Uncle Sam Goes After Education Management

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It may not come as much of a surprise, but the U.S. Department of Justice has sued Education Management Corp. (NAS: 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 (NAS: 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 (NAS: STRA) and Bridgepoint Education (NYS: 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.

At the time this article was published Fool contributorEvan Niuis a gambling man but holds no position in any company mentioned. Check out hisholdings and a short bio. The Motley Fool owns shares of Bridgepoint Education. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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