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EDMC agrees to $95.5M settlement, will improve recruiting process

| Monday, Nov. 16, 2015, 11:18 a.m.
In this file photo from June 2014, students worked on a video project at the Art Institute of Pittsburgh. The school is owned by Education Management Corporation, a for-profit college system that runs the Art Institute of Pittsburgh and other schools throughout the nation.
Sidney Davis | Tribune-Review
In this file photo from June 2014, students worked on a video project at the Art Institute of Pittsburgh. The school is owned by Education Management Corporation, a for-profit college system that runs the Art Institute of Pittsburgh and other schools throughout the nation.

Education Management Corp. escaped billions of dollars in potential penalties in a $95.5 million settlement with the federal government over questionable recruiting practices, highlighting the challenges prosecutors face in holding companies accountable for alleged wrongdoing without putting them out of business.

The company also has set aside $100 million to cover student loan debt forgiveness as part of a separate deal with 39 states and the District of Columbia, which agreed to end investigations into similar allegations.

The federal settlement and separate agreement with states marked the end of a costly legal battle that began with a whistleblower case and threatened to bankrupt the troubled operator of for-profit colleges. The case revolved around $11 billion in student loans to EDMC schools between 2003 and 2011, when the government said the nation's second-biggest operator of for-profit colleges paid employees illegal bonuses to recruit students.

U.S. Attorney General Loretta Lynch called the settlement a “historic step forward” in combating abuses in the industry while acknowledging the practical considerations for not forcing EDMC into bankruptcy.

“An important part of the settlement was factoring in the company's ability to pay,” she said during a news conference in Washington.

EDMC will have seven years to satisfy the penalties, paying $45.5 million in the next two weeks and spreading out the balance in payments until 2022.

Legal experts said the penalties and terms seemed forgiving to the company and underscore regulators' concern with EDMC's financial position. The company has had three straight years of financial losses, including $664 million in 2014, and turned over control of the business to creditors last year in exchange for erasing $1.1 billion in debt.

‘Heading south in a hurry'

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.

The $95.5 million settlement, a fraction of the billions in penalties the government could have extracted, underscores prosecutors' concern over setting realistic expectations about the amount of money they can collect from a cash-strapped company, said Douglas Branson, a professor of business at the University of Pittsburgh.

“I think that all of these for-profit education providers are heading south in a hurry, so the government is probably satisfied with what it can get — and there's not too much to get,” Branson said.

One of EDMC's competitors, Corinthian Colleges Inc., went out of business as a result of coming under pressure from the Department of Education over concerns about its marketing practices, including the falsifying of job-placement data. Corinthian sold most of its schools in an agreement with the government last year then closed its remaining 30 campuses in April after the Education Department fined the company $30 million.

The closures left its students in limbo and the government on the hook for millions of dollars in federal loans.

Best interest of students

Legal experts and industry analysts say the government likely was reluctant to force another education company to close and settled for a fraction of the money at stake, to be paid over seven years.

“They wouldn't want to put the place out of business,” said Pat Sorek, a commercial law attorney at the Downtown firm Burns White. “What they are probably doing is accounting for the business saying, ‘We can't pay this all at once, so can we work out some terms to owe this money over time.' ”

The company's CEO, Mark McEachen, said prosecutors were flexible in negotiating the settlement and the agreement with attorneys general in 39 states and the District of Columbia. Those state prosecutors agreed to end their investigations into EDMC in exchange for the company implementing more transparent recruiting practices and improving staff monitoring.

The agreement with the states compels EDMC to forgive debts owed by students who enrolled between 2006 and 2014 but dropped out after 45 days or less.

“We kept going back to how does this impact the students, how does this benefit the students,” McEachen said of the negotiations. “(Prosecutors) were a willing partner, and you would think and hope that they were doing everything in the best interest of the students.”

McEachen said he was pleased to have resolved the issues, eliminating a distraction that hurt enrollment and diverted EDMC's resources from educational programs.

EDMC admitted no wrongdoing but is taking steps to improve recruiting and student disclosures. For example, prospective students will receive an easy-to-read, single-page disclosure that details information such as graduate placement rate and financial implications of student loans. All telephone calls and online chats between admissions staff and students will be recorded unless the student requests otherwise.

Whistleblowers sought change

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

Three other False Claims Act lawsuits brought against EDMC were resolved in the settlement, leaving no pending whistleblower cases against the company.

Washington and Mahoney will split $13.2 million; the other whistleblowers will share $1.4 million, according to the agreement.

Washington and Mahoney declined to comment through their attorney, Harry Litman. He said that although EDMC's penalties were a fraction of what they could have been, the lawsuit achieved its larger purpose in pushing for change.

“We think they've been called to account for some pretty serious and massive fraud. It's true that because of ability to pay, it's a partial accounting,” he said. “We think the lawsuit has acted as a spearhead for change in the industry. That's pretty satisfying.”

Chris Fleisher is a Trib Total Media staff writer. Reach him at 412-320-7854 or cfleisher@tribweb.com.

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