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Gary McCullough, For-Profit College Chief, Resigns Following Internal Investigation

For Profit Colleges

First Posted: 11/02/11 08:19 PM ET Updated: 11/02/11 08:19 PM ET

The chief executive of one of the nation's largest chains of for-profit colleges resigned earlier this week, following an internal investigation that revealed Career Education Corp. was artificially inflating job placement rates at several of its health and arts schools in order to remain in good standing with college accreditors.

The resignation of Gary E. McCullough marks one of the first major shakeups at the top of any college corporation after a year of heightened federal and state scrutiny of the business practices at for-profit institutions. By manipulating career placement statistics at schools across the company, Career Education was able to continue to tap millions of dollars in federal student aid with little outside inspection from regulators.

The news sent shares of Career Education Corp. tumbling, down more than 47 percent Wednesday from the end of trading the day before.

Many schools have come under fire for aggressive and misleading recruiting tactics, as well as for shouldering students with debts that they cannot repay because of their meager job prospects upon graduation.

Another area of concern lies with overstated promises made to prospective students about the likelihood of securing a job after graduation. For Career Education Corp., the problem appears to have been pervasive, according to an extensive audit performed by an outside legal counsel hired by the company. Career Education Corp. hired the independent firm to do the audit after receiving a subpoena from the New York Attorney General's office last spring, requesting information about career placement statistics.

According to filings with the Securities and Exchange Commission, the investigation by the firm found that the company was inflating career placement statistics for its health, art and design schools at numerous campuses across the country. The investigation found "certain placements that lacked sufficient supporting documentation or otherwise did not meet applicable placement guidelines established by the Company."

Career Education Corp. operates more than 90 campuses in the United States and Europe, including the Le Cordon Bleu chain of culinary schools, Sanford-Brown Institute and American Intercontinental University.

The incorrect student career placement data was both advertised in course catalogs for the schools and provided to outside college accreditors -– independent oversight organizations that are key to a college's eligibility to receive federal student loans and grants. Federal aid money is a crucial revenue source for companies such as Career Education: according to its annual securities filing from 2010, 82 percent of the company's tuition dollars came from federal student loan and Pell Grant programs.

Without proper accreditation, college corporations would not be able to receive the crucial federal funding. For the accrediting body overseeing Career Education Corp.'s health, art and design schools, programs must place at least 65 percent of students in jobs related to their majors in order to avoid sanctions or possibly having accreditation revoked. Based on the audit of Career Education's programs, nearly 75 percent of the 49 schools overseen by the Accrediting Council for Independent Colleges and Schools failed to meet the 65 percent career placement threshold.

Albert Gray, the executive director and chief executive of the Accrediting Council, said the organization is still determining what sanctions Career Education will face. He also said it is unclear how much the company manipulated the statistics.

Gray said his staff is still going through reams of documents to determine how much of a discrepancy there was between the original career placement statistics and the revised statistics produced after the audit. On average, he said most schools overseen by the Accrediting Council have career placement rates between 72 and 73 percent.

Critics of the for-profit higher education sector have pointed to the shortcomings of college accrediting bodies, which act as one of the few barriers between colleges and billions of federal student aid dollars. Career placement statistics are self-reported to the accreditors, which don't have nearly enough resources to verify whether students are actually getting jobs.

"There are 900 schools that we accredit," Gray said. "With 900 schools, if you tried to contact every employer that claimed placement numbers, that would be a full-time job for any kind of staff."

Gray said the problems with Career Education Corp. are "an outlier," compared to other schools overseen by his accrediting organization.

On a investor conference call Wednesday, executives at Career Education Corp. attempted to rally around a litany of grim statistics: total new student enrollments for the quarter were down more than 20 percent from last year, and revenues plummeted 18 percent.

Student loan default rates at several of Career Education’s schools are hovering above 18 percent, meaning that nearly one in five students defaults within two years of graduating or leaving the school. Students at all for-profit colleges had an average default rate of 15 percent, based on the most recent government statistics, more than twice the rate of their peers at public institutions.

"We are obviously disappointed by the findings of our internal investigation," said Steven Lesnik, Career Education’s chairman, who was appointed to replace McCullough as chief executive on Tuesday. "The behavior discovered in this investigation does not align with the broader belief in [a] compliant culture. That will change."

Lesnik pointed out that the company has fired several employees involved in manipulating the statistics.

Trace Urdan, an education analyst at Wunderlich Securities, asked executives how the discrepancy in career placement statistics got so out of hand.

"Firing some employees seems to understate how widespread this issue is across differing school brands, so I'm wondering if you've spent some time on the root cause here?" Urdan asked.

Lesnik said the company would continue to investigate "until we are certain that it is completely rooted out."

McCullough's resignation is the first major departure of a chief executive at a publicly traded college corporation since Peter Waller resigned as chief executive of Corinthian Colleges Inc. last November.

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