March 15 (Bloomberg) -- Education Management Corp., the second-largest U.S. for-profit college chain, defrauded U.S. taxpayers by paying illegal bonuses to recruiters who cited falsified job-placement data to lure students, a former employee claimed in a lawsuit.
Education Management used “boiler-room” tactics to receive millions of dollars in federally backed student loans and grants, Jason Sobek, a former recruiter for the company’s South University, said in a complaint unsealed yesterday in Pittsburgh federal court. The company targeted “troubled” students, including the homeless and mentally ill, according to the lawsuit.
For-profit colleges, which can receive as much as 90 percent of their revenue from federal financial-aid programs, are under scrutiny by Congress, state attorneys general and federal prosecutors for their sales practices and student-loan default rates. The Justice Department and several states joined a separate whistle-blower case last year against Education Management that makes similar allegations.
Education Management “had a corps of recruiters, all well-trained in sales and closing techniques, who perfected the art of preying on the hopes and dreams of vulnerable students desperately seeking better lives,” Sobek said in his complaint, which was filed in 2010. He worked as an associate director of admissions from June 2008 until November 2010.
Jacquelyn Muller, a spokeswoman for Pittsburgh-based Education Management, didn’t return messages seeking comment.
Education Management, which is 43 percent owned by Goldman Sachs Group Inc. funds, rose 0.1 percent to $15.92 at the close in New York. The shares have slid 43 percent this year.
As of October, Education Management had about 151,000 students and also operates the Art Institutes, Brown Mackie College, Western State University and Argosy University, through its campuses and online offerings. Apollo Group Inc.’s University of Phoenix is the largest for-profit college company.
In whistle-blower, or qui tam, lawsuits, private citizens file fraud complaints on behalf of the federal government. The cases are filed under seal while the government investigates and decides whether or not to join. The whistle-blower may get 15 to 25 percent of any recovery.
The Justice Department hasn’t intervened in this case though it is still investigating, Andrew Stone, an attorney for Sobek said in a phone interview.
Margaret Philbin, a spokeswoman for U.S. Attorney David J. Hickton in Pittsburgh, didn’t immediately return a phone call seeking comment on Sobek’s complaint.
Education Management targeted “a troubled population” that included “the poor, the undereducated, the homeless,” students with criminal records, single mothers on welfare and those living in shelters and halfway houses, Sobek said in the complaint.
The company routinely enrolled mentally ill students who had to retake classes and were likely to default on their loans, according to the lawsuit.
In internal materials for recruiters, Education Management said that 87 percent of Art Institute graduates and 92 percent of South University graduates were employed in their fields of study, according to the lawsuit. The average salary of South University graduates was listed at $51,000, while at the Art Institute, it was $31,455, Sobek said in his complaint.
‘Pleasure and Pain’
Education Management kept two sets of job-placement statistics, one for accrediting agencies and another for prospective students, employers and investors that inflated the rates, Sobek claimed. The more favorable rates omitted single parents and graduates with jobs outside their field of study, and included graduates who worked as little as a single day, according to the complaint.
The company told recruiters to prey on students’ weaknesses, using a strategy of invoking “pleasure and pain,” even insulting them if it could help make a sale, according to the lawsuit.
The complaint cited a passage from a training document that read: “When are you allowed to call a student a LOSER? When they give us permission by telling us why they think they are a loser. You can repeat it back to them.”
As in the other whistle-blower complaint, Sobek alleges that Education Management tied bonuses directly to the number of students enrolled, in violation of federal student-aid rules. Those rules are designed to make sure recruiters don’t have an incentive to enroll students who aren’t in a position to benefit from degrees. In the earlier complaint, federal prosecutors said the company used improper recruitment practices to secure more than $11 billion in U.S. student aid.
The case is U.S., ex. rel. Jason Sobek v. Education Management, 10-cv-0131, U.S. District Court, Western District of Pennsylvania (Pittsburgh).
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