Coalition Sues GAO

8/7/2019 Coalition Sues GAO

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IN THE UNITED STATES DISTRICT COURTFOR THE DISTRICT OF COLUMBIA

)COALITION FOR EDUCATIONAL SUCCESS, )One North Wacker Drive, Suite 4800 )Chicago, IL 60606 ))Plaintiff, ))v. ))UNITED STATES OF AMERICA, ))Defendant. )

COMPLAINT

Case: 1: 11-cv-00287Ass!gned To : Huvelle, Ellen SAssign. Date: 212/2011 .Description: PI/MalpracticeCOMPLAINTFederal Tort Claims Act(Professional Malpractice)

NATURE OF THE ACTION1. This is an action against the United States under the Federal Tort Claims Act, 28

U.S.C. 1346(b) and 2671, et seq., for negligence and malpractice in connection with theGovernment Accountability Office's ("GAO's") recent investigation of career colleges, which

resulted in an erroneous and completely biased GAO Report in August 2010 ("the AugustReport") that was subsequently amended in November 2010 ("the Revised Report"). Theevidence will show that the GAO - an investigative agency that prides itself on being unbiasedand apolitical - issued a negligently written, biased and distorted report that foreseeably causedsubstantial financial injury to the plaintiff, the Coalition for Educational Success (the"Coalition"), a group of for-profit "career" colleges, and other career colleges.

2. The GAO's investigation was flawed from the outset. The GAO's investigatorswere not properly trained and did not possess the knowledge of the education sector required toconduct an unbiased and informed investigation. The GAO investigators did not follow the


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GAOs own professional standards and protocols, which mandated independence, impartiality

and due care. As a result of the GAOs intentionally biased and negligently conducted

investigation, the GAOs August and Revised Reports contained inaccurate, incomplete and out-

of-context information, and drew unsubstantiated, erroneous and unfair conclusions all of

which were to the detriment of the career colleges.

3. Indeed, some of the key evidence of the GAOs negligence and violation of itsown professional standards was provided by the GAO itself. The Revised Report, released

quietly without a press release, corrected errors in the prior versions quotation or description of

taped interviews conducted by undercover GAO agents posing as college applicants. Out of 28

"scenarios" reported, the November version corrected findings in at least 15 scenarios. Every

correction involved an error made in the same direction erroneously suggesting fraud or

exaggerating wrongdoing by career college representatives. For example, the August Report

quoted a college representative offering what was at least legally questionable advice to the

undercover applicant. The Revised Report substituted the applicant (i.e., the undercover GAO

representative) was the one who offered the questionable advice.

4. Even more remarkably, even the Revised Report contains a large number of errorsand distortions evidently designed to support the conclusion that the GAO investigators found

substantial evidence of wrongdoing. A comparison of the tapes of some of the interviews with

the descriptions reveals that the Revised Report describes conversations that did not take place

and misinterprets numerous other statements in suggesting they were inaccurate. Taking into

account both corrected and uncorrected errors, a large majority of the so-called infractions

reported in the August Report, which were the basis of the inflammatory claim that violations

were found at 15 of the 15 schools investigated, were not in fact verifiable infractions.


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5. The fallout from the GAOs faulty investigation was severe and substantial. Inthe days following the release of the error-ridden August Report, the market capitalization of the

publicly traded organizations that own and operate career colleges dropped nearly $4.4 billion

or about 14%. The career college industry was forced to spend substantial sums to respond to

the negligent GAO investigation, in an attempt to set the record straight and show how the

investigation was unsubstantiated and unfair. The damages suffered by the career college

industry continue to accrue because the GAO refuses to withdraw its Revised Report.

6. Had the GAO conducted these tests and written its report accurately andaccording to its own professional standards, on information and belief, the Coalition and its

members would have benefited. An honest and professional conducted study by the GAO

consistent with its own standards would have proved that the instances of misconduct and

deceitful practices by career college personnel were exceptional and anecdotal, and not systemic

or pervasive, and thus there was no basis for targeting career colleges for harsh regulation.

JURISDICTION AND VENUE

7. This Court has jurisdiction over this matter under 28 U.S.C. 1331 and 1346(b),inasmuch as it is a claim arising against the United States under the Federal Tort Claims Act

(FTCA), 28 U.S.C. 1346(b) and 2671, et seq.

8. Venue is proper in this district under 28 U.S.C. 1402(b).PARTIES

The Coalition.

9. Plaintiff Coalition is a non-profit association that is incorporated under the laws ofthe District of Columbia and has a principal place of business in Chicago, Illinois.


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10. The Coalition represents the interests of career colleges in connection with,among other things, proposed Government regulations and legislation that may affect the career

college sector. The Coalition tries to encourage the Government to act in an informed manner

and evenhandedly with respect to career colleges vis--vis non-profit or public institutions. The

Coalition also advocates for Government policies that support wider access to higher education,

particularly for non-traditional students, including full-time workers, workforce returners,

working parents, minorities and veterans.

11. The Coalition counts among its members many of the nations leading careercolleges, serving more than 350,000 students at 478 campuses in 41 states and providing training

for students in 17 of the 20 fastest growing fields. Three of the Coalitions members were

among the 15 schools investigated by the GAO.

The GAO.

12. The GAO is an agency of the defendant United States of America. It isheadquartered in Washington, D.C., and has offices in Atlanta, GA; Boston, MA; Chicago, IL;

Dallas, TX: Dayton, OH; Denver, CO; Huntsville, AL; Los Angeles, CA; Norfolk, VA; San

Francisco, CA; and Seattle, WA. The GAO has over 3,000 employees.

13. The GAO is the Congressional watchdog. See GAO website, available athttp://www.gao.gov/about/index.html. Its purpose is to help improve the performance and

ensure the accountability of the federal government, for the benefit of the American People, by

providing the Congress with information that is objective, fact-based, nonpartisan,

nonideological, fair, and balanced. Id. The GAO operate[s] under strict professional standards

of review and referencing; all facts and analyses in [its] work are thoroughly checked for

accuracy. Id.


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FACTUAL BACKGROUND

GAO Investigations Must Be Professional, Unbiased and Accurate.

14. The GAOs work for Congress is governed by certain standards and protocols,which are intended to provide a means of holding GAO accountable for commitments made to

the Congress and ensuring that GAO is consistent in dealing with all committees and Members.

See GAOs Congressional Protocols at p. 1 (2004).

15. According to the GAOs protocols: To effectively support the Congress, GAOmust be professional, objective, fact-based, nonpartisan, and nonideological in all of its work.

All GAO products and services must also conform to generally accepted and applicable

auditing, accounting, investigative, and evaluation principles and standards. GAO will

exercise the independence necessary to ensure that its products and work conform to applicable

professional standards and the agencys core values of accountability, integrity, and reliability.

Id. at p. 7 (emphasis added).

16. Further, the GAO protocols state: It is GAOs policy to conduct investigationsaccording to standards established by the Presidents Council on Integrity and Efficiency (PCIE)

as adapted for GAOs work. PCIE standards place upon GAO and its investigators the

responsibility to ensure that(1) investigations are conducted by personnel who collectively

possess the required knowledge, skills, and abilities to perform investigations; (2) judgments

made in collecting and analyzing evidence and communicating results are impartial; and (3)

due professional care(e.g., thoroughness, appropriate use of investigative techniques,

impartiality, objectivity, protection of individual rights, and timeliness)is exercised. Id. at p.

21 (emphasis added).


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17. The applicable PCIE standards expressly provide that the GAO use dueprofessional care in conducting investigations and in preparing related reports. See PCIE

Quality Standards for Investigations, http://www.ignet.gov/pande/standards/invstds.pdf, at p. 6.

Among other things, that requires that all investigations must be conducted in a thorough,

diligent, complete, fair and equitable manner; evidence must be gathered and reported in an

unbiased and independent manner in an effort to determine the validity of an allegation; and

investigative report findings must be supported by adequate documentation in the case file.Id.

at p. 7.

18.

These standards and protocols are not discretionary; the GAO must follow these

professional standards and protocols with respect to all investigative work it performs. See

GAOs Congressional Protocols at p. 1 (2004), at pp. 21-22.

The GAO Investigation of Career Colleges.

19. Beginning in June 2010, the Senate Health, Education, Labor and Pension(HELP) Committee began a series of oversight hearings intended to examine federal education

spending at career colleges. The hearings were chaired by Senator Tom Harkin, a well-known

and prominent critic of career colleges.

20. In anticipation of the Senate HELP Committees oversight hearings, SenatorHarkin requested that the GAO, among other things, conduct an undercover investigation to

determine if career college representatives engaged in fraudulent, deceptive, or otherwise

questionable marketing practices.

21. The GAO failed to perform its essential duties and failed to follow its professionalstandards and protocols with respect to the investigation. From May 2010 through July 2010, the

GAO sent individuals posing as prospective applicants applying for admission to 15 career


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colleges located in Arizona, California, Florida, Illinois, Pennsylvania, Texas and Washington,

D.C. This technique of sending individuals undercover who pose as potential consumers (or in

this case applicants) is also referred to as mystery shopping.

22. These GAO individuals then noted, among other things, the purported statementsmade to them by representatives of the various colleges.

23. The individuals sent by the GAO were not properly trained. In violation of theGAOs standards and protocols, the undercover applicants did not possess the knowledge of the

education sector required to conduct an unbiased and informed investigation. They presented the

college representatives with highly unusual and contrived scenarios, with which a typical

financial aid or admissions representatives would have little experience or familiarity. (See, e.g.,

August Report, p. 7 (describing discussions with representatives concerning the potential impact

of a $250,000 inheritance on financial aid).)

24. By the GAOs own admission, the 15 colleges selected for investigationconstituted a nonrepresentative sample. (See August Report, p. 2). Press reports have

suggested that more than 200 schools were surveyed for the [R]eport but, the GAO cherry-

picked only the 15 schools accused of deceptive or fraudulent marketing practices. The[re] are

also unconfirmed reports that the Dept of Ed was specifically targeting the University of Phoenix

in response to complaints made by public universities. M. Hyman, Assault on Career

Colleges, The American Spectator, Oct. 6, 2010, available at

http://spectator.org/archives/2010/10/06/assault-on-career-colleges.

25. At least some of these interactions with the college representatives were audiotaped and/or videotaped. On information and belief, and according to several media outlets, the

GAO collected more than 80 hours of recordings during the course of its investigation. However,


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in violation of professional standards and protocols, it appears the recording devices were turned

on and off by the GAO undercover applicants during the interviews resulting in gaps in the

conversations.

The GAOs August Report.

26. As part of its investigation, the GAO first published its purported findings fromthat investigation in its August Report entitled For Profit Colleges: Undercover Testing Finds

Colleges Encouraged Fraud and Engaged in Deceptive and Questionable Marketing Practices.

(A copy of the August Report is attached hereto as Exhibit A.) In the August Report, the GAO

claimed that four of the career colleges encouraged fraudulent practices and that all 15 colleges

made deceptive or otherwise questionable statements to the GAOs undercover applicants. The

so-called deceptive or questionable statements were described in detail in the August Report.

27. The August Report was submitted as the written testimony of Gregory D. Kutz,the Managing Director of the GAOs Forensic Audits and Special Investigations division, before

the Senate HELP Committee, as part of the Committees oversight hearings concerning career

colleges. In that report and testimony, Mr. Kutz claimed that his and the GAOs investigative

work had been performed in accordance with the professional standards prescribed by the

Council of the Inspectors General on Integrity and Efficiency. (See August Report, p. 4.)

28. However, the GAO failed to adhere to applicable professional standards andprotocols in preparing its findings. Because the investigation was not impartial but was

preordained to reach conclusions against career colleges, the GAO produced findings that were

riddled with errors and replete with biased and unsubstantiated conclusions.


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29. According to the August Report, the GAO observed alleged deceptive marketingpractices at all 15 of the career colleges visited by its undercover investigators and observed

alleged fraudulent practices at four of those schools.

30. Specifically, the August Report accused the schools of making false or misleadingstatements regarding, among other things, graduation rates, salaries of its graduates, and the

expected length and cost of the program.

31. As the GAO later admitted, and as set forth in detail below, the August Reportcontained many inaccuracies and inappropriate conclusions about career colleges.

32.

In addition to its written report, the GAO posted to its own website and to

YouTube clips of video recordings allegedly taken by its undercover investigators, unbeknownst

to the 15 schools. See http://www.gao.gov/products/GAO-10-948T;

http://www.youtube.com/watch?v=4XZp-2HDRG0.

33. The video clips are seconds-long segments devoid of context, but the GAO has sofar refused to release the unabridged video recordings, which would provide context for the

practices that the GAO has alleged to be deceptive or fraudulent.

The GAOs Revised Report.

34. As a result of its intentionally slanted and negligently conducted investigation, theGAOs August Report contained inaccurate, incomplete and out-of-context information, and

drew unsubstantiated, erroneous and unfair conclusions all of which were to the detriment of

the career colleges.

35. On November 30, 2010, the GAO took the rare and extraordinary step of revisingits August Report and reissuing its August 4, 2010 testimony before the Senate HELP

Committee. (A copy of the Revised Report is attached hereto as Exhibit B.)


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36. The GAO did so with none of the publicity with which its initial report wasreleased. Instead, the GAO quietly posted the Revised Report on its website, without so much as

a press release.

37. The GAOs Revised Report exposed numerous and blatant errors in the initialAugust Report, which significantly undermined many of the GAOs allegations and cast serious

doubt on the credibility and objectivity of the GAOs analysis. All of the corrected errors in the

initial report were to the detriment of the career colleges.

38. In Appendix I to the August Report, the GAO included 28 so-called factualscenarios of purported [e]ncouragement of fraud, and engagement in deceptive, or otherwise

questionable behavior. In the Revised Report, the GAO changed findings in more than half of

these so-called factual scenarios, resulting in corrections to findings for 13 out of 15 schools. As

these changes demonstrate, the August Report inaccurately and unfairly summarized the actual

exchanges between the undercover applicants and the college representatives in order to create or

enhance a negative impression of the career colleges. For example:

AUGUST REPORT REVISED REPORT

Criticized a representative of College #1 forpurportedly telling an undercover applicantthat the applicant should take out themaximum amount of federal loans, even if hedid not need all of the money (August Report,p. 19, College #1, scenario 2.)

Corrects this statement and confirms that thecollege representative actually told theundercover applicant that the applicant couldtake out the full amount of federal loans, evenif he did not need all of the money. (RevisedReport, p. 19, College #1, scenario 2.)

Criticized a representative of College #2 forpurportedly estimating federal aid eligibility

without the undercover applicants reported$250,000 in savings to see if applicantqualified for more aid. (August Report, p. 20,College #2, scenario 2.)

Revises this statement to add that thediscussion of aid eligibility without the

applicants savings was not raised by therepresentative but Upon request by theapplicant. (Revised Report, p. 20, College #2,scenario 2.)


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Criticized an admissions representative ofCollege #3 for purportedly telling the GAOsundercover applicant that if she failed to passthe colleges required assessment test, she cancontinue to take different tests until she passes.(August Report, p. 20, College #3, scenario 1,bullet 1.)

Corrects this statement to show that thepurported conversation took place not with anadmissions representative but with a collegerepresentative. (Revised Report, p. 20,College #3, scenario 1, bullet 1.)

Criticized a representative of College #3 forpurportedly not telling the GAOs undercoverapplicant the graduation rate when asked andinstead stating that many students havegraduated from the program recently.(August Report, p. 20, College #3, scenario 1,bullet 2.)

Revises this statement to add that the collegerepresentative replied to the alleged questionabout graduation rate as follows: I think,pretty much, if you try and show up and, youknow, you do the work, youre going tograduate. Youre going to pass guaranteed.(Revised Report, p. 20, College #3, scenario 1,

bullet 2.)

Criticized a representative of College #3 forpurportedly suggest[ing] that the GAOsundercover applicant take out the maximum instudent loans notwithstanding the applicantsinheritance. (August Report, p. 20, College #3,scenario 2, bullet 2.)

Corrects this statement by removing theallegation that the representative suggestedthat the applicant take out the maximum instudent loans and adds that the representativewas addressing the applicants expressedinterest in loans when the representativemerely confirmed that the applicant could takeout the maximum. (Revised Report, p. 20,College #3, scenario 2, bullet 2.)

Criticized a representative of College #3 forpurportedly telling the GAOs undercoverapplicant that the school had graduates making$120,000-$130,000, when, according to theGAO, most graduates make less than $70,000per year. (August Report, p. 20, College #3,scenario 2, bullet 3.)

Adds that the college representative also toldthe undercover applicant that in the currenteconomic environment, the applicant couldexpect a job with a likely starting salary of$13-$14 per hour or $15 if the applicant waslucky a material statement that belies anysuggestion of misrepresentation, and whichwas completely omitted from the August

Report. (Revised Report, p. 20, College #3,scenario 2, bullet 3.)


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Claimed that an undercover applicant visitingCollege #4 was allegedly misled because hewas told he could earn up to $100 an hour as amassage therapist when, according to theGAO, most message therapists in Californiamake less than $34 per hour. (August Report,p. 21, College #4, scenario 2.)

Revises this statement to add, among otherthings, that the same applicant was told byanother representative during his visit that, infact, he could earn up to $30 an hour as amessage therapist a number that is in-linewith the GAOs own figures, and whichcontradicts the GAOs conclusions that itsundercover applicants were misled. (RevisedReport, p.21, College #4, scenario 2.)

Criticized representative of College #5 forpurportedly telling applicant that it would take3.5 to 4 years to complete a bachelors degreebut only providing a one-year cost estimateequal to 1/5 of the required credits. (August

Report, p. 21, College #5, scenario 2.)

Revises this statement to add, among otherthings, that the representative also provided theundercover applicantthe cost per 12 hoursemester, the amount per credit, the totalnumber of credits required for graduation, and

the number of credits for the first year.(Revised Report, p.21, College #5, scenario2.)

Criticized representative of College #6 forpurportedly telling applicant that all graduatesget jobs and the president of the college wouldemploy students in his local salons if they didnot find work elsewhere. (August Report, p.21, College #6, scenario 1.)

Revises this statement to reflect that therepresentative merely suggestedthat allgraduates get jobs and purportedly told theapplicant that if he had not found a job by thetime he graduated, the owner of the schoolwould personally find the applicant a jobhimself. (Revised Report, p.22, College #6,scenario 1.)

Chastised representatives at two differentschools for purportedly failing to provide theirschools graduation rates after being directlyasked by the undercover applicants. (AugustReport, p. 22, College #7, Scenario 1 and p. 26,College #14, scenario 1.)

Corrects this statement with respect to oneschool stating that the schools representativegave some general figures and stated that shewould have to talk to career services to obtainspecific numbers (Revised Report, p. 23,College #7, Scenario 1); and drops thatallegation altogether with respect to the otherschool, and adds a statement that the collegeswebsite did not provide the graduation rate

(Revised Report, p. 27, College #14, scenario1.)


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Criticized representative of College #8 for

purportedly telling undercover applicant

different lengths of the program, and telling

him that student loans would absolutely cover

all costs in the two-year program although,

according to the August Report, to pay for the

program the applicant would need to acquire

federal student loans for three years or acquire

private loans or pay some out of pocket to

complete the program in less than three years.

(August Report, p. 23, College #8, scenario 2.)

Revises this statement to drop any purported

discussion about different lengths of the

program, and changes criticism to stating that

the representative did not specify thatfederal

student loans by themselves would not cover

the entire cost of the program an implicit

acknowledgement that the representative made

no false statement. (Revised Report, p. 24,

College #8, scenario 2.)

Criticized a representative of College #10 for

purportedly not telling the GAOs undercover

applicant about the qualifications of the

professors when asked but merely telling theapplicant that the professors had professorial

experience. (August Report, p. 24, College

#10, scenario 2.)

Drops this entire statement. (See Revised

Report, p. 25, College #10.)

Criticized representative of College #11 for

purportedly telling an undercover applicant

that she should take out the maximum

amount of federal loans, even if she did not

need all of the money. (August Report, p. 24,


Corrects this statement and confirms that the

college representative actually told the

undercover applicant that she could take out

the full amount of federal loans, even if she did

not need all of the money. (Revised Report, p.

25, College #11, scenario 1.)

Chastised representative of College #12 for

purportedly telling an undercover applicant

that if the applicant could enroll a friend she

could get an MP3 player and a rolling

backpack. (August Report, p. 25, College #12,

scenario 1.)

Adds to this statement that [a]s noted in the

testimony, although this is not illegal, it is a

marketing tactic. (Revised Report, p. 26,


Criticized representative of College #12 by

quoting her as telling an undercover applicant

that she would correct his FAFSA form byreducing the reported assets to zero. (August


Revises statement to remove the attributed

word, correct, and to reflect that

representative purportedly told the applicantshe would change his FAFSA form by

reducing the reported assets to zero. (Revised



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Unequivocally claimed that College #13s

representative failed to provide the undercover

applicant with a specific number for the cost

of the program. (August Report, p. 25, College

#13, scenario 1.)

Shows that this was untrue by adding that the

representative later brought the applicant to the

financial aid office and the specific costs of

attendance were provided. (Revised Report,

p. 26, College #13, scenario 1.)

39. The GAO made numerous other significant and material changes to its AugustReport, correcting the GAOs admitted errors that were to the detriment of career colleges. For

example, in a Table of supposed Fraudulent Actions Encouraged by For-Profit Colleges, the

GAO claimed that a college representative allegedly told the undercover applicant that by the

time the college would be required by [the] Education [Department] to verify any information

about the applicant, the applicant would have already graduated from the 7-month program.

(August Report, p. 8, CA college in Table 1.) But the Revised Report attributes that statement

not to the college representative, but to the undercover applicant. (Revised Report, p. 8, CA

college in Table 1.)

40. Given that all of these corrected factual findings contained inaccuracies thatreflected negatively on career colleges, the unavoidable inference is that the GAOs pervasive

and one-sided errors resulted from the intentional bias driving the investigation, in violation of

the GAOs protocols mandating impartiality and integrity on the part of the GAO.

41. In fact, according to a press release from certain members of the HouseCommittee on Oversight & Government Reform, The factual changes to the report have raised

new questions about conclusions reached by the GAO regarding the recruiting practices of

[career colleges].

42. Moreover, because the GAOs Revised Report did not correct all of theinaccuracies and defects in the August Report, it remains biased and inaccurate.


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43. The Revised Report remains replete with erroneous, biased, invalid, orunsupported conclusions. For example:

a. The Revised Report still maintains that representatives of certain collegesmisrepresented the length of the program by telling the undercover

applicants that it would take two years to complete, but then providing the

applicants with a per-year cost estimate based on more than 2.5 years to

complete the program. (See, e.g., August Report at p. 20, College #2,

scenario 2; Revised Report, p. 20, College #2, scenario 2.) The recordings

of the discussions that have been released tell a far different story. The

recordings demonstrate that the undercover investigators were expressly

told that the cost estimates they received were for an academic year,

which is nine months in duration, and that the program is 24 months long

and, therefore, would take two and a halfacademic years to complete.

These recorded exchanges flatly contradict the GAOs assertion that the

applicants were misled as to the length or cost of the program.

b. In one case, the GAO reports that an undercover applicant was told thatgetting a job was a piece of cake and that graduates from this school are

making $120,000 to $130,000 per year. (August Report, p. 20, College

#3, scenario 2; Revised Report, p. 20, College #3, scenario 2.) There is no

evidence of this conversation in the recording that has been released.

c. In another case, the GAO reports that the college representative did nottell the graduation rate when asked directly. (August Report, p. 20,

College #3, scenario 1; Revised Report, p. 20, College #3, scenario 1.)


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However, based on the recording that has been released, the question of

graduation rate was never raised by the undercover agent.

d. In an attempt to paint a college as over-promising expected earnings atgraduation, the August Report stated the undercover applicant was told he

could make up to $100 an hour. (August Report, p.21, College #4,

scenario 2.) The Revised Report adjusts this down to $30 an hour.

(Revised Report, p.21,College #4, scenario 2.) But the complete

recording, which has been released, reveals that later in the discussion the

undercover applicant is given a data sheet and the admissions

representative states that the minimum average rate per hour for massage

therapists in their area is $22. The GAO never reports this last accurate

piece of information.

e. The August and Revised Reports focus solely on an admissionrepresentatives statement offered during the conversation regarding the

undercover applicants ability to take out the maximum in loans. (August

Report, p. 24, College #11, scenario 1; Revised Report, p. 25, College #11,

scenario 1.) However, the Reports ignore that the admission

representative thoroughly explained student loans and the importance of

financial responsibility, and even suggested the undercover applicant

borrow less than what the applicant needed. Among other things, the

representative told the applicant, I want you to choose whats financially

responsible. Neither GAO Report includes this statement.


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44. On information and belief, the Revised Report contains numerous otherinaccuracies, false statements, and biased and unsubstantiated conclusions. The GAO has

refused to release to the public (or even to the Coalition and the colleges that were investigated)

the GAOs full, unabridged recordings from its investigation or other documents that it claims

support its findings. On information and belief, discovery in this action will reveal that the

recordings and other documents currently being withheld by the GAO further belie the purported

findings and conclusions in the Reports.

45. Additionally, in violation of the GAO protocols, the undercover applicants did notpossess the knowledge of the education sector required to conduct an unbiased and informed

investigation, which led to incorrect findings in both the August and Revised Reports. For

example, the August and Revised Reports cite as findings of Encouragement of fraud, and

engagement in deceptive, or otherwise questionable behavior various statements about

graduation rates and the length and costs of programs and marketing, which are actually in

accordance with Department of Education (DOE) requirements and were completely proper.

46. An adequately informed investigator would have understood that these exchangesinvolved no improper action. By including these uninformed findings, the GAO Reports unfairly

conjure the specter of improper behavior by career colleges.

47. The Revised Report demonstrates that the GAO continues to violate applicableprofessional standards and protocols in connection with its investigation and testimony

concerning career colleges.


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The Fallout From the GAOs Negligent Investigation.

48. The fallout from the GAOs defective and prejudiced investigation was explosive,causing severe and substantial harm to both the career college industry generally and the

Coalition specifically.

49. Indeed, by incorrectly concluding that deceptive or otherwise questionablestatements were made by 15 out of the 15 schools investigated, the GAOs investigation created

the false inference that every career college engages in improper practices.

50. Similarly, the title of the GAO August and Revised Reports For-ProfitColleges: Undercover Testing Finds Colleges Encouraged Fraud and Engaged in Deceptive and

Questionable Marketing Practices perpetuated this false inference.

51. The findings of the GAOs investigation were widely reported in the press. Thosefindings were used by critics of career colleges, including competitors and Senator Harkin, to

vilify and attack the entire career college sector.

52. For example, on the date the GAOs August Report was publicly released,Senator Harkin stated that the GAOs findings make it disturbingly clear that abuses in for-

profit recruiting are not limited to a few rogue recruiters or even a few schools with lax

oversight. To the contrary, the evidence points to a problem that is systemic to the for-profit

industry. Reuters, U.S. senator lashes out at for-profit education, Aug. 4, 2010, available at

http://www.reuters.com/article/idUSN0421762120100804.

53. As could be reasonably foreseen, the entire industry numbering more than 2,500schools was directly injured by the GAOs tainted investigation. In the days following the

release of the August Report, the market capitalization of the publicly traded organizations that

own and operate career colleges dropped nearly $4.4 billion or about 14%.


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54. Moreover, as a direct result of the findings in the August Report, Senator Harkinissued extensive and costly requests for information and documents to 30 schools some of

which were Coalition members and announced that the Senate HELP Committee was going to

hold additional hearings on the career college sector in the coming months.

55. The investigation also caused direct damage to the Coalition. In order to combatthe GAOs biased investigation and conclusions, the Coalition was forced to incur substantial

additional costs and expenses to advocate for its numerous career college members and to set the

record straight.

56.

These incremental expenses would not have been incurred but for the GAOs

faulty investigation.

57. Moreover, the Coalitions damages continue to accrue because the GAOsRevised Report still contains detrimental, erroneous and biased information and conclusions and

the GAO refuses to withdraw or further amend its report and findings. The Coalition will

continue to be required to make additional, incremental expenditures in order to effectively

perform its functions and combat the damage caused by the GAO.

COUNT I PROFESSIONAL MALPRACTICE

58. Paragraphs 1 through 57 are incorporated herein by reference.59. The Coalition is entitled to bring this suit against the United States under the

Federal Tort Claims Act, 28 U.S.C. 1346(b) and 2671, et seq., because the United States, if a

private person, would be liable to the Coalition for the money damages caused by the

professional malpractice or negligence of the United States, acting through the GAO within the

scope of its office, in connection with the GAOs investigation concerning career colleges.


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60. When conducting an investigation and reporting on its findings, the GAO has aduty of care to use such skill, prudence and diligence as other accountants, auditors or

investigators commonly possess and exercise.

61. Among other things, the GAO has a duty to conduct its investigations and prepareits reports in accordance with the professional standards mandated by its own protocols and the

standards established by the Presidents Council on Integrity and Efficiency.

62. These standards and protocols are not discretionary, but must be followed by theGAO in each investigation it conducts and in every report it prepares.

63.

Acting in its purported role as Congressional watchdog, the GAO conducted an

investigation into career colleges and released its purported findings in the GAOs August

Report, which were subsequently revised and amended in November 2010. The end aim of the

GAOs investigation was to provide findings and conclusions that would directly impact the

career college sector and its representatives. Thus, the Coalition and others in the career college

industry were the direct and intended beneficiaries of the GAOs professional services relating to

the GAOs investigation concerning career colleges.

64. In conducting its investigation into career colleges, the GAO owed a duty of careto the Coalition and others in the career college industry to ensure that it complied with its

professional standards and protocols, so that, among other things, the factual information

reported would be fair, impartial and accurate and the GAOs ultimate conclusions would be

reasonable and substantiated. That in turn would ensure that Government officials would have

complete and accurate information when making decisions impacting the career college industry.


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65. In conducting its investigation, the GAO breached its duty of care and failed toadhere to its mandatory professional standards and protocols. Among other things, the GAO

failed to:

a. Ensure that its factual findings were complete, accurate and objective, and thatits conclusions were reasonable, impartial and supported by adequate

documentation in the case file;

b. Conduct its investigation and prepare its report in a thorough, complete,diligent and unbiased manner;

c.

Ensure that its judgments made in collecting and analyzing evidence and

communicating results were impartial;

d. Gather and report on evidence in an unbiased and independent manner in aneffort to determine the validity of an allegation;

e. Conduct its investigation using generally accepted investigative techniques;f. Conduct its investigation using personnel who possess the required

knowledge, skills and abilities to perform investigations;

g. Be professional, objective, fact-based, nonpartisan, and nonideological in itswork;

h. Conform its services and work product to generally accepted and applicableauditing, accounting, investigative and evaluation principles and standards;

and

i. Exercise the independence necessary to ensure that its products and workconform to applicable professional standards and the agencys core values of

accountability, integrity and reliability.


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66. The GAO's conduct relating to its investigation regarding career collegesamounted to professional malpractice or negligence.

67. It was reasonably foreseeable that the GAO's malpractice and negligence would

directly harm the Coalition by requiring it to incur substantial costs and expenses to respond tothe GAO's defective reports, in order to set the record straight during a critical time for theCoalition and its members.

68. The Coalition suffered injury as a direct, foreseeable and proximate result of theGAO's professional malpractice or negligence, including but not limited to incurring substantialsums in costs and expenses in responding to the defective and negligent GAO investigations andreports.

PRAYER FOR RELIEFWHEREFORE, Plaintiff Coalition for Educational Success prays that this Court:A. Enter judgment against the defendant United States of America for money

damages in an amount to be proven at trial; andB. Order such other relief as the Court may deem appropriate.

Respectfully submitted,COALlYl~ FOR E~ltCA TIONAL SUCCESS/ .I

ated: February 2,2011 By:Paul M. Smith (DC Bar No. 358870)Matthew E. PriceJENNER & BLOCK LLPi 099 New Y ork Avenue NW Suite 900Washington, DC 20001(202) 639-6000

22


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23

Susan C. Levy

Debbie L. Berman

Matthew J. Thomas

JENNER & BLOCK LLP

353 N. Clark St.

Chicago, IL 60654(312) 222-9350

Attorneys for Coalition For Educational Success


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EXHIBIT A


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GAOUnited States Government Accountability Office

Testimony

Before the Committee on Health,Education, Labor, and Pensions, U.S.Senate

FOR-PROFIT COLLEGES

Undercover Testing FindsColleges Encouraged Fraudand Engaged in Deceptive

and Questionable MarketingPractices

Statement of Gregory D. Kutz, Managing DirectorForensic Audits and Special Investigations

For Release on DeliveryExpected at 10:00 a.m. EDTWednesday, August 4, 2010

GAO-10-948T


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What GAO Found

United States Government Accountability Office

Why GAO Did This Study

HighlightsAccountability Integrity Reliability

August 4, 2010

FOR-PROFIT COLLEGES

Undercover Testing Finds Colleges EncouragedFraud and Engaged in Deceptive and QuestionableMarketing PracticesHighlights of GAO-10-948T, a testimony

before the Committee on Health,Education, Labor, and Pensions, U.S.

Senate

!

Enrollment in for-profit collegeshas grown from about 365,000students to almost 1.8 million in thelast several years. These collegesoffer degrees and certifications inprograms ranging from businessadministration to cosmetology. In2009, students at for-profit collegesreceived more than $4 billion inPell Grants and more than $20billion in federal loans provided bythe Department of Education(Education). GAO was asked to 1)conduct undercover testing todetermine if for-profit collegesrepresentatives engaged infraudulent, deceptive, or otherwisequestionable marketing practices,and 2) compare the tuitions of thefor-profit colleges tested with thoseof other colleges in the samegeographic region.

To conduct this investigation, GAO

investigators posing as prospectivestudents applied for admissions at15 for-profit colleges in 6 states andWashington, D.C.. The collegeswere selected based on severalfactors, including those that theDepartment of Education reportedreceived 89 percent or more oftheir revenue from federal studentaid. GAO also entered informationon four fictitious prospectivestudents into education search Websites to determine what type offollow-up contact resulted from aninquiry. GAO compared tuition for

the 15 for-profit colleges testedwith tuition for the same programsat other colleges located in thesame geographic areas. Results ofthe undercover tests and tuitioncomparisons cannot be projectedto all for-profit colleges.

Undercover tests at 15 for-profit colleges found that 4 colleges encouragedfraudulent practices and that all 15 made deceptive or otherwise questionablestatements to GAOs undercover applicants. Four undercover applicants wereencouraged by college personnel to falsify their financial aid forms to qualifyfor federal aidfor example, one admissions representative told an applicantto fraudulently remove $250,000 in savings.Other college representativesexaggerated undercover applicants potential salary after graduation andfailed to provide clear information about the colleges program duration,costs, or graduation rate despite federal regulations requiring them to do so.

For example, staff commonly told GAOs applicants they would attend classesfor 12 months a year, but stated the annual cost of attendance for 9 months ofclasses, misleading applicants about the total cost of tuition. Admissions staffused other deceptive practices, such as pressuring applicants to sign acontract for enrollment before allowing them to speak to a financial advisorabout program cost and financing options. However, in some instances,undercover applicants were provided accurate and helpful information bycollege personnel, such as not to borrow more money than necessary.

Fraudulent, Deceptive, and Otherwise Questionable Practices

Degree/certificate, location Sales and Marketing Practice

Certificate Program California

Undercover applicant was encouraged by a college representative tochange federal aid forms to falsely increase the number ofdependents in the household in order to qualify for grants.

Associates Degree Florida Undercover applicant was falsely told that the college was accredited

by the same organization that accredits Harvard and the Universityof Florida.

Certificate Program Washington, D.C.

Admissions representative said that barbers can earn up to$150,000 to $250,000 a year, an exceptional figure for the industry.The Bureau of Labor Statistics reports that 90 percent of barbersmake less than $43,000 a year.

Certificate Program Florida Admission representative told an undercover applicant that studentloans were not like a car payment and that no one would comeafter the applicant if she did not pay back her loans.

Source: GAO

In addition, GAOs four fictitious prospective students received numerous,repetitive calls fromfor-profit colleges attempting to recruit the studentswhen they registered with Web sites designed to link for-profit colleges withprospective students. Once registered, GAOs prospective students beganreceiving calls within 5 minutes. One fictitious prospective student receivedmore than 180 phone calls in a month. Calls were received at all hours of theday, as late as 11 p.m. To see video clips of undercover applications and tohear voicemail messages from for-profit college recruiters, seehttp://www.gao.gov/products/GAO-10-948T.

Programs at the for-profit colleges GAO tested cost substantially more forassociates degrees and certificates than comparable degrees and certificatesat public colleges nearby. A student interested in a massage therapycertificate costing $14,000 at a for-profit college was told that the programwas a good value. However the same certificate from a local communitycollege cost $520. Costs at private nonprofit colleges were more comparablewhen similar degrees were offered.

View GAO-10-948T or key components.For more information, contact Gregory Kutz at(202) 512-6722 or [email protected].


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Page 1 GAO-10-948T

Mr. Chairman and Members of the Committee:

Thank you for the opportunity to discuss our investigation into fraudulent,deceptive, or otherwise questionable sales and marketing practices in thefor-profit college industry.1 Across the nation, about 2,000 for-profitcolleges eligible to receive federal student aid offer certifications anddegrees in subjects such as business administration, medical billing,psychology, and cosmetology. Enrollment in such colleges has grown farfaster than traditional higher-education institutions. The for-profit collegesrange from small, privately owned colleges to colleges owned andoperated by publicly traded corporations. Fourteen such corporations,

worth more than $26 billion as of July 2010,2 have a total enrollment of 1.4million students. With 443,000 students, one for-profit college is one of thelargest higher-education systems in the countryenrolling only 20,000students fewer than the State University of New York.

The Department of Educations Office of Federal Student Aid manages andadministers billions of dollars in student financial assistance programsunder Title IV of the Higher Education Act of 1965, as amended. Theseprograms include, among others, the William D. Ford Federal Direct LoanProgram (Direct Loans), the Federal Pell Grant Program, and campus-based aid programs.3 Grants do not have to be repaid by students, whileloans must be repaid whether or not a student completes a degree

program. Students may be eligible for subsidized loans or unsubsidizedloans. For unsubsidized loans, interest begins to accrue on the loan assoon as the loan is taken out by the student (i.e. while attending classes).

1For-profit colleges are institutions of post-secondary education that are privately-owned orowned by a publicly traded company and whose net earnings can benefit a shareholder orindividual. In this report, we use the term college to refer to all of those institutions of

post-secondary education that are eligible for funds under Title IV of the Higher EducationAct of 1965, as amended. This term thus includes public and private nonprofit institutions,proprietary or for-profit institutions, and post-secondary vocational institutions.

2$26 billion is the aggregate market capitalization of the 14 publicly traded corporations onJuly 14, 2010. In addition, there is a 15th company that operates for-profit colleges;

however, the parent company is involved in other industries; therefore, we are unable toseparate its market capitalization for only the for-profit college line of business, and itsvalue is not included in this calculation.

3The Federal Supplemental Educational Opportunity Grant (FSEOG), Federal Work-Study(FWS), and Federal Perkins Loan programs are called campus-based programs and areadministered directly by the financial aid office at each participating college. As of July 1,2010 new federal student loans that are not part of the campus-based programs will comedirectly from the Department of Education under the Direct Loan program.


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For subsidized loans, interest does not accrue while a student is in college.Colleges received $105 billion in Title IV funding for the 2008-2009 schoolyearof which approximately 23 percent or $24 billion went to for-profitcolleges. Because of the billions of dollars in federal grants and loansutilized by students attending for-profit colleges, you asked us to (1)conduct undercover testing to determine if for-profit collegerepresentatives engaged in fraudulent, deceptive, or otherwisequestionable marketing practices, and (2) compare the cost of attendingfor-profit colleges tested with the cost of attending nonprofit colleges inthe same geographic region.

To determine whether for-profit college representatives engaged infraudulent, deceptive, or otherwise questionable sales and marketingpractices, we investigated a nonrepresentative selection of 15 for-profitcolleges located in Arizona, California, Florida, Illinois, Pennsylvania,Texas, and Washington, D.C. We chose colleges based on several factors inorder to test for-profit colleges offering a variety of educational serviceswith varying corporate sizes and structures located across the country.Factors included whether a college received 89 percent or more of totalrevenue from federal student aid according to Department of Education(Education) data or was located in a state that was among the top 10recipients of Title IV funding. We also chose a mix of privately held orpublicly traded for-profit colleges. We reviewed Federal Trade

Commission (FTC) statutes and regulations regarding unfair and deceptivemarketing practices and Education statutes and regulations regardingwhat information postsecondary colleges are required to provide tostudents upon request and what constitutes substantial misrepresentationof services. During our undercover tests we attempted to identify whethercolleges met these regulatory requirements, but we were not able to testall regulatory requirements in all tests.

Using fictitious identities, we posed as potential students to meet with thecolleges admissions and financial aid representatives and inquire aboutcertificate programs, associates degrees, and bachelors degrees.4 Weinquired about one degree type and one majorsuch as cosmetology,massage therapy, construction management, or elementary educationat

each college. We tested each college twiceonce posing as a prospectivestudent with an income low enough to qualify for federal grants and

4A certificate program allows a student to earn a college level credential in a particular fieldwithout earning a degree.

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subsidized student loans, and once as a prospective student with higherincome and assets to qualify the student only for certain unsubsidizedloans.5 Our undercover applicants were ineligible for other types of federalpostsecondary education assistance programs such as benefits availableunder the Post-9/11 Veterans Educational Assistance Act of 2008(commonly referred to as the Post-9/11 G.I. Bill). We used fabricateddocumentation, such as tax returns, created with publicly availablehardware, software and materials, and the Free Application for FederalStudent Aid (FAFSA)the form used by virtually all 2- and 4-year colleges,universities, and career colleges for awarding federal student aidduringour in-person meetings. In addition, using additional bogus identities,

investigators posing as four prospective students filled out forms on twoWeb sites that ask questions about students academic interests, matchthem to colleges with relevant programs, and provide the studentsinformation to colleges or the colleges outsourced calling center forfollow-up about enrollment. Two students expressed interest in a culinaryarts degree, and two other students expressed interest in a businessadministration degree. We filled out information on two Web sites withthese fictitious prospective students contact information and educationalinterests in order to document the type and frequency of contact thefictitious prospective students would receive. We then monitored thephone calls and voicemails received.

To compare the cost of attending for-profit colleges with that of nonprofitcolleges, we used Education information to select public and privatenonprofit colleges located in the same geographic areas as the 15 for-profitcolleges we visited. We compared tuition rates for the same type of degreeor certificate between the for-profit and nonprofit colleges. For the 15 for-profit colleges we visited, we used information obtained from campusrepresentatives to determine tuition at these programs. For the nonprofitcolleges, we obtained information from their Web sites or, when notavailable publicly, from campus representatives. Not all nonprofit collegesoffered similar degrees, specifically when comparing associates degreesand certificate programs. We cannot project the results of our undercovertests or cost comparisons to other for-profit colleges.

5Regardless of income and assets, all eligible students attending a Title IV college areeligible to receive unsubsidized federal loans. The maximum amount of the unsubsidizedloan ranges from $2,000 to $12,000 per year, depending on the students grade level and onwhether the student is considered dependent or independent from his or her parents orguardians.

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We plan to refer cases of school officials encouraging fraud and engagingin deceptive practices to Educations Office of Inspector General, whereappropriate. Our investigative work, conducted from May 2010 throughJuly 2010, was performed in accordance with standards prescribed by theCouncil of the Inspectors General on Integrity and Efficiency.

In recent years, the scale and scope of for-profit colleges have changedconsiderably. Traditionally focused on certificate and programs rangingfrom cosmetology to medical assistance and business administration, for-profit institutions have expanded their offerings to include bachelors,

masters, and doctoral level programs. Both the certificate and degreeprograms provide students with training for careers in a variety of fields.Proponents of for-profit colleges argue that they offer certain flexibilitiesthat traditional universities cannot, such as, online courses, flexiblemeeting times, and year-round courses. Moreover, for-profit colleges oftenhave open admissions policies to accept any student who applies.

Background

Currently, according to Education about 2,000 for-profit collegesparticipate in Title IV programs and in the 20082009 school year, for-profit colleges received approximately $24 billion in Title IV funds.Students can only receive Title IV funds when they attend collegesapproved by Education to participate in the Title IV program.

Title IV Program EligibilityCriteria

The Higher Education Act of 1965, as amended, provides that a variety ofinstitutions of higher education are eligible to participate in Title IVprograms, including:

! Public institutionsInstitutions operated and funded by state or localgovernments, which include state universities and community colleges.

! Private nonprofit institutionsInstitutions owned and operated bynonprofit organizations whose net earnings do not benefit anyshareholder or individual. These institutions are eligible for tax-deductible contributions in accordance with the Internal Revenue code

(26 U.S.C. 501(c)(3)).

! For-profit institutionsInstitutions that are privately owned or ownedby a publicly traded company and whose net earnings can benefit ashareholder or individual.

Colleges must meet certain requirements to receive Title IV funds. Whilefull requirements differ depending on the type of college, most colleges are

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required to: be authorized or licensed by the state in which it is located to

provide higher education; provide at least one eligible program that

provides an associates degree or higher, or provides training to students

for employment in a recognized occupation; and be accredited by an

accrediting agency recognized by the Secretary of Education. Moreover,

for-profit colleges must enter a program participation agreement with

Education that requires the school to derive not less than 10 percent of

revenues from sources other than Title IV funds and certain other federal

programs (known as the 90/10 Rule). Student eligibility for grants and

subsidized student loans is based on student financial need. In addition, in

order for a student to be eligible for Title IV funds, the college must ensure

that the student meets the following requirements, among others: has ahigh school diploma, a General Education Development certification, or

passes an ability-to-benefit test approved by Education, or completes a

secondary school education in a home school setting recognized as such

under state law; is working toward a degree or certificate in an eligible

program; and is maintaining satisfactory academic progress once in

college.6

Defaults on Student Loans In August 2009, GAO reported that in the repayment period, students whoattended for-profit colleges were more likely to default on federal student

loans than were students from other colleges. 7 When students do not

make payments on their federal loans and the loans are in default, thefederal government and taxpayers assume nearly all the risk and are left

with the costs. For example, in the Direct Loan program, the federal

government and taxpayers pick up 100 percent of the unpaid principal on

defaulted loans. In addition, students who default are also at risk of facing

a number of personal and financial burdens. For example, defaulted loans

will appear on the students credit record, which may make it more

difficult to obtain an auto loan, mortgage, or credit card. Students will also

be ineligible for assistance under most federal loan programs and may not

receive any additional Title IV federal student aid until the loan is repaid in

full. Furthermore, Education can refer defaulted student loan debts to the

Department of Treasury to offset any federal or state income tax refunds

6GAO previously investigated certain schools use of abilityto-benefit tests. For moreinformation, see GAO,PROPRIETARY SCHOOLS: Stronger Department of EducationOversight Needed to Help Ensure Only Eligible Students Receive Federal Student Aid,

GAO-09-600 (Washington, D.C.: August 17, 2009).

7GAO-09-600.

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due to the borrower to repay the defaulted loan. In addition, Educationmay require employers who employ individuals who have defaulted on astudent loan to deduct 15 percent of the borrowers disposable pay towardrepayment of the debt. Garnishment may continue until the entire balanceof the outstanding loan is paid.

College DisclosureRequirements

In order to be an educational institution that is eligible to receive Title IVfunds, Education statutes and regulations require that each institutionmake certain information readily available upon request to enrolled andprospective students. 8 Institutions may satisfy their disclosure

requirements by posting the information on their Internet Web sites.Information to be provided includes: tuition, fees, and other estimatedcosts; the institutions refund policy; the requirements and procedures forwithdrawing from the institution; a summary of the requirements for thereturn of Title IV grant or loan assistance funds; the institutionsaccreditation information; and the institutions completion or graduationrate. If a college substantially misrepresents information to students, a fineof no more than $25,000 may be imposed for each violation ormisrepresentation and their Title IV eligibility status may be suspended orterminated.9 In addition, the FTC prohibits unfair methods ofcompetition and unfair or deceptive acts or practices that affectinterstate commerce.

820 U.S.C. 1092 and 34 C.F.R. 668.41 -.49.

920 U.S.C. 1094 (c) (3) and 34 C.F.R. 668.71 - .75. Additionally, Education has recently

proposed new regulations that would enhance its oversight of Title IV eligible institutions,including provisions related to misrepresentation and aggressive recruiting practices. See75 Fed. Reg. 34,806 (June 18, 2010).

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For-Profit CollegesEncouraged Fraudand Engaged inDeceptive andOtherwiseQuestionable Salesand Marketing

Practices

Our covert testing at 15 for-profit colleges found that four collegesencouraged fraudulent practices, such as encouraging students to submitfalse information about their financial status. In addition all 15 collegesmade some type of deceptive or otherwise questionable statement toundercover applicants, such as misrepresenting the applicants likelysalary after graduation and not providing clear information about thecolleges graduation rate. Other times our undercover applicants wereprovided accurate or helpful information by campus admissions andfinancial aid representatives. Selected video clips of our undercover testscan be seen at http://www.gao.gov/products/GAO-10-948T.

Fraudulent PracticesEncouraged by For-ProfitColleges

Four of the 15 colleges we visited encouraged our undercover applicantsto falsify their FAFSA in order to qualify for financial aid. A financial aidofficer at a privately owned college in Texas told our undercover applicantnot to report $250,000 in savings, stating that it was not the governmentsbusiness how much money the undercover applicant had in a bankaccount. However, Education requires students to report such assets,which along with income, are used to determine how much and what typeof financial aid for which a student is eligible. The admissionsrepresentative at this same school encouraged the undercover applicant to

change the FAFSA to falsely add dependents in order to qualify for grants.The admissions representative attempted to ease the undercoverapplicants concerns about committing fraud by stating that informationabout the reported dependents, such as Social Security numbers, was notrequired. An admissions representative at another college told ourundercover applicant that changing the FAFSA to indicate that hesupported three dependents instead of being a single-person householdmight drop his income enough to qualify for a Pell Grant. In all foursituations when college representatives encouraged our undercoverapplicants to commit fraud, the applicants indicated on their FAFSA, aswell as to the for-profit college staff, that they had just come into aninheritance worth approximately $250,000. This inheritance was sufficientto pay for the entire cost of the undercover applicants tuition. However, in

all four cases, campus representatives encouraged the undercoverapplicants to take out loans and assisted them in becoming eligible eitherfor grants or subsidized loans. It was unclear what incentive these collegeshad to encourage our undercover applicants to fraudulently fill outfinancial aid forms given the applicants ability to pay for college. Thefollowing table provides more details on the four colleges involved inencouraging fraudulent activity.

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Table 1: Fraudulent Actions Encouraged by For-Profit Colleges

Location

CertificationSought andCourse of Study

Type ofCollege Fraudulent Behavior Encouraged

CA Certificate -Computer AidedDrafting

Less than 2-year, privatelyowned

! Undercover applicant was encouraged by a financial aid representative tochange the FAFSA to falsely increase the number of dependents in thehousehold in order to qualify for Pell Grants.

! The representative told the undercover applicant that by the time the collegewould be required by Education to verify any information about the applicant, theapplicant would have already graduated from the 7-month program.

! This undercover applicant indicated to the financial aid representative that hehad $250,000 in the bank, and was therefore capable of paying the programs$15,000 cost. The fraud would have made the applicant eligible for grants andsubsidized loans.

FL Associates Degree- RadiologicTechnology

2-year,privatelyowned

! Financial aid representative suggested to the undercover applicant that he notreport $250,000 in savings reported on the FAFSA. The representative told theapplicant to come back once the fraudulent financial information changes hadbeen processed.

! This change would not have made the applicant eligible for grants because hisincome would have been too high, but it would have made him eligible for loanssubsidized by the government. However, this undercover applicant indicated thathe had $250,000 in savingsmore than enough to pay for the programs$39,000 costs.

PA Certificate - WebPage Design

Less than 2-year, privatelyowned

! Financial aid representative told the undercover applicant that he should haveanswered zero when asked about money he had in savingsthe applicant hadreported a $250,000 inheritance.

! The financial aid representative told the undercover applicant that she wouldcorrect his FAFSA form by reducing the reported assets to zero. She laterconfirmed by email and voicemail that she had made the change.

! This change would not have made the applicant eligible for grants, but it wouldhave made him eligible for loans subsidized by the government. However, thisapplicant indicated that he had about $250,000 in savingsmore than enough topay for the programs $21,000 costs.

TX Bachelors Degree- ConstructionManagement

4-year,privatelyowned

! Admissions representative encouraged applicant to change the FAFSA to falselyadd dependents in order to qualify for Pell Grants.

! Admissions representative assured the undercover applicant that he did not haveto identify anything about the dependents, such as their Social Security numbers,nor did he have to prove to the college with a tax return that he had previouslyclaimed them as dependents.

! Financial aid representative told the undercover applicant that he should notreport the $250,000 in cash he had in savings.

! This applicant indicated to the financial aid representative that he had $250,000in the bank, and was therefore capable of paying the programs $68,000 cost.The fraud would have made the undercover applicant eligible for more than$2,000 in grants per year.

Source: GAO.

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Deceptive or QuestionableStatements

Admissions or financial aid representatives at all 15 for-profit colleges

provided our undercover applicants with deceptive or otherwise

questionable statements. These deceptive and questionable statements

included information about the colleges accreditation, graduation rates

and its students prospective employment and salary qualifications,

duration and cost of the program, or financial aid. Representatives at

schools also employed hard-sell sales and marketing techniques to

encourage students to enroll.

Admissions representatives at four colleges either misidentified or failed

to identify their colleges accrediting organizations. While all the for-profit

colleges we visited were accredited according to information availablefrom Education, federal regulations state that institutions may not provide

students with false, erroneous, or misleading statements concerning the

particular type, specific source, or the nature and extent of its

accreditation. Examples include:

Accreditation Information

! A representative at a college in Florida owned by a publicly tradedcompany told an undercover applicant that the college was accreditedby the same organization that accredits Harvard and the University ofFlorida when in fact it was not. The representative told the undercoverapplicant: Its the top accrediting agencyHarvard, University ofFloridathey all use that accrediting agency.All schools are thesame; you never read the papers from the schools.

! A representative of a small beauty college in Washington, D.C. told anundercover applicant that the college was accredited by an agencyaffiliated with the government, but did not specifically name theaccrediting body. Federal and state government agencies do notaccredit educational institutions.

! A representative of a college in California owned by a privatecorporation told an undercover applicant that this college was the onlyone to receive its accrediting organizations School of Excellenceaward. The accrediting organizations Web site listed 35 colleges ashaving received that award.

Representatives from 13 colleges gave our applicants deceptive or

otherwise questionable information about graduation rates, guaranteed

applicants jobs upon graduation, or exaggerated likely earnings. Federal

statutes and regulations require that colleges disclose the graduation rate

to applicants upon request, although this requirement can be satisfied by

posting the information on their Web site. Representatives at 13 colleges

Graduation Rate, Employmentand Expected Salaries

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did not provide applicants with accurate or complete information aboutgraduation rates. Of these thirteen, four provided graduation rateinformation in some form on their Web site, although it required aconsiderable amount of searching to locate the information. Nine schoolsdid not provide graduation rates either during our in person visit or ontheir Web sites. For example, when asked for the graduation rate, arepresentative at a college in Arizona owned by a publicly traded companysaid that last year 90 students graduated, but did not disclose the actualgraduation rate. When our undercover applicant asked about graduationrates at a college in Pennsylvania owned by a publicly traded company, hewas told that if all work was completed, then the applicant should

successfully complete the programagain the representative failed todisclose the colleges graduation rate when asked. However, becausegraduation rate information was available at both these colleges Websites, the colleges were in compliance with Education regulations.

In addition, according to federal regulations, a college may notmisrepresent the employability of its graduates, including the collegesability to secure its graduates employment. However, representatives attwo colleges told our undercover applicants that they were guaranteed orvirtually guaranteed employment upon completion of the program. At fivecolleges, our undercover applicants were given potentially deceptiveinformation about prospective salaries. Examples of deceptive or

otherwise questionable information told to our undercover applicantsincluded:

! A college owned by a publicly traded company told our applicant that,after completing an associates degree in criminal justice, he could tryto go work for the Federal Bureau of Investigation or the CentralIntelligence Agency. While other careers within those agencies may bepossible, positions as a FBI Special Agent or CIA Clandestine Officer,require a bachelors degree at a minimum.

! A small beauty college told our applicant that barbers can earn$150,000 to $250,000 a year. While this may be true in exceptionalcircumstances, the Bureau of Labor Statistics (BLS) reports that 90

percent of barbers make less than $43,000 a year.

! A college owned by a publicly traded company told our applicant thatinstead of obtaining a criminal justice associates degree, she shouldconsider a medical assisting certificate and that after only 9 months ofcollege, she could earn up to $68,000 a year. A salary this high would be

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extremely unusual; 90 percent of all people working in this field makeless than $40,000 a year, according to the BLS.

Representatives from nine colleges gave our undercover applicantsdeceptive or otherwise questionable information about the duration orcost of their colleges programs. According to federal regulations, a collegemay not substantially misrepresent the total cost of an academic program.Representatives at these colleges used two different methods to calculateprogram duration and cost of attendance. Colleges described the durationof the program as if students would attend classes for 12 months per year,but reported the annual cost of attendance for only 9 months of classes

per year. This disguises the programs total cost. Examples include:

Program Duration and Cost

! A representative at one college said it would take 3.54 years to obtaina bachelors degree by taking classes year round, but quoted theapplicant an annual cost for attending classes for 9 months of the year.She did not explain that attending classes for only 9 months out of theyear would require an additional year to complete the program. If theapplicant did complete the degree in 4 years, the annual cost would behigher than quoted to reflect the extra class time required per year.

! At another college, the representative quoted our undercover applicantan annual cost of around $12,000 per year and said it would take 2years to graduate without breaks, but when asked about the total cost,

the representative told our undercover applicant it would cost $30,000to complete the programequivalent to more than two and a half yearsof the previously quoted amount. If the undercover applicant had notinquired about the total cost of the program, she would have been ledto believe that the total cost to obtain the associates degree wouldhave been $24,000.

Eleven colleges denied undercover applicants access to their financial aideligibility or provided questionable financial advice. According to federalstatutes and regulations, colleges must make information on financialassistance programs available to all current and prospective students.

Financial Aid

! Six colleges in four states told our undercover applicants that theycould not speak with financial aid representatives or find out whatgrants and loans they were eligible to receive until they completed thecolleges enrollment forms agreeing to become a student and paid asmall application fee to enroll.

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! A representative at one college in Florida owned by a publicly tradedcompany advised our undercover applicant not to concern himself withloan repayment because his future salaryhe was assuredwould besufficient to repay loans.

! A representative at one college in Florida owned by a private companytold our undercover applicant that student loans were not like carloans because no one will come after you if you dont pay. In reality,students who cannot pay their loans face fees, may damage their credit,have difficulty taking out future loans, and in most cases, bankruptcylaw prohibits a student borrower from discharging a student loan.

! A representative at a college owned by a publicly traded corporationtold our undercover applicant that she should take out the maximumamount of federal loans she could, even if she did not need all themoney. She told the applicant she should put the extra money in a high-interest savings account. While subsidized loans do not accrue interestwhile a student is in college, unsubsidized loans do accrue interest. Therepresentative did not disclose this distinction to the applicant whenexplaining that she should put the money in a savings account.

Six colleges engaged in other questionable sales and marketing tactics

such as employing hard-sell sales and marketing techniques and requiring

enrolled students to pay monthly installments to the college during their

education.

Other Sales and MarketingTactics

! At one Florida college owned by a publicly traded company, arepresentative told our undercover applicant she needed to answer 18questions correctly on a 50 question test to be accepted to the college.The test proctor sat with her in the room and coached her during thetest.

! At two other colleges, our undercover applicants were allowed 20minutes to complete a 12-minute test or took the test twice to get ahigher score.

! At the same Florida college, multiple representatives used highpressure marketing techniques, becoming argumentative, and scoldingour undercover applicants for refusing to enroll before speaking withfinancial aid.

! A representative at this Florida college encouraged our undercoverapplicant to sign an enrollment agreement while assuring her that thecontract was not legally binding.

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! A representative at another college in Florida owned by a publiclytraded company said that he personally had taken out over $85,000 inloans to pay for his degree, but he told our undercover applicant thathe probably would not pay it back because he had a tomorrows neverpromised philosophy.

! Three colleges required undercover applicants to make $20$150monthly payments once enrolled, despite the fact that students aretypically not required to repay loans until after the student finishes ordrops out of the program. These colleges gave different reasons forwhy students were required to make these payments and were

sometimes unclear exactly what these payments were for. At onecollege, the applicant would have been eligible for enough grants andloans to cover the annual cost of tuition, but was told that she neededto make progress payments toward the cost of the degree separatefrom the money she would receive from loans and grants. Arepresentative from this college told the undercover applicant that thefederal governments 90/10 Rule required the applicant to make thesepayments. However, the 90/10 Rule does not place any requirementson students, only on the college.

! At two colleges, our undercover applicants were told that if theyrecruited other students, they could earn rewards, such as an MP3player or a gift card to a local store. 10

Accurate and HelpfulInformation Provided

In some instances our undercover applicants were provided accurate orhelpful information by campus admissions and financial aidrepresentatives. In line with federal regulations, undercover applicants atseveral colleges were provided accurate information about thetransferability of credits to other postsecondary institutions, for example:

10Depending on the value of the gift, such a transaction may be allowed under current law.

Federal statute requires that a colleges program participation agreement with Educationinclude a provision that the college will not provide any commission, bonus, or other

incentive payment based directly or indirectly on success in securing enrollments orfinancial aid to any persons or entities engaged in any student recruiting or admissionactivities. However, Educations regulations have identified 12 types of payment andcompensation plans that do not violate this statutory prohibition, referred to as safeharbors. Under one of these exceptions, schools are allowed to provide token gifts

valued under $100 to a student provided the gift is not in the form of money and no morethan one gift is provided annually to an individual. However, on June 18, 2010 theDepartment of Education issued a notice of proposed rulemaking that would, among otherthings, eliminate these 12 safe harbors and restore the full prohibition.

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! A representative at a college owned by a publicly traded company inPennsylvania told our applicant that with regard to the transfer ofcredits, different schools treat it differently; you have to roll the diceand hope it transfers.

! A representative at a privately owned for-profit college in Washington,D.C. told our undercover applicant that the transfer of credits dependson the college the applicant wanted to transfer to.

Some financial aid counselors cautioned undercover applicants not to takeout more loans than necessary or provided accurate information aboutwhat the applicant was required to report on his FAFSA, for example:

! One financial aid counselor at a privately owned college in WashingtonD.C. told an applicant that because the money had to be paid back, theapplicant should be cautious about taking out more debt thannecessary.

! A financial aid counselor at a college in Arizona owned by a publiclytraded company had the undercover applicant call the FAFSA help lineto have him ask whether he was required to report his $250,000inheritance. When the FAFSA help line representative told theundercover applicant that it had to be reported, the college financialaid representative did not encourage the applicant not to report themoney.

In addition, some admissions or career placement staff gave undercoverapplicants reasonable information about prospective salaries and potentialfor employment, for example:

! Several undercover applicants were provided salary informationobtained from the BLS or were encouraged to research salaries in theirprospective fields using the BLS Web site.

! A career services representative at a privately owned for-profit collegein Pennsylvania told an applicant that as an entry level graphicdesigner, he could expect to earn $10$15 per hour. According to theBLS only 25 percent of graphic designers earn less than $15 per hour in

Pennsylvania.

Web Site Inquiries Resultin Hundreds of Calls

Some Web sites that claim to match students with colleges are in realitylead generators used by many for-profit colleges to market to prospectivestudents. Though such Web sites may be useful for students searching forschools in some cases, our undercover tests involving four fictitious

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prospective students led to a flood of callsabout five a day. Four of our

prospective students filled out forms on two Web sites, which ask

questions about students interests, match them to for-profit colleges with

relevant programs, and provide the students information to the

appropriate college or the colleges outsourced calling center for follow-up

about enrollment. Two fictitious prospective students expressed interest

in a culinary arts certificate, one on Web site A and one on Web site B.

Two other prospective students expressed interest in a bachelors in

business administration degree, one on each Web site.

Within minutes of filling out forms, three prospective students received

numerous phone calls from colleges. One fictitious prospective studentreceived a phone call about enrollment within 5 minutes of registering and

another 5 phone calls within the hour. Another prospective student

received 2 phone calls separated only by seconds within the first 5 minutes

of registering and another 3 phone calls within the hour. Within a month of

using the Web sites, one student interested in business management

received 182 phone calls and another student also interested in business

management received 179 phone calls. The two students interested in

culinary arts programs received fewer callsone student received only a

handful, while the other received 72. In total, the four students received

436 phone calls in the first 30 days after using the Web

Coalition Sues GAO

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