Column: SEC Gives Ex-Corinthian College Leaders Massive Scam, Slaps on the Wrists

Corinthian Colleges was a higher education scam that defrauded tens of thousands of low-income students out of up to $100 million in federally guaranteed loans. Many are still grappling with the consequences because the Trump administration refuses to give them full student debt relief.

The Securities and Exchange Commission comes settled his case against Jack D. Massimino and Robert C. Owen, the principal authors of this deception, for a pittance.

The penalties imposed for their alleged violations of securities laws: $80,000 against Massimino and $20,000 against Owen. Neither had to admit wrongdoing and neither is barred from serving again as an officer or director of another publicly traded company.

“Just comparing the slap in the face that executives received from the SEC to the plight of students is quite outrageous, both in absolute and relative terms,” ​​says Eileen Connor of the Project on Predatory Student Lending at Harvard Law School, which has represented many students in court.

Santa Ana-based Corinthian filed for bankruptcy in 2015 and is now defunct. Massimino, who was the president and CEO of the vocational education company, was paid $9.6 million in 2011–13; Owen, its chief financial officer, was paid $2.6 million over the same period.

The SEC settlement, which was filed in federal court in Los Angeles on Feb. 25, has caught the attention of Democrats in Congress, who see it as part of the Trump administration’s bizarrely tolerant approach to for-profit colleges.

Sens Elizabeth Warren of Massachusetts, Richard Blumenthal of Connecticut, Sherrod Brown of Ohio and Richard Durbin of Illinois wrote to SEC Chairman Jay Clayton on Monday demand an explanation for the settlement’s weakness, calling it an “insult to the victims of the Corinthian fraud,” including thousands of people the feds are still suing “for debt in excess of SEC fines.” They called the settlement “shocking in its failure to hold these leaders appropriately accountable.”

Massimino and Owen could not be reached for comment, and their attorneys did not return calls.

Institutions like Corinthian, which fed on federal loans taken out by their students, were a poisonous corner of the higher education sector until the Obama administration and state attorneys general derailed the sauce, from 2013 approx.

In 2016, then California Atty. General Kamala Harris has won a $1.1 billion default judgment against Corinthian for a series of deceptive practices.

Corinthian, along with several other such operations, were forced to close.

The Trump administration, however, has given the industry hugs and kisses while putting pressure on its defrauded students.

Under President Obama, the Department of Education offered a blanket forgiveness of federal student loans taken out by Corinthian students. His reasoning was that Corinthian had systematically inflated its graduate placement statistics, which meant that students were being misled about their job prospects after graduation.

Critics claimed that Corinthian and other institutions like it were preying on a vulnerable population of low-income students wanting to enter professional fields by assuring them that they could finance their studies with loans and pay them back with higher salaries after graduation.

“The Corinthian collapse was – and still is – the largest collapse of an institution of higher learning in American history,” the four senators observed in their letter. “It hurt shareholders, cost taxpayers tens of millions of dollars, and left tens of thousands of Corinthian students with wasted college credits and no clear path to furthering their education.”

Trump Education Secretary Betsy DeVos slashed loan relief, measuring the balance owed on student loans against student income using a formula that critics say was flawed and illegal . A federal judge, ruling in a class action lawsuit against DeVos brought by Connor’s group, blocked the department’s action last year, but a government appeal is pending.

DeVos, meanwhile, installed former executives of for-profit institutions in the highest ranks of her agency.

For example, she appointed Julian Schmoke Jr. as the Department of Education’s director of enforcement, responsible for overseeing investigations of for-profit education scams. Schmoke is a former dean of the DeVry Education Group (now known as Adtalem); in 2016, DeVry has agreed to a $100 million settlement of Federal Trade Commission charges that he misled students with false employment statistics, covering certain activities that took place while Schmoke was employed at DeVry.

The Corinthian case is not the first in the for-profit education sector in which the SEC has treated the alleged perpetrators with gloves. In 2017, SEC staff reached a settlement with ITT Educational Services and two of its top executives whom the agency had accused of fraud. The settlement with the company required the executives not to pay any penalties or make confessions; the company, which was then bankrupt, paid no fines and made no admissions of guilt.

SEC commissioners, however, rejected the settlement, possibly because Durbin and Brown raised a public stench about it. Last year, the SEC reached a new regulation in which the executives, former CEO Kevin Modany and former CFO Daniel Fitzpatrick, were penalized $200,000 and $100,000, respectively, and banned from serving as officers or directors of public companies for five years . They neither admitted nor denied the allegations.

The SEC case against Massimino and Owen was something of a side show to the major deceptions Corinthian was accused of. Rather, it’s about the company’s alleged maneuvering to remain eligible for federal student grants and loans, which were its cornerstone.

The company’s eligibility depended on a “composite score” measuring its financial health. To raise its score above the required threshold, the SEC said, Corinthian inflated its long-term debt by borrowing tens of millions of dollars days before the end of its fiscal year in 2011, 2012 and 2013, then repaying loans a few days later, after the start of the next fiscal year.

The maneuvers gave the impression that Corinthian had a lot more in the bank at the end of each exercise than he actually had. Without them, Corinthian’s composite scores would have fallen below the minimum required to be eligible to receive federal student loan and scholarship money.

“There’s clearly been a change of heart at the SEC about culpability and the consequences for these people who are extracting so much taxpayer money and then harming hundreds of thousands of students,” Connor told me. The Department of Education has even begun garnishing earned income tax credit payments from former students to pay off their student loans, even when they have pending relief applications, she says.

“It looks like the department will go to the ends of the earth to squeeze money out of these students,” Connor says. “When it comes time to hold accountable the people who were actually responsible for this situation, it’s a slap on the wrist.”

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