Putting an end to a years-long investigation, Education Management Corp. announced on Monday it will return nearly $100 million in student loan money and provide greater transparency into its recruiting practices as part of settlements with federal and state prosecutors.
The U.S. Justice Department and attorneys general from 12 states and the District of Columbia reached agreements to settle their allegations the Downtown for-profit education company broke government rules for federal student aid by, in part, paying recruiters incentives based on the number of students they enrolled.
Concurrently, EDMC reached consent agreements with attorneys general from 39 states and the District of Columbia to end state-level investigations into its recruiting practices.
Together, the agreements — which include no admission of guilt from EDMC — contain a number of measures aimed at simplifying information given to current and prospective students, including a free orientation at the beginning of their first year and an online tool to help them make decisions during their time in school.
EDMC promised “an easy-to-read, single-page disclosure that details important information like graduate placement rate and student financial impact.”
EDMC also agreed to record and archive all telephone conversations and online chats with prospective students.
The company agreed to forgive $96 million owed by students briefly enrolled from 2006 to 2014. EDMC is also allowing on-campus undergraduate students to withdraw with no tuition obligation for up to seven days after their first class; if enrolled online, students can leave tuition-free for up to 21 days.
The settlement comes nearly two months after CEO Mark McEachen took the helm of the Pittsburgh company with a promise to put an end to the long-running litigation.
Settling all of its legal troubles at once, the beleaguered operator of four education brands — the Art Institutes, Argosy University, South University and Brown Mackie College — hopes to move from under what Mr. McEachen has compared to a dark cloud hovering over conversations with prospective students and parents, as well as current students, faculty and staff.
EDMC institutions enroll 100,000 students and employ 20,000 faculty and staff spread across 110 schools in 32 states and Canada, according to the company.
Original demands for $11 billion to be returned
In 2011, the Justice Department and state attorneys general joined a lawsuit filed by whistle-blowers four years prior claiming EDMC illegally paid incentives to recruiters based on the number of students they enrolled.
Alleging EDMC violated requirements to receive federal student loan money, they demanded the company return $11 billion it received from 2003 to 2011. More states launched their own investigations, bringing the total to 39 attorneys general involved.
Federal regulators had heightened scrutiny of the for-profit education industry as a whole following a two-year
Congressional investigation over allegations of deceptive recruitment practices and low performance.
Other companies have also come under fire, including ITT Educational Services Inc., Career Education Corp. and Corinthian Colleges Inc., which filed for Chapter 11 bankruptcy in May.
When he first came to EDMC earlier this year, “a lot of good people on both sides were working very diligently” on reaching settlements, Mr. McEachen said in an interview on Sunday.
“The best way to get out of a hole — and this was a hole that we were in — is to put your shovel down, stop digging and climb out,” he said.
Harry Litman, a Pittsburgh lawyer who served as lead counsel for the whistleblowers when they filed their case in 2007, said he was pleased.
He pointed out the settlement amount is the largest in any such case involving education regulators, despite totaling less than 1 percent of the total student aid given to EDMC over those years. The settlement was computed under the Justice Department’s “ability to pay” policy, which considers the defendant’s financial situation.
“The case was not about putting EDMC out of business but about making sure they comply with the law,” he said. “And in that sense, we think the case has been a real spearhead for reform at EDMC and even in the broader industry.”
Mr. Litman said EDMC recruiters had been pressured into bringing in as many students as possible with the qualifications for enrollment reduced to “a pulse and a Pell” — referring to the federal student-aid Pell Grant.
The whistleblowers filed suits under the False Claims Act, a Civil War-era statue that permits private citizens who know of fraud against the government to sue in the government’s name and litigate in partnership with it.
He said the prosecution pushed compelling evidence that would have given the company trouble had the case gone to court.
“This was by far the most fruitful partnership with the government I’ve ever seen in an F.C.A. case,” Mr. Litman said.
Mr. McEachen portrayed the simplified information sheet and orientation program and the archiving of recruiters’ calls and online chats as effective remedies to prosecutor’s demands.
“If there’s any discrepancy, we’ve got it readily available for anyone to hear,” he said. “We put ourselves in the shoes of the prospective students. They want something that is honest, that is easy to understand and can be used to their specific needs. That’s what we’ve provided here.”
Students and investors lost faith
The settlements represent a major cleared hurdle during a year of sweeping changes at EDMC. The high-profile lawsuits hurt the company financially as students and investors alike lost faith. EDMC’s stock price plummeted from a high of $27.99 a share in December 2011 to $3.27 a share in August 2012. After falling to 30 cents, the company de-listed its shares from the Nasdaq in November 2014. They are now traded over-the-counter.
In May, EDMC announced plans to close 15 of its 51 Art Institute campuses, affecting 1,200 employees and more than 5,000 students. In June, it laid off 300 employees nationwide, including 70 in Pittsburgh. It laid off another 115 faculty and staff, including 10 in Pittsburgh, in October.
Most recently, it reported a loss of $664 million, or $5.29 a share, for 2014, according to a filing with the U.S. Securities and Exchange Commission.
In April, eight of 11 board members stepped down in a restructuring deal that exchanged $1.3 billion of debt, giving lenders a majority stake in the company.
The company in September agreed to pay $2.5 million to settle a class-action lawsuit launched by investors who alleged EDMC misled them when its stock plunged amid the ongoing suits.
Mr. McEachen will continue to push back against another legal thorn in the company’s side: new standards passed by the U.S. Department of Education in July that tie federal funding for for-profit institutions to minimum thresholds of debt-to-income rates of their graduates.
Mr. McEachen has sharply criticized the rules as unfair and creating inequities against some students to get the education. He reiterated that position on Sunday, saying while the settlements were a positive step, the gainful employment rules are a separate issue.
Daniel Moore: dmoore@post-gazette.com, 412-263-2743 and Twitter @PGdanielmoore.
First Published: November 16, 2015, 4:15 p.m.
Updated: November 17, 2015, 4:33 a.m.
