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Breaking Up Is Hard to Do

Breaking Up Is Hard to Do
December 9, 2008

When the New York Institute of Technology went into business with a private online course developer in 2003, both parties expected a happy marriage. But the institute’s recent break-up with Cardean Learning Group, LLC, finalized in a summer court settlement, had the makings of a bitter divorce, with both sides launching harsh accusations in a custody battle over students.

The partnership between the institute -- an accredited private, non-profit college -- and Cardean, a for-profit company formerly known as UNext, was billed as a win-win situation. Cardean would help design and finance a new online branch campus for NYIT, and in turn NYIT would put Cardean on the path to developing its own freestanding, accredited university.

The agreement between the two gave birth to Ellis College, an online NYIT venture that would eventually be phased out at the point that Cardean secured accreditation for Ellis University, an independent institution. In a strategic alliance between the two, a crop of online students would be ushered into NYIT -- where they could receive financial aid from an accredited institution -- and then transfer to the newly established Ellis University once it achieved accreditation on its own.

While Ellis University has been accredited, and officials say the student transfers are now under way, the process went anything but smoothly. The friction between the two has drawn the attention of Ellis University’s new accreditor, which is planning a focused on-site visit in January to ensure that Ellis is meeting the standards of the Higher Learning Commission of the North Central Association of Colleges and Schools.

Fight Started When the Money Got Tight

The story of Cardean and NYIT’s relationship (see timeline), as culled from court documents and interviews, is a veritable case study of the potential perils of increasingly common joint ventures between private companies and established nonprofit colleges looking for new revenue steams.

As with many marriages, a feud over money marred the relationship between NYIT and Cardean. Claiming that Cardean breached its contract and owed NYIT upwards of $2 million, NYIT officials refused to release students to Ellis University. Moreover, NYIT officials actively sought to undermine Cardean’s efforts to accredit Ellis University, according to court documents.

Lawsuits filed by both parties, which were settled in August for an undisclosed sum, show a relationship between NYIT and Cardean that had grown increasingly strained by the summer of 2007. In August of that year, NYIT officials -- smarting from Cardean’s unpaid debts and the disappearing value of promised stock options in the company -- contacted the Middle States Commission on Higher Education and advised officials there not to accredit Ellis University, court documents say.

Cardean’s lawyers asserted that the action was taken “solely out of malice,” but by this point NYIT officials had sufficient reason to believe that Cardean and its parent company, UNext, were going broke, the documents say. Since Cardean couldn't pay NYIT, officials there argued the company was in no position to start a new university, according to the documents.

Rejected by Middle States -- NYIT’s own accreditor -- Ellis University successfully pursued accreditation from the Higher Learning Commission, which accredited the University of Phoenix and has become the accreditor of choice of for-profit institutions that seek regional (as opposed to national) accreditation.

Cardean declined an interview request with Inside Higher Ed, but provided a statement about the claims made in court.

“Lawsuits and responses to lawsuits always carry allegations,” Marguerite Schimmel, a spokeswoman for Cardean, wrote in an e-mail. “We did not think the allegations had any basis, and filed a counter-claim … CLG is happy to report that CLG and NYIT currently enjoy an amicable and productive relationship.”

Any remaining relationship between Cardean and NYIT, however, appears to be winding down. Students who elect to stay at NYIT’s online campus, known as Ellis College, will continue to take courses on Cardean platforms. But NYIT isn’t accepting any more students in the program, and the institute doesn’t plan to continue using Cardean as a vendor, according to Harriet Arnone, vice president for planning and assessment at NYIT.

Security Breach, Mishandling of Financial Aid Alleged

Despite the sometimes-heated back and forth between Cardean and NYIT, Arnone says the partnership was useful in helping the institute to develop Web-based instruction.

“I don’t regret it at all, because I believe that higher education, like a lot of other things in the not-for-profit world, needs to learn how to play nice with business,” she says. “Unless we figure out how to incorporate some of the best practices that are going on in business into the way that we do what we do, we’re not going to make it over the long haul.”

But “best practices” weren’t always what NYIT witnessed from Cardean, according to the institute’s lawsuit. Along with failing to pay debts, Cardean betrayed personal student information, the suit alleges.

“In March 2007, an academic advisor employed by [Cardean] sent an e-mail to 250 Ellis College students that attached a spreadsheet with highly confidential personal information of all 250 students, including Social Security numbers, names, addresses, phone numbers, student numbers, marital status and dates of birth,” the suit states.

Cardean admitted to violating the Family Educational Rights and Privacy Act (FERPA), which protects student records, but not until more than a year after the security breach occurred, NYIT officials asserted. As a result, students weren’t even notified that their personal information had been compromised until well after the fact.

 

In a counter lawsuit, Cardean launched its own criticisms of NYIT’s management, particularly in the area of financial aid. Students who qualified for interest-free subsidized loans were instead steered toward unsubsidized loans that required interest payments, Cardean claims. The program lost prospective students because financial aid was not properly administered, costing Cardean damages in excess of $10 million, according to the suit.

Accreditor Still Has Questions

While the messy legal wrangling between Cardean and NYIT has come to a close, Ellis University is under renewed scrutiny from the Higher Learning Commission. The commission still has questions about whether the dispute between the two parties prevented Ellis University from becoming truly independent on an agreed-upon schedule.

“Those [transfer] students were the key to the whole plan being acceptable to the commission,” said Karen Solinski, the commission's assistant director for legal and governmental affairs.

The commission expected the transfers to begin on or before May 28. The litigation delayed that timeline by about a month, but the transfers are now under way and NYIT is phasing out its online campus as the agreement had initially stipulated, according to institute officials. Even so, commission officials still say a visit is in order to verify that Ellis University is in compliance with its standards.

“We need to have some facts on the ground that we’re not able to tell from financial statements,” Solinski said.

David Harpool, president of Ellis University, says he’s confident the commission will be satisfied with the university’s progress.

“Not one person has ever suggested that there’s anything other than absolute quality in what we do online,” he says.

At its October 31 meeting, the commission’s board of trustees decided not to reconsider Ellis University’s accreditation. However, the board directed the commission’s president to review the report of the January visiting team, and recommend possible sanctions if Ellis University’s claims of progress can’t be independently verified.

Cardean, Ellis Links Under Scrutiny

In addition to having questions about Ellis University’s enrollment, accreditors want more information about the university’s “continuing relationship with Cardean Learning Group,” according to a public disclosure issued by the commission November 3.

Ellis University is incorporated as a private, nonprofit institution with 501(C)(3) status. Cardean, on the other hand, is a for-profit corporation whose board of directors includes Mike Milken. Milken, who is now seeking a pardon from President Bush, has a complicated legacy that includes convictions on felony securities fraud charges and a celebrated history of charitable work in education and cancer research.

While Cardean provided money to help Ellis University spin off from NYIT, the company has no equity interest in the university -- and legally, it can’t have any such interest because of Ellis’s nonprofit status, according to Michael B. Goldstein, a lawyer representing Ellis. That’s not to say, however, that the Higher Learning Commission -- and the Internal Revenue Service -- haven’t already asked exhaustive questions about the relationship.

“There was certainly skepticism,” recalls Goldstein, who heads the higher education practice at the Washington firm Dow Lohnes. The suggestion was, “You guys have been living together for a while. Are you sure you’re not sleeping together?”

Harpool says emphatically that Ellis University is completely independent, with no employees or board members affiliated with Cardean.

“They don’t own one dime of Ellis,” he says.

The relationship between Ellis and Cardean is purely a “vendor/vendee” relationship, in which the university pays Cardean to provide online platforms for its classes, Harpool says. Under its service agreement, Harpool adds that the university is free to end business with Cardean if the company fails to provide a quality product.

While Harpool attests that the university’s board selected Cardean only after considering other offers, the company was instrumental in the creation of Ellis University, and Cardean “certainly did everything possible to endear themselves to Ellis,” Goldstein acknowledges.

According to legal documents, Cardean has staked its entire future on the Ellis University project.

“Without a services agreement with Ellis University, Cardean will have no business function and cease to exist as a going concern,” the company’s countersuit asserts.

Cardean and its parent company, UNext, were leaders in the formative phases of online education. The company’s early partners included some of the biggest names in education, including the University of Chicago, Stanford and Columbia Universities, and the London School of Economics.

If the claims made within the legal documents filed by both NYIT and Cardean are any indicators, however, Cardean is now banking on Ellis University as its last, best hope to thrive in the increasingly competitive world of online education.

The company’s Web site currently lists three clients, including Ellis University and Sierra Nevada College, a nonprofit liberal arts institution that was rescued from financial ruin by a $15 million cash infusion provided by Cardean and Knowledge Universe Learning Group, a company co-founded by Milken. The last of Cardean’s three listed clients is NYIT, and that partnership looks more than a little tenuous now.

 

 

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