Preet Bharara, the United States Attorney for the Southern District of New York, and Brian M. Hickey, the Special Agent-in-Charge of the Northeastern Region of the United States Department of Education’s Office of Inspector General (“USED-OIG”), announced today that the United States has settled a civil fraud lawsuit that it filed against NEW YORK INSTITUTE OF TECHNOLOGY and CARDEAN LEARNING GROUP, LLC on December 20, 2012 for submitting false claims in connection with federal student loans and grants. The settlement agreements, approved in Manhattan federal court by U.S. District Judge John F. Keenan, require NEW YORK INSTITUTE OF TECHNOLOGY (“NYIT”) to pay $2.5 million and CARDEAN LEARNING GROUP, LLC (“CARDEAN”) to pay $1.5 million in civil damages under the False Claims Act. NYIT and CARDEAN also admitted to certain conduct set forth in the complaint.

Manhattan U.S. Attorney Preet Bharara said: “Repeatedly, we see federal programs intended to help students being exploited through fraud. Here, the defendants abused federal student loan and grant programs, which give low-income students who could not otherwise avail themselves of a higher education the opportunity to do so. This Office will continue to be vigilant in ensuring that these critical programs are protected from fraud, and that the important goals of the programs are preserved.”

USED-OIG Special Agent-in-Charge Brian M. Hickey said: “The incentive compensation prohibition primarily exists for one reason – it protects students. I am proud of the work of our team whose efforts led to this settlement and all of the work we do in support of America’s students and taxpayers.”

According to the Complaint and Settlement Agreements filed in Manhattan federal court:

NYIT is a private, non-profit university with over 14,000 students that participates in federally-funded student loan and grant programs administered by the United States Department of Education (“USED”). As a condition of receiving this funding, NYIT is required to comply with certain statutory and contractual provisions, one of which prohibits program participants from paying recruiters based solely on the number of students they are able to enroll (the “incentive compensation ban”).

In 2003, NYIT contracted with CARDEAN, a for-profit provider of on-line education, to permit students of Ellis College, an on-line school, to use NYIT’s eligibility for federal student loan and grant funding and to receive degrees issued by NYIT in exchange for a percentage of CARDEAN’s revenue. Under the arrangement, students who enrolled and completed courses of study at Ellis College were awarded degrees issued by NYIT even though Ellis College students could not take NYIT courses. To attract students to Ellis College, CARDEAN used recruiters who were paid incentive compensation based on the number of students they enrolled in Ellis College – in direct violation of the incentive compensation ban. Critical to the success of the arrangement between NYIT and CARDEAN, the students who attended Ellis College’s on-line courses had access to federal funding through NYIT to which they would not otherwise have been entitled.

The contractual arrangement was a huge boon to NYIT. By 2007, 3,200 students out of NYIT’s total enrollment of 14,500 - 22% - were enrolled in Ellis College. That same year, NYIT administered over $107 million in federal financial aid, of which $17 million – 16% - was for Ellis College students. NYIT turned a blind eye to CARDEAN’S violation of USED’s incentive compensation ban, a prohibition intended to avoid the drain on public funds resulting from high default rates associated with the practice. As a result of this fraud, the Government paid NYIT millions in the form of grants and subsidized and guaranteed loans, and defendants received money to which they were not entitled.

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In the settlement agreement between the federal government and NYIT, NYIT admitted that it entered into agreements with USED certifying that it would comply with the incentive compensation ban and that it would not contract with any third party that violated the ban. NYIT admits that it contracted with CARDEAN to provide recruitment and other services with respect to Ellis College and further admits that it failed to exercise adequate oversight over CARDEAN’S practices with respect to compensating Ellis College recruiters.

In the settlement agreement between the federal government and CARDEAN, CARDEAN admits in the settlement agreement that, in some cases, it compensated Ellis College recruiters with incentive payments in addition to their regular salaries for, among other things, securing student enrollments for Ellis College.

Mr. Bharara praised the investigative work of the USED-OIG for its extraordinary assistance in this case.

This case is being handled by the Office’s Civil Frauds Unit. Assistant U.S. Attorneys Heidi A. Wendel and Mara E. Trager are in charge of the case.

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