POLITICS JANUARY 19, 2014
On June 6, 2007, the California attorney general’s office was on the verge of suing Corinthian Colleges for intentionally and blatantly lying to prospective students about the company’s record of placing graduates into jobs. The AG’s complaint against the giant, publicly traded for-profit higher education company had been written, and a request prepared for a preliminary injunction to bar Corinthian from continuing to make false claims about its job placement rates. The press office was busy contacting reporters to let them know that there would be a news conference the next day announcing the suit.
The press conference was never held. At the eleventh hour, Attorney General Jerry Brown surprised the lawyers in his office by telling them he was stopping the lawsuit. A month and a half later, Brown (who is now California’s governor) announced that his office had reached a $6.5 million settlement with Corinthian, which has annual revenues of about $1.6 billion. The agreement required the school chain to provide $5.8 million in restitution to students who had been misled. It also forced the company to shut down nine of its campuses’ worst-performing programs. And it permanently enjoined Corinthian from continuing to deceive students about its job placement rates.
This might appear to have been a win for students. It wasn’t. Despite the substantial amount of evidence of deception that the AG’s office had uncovered over the course of its three-year investigation, the company did not have to admit to any wrongdoing. That meant that the settlement allowed Corinthian executives to tell the world that their schools had not done anything wrong and could continue to be trusted with taxpayer dollars.
The events that occurred in the summer of 2007 may seem like ancient history. But judging by a new lawsuit that Brown’s successor as AG, Kamala D. Harris, filed against Corinthian in October, the company’s practices don’t seem to have changed. The lawsuit accuses the company of deliberately misleading prospective students and investors about its success in placing students into jobs. In a press release announcing the suit, Harris’s office wrote that Corinthian “advertised job placement rates as high as 100 percent for specific programs when, in some cases, there is no evidence that a single student obtained a job during the specified time frame.”
Five other attorneys general are investigating the company, as are the federal Consumer Financial Protection Bureau and the Securities and Exchange Commission, suggesting that despite—or perhaps because of—the earlier settlement, Corinthian has felt little pressure to change its behavior. Brown's decision, in other words, may have given the company license to continue making false promises to attract tens of thousands of students each year, leaving many of them buried in debt they may never be able to repay.
By nearly any measure, Corinthian Colleges, which provides training in fields such as health care and information technology to about 80,000 students at more than 100 campuses in the United States and Canada, is among the worst-performing higher education companies of its kind in the country.
According to Senate investigators, two-thirds of students who enroll in Corinthian’s associate degree programs each year end up dropping out, as do more than half of all its students at its Everest, Heald, and Wyotech campuses. The median stay for students who withdraw is only three months. These students are typically left in debt without the training they need to get a job in the field in which they sought training.
So it shouldn’t come as a surprise that a large proportion of Corinthian’s students fail to repay their federal loans and end up in default. About one in five Corinthian students who entered repayment on their federal loans in 2010 defaulted on their debt within three years. And that may be understating the problem, as the company has been pushing former students who are struggling with their debt to obtain temporary forbearances and deferments on their loans. By doing so, the company ensures that these borrowers won’t go into default during the three-year window in which the U.S. Department of Education holds schools accountable for their rates—although these former students are still very much in danger of defaulting once they have exhausted their eligibility for these temporary relief programs.
Meanwhile, substantial shares of students at Corinthian’s schools take out high-cost private loans on top of the federal loans they borrow. Corinthian backs up these loans to students even though it knows full well that more than half of the private loan dollars its students receive will end up in default. Corinthian is willing to take this risk because it knows that losses on these loans are more than offset by the federal financial-aid dollars the students bring in.
In 2012, the U.S. Department of Education found that 44 Corinthian College programs, the most of any chain of for-profit colleges, failed all three of the tests it created to determine whether students are leaving these schools gainfully employed—that is, with earnings sufficient to pay off their debt. A remarkable 95 percent of the company’s Everest College programs flunked at least one of the Department’s three tests, raising the question of whether the schools are leaving their students worse off than before they enrolled.
Based on these types of results, a 2012 Senate Health, Education, Labor and Pensions (HELP) Committee report on the for-profit higher education industry questioned whether “Corinthian delivers an educational product worth the rapidly growing Federal investment taxpayers and students are making in the company.” Despite the questions, the company obtained $1.4 billion in federal grant and loan dollars in 2010 alone, more than the 10 University of California campuses combined received that year.
In the late 1980s and early 1990s, it came to light that hundreds of for-profit schools had been set up to reap profits from the federal student aid programs, in part by preying on poor people and minorities.
Federal and state officials reacted by strengthening regulation over the for-profit college industry. Hundreds of schools were shut down, and for a time, it seemed that the industry’s problems were in the past. But behind the scenes, for-profit college lobbyists pressed policymakers to water down the safeguards that had been added. In California, they succeeded in getting state officials to weaken a regulatory agency that had been created to police the schools, removing much-needed oversight of the industry.
Soon after, reports of abuses began to resurface, and by 2004 they had caught the California AG’s office attention. The office’s attorneys, under the leadership of Bill Lockyer, investigated the source of many of the complaints: California-based Corinthian Colleges. The lawyers were particularly interested in the company’s job placement claims, since the promise of providing training that would lead to lucrative jobs was central to the schools’ pitch.
As a result of the settlement, the AG office’s complaint didn’t go into much detail about the investigation or its findings. But in testimony she delivered to the Senate HELP committee in June 2010, Margaret Reiter, who was the supervising deputy attorney general in the office’s consumer law section at the time of the investigation, explained how the inquiry was conducted and what was found.
To undertake its investigation, lawyers in the AG’s office examined the employment records from two of Corinthian’s schools, located in Alhambra and West Los Angeles. They then interviewed former students and companies at which the schools claimed their graduates worked. They discovered major discrepancies. “Hundreds of declarations by former students and employers listed in those records contradicted the information contained in the school’s records,” Reiter told the Senate committee.
The AG’s lawyers found that the schools had inflated the job placement rates for every single program it looked at by as much as 37 percentage points. For example, in its written disclosures to students, the West L.A. campus claimed that its diagnostic medical sonographer program had a job placement rate of 80 percent, when it fact it was just 43 percent, according to the AG. Similarly, the office found that the dental assistant’s program at the Alhambra campus had a placement rate of 53 percent, 20 percentage points lower than the rate the school was disclosing.
“In most courses, only 30 percent to 52 percent of graduates obtained employment,” Reiter said. “Ten of 19 programs had placement rates of less than 50 percent. Fifteen had placement rates of less than 55 percent.” Because California law at the time required schools to place at least 70 percent of their graduates into jobs in the fields in which they trained, many of these schools would have been in jeopardy of closure had they reported the real placement rates. (California no longer has a minimum job placement rate.)
The lawyers in the AG’s office also found false claims in the massage therapy programs, with schools listing non-existent businesses as students’ place of employment. “For all three massage therapy programs, the school consistently reported students as being employed at non-existent, fake businesses that the students invented as part of a class assignment in order to learn how to make business cards,” Reiter stated.
During the investigation, the AG’s office also sent investigators posing as prospective students to six Corinthian campuses. They found that schools’ recruiters often touted job placement rates that were even higher than the already-inflated rates included in the company’s written disclosures. For example, many claimed that their programs had job-placement rates as high as 85 to 90 percent and would rush prospective students through signing the written disclosures so that they wouldn’t notice that the official rates were much lower.
One admissions director told the AG’s office that this was the standard operating procedure at her campus, where, according to Reiter, the typical “admissions representative downplayed or concealed the significance of the employment disclosure by including it in a large stack of documents and saying, ‘just go ahead and sign this.’”
Jerry Brown succeeded Lockyer (who is now the treasurer of California) as California’s attorney general in January 2007. At the time, lawyers in the AG’s office were preparing the lawsuit they planned to file against Corinthian. But the law firm Corinthian chose to defend itself—the Democratic powerhouse Manatt, Phelps & Phillips—had strong ties to Brown (and still does, as Brown’s sister Kathleen is now a partner in the firm).
Brown has an especially close friendship with George Kieffer, who heads up Manatt Phelps’s governmental and regulatory policy division. Their relationship dates back to at least 1976, when Kieffer served as general counsel for Brown’s unsuccessful bid for the Democratic presidential nomination. In 1980, then-Governor Brown appointed Kieffer to the Board of Governors of the California Community College System. Today, Kieffer is president of the non-profit Governor's Residence Foundation, which pays the $3,000 monthly rent on the luxury loft that Brown and his wife live in while he serves as governor. He also leads a second non-profit organization that raises money to cover the costs of Governor Brown’s international travel.
In addition to having an allegiance to Kieffer, Brown received help from the firm for his run for attorney general. During Brown’s 2005-06 campaign, Manatt Phelps was one his biggest donors, contributing nearly $34,000 to the effort, according to the Sunlight Foundation. That was the largest donation the law firm made during that election cycle to any federal or state official.
Some consumer advocates suspect that Brown's relationship with the law firm played a role in his decision to settle with Corinthian. (Neither Brown nor Manatt Phelps responded to repeated requests for comment.) The attorneys who conducted the inquiry were unhappy that they had to settle the case, as were consumer advocates who had been following the case. Speaking at a press conference she called after hearing of the attorney general’s decision, Elena Ackel, a senior consumer-rights lawyer for the Legal Aid Foundation of Los Angeles, said, “Attorney General Brown did a disservice to the people of the state by interceding for his friends at Manatt Phelps.”
As part of the settlement, the AG’s office permanently banned Corinthian from making false claims to its students about its job placement rates. Brown touted this prohibition when announcing the details of the agreement, saying that the settlement committed “Corinthian to reforming its practices for the future.”
Judging from the new lawsuit that California’s current AG, Kamala D. Harris, recently filed against Corinthian, the company apparently didn't feel compelled to change its practices.
During the course of her investigation, Harris found that the placement rates that Corinthian has disclosed to prospective students and investors generally cannot be substantiated. “The data in the disclosures on or about July 1, 2012 for all campuses in California and online campuses does not match or agree with the data in [Corinthian’s] own database system and/or in student files,” the lawsuit states. “In numerous cases, the placement rate data in [the company’s] files shows that the placement rate is lower than the advertised rate.”
This is not a case of small data discrepancies. The AG’s office discovered that some of Corinthian’s Everest College campuses have even paid temp agencies to place graduates in short-term jobs to help the school meet the minimum job placement rates required by their regulators. Others allegedly fabricated the data. In many cases, the documentation needed to verify placements is missing.
The AG’s complaint includes excerpts from internal company e-mails showing that top Corinthian executives were fully aware of the problems with the data. “Corinthian Colleges, Inc.’s CEO and/or senior management were, at all relevant times, aware of the falsity, inaccuracy, and unreliability of job placement data and the statements they made concerning the data yet they did not disclose that fact to consumers or investors, or take any action to make consumer disclosures and statements to investors accurate,” the lawsuit says.
Corinthian College officials deny the allegations, saying in a press release that the AG’s “complaint paints a misleading and inaccurate picture of our schools.” Kent Jenkins, a spokesman for the company, notes that Corinthian has a company-wide verification team that checks the accuracy of job placement data reported by its campuses. According to Jenkins, the verification team, which is made up of about 15 employees, checks all placements its campuses report by reaching out directly to employers or graduates to confirm them.
“The verification team helps us employ standard criteria for job placements across all our campuses,” Jenkins says. “And in the very rare instances where the team might find questionable job placements, we are able to eliminate them before they are reported to accreditors and regulators.”
But former career service employees at Corinthian’s Everest Colleges paint an entirely different picture of the company. In a recent article by the Huffington Post, former employees at Everest College campuses in six states “said they felt tremendous pressure from management to meet job placement goals, and to stretch the definition of a successful placement.”
“For example, they were encouraged by executives to count dental assistant graduates who worked at a one-day volunteer event as “placed” in the field,” the Huffington Post reports. “Business graduates who got jobs moving boxes in warehouses were considered successfully employed in ‘logistics.’”
Based on these reports, Sen. Dick Durbin (D-IL) has called on the U.S. Department of Education and Corinthian’s accreditors to investigate the company’s job placement practices. “Corinthian has outright misrepresented job placement rates to students by advertising numbers substantially higher than their actual rates,” Durbin said in a speech on the Senate floor in December. “These deceptive practices give the illusion that this is a successful undertaking. Go to Everest and get a job. It turns out that it is a charade.”
The events of June 2007 are interesting in and of themselves, but they also speak to a far larger problem in the oversight of for-profit colleges.
Over the last decade, for-profit higher education companies like Corinthian have come under scrutiny from federal and state regulators, and have faced numerous lawsuits by former employees, students, and shareholders over allegations that they have engaged in misleading recruitment and admissions tactics to inflate their enrollment numbers. Many of these companies, such as Career Education Corporation and Alta Colleges, have been accused, for example, of cooking the books on their job placement rates.
Yet, time and again, these actions have ended in settlements, in which the companies agree to pay a fine but do not admit to any wrongdoing. What’s more, as part of the terms of these agreements, evidence of abuses that have been unearthed are sealed. As a result, no matter how airtight the cases are against them, the companies usually get off scot-free. They have to pay a fine, but they get to maintain their innocence—and few change their practices.
The settlements have not only given cover to the individual companies but to the for-profit higher education sector as a whole. The fact that nobody has been found guilty of anything has allowed the industry, as well as its backers on Capitol Hill and Wall Street, to remain in denial about the extent of the abuses that have occurred and the damage that has been done to students. Instead, these settlements have, in recent years, made it many times easier for for-profit college leaders and lobbyists to portray themselves as innocent victims of a partisan witch hunt, as they have fought efforts by the Obama administration and Senate Democrats to rein in the industry’s worst players and practices.
Brown contributed to these problems when he forced his office to settle with Corinthian. Harris now has a chance to rectify Brown’s error. Allowing this lawsuit to have its day in court may be the only way to force changes at Corinthian and perhaps within the industry as a whole.