Some Things You Just Cant Teach
New York Times
May 15, 2005
Gretchen
Morgenson
The business world, nowadays, divides into two kinds
of companies: those that embrace the idea of being more candid with
shareholders and those that prefer the alternative. The Career Education
Corporation, a for-profit provider of technical and business education at 80
campuses around the world, is in the closed-mouth camp. That is unfortunate,
for its owners anyway, because some of the stuff they may not know about seems
disturbing. The company, which had $1.7 billion in revenue last year, offers
diploma programs in information technology, health education, business and
culinary arts. As of April 30, Career Education had some 71,000 students at its
campuses; 25,500 more students were enrolled in its online education group. A
substantial portion of the companys revenue comes from federal education
programs paid for by United States taxpayers. In the first quarter of 2005, for
instance, the company said 60 percent of its tuition payments came from the
federal government. That makes the Career Education story of interest not only
to its shareholders, but to taxpayers everywhere. As Career Education noted in
its latest quarterly filing, it is the subject of investigations by both the
Justice Department and the Securities and Exchange Commission. It is also a
defendant in four lawsuits filed since July 2004, the filing noted.These cases
accuse the company of improprieties in both financial aid and admissions
practices, or of misleading potential students regarding postgraduate placement
rates. The company said that it is cooperating with federal regulators and
prosecutors and that it is defending itself against the lawsuits. Career
Education has advised shareholders of these unpleasantries, as it must. But
several other issues remain under wraps. For example, the company has so far
been silent on a wrongful-termination lawsuit filed in March by Vinod Kapoor, a
former faculty member at its American InterContinental University in Los
Angeles. The suit by Mr. Kapoor accused the company of fraudulent enrollment
practices that allowed it to get federal student aid funds. According to his
complaint, Mr. Kapoor worked for Career Education in Los Angeles from 1999
until March 2004; in 2001, he received an educator of the year
award from the company. In 2003, his lawsuit stated, Mr. Kapoor began to
encounter problems, both with students and superiors. Many students were
failing his classes, not bothering to show up or were lacking in qualifications
- like high school degrees - that were required for admission. Mr. Kapoor
objected when he was told to register students whom he discovered had no
intention of attending the school, according to the suit.Mr. Kapoor said
that after his superiors told him to stop complaining, he notified Career
Educations board in late 2003 about what he called fraudulent practices.
In addition to enrolling students who did not meet requirements and admitting
imaginary students, the abuses he alleged included creating fictitious courses,
falsely advertising that the school provided job placement for all students in
their fields of study and forcing teachers to raise students grades to
improve graduation rates. Mr. Kapoor also said in his lawsuit that officials at
the school encouraged students to stay in classes and fail rather than drop
them. That way, the federal student aid funds would continue to flow in. Mr.
Kapoor lodged a second complaint with the companys board, the lawsuit
said, on March 21, 2004. Ten days later, Mr. Kapoor was fired. So was another
employee who had also complained about enrollment practices, the lawsuit said.
Janice L. Block, Career Educations general counsel, declined to answer
specific questions about the case. She did say that the company answered the
complaint on May 4 but added that it does not routinely disclose employment
suits in its filings. But Mr. Kapoors case seems to go beyond employment
matters to raise serious issues that shareholders may want to consider. Another
matter of interest to shareholders is the companys internal review, begun
a year ago by a committee of its board, into allegations of securities laws
violations made in a class-action suit. Last week, the company said that the
committee had concluded its inquiry and that it had not found support for
claims that its senior management had violated securities laws. The company
said the review examined accounting practices and the reporting of student
population and placement figures. ODDLY, however, Career Education chose not to
release the report, even though the committees review found
wrongful conduct by individual employees of the company, according
to a press release. No improper conduct was directed or orchestrated by
the companys senior management, the release said, but Career
Education said it had decided to improve its internal controls related to
finance and compliance as a result of the committees findings. In other
words, trust me. But thats not something that shareholders
are eager to do nowadays. There may be reason to question the thoroughness of
the review. The committee that reviewed the companys practices consisted
of three directors whom Career Education considers independent, not the
outsiders companies often turn to in such matters. They were Dennis H.
Chookaszian, the former chief executive of CNA Financial, an insurance company;
Thomas B. Lally, the former president of Heller Equity Capital, a venture
capital arm of Heller Financial, a unit of General Electric; and Keith K.
Ogata, former president of National Education Centers, a for-profit education
company that was acquired by Harcourt General Inc., the educational publisher,
in June 1997. (John M. Larson, Career Educations founder and chief
executive, worked as a sales executive for National Education from 1980 to
1989, just before Mr. Ogata arrived.) To assist in the review, the committee
retained the law firm of McDermott, Will & Emery. Career Education says
that these men are independent, and they may well be. In addition, Ms. Block
said the committee hired outside lawyers and accountants to review thousands of
pages of data and to interview hundreds of employees. But two committee members
- Mr. Lally and Mr. Ogata - have been on the board since 1998, when the company
issued shares to the public for the first time. And Mr. Lally has a
particularly close tie to Mr. Larson: Heller Equity Capital, when Mr. Lally was
president, financed Career Education and was the largest shareholder when it
became a public company. In addition, most of the pay given to each outside
director at Career Education is in the form of options on the companys
stock - 24,000 stock options, and $18,000 in cash compensation. Mr. Chookaszian
holds 88,000 of the companys shares, Mr. Lally owns 132,000 shares and
Mr. Ogata owns 110,000 shares, according to the most recent proxy statement. On
Friday, Career Education will hold its annual shareholder meeting at a hotel
near its headquarters in Hoffman Estates, Ill. It could well be an interesting
meeting. For starters, shareholders at that meeting may want to ask why the
company is not disclosing the results of its review publicly. Ms. Block said
the company wanted to wait until the S.E.C. investigation ended before deciding
whether to make additional disclosures. Institutional Shareholder Services, an
investment advisory service in Rockville, Md., has recommended that
shareholders withhold their votes for all three Career Education directors who
are up for re-election. They are Mr. Chookaszian; Robert E. Dowdell, a former
president of National Education Centers; and Patrick K. Pesch, Career
Educations chief financial officer. Institutional Shareholder Services
said that it recommended withholding votes to send a message to the company
that an attitude of open governance and increased shareholder
rights are important and to highlight the concern that shareholders
have regarding the companys practices. One of those concerns,
I.S.S. said, was certain stock sales made by the companys executive
officers and directors - worth $66.7 million - that occurred about a month
before the disclosure that the S.E.C. was formally investigating the company.
Career Education said management was not aware of that fact when the sales were
made but acknowledged that the sales were not part of an existing trading plan.
Career Educations shares, not surprisingly, are well below their 2004
peak of almost $71. They closed on Friday at $32.79. Shareholders have a right
to know more about the questionable practices turned up by the directors
review and to wonder why true outsiders were not in charge of the review. The
trust me days, after all, were supposed to have ended some time
ago.