For those who do not know about Judge Melvin Schweitzer, he was the judge who dismissed the class action lawsuit brought by nine New York Law School graduates accusing their school of misleading them into matriculating using false employment statistics. The plaintiff’s attorneys appealed but the decision was affirmed. It is unknown whether the case will be appealed to the New York Court of Appeals. Judge Schweitzer’s reasoning (basically caveat emptor) was followed by some courts in other states where similar lawsuits have been filed.
Interestingly, in a January 23 article on Dealbook entitled, “Financial Crisis Suit Suggests Bad Behavior at Morgan Stanley”, the author talked about lawsuit in which a Taiwanese bank sued Morgan Stanley alleging fraud in the sale of mortgage-backed securities.
The author described Morgan Stanley’s defense to the claims:
“[Morgan Stanley] is fighting the lawsuit, contending that the buyers were sophisticated clients and could have known what was going on in the subprime market. The CDO documents disclosed, albeit obliquely, that Morgan Stanley might bet against the securities, a strategy known as shorting. The firm did not pick the assets going into the deal (though it was able to veto any assets). And any shorting of the deal was part of a larger array of trades, both long and short. Indeed, Morgan Stanley owned a big piece of Stack min addition to its short bet” (emphasis added)
The judge denied Morgan Stanley’s motion to dismiss on February 25, 2011 and the case proceeded to discovery where some incredible information was revealed. And the judge in this case was….Melvin Schweitzer.
Do these defenses above sound familiar? In the NYLS lawsuit, the school also claimed that the plaintiffs were college educated and should have done their due diligence. NYLS’s post-graduate employment statistics claimed a 90%+ employment rate nine months after graduation. But while the information complied with ABA rules, the information was disclosed in such a confusing manner (JD preferred, not seeking…etc.) that it was difficult to tell whether someone was working in a law related field or as a janitor. Also, critics of the class action lawsuits say that a legal education will be beneficial in the long run. This wasn’t addressed in the NYLS motion to dismiss although there was a line stating that there is an “intrinsic value” of a NYLS education.
While it’s obvious that there is a difference between a legal education and mortgage backed securities, I still cannot fathom why Judge Schweitzer dismissed the lawsuit against NYLS. Both plaintiffs invested a large sum of money hoping that it would bring a reasonable return of investment. Both plaintiffs relied on the statements of the sellers – this is especially relevant considering that NYLS is a non-profit organization. This suggests that NYLS administrators are noble and charitable people with no profit maximizing motives. To put it another way, why didn’t Judge Schweitzer dismiss the case in the Morgan Stanley case? The plaintiff was a BANK presumably with smart people working for it so the caveat emptor theory would make much more sense. Didn’t they have access to people who could have seen this coming?
It would have been interesting to see the NYLS case proceed to discovery. I’m sure that there are some salacious emails that show that the NYLS administration intentionally gamed the employment statistics in order to attract students and to increase the school’s US News rankings. In the class action lawsuit against Thomas Jefferson Law School in California, a former employee submitted a sworn statement with supporting evidence admitting that she falsified graduate employment numbers which violated ABA and NALP reporting guidelines. I’m sure that there is evidence that NYLS acted unethically that would violate ABA accreditation rules. But unless the New York Court of Appeals reverses the motion to dismiss, all we can do is wonder.
Looking at these two lawsuits together, I think it will take a different type of plaintiff to convince a judge to allow these cases to go to discovery. Specifically, student loan lenders will have to sue the schools. Once the lenders see that a large portion of NYLS’s graduates are defaulting on their loans, are paying low monthly payments through IBR or in some cases filing bankruptcy, they will start asking questions and demand answers. Once the lenders slowly but surely lose returns on their capital investments, they will demand retribution from the schools.