By Danny Weil
The for-profit university company, Educational Management Corporation (NASDAQ ticket name, EDMC) is one of those shady corporations that sell education over the counter like a commodity to unwitting students who either cannot get into traditional colleges or universities, or have been coaxed into the insidious ‘rabbit hole’ that is for-profit higher education.
A private consortium of private equity investors first acquired Education Management on June 1, 2006 in a in a leveraged buy-out transaction valued at approximately $3.4 billion. The leveraged buyout of EDMC was the largest buyout in the for-profit education sector to that point ((http://en.wikipedia.org/wiki/Education_Management_Corporation). EDMC “the operation”, then went public, launching an initial public offering (IPO) of 20,000,000 shares of its common stock on September 21, 2009. The principal investors in Education Management are Providence Equity Partners, Goldman Sachs Capital Partners and Leeds Equity Partners. They own 70% of all stocks in the company
EDMC is the second largest for-profit college company in the United States, after the Apollo Group, which owns the University of Phoenix. They operate 105 schools and they receive federal taxpayer funds — over ninety percent — to subsidize their operation. The company is based in Pittsburgh, Pennsylvania and until recently employed 20,000 people and had an enrollment of approximately 158,300 students as of its fall 2010 semester. That is until recently.
The company has been steadily barreling down hill, leaving the students in the lurch and the Department of Education holding the –for-profit subsidy bag’ while corporate CEO’s and Wall Street covet the profits.
Wall Street Board of Directors
The Board of Directors of EDMC reads like Bernie Madoff’s rolodex and begs the question, in our current corporate climate of greed, why anyone would think that investment vultures, hedge fund operators and traders on Wall Street could be responsible for public education? EDMC’s current board members are:
Mick J. Beekhuizen – he joined Goldman, Sachs & Co. in 2000 and has been a Managing Director in the Merchant Banking Division since 2010.
Samuel C. Cowley – he served as Executive Vice President, Business Development, General Counsel and Secretary of Matrixx Initiatives, Inc., a seller of over-the-counter healthcare products, from May 2008 until its sale in February 2011.
Adrian M. Jones — he joined Goldman, Sachs & Co. in 1994 and has been a Managing Director within the Principal Investment Area of its Merchant Banking Division since 2002, where he focuses on consumer-related and healthcare opportunities and is also a member of the Corporate Investment Committee of the Merchant Banking Division of Goldman, Sachs & Co.
Jeffrey T. Leeds — he is the co-founder of Leeds Equity Partners, LLC, a leading New York-based private equity firm focusing on the education, training and information services industries. Prior to co-founding Leeds Equity Partners, Mr. Leeds spent seven years specializing in mergers and acquisitions and corporate finance at Lazard Freres & Co.
John R. McKernan, Jr. – he is Chairman of the Board of Directors. Mr. McKernan served as our Executive Chairman from February 2007 to December 2008 and our Chief Executive Officer from September 2003 until February 2007
Leo F. Mullin is a retired as Chief Executive Officer of Delta Air Lines, Inc. in December 2003 and Chairman in April 2004, after having served as Chief Executive Officer of Delta Air Lines, Inc. since 1997 and Chairman since 1999.
Paul J. Salem – he is a Senior Managing Director and a co-founder of Providence Equity Partners. Prior to joining Providence Equity Partners in 1992, Mr. Salem worked for Morgan Stanley & Co. in corporate finance and mergers and acquisitions. Prior to that time, Mr. Salem spent four years with Prudential Investment Corporation, an affiliate of Prudential Insurance, where his responsibilities included leveraged buyout transactions and helping to establish Prudential’s European investment office.
Peter O. Wilde — he is a Managing Director of Providence Equity Partners. Prior to joining Providence Equity Partners in 2002, Mr. Wilde was a General Partner at BCI Partners, where he began his career in private equity investing in 1992.
Joseph R. Wright – he currently serves as Chairman of Seamobile/MTN Satellite Communications and is a director of Federal Signal Corporation, where he serves on the Compensation and Benefits Committee, and Cowen Group, Inc., where he serves on the Audit Committee (http://www.edmc.edu/about/Board.aspx).
Problems at corporate headquarters
Big problems for EDMC started back in August when the Department of Justice, in tandem with four states, filed a multi-billion-dollar fraud suit against the operation carefully alleging that EDMC was not eligible for the $11 billion in state and federal financial aid it took from the Department of Education from July 2003 through June 2011. The lawsuit concerns EDMC’s alleged failure to comply with government regulations, especially those surrounding the use and payment of ‘recruits’ at the colleges EDMC owns (http://www.nytimes.com/2011/08/09/education/09forprofit.html?_r=1).
The lawsuit declares that each year, Education Management has falsely certified that it was complying with the law, making it eligible to receive student financial aid in the form of Title IV funds, when in fact it has not. The crux of the carefully designed wording of the lawsuit clearly infers that the real allegation is criminal fraud —- the corporation is accused of having in the past and continues to defraud the federal government of billions of taxpayer funds while thumbing their noses at legal regulations.
This is not surprising for the expanding companies that offer on-line colleges and universities for-profit have shown little but disdain for regulations and regulators and nothing but glee at the profits they cut out of federal subsidies for their shareholders and investors. Last year the ‘industry’ pooled over $13 million to thwart new Department of Education regulations relative to the gainful employment provision.
The lawsuit still pending against EDMC was brought by two whistleblowers who were two former employees: Lynntoya Washington, an assistant director of admissions at the Art Institute of Pittsburgh Online Division, and Michael T. Mahoney, the director of training for the Online Higher Education Division. According to Harry Litman, a lawyer in Pittsburgh and former federal prosecutor who is one of those representing the two whistle-blowers whose 2007 complaints spurred the suit:
“The depth and breadth of the fraud laid out in the complaint are astonishing,” It spans the entire company — from the ground level in over 100 separate institutions up to the most senior management — and accounts for nearly all the revenues the company has realized since 2003 (ibid).
The government’s incentive compensation ban on payment to recruiters for the amount of students they enrolled in for-profit colleges was designed to stop these colleges and universities from signing up unqualified students in an effort to get their hands on student aid and loan money, which is how these for-profits operate. The False Claims Act is the basis for the federal and state government lawsuit. It provides for triple damages if the company is found engaging in tortuous actions such as fraud and misrepresentation and since the complaint stated all the government student aid to EDMC came from such tortuous claims, the corporation could be on the hook for as much as a whopping $33 billion. The suit has not been settled and is still winding its way through the courts.
Meanwhile, the ‘operation’ is crumbling. On January 26, 2012, after persistent rumors, EDMC released the following announcement:
“Education Management Corporation (EDMC) announced staffing reductions today at its Online Higher Education operations across multiple positions, departments and locations in Arizona and Pennsylvania which will affect fewer than 2% of its 20,000 employees. These changes will be effective February 10, 2012 and are not anticipated to have any impact on students. As disclosed to employees this past Tuesday, EDMC Online Higher Education engaged in a review and evaluation of its operations in order to identify efficiencies and direct resources in ways designed to ensure high quality outcomes remain a top priority for students. Determinations were based on the current and anticipated future needs of the organization with particular attention paid to current positions that may be redundant, or that could be managed elsewhere” (http://www.pittsburghcitypaper.ws/SlagHeap/archives/2012/01/26/edmc-insiders-report-layoffs-underway).
One of two-laid off workers who worked in ‘admissions’ said that she had “half a mind” to call students she’d recently recruited “and tell them not to bother” (ibid).
She might as well for it looks like EDMC is simply another sad case of fraud and misrepresentation that pock marks the for-profit predatory corporate higher educational sector. Of course it is taxpayers and students who lose — as well as some investors.
One of those investors is Change to Win, a coalition of labor unions founded in 2005 whose central mission is, in the words of their website, “to unite the 50 million American workers who work in industries that cannot be outsourced or shipped overseas into strong unions that can win them a place in the American middle class — where their jobs provide good wages, decent working conditions and a voice on the job” (http://www.changetowin.org/about).
This not only means representing workers at he bargaining table and assuring that wages and working conditions are just, but it also means managing the $1.4 trillion dollar pension plan for members, an exceedingly tough job in the midst of rampant corporate fraud.
Change to Win sends a letter to EDMC
The Change to Win (CTW) pension fund holds 66,000 shares of EDMC or one half of one percent of the company’s stock. Though they do not hold a large amount of stock, this makes Change to Win a small but formidable shareholder.
In a letter anonymously received from Change to Win investment group, dated January 20, 2012 and directed and sent to Leo P. Mullin, the Chairman of the Audit Committee for Education Management Company, Change to Win expresses some very grave concerns and sets out some upsetting facts and reasons to support them.
To begin with, Change to Win sets out three areas of displeasure with the company:
1. The fact that the company is not nor has it provided the federal government with a letter of credit. EDMC is legally responsible to post such a letter with the federal government by law but it hasn’t;
2. The civil suit filed by the Department of Justice specifically names CEO Todd S. Nelson as a respondent, and Nelson was the same person who ran the Apollo Group where similar allegations of recruiter incentive pay were lodged when Todd was then CEO;
3. Now that substantial changes have been made in regulations as of July of 2011 that require substantially expanded disclosure of costs to students, and which require for-profit institutions to meet certain minimum targets for its graduates’ debt service payments relative to income, Change to Win is not convinced that under the current Board that governs the corporation, these rules will be complied with.
To begin with, unlike most for-profit corporations who have a debt and leverage ratio from as low as $0, for Capella University and DeVry, to the mid- $80 million held by Strayer and Apollo Group, to the $2 million and $150 million that Career Education Co. and ITT Educational Services hold respectively, EDMC has a debt and leverage rate of $1.496.1 million or close to $1.5 billion dollars! The company is not simply broke; it is broke and mired in debt. Yet the company refuses to post any letter of credit as required by the government.
Secondly, EDMC has been steadily relying on government subsidies in the form of Title IV funds for most of its operational profits. In 2008 the company received 70.2% of its operational revenue from the government with the amount steadily increasing to 81.3% in 2009, 88.5% in 2010 and a whopping 90.3% in 2011 with the .3% taking it over the government threshold of no more than 90% allowance from federal funds. The company is clearly in violation of the 90/10 rule which regulates how much federal dollars a for-profit corporation can take from taxpayers.
Change to Win states in its letter to EDMC that:
“Increased reliance on Title IV aid as a source of revenue brings with it increased exposure to compliance risk” (the letter)
The letter goes on to further note:
“Yet, we see no indication that EDMC has in place a plan to address its persistent failure to meet minimum standard in Financial Responsibility composite score (this is a score the government uses to judge if a company is eligible to receive Title IV funds) (the letter)
Currently, for-profit institutions are also prohibited from participating in Title IV programs unless they meet one of the following three criteria which are part of the new gainful employment regulations promulgated in 2011 by the Department of Education:
35% of former students are paying down debt
Typical graduate’s annual loan payment does not exceed 30% of discretionary income
Typical graduate’s annual loan payment does not exceed 12% of total income
As Change to Win notes in its letter, the company, according to its most recent 10K filing with the SEC, does not even know whether it is currently in compliance with new regulations (the letter)
Finally, as the letter goes on to state, in March 2003 a qui tam suit (Whistleblower suit) was lodged against the Apollo Group that runs the Phoenix University. The suit alleged recruitment fraud at the colleges owned by Apollo. The suit was eventually settled out of court for $78.5 million dollars (with a non-disclosure clause). The CEO of the Apollo Group at the time of the lawsuit was Todd Nelson, the current CEO of the EDMC operation. As the letter indicates:
“For the second time in nine years , a company of which Mr. Nelson is CEO is alleged to have violated the longstanding ban on incentive payments for recruits, with shareholders facing the prospect of substantial financial as well as reputational costs” (the letter ).
The letter finally closes by stating:
“The combination of the longstanding failure to adjust it capital structure to meet The Department of Education’s Responsibility test, the federal and state civil action challenging recruitment practices, and the new disclosure and gainful employment regulations creates a circumstance where inadequate Board oversight could have disproportionately bad consequences for shareholders” (the letter ).
A spokesperson for Change to Win Investment Group interviewed about the letter to EDMC by phone stated that Change to Win is demanding a change in the governing board of directors. The spokesperson also mentioned the letter is the first step in assuring that the pension fund for Change to Win members is protected when it comes to EDMC stock. He/she would not comment if a lawsuit might be pending, but it would not be surprising given the poor state of the company.
What we do know is that EDMC is a failing company hovering on the brink of bankruptcy. It seems unable to follow federal laws, rules and guidelines it does not like and therefore opens itself up to lawsuits in the worst interest of its shareholders and the students it purportedly serves. The operation also seems to employ a CEO who is alleged to be a serial violator of federal laws governing incentive pay for recruitment jockeys, salespeople who reel students into the for-profit school like they were fish. Somehow the presence of a ‘usual suspect’ does not seem so unusual.
In San Francisco the city attorney’s office is investigating student recruiting practices and job placement reporting at the EDMC Art Institute of California in San Francisco and seven other Art Institute campuses across the state. In an U.S. Securities and Exchange Commission filing this week, Education Management said the company received a letter in December 2011 from the city attorney of San Francisco seeking information regarding student recruitment and indebtedness at The Art Institutes (http://www.huffingtonpost.com/2012/02/10/art-institute-california-san-francisco_n_1269336.html).
I spoke to a high ranking member of Change to Win investment group and asked him frankly why CTW did not divest their holdings from the company as was done in the 1980’s with South Africa. After all, divestiture would let these companies know their practices were less than savory; they are either illegal or border on illegal. He responded by telling me that in the case of Change to Win, the amount of stock was so diminutive, less than ½ of one percent, that it would make no difference. He stated that Change to Win thought they could fight for members’ rights by taking the company to task head on and forcing changes in its governing structure and fiduciary responsibilities. As of this writing, Change to Win has received no response from EDMC.
Certainly the amount of stock held by Change to Win is low and by itself would not have the desired effect that divestiture had in the 1980’s in the fight against the apartheid regime in South Africa, but with apartheid alive and well in America’s New Jim Crow, especially as seen in the percentages of minorities and people of color who attend such for-profits as EDMC, a divestiture movement on behalf of pension funds against all of these for-profit traded companies on Wall Street might not be a bad idea. There is no reckoning with them; they exist to suck federal monies right out of the government and they do so while moaning about the size and cost of the federal government. How they get away with this is simple: the public is not sufficiently educated to think critically about civic concerns and they certainly will not be as long as these schools leverage students for money while delivering a commodified education.
As with all for-profit colleges, for the students enrolling and paying these institutions whether they receive an education is really up to a roll of the dice. Students never know if the schools are accredited, if the institutions are solvent or hovering on the precipice of bankruptcy, what they charge for actual tuition and fees, if the credits received are transferable to other colleges and a host of other unknowns.
The best thing to do is stay away from predatory institutions like EDMC. The struggle is to support and assure that public institutions of higher learning receive the public funds they need to serve students’ needs. This means mobilizing to stop public education budget cuts that set the table for nefarious organizations like EDMC to operate and exploit working class students, especially students of color.
A note: Change to Win affiliate SEIU recently sponsored a ‘webinar’ on for-profit colleges and universities. It should have been required viewing for potential recruits and members of the paid for Congress.
For more information as to what SEIU is doing to fight for-profit education and educate members and the public as to their predatory status please visit www.ForProfitU.org.
Danny Weil is part of the ‘Public Intellectual Project” at Truthout (http://www.truth-out.org/public-intellectual-danny-weil/1319673742) and a writer for Project Censored and Daily Censored. He received the Project Censored “Most Censored” News Stories of 2009-10 award for his article: “Neoliberalism, Charter Schools and the Chicago Model / Obama and Duncan’s Education Policy: Like Bush’s, Only Worse,” published by Counterpunch, August 24, 2009. Dr. Weil has published more than seven books on education in the past 20 years. You can also read much more about the for-profit, predatory colleges in his writings found at Counterpunch.com, Truthout, Dailycensored.com, dissidentvoice.com and Project Censored.com where he has covered the issue of the privatization of education for years. He can be reached at firstname.lastname@example.org. His new book, an encyclopedia on charter schools, entitled: “Charter School Movement: History, Politics, Policies, Economics and Effectiveness,” 641 pages, was published in August of 2009 by Grey House Publishing, New York, and provides a scathing look at the privatization of education through charter schools.
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