The February 2004 Program Review Report Relating To The University Of Phoenix Was Fundamentally Flawed

Background
In March 2003, two former University of Phoenix ("UOP") enrollment counselors filed a False Claims Act ("FCA") action against UOP in the federal District Court for the Eastern District of California. The lawsuit alleged that UOP improperly obtained federal student financial aid funding from the U.S. Department of Education ("ED"), arguing that it received this funding while in alleged violation of requirements set forth in Title IV of the Higher Education Act regarding the manner in which recruiters may be compensated.

The lawsuit was filed under seal, as required by the FCA, to allow the U.S. Department of Justice ("DOJ") to consider whether it wanted to intervene and take over control of the case from the plaintiffs. In May 2003, the Justice Department declined to intervene. Subsequent to this decision, ED launched an administrative "program review" pursuant to its regulatory authority under Title IV. This program review was based on the allegations in the plaintiffs' complaint. ED staff conducted field work in August 2003 and sent a purported program review report ("PRR") to UOP in February 2004. As set forth in ED policies and regulations, a PRR is a first step in a multi-step process designed to foster institutional compliance with Title IV requirements. In September 2004, ED and UOP reached a Settlement Agreement which resolved all issues identified in the PRR relating to the manner in which UOP compensated its enrollment counselors. As a result of the settlement, no final determination by ED was ever issued.

At Issue
While UOP was and is pleased to have resolved these issues, it remains very concerned about the unfair and inaccurate nature of the PRR. The fact that the PRR is riddled with inaccuracies and inconsistencies is not surprising in that entire portions of the PRR are little more than verbatim recitations of the plaintiffs' self-interested complaint.

For the reasons outlined below, UOP believes that the PRR represents a wholly irresponsible and flawed review of UOP's administration of Title IV programs by low-level ED employees and should be completely discredited. The flaws with the PRR are many and include:

• The PRR uses the wrong legal standard. Perhaps the single most glaring flaw of the PRR is that it uses the wrong legal standard. The PRR states that "salary adjustments based on success in securing enrollments remain prohibited." That is simply not true. In "Safe Harbor" regulations, published by ED in November 2002 to clarify the ways in which educational institutions can compensate recruiters without running afoul of the Title IV restrictions, ED made absolutely clear that Title IV does not prohibit the payment to recruiters of merit-based salaries and that such merit-based salaries are proper provided that the salaries are not based “solely on the number of students recruited, admitted, enrolled or awarded financial aid.” Through the regulatory notice and comment process, ED confirmed that its use of the word "solely" was intentional and intended to be interpreted consistent with "its dictionary definition;" that is, "singly," "alone," "exclusively" or "to the exclusion of other things." ED also recognized that "by the very job description, a recruiter's job is to recruit.”
  
  The PRR, however, conveniently omits the rather critical word – "solely" – and concludes that UOP's compensation plan is improper because it considers, to a significant but not exclusive extent, the number of enrollments achieved by enrollment counselors. This flaw is so significant that it undermines and taints all aspects and alleged findings of the PRR.
  
  The simple fact is that in evaluating the performance of its enrollment counselors and in setting and adjusting their salary levels, UOP considered, in addition to the number of enrollments achieved by the enrollment counselor, a whole host of quantitative and qualitative non-enrollment factors including tenure, judgment, communications, and working relationships.
• The PRR made conclusions regarding UOP's compensation plan before ever receiving and evaluating the data necessary to determine whether UOP's compensation plan was compliant. We do not understand how the PRR team was able to make conclusions regarding the manner in which UOP compensated its enrollment counselors without considering the salary and enrollment history of the counselors – data that UOP was requested to produce after the PRR was prepared. UOP thereafter did produce the requested information.
  
  As we now know, every statistical analysis that has been performed of UOP's compensation system, by both UOP and its adversaries, confirms UOP’s compensation plan was and is compliant and clearly demonstrates that UOP's system was not based "solely" on the number of enrollments. Specifically, a prominent national accounting firm and a prominent national consulting firm have independently performed statistical analyses of UOP's compensation plan, which demonstrate that salary adjustments were not based solely on enrollments.
  
  UOP's suspicions that the PRR was nothing more than a result in search of a justification was recently confirmed in a sworn declaration by one of the ED employees responsible for the PRR. She has testified that even before the program review was started, she had concluded UOP was in violation and that "the purpose of the review was to quantify the extent of the violations in order to set an appropriate fine amount." So much for fairness and due process.
• We have serious and numerous concerns about the thoroughness of the diligence conducted by the PRR team as well as the reliability of witnesses relied on by the PRR team.
  
  - Virtually all of the alleged conclusions set forth in the PRR were based on unreliable anecdotal testimony of a limited number of individuals, primarily the plaintiffs, who hope to collect millions of dollars in their lawsuit against UOP, and other enrollment counselors recruited by the plaintiffs to substantiate their story. Based on limited documentation produced to UOP, it is clear that the PRR team and the plaintiffs' attorneys were working together very closely.
  
  - The PRR’s conclusions were based on a handful of witnesses at only seven of UOP’s more than 250 campuses and learning centers across the country. UOP has many thousands of recruiters all across the U.S. However, the alleged conclusions set forth in the PRR, including the baseless conclusion of "systemic problems," were based on interviews of a few dozen enrollment counselors in two locations, Northern California and Phoenix.
  
  - Almost all of the allegations set forth in the PRR are based on anonymous sources. In addition, virtually all of the allegations are in the nature of "one enrollment counselor said this" or that "some enrollment counselors said that." Both the plaintiffs’ complaint and the PRR are very carefully written to suggest there is much more to the allegations than there really is. We suspect that the sources for virtually all of the allegations are the plaintiffs and a small handful of other enrollment counselors who, for whatever reasons, have agreed to help the plaintiffs.
• The investigative techniques used by the PRR team clearly demonstrated that the reviewers improperly had reached adverse conclusions before even starting the review. Numerous UOP employees interviewed by the PRR team raised contemporaneous concerns about the aggressive and improper tactics used by the PRR team and the fact that they only seemed interested in "bad stuff" and confirmation of their belief that UOP's compensation system was improper. In fact, more than a dozen UOP enrollment counselors interviewed by the PRR team have signed affidavits stating that they told the PRR team that their performance evaluations and salary adjustments were based, at least in part, on qualitative, non-enrollment factors but that, in many cases, the PRR team indicated that they did not believe the employee or did not want to hear and ignored such statements.
• The PRR's assertion, without any factual basis, that UOP's compensation system encouraged the recruitment of unqualified students is both offensive and completely untrue. The simple fact is that there is absolutely no evidence that UOP directed, encouraged, or permitted the recruitment of unqualified students. In fact, all of the available evidence is to the contrary. First, we are not aware of a single enrollment counselor, including those hostile to UOP, who will testify that he or she enrolled unqualified students. Second, all of the statistical evidence suggests that UOP enrollment counselors enrolled students who could and did benefit from the education they obtained at UOP. For the time period relevant to the lawsuit, UOP's average cohort default rate on student loans was 5.8 percent, well below the national average of 7.4 percent for comparable for-profit schools and very close to the national average of 5.4 percent for traditional colleges. Moreover, UOP's graduation rate was between 50 to 60 percent – the same average rate found among traditional colleges. These default and graduation rates are widely-accepted measures of quality. The fact that the PRR team made the conclusion it did without even considering UOP's default and graduation rate is another sign that the PRR is shoddy and unreliable.
• The PRR utilized inappropriate and inflammatory invective to attack UOP and its students. A great deal of the PRR relates to allegations of excessive profitability and pressure that is put on enrollment counselors to do their job. There is certainly nothing illegal about education companies making a profit or expecting and requiring that its employees perform their jobs. Indeed, UOP is extremely proud of its growth and success, financially and otherwise, and hopes to continue to grow and prosper so that it will be able to provide educational opportunities to more and more working adults.
• Much of the analysis set forth in the PRR actually proves that salary adjustments were not based solely on the enrollments – and is inconsistent with the alleged findings of the PRR to the contrary. For example, there is a chart on page 20 of the PRR that includes six enrollment counselors who have achieved high enrollment numbers and, as a result, received what the PRR characterizes as "phenomenal raises." Two of the enrollment counselors listed on this chart had 100 enrollments during the relevant period and received raises of $24,000 and $37,000, respectively. This chart is then contrasted to a chart on page 21 of the PRR listing five enrollment counselors who achieved more modest enrollment numbers and, as a result, received "no raise or only a very small percentage increase." One of the enrollment counselors on this chart had 98 enrollments during the same relevant period – only two less than the two enrollment counselors who had 100 enrollments and had received "phenomenal raises" – and received a raise of only $1,700. Clearly, factors other than enrollments were considered and impacted the salary adjustments of even those few enrollment counselors selected by the PRR team as examples of UOP's compensation practices.

Additionally, on at least two occasions, the PRR and its alleged findings have been considered, evaluated, and rejected.

First, as a result of the PRR and Settlement Agreement, the Arizona State Board for Private Postsecondary Education "open[ed] a complaint . . . to investigate the allegations raised in the PRR" because the allegations, if true, could also violate Board statute and rules. After several months of diligence, UOP received a letter from the Arizona Board informing UOP that the Board had "voted unanimously to dismiss the complaint." The investigative report on the complaint indicated that "Staff is unable to substantiate the allegations contained in the US Dept of Education February 2004 PRR."

Second, we believe that the terms of the Settlement Agreement between UOP and ED constitute a clear, albeit implicit, rejection of the PRR and its alleged findings. The simple fact is that if the alleged findings in the PRR had any merit – which they do not – ED would not and could not have settled the issues raised in the PRR on the terms that it did. The terms of the Settlement Agreement are very favorable to UOP**. For example:

• The Settlement Agreement contains no admission of liability.
• No Final Program Review Determination was issued by ED.
• The Settlement Agreement makes clear that the PRR is simply one step of a multi-step process – in other words, the alleged findings set forth in the PRR were not the final views of ED.
• The Settlement Agreement includes a statement that UOP strongly disputes the PRR's methodology and conclusions – significantly, this statement is not accompanied by the very typical parallel statement that ED stands by the PRR's methodology and conclusions.
• The Settlement Agreement includes an acknowledgement that the safe harbor regulations helped to clarify the scope and meaning of the incentive compensation restrictions – implying that ED's guidance in the area was ambiguous prior to the new regulations.
• The Settlement Agreement makes clear that, notwithstanding the alleged serious findings and strong rhetoric of the PRR, ED will not take any further investigation or action of any kind against UOP or limit in any way UOP's ability to participate fully in Title IV programs.

Conclusion
Thus, for all of the reasons set forth above, we believe that the PRR represents a wholly irresponsible and deeply flawed review of UOP's administration of Title IV programs, and should be completely discredited. Had ED performed an objective analysis, the PRR would have concluded that UOP's compensation system was and is compliant with applicable legal requirements.

* The False Claims Act is a statute designed to remedy false or fraudulent claims for payment submitted to the federal government. The statute includes a legal device called a “qui tam” provision, which allows a private person to bring a lawsuit on behalf of the United States.

** The public statement that ED issued after the Settlement Agreement was executed – that "this is the largest fine the department has ever imposed on a school" – is clearly mistaken. The fact is that UOP did not pay a fine. The Settlement Agreement could not be more clear – UOP paid money to ED to settle a dispute. Indeed, the only reference to the term "fine" in the Settlement Agreement is in the context of ED agreeing not to "impose on UOP any . . . administrative fine." Moreover, the amount that UOP paid to ED as part of the Settlement Agreement ($9.8 million – less than 1 percent of UOP parent company’s cash and cash equivalents) – pales in comparison to the amounts ED sought from Computer Learning Center ($187 million) and Phillips College ($106 million), schools a fraction the size of UOP.

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