Antitrust Law Daily Wrap Up, RICO—S.D. N.Y.: Former students fail to show fraud in action against associate degree college, (Jun 8, 2015)

By Linda O’Brien, J.D., LL.M.

In an action by former students against an associate degree college for engaging in a scheme to obtain financial aid for the school by fraudulently misrepresenting the nature of its programs, the students failed to allege fraudulent intent to establish a claim under the Racketeering Influenced and Corrupt Organization Act, the federal district court in New York City has decided. Thus, the defendants’ motion to dismiss was granted (Sanchez v. ASA College, Inc., June 5, 2015, Furman, J.).

ASA College is a for-profit corporation that offers certificate and associate’s degree programs in career-oriented fields such as business and healthcare. ASA relies primarily on the federal and state financial aid awarded to incoming students to generate revenue. Since over 70 percent of ASA’s students drop out within two semesters, the school’s efforts to recruit and enroll new students are vital to its financial success.

In July 2014, Karilin Sanchez, along with other former ASA students, filed suit alleging, in part, that ASA and its officers engaged in predatory and fraudulent practices in violation of Racketeering Influenced and Corrupt Organization Act (RICO). Specifically, the plaintiffs asserted that, due to the pressure to enroll new students, the defendants systematically and fraudulently misrepresented the nature of the school’s programs as part of a scheme to draw millions of dollars in federal and state financial aid to ASA. The misrepresentations included employment prospects, the extent and nature of students’ future debt burden, and that undocumented prospective students would receive work permits or green cards. The defendants moved for dismissal of the plaintiffs’ amended complaint.

Fraudulent intent. The court found that the plaintiffs failed to adequately allege the requisite fraudulent intent in the defendants’ participation in the alleged scheme. The plaintiffs contended that ASA officers: (1) prioritized recruitment in lieu of allocating sufficient resources to job placement activities; (2) marketed inaccurate job placement rates; and (3) misrepresented the full cost of school programs and failed to explain financial aid documents to non-English speaking students.

The court noted that the defendants’ choice to allocate funds to some departments over others was better characterized as a business decision rather than one in furtherance of fraud. Also, the school’s representations that students could “immediately embark on a meaningful career” were “expressions of corporate optimism” which did not amount to fraud. Furthermore, the plaintiffs could not rely on the defendant officers’ “position of control” in the alleged enterprise to show knowing or intentional participation in a fraud.

Job placement. The plaintiffs also failed to allege sufficient facts with particularity the circumstances constituting fraud regarding job placement. Although the plaintiffs set forth examples of marketing materials that contained the inflated job placement statistics, the complaint contained no facts as to when and where those materials were disseminated, in the court’s view.

Conspiracy. To show a civil RICO conspiracy, a plaintiff must show that the defendant agreed with at least one other entity to commit a substantive RICO offense. According to the court, the plaintiffs failed to allege specific facts that the defendants entered into an agreement to facilitate the goals of the enterprise. The plaintiffs’ conspiracy allegations were conclusory and did not permit the court to infer more than the mere possibility of misconduct.

The case is No. 1:14-cv-05006-JMF.

Attorneys: Danielle Feldman Tarantolo (New York Legal Assistance Group) for Karilin Frica Sanchez. Joshua Michael Sivin (Johnson Gallagher Magliery LLC) for ASA College, Inc.

Companies: ASA College, Inc.

Cases: RICO NewYorkNews