Recent Developments Related to Litigation Involving the Education Sector (April 2015)

April 23, 2015

This is the latest update of significant developments relating to qui tam, securities, and other lawsuits and investigations involving schools, especially private-sector schools.  This quarter was an eventful one with the establishment of helpful precedent in the Eleventh Circuit as well as several key district court decisions on the merits and on discovery obligations.  But, as detailed below, the waters remain choppy, especially on the government enforcement side.  

A.   Two Wins for Kaplan (and the Sector)

This past quarter was a successful one for Kaplan, Inc. on the litigation front.  First, the school scored precedent-setting victories on March 11, 2015 in two consolidated False Claims Act ("FCA") cases pending in the Eleventh Circuit.  In U.S. ex rel. Gillespie v. Kaplan University,* a former associate professor of paralegal studies alleged that Kaplan had falsely certified that it was in compliance with the Rehabilitation Act and its implementing regulations to be eligible to receive federal student aid funds.  The district court granted summary judgment because there was no evidence that Kaplan had acted with wrongful scienter–i.e., "buried [its] head in the sand and failed to make basic inquiries" or acted in "an extreme version of ordinary negligence."  U.S. ex rel. Gillespie v. Kaplan Univ., No. 09-20756-CIV, 2013 WL 3762445, at 6-8 (S.D. Fla. July 16, 2013) (internal quotations omitted).  In a published opinion, the Eleventh Circuit affirmed that ruling in full, dismissing the former professor’s unwarranted and "hypercritical assessments" of Kaplan’s executives and rejecting a number of other arguments, emphasizing repeatedly that "[c]ontext matters."  Urquilla-Diaz v. Kaplan Univ., — F.3d —-, 2015 WL 1037084, at *14, *18 (11th Cir. 2015).  In doing so, the Eleventh Circuit adopted a high threshold for the scienter requirement in FCA actions, and perhaps even more importantly, held that in a false certification case, the plaintiff must demonstrate that the defendant had the requisite knowledge at the time (not after) it made the alleged false certification.  Id. at *14-16.

In the same opinion, the Eleventh Circuit also affirmed dismissal on the pleadings in three of the four claims brought by another former professor of paralegal studies in U.S. ex rel. Diaz v. Kaplan University.*  Id. at *12-13.  The plaintiff in Diaz alleged that Kaplan had falsely certified compliance with the Department of Education’s (1) accreditation requirement, (2) 90/10 rule, (3) satisfactory progress requirement, and (4) incentive compensation ban.  The Eleventh Circuit agreed that the first three claims were properly dismissed by the district court holding that nefarious-sounding accusations without an actual pled violation of a regulation are not enough to satisfy the falsity element of an FCA claim.  Id.

Unfortunately, the Eleventh Circuit did determine that Diaz had adequately pled his incentive-compensation claim by alleging that salary factors unrelated to the number of enrollments (e.g., professionalism, attendance, etc.) were "merely pretextual."  This follows what seems to be a recent trend of courts becoming wary of dismissing incentive compensation cases at the pleading stage, no matter how skimpy the facts.  And the Eleventh Circuit did significantly cabin the relevant time period at issue in these claims from an eleven year span (1999 through 2009) to just six years (2004 through 2009).  We will keep you posted on how this one remaining claim progresses back in the district court.

In the last quarter, Kaplan also prevailed on summary judgment in another long-running FCA case, U.S. ex rel. Jajdelski v. Kaplan, Inc., No. 2:05–CV–01054–KJD–GWF, 2015 WL 1034055 (D. Nev. Mar 9, 2015).*  The qui tam plaintiff’s claims in that case were premised on allegations that Heritage College, a school in Las Vegas, knowingly received federal financial aid on behalf of "phantom students" who either never attended the school or who had previously withdrawn.  Although the plaintiff’s allegations at the pleading stage survived a motion to dismiss following appeal, the court held that summary judgment was now appropriate because the plaintiff "failed to identify even one false claim" related to "phantom students."  Id. at *3.  This case, like the Gillespie case, shows that even though FCA cases may be surviving motions to dismiss with more frequency, they are still vulnerable to dismissal at summary judgment.

B.   Beauty School FCA Case–No Amount of Lipstick Can Mask the Truth 

On March 25, 2015, Magistrate Judge John H. England, III of the United States District Court for the Northern District of Alabama recommended dismissal of an FCA lawsuit pending against an independently operated and owned Aveda beauty school in Birmingham, Alabama, and Aveda Inc. (along with its parent company and an affiliated company) that licenses the curriculum and products.  U.S. ex rel. Rutledge v. Aveda, No. 2:14-cv-00145-JHE, ECF No. 44 (N.D. Ala. Mar. 25, 2015).*  The beauty school instructor-turned-plaintiff’s basic allegation was that the school she teaches at in Birmingham, the Aveda Institute Birmingham, was focused on product sales, not education, and thus was misleading students.  Id. at 3-4.

Recognizing the bare-bones complaint relied more on innuendo than any false promise of compliance by the school, the magistrate judge held that the plaintiff failed to adequately plead every element of an FCA claim:  (1) falsity, (2) materiality, (3) scienter, and (4) presentment.  The court’s analysis of materiality is particularly noteworthy, as Magistrate Judge England recognized that the plaintiff needed to allege "how and why noncompliance with the regulations . . . would prevent payment by the government."  Id. at 16.  Without those allegations, there was no basis for concluding that "any misrepresentations" made by the school or any alleged "violations were material to the government’s payment of claims and would have made the Aveda Institute Birmingham ineligible for participation in the program."  Id. at 17.   This decision aligns with the growing trend of courts recognizing that materiality cannot be presumed just because the regulation is one of many provisions incorporated into the program participation agreement.  See, e.g., U.S. ex rel. Miller v. Weston Educ. Inc., No. 4:11-CV-00112, 2014 WL 1292407, at *5-7 (W.D. Mo. Mar. 31, 2014) ("[N]ot every [false] record . . . is material to the repayment of Title IV Funds."). 

The victory in the Rutledge case came on the heels of another win for the company that owns and operates the Aveda Institute Birmingham.  On February 11, 2015, the United States District Court for the Northern District of Alabama dismissed a related FCA matter pending against the school.  U.S. ex rel. Barrett v. Beauty Basics, Inc., No. 13-cv-1989-SLB, ECF No. 16 (N.D. Ala. Feb. 11, 2015).  The crux of the Barrett case was based on allegations that the students at the beauty school were "not provided grades or ‘properly licensed instructors,’ both of which, the plaintiffs claimed, are required by" the school’s accreditor.  Id. at 3.  But the plaintiffs alleged no specifics (not even the date) of the alleged false statements, and thus the district court held the plaintiffs had not presented "the detail-rich complaint required by Rule 9(b) as interpreted by the Eleventh Circuit."  Id. at 6, 8-9.

C.   Two New Lawsuits Arise, Another Is Threatened with Dismissal, and a Remanded Case Is Denied Relief from Judgment

This quarter saw two new lawsuits filed in federal court, another lawsuit on the verge of dismissal, and another remanded and dismissed.

Two New Lawsuits 

On March 30, 2015, the Colorado Attorney General asserted new claims against College America, in a suit it had filed under seal in December 2014.  College America has three campuses in Colorado, including Fort Collins, Denver, and Colorado Springs.  The complaint as originally filed accused the for-profit school of using false and misleading advertising promising students lucrative careers.  The additional claims now also assert that College America employees were instructed to hide information from accreditation teams, fabricate student files, and report erroneous graduate employment data.  The Attorney General is seeking a temporary restraining order to stop these allegedly deceptive tactics.  College America vigorously contests these claims, stating that it extended several offers–all of which College America claims were rejected–to meet with the Attorney General’s Office to review and modify any practices the Attorney General found objectionable during its two-year investigation.  A hearing is scheduled for April.   

On March 3, 2015, John L. Hopkins, the former president of Concorde Career Colleges, Inc., accused the for-profit school of wrongfully terminating his employment when he allegedly tried to report FCA violations.  Hopkins alleged Concorde was using illegal recruitment policies and steering potential nursing students into less popular careers in violation of the FCA.  He further claimed that when he took his concerns to outside counsel and informed the regional directors of admission that the admissions process needed to be revised, he was soon fired.  His termination letter stated that Hopkins had failed to devote his "full business time, energy, skill and efforts" to running Concorde, a requirement set out in his employment agreement.  The suit brings claims for breach of contract and breach of implied covenant of good faith and fair dealing, as well as retaliation in violation of the FCA, Delaware Whistleblower’s Protection Act and Oregon’s Whistleblower Protection Statute.             

Judge Warns Plaintiffs of the Futility of Their Case Against the University of Phoenix

A federal district judge sitting in the United States District Court for the Central District of California stated on March 23, 2015 that he was inclined to dismiss a false advertising suit brought by a putative class of students against the University of Phoenix.  The putative class alleged that the for-profit college deceived them into paying for a substandard education as credits earned in University of Phoenix classes were not transferable to other schools and were not useful when seeking jobs.  The court, however, expressed doubts about whether the plaintiffs had adequately pled their claims.  The court also expressed skepticism on the plaintiffs’ chances for class certification because even if the plaintiffs could eventually plead the elements of a false advertising claim, there was a lack of commonality across the class.  "It seems to me you are barking up the wrong tree," the judge informed the plaintiffs.    

District Court Denies "Do-Over" Attempt in Corinthian Colleges Case

On March 4, 2015, the United States District Court for the Central District of California denied the plaintiffs’ motion for relief from judgment pursuant to the Federal Rule of Civil Procedure 60(b)(6) and leave to file amended complaint.  Karam v. Corinthian Colleges, Inc., No. 10-06523-GHK, ECF No. 145 (N.D. Cal. March 4, 2015).  In August 2010, the plaintiffs filed a putative class action on behalf of shareholders who acquired Corinthian Colleges, Inc.’s publicly traded securities between October 30, 2007 and August 19, 2010.  Id. at 1.  The plaintiffs alleged that Corinthian concealed from its shareholders that its growth and enrollments depended on recruiting students who lacked foundational math and writing skills, on passing students who were failing their courses, and on using deceptive sales practices in recruitment.  Id.  The district court dismissed the complaint in August 2012 for failure to plead particularized facts, and the plaintiffs appealed to the Ninth Circuit.  Id.  While their appeal was pending, the Department of Education announced on July 3, 2014 that it had reached an agreement on an operating plan with Corinthian Colleges to sell or close a large number of its campuses. 

Attempting to use recent developments as factual support of their claims, the plaintiffs sought to have the district court reexamine its earlier ruling.  Id.  Specifically, the plaintiffs argued that the recent Department of Education settlement with Corinthian and several government investigations and lawsuits against Corinthian suggest that misconduct was widespread throughout Corinthian during the class period.  Id.  The court was unpersuaded.  First, the court noted that the plaintiffs’ motion was time-barred.  Id.  And even if it was not, the court held that the plaintiffs had not shown good grounds for reconsidering the court’s earlier decision.  Id.  Rule 60(b), the court observed, "is not a do-over when more facts emerge."  Id. at 4. 

The plaintiffs filed their notice of appeal to the Ninth Circuit regarding the district court’s ruling on their Rule 60(b)(6) motion on March 12, 2015.

D.   Important Discovery Rulings in an FCA Case Involving Bridgepoint Education

This past quarter, Magistrate Judge William V. Gallo of the United States District Court for the Southern District of California issued a number of thorough discovery rulings in a pending FCA matter involving Bridgepoint Education, which centers on alleged violations of the incentive compensation provision.  U.S. ex rel. Carter v. Bridgepoint Educ., Inc., No. 10-CV-01401-LS WVG, (S.D. Cal).*  First, on March 18, 2015, Magistrate Judge Gallo granted Bridgepoint Education’s motions to strike the "errata" changes to one of the plaintiff’s sworn deposition testimony and to compel production of the plaintiffs’ pre-filing disclosure statement with the government.  Order at 1, No. 10-CV-01401-LS WVG, ECF No. 92 (S.D. Cal. Mar. 18, 2015).  As for the plaintiff’s errata, the court found the plaintiff could not engage in "’purposeful rewrites tailored to manufacture an issue of material fact.’" Id. at 25-26 (citation omitted).  For example, the plaintiff could not change his answer that "[i]t was only after seeking consultation with [his attorney] that [he] came to the feeling that the matrix violated the safe harbor law" to add "but it was not due to my conversation with my [attorney] that I came to that conclusion."  Id. at 26.  This addition was "essentially contradictory."  Id. 

As to the motion to compel, the court held that the pre-filing disclosure statement was critical to defendants’ argument that plaintiffs’ case was potentially barred for the plaintiffs’ failure to comply with the FCA’s rules regarding pre-filing disclosures.  Accordingly, the court ordered the plaintiffs to produce a redacted version of their disclosure statement, warning "that redactions of more than pure legal opinions, impressions, and conclusions will be met with swift and severe sanctions."  Id. at 31.   

Second, on February 17, 2015, Magistrate Judge Gallo issued a soon-to-be published decision denying the plaintiffs’ requests for production of emails from back-up databases, active emails in native format, and metadata.  — F.Supp.3d —-, 2015 WL 818032, at *21 (S.D. Cal. Feb. 20, 2015).  The court held that the plaintiffs were not entitled to production of materials from backup databases because backup data, although generally discoverable, was deemed "inaccessible" in the context of this case and thus the burden of production should not necessarily be on the party in possession of the electronic data.  Id. at *14.  Noting that the plaintiffs relied on nothing more than "implications and innuendo" and "unproven and unknowable assertions" in connection with a claim that defendants had intentionally caused the materials to become inaccessible, the court held that if plaintiffs wanted the backup data, they would need to "pay the price of its production."  Id. at *16.  Similarly, the court denied plaintiffs’ requests for production of email in native format and of metadata (i.e., the data about the data) of documents stored in accessible locations (i.e., not on backup tapes), because the plaintiffs had not specifically asked for native format or the metadata in their discovery requests or explained why either native format or the metadata was specifically necessary for their case.  See id. at *17-20. 

E.   Settlement on Appeal in the Keiser University FCA Case

In the past few quarters, we have reported on developments in U.S. ex rel. Christianson v. Everglades College, Inc., No. 12-60185-CIV, ECF No. 435 (S.D. Fla. Apr. 4, 2015), the first FCA case to have gone to trial relating to alleged recruiter compensation violations.  This past quarter appears to signal the end of the long-running case as Everglades College (also known as Keiser University) and the United States have settled.  On March 4, 2015, the United States filed a motion to intervene and seek a ruling from the district court indicating it would approve a settlement in which the school will pay the United States $335,000 to resolve the FCA liability claims.  Id. at 1, 4-5.  Over the plaintiffs’ strenuous objections, the district court ruled on April 1, 2015 that it "would likely find that the settlement agreement is fair, adequate, and reasonable" if the Eleventh Circuit returns the case to its docket.  Id. at 4, 6.

Barring something unusual, the district court’s ruling will likely end the substantive portions of the case.  But the settlement explicitly does not resolve the dispute on attorneys’ fees for the plaintiffs.  The plaintiffs will likely continue to press their appeal of the district court’s decision to deny their request for more than a million dollars in fees and only award $60,000. 

F.   Department of Education Levies Nearly $30 Million Fine on Heald College

On April 14, 2015, the Department of Education informed Heald College and its corporate parent, Corinthian Colleges, Inc., that the department intends to fine Heald College $29,665,000 based on claims that the school misrepresented its placement rates.  In a letter released to the public, the Department accuses the school of, among other things, failing to adhere to its own methodologies for calculating employment rates, omitting from their statistics students who had deferred employment, having inadequate documentation to substantiate the statistics, and counting students as employed in a field when they had held the position before entering a Heald program.   

Following the Department’s public announcement, Corinthian stated it planned to appeal "as soon as possible" and noted that the fine may impair the anticipated sale of the Heald schools.

G.   Consumer Financial Protection Bureau Continues to Attempt to Extend Authority over Private-Sector Schools

As we reported in the last few updates, the Consumer Financial Protection Bureau ("CFPB") has taken great interest in private-sector schools, opening investigations into and filing lawsuits against major players in the sector.  This past quarter saw two newsworthy developments on that front. 

First, on February 2, 2015, the purchaser of the majority of Corinthian Colleges campuses, the ECMC Group, entered into a settlement with the CFPB and the Department of Education in connection with that purchase to resolve allegations regarding alleged predatory student lending by Corinthian.  In addition to agreeing to forgive about $480 million worth of private student loans issued by Corinthian, the company promised to refrain from offering private student loans for seven years, to remove negative information from Corinthian borrowers’ credit reports, to not continue Corinthian’s allegedly aggressive debt collection tactics, and to stop including a mandatory arbitration clause in its student enrollment agreements.  This final condition is particularly interesting as it appears to directly conflict with federal law’s clear preference for arbitration, as evidenced by recent Supreme Court decisions and the Federal Arbitration Act.

Second, on March 9, 2015, the United States District Court for the Southern District of Indiana issued a 67-page order on a motion to dismiss in Consumer Financial Protection Bureau v. ITT Educational Services, Inc., No. 1:14-cv-00292 (S.D. Ind. March 9, 2015), ECF No. 49.*  As we reported previously, CFPB filed this lawsuit against ITT Educational Services, Inc. under the Consumer Financial Protection Act of 2010 in February 2014, accusing ITT of driving students into high-cost private student loans they could not afford.  Last April, ITT moved to dismiss all four of the CFPB’s claims.  The court sustained three of the CFPB’s claims but granted ITT’s motion in part, dismissing the claim with the highest potential damages exposure.

ITT argued that CFPB lacks standing to bring the suit altogether because it is an unconstitutional entity for two chief reasons:  (1) it restricts the executive’s removal power insofar as the CFPB director can only be removed for cause, and (2) "no federal entity has heretofore combined the Bureau’s panoply of problematic features," e.g., length of the Director’s tenure, for-cause removal of the Director, immunity from the congressional appropriations process, unprecedented restrictions on judicial review, amongst others.  Id. at 16-19 (internal quotations omitted).  In addition, ITT argued that CFPA’s prohibitions of "unfair" and "abusive" acts violate the due process clause.  Id. at 26.  The court disagreed with these constitutional arguments.  CFPB "undoubtedly wields paradigmatic ‘executive powers’–notably the authority to bring suit on behalf of the United States," the court ruled, but there is "no basis for concluding that the [CFPB’s] Director’s powers are so great that the inability to remove him or her at whim fatally undermines the President’s constitutional prerogatives."  Id. at 17.  Moreover, the court held, nothing about the structure of the CFPA or its authority is unconstitutional, even if unprecedented.  Id. at 19.  The court further held that CFPA’s language was not subject to a heightened scrutiny for vagueness since it is "a statute imposing only civil liability and governing economic activity rather than protected constitutional interest like free expression."  Id. at 31.  The court further observed that although the meaning of "unfair" is well-settled in case law, id. at 33, the term "’abusive’ is a novel term in the context of the statute," id. at 36. 

The latter ruling is one of the first to analyze the meaning of the term "abusive" under the CFPA.  The court noted that the legislative history suggested the term "abusive" included conduct separate from "unfair" or "deceptive" conduct, that the standard measuring what constituted "abusive" conduct could be gleaned from the statute itself, and pointed to other consumer protection statutes that utilized the term, e.g., Fair Debt Collections Practices Act and the Federal Telemarketing Sales Rule, as analogous.  Id. at 35-37.  The court then held that the statutory language "provides at least the minimal level of clarity that the due process clause demands of non-criminal economic regulation."  Id. at 37.  How broadly "abusive" applies to conduct and practices remains to be seen as more courts interpret and rule on the term, but in light of this decision, for-profit schools can seek guidance on what constitutes "abusive" conduct from the CFPA itself as well as other closely related consumer protection statutes and regulations.

The court also rejected ITT’s argument that the Bureau failed to allege adequately that ITT is a covered entity subject to the CFPA.  The court concluded that the agency had sufficiently alleged that ITT engaged in "financial advisory services" by claiming ITT not only advised students on how to manage their debt to the school after having taken out a short-term loan–advice which allegedly led students to sign up for private loan programs–but also filled out the necessary forms (except the signature) to take out private loans on behalf of students and forwarded the forms to the lending credit union.  Id. at 42-46.  The court held, moreover, that the CFPA is not restricted to financial institutions and that the Bureau adequately alleged that ITT is a "service provider" under the CFPA insofar as the company operated and maintained the loan program.  Id. at 45, 47.  Based on this reasoning, the court sustained the three claims the CFPB pleaded under the CFPA.

On the other hand, the court dismissed the CFPB’s fourth claim, which asserted that ITT failed to disclose certain finance charges in violation of the Truth in Lending Act ("TILA").  The court reasoned that the claim was time-barred under TILA’s one-year statute of limitations. 

ITT is appealing the partial denial of its motion to dismiss to the Seventh Circuit Court of Appeals. 

We expect the CFPB’s scrutiny of the sector to only continue.          

H.   Conflicting Opinions on the Admissibility of the Harkin Report

One of the recent trends in litigation against for-profit schools has been the plaintiff’s bar’s reliance on the reports of the Majority Staff of the Senate Health, Education, Labor and Pensions ("HELP") Committee, chaired by Senator Tom Harkin, and often colloquially known as the "Harkin Report."  Maj. Staff of S. Comm. on Health, Educ., Labor & Pensions, Is the New G.I. Bill Working?: For-Profit Colleges Increasing Veteran Enrollment and Federal Funds (Comm. Print 2014); Maj. Staff of S. Comm. on Health, Educ., Labor & Pensions, For Profit Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Success (Comm. Print 2012); Maj. Staff of S. Comm. on Health, Educ., Labor & Pensions, Education, Labor and Pensions, Benefitting Whom? For-Profit Education Companies and the Growth of Military Educational Benefits (Comm. Print 2010).  How courts have responded to the potential admissibility and reliability of the so-called Harkin Report have varied. 

The plaintiffs in the Bridgepoint case discussed above attempted to rely upon the Harkin Report to argue it created some sort of litigation hold obligations.  Recognizing that this report is "not even the formal congressional report accompanying an enacted bill, one of the rare pieces of legislative history occasionally worthy of some judicial solicitude," Magistrate Judge Gallo questioned the plaintiffs’ heavy reliance on the 2014 report in their motion to compel discovery.  Carter, 2015 WL 818032, at *2 n.7.*  The court explained that "[h]owever accurate [the 2014 report] may be, a congressional report is not a finding of fact or proof of a wrong committed as a matter of law, regardless of what it may be as ‘a matter of public record.’"  Id.

In contrast, a Master in Chancery in the Delaware Court of Chancery recently held that the 2012 Harkin Report was "sufficiently reliable" to support a shareholder’s demand for books and records from ITT Educational Services, Inc.  Master’s Report at 34, Walther v. ITT Educational Services, Inc., C.A. No. 8273-MA (Del. Ch. Mar. 25, 2015).*  Recognizing the report was hearsay and partisan, the court nonetheless held that the report was sufficiently reliable because it was the product of an "in-depth oversight investigation" and there is "nothing in the record to suggest that the Staff Report’s conclusion was politically motivated or designed to embarrass ITT or its management."  Id. at 30-33.  The report went on to point out that the references to ITT in the report "are, more often than not, positive relative to the other for-profit companies."  Id. at 33.[1]

I.   Department of Education Policies and Practices Are Highlighted

Department of Education Addresses Criticism over Debt Collection Practices

Over the past few months, the Department has faced increasing criticism for its oversight of the various private companies that manage the Department’s $744.3 billion portfolio of student loans, especially in light of recent federal data reporting one-third of borrowers with federal loans are late on their payments and that the Department lacked knowledge about its own loan program.  In response, the Department of Education announced on February 27, 2015, that it will end contracts with five private collection agencies after finding they were providing inaccurate information to borrowers.  The Department also pledged to provide more monitoring of and guidance to private collection agencies, increase internal training for staff, and refine its internal escalation practices.

Of note is the contrast between the governmental agencies’ reaction to the debt collector’s deceptive sales tactics and the response to for-profit schools allegedly engaging in similar deceptive practices:  there has been little response (i.e., coordinated government investigations or lawsuits) by agencies like the CFPB and FTC, as well as state attorneys general, to the former’s allegedly improper practices, whereas for-profit schools have been heavily targeted by both federal and state enforcement agencies for far less reliable and substantiated allegations of wrongdoing.

Department of Education OIG Releases Critical Report on the Office of Federal Student Aid

On March 24, 2015, the Office of Inspector General for the Department of Education released its final audit that examined the Office of Federal Student Aid’s enforcement of the incentive compensation ban.  One particularly noteworthy finding in the lengthy report was the report’s recognition that the so-called "Hansen Memorandum," which stated that incentive compensation violations should be handled by a fine rather than loss of student or institution eligibility, has been and remains Department of Education policy.  Indeed, in the report, the Office of Federal Student Aid acknowledged that:

The Department’s current enforcement policy regarding violations of the prohibition on incentive compensation is set forth in the October 30, 2002 memo from William D. Hansen, then Deputy Secretary of Education, to Terri Shaw, then Chief Operating Officer, FSA, entitled "Enforcement policy for violations of incentive compensation prohibition by institutions participating in student aid programs" (Hansen memo).  According to the Hansen memo, the Department treats a violation of § 487(a)(20) of the HEA as a compliance matter for which remedial or punitive sanctions should be considered, rather than as a violation that results in monetary loss to the Department, which was the Department’s prior policy.

This report’s discussion of the Hansen Memorandum and its acknowledgment that it was and is Department policy should help convince courts to rely on the policy articulated in the memorandum, especially with regard to arguments relating to materiality.  

Conclusion

We will continue to keep you informed on these and other related issues as they develop. 

   [*] The asterisks indicate matters in which Gibson Dunn is involved.

   [1]   Despite the ruling on the Harkin Report, ITT still prevailed before this court, with the court holding that the shareholder lacked a proper purpose for the discovery.  Id. at 38-39. 

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