Deceptive practices by private equity-owned for-profit colleges

From report “Private equity’s failing grade: Private equity investment in for-profit colleges”

(Written jointly by Private Equity Stakeholder Project and Americans for Financial Reform)

Multiple for-profit colleges owned by private equity firms have reached settlements with state and federal agencies following allegations that they engaged in deceptive practices.  A few noteworthy examples include:

Education Management Corp. (Goldman Sachs/ Providence Equity/Leeds Equity and later KKR)

In November 2015, Education Management Corp (EDMC) entered into a settlement with the US Department of Justice and agreed to pay $95.5 million to settle claims of illegal recruiting, consumer fraud, and other violations.[i]

EDMC was owned by the private equity arm of Goldman Sachs, Providence Equity Partners, and Leeds Equity Partners until August 2014[ii], when the company’s lenders, led by private equity manager KKR, converted their loans to a 90 percent equity stake in the for-profit college chain.[iii]  The allegations by Department of Justice extended through the periods when Goldman Sachs/ Providence/Leeds were major equity owners in EDMC and KKR was a major lender.[iv]

The Justice Department alleged that EDMC ran a high-pressure boiler room where admissions personnel were paid based on the number of students they enrolled.[v]

“Operating essentially as a recruitment mill, EDMC’s actions were not only a violation of federal law but also a violation of the trust placed in them by their students – including veterans and working parents – all at taxpayer expense,” said Attorney General Loretta Lynch.

Ashford University/ Bridgepoint Education (Warburg Pincus)

In May 2014 Ashford University, a subsidiary of Bridgepoint Education, agreed to pay $7.25 million to settle claims that recruiters lied to convince prospective students to enroll in online classes.  While Bridgepoint was publicly traded, private equity firm Warburg Pincus owned a majority (61.4%) of the company as of April 2014.[vi]

Iowa Attorney General Tom Miller alleged Ashford and Bridgepoint violated Iowa’s Consumer Fraud Act by withholding critical information, using high-pressure sales tactics, charging huge non-refundable fees and making misleading statements to convince prospective students to enroll in online classes.[vii]

“Our investigation found what we allege was troubling conduct by Ashford recruiters, including misleading prospective students to encourage them to sign on the dotted line,” Miller said.  “Unfortunately for many Ashford students, they didn’t get the degree they hoped for or the job they were led to believe they’d get after graduating.  What they did end up with was a crushing amount of student loan debt.”[viii]

Two years later, in September 2016, the Consumer Financial Protection Bureau (CFPB) ordered Bridgepoint to pay more than $24 million to refund and discharge debt that students accumulated through an in-house loan program that used deceptive marketing to lure borrowers. CFPB officials say the company misrepresented the total cost of the loans by telling prospective borrowers that they could pay them off by sending as little as $25 a month. But the typical payments on the loans were far higher.  “Bridgepoint deceived its students into taking out loans that cost more than advertised, and so we are ordering full relief of all loans made by the school,” said CFPB Director Richard Cordray.[ix]

Education Affiliates (JLL Partners)

In June 2015, Education Affiliates agreed to pay $13 million to the United States government to resolve allegations that it violated the False Claims Act by submitting false claims to the US Department of Education for federal student aid for students enrolled in its programs.[x]

The government alleged that employees at EA’s All-State Career campus in Baltimore altered admissions test results to admit unqualified students, created false or fraudulent high school diplomas and falsified students’ federal aid applications, and that multiple EA schools referred prospective students to “diploma mills” to obtain invalid online high school diplomas.  These allegations also led to criminal convictions of two All State Careers admission representatives, Barry Sugarman and Jesse Moore, and a test proctor, Jacqueline Caldwell.[xi]

“The various cases that were settled here include numerous allegations of predatory conduct that victimized students and bilked taxpayers,” said Under Secretary Ted Mitchell of the U.S. Department of Education.[xii]

[i]“For-Profit College Company to Pay $95.5 Million to Settle Claims of Illegal Recruiting, Consumer Fraud and Other Violations,” US Department of Justice, Nov 16, 2015.

[ii]EDMC Form DEF-14A, Oct 7, 2013.

[iii]“EDMC announces debt restructuring; expects improved capital structure,” Pittsburgh Post-Gazette, Aug 27, 2014.

[iv]“For-Profit College Company to Pay $95.5 Million to Settle Claims of Illegal Recruiting, Consumer Fraud and Other Violations,” US Department of Justice, Nov 16, 2015.

[v]“For-Profit College Company to Pay $95.5 Million to Settle Claims of Illegal Recruiting, Consumer Fraud and Other Violations,” US Department of Justice, Nov 16, 2015.

[vi]Bridgepointe Education 2014 Form DEF-14A, Apr 18, 2014.

[vii]“$7.25 million settlement reached to settle fraud claims against Ashford University,” WQAD News 8, May 16, 2014.

[viii]“$7.25 million settlement reached to settle fraud claims against Ashford University,” WQAD News 8, May 16, 2014.

[ix]“For-profit Bridgepoint Education forced to forgive $24 million in private student loans,” Washington Post, Sept 12, 2016.

[x]“For-Profit Education Company to Pay $13 Million to Resolve Several Cases Alleging Submission of False Claims for Federal Student Aid,” US Dept. of Justice, Jun 24, 2015.

[xi]“For-Profit Education Company to Pay $13 Million to Resolve Several Cases Alleging Submission of False Claims for Federal Student Aid,” US Dept. of Justice, Jun 24, 2015.

[xii]“For-Profit Education Company to Pay $13 Million to Resolve Several Cases Alleging Submission of False Claims for Federal Student Aid,” US Dept. of Justice, Jun 24, 2015.