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Second largest for-profit chain to pay $95 million to settle fraud charges

U.S. Attorney General Loretta Lynch is part of a state and federal case against Education Management Corp. (Reuters/Yuri Gripas/Files)

Education Management Corp., the second-largest for-profit college chain, on Monday agreed to pay $95.5 million to resolve allegations that it paid employees based on student enrollment in violation of federal law.

For-profit colleges are reeling from mounting government probes, tanking stock prices, regulatory scrutiny and depressed student enrollment. ITT Tech is being sued by the Securities and Exchange Commission for fraud; University of Phoenix has been suspended from receiving military tuition assistance; and Career Education Corp. closed all 14 of its Sanford-Brown schools. As marquee names falter, the industry itself appears to be in trouble.

[White House urges Congress to protect U.S. troops from aggressive for-profit colleges]

In the case of Education Management, which operates the Art Institutes, Argosy University, Brown Mackie College and South University, the Department of Justice claims the company violated a federal ban on incentive compensation at schools participating in federal financial aid programs. The rule is meant to prevent schools from steering students into loans to boost revenue.

Prosecutors say the company flouted the ban by paying recruiters based on the number of students enrolled, leading employees to use aggressive and deceptive tactics to get students in the doors. Top recruiters received Pittsburgh Pirates tickets, free lunches and all-expense-paid vacations to Las Vegas and Puerto Vallarta, according to the complaint.

All the while, Education Management swore to the Department of Education that it was complying with the rules. Between July 2003 and June 2011 about 90 percent of the tuition the company received, or $11 billion, came from federal grants and loans, according to the complaint.

“EDMC’s actions were not only a betrayal of their students’ trust; they were a violation of federal law,” Attorney General Lorretta Lynch said Monday during a press conference. She called the settlement “a historic step forward in our collective and ongoing fight against fraudulent and abusive practices in the for-profit education industry.”

Problems at the company came to light in 2007 when Lynntoya Washington, a former assistant director of admission at the Art Institute of Pittsburgh Online Division, sued the company under the so-called False Claims Act. The law encourages witnesses to come forward in cases where the government has been defrauded by providing them up to a third of the proceeds recovered by authorities.

State and federal authorities joined Washington’s case in 2011, shortly after another whistleblower, Michael T. Mahoney, the director of the company’s online higher education division, came forward with more evidence of misconduct.

The civil settlement is the largest involving false claims made to the Department of Education. It calls on Education Management to provide students with a single-page disclosure detailing job placement rates, free orientation and the ability to withdraw at no cost up to seven days after their first class on campus or 21 days online.

The company will also forgive $102.9 million in debt owed by more than 80,000 former students who left within 45 days of their first term and whose final day of attendance was between Jan. 1, 2006, and Dec. 31, 2014. About 2,000 former students in Virginia will receive a total of $2.3 million in loan forgiveness through the settlement, according to state attorney general’s office.

“We are also pleased to have resolved the civil claims raised by the Department of Justice and state attorneys general,” Education Management president and chief executive Mark A. McEachen said in a statement. “Though we continue to believe the allegations in the cases were without merit, putting these matters behind us returns our focus to educating students.”

Education Management, which is headquartered in Pittsburgh and enrolls more than 100,000 students, did not admit to any wrongdoing.

“This settlement should be a warning to other career colleges out there: We will not stand by while you profit illegally off of students and taxpayers,” Education Secretary Arne Duncan said during the press conference. “The federal government will continue to work tirelessly with state attorneys general to ensure that all colleges follow the law.”

The government plans to share out the $95.5 million among the 13 states involved in the case and the whistleblowers. Justice will receive $52.6 million, while the former Education Management employees with receive a total of $11.3 million.

Massachusetts Attorney General Maura Healey, who was involved in the case, is calling on federal prosecutors to use their share of the settlement to help students affected by the company’s actions pay off their student loans. The state’s top prosecutor is using the $75,000 recovered from the settlement to pay down state loans given to students at the New England Institute of Art. Healey is still pursuing a separate case against Education Management for using deceptive tactics to enroll students.

“Every single dollar recovered in this settlement can and should be used to help students struggling with loans from EDMC,” she said. “As millions of students struggle with their college loans, it is our hope that the federal government will not continue to pursue borrowers victimized by this scheme for debt that has already been recovered by this settlement.”

Justice officials did not immediately respond to requests for comment.

The case against Education Management is the government’s latest effort to crack down on for-profit colleges accused of defrauding taxpayers and students. The Department of Education’s decision last year to cut off Corinthian Colleges’ access to federal student loans and grants for falsifying job placement and graduation rates ultimately led the company to file bankruptcy. The department fined the company $30 million in April, a month before Corinthian shut its doors.

To learn more about for-profit colleges, check out these stories:

Is this the beginning of the end for ITT?

Are Corinthian Colleges’ former schools on the mend?

For-profit colleges lose bid to scuttle government rules