Record Settlement Win in False Claims Act Suit Against Education Management Corporation

Nov 16, 2015, 11:35 ET from Litman Law Firm

PITTSBURGH, Nov. 16, 2015 /PRNewswire/ -- Education Management Corporation (EDMC), a Pittsburgh-based operator of for-profit educational institutions, has agreed to pay more than $80 million to settle an eight-year False Claims Act whistleblower lawsuit, the largest settlement ever in an FCA suit involving the U.S. Department of Education.

Attorney General Loretta E. Lynch, Secretary of Education Arne Duncan, United States Attorney David J. Hickton, and Iowa Attorney General Tom Miller announced the record settlement in Washington, D.C., today.

Lynntoya Washington, a former assistant director of admissions at EDMC's Art Institute of Pittsburgh's Online Division, brought the suit in 2007, and later was joined by another whistleblower, Michael T. Mahoney, director of training for EDMC's Online Higher Education Division. Their complaint alleged a widespread violation of the Incentive Compensation Ban, which Congress passed in 1992 to safeguard against over-aggressive recruitment practices by the for-profit college industry.

"We're very pleased that EDMC has been called to account for some pretty sordid conduct that cost taxpayers billions of dollars while victimizing untold numbers of students," said Harry Litman of the Litman Law Firm in Pittsburgh, lead counsel for the whistleblowers.

Washington and Mahoney brought the case under the federal False Claims Act, a Civil War–era statute that permits private citizens, or "relators," who know of fraud against the government to sue in the government's name, litigate in partnership with it, and share in any recovery.  They came forward with extensive evidence that EDMC for years paid its recruiters incentive compensation based upon how many students they enrolled, regardless of whether the students were suitable candidates, while steadily concealing its illegal practices with repeated false statements to state and federal authorities. The fraud enabled EDMC to receive more than $11 billion in federal and state funds for financial aid programs — nearly all of the company's revenues during the time covered by the suit.

"Recruiters were pressuring students, supervisors were pressuring recruiters, managers were pressuring supervisors, all the way up the chain," Litman said. "The whole operation was designed with one goal in mind: to recruit anyone with, as they put it at EDMC,  'a pulse and a Pell' — a federal student-aid Pell Grant."

In 2011, the federal government — along with the state governments of California, Florida, Illinois, Indiana, and Minnesota — announced they would intervene in the case. It was the first time that the federal or any state government joined a case against a for-profit college alleging violation of the Incentive Compensation Ban. The federal government previously declined to intervene in more than 25 similar cases.

"This was by far the most fruitful partnership with the government I've ever seen in an FCA case," Litman said.  "We were permitted to work shoulder-to-shoulder at every turn with an extraordinary cadre of government attorneys."

Following the governments' intervention, the parties litigated the case for several years, during which the relators and governments developed extensive additional evidence while defeating several efforts by EDMC to get it dismissed. The procedural victories paved the way for an eventual trial, which today's settlement averts.

"We were very confident of our prospects had the case gone to trial," Litman said.  "We had developed overwhelming evidence that EDMC had been running a high-pressure boiler-room operation designed to corral any student to enroll in the school, exactly the conduct that Congress sought to prevent."

In addition to this case, the settlement announced today also resolves allegations against EDMC in three other FCA cases in which the government did not intervene and separate investigations under the consumer-protection laws of 39 states and the District of Columbia. The agreement provides for EDMC to pay, on top of the $80 million, an additional $8.75 million, to be used in part to appoint an administrator to oversee compliance going forward.

The settlement was computed under the U.S. Department of Justice's "ability to pay" policy, which takes into account defendant companies' financial situation.  EDMC stock, which was trading above $20 when the case was unsealed in 2011, closed on November 13 at under 8 cents.

"It's true that EDMC's financial difficulties drove an overall lower settlement in the case," Litman said.  "On the other hand, we think the company's financial fortunes reflected their adjustment to stricter rules of compliance and to the lawsuit itself. We believe that the case has played a key role in much-needed reform at EDMC and in the for-profit-college industry as a whole, which is gratifying."

In addition to being a principal at the Litman Law Firm, Litman is of counsel with Constantine Cannon in San Francisco. Along with Litman, the relators were represented by Stuart M. Rennert of McKool Smith in Washington, D.C.; Thomas J. Farrell of Farrell & Reisinger in Pittsburgh; and Yale Gutnick of Strassburger, McKenna, Gutnick and Gefsky in Pittsburgh.

The case is United States of America ex rel. Lynntoya Washington v. Education Management LLC et al., Civil Action No. 07-461 (W.D. Pa.).

Media Contact:
Harry Litman
(412) 523-1000

SOURCE Litman Law Firm