From the issue dated May 14, 2004
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For-Profit Colleges Face New ScrutinyRaid by federal agents arouses anxiety for darlings of Wall Street
In the two months since federal agents brandishing search warrants and grand-jury subpoenas swarmed ITT Educational Services' Indianapolis headquarters and 10 of its campuses, anxieties have been running high in for-profit higher education. The brashness and scope of the raid came as a shock to many in the industry, which has ridden a wave of good publicity and become a Wall Street darling. For the past three years, investors have flocked to education-industry stocks, bidding up their share prices. The eight largest companies now have a combined market value of more than $36-billion, based on what shareholders have paid. With a reputation for providing the sort of training that gets students into jobs, the companies have also become a politically potent force on Capitol Hill, where lawmakers are gearing up to rewrite policies on federal student aid, a crucial source of revenue for the industry. At Corinthian Colleges Inc., for example, 82 percent of all revenue comes from either federal Pell Grants or from funds that students have borrowed using federally guaranteed student-loan programs. The companies hope that the reauthorization of the Higher Education Act will not only expand their access to federal student aid but also allow them to tap into other sources of federal money. Now people who watch for-profit higher education are wondering if the flamboyant raid in late February, caught by cameras from CNN and other news media, heralds a turning tide of closer scrutiny by federal authorities, as well as state investigators and shareholders. "It certainly captures everybody's attention," said Mark L. Pelesh, executive vice president for legislative and regulatory affairs at Corinthian, which operates 87 colleges in 21 states. Federal investigators carted away from ITT hundreds of thousands of records on attendance, placement of graduates into jobs, and retention rates, as well as recruiting and admissions materials. Some observers have speculated that the kind of materials seized and the involvement of inspectors from the U.S. Postal Service point to an investigation into allegations that ITT has used the U.S. mail to defraud its customers. Other Investigations Further fueling anxieties among for-profit colleges are a series of seemingly unrelated events, including:
ITT officials said they believed that the investigation had been prompted by one or more whistle-blower lawsuits filed by private parties and still under seal by the courts. The lawsuits presumedly accuse the company of obtaining state or federal financial-aid funds by fraudulent means. Christopher Ames, who directs the false-claims unit, declined to comment on the ITT case. Such investigations may be a sign that the attorney general suspects wrongdoing, but not necessarily: By law, the false-claims office is required to investigate any claims in a whistle-blower case, and to decide whether to join the case and file its own civil charges. To date, no charges have been filed. If a college is found to be violating state or federal laws, it could be required to pay back funds or lose its eligibility to participate in government financial-aid programs. The other state investigation in California, by the attorney general's consumer-protection division, began several months ago. That broader inquiry is examining whether for-profit colleges are misrepresenting the value of their programs and graduates' job prospects. "We think it's an extensive problem," said Herschel Elkins, director of the division, who declined to name the institutions under investigation or to say how many are being scrutinized. "It is something we intend to look at very closely and spend some time on." A source outside the office said consumer-protection investigators have obtained records about for-profit colleges from at least one accreditor, the Accrediting Commission of Career Schools and Colleges of Technology. The commission, based in Arlington, Va., accredits 783 institutions, including some owned by Corinthian and some owned by two other major publicly traded companies, Career Education Corporation and Education Management Corporation. Elise Scanlon, the accreditor's executive director, declined to corroborate the inquiry. "I can't confirm or deny that we received a request" for records, she said. Officials of ITT and of Golden State Business College, a small, privately owned college that was also raided by federal agents, said they were cooperating with investigators and knew of no wrongdoing at their institutions. "What is their investigation about?" asked Rene R. Champagne, chairman and chief executive of ITT, during a conference call with analysts and investors in April. "Where is it going? We're waiting to hear that." Apollo, the nation's largest for-profit provider of higher education, disclosed the Education Department probe in a conference call with stock analysts in March. The company called the matter routine but provided few details about the inquiry. The Education Department's Office of Student Financial Assistance, which oversees financial-aid programs at thousands of colleges, conducts 250 to 270 such reviews a year. Lawsuits by Shareholders ITT and Career Education, meanwhile, also face the prospect of having to defend their student-recruiting and job-placement practices in the courts. Shareholders who lost money when ITT's stock price dropped 33 percent as news of the raids became public are suing the company and several top officers. They have accused ITT of employing improper recruiting and academic practices and relying on those practices to generate profits from ill-gotten means. Career Education shareholders sued on similar grounds, after its stock price dropped precipitously in December after it was reported that a former registrar at one of its photography institutes in California had accused it of altering student records. Its accreditor, the Accrediting Council for Independent Colleges and Schools, said in February that it had found no fraud. The shareholders in both cases are seeking class-action status. Lawyers representing the plaintiffs say they are prepared to present as witnesses a number of former faculty members and administrators who will testify that they were pressured to recruit students based on misleading job-placement data or to pass undeserving students in order to keep graduation rates high. The companies say they regularly monitor their practices and know of no wrongdoing. Shareholder lawsuits like those are becoming commonplace throughout the business world in instances where stock prices fall suddenly. It is far from certain whether these two cases will make it to trial. But as Corinthian Colleges learned in an unrelated matter, such cases can lead to financial problems for the companies even without a trial. Corinthian was sued in March by former students in Florida who charge that they were wrongly told that their credits from the company's Florida Metropolitan University could be transferred to any other institution. Corinthian said that it never made such a claim to students, and that the lawsuits are without merit. But the publicity from the cases hurt the university's enrollment this spring. The company is suing Peter N. Price, one of the Florida lawyers who represents the former Corinthian students, for defamation and for interference with its business. "When an individual, in a public forum and for obvious pecuniary gain, crosses acceptable lines, we believe we must vigorously defend the reputation and quality of education Corinthian Colleges has worked so hard to achieve," said Stan Mortenson, executive vice president and general counsel. Playing Offense ITT, the company most affected by the current investigations and lawsuits, has taken steps to calm investors and students as well as to prepare for a possible torrent of litigation. The company has appointed a three-person committee, made up of members of its Board of Directors who are not employees, to conduct its own investigation into circumstances that appear to be the subject of the federal and state probes. ITT has also set aside $9.7-million to cover its expected legal costs, an amount equivalent to about 40 percent of its profits from operations in the first quarter of 2004. In public, ITT officials have remained optimistic. "Fundamentally our businesses have never been stronger," Mr. Champagne declared in last month's conference call, during which he reported enrollment of more than 38,000 students, an increase of 19 percent since last year. The company has said that it did not know what prompted the federal investigation, which is being led by U.S. Attorney Michael Shelby, of Houston. Sources familiar with ITT's efforts to learn more about the probe said the investigation also involves the Education Department's Office of Inspector General, the same unit that conducted the raid at Golden State. The Inspector General's office can -- and often does -- operate independently from the Education Department. That may help to explain why the Education Department has not moved to limit ITT's participation in federal financial-aid programs, a decision that the company found "heartening but surprising," according to one insider. The department's response is more benign than in 1999, when ITT came under investigation for the way it recruited its students and paid its recruiters. Back then, the department barred the company from offering financial aid on new campuses for two and a half years. The Inspector General's office and staff lawyers from the Houston U.S. Attorney's Office were involved in the previous investigation, which at one point posed the threat of ITT's having to repay the government as much as $400-million. Eventually the Education Department and the company negotiated a settlement, and the investigation was closed in April 2003 with no findings issued and ITT paying $230,000. Observers familiar with the last investigation have speculated that some of the zeal behind the latest raid comes from the investigators who, as one said, have had ITT "in their sights" since 1999, and who may believe that the company got a sweetheart deal from the Education Department in 2003. For the most part, Wall Street analysts and other industry observers said they are concerned by recent events but not overly alarmed. "When companies and industries are doing well, that makes them vulnerable," said Sean Gallagher, an analyst who follows the for-profit-education sector for the consulting company Eduventures. A lot of the events making headlines, he said, are "just noise." He nonetheless conceded that he might be wrong. "There are significant implications if it isn't noise," Mr. Gallagher said. "There is a lot of money to be lost if there are problems." 
http://chronicle.com Section: Money & Management Volume 50, Issue 36, Page A1 | |||||||||||||||
Copyright © 2004 by The Chronicle of Higher Education