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Avalanche of Oversight: An Update Involving Litigation In The Educational Sector

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Title: Avalanche of Oversight: An Update Involving Litigation In The Educational Sector


1
Avalanche of Oversight An Update Involving
Litigation In The Educational Sector
  • Jim Zelenay
  • Of Counsel
  • Gibson, Dunn Crutcher LLP

2
Overview
  • Short history of litigation involving the sector
  • The Senate HELP Committee (i.e., Harkin
    Committee) Review and the Role It Plays
  • Where We Are Today
  • More investigations and litigation, from more
    sources, involving more laws and issues than ever
    before
  • Common demands of resolutions
  • Risks posed by resolutions
  • Ways to avoid or minimize litigation and exposure

3
Short History Of Litigation Involving The Sector
  • Until the mid-2000s, the primary regulator was ED
  • Had extensive regulations
  • Authority increased with Congresss passage of
    the 1992 amendments to the Higher Education Act
  • Added incentive compensation provision
  • Added provisions about loan default rates
  • Tightened restrictions about ABT tests
  • More than 1100 schools closed in the ten years
    following 1992 amendments
  • Strong source of authority

4
Short History Of Litigation Involving The Sector
  • Relationship with ED was cooperative, but
    occasionally combative.
  • Dear Colleague letters
  • Informal guidance
  • Cooperative efforts to resolve issues
  • But see Computer Learning Centers (2000)
  • ED program review finding CLC violated the
    incentive comp provision based upon new
    interpretation
  • Required return of 180 million in Title IV funds
  • CLC declared bankruptcy
  • Thousands of students and employees left in the
    lurch
  • Government left holding the bag for student debt
    (which was discharged)

5
Short History Of Litigation Involving The Sector
  • ED to its credit changed
  • Hansen Memorandum
  • Safe Harbor and other regulations (2002)
  • Other sources of federal and state oversight
    existed (DOJ, SEC, States Attorneys General,
    etc.), but ED remained the primary regulator and
    trust was placed with ED and accreditors
  • False Claims Act and other litigation had been
    non-starters
  • U.S. ex rel. Graves v. ITT DOJ declination,
    dismissed on the pleadings, affd by the Fifth
    Circuit

6
Short History Of Litigation Involving The Sector
  • 2005 The tide turns
  • U.S. ex rel. Main v. Oakland City University
    (2005) (Easterbrook, J.).
  • See also U.S. ex rel. Hendow v. University of
    Phoenix (2006)
  • False Claims Act is a dangerous weapon
  • Qui tam provisions
  • Treble damages
  • Per claim penalties
  • Untested theories of liability and damages
  • Oakland City University settled for 5.3 million
  • University of Phoenix settled for 67.5 million

7
Short History Of Litigation Involving The Sector
  • The water gets rocky . . .
  • 2008 -- Economy crashes
  • Student defaults increase significantly
  • Employee downsizing occurs
  • Floodgates open from plaintiffs attorneys
  • Scores of FCA, consumer, securities, and other
    lawsuits filed
  • New administration
  • Industry growth slows
  • Perfect storm for political opportunity (and
    short sellers)

8
Senate HELP Committee Review
  • Senator Harkin (D-IA) convenes a 2-year review by
    the Senate Committee on Health, Education, Labor
    and Pensions (HELP) of virtually every
    for-profit educational institution in the country
  • Highly political
  • Required production of massive amounts of
    material held multiple hearings
  • Issues lengthy report in 2012, attacking numerous
    institutions on a variety of fronts, including
    representations to students, marketing efforts,
    and student lending.
  • Harkin Report becomes Exhibit A and the
    playbook for what is to come and where we are
    today

9
Where We Are Today
  • Intense slew of activity
  • Comes from more sources, covering more issues,
    than ever before.
  • Not just ED. Now, also
  • Other federal agencies
  • CFPB
  • FTC
  • SEC
  • DOJ
  • State Agencies and State Attorneys General
  • City and County Attorneys
  • Accreditors -- also subject to scrutiny of their
    own
  • Plaintiffs Attorneys (FCA cases, consumer class
    actions, securities litigation, individual
    arbitrations / lawsuits, etc.)
  • Will discuss recent activity from these entities
    next.

10
CFPB
  • The new kid on the block
  • Has flexed its muscles
  • Has seemingly tried to insert itself into many
    consumer interactions, whether or not they have
    to do with financing.
  • Has sued
  • For-profit education institutions (Corinthian,
    ITT)
  • Loan service providers (College Education
    Services LLC, Irvine WebWorks)
  • Even law firms engaging in debt collection
    lawsuits (Hanna Associates)
  • No target is too big or too small

11
CFPB
  • Question of reach and authority is contested
  • Although sued Corinthian and ITT based upon
    alleged lending practices, complaints covered
    breadth of territory (e.g., representations to
    students regarding placement rates, recruitment,
    cost, etc.).
  • Sued ITT even though ITT did not own or service
    the loans
  • Remarkably used ITTs own mystery shop program
    against ITT
  • Constitutionality of CFPB also contested
  • Scope of settlement power
  • Settled with purchaser of Corinthian schools in
    February
  • 480 million in loan forgiveness, plus other
    terms (a five-day cooling off period, required
    disclosures).
  • Raises question What is this agencys role?
  • Settlements may set precedent in agencys view
    disclosures, industry code of conduct, etc.

12
CFPB
  • Student loan issues on its radar
  • Sued College Education Services LLC alleging
    student debt relief service illegally charged
    advance fees, promised lower payments, etc.
  • Asked for consent order permanently banning CES
    from debt relief
  • Sued Student Loan Processing.US alleging false
    representation of affiliation with ED, illegal
    advance fees, deception of costs and terms
  • Issued October 2014 Report on Student Loan
    Servicing
  • Finding companies engaged in illegal practices
    (charging unfair late fees, harassing debt
    collection calls, etc.)
  • WSJ
  • Theres more tension between banks and those in
    the CFPBs student-lending division than in all
    other areas of the CFPB combined.
  • Student lending is the only consumer-lending
    sector that has its own ombudsman in the CFPB.
  • Will CFPB attempt to set industry standards /
    code of conduct?

13
FTC
  • Confirmed it has requested documents from one
    for-profit school
  • Per WSJ, conducting investigations . . .
    focusing on whether students are being deceived
    by for-profit colleges offering programs in
    career paths such as nursing, education,
    psychology and law enforcement. (WSJ, May 26,
    2014)
  • Stated that it monitors student debt relief
    services for false claims
  • What is role of FTC in education?
  • FTCs traditional role related to advertising
  • ED has misrepresentation rules
  • Accreditors have misrepresentation rules
  • Educational information is nuanced, complicated,
    and highly regulated
  • More and more schools all schools advertising
    outcomes

14
DOJ
  • Historically declined to intervene in FCA suits
    against the sector
  • That has changed
  • Has now intervened in a handful of cases
    generally, intervention plays an important role
  • Issued CIDs and grand jury subpoenas within the
    sector
  • Has made a commitment to begin reviewing FCA
    matters for potential criminal liability as well.

15
DOJ
  • EDMC Intervened in case alleging incentive
    compensation violations. Case ongoing discovery
    going both ways statistical MSJ denied.
  • Stevens-Henager College Intervened in case
    alleging incentive comp. Case ongoing.
  • ATI Intervened in case alleging false
    statements about employment statistics,
    enrollment of ineligible students, etc. Case
    settled for 3.7 million
  • American Commercial Colleges Intervened in case
    alleging violations of 90/10 rule. Case settled
    for 2.5 million.
  • Maricopa County Community College Alleging
    improper certification students completed service
    hours. Settled for 4.08 million.
  • FastTrain College alleging misrepresentation of
    eligibility. Case ongoing.

16
DOJ / FDIC
  • Joint matter brought by DOJ and FDIC, with
    coordination of ED and CFPB
  • Investigation was the result of referral of
    service member complaints from CFPB
  • Alleged Sallie Mae denied members of the
    military six percent interest rate cap under The
    Service members Civil Relief Act.
  • Settled with Sallie Mae for 60 million (May
    2014)

17
ED
  • Remains the biggest player
  • Removed incentive compensation provision safe
    harbor regulations
  • Attempted to enact gainful employment
    regulations, tying eligibility to cost of program
    vs. students ability to repay debt
  • Challenged in court and set aside as arbitrary
    and capricious ruling affirmed on appeal
  • Has tried again being challenged again
  • Corinthian placed on heightened cash
    monitoring.

18
States Attorneys General
  • Perhaps the most significant development
  • Onslaught of investigations and lawsuits by
    States Attorneys General
  • Working group of 15 different AGs investigating
    for-profit education
  • Employed the Harkin playbook
  • Numerous lawsuits
  • CA and Wisconsin AGs sued Corinthian for alleged
    deceptive practices ongoing
  • Ill AG sued Alta/Westwood Colleges, including for
    federal CFPA violations ongoing
  • NM AG sued ITT for alleged unfair loan practices
    ongoing
  • Iowa AG settled with Bridgepoint for 7.25
    million and a 3-year monitor
  • Yet again raises question of the role of state
    AGs

19
States Attorneys General
  • MA AG
  • Sued Salter Schools for alleged misrepresentation
    settled for 3.75 million additional
    disclosures
  • Sued Corinthian for alleged misrepresentation
  • Investigating others in the industry
  • Issued its own regulations relating to for-profit
    education
  • Massachusetts Association of Private Career
    Schools sued, claiming regulations are
    unconstitutional and in conflict with federal law
  • Case ongoing
  • Just one example of one of the many very
    aggressive states.
  • Others include Iowa, Kentucky, California.
  • Presents risks of fighting litigation in many,
    multiple jurisdictions at the same time.

20
Cities
  • Even cities in on the action
  • EDMC entered into a settlement with the City of
    San Francisco relating to alleged
    misrepresentation by the Art Institutes costs
    and placement statistics.
  • Case settled for 1.95 million a 1.6 million
    scholarship fund and 850,000 in scholarship
    funds to new students.
  • EDMC also agreed to calculate graduation and
    employment statistics in the manner specified by
    the settlement agreement.

21
Inter-Agency Coordination
  • October 2014 ED confirmed coordination long
    suspected
  • Officially announced an interagency task force
    dedicated to oversight of for-profit education
  • ED, DOJ, Treasury, Veterans Affairs, CFPB, FTC,
    SEC, States
  • Meets at least once a quarter
  • Interagency investigations may be the new norm
  • Two schools of thought on development

22
Plaintiffs Attorneys
  • Have Not Stopped FCA cases, securities
    lawsuits, consumer class actions, etc.
  • Generally remain unsuccessful, but continue to
    cause defendants expense.
  • Harkin Report remains Exhibit A -- dispute
    regarding admissibility
  • A few rulings of note
  • Keiser University case First FCA education case
    to go to trial. Verdict for plaintiffs. No
    damages one penalty of 11,000.
  • Munoz v. CSI case Effectively any violation of
    the PPA can provide a basis for an FCA case that
    can survive pleadings.
  • U.S. ex rel. Hoggett v. Univ. of Phoenix
    Dismissed on public disclosure grounds.
  • Apollo, DeVry, and ITT Securities Lawsuits
    Apollo and DeVry dismissed on pleadings ITT
    dismissed on pleadings in part.
  • Sallie Mae class action case alleged to be
    true lenders of student loans, instead of
    banks, and used banks to avoid usury and consumer
    protection laws. Class certified.

23
How Investigations / Cases Are Being Resolved
  • For those that choose to cooperate expensive
    and distracting
  • For those that choose to litigate -- expensive
    and distracting
  • Potentially large collateral consequences
    (especially in FCA cases).
  • Rewarding if you win, not if you lose.
  • For those that choose to settle (particularly
    with government authorities)
  • Money / debt repayment
  • Monitors (more on that in a minute)
  • Amended or revised disclosures
  • Code of conduct
  • Different models

24
A Word on Monitors
  • Becoming more frequent in settlements
  • The importance of selecting the right person
  • Extremely important to have a clearly articulated
    agreement as to scope
  • Cost
  • Tenure
  • Areas subject to investigation
  • Approval required over items?
  • To whom monitor can provide information and what
    information
  • How privileged information is handled
  • How concluded
  • What happens with work product? Does it stay
    confidential?
  • Coordinating only one monitor if facing multiple
    investigations / reviews

25
Some Risks Associated With Resolutions
  • Confusing and contradictory disclosures
  • Helps or hurts students?
  • Collateral consequences of settlements
  • Business consequences competitive disadvantages
  • Can spur other litigation FCA litigation,
    shareholder actions, consumer fraud actions,
    other government actions
  • Costs / Disruption
  • Monitors

26
Best Practices How to Avoid and Defend Against
Lawsuits
  • Review and update formal business ethics
    awareness and compliance program and internal
    control system.
  • Tone at the top
  • Internal audits
  • External audits
  • Compliance hotline
  • Take complaints seriously / investigate. Most
    whistleblowers attempt to first resolve
    complaints internally.
  • But, be mindful of retaliation provisions in the
    law.

27
Best Practices How to Avoid and Defend Against
Lawsuits
  • Inform and train employees, including on
    compliance and how to report purported
    misconduct.
  • Consistently inform employees of outlets for
    grievances
  • Have strong HR system in place
  • Most whistleblower are aggrieved / disgruntled
    former employees
  • Documentation and transparency with government
    are key.
  • Implement procedures to determine the credibility
    of evidence of alleged misconduct or violations
    to minimize exposure to liability.

28
Best Practices How to Avoid and Defend Against
Lawsuits
  • Reasonable measures, not perfection A strong
    internal program may not prevent mistakes nor
    stop a rogue employee, but it may defeat
    scienter.
  • SAIC Collective knowledge doctrine.
  • Consider whether self-disclosure is required /
    appropriate
  • Consideration should be made in consultation
    with counsel
  • Evaluate business partners
  • Document the governments knowledge, awareness,
    and ratification of contractual or regulatory
    deviations

29
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