Trump University and the growth of fraud in HE

Fyodor Dostoevsky’s Crime and Punishment rarely plays into civil legal disputes in the United States. In most instances, the contenders in civil litigation reach out-of-court settlements. In most cases, there are no punitive damages. In this sense, Trump University case is no different. The much publicised settlement that covers around 6,000 former students ends two class-action suits in California and a lawsuit brought by the state of New York.

Of the total of US$25 million, US$21 million will cover two class-action suits and US$4 million will be allocated to settle claims pursued by a New York attorney. The victims of the alleged scam will receive at least half of their money back.

Donald Trump sounded satisfied: "I settled the Trump University lawsuit for a small fraction of the potential award because as President I have to focus on our country.” But not completely so: "The ONLY bad thing about winning the Presidency is that I did not have the time to go through a long but winning trial on Trump U. Too bad!”

One day prior to the settlement, Trump tweeted: "Will be working all weekend in choosing the great men and women who will be helping to MAKE AMERICA GREAT AGAIN!”

The US$25 million payout is certainly not the largest in recent history that a US university has had to make. In December 2009, the University of Phoenix agreed to pay US$78.5 million to settle a lawsuit filed by two former admissions officers who acted as whistleblowers.

At that time, the University of Phoenix was the largest private university in the US and the second-largest higher education system in the country, second only to the State University of New York system. This for-profit university enrolled more than half a million students, 80% of whom were receiving federal aid in the form of student loans and grants.

In the 2008-09 academic year, the University of Phoenix hosted almost a quarter million student-recipients of federal Pell Grants, receiving a revenue of around US$657 million.

In 2008, the total sum of financial aid received by University of Phoenix students amounted to almost US$2.5 billion. The Higher Education Act prohibits colleges and universities whose students receive federal financial aid from paying their recruiters based on the number of students enrolled. This provision is intended to discourage recruitment of unqualified students and to stop wastage of federal dollars.

The allegations were that the university wrongfully obtained around US$3 billion in federal funds. Under the False Claims Act, triple the amount defrauded can be recovered. The government declined to intervene as a party plaintiff. The US$78.5 million settlement reached in December 2009 included US$48.5 million for the US Department of Education, US$19 million for the whistleblowers and US$11 million as statutory attorneys’ fees and costs.

Fraud cases

There were other multi-million dollar settlements paid by universities. In 2004, the University of Phoenix had already paid US$9.8 million to the US Department of Education to resolve administrative claims that it was paying improper incentive compensation to its recruiters.

In July 2007, Oakland City University agreed to pay US$5.3 million, including US$1.4 million to the plaintiff, its former director of admissions, to settle a case based on unlawful incentives for recruitment.

That same month, Corinthian Colleges Inc agreed to pay US$6.5 million, including US$5.8 million to plaintiffs, to settle a class-action lawsuit filed by the state on behalf of customers based on alleged false advertisement and unfair business practices.

In February 2008, several dozen public, private and private for-profit colleges and universities and a dozen private student loan providers agreed to pay a total of US$14 million to settle a class-action lawsuit filed by the state of New York on behalf of customers for keeping a preferred student loan providers list. This practice allegedly mounted to consumer fraud and kickbacks.

The Trump University case settlement might be a perfect face-saving formula not only for Donald Trump, but for his close political clique and the country’s judiciary. The consequences, aside from the US$25 million payout, are not significant, if there are any at all.

It is hard to call the settlement a legal precedent. It is unlikely that there will be a string of similar cases filed immediately based on false advertisement or unfulfilled promises dubbed as dishonest marketing. There are too many universities in the US and around the world that fail to deliver on their promises.

Corruption and fraud

Nevertheless, the Trump University case is in the mainstream of recent developments in the still growing higher education sector, including the much anticipated bursting of the education loans bubble.

A wave of issues, including inflated employment rates for recent graduates, inflated starting salaries, as is the case with law schools and business schools, and the employment formula linked to federal grants and loans recipients, as is the case with for-profits, characterises today’s higher education legal landscape in the US. This wave will bring more lawsuits.

Ironically, Trump in his presidential capacity will have the responsibility for fighting corruption and fraud in higher education and for deciding on issues such as the validity of the ‘gainful employment’ criterion in allocating federal funds to students and universities, including private for-profits.

The only mistake that Trump really made is that he labelled his real estate investment business seminar a university. Apparently, Trump envisioned this branding as a good marketing or publicity stunt, similar to Trump Casino, Trump Plaza, Trump resort or Trump golf course.

The most important lesson to be learned is not that the quality provided does not necessarily match the quality promised or advertised, that he has had to pay out as a result and that there might be light at the end of the tunnel for plaintiffs or whistleblowers – it is that democracy in the US is alive and well.

In a third world country, either developing or in transition, the so-called ‘emerging democracies’, judges and prosecutors would lose any interest in pursuing the case at the very moment the results of the presidential elections were announced. And if they insisted on a lawsuit, the judges and the prosecutor would likely face harassment, continuous internal investigations, charges of corruption, lengthy prison terms and confiscation of private property.

Ararat L Osipian holds a PhD in education and human development from Peabody College of Education and Human Development at Vanderbilt University, USA. He is a Pontica Magna Fellow at New Europe Foundation, Bucharest, Romania, and the author of Grey Areas in the Higher Education Sector: Legality versus corruptibility (Brigham Young University Education and Law Journal, 2012).