University of Phoenix parent Apollo Group Inc. will pay $78.5 million to settle a long-running federal whistleblower lawsuit over recruiter-pay practices.
The settlement, which has been expected since settlement talks were disclosed in late September, is the second-largest of its kind, according to the attorneys representing the University of Phoenix employees who filed the lawsuit in March 2003. Apollo’s shares rose nearly 10 percent Monday, to $62.06.
Despite the big payout, analysts said investors are happy the matter is resolved and that Apollo, the nation’s largest for-profit education company, will avoid a high-profile trial that was due to start in March.
“It puts it behind them,” said Jeff Silber of BMO Capital Markets. “This has been a distraction for years.”
The cash-rich company recorded an $80.5 million charge for the estimated settlement last quarter. Initial estimates from one analyst put the settlement range between $40 million and $250 million.
The lawsuit, filed in U.S. District Court in Sacramento, was filed by two former University of Phoenix enrollment counselors on behalf of the federal government under the False Claims Act.
They said the Phoenix-based for-profit school was defrauding the government of billions in financial aid because it paid recruiters based on the number of students they enrolled, a violation of federal law.
Apollo vehemently denied the charges and said the former employees were disgruntled and their lawyers opportunistic. The company said the University of Phoenix’s pay practices are legal – its reading of the the law and related regulations is that is OK to base pay on enrollments as long as that is not the sole determinant. The company’s attorneys also argued that University of Phoenix had already settled the allegations raised in the lawsuit in a $9.8 million settlement with the Department of Education in 2004.
Apollo succeeded in getting the case dismissed but it was reinstated on appeal.
The federal government declined to intervene in the case, often viewed as a negative for plaintiffs’ chances.
This is the second-largest settlement in a False Claims Act case where the government declined to intervene, said Rachel Geman, partner with the law firm Lieff Cabraser Heimann & Bernstein. It eclipses the total amount of settlements and judgments in the past two years in such cases where the government declined to intervene, according to the U.S. Department of Justice.
The $78.5 million settlement also makes the top 100 biggest federal False Claim Act settlements of any kind, according to Taxpayers Against Fraud. The list is dominated by large pharmaceutical and health-care companies, with Pfizer at the top with a $1 billion settlement announced earlier this year.
Apollo did not admit any liability or wrongdoing in the settlement.
The company said it is confident it will not be subject to any more financial exposure on its recruiter pay practices from March 1997 through today given agreements with the U.S. Department of Education, U.S. Department of Justice and the plaintiffs as part of the settlement.