Monday, October 19, 2009 6:00 pmAnother whistleblower's lawsuit filed against Nelnet accuses the Lincoln-based student loan company of conspiring with banking giants Citigroup and JPMorgan Chase to get as much money from federal student loan programs as they could by misleading borrowers and offering inducements that violated federal rules.
Nelnet spokesman Ben Kiser called the lawsuit frivolous.
"We take our role as a lender very seriously and are confident our business practices have complied with the (federal) Higher Education Act," said Kiser.
Originally filed in 2007, the lawsuit was unsealed last week in U.S. District Court in Omaha, after the federal government chose not to intervene on its own behalf in the case.
That means the filer, former Nelnet employee Rudy Vigil, is suing on his own to get triple damages as a whistleblower for himself and the government.
The lawsuit lists Vigil as living in Colorado, but he could not be located. His lawyer, Tim Matusheski, could not be reached at a Mississippi phone number. And another lawyer of record, Scott Peters in Council Bluffs, Iowa, also couldn't be reached.
The lawsuit doesn't estimate damages in one sum, but they are presumed to be more than $1 billion.
This lawsuit is similar to one filed two years ago in Maryland by former U.S. Department of Education researcher Jon Oberg, and unsealed earlier this year, but it attacks Nelnet in a different way and accuses two of the world's biggest financial institutions - with vastly deeper pockets - of joining Nelnet in what the suit describes as illegal activities.
A JPMorgan Chase spokeswoman and a Citigroup spokesman had no comment on the litigation.
Both lawsuits are filed under the federal False Claims Act, which allows whistleblowers to seek recovery for the government and themselves from companies accused of defrauding the government.
Vigil's lawsuit says Nelnet, acting on behalf of Citigroup and JPMorgan Chase, applied for federal interest-rate subsidies, student-loan default claims and "special allowance payments" for those lenders.
By doing so, the lawsuit says, the three businesses violated federal law by falsely representing that Nelnet had not offered illegal inducements to encourage people to apply for loans, or by advertising falsely.
In 2005, the lawsuit says, Nelnet, JPMorgan and Citigroup entered a credit agreement providing $500 million to Nelnet from a consortium of big banks, $120 million from JPMorgan and Citigroup.
"This war chest of credit promised by JPMorgan and Citigroup to Nelnet was created ... to pay for Nelnet's liabilities arising from its non-compliance with laws, regulations and orders of any court or administrative agency that were present upon entry of the credit agreement," the lawsuit says.
So Citigroup and JPMorgan Chase, as JP Morgan's successor, are liable for its agent Nelnet's false claims, according to the lawsuit's rationale, because Citigroup and JP Morgan Chase ratified or authorized illegal acts by Nelnet.
Lenders like those big banks used companies like Nelnet to make claims, the lawsuit said, so they could conceal their identity as the lender or to take advantage of Nelnet's exceptional status with the Department of Education.
"There was a single plan for Nelnet, JP Morgan and Citigroup to obtain payment of U.S. money by presenting as many (Federal Family Educational Loan Program) claims as possible," the lawsuit said.
Oberg's suit seeks the return of about $1 billion in the "special allowance payments" wrongfully obtained under a federal subsidy program by Nelnet and by other student loan companies, also named in Oberg's suit.
The allowance payments guaranteed a 9.5 percent return on a limited class of student loans. It was created in the 1980s to ensure low-cost loans when the economy was souring and interest rates were high.
It was largely phased out in 1993, but companies found a loophole that allowed them to expand the loans receiving the subsidy by recycling older loans and packaging them with newer ones.
Nelnet acknowledged using the loophole, and the department's inspector general recommended the company repay the federal government $278 million.
Instead, Nelnet and the Education Department reached a settlement in January 2007 that allowed the lender to keep the $278 million. Nelnet agreed to stop using the subsidy, giving up as much as $882 million in future profits.
Nelnet's response to the Oberg lawsuit was that the matter was settled with the federal government so the lawsuit is moot.
Vigil's lawsuit aims more at Nelnet's relationship with borrowers and colleges and at the pockets of Citigroup and JPMorgan Chase.
It says Nelnet directed Vigil and other employees to mislead borrowers.
Identified in the lawsuit as a full-time telemarketer for Nelnet from 2003 through 2004, Vigil's job was to encourage students to consolidate their student loans for Nelnet.
According to the lawsuit, loan advisers like Vigil were instructed to mislead potential customers into thinking consolidations could be done only in the first six months after graduation.
Nelnet's Web site also misled consumers into thinking they could save thousands of dollars in payments by consolidating with Nelnet, the lawsuit said.
"Individuals who consolidate their student loans with Nelnet, however, end up paying more interest over the life of their loans and make payments for longer periods of time," the lawsuit said.
Nelnet also made fraudulent and misleading statements on its Web site by telling consumers consolidating with Nelnet entitled them to a six-month payment forbearance, the suit alleges.
It also claims Nelnet offered illegal inducements through its marketing relationships with schools and college alumni associations.
Nelnet said it ended those associations in 2007.
"The institutions received prohibited inducements and incentives in return for steering students to Nelnet's exit-counseling software and website, because Nelnet, on its website, undertakes, free of charge to the institution, the instituiton's regulatory duty to conduct exit counseling," the lawsuit said.
Vigil and his lawyers seek three times actual damages, unestimated by the lawsuit, plus thousands of dollars for each example of a false claim, plus attorneys' fees.
Nelnet had about 800 people working in Lincoln as of June.
The company remains one of four chosen by the Obama administration to service student loans the president hopes will be made entirely through the government, and not by private companies like Nelnet, pending changes in law.
Reach Richard Piersol at 473-7241 or at dpiersol@journalstar.com.
