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Did lawsuit factor in Olympia Snowe's departure?

by Bill Allison and Lindsay Young

Last August, while Sen. Olympia Snowe, R-Maine, was in the midst of an intensive round of fundraising for her 2012 reelection bid, a four-year-old civil lawsuit alleging fraud by an education company in which she and her husband are heavily invested became public.

Nationally, most of the coverage of Snowe's decision to drop her reelection bid has focused on the centrist Republican's frustration with the polarized politics on Capitol Hill. But in Maine, a few newspapers have speculated that her husband's legal entanglements had a role in Snowe's sudden and surprising decision, which left her with more than $3 million in her campaign coffers and her party without a Senate candidate less than three weeks before the filing deadline for Maine's June 12 primary.

According to the senator's most recent financial disclosure form, she and her husband, former Maine Gov. John McKernan Jr., have investments worth between $2 million and $10 million in Education Management Corp., a Pittsburgh-based company that operates for-profit higher education institutions. McKernan is chairman of the board of directors of the company, now embroiled in a lawsuit in which the federal goverment, 11 states and the District of Columbia are seeking to recover a portion of the $11 billion in federal student aid that the education firm has received since July 2003.

Originally filed in April 2007 by a pair of whistleblowers, the lawsuit alleges that the company violated a federal law that prohibits schools from paying admissions officers based on the number of students they recruit and enroll. Those numbers can affect a school's revenues because more students mean a school is potentially eligible for more federal aid dollars. The whistleblowers alleged, and provided documents indicating, that they were paid bounties for the number of students they enrolled.

The Justice Department's decision to intervene on Aug. 8 made the lawsuit, which had been under seal, public. In its complaint, Justice alleged that Education Management Corp. submitted "knowingly false, misrepresented, and/or improper certifications" to the Education Department, stating that it did not offer enrollment incentives to its admissions officers. Without those certifications, students enrolling at the the company's schools, which include Argosy University, Brown Mackie College and South University, would not be eligible for federal financial aid. The complaint names Snowe's husband, noting that in December 2006, while he was the company's chief executive officer, McKernan personally signed certifications that Education Management Corp.'s schools complied with the ban on offering compensation to admissions officers based on the number of students they recruit. 

Education Management Corp. has asked that the case be dismissed. In a press release issued after the suit was announced, Bonnie Campbell, spokesperson for the company's legal team and a former attorney general of Iowa and Justice Dept. official, described the suit as "flat-out wrong." Campbell stated that the company's compensation policies for admissions officers were based on a number of factors, not solely the number of students they recruited, and had been developed with the aid of outside consultants to ensure they complied with federal law.

According to the company's most recent proxy statement, McKernan, who was briefly named as a defendant in the suit but removed, owns more than 835,000 shares in the company, worth more than $14.9 million at current prices. That was up from the 128,000 shares he owned when he became CEO in 2003. He joined the company in 1999, and stepped down from the CEO position in February 2007.

A report from New America Foundation's Higher Ed Watch noted that Education Management Corp. in the words of its founder, Robert Knutson, was "oriented to the needs of [its] students" until 2006, when a group of private equity investors led by Goldman Sachs acquired the company. A filing with the Securities and Exchange Commission shows that McKernan was involved in the acquisition talks, receiving the first contact about an acquisition and serving on a special committee to advise the board on the progress of talks. Goldman Sachs retained McKernan, but did away with the rest of the management, according to the Higher Ed Watch Report. The new management greatly increased enrollment at Education Management Corporation's schools, doubling it to 160,000 students.

The company's most recent annual report filed with the SEC shows that 74.3 percent of the company's revenues--some $2.6 billion--came from programs under Title IV of the Higher Education Act, which requires recipients to certify that they don't offer incentives to admissions officers based on the number of students they enroll. 

When news of the lawsuit was released, political opponents of Snowe's raised the issue, the Lewiston (Me.) Sun Journal reported. Scott D'Amboise, a Republican challenging her in the Senate primary, called on her to resign, while Democratic Senatorial Campaign Committee spokesperson Shripal Shah charged that Snowe and her husband may have personally profited while defrauding low income students.

At the time, Snowe dismissed the charges, citing the care the company took in developing its compensation policies. Her office did not respond to requests for comment.