Jacquelyn Martin/AP Photo
Education Secretary Miguel Cardona speaks at an event where Vice President Kamala Harris announced the cancellation of federal student loans borrowed by students of Corinthian Colleges, June 2, 2022.
Earlier this month, the federal government canceled all loans made for students attending the defunct, predatory for-profit education chain Corinthian Colleges, at a cost of close to $6 billion. While restitution for fraud victims was welcomed, many were disappointed to see no accountability for the individuals responsible for perpetrating the fraud. This is a perennial lament in the field of white-collar crime, where accountability has been lacking for decades.
Indeed, the CEO of Corinthian, Jack Massimino, had to pay a grand total of $80,000 to settle a Securities and Exchange Commission case about the college; his chief financial officer had to pay just $20,000. That adds up to just a smidgen of the more than half a million loans Corinthian lured students into to pursue valueless diplomas. Massimino made millions of dollars while serving as Corinthian’s CEO.
Could the government force the controlling officers of for-profit colleges to be personally liable for the fraud they commit? A prominent borrowers’ group and some congressional leaders say yes, but they have met with resistance from the Department of Education. In an exchange of letters late last year and this spring, undersecretary of education James Kvaal claimed that the agency had to get the signatures of owners and controllers of for-profit colleges on official documents in order to hold them liable.
Advocates disagree, but also find this to be a fascinating claim from Kvaal, because in fact the signatures of leading for-profit CEOs—including, it appears, Corinthian’s ex-CEO Massimino—are already on those documents.
At issue is what to do when a for-profit college files for bankruptcy or shutters its operations after defrauding students, leaving the Education Department on the hook for student loan discharges. That financial risk is part of why critics have said that the agency should move quickly to close down predatory colleges on the front end, rather than suffer having to pay the bills afterward.
The department can force colleges suspected of fraud to engage in “heightened risk monitoring” or even file a letter of credit that would get paid in the event of closure. But the amounts of that financial guarantee are usually too low to cover all the losses in the event of a full closure, as was the case with Corinthian.
Student Defense, a borrower advocacy group, laid out the authorities the Education Department has in an October 2020 paper that made clear the department’s authority to hold actual people responsible for the for-profits’ misdeeds. After a series of oversight hearings and testimony of the department’s inspector general in 1992, amendments to the Higher Education Act “may require … the assumption of personal liability” for various financial losses by members of the board of directors, CEO, other executive officer, or individual with at least 25 percent ownership interest (known as the “Institutional Control Group”).
There are a number of these directives within the Higher Education Act amendments of 1992. As Dan Zibel of Student Defense wrote in the Washington Monthly in 2020, “These changes were made with companies like Corinthian in mind.” Yet to date, they have not been used to force personal liability on any members of the Institutional Control Group at a for-profit college.
The message sent is that top for-profit college executives will be able to earn and keep massive sums from schemes that damage students, and the Education Department will pick up the check in the aftermath.
Last August, Rep. Bobby Scott (D-VA), chair of the House Education and Labor Committee, cited the 1992 amendments in a letter and asked the Education Department why they haven’t gone after directors and officers for financial restitution, specifically mentioning Corinthian and several other shuttered for-profits. While short of criminal liability, the forced disgorgement could at least provide some measure of deterrent for the serial activities of for-profit executives.
But on March 31, Undersecretary Kvaal replied to Scott. He agreed that school owners “should be held liable for the wrongdoing or closure of their institutions,” and explained that the department had taken steps to ensure that. Specifically, in March the Education Department required entities with “substantial control” over for-profits to co-sign the “Program Participation Agreement” (PPA), which lays out the college’s conditions for access to federal student aid programs. This was explicitly intended to disincentivize executives from engaging in fraud, because it put them at risk of financial liability. Kvaal noted that the department denied certification for student loan programs to one for-profit because the owner refused to sign the PPA.
Referring to for-profit colleges that already closed down, however, Kvaal wrote, “Unfortunately, the Department did not require the owners of those institutions to assume responsibility for losses by co-signing the PPAs of the institutions. As a result, there is no clear path to collect liabilities from entities or individuals associated with the shuttered institutions.” Bloomberg first reported on this exchange.
Advocates who spoke with the Prospect do not agree, though, that a signature on the PPA is required for the Education Department to seek personal liability. As long as the directors and officers have recognized institutional control of the college, they are fair game, these advocates claim. “The Department says that it’s serious about accountability, but their choice to let these individuals off the hook is baffling,” Dan Zibel, chief counsel at Student Defense and a former Education Department attorney, told Politico.
Even the head of the for-profit college industry’s leading trade group, former member of Congress Jason Altmire, admitted to NPR, “In any case that involves substantial fraud or the owner withdrawing capital before a closure … they absolutely should be subject to [personal liability]. That is the reason that authority exists.”
But say for the sake of argument that you accept Kvaal’s interpretation. There still appear to be multiple instances where for-profit executives signed PPAs.
For example, in a lawsuit filed in 2012 against Corinthian Colleges and two of its former CEOs, David Moore and Jack Massimino, Corinthian’s attorneys state plainly that both Moore and Massimino “signed some Program Participation Agreements” on the college’s behalf. Under Kvaal’s standard, that would appear to make Massimino and Moore eligible for personal liability.
Another example is even more clear-cut. Documents obtained through the Freedom of Information Act show that Brent Richardson, former CEO of Dream Center Education Holdings, and Shelly Murphy, the chief officer for compliance, signed multiple different PPAs in 2017. Dream Center controlled Argosy University, South University, and the Art Institutes, all for-profit colleges that were accused of committing fraud against students and subsequently closed.
In July 2020, the House Education and Labor Committee detailed the extent to which the Dream Center “defrauded students” by claiming to be accredited after losing accreditation, as well as how Trump’s Education Department, then under Betsy DeVos, continued to give the institution access to federal student aid funding. The resulting implosion of the Dream Center network cost at least $600 million. Scott’s initial letter cited Dream Center as well as Corinthian on the subject of personal liability.
These two instances of co-signatures on PPAs make clear that, even under the Education Department’s narrow reading of the statutes on personal liability, it would have a way to go after top executives at both Corinthian and Dream Center. While Kvaal may be intimating that PPAs must be configured differently to explicitly state that signers are financially liable, Student Defense argues that “the Department need not change these agreements to impose personal liability on those with ‘substantial control.’”
The Education Department made a distinction between executives signing as a representative of the institution and signing in their personal capacity. But the signatures in the Dream Center case come under the heading “the owners of the institution agree to be jointly and severally liable for the performance by the institution of its obligations under the agreement.” The Prospect has not seen the Corinthian documents directly. The agency did express a commitment to pursue accountability on past performance requirements if the law allowed it, but their statements thus far do not inspire confidence.
The overall message sent is that top for-profit college executives will be able to earn and keep massive sums from schemes that damage students, and the Education Department will pick up the check in the aftermath, even if they have incontrovertible evidence that these executives were personally liable under the statute.
Moving forward, the Education Department says it is reconstituting an Office of Enforcement to investigate and take action against for-profit wrongdoing. It has sent bulletins on instances of misconduct, in one case involving military veterans and service members. It is strengthening the gainful employment rule, to force for-profits to show that they are placing students in their chosen fields as a condition of access to financial aid, and the borrower defense rule, to better ensure that defrauded students can receive restitution.
But it’s hard to get too excited about these measures, when the department has neglected the evidence at its fingertips to hold individual for-profit college executives accountable.
