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Educational Management Organizations (EMOs) Facing Controversy

Rasansky Law Firm - Dallas Office

February 3, 2014

The Education Management Corporation faces charges of fraud in a multi-million dollar lawsuit that was filed by the Department of Justice and four states. The lawsuit states that the organization is the second largest for-profit college organization and as such was ineligible for the $11 billion in financial aid it received from the state and federal governments between July 2003 and June 2011. Of course, this brings up the question of whether career based colleges should face cut offs of student loans when the graduates are shouldering a substantial amount of debt they have difficulty repaying.

Definition and History of EMOs

What is an EMO? An EMO is a firm or company that manages a minimum of one school that receives funds from the public sector and manages its school or schools under the exact same guidelines as a regular public school. The EMO organization can be either for-profit or non-profit and can have the responsibility to manage both traditional public schools as well as charter schools.

EMOs first began in the early 1990s in light of a growing interest in market-based proposals for school reform. Supporters of EMOs believe they offer entrepreneurial spirit and competitive philosophy to the public school educational process. Opponents base their opinions on the premise that outsourcing not only results in the creation of additional service fees and/or profits but also creates an additional administrative layer. They also have some concerns about the feasibility of public organizations giving up their control over public schools.

Lawsuits and Pending Charges

Civil lawsuits facing the for-profit college industry are not new, but this is the first time the government felt the need to intervene in order to back up claims that a specific company violated federal law because they made payments to recruiters based upon student enrollment. According to reports, Education Management claimed it was complying with the law thus providing the government with what it needed to provide students with financial aid.

There is a tremendous amount of fraud contained in the complaint against this organization and it involves information relative to over 100 different educational facilities and includes senior management employees. The funds involved comprise almost all the revenues of the company since 2003. Education Management has approximately 150,000 students enrolled in 105 schools that operate under four separate names: Art Institute, Argosy University, Brown Mackie College, and South University. The company has denied it did anything wrong.

Background of the Lawsuit

The legal counsel for EDMC believes the 2003 design and implementation followed the law fully. They are insistent that federal regulations that existed in 2002 permitted companies to take enrollments into consideration when assigning compensation for admissions officers as long as other factors were considered as well. They also insisted they worked closely with various outside experts in order to ensure they complied with the regulations. They did this so they could develop and plan for the five quality factors that were necessary in addition to enrollment numbers for salary considerations.

The government designed the ban on the incentive compensation to prevent companies from enrolling students who were not qualified simply to receive the financial aid money. The False Claims Act formed the basis for the government’s lawsuit and provided provisions for triple damages which could amount to as much as $33 billion because of the fact that all claims were alleged to come from student aid.

Like other public entities, changes in administrative functions causes a great deal of controversy among the public. In order to be certain of the validity of these EMOs, each person should conduct some research into the feasibility of this management tool. Our firm has a great deal of information you will find very helpful.


The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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