WASHINGTON — The Obama administration and four states are accusing a private, for-profit college of illegally paying recruiters to enroll students in an $11 billion fraud, the latest action in a long-running examination of the industry’s recruitment techniques and an allegation the company called “flat-out wrong.”

The U.S. Department of Justice and the attorneys general of California, Illinois, Florida and Indiana on Monday intervened in a whistle-blower lawsuit against Pittsburgh-based Education Management Corp. Their complaint says the company broke a 1992 law prohibiting for-profit colleges from paying recruiters incentive compensation.

The law was enacted in response to reports of overly aggressive sales procedures in the industry. It is the first time the federal government has intervened in a lawsuit alleging a violation of the ban. The lawsuit was brought in 2007 by former Education Management employees Michael Mahoney and Lynntoya Washington.

John McKernan, a former Maine governor and the husband of U.S. Sen. Olympia Snowe, R-Maine, is board chairman of Education Management Corp., which has no schools in Maine.
McKernan has been with the company since 1999, when he joined as vice chairman. He was president from March to September 2003 and CEO from September 2003 to February 2007.

The governments’ complaint says the company, which offers classes online and at 105 locations in 32 states and Canada, repeatedly made false statements to conceal its practices and receive $11 billion in federal and state financial aid – nearly all of the company’s revenue.

The complaint alleges that enrollment was the sole focus of its compensation system, and that the company instructed recruiters to use high-pressure sales techniques like playing on an applicant’s psychological vulnerabilities and inflating claims of career placement opportunities to enroll students regardless of their qualifications.

McKernan said in a prepared statement, “The governments’ intervention in this case against EDMC ignores the fact that EDMC has gone to great lengths to ensure compliance with the law.

“EDMC engaged two law firms with expertise in education law to help design the company’s compensation plan to make sure it complied with the law,” he said.

“EDMC has … long had a robust compliance program including procedures for employees to report violations of company policy. The company worked rigorously to ensure that the plan was properly implemented companywide,” McKernan said.

Another statement by Education Management said federal regulations issued in 2002 allow companies to consider enrollment in admission officers’ compensation as long as it isn’t the sole factor considered. The statement said the company’s plan required consideration of five “quality factors,” along with enrollment numbers, to determine salary.

“The pursuit of this legal action by the federal government and a handful of states is flat-out wrong,” said the statement from Bonnie Campbell, a former Iowa attorney general and member of the state Board of Regents who is an adviser to the college’s legal counsel. “EDMC’s 2003 compensation plan followed the law in both its design and implementation.”

Education Management offers undergraduate and graduate programs as well as diplomas in trades such as design, media arts, health sciences, culinary, fashion, business, education, legal and information technology.

MaineToday Media Washington Bureau Chief Jonathan Riskind contributed to this story.