Home > News > October 27, 2006

Has Capella University Defrauded U.S. Taxpayers?!

Based upon information that is contained in the Capella Education Company's prospectus, that has just been released in anticipation of their soon-to-be realized stock offering (to be sold on the NASDAQ under the symbol, CPLA), we have learned that the United States Department of Education, Office of the Inspector General (OIG) is conducting an audit of funds that apparently have not been returned (stolen?) to the Federal government! Specifically, Capella's prospectus states,

"Based on its review to date, the OIG audit staff has identified several such learners for whom it believes proper returns of Title IV funds were not made. For the three year audit period, the total amount of Title IV funds that was not returned for learners that withdrew without providing official notification was approximately $500,000."

This reeks of similarities to a similar audit of another highly criticized for-profit "school" - the University of Phoenix in which the USDE Inspector General's Office found that UOP "had improperly used
$319,338 in Title IV funds!" If that's the case then Capella University, which is a much smaller school, as apparently tried to defraud the government of even more money - approximately $500,000!

The following text was taken directly from Capella University's Prospectus
(pages 12 and 13):

(Note: Portions of the following text have been highlighted for your reading pleasure!)

“The Office of Inspector General of the U.S. Department of Education has commenced a compliance audit of Capella University which is ongoing and which may result in repayment of Title IV funds, fines, penalties, remedial action and damage to our reputation in the industry.

The Office of Inspector General (“OIG”) of the U.S. Department of Education is responsible for, among other things, promoting the effectiveness and integrity of the Department of Education’s programs and operations. With respect to educational institutions that participate in the Title IV funding programs, the OIG conducts its work primarily through compliance audits and investigations. An OTG compliance audit typically focuses upon whether an institution administers federal funds in accordance with applicable rules and regulations, whereas an investigation typically indicates a concern regarding potential fraud or abuse involving federal funds. In our case, the OIG has informed us that they are conducting a compliance audit (and not an investigation) of Capella University. The compliance audit commenced on April 10, 2006 and since then we have been working with the OIG to facilitate their audit. The period under audit is the Title IV award years of 2002-2003, 2003-2004 and 2004-2005 (with each award year commencing on July 1st).

We do not yet know the full scope of the OIG’s findings; however, based on the field auditors’ preliminary audit exceptions and our verbal communications with the OIG audit staff, we believe that the audit is primarily focused upon whether we properly calculated the amount of Title IV funds required to be returned for learners that withdrew from Capella University without providing an official notification of withdrawal and without engaging in any academic activity prior to such withdrawal. Based on its review to date, the OIG audit staff has identified several such learners for whom it believes proper returns of Title IV funds were not made. For the three year audit period, the total amount of Title IV funds that was not returned for learners that withdrew without providing official notification was approximately $500,000. If it is determined that we improperly withheld any portion of these funds, we would be required to return the improperly withheld funds. As part of our internal process of continuously evaluating and attempting to improve our policies and procedures, prior to the initiation of the OIG audit we had already begun modifying our policies and procedures for determining whether a learner is engaged in any academic activity. We developed these policies and procedures during spring 2006 and fully implemented them for the summer quarter. We believe the audit is also focused upon our policies and procedures for disbursing Title IV funding to learners, and focused to a lesser extent on our communication to our learners of our satisfactory academic progress policy, our exit counseling for federal student loan recipients, and our review of learners’ financial aid histories prior to disbursing Title IV funding. See “Regulatory Environment — Regulation of Federal Student Financial Aid Programs — Compliance Reviews” for information about the OIG audit staffs inquiries.

After the OIG completes its field work, the OIG will issue a draft audit report for our response and comment. At present, we do not anticipate receiving a draft audit report for several months, and we do not expect a final report for several months thereafter. In the event that the OIG identifies findings of noncompliance in its final report, the OIG will likely recommend remedial actions to the Office of Federal Student Aid, which will determine whether to require Capella University to refund certain federal student aid funds, modify our Title IV administration procedures, impose fines or penalties or take other remedial action. Because of the ongoing nature of the OIG audit, we can neither know nor predict with certainty the ultimate extent of the draft or final audit findings, or the potential liability or remedial actions that might result. These findings and related remedial action may have an adverse impact on our reputation in the industry, our cash flows and results of operations and our ability to recruit learners, and may have an adverse effect on our stock price. The possible effects of a finding of a regulatory violation (including refunds, fines, penalties and limitations, conditions, suspension or termination of our participation in Title IV programs) are described more fully in “Regulatory Environment — Regulation of Federal Student Financial Aid Programs — Potential Effect of Regulatory Violations.”

Possible Ramifications of Capella University's Actions According to their Prospectus
(Pages 84 and 85)

In the event that the USDE, Office of the Inspector General's Office finds that Capella University and the Capella Education Company have defrauded American taxpayers, we hope that they take the most aggressive action against them for their apparent deceit. The following is an outline of what may happen if the OIG finds that Capella has violated their responsibilities:

“Potential Effect of Regulatory Violations. If Capella University fails to comply with the regulatory standards governing Title IV programs, the Department of Education could impose one or more sanctions, including transferring Capella University to the reimbursement or cash monitoring system of payment, seeking to require repayment of certain Title IV program funds, requiring Capella University to post a letter of credit in favor of the Department of Education as a condition for continued Title IV certification, taking emergency action against Capella University, referring the matter for criminal prosecution or initiating proceedings to impose a fine or to limit, condition, suspend or terminate the participation of Capella University in Title IV programs. In addition, the agencies that guarantee FFEL loans for Capella University learners could initiate proceedings to limit, suspend, or terminate Capella University’s eligibility to provide guaranteed student loans in the event of certain regulatory violations. If such sanctions or proceedings were imposed against us and resulted in a substantial curtailment, or termination, of Capella University’s participation in Title IV programs, our enrollments, revenues and results of operations would be materially and adversely affected.

If Capella University lost its eligibility to participate in Title IV programs, or if the amount of available federal student financial aid were reduced, we would seek to arrange or provide alternative sources of revenue or financial aid for learners. Although we believe that one or more private organizations would be willing to provide financial assistance to learners attending Capella University, there is no assurance that this would be the case, and the interest rate and other terms of such financial aid might not be as favorable as those for Title IV program funds. We may be required to guarantee all or part of such alternative assistance or might incur other additional costs in connection with securing alternative sources of financial aid. Accordingly, the loss of eligibility of Capella University to participate in Title IV programs, or a reduction in the amount of available federal student financial aid, would be expected to have a material adverse effect on our results of operations even if we could arrange or provide alternative sources of revenue or student financial aid.

Capella University also may be subject, from time to time, to complaints and lawsuits relating to regulatory compliance brought not only by our regulatory agencies, but also by other government agencies and third parties, such as present or former learners or employees and other members of the public.”

What does Capella mean, "may be subject, from time to time, to complaints and lawsuits?" As the lawsuits section of this web site attests, Capella is currently involved in three (or four, if a matter that is before the Ninth Circuit Court of Appeals is counted) lawsuits at the time this was posted! Those are just the lawsuits that are before the Federal courts - any lawsuits that have been filed in state courts is unknown.

Be sure to visit often for the latest details regarding this unfolding story!