The Los Angeles Film School paid $1 million to resolve a 2020 federal audit, but avoided the harsh penalties that have befallen other for-profit colleges accused of fraud.
The results of the Department of Education’s audit were not made public at the time, but are included in the settlement agreement obtained by Variety.
LAFS is facing a federal whistleblower lawsuit alleging a massive scheme to hire thousands of graduates in fake two-day jobs. The scheme was designed to inflate the school’s “placement” numbers, or the number of graduates who were able to find jobs, in order to continue receiving millions of dollars in student aid from the federal government, according to the complaint.
Although Department of Education auditors reviewed the school’s employment data, whistleblowers allege in the lawsuit that the school withheld key evidence showing the extent of widespread fraud. As part of the settlement with the government, the school agreed to no longer pay industry professionals to employ its graduates.
The audit comes as the federal government investigates placement rates at several other for-profit colleges and imposes harsh penalties on students who falsify numbers.
Two whistleblowers, former vice president of placement Dave Phillips and former vice president of admissions Ben Chaib, allege in the lawsuit that school leaders feared a significant loss of revenue if auditors uncovered fraud.
According to emails cited in the lawsuit, the school denied the existence of a “referral fee payment” program in May 2017.
“LAFS does not have any agreements with employers or potential employers that involve payments related to graduate employment,” Jason Kapp, vice president of financial aid, said in an email to auditors.
“This was completely false,” the complaint states.
The school then provided information about vendors that “paid referral fees,” but the largest transactions were hidden from auditors, the lawsuit alleges.
In a February 2018 report, federal auditors said the employment review was “ongoing” but said they found the school was not in compliance with several other regulations. The report concluded that the school was not tracking students’ academic progress, meaning students who fell behind and would have been ineligible for the grant were instead allowed to continue participating in the program.
The audit also found that LAFS did not accurately record the dates students dropped out of school and, in some cases, schools received aid for students who were not attending school. Auditors also found that LAFS allowed students to use borrowed funds to pay the school’s $75 enrollment fee, which is not an allowable expense.
The 2018 report does not mention LAFS’ employment placement policy. It also did not include allegations since brought in a whistleblower lawsuit that admissions officers were given improper pay incentives to admit more students.
The school reached a settlement with the department in October 2020. According to the agreement, LAFS “fully cooperated” with the auditor’s information requests and resolved many of the tracking and accounting issues identified in the 2018 report.
The settlement also states that the department reviewed the school’s employment data from 2015 to 2019. The proposed settlement did not include any findings on that issue. The school admitted there was no wrongdoing.
However, the school accepted a series of conditions. Among them was that it would not “pay money to industry participants or other third parties to directly or indirectly provide or arrange for jobs or gigs that LA Film uses to certify that graduates are being placed for the purposes of employment rates or job placement rates required for calculations.”
In addition to paying $705,000 to resolve the audit issues, the school agreed to pay a $294,000 fine to complete a review of its employment information data.
A spokesperson for LAFS denied any wrongdoing in a statement to Variety.
“Los Angeles Film School believes it did nothing wrong, and the institution’s representatives were fully transparent with the U.S. Department of Education during the three-year review of the program,” a spokesperson said. “The Los Angeles Film School has a long track record of success in helping students build successful careers in the entertainment industry and the adjacent professions that support it. Employers hire our graduates because of the specialized skills they bring to the table, which few institutions of higher education in the country are focused on developing, and the accolades our graduates receive confirm their success.”
Although the settlement ended the audit, it did not waive any potential civil fraud claims against the U.S. government, nor did it absolve any potential criminal violations.
The whistleblower lawsuit, first reported by Variety on Sept. 23, alleges that although LAFS has made “cosmetic” changes to its operations, there will still be at least one “referral fee payment” relationship in place in 2024.
The school is owned by James “Bill” Heavener and three partners, who also own Full Sail University in Winter Park, Florida.
At a Sept. 26 hearing in federal court in Los Angeles, school attorney Matsuda Antia argued that the lawsuit should be thrown out, in part because it rehash old claims.
“The government knew about these allegations,” he said. “The government investigated these allegations. The government entered into a settlement agreement with the Los Angeles Film School regarding these allegations.”
Mark Kleiman, a lawyer for the two whistleblowers, disputed that characterization.
“The contents of the report do not reflect the allegations in this case,” Kleiman said.
Mr. Phillips alleges in his lawsuit that Mr. Hebner directed him not to disclose to auditors that the school had a “referral fee” relationship with Ivor Music Group.
The school paid companies to hire nearly a third of its graduates from 2010 to 2017, according to the suit. School leaders “knew that if the deal was exposed, their access to federal student loans and veterans’ education benefits would almost certainly be terminated,” according to the complaint.
Shortly after auditors visited the school in May 2017, Hebner removed Phillips from his job, according to the complaint. The complaint quotes an LAFS executive as saying the owners “needed Dave to hold them accountable for their plans.” Phillips continued to work as a consultant for the same salary, but left school after five years. A settlement was later reached with the school.
In a statement, LAFS disputed the whistleblower’s claims.
“The claims made by the two former employees are baseless and speculative and do not reflect the reality of our school or the real-life success stories of our graduates,” a school spokesperson said. “We are extremely proud of the success of our graduates who have helped shape the highest levels of the entertainment industry, and we look forward to responding to these claims in accordance with the deadlines set by the court.”
Under the Obama administration, the federal government tightened regulations and launched a series of investigations into for-profit colleges.
In 2016, the Federal Trade Commission reached a $100 million settlement with DeVry University over the university’s claim that 90% of its graduates were able to find jobs in their field. The Department of Education fined Heald College, a subsidiary of Corinthian College, $29.7 million in 2015 for misrepresenting employment rates. In 2013, Career Education Corporation reached a $10.25 million settlement with the New York State Attorney General’s Office over false employment information and paid $9.25 million in restitution to students.
The Trump administration sought to dismantle the Department of Education, laying off hundreds of employees who oversee student aid programs earlier this year. The department’s public information office did not respond to Variety’s request for information about the LAFS settlement.
In preparation for trial in the whistleblower case, lawyers for both sides told the court that it was difficult to obtain information from the Department of Education. Judge Stanley Blumenfeld agreed to extend the trial date, originally scheduled for next August, to October 2026.
