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University of Phoenix Faces Fraud Suit

Times Staff Writer

A federal appeals court in San Francisco on Tuesday reinstated a massive fraud lawsuit against the University of Phoenix, which, with 180 campuses and more than 310,000 students across the country, is now the nation’s largest accredited university.

The suit was filed under the federal False Claims Act by two former employees who alleged that school officials violated federal rules barring incentive payments to employees who recruit students to enroll in the college.

The False Claims Act permits individuals with exclusive knowledge of a fraud perpetrated against the federal government to file a lawsuit on behalf of the government and share in any financial recovery. An individual or company violating the law must pay the U.S. civil penalties and triple damages.

The vast majority of students at the University of Phoenix use federal loans and grants to pay their tuition. According to government records, last year the university obtained $1.7 billion in federal education funds.

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According to Taxpayers Against Fraud, a group that supports False Claims Act lawsuits, many students who enroll at the University of Phoenix “never complete their education,” leaving taxpayers on the hook when the students are unable to repay their loans.

Two years ago, after a probe by the Department of Education, the University of Phoenix paid the government $9.8 million in compensation. A report issued by the department said the company promoted an intense sales culture that rewarded recruiters who encouraged the most students, even if they were unqualified, to enroll.

Two years ago, Mary Hendow and Julie Albertson, former enrollment counselors at the University of Phoenix, sued in federal district court in Sacramento, alleging that the school paid recruiters solely on the basis of how many students they enrolled. The suit alleged that Phoenix ranked counselors by their sign-ups and gave the highest producers bigger salaries, benefits and incentives.

The suit asserted that the university also urges counselors “to enroll students without reviewing their transcripts to determine their academic qualifications to attend the university.” Albertson said she was given a specific target number of students to recruit and that when she reached that benchmark her salary increased by more than $50,000. Hendow alleged that she won trips and home electronics as a result of enrolling large numbers of students.

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The two women also said the company maintained two separate employment files for its enrollment counselors -- one real and one fake -- in an effort to deceive the U.S. Department of Education about its practices.

The university countered that it did not pay recruiters solely on the basis of numbers.

U.S. District Judge Garland E. Burrell dismissed the suit, saying the plaintiffs’ allegations were beyond the scope of conduct regulated by the False Claims Act.

The 9th Circuit Court of Appeals, in a 3-0 decision written by Judge Cynthia Holcomb Hall, reversed Burrell. Hall said that the False Claims Act is intended to reach all types of fraud, without qualification, that might result in financial loss to the government.

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The U.S. Department of Justice had filed a friend-of-the-court brief saying that the lower court ruling could impair enforcement of the False Claims Act, its primary tool to deter fraud and recover losses.

Tuesday’s decision was hailed by attorneys representing the plaintiffs and by Taxpayers Against Fraud.

“The University of Phoenix does not care if students are actually qualified, since the goal is simply to get them in the door and signed up for a federal loan,” said Nancy G. Krop, a Redwood City attorney who represents the plaintiffs. Krop said the potential damages in the case could reach $1.5 billion.

Timothy J. Hatch, a Los Angeles attorney who represents the university, said officials were disappointed in the decision.

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“We think the 9th Circuit decision is a significant expansion of well-settled law with regard to the reach of the False Claims Act,” he said.

He said a federal appeals court based in New Orleans had upheld the dismissal of three similar cases. However, another federal appeals court in Chicago last year ruled the same way as the 9th Circuit.

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henry.weinstein@latimes.com

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