Fraud Case Against Academy of Art University in San Francisco Will Proceed

Academy of Art University building, South of Market neighborhood, San Francisco (via Wikimedia Commons)

For 10 years, the Academy of Art University in San Francisco has fought allegations that it defrauded the government out of millions of dollars in student loans and grants through an illegal incentivizing scheme. Federal prosecutors have argued that the university — one of the biggest for-profit art schools in the country — accepted large numbers of under-qualified candidates unlikely to graduate and pay back their government-subsidized loans.

Yesterday, the US Supreme Court rejected the Academy of Art’s attempts to halt prosecution, letting stand a Ninth US Circuit Court of Appeals ruling from August that said the case can go forward because evidence exists that the school deployed illegal tactics for enrollment between 2006 and 2010. This is the fifth time since 2009 that the for-profit college has tried and failed to get the allegations thrown out of court; the school will now have to settle or go to trial.

When it originally opened in 1929, the school began as the Academy of Advertising Art. The 90-year-old institution swelled in activity by 2012, when it taught more than 18,000 students. Enrollment numbers have dwindled ever since. Nevertheless, the privately-owned university still offers bachelor’s and master’s degrees in more than 25 subjects including acting, advertising, fashion, and fine arts. Famous alumnae include Deanne Fitzmaurice, winner of the Pulitzer Prize of 2005 for Feature Photography and The Hills costars, Lauren Conrad and Heidi Montag.

Critics of the Academy of Art cite the school’s low success rate with students. In 2016, only about seven percent of students graduated on time. According to the website College Factual, the university still maintains a 100 percent acceptance rate while its overall graduation rate hovers around 30 percent.

The enrollment lawsuit originated from a tip by former recruiters — Scott Rose, Mary Aquino, Mitchell Nelson, and Lucy Stearns — who are pursuing legal action under the federal False Claims Act, which awards triple damage to whistleblowers who believe the government has been cheated. Reporting on the story, the San Francisco Chronicle writes that the case could cost the university as much as $450 million with 30 percent dolled out to the employees who alerted the feds.

Allegations against the Academy of Art say the institution dangled raises of up to $30,000 and trips to Hawaii based on the number of students employees could recruit. When recruiters missed these goals, they say that the school reduced their pay.

Since 2006, the college has collected more than $1.5 billion in federal student loans and at least $171 million in Pell and other federal grants, according to federal records. Former recruits claim that these millions urged the school to continue growing its enrollment of students at all cost.

The Academy of Art has responded to the allegations by saying it did nothing illegal, and that the incentives it used were at the time allowed under a federal “safe harbor” law implemented in 2002 by the Bush administration and rescinded in 2010 by President Barack Obama. The order allowed for-profit schools multiple ways to compensate its salespeople and admissions staff based on their success in securing enrollment and financial aid as long as they weren’t “solely” compensated on that basis.

On Monday, the school’s attorney Steve Gombos declined to comment on the high court’s rejection to reporters. The plaintiff’s attorney Stephen Jaffe said that his clients “look forward to pursuing a fair resolution of the lawsuit.”

The case will return to the US District Court in Oakland, where it could possibly take months before a new trial date is set, during which both sides are expected to continue settlement talks.

In the meantime, the Academy of Art is continuing to do business. Currently, tuition is listed at about $25,000, with prices rising an extra $1,000 by fall. In addition to educating more than 13,000 students — many of them taking courses online — the university also operates a car museum. Forbes has estimated that the institution’s collection, which includes 200 vintage cars, is worth $70 million.

Moreover, the university owns 40 buildings across San Francisco’s pricy real estate terrain. In 2016, the school agreed to pay a $60 million settlement with the city for flouting planning code violations and compliance standards.