Online Education Fraud: The Diary of a Short Seller is a riveting and timely read. It is a well-researched look behind the curtain of “too big to fail” for-profit education companies. Readers will discover the level of dishonesty of the industry and see how little care is given to students when there is money to be made from the grant program. The book covers the legal and regulatory history of the for-profit colleges and the events that led to the fall of share prices across the sector.
PRLog - Feb. 3, 2015 - RIDGEFIELD, Conn. -- In the late 1980’s and early 1990’s, the US Department of Education started to crack down on schools they deemed to be operating illegitimate businesses, taking advantage of federal loan programs. Many schools were closed because of high student default rates, often in excess of 40%. In that time, the DOE implemented regulations to prevent schools from paying commission to enrollment counselors. Rightly so, they were concerned about the quality of students recruited under any type of quota system.
In the late 1990’s, the Department of Education had serious concerns about one of the country’s largest schools, Computer Learning Centers (CLCX). With over two dozen locations nationwide, CLC had grown rapidly through its use of federal loan money. In early 1998, the Illinois Attorney General filed a fraud lawsuit against CLC, which prompted a “program review” by the Department of the company’s main campus and several branch schools in the Washington, DC area. The local ABC affiliate,WJLA, went into the school with hidden cameras, obtaining footage of enrollment counselors violating federal laws. CLC was caught shredding documents the night before federal investigators arrived.
In 1999, the US Department of Justice raided 10 ITT Education schools, seizing several cases of documents that outlined the company’s use of incentive compensation. Approximately two years later, the DOJ let ITT Education go, without explanation. ITT and a large shareholder were rumored to have strong political ties.
The Department of Education published a Final Determination Letter concluding that all of CLC’s enrollment counselors were being paid commission based on the number of students they enrolled (i.e. a quota system). As a result, the US Department of Education demanded that all Title IV monies received by CLC be returned to the federal government. This amounted to approximately $185 million dollars, which put CLC into bankruptcy. CLC’s stock went from $40 to zero from 1998 to 2001. Several other up and coming for-profit schools watched, concerned about their own recruiting practices, as many of them were already using incentive compensation schemes.
In August of 2003, DOE conducted a program review of the University of Phoenix. In that report, it was shown by the department that UOP’s systems were designed to “fly under the radar” (quoted from the DOE report) of government regulations. The school took the position that as long as they could prove that even 1% of compensation was being paid based on non-quota factors; they considered themselves to be compliant with the Safe Harbors.
Apollo Group received the final program review document in February 2004. That document was kept hidden from the public for six months. During the period between when the Department conducted its review in August of 2003 and Apollo Group’s receipt of the final document in February 2004, senior management sold several million shares of stock, and then sold even more stock after the receipt of the final program review docs in February of 2004. The Securities & Exchange Commission failed to investigate Apollo Group for insider trading. Evidence showed they were in possession of material non-public information, given the findings of the program review. Apollo Group’s then CEO later claimed that they failed to make the final program review document public because the company’s management believed that it did not contain anything that would have been important to shareholders and they didn't want to hurt their share price.
The fraudulent practices mushroomed during 2004-2008, as former senior managers left Apollo Group for greener pastures, taking up the lead at other unscrupulous schools that came public: Education Management Corporation, Grand Canyon University, and Bridgepoint Education. Essentially, they transferred and implemented their knowledge of exploiting the loophole, spawning massive and suspicious growth. Some of these schools were already under investigation by regulators when they went public.
On May 26, 2005, John Higgins, the Inspector General from the ED, testified in Congress on the dangers of for-profit education: “Violations of this requirement occur when refunds are not paid timely, when incorrect calculations result in returning insufficient funds, and when institutions fail to pay refunds at all, which is a criminal offense under the HEA.” Higgins declared, “Historically, fraud and abuse predominantly involves proprietary schools. In fact, over the last six completed fiscal years the majority—approximately 74 percent—of our institutional fraud cases involved proprietary schools.”
In 2009 and 2010, the industry was slammed as the Department of Education started to enforce its own rule, a ban on incentive compensation for enrollment counselor. This immediately put a lid on unscrupulous recruiting behavior. Apollo enrollment counselors often went into to low income housing projects looking for students and selling them on idea of getting free money from the Pell grant program and students loans. Most of these unqualified students quit in the first few days of taking classes. At its peak, University of Phoenix had 470,000 students. After the Department's action, enrollments immediately collapsed, particularly associate degree programs 40% of the total enrollment. Starting in 2011, their new enrollments were down 40% or more for the entire year. New bachelor enrollments weren't much better down 25% for the year.
Today, Phoenix has approximately 250,000. The book goes into great detail, exposing many gimmicks and tricks used by the for-profit industry to elude detection and exploit the student loan program. There are just too many to list here.
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"Online Education Fraud: The Diary of a Short Seller" is a new book that exposes fraud in online education
February 03, 2015 at 12:18 PM EST
