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The Questionable Activities Of For-Profit Schools

 October 22, 2010 01:18 PM
 


Federal prosecutors in Manhattan and Georgia last week scored a major Medicare fraud bust with the indictments of 44 members of an Armenian-American crime syndicate who billed Medicare for more than $100 million of treatments that were never performed or received. The group reportedly succeeded in stealing $35 million in Medicare reimbursements, making it the largest Medicare fraud operation conducted by a single group to result in criminal fraud charges.

"With 118 phantom clinics and over $100 million in bogus billings, this group of international gangsters allegedly ran a veritable fraud franchise," Preet Bharara, the United States attorney in Manhattan, said in a statement announcing the charges. "As charged, they stole taxpayer dollars earmarked for the elderly and infirm and got away with it, until now."

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If Bharara and his federal colleagues are genuinely concerned about misuse of taxpayer money, it is my sincere hope that they are taking a close look at the GAO's allegations that many of the nation's leading for-profit schools engaged in equally deceptive practices involving taxpayer dollars.

As someone who has investigated Wall Street for more than three decades, I've seen an incredible amount of wrongdoing. However, the activities of for-profit education schools appears to take the cake. Most Wall Street wrongdoing involves firms or brokers simply ripping off their customers; there is considerable evidence suggesting that for-profit education companies may have systematically defrauded the Department of Education, ruined, possibly forever, the finances of already hard-pressed low-income students, and deceived investors about the true condition of their business. The extent and the magnitude of the wrongdoing could possibly rival the sub-prime mortgage debacle.

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The GAO reported in August that undercover tests at 15 for-profit colleges found that all made "deceptive or otherwise questionable statements" to the agency's undercover applicants. One admissions representative told an applicant to fraudulently remove $250,000 in savings on a financial aid form. A student interested in a massage therapy certificate costing $14,000 at a for-profit college was told that the program was a good value, but the GAO said the same certificate from a local community college cost $520. Recruiters at these schools also frequently engaged in aggressive marketing tactics to pressure these students, who had few options and limited financial flexibility, into enrolling. To review the extent of the alleged wrongdoing, here's a link to the GAO report. Warning: the accompanying video will make your blood boil.

My firm represents investors who bought for-education stocks that were aggressively touted by their brokers. The clients were told that for-education stocks would prosper in the wake of the downturn because millions of people would seek vocational retraining. The investors, of course, were never told that for-education companies were boosting their financials using questionable sales and marketing practices. The stocks of these companies have plummeted.

President Obama has repeatedly been bashing Wall Street for its greed and unscrupulous practices but so far his rhetoric rings hollow. The SEC remains as ineffective as ever under his administration, merely meting out wrist slaps to alleged fraudsters like Goldman Sachs and Angelo Mozilo. I say alleged because despite agreeing to pay fines of $550 million and $67.5 million respectively, they weren't required to admit any wrongdoing.

If President Obama truly cared about curbing Wall Street's reckless and ruinous behavior, he'd be at the forefront calling for a public investigation of for-profit companies and criminal prosecutions for defrauding any government program, not just Medicare.

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