In a filing this week with the U.S. Securities and Exchange Commission, Education Management said the company received a letter in December from the city attorney seeking information regarding student recruitment and indebtedness at The Art Institutes. The statement said the company intends to cooperate with the investigation, but can't predict the scope or outcome of the investigation.
A spokesman with the city attorney's office declined to comment on the investigation.
While several state attorneys general have been investigating claims of fraud and deceptive business practices at for-profit college companies in the last few years, an investigation by a city attorney appears to be less common.
State law gives city attorneys in California's large cities the authority to act as attorney general and bring claims concerning unfair or deceptive business practices on behalf of consumers in the local jurisdiction, said former San Francisco City Attorney Louise Renne.
Renne used that authority, for example, when the city sued gun makers, claiming they knowingly and recklessly marketed and sold guns in a way that circumvented the law and contributed to the use of guns in crimes.
"It's there to protect consumers and taxpayers," said Renne, who is a partner at the law firm Renne Sloan Holtzman Sakai. "It's an affirmative tool."
It's possible the San Francisco city attorney's office is coordinating with the California attorney general's office, Renne said.
California Attorney General Kamala Harris, the U.S. Department of Justice and attorneys general in five other states and the District of Columbia are suing Pennsylvania-based Education Management, contending that the for-profit college company illegally paid admissions employees based on the number of students they recruited, regardless of the students' qualifications.
Federal law prohibits colleges and universities that participate in the federal financial aid program from paying commissions, bonuses or other incentive payments to recruiters based on how many students they enroll.
Harris is suing Education Management for all the state financial aid the company's colleges have received since 2003, plus other fines. The exact dollar figure isn't clear, but from 1999 to 2010, Education Management-run colleges have received about $93 million in Cal Grants funds from the California Student Aid Commission, according to the complaint.
Education Management runs not just the eight Art Institutes in California, but also five Argosy University campuses and the Western State University College of Law in Fullerton.
The federal government and states contend that the sole factor that determined changes to admissions representatives' pay at Education Management-run colleges was the number of students the employee recruited during the previous year.
Education Management filed a 64-page brief this month in an effort to get the government lawsuit dismissed. The company argued that its compensation plan was legal because it was not based just on the number of students recruited, but also on considerations such as professionalism, customer service, and business practices and ethics.
The case is in U.S. District Court in the Western District of Pennsylvania. Judge Terrence F. McVerry has not yet ruled on whether to dismiss the complaint.
Read more California investigative reports at CaliforniaWatch.com.