from the Wall St Journal ...Heard On The Street: Apollo's Bad Marks Hit Stock

APOLLO GROUP, star of the for-profit education business, just got a rare
failing grade from regulators. Will Wall Street mark down its high-achieving
shares, too?
A newly disclosed Education Department report blasts Apollo Group Inc.'s
flagship University of Phoenix for a "culture of duplicity" in which
supervisors improperly lavished money on sales employees for signing up scores
of new students, including those unable to cut it.
Federal investigators said recruiters -- called "enrollment counselors" at
the University of Phoenix -- faced pressures more akin to car dealerships than
colleges. Forty-four of 61 counselors interviewed by the government told
investigators that salaries were always about enrollment numbers. The
Education Department said counselors were told they could as much as double or
triple their starting salaries in three to six months if they signed up enough
students.
Apollo strongly disputes the investigators' findings, saying it doesn't base
salaries on enrollment figures. Still, the report provides fresh details about
sales practices in the for-profit education business. It also raises the
question of whether a too-aggressive approach contributed to Apollo's dazzling
growth -- and if it now will be forced to tone down its approach and grow more
slowly. Amid news of the report yesterday, Apollo shares slipped as much as 3%
before rebounding to trade at $80.09, down 54 cents, or 0.67%, as of 4 p.m. on
the Nasdaq Stock Market.
The shares have dropped sharply in recent weeks as Apollo's peers faced
various legal and regulatory assaults over their recruiting and placement
practices, but Apollo's stock remains up about 18% year to date. Since the
company's initial public offering in 1994, its shares have soared from 72
cents apiece to as high as $98 in June, adjusted for stock splits.
U.S. regulations forbid schools whose students receive federal financial aid
from tying pay directly to enrollments. In 2003, about 60% of the University
of Phoenix's revenue came from federal student aid, which comes in the form of
grants and guaranteed loans. Violating the rules runs the risk of losing the
aid.
Responding to a series of scandals in the 1980s and 1990s, the government
has sought to prevent entrepreneurial schools from signing up students for
programs that don't benefit them, then leaving them saddled with loans that
they can't repay. Aid recipients are generally low-income students. Many rely
heavily on federal aid and pay little or nothing out of pocket to cover
tuition.
Last week, Apollo Group, based in Phoenix, disclosed it had agreed to pay
$9.8 million to settle the sales-incentive allegations spelled out in the
Education Department report. But the company, which said the inquiry covered
1998 through June 2004, disclosed few details. The Wall Street Journal
reviewed a copy of the Education Department document, contents of which were
detailed yesterday in the Arizona Republic.
Apollo Group Chief Executive Todd S. Nelson yesterday dismissed the
conclusions of the report as "totally false." He said the company settled its
dispute to avoid the expense and distraction of the probe. He said its own
internal examination, headed by outside accounting firm KPMG LLP, found no
correlation between compensation and enrollment.
"If the things said in the report were 100% accurate, the government
certainly wouldn't have resolved this for $9 million," he said. Education
Department spokeswoman Susan Aspey said the agency stands by the report and
noted the fine is the largest the agency had ever levied.
Mr. Nelson said the company changed its compensation system in June -- to
make it clear that pay wasn't tied to enrollment but to other measures, such
as customer satisfaction. "The growth in our company is not based on the
compensation of our enrollment counselors," he said. "It's based on the demand
for the quality education we deliver."
Founded in 1973, Apollo has prospered amid a demographic shift in higher
education from young students to "lifelong learning" by working adults who
need to enhance job skills in a fast-changing economy. In the four fiscal
years through Aug. 31, 2003, enrollment and revenue at Apollo has more than
doubled. Annual profit quadrupled to $247 million.
Jennifer Childe, an analyst with Bear Stearns with an "outperform" rating on
the shares, said details of the Education Department report are catching some
investors by surprise because Apollo was perceived as being "pure as the
driven snow." But she said she has considered aggressive sales practices to be
"the norm in the business." Apollo is "growing enrollment north of 40% a
year," she said. "It's hard to believe they've been able to do that without
being aggressive." (Bear Stearns says it has no banking relationship with
Apollo.)
Larry Puglia, manager of T. Rowe Price Blue Chip Growth Fund, which owns one
million Apollo shares, says he is still confident that the company can report
better than 30% annual earnings growth, based on the strong demand for
postsecondary education. "There are a lot of people who have tried to put this
company in the basket of companies that have had pretty widespread regulatory
deficiencies," he says. "I don't think this is the case going forward."
Mr. Nelson characterized the allegations of the current and former workers
interviewed by the government as those of "disgruntled employees," including
some with litigation against the company. He said they represent the views of
a small number of the company's 5,000 counselors.
Investigators said the school hired counselors at $26,000 a year from far
higher-paying jobs, then promised to bump their salaries up to as much as
$120,000 if they logged enough enrollments. Internal literature boasted of
"$$$-No limit on income" and "Never have to worry about $$$ again."
Recruiters with over 200 student enrollments a year earned $80,000 to
$100,000, regardless of their length of service, the report said. The
university rewarded top performers with all-expense paid trips, including one
to the Watergate Hotel in Washington, the report said. Counselors also
received $100 gift certificates and spa packages.
Mr. Nelson said top performers did receive trips, though not to Washington.
He said a few employees got gifts from bosses, though not for enrollment. He
said the literature cited by the government wasn't sanctioned by the company
and that only longtime counselors could make more than $100,000.
Investigators said the company kept performance reviews that suggested the
company used other criteria, such as rapport with students, to make it appear
the company wasn't directly tying enrollments to compensation. But they
described the efforts as "smoke and mirrors" to avoid government detection.
The company pressured recruiters to sign up unqualified students, such as
those who don't have the money to complete the program, the report said. The
recruiters would overcome objections by citing the availability of student
aid, stressing no up-front costs and playing down loan-repayment obligations,
investigators said.
The report cited "a culture of duplicity," with some counselors even forging
student signatures on loan documents. Mr. Nelson said only a few counselors
have ever forged documents and they were quickly fired. He said statistics
show that University of Phoenix has graduation rates above -- and loan-default
rates below -- the rest of the industry, proving the company doesn't sell to
unqualified students.

 

someone needs to tell Mr Nelson that the 9 million fine is one of the largest fines ever levied by the dept of Education .

Anyone else feel like the company is more concerned about making money than students success. Forging signatures on financial forms is pretty disgusting conduct

 

Kinda, sorta, pretty illegal conduct, I'd think.