School’s enrollment fraud case heads to trial

A federal judge in Sacramento has rebuffed efforts by the nation’s largest for-profit school chain to dismiss a massive fraud case, paving the way for a trial in which the University of Phoenix could be liable for millions of dollars in damages.

U.S. District Judge Garland E. Burrell, in an order released Monday, rejected the university’s contention that a $9.8-million settlement it made with the federal government should end the lawsuit.

The case stems from allegations by two former University of Phoenix enrollment counselors, Julie Albertson and Mary Hendow, that the school violated federal rules by offering incentives to employees, including higher salaries and more benefits, based on the number of students they enrolled.

The university, with 180 campuses and more than 310,000 students in 39 states, Canada, Mexico, the Netherlands and Puerto Rico, is the largest subsidiary of Apollo Group Inc., a publicly traded education provider based in Phoenix.

About 80% of the university’s students are on federal financial aid, and the school collects about $2 billion a year from those taxpayer-subsidized students, government records show.

The case was filed under the federal False Claims Act, which permits private individuals to sue on behalf of the government and to share in the recovery if the suit is successful.

Last year, the university paid the U.S. Department of Education to settle allegations similar to those made in the lawsuit -- numerous violations of the Higher Education Act provision that prohibit colleges from paying recruiters based solely on enrollment numbers.

In June, the university’s lawyer, Timothy J. Hatch, said the settlement represented an “alternate remedy” to the lawsuit.

But lawyers for the whistle-blowers, supported by a Justice Department attorney, countered that the settlement stated explicitly that the Department of Education did not have the authority to “waive, compromise, restrict or settle . . . any past, present or future violations” by the university of criminal laws or any action initiated against the school for fraud under the False Claims Act.

Justice Department lawyer Jay D. Majors said that if Phoenix prevailed, it would have “wide-ranging and debilitating” ramifications for the government’s efforts to combat fraud.

Burrell, in a short decision dated Friday, agreed with the plaintiffs.

San Francisco lawyer Michael Rubin, who argued the case for the plaintiffs, said he was pleased with the ruling.

“The next step is for us to prove that the university did, in fact, falsely certify” that it had complied with federal law, “and did, in fact, pay its recruiters based on the number of students they enrolled, whether qualified or not,” Rubin said.

His co-counsel, Nancy Krop of Redwood City, Calif., said that the Department of Education had interviewed more than 90 people while investigating the chain and all of them were potential witnesses in a trial, scheduled to start in September 2009. In addition to interviewing witnesses, she said, the plaintiffs would seek reams of documents.

Hatch said he was disappointed with the ruling but “quite confident” that the evidence would show that the university had “fully complied with the law.” He said the allegations were “easy to make but difficult to prove.”

The university, Hatch said, takes “a large number of factors” into consideration in determining the salaries of its enrollment counselors, not only the number of recruits.

henry.weinstein@latimes.com