In 2004, when Todd S. Nelson was chief executive of the University of Phoenix, the nation’s largest for-profit college, he signed a $9.8 million settlement with the Department of Education, which found that Phoenix had "systematically and intentionally" broken the federal rules against paying recruiters for students.
Mr. Nelson is now chief executive of the nation’s second-largest for-profit college company, Education Management Corporation, or EDMC, and the Justice Department and two state attorneys general are intervening in a whistle-blower lawsuit charging that EDMC also violated the ban on what is known as incentive compensation. That practice encourages aggressive recruitment of unqualified students for their federal student aid.
Given the cast of characters — along with Mr. Nelson, a half dozen former Phoenix executives are now at EDMC — the complaint against EDMC says that "senior management knows that the compensation system it administers violates the incentive compensation ban."
Phoenix never admitted any wrongdoing, either in the settlement with the Education Department or in a later $78.5 million settlement in the whistle-blower suit that had led to that inquiry. Education Management, which enrolls about 150,000 students at Argosy University, Brown Mackie College, South University and in its Art Institutes, has said it plans a vigorous defense.
“We feel very comfortable, based on the advice we got from our lawyers, that it does not violate the law,” Anthony J. Guida Jr., EDMC’s senior vice president for regulatory affairs, said of the compensation plan. He added that it was reviewed by two law firms before it was carried out in 2003, and has been periodically evaluated since.
Click through for full article text.