The act was created in 1863 to police fraud by Civil War contractors. Citizens were authorized to bring action because federal resources to prosecute fraud were limited.
Today, citizens still bring actions, and the U.S. Department of Justice decides whether to take over a case.
The amounts of money on the line are staggering.
If Lincoln-based student lender Nelnet fails to fend off a lawsuit accusing it of defrauding the federal Treasury, it could be on the hook for almost $1 billion.
And for a former Nebraskan who blew the whistle on questionable federal subsidies collected by Nelnet, that result would be like hitting the lottery. Under the little-known law under which Jon Oberg brought the suit, he would receive up to 30 percent of any judgment he recovers for U.S. taxpayers — a figure that could exceed $300 million.
Those are the possible stakes in United States of America ex. rel. Jon H. Oberg v. Nelnet Inc. et al., a case currently set to go to trial next week in a federal court in Virginia.
The suit is the latest chapter in a controversy that began seven years ago when Nelnet, one of the nation's largest student lenders, used a loophole to boost by about $300 million the federal subsidies it received on some student loans.
Oberg brought the case under the U.S. False Claims Act, which allows citizens to sue on behalf of the government alleging fraud by federal contractors. And under that law, any damages awarded are tripled.
With such big dollars on the line for Nelnet, other lenders, Oberg and taxpayers, a federal judge presiding over the case is strongly urging an out-of-court settlement. The judge last week scheduled a settlement conference for Wednesday and delayed the start of the trial by a day, to next Tuesday.
Nelnet officials said they will participate in the settlement meeting but continue to think they have a strong defense against the allegations.
“We remain confident in our position,'' Nelnet spokesman Ben Kiser said Monday. “The law and the facts have always been on our side, and no new evidence has been presented to change that.''
Oberg's lawsuit says Nelnet and the other student loan companies out of greed illegally boosted their profits at the expense of a program intended to help students and their families. The companies should not be allowed to get away with their fraudulent financial gains, the lawsuit says.
“In truth, (the student loan firms) were more Bernie Madoff than Mother Teresa,'' Oberg's attorneys say in a court filing. “Their universal goal was to grab every possible taxpayer dollar.''
Nelnet argues that it informed U.S. Department of Education officials up front how it was increasing its subsidy billings and the legal basis for the claims — proving there never was any intent to defraud the government.
Nelnet officials cite statements from several department officials, including an assistant secretary who said such increased claims were “no fraud and abuse.''
“Far from being fraudulent, Nelnet's claims for payment were lawful and proper under the statutes, regulations and agency guidance that existed at the time,'' its attorneys wrote in one brief.
Nelnet also argues that a 2007 settlement it reached with the U.S. Department of Education over its alleged overcharges long ago resolved the dispute.
On Nelnet's side is the fact that the U.S. Justice Department last year declined to intervene and take over the case, which it had the right to do. A False Claims Act expert said last week that the decision not to get involved suggests that the Justice Department did not consider the case a strong one.
“If the government doesn't intervene, that should tell you something,'' said attorney John T. Boese of Washington, D.C., author of a respected legal primer on the act.
However, the private D.C. law firm that originally brought Oberg's action has carried it forward, and the Justice Department last month submitted a brief helpful to Oberg. It opposed efforts by the lenders to have the suit thrown out.
Oberg's attorneys argue that although Nelnet officials told the Education Department of its plans, department officials only later understood the full scope of how the company had increased its subsidies.
Nelnet, which employs about 1,000 people at its home base in Lincoln, says in an SEC filing that it has strong defenses but can't predict the outcome of a case that “could have a material adverse effect on the Company's results of operations and financial condition.'' The more than $900 million that Oberg is seeking in judgment against Nelnet nearly equals the $1.1 billion value of all the company's stock.
In addition to Nelnet's $300 million, Oberg had alleged that the Treasury was overcharged by almost $100 million by four other companies still facing trial. Those companies are Education Loans Inc./S.D. of Aberdeen, S.D.; Southwest Student Services of Gilbert, Ariz.; Panhandle Plains Higher Education Authority of Canyon, Texas; and Brazos Higher Education Services of Waco, Texas.
Brazos recently reached a tentative settlement with Oberg, which is being reviewed by the Justice Department. Terms have not been disclosed.
Four additional student loan firms, with alleged overbillings of more than $200 million, were dismissed from the suit earlier this year when it was ruled they were state entities immune from being sued for false claims.
Should the case go before a jury in the federal court in Alexandria, Va., among those who could be called to testify are several Nelnet executives, including CEO Mike Dunlap, and former administrators from the U.S. Department of Education.
Another potential witness is Oberg, a former budget official in the administration of Nebraska Gov. J.J. Exon. Oberg first brought the student loan controversy to light. He has declined to comment on the case.
Working as a researcher in the U.S. Department of Education in 2003, Oberg noticed an irregularity in the federal student loan program, which partially subsidizes student loans made by banks and other private lenders to make the loans more affordable.
Nelnet and other companies were significantly increasing the volume of student loans on which they were claiming a 9.5 percent guaranteed return. That was despite the fact that Congress a decade earlier had barred new loans under that outdated part of the loan program stemming from a time of high interest rates.
The student lenders thought they had found a legal loophole that allowed them to create new 9.5 percent loans.
As a result, Nelnet had started a program known internally as “Project 950.'' Under it, new loans were packaged with old loans eligible for the 9.5 percent guarantee, sometimes for as little as a day. The company claimed that those intra-office transfers made the new loans eligible for the guarantee.
Nelnet created nearly $3 billion worth of the loans and collected tens of millions in additional quarterly interest subsidies from the Treasury.
After a formal complaint filed by Oberg, the Education Department's independent inspector general's office investigated. It found that no such loophole existed and called for Nelnet to return more than $300 million in allegedly improper billings on the loans.
In the end, the Education Department, during the George W. Bush administration, reached a settlement in which Nelnet would forgo collecting almost $1 billion in additional subsidies on the loans but would keep what it had already collected. Other companies engaging in similar practices were offered — and took — the same settlement.
But the settlements specifically exempted actions under the False Claims Act, letting them go forward. Oberg filed his action later that year, and it was unsealed by the court last year.
Earlier this year, President Barack Obama signed a bill that eliminated the banks' college lending program, with all students now borrowing directly from the federal government.
Nelnet is now focused on providing educational services for fees, including loan servicing, payment processing and enrollment services. It currently has a contract to service $13 billion in loans under the federal direct lending program.
Contact the writer:
444-1130, henry.cordes@owh.com
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