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Qui Tam Litigation Against For-Profit Colleges

Date Published
Jan 18, 2011

For-profit colleges are corporations in the business of selling “career” education services at a premium price to a largely underprivileged population. Last year, a surge of consumer complaints led the U.S. Government Accountability Office (“GAO”) to conduct an undercover investigation into the recruiting and enrollment practices of 15 for-profit colleges. As a result, the GAO issued a report revealing that every single school that it investigated had engaged in fraudulent, deceptive, and misleading practices during the recruiting and enrollment process.

The investigation was rooted in large part by the government’s own staggering financial contribution to the for-profit college sector: despite enrolling only 10% of post-secondary education students nationwide, for-profit colleges obtain 25% of the $89 billion in Federal Title IV student aid that is distributed to all institutions annual. In fact, many for-profit colleges derive the large majority of their revenues from Title IV student aid. For example, Corinthian Colleges, Inc., one of most expansive for-profit colleges in the country, derives 89.9% of its revenue from Title IV lending programs.

All colleges and universities must follow specific laws to participate in Title IV student financial aid programs, including for-profit institutions, which have become increasingly popular and profitable in recent years. With the rise of for-profit institutions, allegations of fraud and abuse of Title IV eligibility is becoming more common. Many of these illegal activities can form the basis of qui tam lawsuits against for-profit institutions.

First, once a for-profit college has been approved to participate in Title IV programs, it enters into a “program agreement” with the Department of Education for the duration of its participation. Under the program agreement, the for-profit college agrees to handle the administration of Title IV student aid in a certain manner, and refrain from participating in a number of specifically prohibited acts.

At least one court-the U.S. Court of Appeals for the Ninth Circuit-has decided that the program agreement is a certification of compliance with the provisions of the Higher Education Act, and that a failure to comply with its terms can lead to a false claim under the False Claims Act. As a result of that decision, the University of Phoenix, one of the country’s largest for-profit colleges, paid $78.5 million dollars to settle a qui tam lawsuit alleging that it gave incentive payments to its recruiters, in violation of a prohibition incorporated into the terms of all program agreements with the Department of Education.

In recent years, other for-profit colleges have been the target of qui tam lawsuits arising out of the way the colleges compensated recruiters. For example, in 2010, Grand Canyon Education agreed to pay $5.2 million to settle a qui tam lawsuit alleging that it improperly paid compensation to recruiting representatives from 2001 through 2010. And in early 2010, a qui tam whistleblower complaint against South University Online and its parent company was unsealed. That complaint also alleged that the school gave its admissions representatives improper, enrollment-based compensation, such as paid vacations, iPods, and gift cards.

For-profit college fraud can also stem from ongoing obligations to submit information to the Department of Education and other agencies for continuing eligibility to participate in Title IV federal aid programs. Many of these submissions present opportunities for for-profit colleges to potentially falsely certify their ability to achieve and maintain eligibility for Title IV programs.

For example, as a condition of eligibility, for-profit colleges must be accredited by an accrediting agency and have a valid state license to operate. Accreditation and state licensing, in turn, require the for-profit institution to report student achievement information, such as annual graduation rates and placement rates. Many of the state and accrediting agencies establish minimum thresholds for these rates. For example, to maintain accreditation, a for-profit college must typically report a 70% placement rate for its graduates. Additionally, under limited circumstances, a for-profit college is required to report placement and graduation rates directly to the Department of Education each time it submits an application for initial and recertification of its eligibility to receive Title IV funds. If a for-profit college submits false graduation of placement rates to an accrediting agency, state licensing agency, or the Department of Education, it could open itself to liability under the False Claims Act.

Kaplan University has been targeted with at least four whistleblower qui tam lawsuits, based on such allegations that it submitted false information to certify its eligibility to receive Title IV funds. The Kaplan lawsuits were brought by former instructors, deans, department directors, and admissions representatives, and the accusations of misconduct are diverse. One lawsuit alleges that Kaplan inflated grades and manipulated placement data by falsely reporting that graduates employed as cashiers or a telemarketer were working in “accounting management” or “business administration fashion merchandising.” Another lawsuit filed by a former Kaplan director of education alleges the school knowingly enrolled students it could not place in the externships the students needed to graduate, only to later drop them out of the program, and keep the students’ federal aid. One former Kaplan admissions adviser filed his lawsuit after he allegedly found boxes of diplomas for phantom students who never attended class and informed the school’s regional assistant director, who told him keep things quiet and “be a team player.” And the broadest complaint was filed by a former Kaplan dean of paralegal students and two other plaintiffs, alleging, among other things, that the school engaged in enrollment compensation fraud. Three of the lawsuits were consolidated by the Judicial Panel on Multi-District Litigation, and are pending in federal court in Florida. The fourth, which was not consolidated with the other three, is pending in federal court in Nevada.

Qui tam whistleblowers have provided unparalleled assistance to the government in its oversight of the for-profit college industry. Given these wide-spread and increasing allegations of fraud and misconduct, the for-profit sector’s access to its main source of revenue-Title IV funds-will likely be scrutinized until industry practices have been reformed.

Note: Tycko & Zavareei LLP is currently representing former students of Corinthian Colleges, Inc. d/b/a Everest College – one of the nation’s largest for-profit colleges – in class action litigation arising out of alleged misrepresentations to prospective students during the enrollment process.

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