Articles Posted in Education

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Loan-Application 2B&H Education, the operator of a chain of beauty and massage schools known as the “Marinello School of Beauty,” which are located in the state of California, paid over $8 million dollars to settle a False Claims Act (“FCA”) lawsuit brought by employees-turned-whistleblowers.

The False Claims Act, originally enacted in 1863 during height of the civil war to combat rampant fraud in government contracting, was amended by Congress in 1986 to enhance the federal government’s ability to recover losses from fraud against the United States.

Violations of the FCA are subject to civil penalties (approximately $20,000) for each false claim plus three times the amount of the loss that the government incurred as a result of the defendant’s actions.

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New-York-City2-300x200Columbia University will pay $9.5 million dollars to settle a False Claims Act suit that alleged the university routinely overcharged federal agencies for medical research.

The False Claims Act (“FCA”) allows whistleblowers to bring allegations under seal against companies and institutions that fraudulently bill the federal government. After filing, the government has the option to “intervene” and control the suit itself. If the whistleblower’s suit is successful, as it was here, the whistleblower is entitled to a portion of the government’s recovery. Whistleblowers typically receive 15-30% of the government’s take.

The government’s complaint alleges that Columbia impermissibly applied its “on-campus” research cost rate instead of the substantially lower “off-campus” rate when seeking federal reimbursement for 423 National Institutes of Health (“NIH”) grants where the research was primarily performed at  facilities owned by the state of New York or other academic institutions.

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College-classroom2The former president of Concorde Career Colleges Inc. (“Concorde”) is alleging that the concerns he raised regarding the recruitment policies of the for-profit school resulted in his termination in violation of the federal False Claims Act. The complaint also alleges breach of contract, and violations of Delaware Whistleblower’s Protection Act and Oregon Whistleblower Protection Statute. According to relator John L. Hopkins, the network of schools was risking defauding the U.S. Department of Education based on its recruitment policies. The network of schools allegedly requires its recruiters to get a set number of students to enroll every week in addition to developing a program that tries to steer potential nursing students into less popular careers in order to increase enrollment in its other programs. Continue reading

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College-classroomYesterday, the Kansas Attorney General’s Office announced that it had filed suit under the state’s recently enacted False Claims Act against a New Jersey company that sent false invoices for textbooks that were never purchased or delivered to at least 317 Kansas public schools. The suit was filed against Robert Armstrong, an individual doing business as Scholastic School Supply LLC out of Franklinville, New Jersey. The company is not affiliated with Scholastic Inc., the well-known children’s book publisher. An investigation by the attorney general’s consumer protection division stemmed from multiple complaints received from school districts across Kansas that received false invoices from Scholastic School Supply between September and December 2014.  None of the Kansas schools receiving invoices had actually ordered textbooks from the company. The Kansas Department of Education worked with the attorney general to notify school districts statewide of the problem before they erroneously paid the invoices. Continue reading

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College-classroomThe federal government and the state of Florida have filed a civil complaint under the False Claims Act, intervening in a relator’s case against FastTrain College (“FastTrain”). The now defunct Miami-based for profit chain of schools allegedly submitted fraudulent documents to the U.S. Department of Education on behalf of students in order to gain access to federal financial aid programs. The conduct allegedly occurred from at least January 1, 2009 through June 22, 2012 when the schools were closed. Over this period, the school and its students received $4.34 million in student loans and $2.2 million in federal Pell Grants. In October, the school, its owner, and three other employees were charged in a 15-count indictment for conspiring to steal government money. Continue reading

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College classroomOn Tuesday, the U.S. Department of Justice announced a $400,000 settlement with Texas businessman Larry Lehmann to resolve allegations that he violated the federal False Claims Act in connection with the Federal Communications Commission’s E-rate Program while acting as the CEO and managing partner of Acclaim Professional Services (“Acclaim”).

The Schools and Libraries Program of the Universal Service Fund is commonly known as the E-rate Program and was created by Congress as part of the Telecommunications Act of 1996. The program helps schools and libraries in the United States obtain affordable Internet access and internal networking by subsidizing eligible equipment and services. The Houston Independent School District (“HISD”) applied for and received E-rate subsidies for two years, from 2004 until 2006. Over this two-year period, Acclaim partnered with other companies to provide E-rate funded equipment and services to HISD.

United States ex rel. Richardson and Gillis v. Lehmann was initiated by two whistleblowers that had previously bid for contracts with HISD and the Dallas Independent School District (“DISD”). The government intervened in the suit and alleged that Lehmann violated the E-rate program’s competitive bidding requirements and HISD’s procurement rules by providing gifts such as tickets to sporting events to school district employees, and loans totaling $66,750 to an employee of the school district that was involved in the procurement and administration of HISD’s E-rate projects. The suit additionally alleged that Lehmann developed a scheme where HISD outsourced some of its employees to Acclaim, allowing them to continue to work for the school district while passing the cost on to the E-rate Program. Acclaim then allegedly disguised the cost of these employees by billing them as eligible goods and services in its E-rate program invoices.

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Loan ApplicationThe for-profit college is industry has come under heavy scrutiny in recent years, resulting in litigation under the federal False Claims Act (“FCA”) and investigations into the recruiter payment schemes of for-profit higher educational institutions. Recently, a federal district court judge in Pittsburgh allowed an FCA whistleblower lawsuit against Education Management Corporation (EDMC), the second-largest for-profit educational company in the U.S. and partly owned by Goldman Sachs, to proceed. The whistleblowers in the EDMC case allege $11 billion in fraudulently-obtained student loans. In 2009, Apollo Group, which owns the University of Phoenix, settled claims under the FCA for $78.5 million. In each case, whistleblowers and the government allege that these for-profit educational entities instruct recruiters to attract as many students as possible, particularly low-income students eligible for high amounts of student loans, regardless of the students’ qualifications. Federal law prohibits such so-called “incentive-based” compensation, but, until 2010, a safe harbor provision permitted colleges to take into account the number of students recruited as long as other, qualitative, factors were considered. When a college submits a claim for federal student loan money, it must be in compliance with federal recruiter compensation laws. A college’s failure to comply with federal law, then, renders any claim for student loans fraudulent and may result in liability under the FCA.

According to the Government Accountability Office (GAO), for-profit colleges constitute a $30 billion a year industry, with as much as 90% of its revenue coming from student loans and grants. Critics of such colleges argue that they are concerned chiefly with turning a profit for the shareholders of their publicly-traded parent companies rather than providing a quality education to their students. While students of for-profit schools make up roughly 10% of the nation’s college enrollment, they take out about a quarter of all student loans and grants. Critics also point to the fact that nearly half of all students who default on their student loans come from for-profit colleges. Since for-profit colleges cater to a primarily low-income student body, the massive debt loads accumulated by low-income students can wreak havoc on their credit and inhibit their ability to achieve financial stability in the future. Total student debt in the United States has reached the $1 trillion mark.

Insight into the practices of for-profit colleges has come thanks in large part to information provided by whistleblowers in suits under the FCA. A federal statute dating back to 1863, the FCA allows private whistleblowers (known as qui tam “relators”) to sue on behalf of the government for fraud. Liability under the law comes from the submission of a false claim for payment from the government, or the submission of a false claim to reduce a liability owed to the government (so-called “reverse false claims”). The statute contains provisions to protect against employer retaliation; after the passage of a 2009 law, the FCA protections against retaliation have been fortified. Any employee, agent, or contractor who takes lawful efforts to stop a violation of the FCA, regardless of whether or not the individual has filed an FCA complaint, may avail themselves of the anti-retaliation provisions. The government may intervene in a private qui tam action, but does not always do so. Regardless of whether or not the government intervenes, relators may move forward with their claims; if successful, relators may recover between 15% and 30% of any final judgment or settlement.

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On September 28, Senator Majority Whip Dick Durbin (D-IL) addressed Congress in an attempt to highlight the fraud-ridden for-profit education industry.  Durbin states that for-profit colleges receive the largest share of federal funding, yet are often under-performing. The University of Phoenix, DeVry University, and Kaplan University rank as the top three college recipients of federal funding — and all three have faced False Claims Act or class action lawsuits alleging questionable loan practices, false and misleading statements and advertising, and falsified documents to obtain accreditation. Kaplan University currently faces a False Claims Act suit already slated for trial. Continue reading

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For-profit universities have recently been the subject of a number of False Claims Act lawsuits.  Continuing this trend, Grand Canyon Education settled its False Claims Act suit for $5.2 million in August. The whistleblower, a former employee of the company, filed the qui tam action in August 2007. The case was unsealed in September 2008 and alleged unlawful recruitment and compensation practices. Continue reading

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Nelnet, a student lending company based in Lincoln, Nebraska, is scheduled to go to trial on a False Claims Act case next week.  The lawsuit alleges that the company defrauded the U.S. Department of Education, which subsidizes many student loans to make them more affordable to students.  The lawsuit seeks over $300 million from Nelnet.  Under the FCA’s treble damages provision, this education fraud case could result in a recovery approaching $1 billion.

The lawsuit specifically alleges that the company basically invented a loophole in the DOE’s student loan program to increase the amount of subsidies it received. Continue reading

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