Academy of Art Fraud? Former Employees Accuse For-Profit Art School Of Scamming Government

SAN FRANCISCO -- A handful of former employees of San Francisco's Academy of Art University have accused their former employer of defrauding the U.S. government out of millions of dollars in a lawsuit that a federal judge recently gave an important go-ahead.

The employees allege the for-profit art school used an illegal compensation structure for its recruiters that encouraged them to enroll prospective applicants even in cases when doing so conflicted with the students' best interests.

The four plaintiffs charge, in a suit filed in 2009, that the school raised or lowered recruiters' pay based on the number of students they enrolled and dangled Hawaiian vacations as carrots for top sellers. They argue these practices violate rules prohibiting college recruiters from being solely incentivised based on the number of students they enroll. U.S. District Court Judge Phyllis Hamilton approved the case to move forward in late June.

These rules were put in place in order to prevent colleges from taking advantage of students who might be ill-served by going back to school or would have difficultly paying back their student loans.

"It's just gravy," Stephen Jaffe, a lawyer representing the plaintiffs told the Chronicle. "Schools have a tremendous incentive to enroll as many students as possible."

The plaintiffs themselves also have a significant monetary incentive in the case. They are suing under the False Claims Act, which allows whistle-blowers to sue on behalf of the government in exchange for getting up to nearly one-third of the money awarded if the case is found in the government's favor.

For-profit colleges are allowed to get up to 90 percent of their funding from federal student aid programs, and it's not uncommon for schools to regularly bump up against that cap. The suit accuses the school's recruiting practices of effectively bilking the government out millions.

The university argues that it did nothing illegal and its practices were allowed under the "safe harbor" loophole that allowed institutions to make up to two performance-based adjustments to a recruiter's salary in a 12-month period as long as the number of students signed up wasn't the sole criteria by which they were evaluated. The "safe harbor" provisions were eliminated last year; however, Academy of Art representatives say the incidents mentioned in the suit all occurred during the time period in which the loopholes existed.

"At all times, the Academy of Art complied with the regulations regarding compensation of admissions representatives," the university's attorney Steve Gombos told the Chronicle.

The entire for-profit college industry has born the brunt of increased governmental scrutiny in recent years, as critics have accused the institutions of taking advantage of disadvantaged students in efforts to make massive profits off federal student aid dollars.

Last year, the U.S. Justice Department joined with four states (including California) to sue Education Management Corporation, the country's second-largest for-profit college, on allegations very similar to the ones leveled at the Academy of Art.

Even so, many of these practices are endemic across the for-profit college industry.

"I absolutely felt like I was compelled to give people bad advice to perspective students because of the incentives," Jon, who worked as a recruiter at a for-profit college in California during the safe harbor-era and requested his last name be withheld, told The Huffington Post. "For the first six months I worked there I really believed I was helping people, but then I went back and looked at my list and saw that almost all of the students I had enrolled had dropped out after only taking a couple classes."

Academy of Art faced additional scrutiny in 2010 after college officials admitted to illegally converting buildings into dormitories without first securing the necessary permits.

The city ultimately decided not to file suit against the school, which is, after the Catholic Church, the largest private landholder in San Francisco.