It may not come as much of a surprise, but the U.S. Department of Justice has sued Education Management Corp. (Nasdaq: EDMC) for allegedly violating laws related to compensation practices.
This comes after a former admissions recruiter-turned-whistleblower filed suit against the company several months ago, claiming that it illegally paid recruiters based on the number of students they enrolled -- a violation of federal law. This restriction on compensation was also recently upheld in court.
In Education Management’s 10-Q for the quarter ended in March, the company goes as far as to certify that it has completed the implementation of a new compensation plan in response to these regulatory changes. On the other hand, it also acknowledged that it is under investigation for its recruiter-compensation practices.
The company and students enrolled in its programs have received more than $11 billion in federal funds since 2003. Although the Department of Justice didn't elaborate on how much it is seeking, if I were a gambling man I'd wager there are a lot of zeroes involved. To help put that into perspective, the company's revenue for the most recent full fiscal year was approximately $2.9 billion. For-profit education stocks all derive a substantial portion of their revenue from federal funds.
Regulators and attorneys general have been cracking down on the whole industry. A glimpse through rival Apollo Group's (Nasdaq: APOL) recent filings also show a handful of investigations in multiple states related to its flagship University of Phoenix. Every company residing in the sector, including Strayer (Nasdaq: STRA) and Bridgepoint Education (NYSE: BPI), faces heightened regulatory scrutiny that threatens their way of business.
The risks are mounting, and I fail to see any positive catalysts on the horizon. Frankly, there really doesn't seem to be a lot going for these companies, other than lawsuits and investigations. For the sake of your portfolio, buy something else while it’s still on sale.
- Add Strayer Education to My Watchlist.
- Add Education Management to My Watchlist.
- Add Bridgepoint Education to My Watchlist.
- Add Apollo Group to My Watchlist.
