Federal Judge Gives Go Ahead to $11 Billion Whistleblower Lawsuit

Potentially groundbreaking case stems from allegations that company profited by violating the Higher Education Act, reports whistleblower lawyer Jeffrey Keller

05/23/2012 // San Francisco, CA, USA // Whistleblower Law Firm // Jeffrey Keller // (press release)

A federal judge in Pennsylvania has given the go-ahead to a potentially groundbreaking whistleblower lawsuit — with plaintiffs claiming $11 billion in fraud by Pittsburgh-based Education Management Corp. Those claims — brought by two former recruiters for EDMC — allege that the company, which operates more than 100 campuses, violated the Higher Education Act by paying financial incentives to college recruiters based on the number of students they signed up. The federal government and more than a dozen states have joined the whistleblower lawsuit.

In his ruling rejecting EDMC’s motion to dismiss, U.S. District Court Judge Terrence F. McVerry called the case, which has been brought under the federal False Claims Act, “massive and complex.” The multibillion-dollar damages alleged are similarly massive, whistleblower lawyers say.

“At $11 billion, this would be an industry changer,” says whistleblower lawyer Jeffrey Keller, a founding partner at Keller Grover, a nationally recognized labor and employment law firm, and a veteran whistleblower attorney. “It could also mean an immense recovery not just to the government, but for the whistleblowers themselves, who under the provisions of the False Claims Act stand to share in any settlement or award.”

The False Claims Act — a Civil War-era statute that was significantly revised in the mid 1980s — is intended to fight fraud and profiteering that comes at the taxpayer’s expense. It has been used recently to recover sums improperly paid to pharmaceutical companies that improperly marketed drugs for off-label uses, contractors that overcharged for wartime services, and other corporations and individuals that profited via fraudulent or otherwise wrongful acts. Since 1986, more than $34 billion has been recovered via False Claims Act whistleblower lawsuits.

In the EDMC case, the plaintiffs allege that the salary structure used for recruiters, called the Admissions Performance Plan, was “nothing more than window-dressing” to cover violations of the federal ban on incentive compensation. EDMC maintains that the plan was lawful, falling within safe harbor provisions of the Higher Education Act. In his 50-page ruling, Judge McVerry said that while the plan as written may comply with the safe harbor provisions, the plan that was implemented may not — thus making dismissal of the case unwarranted.

Congress banned incentive-based recruiter compensation in 1992 after it investigated abuses of the federal student loan programs, which guarantee payment to schools and make taxpayers liable for any subsequent defaults. The intent of the ban was to prevent schools from recruiting poorly qualified students simply to fill their coffers.

Plaintiffs allege that EDMC was engaging in exactly that strategy as it worked to increase enrollment from 4,500 in 2006 to 50,000 in 2011. The annual federal student aid funds EDMC received soared from $656 million in 2003 to $2.578 billion in 2010, according to McVerry’s opinion.

Whatever the outcome in the courtroom, whistleblower lawyers say that the case highlights the importance — and power — of the False Claims Act.

“Every year, billions of dollars in taxpayers’ dollars is lost to fraud and profiteering,” says Keller. “The False Claims Act gives those who know something is wrong an incentive to speak out; to brave the risk of retaliation and to help get those amounts back for taxpayers. It’s an important law with an important mission. And as cases like this show, it’s a good thing we have it.”

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