Suit filed against diploma mill that MEDC is planning to finance

By Brian BowlingPITTSBURGH TRIBUNE-REVIEWFriday, May 7, 2010
A former employee of South University Online claims in a federal lawsuit unsealed Thursday that the subsidiary of Downtown-based Education Management Corp. fraudulently obtained student loans.

Brian T. Buchanan of Squirrel Hill filed the lawsuit in 2007 seeking return of the student loan money under a federal law that allows private citizens to file such actions on behalf of the government.

He claims that while working for the school from December 2005 until May 2007, he observed the company paying salaries to admissions representatives based on the number of students they signed up for courses. That violates the federal law that made South University Online eligible to accept federal student aid, he says in the lawsuit.

Jacquelyn Muller, spokeswoman for Education Management Corp., said the publicly held company doesn't comment on pending litigation, but it plans to file a shareholder notice about the lawsuit today with the Securities and Exchange Commission. Such notices typically advise shareholders about the potential impact a damage award could have on the company's finances.

The law under which Buchanan sued requires the case to be sealed for at least 60 days until the government decides whether it wants to take over the case. The government repeatedly asked for extensions of the deadline. U.S. District Judge Arthur Schwab told the government on March 4 that it had to make a decision by April 15. The government decided to let Buchanan continue with the case but may still intervene, according to court documents.

"We're still investigating the case," said acting U.S. Attorney Bob Cessar. He declined further comment.

The lawsuit accuses the company of submitting fake proctor forms that are supposed to ensure students who took admissions tests online were observed by a nonfamily member who verified they didn't look up the answers. Prospective students are not allowed to take the admissions test more than three times in a year, but South University Online allowed students to repeatedly take the tests until they passed it, the lawsuit says.

The company provided free trips, iPods and gift cards to admissions representatives who signed up the highest numbers of students, the lawsuit says.

If Buchanan proves his claims, South University Online would be liable for three times the amount it defrauded from the government plus a fine of $5,000 to $10,000 for each false claim it submitted.

If the government doesn't intervene in the case, Buchanan would receive about 25 to 30 percent of the damages, according to a 2009 report on citizen lawsuits by the Congressional Research Service. If the government intervenes, his share would be at least 10 percent and as high as 25 percent, depending on how crucial his information was in winning the lawsuit.