University pays $2.5 Million to settle False Claims Act charges over violations of bans on incentive compensation for student recruitment

South CarolinaUniversity, will pay $2.5 million to settle federal claims under the False Claims Act of submitting false claims to the U.S. Department of Education in violation of the federal ban on incentive-based compensation, the Justice Department announced today.   The settlement resolves allegations that between 2014 and 2016, NGU hired Joined Inc., a company partially owned by NGU, to recruit students to NGU and compensated Joined based on the number of students who enrolled in NGU’s programs, in violation of the prohibition on incentive compensation. The allegations resolved by the settlement were brought in a lawsuit filed under the qui tam, or whistleblowerprovisions of the False Claims Act by Maurice Shoe, the co-owner of Joined. Mr. Shoe is represented by the firm of  Guttman, Buschner & Brooks (“GBB”), The Act permits private parties to sue on behalf of the government for false claims and to receive a share of any recovery.  As part of today’s resolution, the whistleblower will receive $375,000.

Title IV of the Higher Education Act (HEA) prohibits any institution of higher education that receives federal student aid from compensating student recruiters with a commission, bonus, or other incentive payment based on the recruiters’ success in securing student enrollment.  The incentive compensation ban protects students against aggressive admissions and recruitment practices that serve the financial interests of the recruiter, rather than the educational needs of the student.

“Offering unlawful financial incentives for recruiting undermines the integrity of our higher education system,” said Assistant Attorney General Jody Hunt of the Department of Justice’s Civil Division.  “Prospective students are entitled to make enrollment decisions without the improper influence of recruiting companies who pursue their own financial gain at the expense of the students’ best interests.”“This settlement will help ensure that schools and recruitment services put the educational interests of students and potential enrollees first,” said U.S. Attorney Sherri A. Lydon for the District of South Carolina.  “It should serve as a warning to institutions that would attempt to maximize enrollments to line their own pockets, disregarding the best interests of students in the process.  Through False Claims Act cases like this one, the U.S. Attorney’s Office will continue to help protect federal taxpayer dollars from waste, fraud, and abuse.”

“The Office of Inspector General has a unique and special law enforcement mission – to protect public education funds for eligible students.  Today’s settlement is an example of our commitment to this mission,” said Neil Sanchez, Special Agent in Charge of the U S. Department of Education Office of Inspector General’s Southern Regional Office.  “The OIG will continue to work with our law enforcement colleagues and pursue allegations of violations of the False Claims Act in carrying out our important public service.”

This matter was investigated by the U.S. Attorney’s Office for the District of South Carolina and the Civil Division’s Commercial Litigation Branch.  Investigative assistance was provided by the Office of Inspector General of the Department of Education.

The claims resolved by the settlement are allegations only, and there has been no determination of liability.  The case is captioned United States ex rel. Shoe v. North Greenville University, No. 6:16-cv-01570 (D.S.C.).

This case is similar to  a case against the Stephens Institute, an Academy of Art University located in San Francisco in which former admissions representatives alleged that the school violated the incentive compensation ban. In November of last year, the Ninth Circuit Court of Appeals upheld the District Courts decision to denied the schools motion to dismiss the case, which is being litigated now.

It is also quite similar to the landmark case involving the Education Management Corporation which paid $95.5 million for violating the False Claims Act for its violations of the incentive ban.

The key allegation was that EDMC unlawfully recruited students, in contravention of the HEA’s Incentive Compensation Ban (ICB), by running a high pressure boiler room where admissions personnel were paid based purely on the number of students they enrolled.  In addition to resolving these and other FCA claims, the global settlement also encompasses an investigation by a consortium of state Attorneys General, of consumer-fraud allegations involving deceptive and misleading recruiting practices.

EDMC,  is headquartered in Pittsburgh, Pennsylvania, operates nationwide under four post-secondary school brands: the Art Institutes, South University, Argosy University and Brown-Mackie College.  Student enrollment across EDMC’s school brands exceeds 100,000 students.

That settlement resolved four separate FCA lawsuits filed in federal court in Pittsburgh, Pennsylvania, and Nashville, Tennessee, under the qui tam, or whistleblower, provisions of the act, which permit private individuals to sue on behalf of the government for false claims and to share in any recovery.

The United States and five states intervened and actively litigated one of those four whistleblower lawsuits, United States ex rel. Washington, in the Western District of Pennsylvania.  The United States’ complaint in intervention alleged systemic violations of Title IV of the HEA’s ICB and parallel state provisions, which prohibit schools from paying recruiters based on their success in securing enrollments.  Specifically, the United States and the plaintiff states claimed that from 2003 to the present, EDMC falsely certified to the U.S. Department of Education and various state offices of higher education that it was complying with the ICB, in order to be eligible to receive the federal grant and loan dollars that compose the majority of EDMC’s revenue.  In reality, according to the United States’ complaint in intervention, EDMC was running a high pressure sales business and paid its recruiters based only on the number of students they enrolled.  As a result of these allegedly false certifications, EDMC improperly enriched itself for more than 10 years with federal and state grant and loan dollars.  More broadly, EDMC’s alleged conduct resulted in exactly the problems that Congress sought to curtail when it enacted the ICB:  the enrollment of students in programs for which they lacked the necessary skills and qualifications, unsustainable student debt and default rates and schools’ pursuit of profits ahead of a legitimate educational mission.

That case also resolved a consumer fraud investigation by a consortium of 40 state Attorneys General, into EDMC’s deceptive and misleading recruiting practices.  The consumer fraud settlement requires EDMC to undertake various compliance obligations, including detailed disclosure obligations to students; prohibitions on deceptive or misleading recruiting practices and oversight by an administrator to ensure compliance.