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					Presentation to the National Council of Higher Education Loan Programs:

Law Schools and Career Colleges:
In the Cross Hairs?
January 20, 2012




           Tim Hatch                          Dennis Cariello
          Gibson Dunn                          DLA Piper
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)

                                                                    2
Qui Tam Cases Brought Against Schools
• False Claims Act, 31 U.S.C. §§ 3729-33
   – 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
     $11,000.00 per false claim.
• Large number of cases over past 10 years against
  schools, most brought against private sector schools
                                                               3
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


                                                               4
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


                                                                    5
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
                                                                   6
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



                                                               7
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



                                                          8
New Federal Education Regulations
• Legal Challenges to New Regulations (75 FR 66832)
• Challenges new rules on:
   – Incentive compensation (34 CFR 668.14(b)(22))
   – Misrepresentation (34 CFR 668.71 et. seq.)
   – State authorization of programs (34 CFR 600.9)
• Challenge to gainful employment regulation (34 CFR
  668.7) (76 FR 34386)



                                                       9
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




                                                          10
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




                                                         11
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. 1740
  (2011)
• Actions brought against lawyers representing plaintiffs


                                                        12
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




                                                      13
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 wasn’t 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
                                                                 14
Criminal Investigations by DOJ
• Rare but, unfortunately, not unprecedented

• ITT Educational Services – a case study




                                               15
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?



                                                         16
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
                                                        17
Presentation to the National Council of Higher Education Loan Programs:

Law Schools and Career Colleges:
In the Cross Hairs?
January 20, 2012




             Tim Hatch                          Dennis Cariello
            Gibson Dunn                           DLA Piper
      thatch@gibsondunn.com              dennis.cariello@dlapiper.com
            213.229.7368                         212.335.4816
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), aff’d, 2004 U.S. App. LEXIS 21799 (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 24673 (5th Cir. 2004). Allegations of improper incentive
  compensation. DOJ declined, dismissed by district court, dismissal affirmed
  by Fifth Circuit, cert denied by Supreme Court.                                19
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 25968 (N.D. Tex. Sept. 3, 2003), aff’d, 2004 U.S. App. LEXIS
  21489 (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.


                                                                           20
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 59364 (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.




                                                                           21
Appendix – List of Qui Tam Cases Against
Schools
• U.S. ex rel. Gatsiopoulos v. Kaplan Higher Education (W.D. Penn. 2006);
  2011 WL 3489443 (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
  1076228 (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.        22
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.
                                                                               23
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 13832 (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. 07-0971 (W.D. Pa. 2007).
  Allegations of improper incentive compensation. DOJ declined (4/15/10),
  voluntarily dismissed by relator.
                                                                            24
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.

                                                                            25
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 129842
  (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”).
                                                                             26
Presentation to the National Council of Higher Education Loan Programs:

Law Schools and Career Colleges:
In the Cross Hairs?
January 20, 2012




             Tim Hatch                          Dennis Cariello
            Gibson Dunn                           DLA Piper
      thatch@gibsondunn.com              dennis.cariello@dlapiper.com
            213.229.7368                         212.335.4816

				
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