The litigation against John McKernan's company could be a headache for his senator spouse. DOJ joins suit vs. McKernan firm

The Department of Justice has joined a whistleblower lawsuit against an education company chaired and formerly run by John McKernan, the former GOP governor of Maine and husband of Sen. Olympia Snowe (R-Maine).

The suit, which the Justice Department intervened in this week after a federal investigation, accuses Education Management Corp. of defrauding the government of financial aid funding by illegally paying recruiters bonuses and other compensation based on the number of students they could enroll. So far, 11 states and the District of Columbia have also signed on to the suit.


McKernan has been a top executive at EDMC, the nation’s second largest chain of for-profit colleges, for the last 12 years. He and his wife have done well in that time, with the couple reporting between $6 million and $30 million in assets from EDMC., likely stocks or stock options, according to Snowe’s 2009 personal financial disclosure records.

But the litigation could threaten that fortune — and create a political headache for Snowe, who is seeking a fourth term in 2012 with the threat of a tea party primary challenge looming and Democrats eager to unseat her.

Snowe’s office did not respond to a request for comment. But EDMC spokeswoman Jacquelyn Muller released a statement on behalf of McKernan saying the intervention by the Justice Department and the states “is unwarranted and without merit.”

“The company denies any allegation of misconduct and plans to present a vigorous defense against this action,” Muller said.

Today McKernan is chairman of the board, but the former governor first joined EDMC’s board of directors in 1999. He became the firm’s president in March 2003, just months before a Securities and Exchange Commission filing says the company adopted a compensation plan for its admissions recruiters that was supposed to comply with Education Department regulations.

McKernan was named chief executive officer in September 2003, and served in that role through 2006 when he became executive chairman. EDMC has about 150,000 students enrolled throughout its college system, which includes Argosy University, South University and Brown Mackie College.

The suit, brought by two former employees, alleges that that the college chain knowingly violated the Higher Education Act and Education Department regulations, which bar institutions that participate in student aid programs from compensating recruiters based on their succcess in enrolling new students.

The concern is that the practice encourages the enrollment of unqualified students who are more likely to default on their loans. Since 1999, EDMC has received billions of dollars in federal student aid funds, according to the suit.

In 2009, Apollo Group, parent company of the University of Phoenix chain, agreed to pay the Education Department $78.5 million after whistleblowers said the company illegally paid its recruiters. Apollo could have a bill of hundreds of millions of dollars more in a securities fraud case for failing to disclose a federal report to shareholders outlining the violations.

The Education Department is expected in the coming weeks to release regulations that would restrict the flow of federal aid to students attending programs that saddle them with too much debt — they’re aimed most squarely at for-profit colleges like those owned by EDMC.

And Democratic Sens. Tom Harkin of Iowa and Dick Durbin of Illinois are planning to introduce legislation to rein in the sector. Harkin, chairman of the Health, Education, Labor and Pensions Committee, began an investigation into for-profit colleges last year, and has held several oversight hearings questioning whether federal funds should flow to the industry as freely as they do.

At one hearing, a former EDMC career counselor testified against the company, saying her supervisors encouraged her to manipulate graduates’ job placement data to make it more favorable.

McKernan met Snowe while the two were serving in the state legislature, and they dated when they were both members of the House of Representatives. McKernan went on to win two terms as Maine governor, serving from 1987 to 1995.

Jennifer Epstein contributed to this story.