Investor sues over Education Management stock drop

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PITTSBURGH (AP) — An investor has filed a federal lawsuit seeking class-action status against Pittsburgh-based Education Management Corp. seeking to recoup losses resulting from the for-profit college company's ongoing run-ins with federal regulators.

The lawsuit contends an investor identified as Brian H. Robb and others have lost money since August 2012 because the company has come under Justice Department scrutiny for the way it recruited students and alleged violations of new federal regulations governing federal student aid.

EDMC runs 110 schools in 32 states, including trade schools for chefs and artists. Its schools include Argosy University, The Art Institutes, Brown Mackie Colleges and South University.

The lawsuit contends the company's earnings statements have obscured the fallout from EDMC's running battle with the Justice Department and an effort by the Securities and Exchange Commission to subpoena its records last year, causing its stock to drop.

"As a result of defendants' wrongful acts and omissions, and the precipitous decline in the market value of the company's securities, plaintiff and other class members have suffered significant losses and damages," the lawsuit filed Monday said.

EDMC shares were trading at $1.09 on the NASDAQ exchange Monday, down 5 cents — and a small-fraction of the company's 52-week high of $16.94.

EDMC spokesman Tyler Gronbach said the company has no comment on the lawsuit.

The company, which has about 23,000 employees, including 2,000 in Pittsburgh, has laid off about 450 employees nationwide and sold off its Art Institute of Pittsburgh building in recent months.

The company's troubles began in 2007 when two former whistle-blowing employees filed a lawsuit that remained sealed and unknown to the public until the U.S. Justice Department and several states intervened in 2011.

The lawsuit contends EDMC exaggerated its career placement abilities and paid recruiters using enrollment-based incentives that violate federal financial aid regulations. The Justice Department and attorneys general from 13 states want the school to forfeit more than $11 billion the company received in federal and state student aid it's received since 2003.

The school has denied the allegations, and provided statistics it contends prove its recruiters weren't solely paid on enrollment statistics, which is illegal.

The SEC has since also questioned how the company paid its recruiters and last year subpoenaed documents about how EDMC has calculated and reported its bad debt expenses on earnings reports.

The school has blamed its debt problems on federal rules that tightened the availability of student loans. EDMC has begun offering more scholarships and giving students more time to pay back such loans, but has said it still expects bad debts to increase compared to net revenue.

The investor lawsuit parrots federal regulatory concerns that the company knowingly recruited students it knew were likely to drop out of school after a few months, without regard to the students' welfare, in order to receive federal education funds.

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