hired by Altorelli to work for Studio/Colbeck on the deal. Other Covington lawyers represent Studio in the receivership case.

Note: An earlier version of this article stated that Mike Goldstein of Cooley LLP has represented Studio Enterprise, in addition to representing Candlewood. Although another Cooley lawyer, Katherine Lee Carey, has represented Studio, and a source involved in the deal told me that Cooley sought clearance from the Department of Education to allow Goldstein to represent Studio, Goldstein tells me he has never represented Studio. Goldstein says that he and Carey “came upon the engagements entirely independently of each other and when we discovered the connection erected … an ‘ethical screen'” to separate their representations.