From an exhibit to Nelnet's 8-K filing earlier this week:
- What is a qui tam lawsuit?: "...a civil case brought by one or more individuals (a “relator”) on behalf of the federal government for an alleged submission to the government of a false claim for payment." Also known as a whistleblower case where "If successful, the relator may claim a share of the government’s recovery in the case."
- What are the allegations?: "The Complaint alleges that the defendants knowingly presented and caused to be presented to the Department of Education false and fraudulent claims, records and statements in order to obtain illegal special allowance payments on FFELP loans in violation of the Federal False Claims Act. Specifically, the Complaint alleges that from 2002 through 2006, Nelnet and other defendants submitted claims to the Department of Education for special allowance payments on certain FFELP loans at a rate of 9.5%, which the relator alleges is higher than that allowed under applicable law."
- How much money is alleged to have been claimed falsely?: "The Complaint alleges that such loans were not eligible to receive special allowance payments based on the 9.5% Floor, and alleges that approximately $407 million in unlawful 9.5% Floor special allowance payment claims were submitted by Nelnet to the Department of Education."
- Haven't we heard about this before?: "In September, 2006, the Department of Education’s Office of Inspector General (“OIG”) issued a report with respect to an audit of Nelnet’s portfolio of student loans, which concluded that some of those loans were not eligible to receive the 9.5% Floor special allowance payments. In January, 2007, without the admission of any liability, Nelnet entered into a Settlement Agreement with the Department of Education to resolve the issues raised by the OIG audit."
- What does the complaint seek?: "The Complaint seeks the imposition of civil penalties and treble the amount of damages sustained by the federal government in connection with the alleged overbilling by Nelnet and the other defendants for special allowance payments." By my simple math, that would appear to be an amount in excess of $1 billion (3 times the $407 million) just on the Nelnet piece; no wonder the whistleblower is "pursuing the case at his own expense on behalf of the government." The Omaha World-Herald reports that "A prevailing plaintiff in a False Claims Act case collects 25 percent to 30 percent of the dollars recovered."
- How confident is the company about their prospects in this lawsuit (remember that this was drafted by lawyers seeking to avoid shareholder suits if this were to adversely impact Nelnet)?: "Although we believe that the Settlement Agreement with the Department of Education resolved the issues with respect to the 9.5% Floor special allowance payment claims submitted to the Department of Education, we can not predict the ultimate outcome of this qui tam case or any liability that may result."
This story is old news to some degree as media outlets were reporting on its details as far back as late August when the complaint was unsealed. The company basically waited until two weeks after they were served the complaint before filing the 8-K:
- Omaha World-Herald: Nelnet Subsidies Targeted (September 1st)
- Identifies whistleblower as Jon Oberg: "Oberg, who had worked in the administration of then-Nebraska Gov. J.J.
Exon and was a longtime employee in the U.S. Department of Education,
about six years ago helped expose the controversial subsidies Nelnet
and the other companies were collecting."
- Details the process that a whistleblower case moves through; in this instance the government chose not purse the case: "Oberg filed his lawsuit in 2007 under the False Claims Act, which allows a person with knowledge of fraud against the U.S. government to go to court on the government’s behalf. By law, the claim was sealed at that time to give the U.S. Justice Department time to investigate Oberg’s accusations. If the department declines to pursue a False Claims Act case, it is then unsealed, and the plaintiff has the right to pursue the action in court. That’s what Oberg now intends to do, said his attorney, Michael Sturm of Washington."
- JournalStar.com: Nelnet, Others Sued Over Misuse of Subsidy (August 31, 2009)
- Named other defendents in his suit: Also named as defendants in the suit are: Sallie Mae; Southwest Student Services Corp., a Sallie Mae subsidiary; the Kentucky Higher Education Student Loan Corp.; the Pennsylvania Higher Education Assistance Agency; the Vermont Student Assistance Corp.; the Panhandle Plains Higher Education Authority; Brazos Higher Education Services Corp.; the Arkansas Student Loan Authority; and Education Loans Inc. of South Dakota.
- Total claims being made: "The suit seeks the return of about $1 billion in "special allowance" payments wrongfully obtained under a federal subsidy program."