SAINT PAUL, Minn. (Legal Newsline) - Minnesota Attorney General Lori Swanson announced a lawsuit on Thursday against a for-profit college company that allegedly engaged in the unlawful collection of state taxpayer-financed student financial aid.
Education Management Corporation, the country's second largest for-profit college company, allegedly collected state taxes at two of its for-profit colleges in Minnesota - Argosy University and Art Institutes International. The lawsuit alleges that the colleges were ineligible to receive the state financial aid because the company paid incentive compensation to its recruiters based on the enrollment of new students, which would violate federal law.
"Incentive payments by for-profit colleges to their recruiters are illegal because they can lead to a hard-sell atmosphere where students are sometimes hustled to enroll in expensive programs paid for by taxpayer-backed student loans, hurting both students who are trying to better themselves and taxpayers who must pick up the tab if the loans default," Swanson said.
Swanson joined five other states and the U.S. Department of Justice in the lawsuit against the Pa.-based EMC, filed in federal court in Pennsylvania. According to the company's 2010 annual report, EMC generates the majority of its marketing leads from web-based advertising, purchases lead aggregators and uses multiple advertising campaigns. The company is 80 percent owned by Goldman Sachs Capital Partners and other private equity funds.
The lawsuit alleges that the compensation EMC paid to its student recruiters violates the ban on for-profit colleges paying "any commission, bonus or other incentive payment" to any person engaged in student recruiting. The lawsuit alleges that the company used a matrix to compensate its student recruiters, converting the number of new students a recruiter enrolled into points and using the recruiter's point total to determine his or her salary, thus making incentive payments to recruiters based upon the number of new students enrolled.
The Minnesota False Claims Act allows the state to pursue fines and damages against entities that knowingly present, or cause to be presented, false or fraudulent claims for payment or approval to the state of Minnesota.
According to its 2011 annual report, EMC receives 90.3 percent of its revenue from federal student aid. Federal law prohibits colleges from receiving more than 90 percent of their funding from federal student aid for two consecutive fiscal years.
The other states that filed suit against EMC are California, Illinois, Kentucky, Indiana and Florida.