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Education Management Corp. Engages In 'Predatory Lending,' Whistleblower Claims

Posted: 03/15/2012 5:42 pm

Education Management Corp
The Art Institute of New York City, one of more than 100 college campuses owned by Education Management Corp.

Another former recruiting manager has come forward with allegations that a prominent for-profit college chain routinely misled students about tuition costs and future job prospects.

The employee, a former associate director of admissions at Pittsburgh-based Education Management Corp., alleged a widespread scheme to boost federal student aid in a whistleblower lawsuit that was unsealed this week.

The suit compares Education Management, the nation's second-largest for-profit college corporation, to predatory lenders. The company is "motivated by profit rather than student success or rankings," and has "every incentive to maximize enrollment by recruiting unqualified students who will not be able to repay their loans," the suit says.

The case is the second pending whistleblower lawsuit against Education Management, which is partially owned by Goldman Sachs. The Justice Department last year intervened in a separate case brought by former employees who alleged the company doled out illegal bonuses and raises to college recruiters based entirely on the number of students they enrolled.

The Justice Department has not intervened in the case that was unsealed this week, according to the federal court docket.

For-profit colleges such as those owned by EDMC have faced heightened scrutiny from the Obama administration, Congress and state attorneys general in recent years, amid evidence of disproportionately high defaults on federal student loans and poor graduation rates.

The suit, brought by Jason Sobek, who worked as an admissions manager at Education Management's South University online, likens the company's business model to "the predatory lending industry, taking zero risk in signing up students for federally guaranteed loans."

"Defendants had a corps of recruiters, all well-trained in sales and closing techniques, who perfected the art of preying on the hopes and dreams of vulnerable students desperately seeking better lives," the complaint reads.

A spokeswoman for Education Management did not respond to an e-mail seeking comment on the suit. The company's lawyers have moved to dismiss the other whistleblower suit, arguing that Education Management's recruiter compensation plan did not violate federal law.

The lawsuit unsealed this week alleges Education Management defrauded the federal government by making false assurances that its admissions counselors were complying with federal higher education laws. The suit alleges recruiters were trained to mislead students about the types of jobs they could expect to get after graduation.

Sales pitches often overstated past students' success in securing employment, according to the complaint. Recruiters cited job placement rates of more than 85 percent, but those numbers didn't include students working in jobs outside their field of study, the suit alleges.

The company considered low-wage jobs successful placements, the suit alleges. For example, a bank teller earning $22,800 was counted as a successful placement for a graduate of a bachelor's degree in business. A fashion marketing graduate who made $14,000 working at a sneaker outlet store was also considered a successful placement, according to the suit.

The suit says the company trained recruiters to avoid discussing the total costs of a degree program, alleging that costs were mentioned "only if the student repeatedly asked, and even then, a response was generally only given as to cost per credit hour of the course, not the total price of a program."

New federal regulations require colleges to disclose information such as program costs, debt levels and student completion rates. A bachelor's degree in graphic design at The Art Institute of Pittsburgh, one of Education Management's colleges, costs more than $90,000, according to the school's disclosure. Education Management has more than 150,000 students across more than 100 college campuses. The company's schools include the The Art Institutes, Argosy University, South University and Brown-Mackie College.

Many of the high-pressure sales tactics described in the complaint mirrored the accounts of former employees who came forward for a Huffington Post investigation of Education Management last fall.

Whistleblower suits such as this are filed under the federal False Claims Act, meant to provide a check against companies that swindle the government. Such suits can technically recover three times the amount of fraudulent claims made to the government, in addition to penalties of up to $11,000 for each claim.

When cases are filed, they must remain sealed for at least 60 days. The Justice Department must investigate the evidence and has the option to intervene.

Two former employees of the University of Phoenix, the nation's largest for-profit college, filed a whistleblower lawsuit against the chain in 2003 that involved billions of federal student assistance dollars. The case was eventually settled with an agreement to pay the federal government $67 million in 2009, which amounts to about a fourth of the company's most recent quarterly income.

Education Management called last year's whistleblower suit a "groundless grab for money."

"The 'hope of gain,' unsupported by fact or law, does not permit the government to bring a massive, nationwide fraud claim as leverage with which to fill its coffers," the company's lawyers wrote in a motion to dismiss the case.

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