Avalanche of Oversight: An Update Involving Litigation In The Educational Sector

1. Avalanche of Oversight: An Update Involving Litigation In The Educational Sector Jim Zelenay Of Counsel Gibson, Dunn & Crutcher LLP

2. Overview • Short history of litigation involving the sector • The Senate HELP Committee (i.e., Harkin Committee) Review and the Role It Plays • Where We Are Today • More investigations and litigation, from more sources, involving more laws and issues than ever before • Common demands of resolutions • Risks posed by resolutions • Ways to avoid or minimize litigation and exposure

3. Short History Of Litigation Involving The Sector • Until the mid-2000s, the primary regulator was ED • Had extensive regulations • Authority increased with Congress’s passage of the 1992 amendments to the Higher Education Act • Added incentive compensation provision • Added provisions about loan default rates • Tightened restrictions about ABT tests • More than 1100 schools closed in the ten years following 1992 amendments • Strong source of authority

4. Short History Of Litigation Involving The Sector • Relationship with ED was cooperative, but occasionally combative. • Dear Colleague letters • Informal guidance • Cooperative efforts to resolve issues • But see Computer Learning Centers (2000) • ED program review finding CLC violated the incentive comp provision based upon new interpretation • Required return of $180 million in Title IV funds • CLC declared bankruptcy • Thousands of students and employees left in the lurch • Government left holding the bag for student debt (which was discharged)

5. Short History Of Litigation Involving The Sector • ED to its credit changed • Hansen Memorandum • Safe Harbor and other regulations (2002) • Other sources of federal and state oversight existed (DOJ, SEC, States Attorneys General, etc.), but ED remained the primary regulator and trust was placed with ED and accreditors • False Claims Act and other litigation had been non-starters • U.S. ex rel. Graves v. ITT – DOJ declination, dismissed on the pleadings, aff’d by the Fifth Circuit

6. Short History Of Litigation Involving The Sector • 2005 – The tide turns • U.S. ex rel. Main v. Oakland City University (2005) (Easterbrook, J.). • See alsoU.S. ex rel. Hendow v. University of Phoenix (2006) • False Claims Act is a dangerous weapon • Qui tam provisions • Treble damages • Per claim penalties • Untested theories of liability and damages • Oakland City University settled for $5.3 million • University of Phoenix settled for $67.5 million

7. Short History Of Litigation Involving The Sector • The water gets rocky . . . • 2008 -- Economy crashes • Student defaults increase significantly • Employee downsizing occurs • Floodgates open from plaintiffs’ attorneys • Scores of FCA, consumer, securities, and other lawsuits filed • New administration • Industry growth slows • Perfect storm for political opportunity (and short sellers)

8. Senate HELP Committee Review • Senator Harkin (D-IA) convenes a 2-year review by the Senate Committee on Health, Education, Labor and Pensions (“HELP”) of virtually every for-profit educational institution in the country • Highly political • Required production of massive amounts of material; held multiple hearings • Issues lengthy report in 2012, attacking numerous institutions on a variety of fronts, including representations to students, marketing efforts, and student lending. • “Harkin Report” becomes “Exhibit A” and the playbook for what is to come and where we are today

9. Where We Are Today • Intense slew of activity • Comes from more sources, covering more issues, than ever before. • Not just ED. Now, also: • Other federal agencies: • CFPB • FTC • SEC • DOJ • State Agencies and State Attorneys General • City and County Attorneys • Accreditors -- also subject to scrutiny of their own • Plaintiffs’ Attorneys (FCA cases, consumer class actions, securities litigation, individual arbitrations / lawsuits, etc.) • Will discuss recent activity from these entities next.

10. CFPB • The new kid on the block • Has flexed its muscles • Has seemingly tried to insert itself into many consumer interactions, whether or not they have to do with financing. • Has sued: • For-profit education institutions (Corinthian, ITT) • Loan service providers (College Education Services LLC, Irvine WebWorks) • Even law firms engaging in debt collection lawsuits (Hanna & Associates) • No target is too big or too small

11. CFPB • Question of reach and authority is contested • Although sued Corinthian and ITT based upon alleged lending practices, complaints covered breadth of territory (e.g., representations to students regarding placement rates, recruitment, cost, etc.). • Sued ITT even though ITT did not own or service the loans • Remarkably used ITT’s own mystery shop program against ITT • Constitutionality of CFPB also contested • Scope of settlement power • Settled with purchaser of Corinthian schools in February • $480 million in loan forgiveness, plus other terms (a five-day cooling off period, required disclosures). • Raises question – What is this agency’s role? • Settlements may set precedent in agency’s view – disclosures, industry code of conduct, etc.

12. CFPB • Student loan issues on its radar • Sued College Education Services LLC – alleging student debt relief service illegally charged advance fees, promised lower payments, etc. • Asked for consent order permanently banning CES from debt relief • Sued Student Loan Processing.US – alleging false representation of affiliation with ED, illegal advance fees, deception of costs and terms • Issued October 2014 Report on Student Loan Servicing • Finding companies engaged in illegal practices (charging unfair late fees, harassing debt collection calls, etc.) • WSJ: • “‘There’s more tension between banks and those in the CFPB’s student-lending division than in all other areas of the CFPB combined.’” • “Student lending is the only consumer-lending sector that has its own ombudsman in the CFPB.” • Will CFPB attempt to set industry standards / code of conduct?

13. FTC • Confirmed it has requested documents from one for-profit school • Per WSJ, conducting “investigations . . . focus[ing] on whether students are being deceived by for-profit colleges offering programs in career paths such as nursing, education, psychology and law enforcement.” (WSJ, May 26, 2014) • Stated that it monitors student debt relief services for false claims • What is role of FTC in education? • FTC’s traditional role related to advertising • ED has misrepresentation rules • Accreditors have misrepresentation rules • Educational information is nuanced, complicated, and highly regulated • More and more schools – all schools – advertising outcomes

14. DOJ • Historically declined to intervene in FCA suits against the sector • That has changed • Has now intervened in a handful of cases – generally, intervention plays an important role • Issued CIDs and grand jury subpoenas within the sector • Has made a commitment to begin reviewing FCA matters for potential criminal liability as well.

15. DOJ • EDMC – Intervened in case alleging incentive compensation violations. Case ongoing; discovery going both ways; statistical MSJ denied. • Stevens-Henager College – Intervened in case alleging incentive comp. Case ongoing. • ATI – Intervened in case alleging false statements about employment statistics, enrollment of ineligible students, etc. Case settled for $3.7 million • American Commercial Colleges – Intervened in case alleging violations of 90/10 rule. Case settled for $2.5 million. • Maricopa County Community College – Alleging improper certification students completed service hours. Settled for $4.08 million. • FastTrain College – alleging misrepresentation of eligibility. Case ongoing.

16. DOJ / FDIC • Joint matter brought by DOJ and FDIC, with coordination of ED and CFPB • Investigation was the result of referral of service member complaints from CFPB • Alleged Sallie Mae denied members of the military six percent interest rate cap under The Service members Civil Relief Act. • Settled with Sallie Mae for $60 million (May 2014)

17. ED • Remains the biggest player • Removed incentive compensation provision safe harbor regulations • Attempted to enact gainful employment regulations, tying eligibility to cost of program vs. student’s ability to repay debt • Challenged in court and set aside as arbitrary and capricious; ruling affirmed on appeal • Has tried again; being challenged again • Corinthian – placed on heightened cash monitoring.

18. States Attorneys General • Perhaps the most significant development • Onslaught of investigations and lawsuits by States Attorneys General • Working group of 15 different AGs investigating for-profit education • Employed the Harkin playbook • Numerous lawsuits: • CA and Wisconsin AGs sued Corinthian for alleged deceptive practices – ongoing • Ill AG sued Alta/Westwood Colleges, including for federal CFPA violations – ongoing • NM AG sued ITT for alleged unfair loan practices – ongoing • Iowa AG settled with Bridgepoint for $7.25 million and a 3-year monitor • Yet again raises question of the role of state AGs

19. States Attorneys General • MA AG • Sued Salter Schools for alleged misrepresentation – settled for $3.75 million & additional disclosures • Sued Corinthian for alleged misrepresentation • Investigating others in the industry • Issued its own regulations relating to for-profit education • Massachusetts Association of Private Career Schools sued, claiming regulations are unconstitutional and in conflict with federal law • Case ongoing • Just one example of one of the many very aggressive states. • Others include Iowa, Kentucky, California. • Presents risks of fighting litigation in many, multiple jurisdictions at the same time.

20. Cities • Even cities in on the action • EDMC entered into a settlement with the City of San Francisco relating to alleged misrepresentation by the Art Institutes’ costs and placement statistics. • Case settled for $1.95 million; a $1.6 million scholarship fund; and $850,000 in scholarship funds to new students. • EDMC also agreed to calculate graduation and employment statistics in the manner specified by the settlement agreement.

21. Inter-Agency Coordination • October 2014 – ED confirmed coordination long suspected • Officially announced an interagency task force dedicated to oversight of for-profit education • ED, DOJ, Treasury, Veterans Affairs, CFPB, FTC, SEC, & States • Meets at least once a quarter • Interagency investigations may be the new norm • Two schools of thought on development

22. Plaintiffs’ Attorneys • Have Not Stopped – FCA cases, securities lawsuits, consumer class actions, etc. • Generally remain unsuccessful, but continue to cause defendants expense. • Harkin Report remains Exhibit A -- dispute regarding admissibility • A few rulings of note: • Keiser University case – First FCA education case to go to trial. Verdict for plaintiffs. No damages; one penalty of $11,000. • Munoz v. CSI case – Effectively any violation of the PPA can provide a basis for an FCA case that can survive pleadings. • U.S. ex rel. Hoggett v. Univ. of Phoenix – Dismissed on public disclosure grounds. • Apollo, DeVry, and ITT Securities Lawsuits – Apollo and DeVry dismissed on pleadings; ITT dismissed on pleadings in part. • Sallie Mae class action case – alleged to be “true lenders” of student loans, instead of banks, and used banks to avoid usury and consumer protection laws. Class certified.

23. How Investigations / Cases Are Being Resolved • For those that choose to cooperate – expensive and distracting • For those that choose to litigate -- expensive and distracting • Potentially large collateral consequences (especially in FCA cases). • Rewarding if you win, not if you lose. • For those that choose to settle (particularly with government authorities): • Money / debt repayment • Monitors (more on that in a minute) • Amended or revised disclosures • Code of conduct • Different models

24. A Word on Monitors • Becoming more frequent in settlements • The importance of selecting the right person • Extremely important to have a clearly articulated agreement as to scope • Cost • Tenure • Areas subject to investigation • Approval required over items? • To whom monitor can provide information and what information • How privileged information is handled • How concluded • What happens with work product? Does it stay confidential? • Coordinating only one monitor if facing multiple investigations / reviews

25. Some Risks Associated With Resolutions • Confusing and contradictory disclosures • Helps or hurts students? • Collateral consequences of settlements • Business consequences – competitive disadvantages • Can spur other litigation – FCA litigation, shareholder actions, consumer fraud actions, other government actions • Costs / Disruption • Monitors

26. Best Practices: How to Avoid and Defend Against Lawsuits • Review and update formal business ethics awareness and compliance program and internal control system. • Tone at the top • Internal audits • External audits • Compliance hotline • Take complaints seriously / investigate. Most whistleblowers attempt to first resolve complaints internally. • But, be mindful of retaliation provisions in the law.

27. Best Practices: How to Avoid and Defend Against Lawsuits • Inform and train employees, including on compliance and how to report purported misconduct. • Consistently inform employees of outlets for grievances • Have strong HR system in place • Most whistleblower are aggrieved / disgruntled former employees • Documentation and transparency with government are key. • Implement procedures to determine the credibility of evidence of alleged misconduct or violations to minimize exposure to liability.

28. Best Practices: How to Avoid and Defend Against Lawsuits • Reasonable measures, not perfection: A strong internal program may not prevent mistakes nor stop a rogue employee, but it may defeat scienter. • SAIC: Collective knowledge doctrine. • Consider whether self-disclosure is required / appropriate Consideration should be made in consultation with counsel • Evaluate business partners • Document the government’s knowledge, awareness, and ratification of contractual or regulatory deviations

29. Questions?