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Tim Hatch Gibson Dunn Dennis Cariello DLA Piper Presentation to the National Council of Higher Education Loan Programs: Law Schools and Career Colleges:

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Presentation on theme: "Tim Hatch Gibson Dunn Dennis Cariello DLA Piper Presentation to the National Council of Higher Education Loan Programs: Law Schools and Career Colleges:"— Presentation transcript:

1 Tim Hatch Gibson Dunn Dennis Cariello DLA Piper Presentation to the National Council of Higher Education Loan Programs: Law Schools and Career Colleges: In the Cross Hairs? January 20, 2012

2 2 Overview I. Qui Tam Cases Brought Against Schools II. New Federal Education Regulations III. Securities Class Action Lawsuits Brought Against Schools IV. Consumer Fraud Action Brought By State Attorneys General and Private Plaintiffs V. Reactions from Regulators VI. Criminal Investigations from DOJ VII. Issues for Lenders VIII. Mitigating or Avoiding Liability Appendix (list of relevant cases)

3 3 Qui Tam Cases Brought Against Schools False Claims Act, 31 U.S.C. §§ –One of the federal government's primary weapons to redress fraud against government programs. –Imposes liability upon anyone who (a) knowingly submits, or causes another to submit, a false claim for payment to the United States government, or (b) knowingly avoids or decreases an obligation to pay the United States government, which may include the knowing retention of an overpayment. –Potential damages: violator is subject to three times the amount of actual damages plus civil penalties of up to $11, per false claim. Large number of cases over past 10 years against schools, most brought against private sector schools

4 4 Qui Tam Cases Brought Against Schools Many Qui Tam cases based on so-called incentive compensation provision of HEA but some based on other alleged violations of HEA or ED regulations Some do not appear to be very closely related to the flow of federal funds –Alleged violations of state regulatory requirements –Alleged violation of requirements imposed on schools by private accreditors –Alleged violation of Rehabilitation Act

5 5 Qui Tam Cases Brought Against Schools All based on the false certification theory of FCA liability – significant split among the circuits with regard to the permissible scope of this theory –Initially successful in convincing courts, including the 5th Circuit, that claims based on incentive compensation provision are not properly actionable – condition of payment versus condition of participation That all changed with the Main decision by the 7th Circuit and the Hendow decision by the 9th Circuit

6 6 Qui Tam Cases Brought Against Schools With one or two possible exceptions, relators have not been very successful in pursuing these lawsuits –Most have been dismissed – no false certification, no violation of the HEA provision (in light of the Safe Harbor regulation), no jurisdiction To date, no finding of liability by any court in any case – courts not influenced by assault on sector Schools have decided to settle several cases – generally in those cases that were able to withstand a motion to dismiss – settlements were for modest amounts and to avoid the significant cost and disruption of discovery –The University of Phoenix settlement

7 7 Qui Tam Cases Brought Against Schools Up until the recent EDMC case, DOJ had declined to intervene in every single incentive compensation case as well as in almost all of the other cases – perhaps the single most significant development in a qui tam case –Number of reasons why DOJ has remained on the sidelines –The EDMC case – aberration or a new approach? The involvement of the states

8 8 Qui Tam Cases Brought Against Schools Where do we go from here? The new ED regulations (75 FR 66832) relating to compensation and misrepresentations – a potential game-changer (and not in a good way) Role of ED and DOJ Need for Supreme Court to address false certification theory of liability

9 9 New Federal Education Regulations Legal Challenges to New Regulations (75 FR 66832) Challenges new rules on: –Incentive compensation (34 CFR (b)(22)) –Misrepresentation (34 CFR et. seq.) –State authorization of programs (34 CFR 600.9) Challenge to gainful employment regulation (34 CFR 668.7) (76 FR 34386)

10 10 Securities Class Action Lawsuits Brought Against Schools Lawsuits brought against most of the publicly-traded, private sector schools Allegations mirror the allegations set forth in GAO report and Harkin investigation To date, at least four complaints have been dismissed – none have been permitted to go forward

11 11 Consumer Fraud Action – Brought by Attorneys General and Private Plaintiffs Increase in investigations, lawsuits, and regulatory efforts by individual states Recent events in Kentucky, Florida, New York, Massachusetts, Texas, others Other states take more pragmatic approach

12 12 Consumer Fraud Action – Brought by Attorneys General and Private Plaintiffs Actions brought by private plaintiffs continue but schools given help in preventing these lawsuits from going forward as class actions Favorable results in most one off cases Rumored settlement involving Career Education AT&T Mobility, LLC v. Concepcion, 131 S. Ct (2011) Actions brought against lawyers representing plaintiffs

13 13 Consumer Fraud Action – Brought by Attorneys General and Private Plaintiffs Potential impact of new misrepresentation regulations Placement rates and reporting Although not limited to law schools, misrepresentations of placement rates

14 14 Reaction from Regulators Climate has increased scrutiny from regulators leading to more program reviews, audits, visits and inquiries –Job Placement and exam passage rates are hot topics and advertising is being reviewed The Pile on Effect – no one wants to be the one who dropped the ball or wasnt involved –Whether in coordination or done separately, the Department of Education, state regulators and accreditors have a propensity to focus on the same school Office of the Inspector General Has its own authority and its own views

15 15 Criminal Investigations by DOJ Rare but, unfortunately, not unprecedented ITT Educational Services – a case study

16 16 Issues for Lenders FTC Holder Rule – allows student borrowers to assert claims against a lender that he could assert against a school Liability beyond the Holder Rule – may depend on how close of a relationship between a lender and the school –RICO?

17 17 Mitigating or Avoiding Liability A culture of compliance and an effective compliance program Buy-in and participation of senior management Proper training of employees and students Clear and effective policies, procedures, and processes Proactive internal audit and compliance programs The importance of clear document retention policies and procedures High quality programs and focus on the student

18 Tim Hatch Gibson Dunn Presentation to the National Council of Higher Education Loan Programs: Law Schools and Career Colleges: In the Cross Hairs? January 20, 2012 Dennis Cariello DLA Piper

19 19 Appendix – List of Qui Tam Cases Against Schools U.S. ex rel. Bowman v. Computer Learning Center (S.D. Tex. 1999). Allegations of improper incentive compensation. Company forced out of business prior to resolution. U.S. ex rel. Graves v. ITT Educational Services, Inc. (S.D. Tex. 1999); 284 F. Supp. 2d 487 (S.D. Tex. 2003), affd, 2004 U.S. App. LEXIS (5th Cir. 2004). Allegations of improper incentive compensation. DOJ declined, dismissed by district court, dismissal affirmed by Fifth Circuit, cert denied by Supreme Court. U.S. ex rel. Mahmoud v. ITT Educational Services, Inc. (C.D. Cal. 2002). Allegations of grades being inflated for purposes of Cal Grant eligibility. DOJ declined, case settled with California AG. U.S. ex rel. Olson v. ITT Educational Services, Inc. (S.D. Ind. 2004). Allegations of poor quality education, awarding of grades that were not deserved, shoddy facilities and equipment and poor placement opportunities. DOJ declined, dismissed by district court, not appealed. U.S. ex rel. Bowman v. Education America (S.D. Tex. 2000); 2004 U.S. App. LEXIS (5th Cir. 2004). Allegations of improper incentive compensation. DOJ declined, dismissed by district court, dismissal affirmed by Fifth Circuit, cert denied by Supreme Court.

20 20 Appendix – List of Qui Tam Cases Against Schools U.S. ex rel. Gay v. Lincoln Technical Institute (N.D. Tex. 2001); 2003 U.S. Dist. LEXIS (N.D. Tex. Sept. 3, 2003), affd, 2004 U.S. App. LEXIS (5th Cir. 2004). Allegations of improper incentive compensation. DOJ declined, dismissed by district court, dismissal affirmed by Fifth Circuit, cert denied by Supreme Court. U.S. ex rel. Payne v. Whitman Education Group (S.D. Tex. 2002). Allegations of improper incentive compensation. DOJ declined, dismissed by district court. U.S. ex rel. Main v. Oakland City University (S.D. Ind. 2003); 426 F.3d 914 (7th Cir. 2005). Allegations of improper incentive compensation. DOJ declined, dismissed by district court, reversed by Seventh Circuit, cert denied by Supreme Court, case settled. U.S. ex rel. Hendow v. University of Phoenix (E.D. Cal. 2003); 461 F.3d 1166 (9th Cir. 2006). Allegations of improper incentive compensation. DOJ declined, dismissed by district court, reversed by Ninth Circuit, cert denied by Supreme Court, case settled.

21 21 Appendix – List of Qui Tam Cases Against Schools U.S. ex rel. Bott v. U.S. Education Corporation (N.D. Cal. 2004); 262 Fed. Appx. 810, 2008 WL (9th Cir. 2008). Allegations of improper incentive compensation. DOJ declined, dismissed by district court, affirmed by Ninth Circuit, cert denied by Supreme Court. U.S. ex rel. Ortiz v. University of Phoenix (W.D. Tex. 2004). Allegation of noncompliance with regulatory requirements, improper incentive compensation and undue pressure to enroll and retain students. DOJ declined, voluntarily dismissed by relator. U.S. ex rel. Ector v. Axia College (D.D.C. 2005). Allegations of improper incentive compensation. DOJ declined, voluntarily dismissed by relator. U.S. ex rel. Brazell v. Alta Colleges (N.D. Tex. 2005). Allegations of improper incentive compensation and violations of state regulatory requirements. DOJ intervened on state regulatory claims, case settled.

22 22 Appendix – List of Qui Tam Cases Against Schools U.S. ex rel. Gatsiopoulos v. Kaplan Higher Education (W.D. Penn. 2006); 2011 WL (S.D. Fla. 2011). Allegations of improper incentive compensation and noncompliance with regulatory requirements. DOJ declined, case transferred to Southern District of Florida. Motion to dismiss denied in part and granted in part (denying motion to dismiss the claims related to the incentive compensation ban). Case transferred back to Western District of Pennsylvania; discovery proceeding on incentive compensation allegations. U.S. ex rel. Pilecki-Simko v. Chubb Institute (D.N.J. 2006); 2010 WL (D.N.J. Mar. 22, 2010). Allegations of improper incentive compensation and noncompliance with regulatory requirements. DOJ declined, motion to dismiss granted. Third Circuit affirmed. U.S. ex rel. Diaz v. Kaplan University (M.D. Fla. 2007). Allegations of improper incentive compensation and noncompliance with regulatory requirements, including the Rehabilitation Act. DOJ declined, case transferred to Southern District of Florida, motion to dismiss granted in part, denied in part. Motion to dismiss granted as to all claims except for Relators' False Claims Act counts based on violations of the Rehabilitation Act and for Relator Diaz's retaliation claim. Discovery proceeding.

23 23 Appendix – List of Qui Tam Cases Against Schools U.S. ex rel. Cruz v. Western Career College (E.D. Cal. 2007). Allegations of improper incentive compensation. DOJ declined, voluntarily dismissed by relator. U.S. ex rel. Torres v. Kaplan Higher Education (N.D. Ill. 2007). Allegations of improper incentive compensation. DOJ declined, case transferred to Southern District of Florida, motion to dismiss granted. Appeal dismissed. U.S. ex rel. Jajdelski v. Kaplan, Inc. (D. Nev. 2007). Allegations of financial aid requests for students never enrolled. DOJ declined, motion to dismiss granted. Appeal pending. U.S. ex rel. Shultz v. DeVry, Inc. (N.D. Ill. 2007). Allegations of improper incentive compensation. DOJ declined, dismissed by district court, case settled on appeal. U.S. ex rel. Leveski v. ITT Educational Services (S.D. Ind. 2007). Allegations of improper incentive compensation. DOJ declined, first motion to dismiss granted, second motion to dismiss granted in part and denied in part. Subsequent motion to dismiss based on public disclosure/original source bar granted.

24 24 Appendix – List of Qui Tam Cases Against Schools U.S. ex rel. Lee v. Corinthian Colleges (C.D. Cal. 2007);655 F.3d 984 (9th Cir. 2011). Allegations of improper incentive compensation. DOJ declined, dismissed by district court. Ninth Circuit, reversed and remanded the dismissal of the claims. Amended complaint filed; anticipated motions to dismiss to be filed shortly. U.S. ex rel. Fuhr v. Corinthian Colleges (C.D. Cal. 2007). Allegations of improper incentive compensation. DOJ declined (2/25/09), dismissed by district court. Appeal voluntarily dismissed. U.S. ex rel. Backhus v. Corinthian Colleges (M.D. Fla. 2007). Allegations of improper incentive compensation. DOJ declined (Feb. or Mar. 2009), voluntarily dismissed by relator. U.S. ex rel. Irwin v. Grand Canyon University (D. Ariz. 2007); 2009 U.S. Dist. LEXIS (Feb. 10, D. Ariz. 2009). Allegations of improper incentive compensation. DOJ declined, motion to dismiss denied, case settled. U.S. ex rel. Buchanan v. South Univ. Online, No (W.D. Pa. 2007). Allegations of improper incentive compensation. DOJ declined (4/15/10), voluntarily dismissed by relator.

25 25 Appendix – List of Qui Tam Cases Against Schools U.S. ex rel. Brodale v. Apollo Group (S.D. Cal. 2008). Allegations of financial aid fraud and improper incentive compensation. DOJ declined (order entered 5/13/09), dismissed by district court. Notice of Appeal filed 1/5/2010. Appeal voluntarily dismissed 2/11/2010. U.S. ex rel. Powell v. American Intercontinental University (N.D. Ga. 2008). Allegations of improper incentive compensation. DOJ declined (7/22/09), motion to dismiss denied, discovery proceeding; motion for partial summary judgment and subsequent motion to dismiss pending. U.S. ex rel. Lopez v. Strayer Educ. Inc. (E.D. Va. 2008). Allegations of improper incentive compensation. DOJ declined (7/13/09), motion to dismiss on public disclosure grounds granted. Notice of appeal filed 4/16/2010. Appeal dismissed on 5/11/2010. U.S. ex rel. Walters v. EDMC, (E.D. Cal. 2010). Allegations of improper incentive compensation. DOJ declined, voluntarily dismissed by relator. U.S. ex rel. Washington v. EDMC (W.D. Pa. 2007). Allegations of improper incentive compensation. DOJ intervened, motion to dismiss filed.

26 26 Appendix – List of Qui Tam Cases Against Schools U.S. ex rel. Washington v. EDMC (W.D. Pa. 2007). Allegations of improper incentive compensation. DOJ intervened, motion to dismiss filed. U.S. ex rel. Hoggett v. University of Phoenix (E.D. Cal. 2010). Allegations of improper incentive compensation on behalf of the United States and the state of California. State of California declined to intervene. Motion to dismiss pending. Honrable Mention: U.S. ex rel. Vigil v. Nelnet, Inc., 639 F.3d 791 (8th Cir. 2011) (affirming dismissal of claim alleging, in part, that the defendant violated FFELP regulations by offering Vigil and other loan advisors prohibited bonuses and commissions based on the number of borrowers they persuaded to complete consolidation-loan applications) U.S. ex rel. Jones v. Collegiate Funding Services, Inc., 2011 WL (E.D. Va. 2011) (granting motion to dismiss complaint alleging, in part, that the defendant violated the HEA's anti-inducement provision by offering and making illegal bonus payments to its employees based on the number of FFELP student-loan applications initiated daily by the respective employee).

27 Tim Hatch Gibson Dunn Presentation to the National Council of Higher Education Loan Programs: Law Schools and Career Colleges: In the Cross Hairs? January 20, 2012 Dennis Cariello DLA Piper


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