For-Profit College Corporation Accused Of Violating Federal Law By States, Justice Department

The U.S. Justice Department and four states sued the nation’s second-largest for-profit college corporation on Monday, alleging in a wide-ranging complaint that Education Management Corp. violated federal laws by giving bonuses and raises to college recruiters based entirely on the number of students they enrolled.

By unlawfully incentivizing its sales force to recruit as many students as possible, Pittsburgh-based EDMC also illegally took in federal student aid money by making false assurances to the government that its admissions counselors were complying with the government recruiting guidelines, the government alleged.

“EDMC has created a ‘boiler room’ style sales culture and has made recruiting and enrolling new students the sole focus of its compensation system,” reads the complaint, filed by the Justice Department and attorneys general in Indiana, Illinois, Florida and California.

The for-profit higher education industry has faced increased federal scrutiny over the past year amid increasing evidence that some schools are preying on disadvantaged students in an attempt to harness federal student aid dollars as profits. The company has taken in more than $11 billion in federal student aid dollars since July 1, 2003.

Monday’s complaint represents one of the most direct challenges by the federal government to allegations of high-pressure recruiting tactics aimed at enrolling as many students as possible, regardless of whether they are likely to succeed.

In a statement from EDMC’s legal counsel, the company denied that student enrollments were the only factor considered in compensating admissions employees.

“EDMC worked closely with outside experts in both human resources and education law to develop a plan that required consideration of five quality factors along with enrollment numbers to determine salaries,” the statement read. “The complaint is wrong in its claim that EDMC disregarded the quality factors in the compensation plan. EDMC worked rigorously to ensure that the plan was properly implemented company-wide.”

The complaint from the federal government notes that admissions employees were told to enroll students who were “unable to write coherently, applicants who appear … to be under the influence of drugs, and applicants for EDMC’s online programs who do not own computers.”

To entice recruiters to enroll more students, EDMC created a “President’s Club” for the highest-performing recruiters, offering all-expenses paid trips to destinations such as Las Vegas, Cancun and Puerto Vallarta, Mexico. Others were offered Pittsburgh Pirates baseball tickets, free passes to amusement parks and other gift cards based on the number of student enrollments secured, according to the complaint.

For those who did not comply with a rigid performance matrix that tracked the number of enrollments per recruiter, the consequences were made clear.

The complaint cites an e-mail from Gregg Schneider, a director of admissions at EDMC’s Art Institute Online, that chided admissions employees for not meeting recruitment goals in October 2006.

“Each of you knows your plan for November,” the e-mail read. “This number is not a casual level that I want you to be at but rather a number that you must hit to have a good review, get promoted or keep your position here. This number is set by the VP of Admissions and the Director of Admissions.”

E-mail from Gregg Schneider, director of admissions

The case emerged from a federal whistleblower lawsuit filed by a former employee in 2007. The Justice Department intervened in the case in May, and Monday’s complaint was the first look at what the government plans to present in court.

The federal government and the four states are seeking a jury trial, and are asking for damages and a recovery of the federal funds.

A number of top executives at EDMC, including chief executive officer Todd S. Nelson, moved to the company from the University of Phoenix, which paid $9.8 million to settle a similar dispute with the Department of Education over improper employee compensation.

At issue in the case is whether EDMC violated the federal False Claims Act. In order to be eligible for federal student aid money, a school must comply with various consumer protection measures written into the Higher Education Act. One of those rules governs incentives that can be given to recruiters. After a series of problems in the 1980s involving fraudulent for-profit trade colleges, Congress banned schools from making “any commission, bonus or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any persons or entities engaged in any student recruiting or admission activities.”

In 2002, the Department of Education under the George W. Bush administration added a series of “safe harbors” to the rules, which added language saying that salaries can be adjusted as long as they are “not based solely on the number of students recruited, admitted, enrolled, or awarded financial aid.”

Critics argued that the addition of the word “solely” gave schools too much leeway in deciding how to dole out raises. The Obama administration has removed the "safe harbor" provisions from the recruiting rules, under new regulations that took effect in July.

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