[image url="http://static.businessinsider.com/image/4adc71710000000000f67211/image.jpg" link="lightbox" caption="" source="" alt="nelnet" align="left" size="xlarge" nocrop="true" clear="true"]
Previously sealed court documents show that JPMorgan (JPM) and Citigroup (C) are being sued for conspiring with education finance company Nelnet (NNI) to allegedly receive federal student loan subsidies by making false claims and illegally recruiting more borrowers.
The civil action suit was filed in May 2008 at U.S. District court in Omaha, Nebraska and was posted recently on Wikileaks, just before it was officially unsealed by the court.
The 285 page suit (below) says Nelnet illegally induced students to apply for federal student loans, paying telemarketers to aggressively push the government product, and used false advertising to get more applications, like promising that students would save thousands of dollars in interest payments by consilidating their loans with Nelnet. They then presented false claims to the Department of Education to receive federal funding.
According to the suit, JPMorgan and Citi alledgely “ratified and/or authorised the wrongful acts of Nelnet and have benefitted from such conduct.”
Without specifying a total amount, the suit asks for triple the U.S. claim payments and other damages, plus civil penalties. It asks for $5,500 to $11,000 for each claim Nelnet presented to the Department of Education between 2004 and 2007 (the number is unclear).
The government could have intervened in the suit, but declined, according to court filings.
Like the sub-prime mortgage debacle, banks and their brokers had an interest in attracting as many borrowers as possible, even risky ones. And Nelnet has gotten into trouble for such practices before.
The company has already had to sign agreements with state authorities promising not to offer a variety of incentives to students and school authorities, according to the Lincoln Journal Star. Here’s their summary:
A settlement with the U.S. Department of Education in 2007 allowed Nelnet to keep $278 million in disputed profits from the controversial loan subsidy.
Nelnet agreed not to take advantage of the subsidy in the future. In 2006, the department’s Office of Inspector General concluded Nelnet got the $278 million improperly and should repay it. After the settlement in early 2007, the Justice Department opened a civil file on other issues contained in the inspector general’s report.
Separately, Nelnet settled with Nebraska Attorney General Jon Bruning and New York Attorney General Andrew Cuomo, who said Nelnet may not have broken the law but acted deceptively and uncompetitively by sponsoring marketing events and paying for school employees to participate.
In 2005, JPMorgan and Citi loaned Nelnet $500 million to help the company pay for its legal problems, committing $120 million themselves, according to the recently unsealed suit, calling it a “war chest.”
It appears to have worked. In June, Nelnet announced that it is one of four companies awarded a federal contract to service student loans.
Jennifer Zuccarelli, a spokesperson for JPMorgan, told us “we’ll just decline to comment on this;” Citi spokesperson Mark Rodgers didn’t comment “because the matter is in litigation;” and Nelnet didn’t immediately respond to our questions.
Here’s the full filing.
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