()

Whistleblower claims that a major for-profit education company defrauded the federal government of billions of dollars in student aid must be illuminated through discovery, U.S. District Judge Terrence McVerry of the Western District of Pennsylvania has ruled.

The judge denied summary judgment to Pittsburgh-based Education Management Corp., which operates more than 100 campuses nationwide, because the plaintiffs have to be able to develop their case through discovery.

Former admissions officers for the company, called EDMC for short, allege that it exploited a loophole in the statutory ban on colleges giving their admissions officers incentive pay for recruiting students who get federal student loans. If the loans aren’t repaid, the school isn’t on the hook, McVerry explained, noting that student loan debt totaled more than $1 trillion at the end of last year.

Since schools get paid in full by students who have federal loans and bear no responsibility if the loan goes into default, there is an incentive to enroll more students.

“In this case, plaintiffs allege that EDMC pursued such an enrollment-maximization strategy, with a goal to dramatically increase student enrollment from 4,500 in 2006 to 50,000 in 2011,” McVerry said.

“As pled, the annual federal student aid funds received by EDMC increased rapidly, from $656 million in 2003-04 to $2.578 billion in 2010-11,” the judge said. “Nevertheless, the issue in this case is not whether such alleged opportunistic exploitation of a poorly-designed government program was unsavory. Rather, plaintiffs must prove that EDMC’s conduct was illegal.”

That requires them to prove a negative, McVerry noted more than once.

The plaintiffs allege that the system used by EDMC for determining compensation for its admissions officers complies with the letter of the law on its face, because it includes other performance factors in addition to the number of students recruited by each admissions officer, but as it is actually implemented, it is the number of students recruited that determines compensation, according to the opinion.

“Direct evidence of this alleged fraud would be possessed by a select number of top EDMC executives, but plaintiffs are also entitled to an opportunity to prove their case through circumstantial evidence,” McVerry said, and the plaintiffs need to have the benefit of discovery to prove it.

The judge rejected EDMC’s argument that its salary worksheet database shows that it complied with the law and considered more than just student enrollment numbers when it calculated the pay for its admissions officers.

“The fact that EDMC’s paperwork and salary database appear to be compliant, on its face, is entirely consistent with plaintiffs’ theory of the case,” McVerry said. “A salary database with clear red flags would not provide much cover or be very effective camouflage. EDMC is accused of mendacity, not incompetence.”

The judge emphasized the weight of the burden carried by the plaintiffs. “They must develop evidence of a top-down, corporate-wide fraud—not merely isolated instances of inadequate evaluations by supervisors,” he said. “Pressure on recruiters to increase enrollments, without more, will not suffice.”

Discovery—which McVerry had characterized in an earlier opinion as being “herculean”—must be done, the judge said.

“At trial, plaintiffs must ‘prove a negative’ and show that the quality factors were not used, such that EDMC violated the incentive compensation ban,” McVerry said.

In an opinion issued last month, McVerry sided with EDMC, ruling that prosecutors can’t use attorney-client or work-product privilege as a sweeping bar to keep it from deposing officials, including a senior enforcement attorney at the education department, as part of the 70 hours of deposition allowed to each side before the close of document discovery.

The suit was first filed in 2007 and prosecutors filed the government’s notice of intervention in 2011.

Charles Moellenberg Jr. of Jones Day in Pittsburgh represented EDMC and couldn’t be reached for comment.

Harry Litman of the Litman Law Firm in Pittsburgh represented the plaintiffs and declined to comment.

Saranac Hale Spencer can be contacted at 215-557-2449 or sspencer@alm.com. Follow her on Twitter @SSpencerTLI.

(Copies of the 11-page opinion in United States v. Education Management, PICS No. 14-0722, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.)