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EDMC, federal government close to settling multibillion-dollar suit

| Wednesday, Oct. 14, 2015, 10:03 a.m.

Education Management Corp. is close to settling a lawsuit in which the government sought to recover billions of dollars it alleged the Downtown-based operator of for-profit colleges obtained by falsely saying it was in compliance with federal laws that prohibited the payment of incentives to employees for recruiting students.

Lawyers for the federal government, 13 states and Education Management Corp. spent several hours Wednesday unsuccessfully trying to finalize the deal that would cover the original whistle-blower lawsuit filed in 2007 and three other cases. The parties have been trying to reach a settlement after a year of negotiations with the help of a mediator.

Assistant U.S. Attorney Michael Comber told U.S. District Judge Terrence McVerry at a morning status conference that all but a few details have been worked out. The parties were sent back to try to conclude an agreement. Some of the 13 states that have joined the federal government and two former employees in suing EDMC haven't agreed to the terms, Comber said. “Those are the only missing pieces,” he said.

“We continue to work to resolve all outstanding litigation,” said Chris Hardman, spokesman for Education Management Corp. He declined further comment.

The U.S. Attorney's Office declined to comment.

Retired U.S. District Judge James Robertson, who has served as a mediator between the company and the governments for the past year, said the case “is within a hair of settling.”

The government has accused EDMC of illegally paying incentives to its employees to recruit students in violation of federal law. Congress enacted the ban on incentive payments as a way to curb the enrollment of unqualified students by schools and cut down on high student loan default rates and the waste of federal student aid. The lawsuit claimed that EDMC fraudulently certified that it was complying with those regulations to collect student financial aid.

EDMC has faced another lawsuit that alleged the company misrepresented its job placement statistics and accreditation, and failed to adequately record student progress, allowing it to collect federal student aid that it wasn't entitled to receive. A third case claims the company used deceptive recruiting practices to target students on the GI bill and lowered the income and assets on their applications to get more money.

A comprehensive agreement would end eight years of legal wrangling for EDMC and remove a major hurdle for the company as it reworks its business model. The company has had three consecutive years of financial losses, including $664 million in 2014, amid declining enrollment. It has been under increased regulatory pressure.

EDMC was taken private this year in a debt restructuring deal that handed ownership to its creditors, who purged eight of 11 board members when the deal was complete in April. Four months later, CEO Edward West resigned.

The man tapped to replace West, Mark E. McEachen, told the Tribune-Review last month that resolving the legal challenges against the company was a priority. Only once those lawsuits are settled can the company restore public trust and turn around declining enrollment, he said.

The Justice Department, 13 states and the District of Columbia sued the school to recover a portion of the more than $11 billion the company received in federal and state student aid between 2003 and 2011. Other for-profit education companies have settled similar lawsuits, but this is the first one joined by the Justice Department.

Two former employees, Lynntoya Washington and Michael T. Mahoney, sued EDMC in 2007 and said the company tied recruiter salaries to the number of students they enrolled, a violation of federal law. They filed the lawsuit under the False Claims Act, which allows whistleblowers to start cases alleging misuse of government funds, and then share in any settlement. The Justice Department joined the lawsuit in 2011.

For-profit education companies thrived in the 1990s and early 2000s as online education proliferated and regulators sought to open enrollment to as many students as possible, paying little attention to borrowing or graduation rates. But enrollment has plummeted since the recession. Enrollment at EDMC's four college brands — the Art Institutes, Argosy University, Brown Mackie College and South University — has fallen 29 percent since 2010.

Dimming employment prospects forced students to reconsider spending $96,000 for a college degree that may not result in a job. Defaults on federal student loans have risen, and for-profits such as EDMC are taking the brunt of the blame.

For-profit colleges have been criticized for saddling students with large debts for careers that don't pay enough to repay the loans. Rule changes that the Department of Education implemented this year threaten to cut funding for for-profits if they don't prepare students better for “gainful employment.”

The company's financial losses have caused it to slash staff and close campuses. In May, EDMC announced it would be closing 15 Art Institutes — a quarter of its Art Institute schools — in the next few years.

So far, EDMC has avoided the fate of its defunct competitor, Corinthian Colleges Inc., which filed for bankruptcy this spring after closing its remaining 28 career schools.

Brian Bowling and Chris Fleisher are staff writers for Trib Total Media. Bowling can be reached at 412-325-4301 or bbowling@tribweb.com. Fleisher can be reached at 412-320-7854 or cfleisher@tribweb.com.

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