Bizarre Case Tests Limits of Incentive Compensation Rules

Justice Department settlements with two Christian universities pull back curtain on confusion over incentive compensation rules -- and raise questions about how they are enforced.

June 6, 2019
 

The news release from the U.S. Department of Justice seemed relatively straightforward: the federal government and Oral Roberts University had reached a $303,000 settlement to resolve charges that the Oklahoma university had violated federal rules barring the use of incentive-based compensation.

But like the incentive compensation guidelines themselves, the situation is anything but simple.

Oral Roberts is indeed paying $303,502 to resolve a False Claims Act lawsuit against it, as the Justice Department news release indicates. The university is accused of contracting with a now-defunct outside company to help it recruit students to online programs, and of paying the company with a "share of the revenue [it] received from the enrollment of recruited students, in violation of the prohibition on incentive compensation." University officials vehemently assert that they've done nothing wrong and say they settled primarily to put an end to three years of distraction from more important matters.

But what the Justice Department statement doesn't say -- but Oral Roberts's own statement does -- is that another Christian institution, North Greenville University, played a much more central role in this situation in which colleges ran afoul of the incentive compensation regulations.

The Justice Department settled with North Greenville in February for $2.5 million. It was accused of paying the same company, Joined Inc., "based on the number of students who enrolled in NGU’s programs, in violation of the prohibition on incentive compensation."

In a statement at the time, the university said that the matter "focused solely on a potential technical violation of federal regulations related to the incentive recruitment aspects of the relationship," and that North Greenville made "no admission of liability … for any violation of federal law."

The federal regulation that North Greenville was accused of technically violating has a long and somewhat tortured history, a full exploration of which would take not only a much longer article but probably a chapter or an entire book. That will have to wait for another day.

But essentially, federal law has long barred colleges from compensating recruiters (be they employees or contractors) based on their success in enrolling students who are eligible for federal financial aid. The Obama administration toughened those rules in 2009 as part of a broader set of changes aimed at protecting the integrity of federal financial aid programs, and in 2011 the department issued guidance that allowed colleges to pay companies if recruiting was only part of a bundled set of services they offered. That change has helped fuel the industry commonly known as online program management providers.

There is broad disagreement among policy makers, consumer advocates and others about whether the exception for "bundling" of services is appropriate, and whether it conflicts with the underlying prohibition on incentive compensation.

One expert, David Hawkins, executive director for educational content and policy at the National Association for College Admission Counseling, said via email Wednesday that the Justice Department's actions in these cases is evidence that "the subregulatory guidance offered by the Department of Education presented challenges to the interpretation of what constituted incentive compensation." Justice Department enforcement of incentive compensation rules is a "significant component of safeguarding the integrity of federal student aid programs," Hawkins said.

Bob Shireman, a Century Foundation fellow who helped write the tougher incentive compensation rules when he was in the Obama administration, said the Justice Department's actions against North Greenville and Oral Roberts may be signs that "the law enforcement side of the federal government has noticed that the guidance is not consistent with the underlying law."

That may be the case. But those larger implications are overshadowed by the pure bizarreness of certain aspects of the situation.

The History

Here are a few basic facts, to the extent they can be gleaned from court documents in the case.

Joined Inc. in the middle of this decade contracted with several Christian universities (in addition to North Greenville and Oral Roberts, court documents and news accounts mention William Jessup University and San Diego Christian College, among others) to help them deliver online programs and recruit students to them.

At some point -- unmentioned in the Justice Department's news releases, but discussed in the original complaint brought against the universities and in Oral Roberts' response to the DOJ settlement -- North Greenville became a minority investor (owning 33 percent) in Joined.

Maurice Shoe was president and co-owner of Joined, the company with which the two universities reportedly worked to defraud the government. He was also -- you may have to read this twice -- the person who brought the False Claims Act lawsuit alleging that the two universities defrauded the government.

His 2016 complaint lawsuit asserted that he did not know at the time when his company engaged in a "covert" agreement with North Greenville to make incentive payments that the relationship between the company and the university was "unlawful." It was only because of the university's "counsel and advice" that Joined "had been caused to engage in illegal relationships with" the universities, Shoe alleged.

To hear Shoe tell it, all of the universities with which Joined worked knew that the company had a relationship to North Greenville and that, as a result, they knowingly violated a provision of the incentive compensation rules (the "affiliate" rule) that prohibits colleges from working with a third party that has a relationship to an educational institution. Shoe's complaint also alleged that the company's services were almost entirely around "recruitment, enrollment and re-enrollment," so the universities should not have qualified for the "bundling" exception.

North Greenville did not directly challenge any of Shoe's (or the Justice Department's) assertions in its February statement responding to its federal settlement.

But Oral Roberts disputed the government and Shoe directly. The university's statement said that its officials were not aware of North Greenville's ownership stake in the company, so it did not violate the affiliate rule. Beyond that, Oral Roberts "only reimbursed Joined a portion of the actual costs it incurred in performing the agreement," and any payments it made to the company were "entirely permissible under the bundled services exception to the incentive compensation ban," the university insisted.

Oral Roberts said it terminated its agreement with Joined "immediately" after Shoe "finally disclosed" North Greenville's ownership interest in the company. (The university also notes, somewhat snarkily, that Joined owed nearly half a million dollars to its employees before it closed in 2016.)

As is the case with all such False Claims Act plaintiffs, or "relators," as they are called, Shoe gets a cut of the settlement that the government received -- $375,000 in the case of North Greenville, and $45,000 in the Oral Roberts case.

Lawyers for Shoe did not respond to emails and phone messages asking for comment from them or him.

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