EDMC charged in lawsuit with improper practices
By Andrew Conte and Bobby Kerlik
Published: Monday, May 21, 2012, 9:30 p.m.
An Oklahoma state pension fund sued Pittsburgh-based Education Management Corp. and its directors Monday, saying they breached their "fiduciary responsibilities" by allowing illegal student recruiting and other practices that have seriously hurt the company's stock value and threaten its funding.
The Oklahoma Law Enforcement Retirement System, which owns an unidentified number of shares in the for-profit education company known as EDMC, says the firm shifted its priorities after it was taken over in 2006 through a leveraged buyout led by Wall Street investment firm Goldman Sachs. That change led the company to value short-term profit over long-term, sustainable growth, according to the lawsuit filed in Allegheny County Common Pleas Court.
"Since the (leveraged buyout), there has been a radical shift in the company's priorities," the lawsuit says. "This focus has led to aggressive and illegal recruiting techniques to drive up student enrollment."
EDMC officials could not immediately be reached for comment. In response to previous lawsuits, representatives have maintained the company acted properly and did nothing wrong.
The Tribune-Review recently published an investigative report on EDMC, which has drawn multiple ongoing federal and state lawsuits and investigations.
The lawsuit filed Monday alleges EDMC illegally compensated employees based solely on the number of students they enrolled, engaged in aggressive and misleading recruitment practices and misrepresented its graduates' job placement data.
The suit says the company's practices threaten its future ability to receive money from U.S. Department of Education Title IV programs such as Pell Grants and government-backed Stafford Loans. The company received $2.6 billion from the programs last year.
Because EDMC does not pay dividends, the suit notes that investors only can make money from the company based on its stock price. The company's stock price has plummeted during the past year from nearly $30 a share to $9.30 at the close of trading Monday.
Pittsburgh attorney William Caroselli, who is representing the plaintiffs, said he doesn't know how much money the plaintiffs have invested in the company, but he described it as "seven figures."
Caroselli said the lawsuit names individual EDMC board members as defendants because "as a board they failed to exercise their fiduciary duty to the stockholders. The EDMC stock has fallen considerably."
The lawsuit claims that since CEO Todd Nelson took over in February 2007, enrollment has been placed above all else and that admissions workers began enrolling "anyone and everyone" to meet student quotas. Admissions employees were taught to identify a prospective student's emotional weakness and press them to enrollments and lock up student loans, the suit states.
The shareholder suit includes allegations made in a whistle-blower lawsuit made public last year, which was brought by two former employees who say the company fraudulently paid admissions officers more money based on how many students they enrolled. The lawsuit was taken over by the U.S. Attorney for Western Pennsylvania and prosecutors in 11 states.
EDMC told the Trib it works with outside experts in both human resources and education law to develop its compensation plan so it complies with federal law.
A federal judge this month dismissed part of the whistle-blower lawsuit, saying enrollment was only one of several factors used to determine a recruiter's pay. The court allowed a claim to proceed that the policy was mere "window dressing."
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