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By Daniel Golden Jan. 19 (Bloomberg) — Apollo Group Inc. , whose for-profit University of Phoenix is among the largest colleges in the U.S. with campuses in 29 of the 30 most populous states, faces one long-standing obstacle to staking its claim as the future of higher education: New York. During Apollo’s 12-year quest to enter the third-biggest state, founder John Sperling raised money for Eliot Spitzer ’s 2006 gubernatorial campaign, and the company hired Mel Miller, former speaker of the New York Assembly, as a lobbyist. New York has blocked Phoenix’s bid for a Manhattan campus, questioning its academic quality, its dropout rate, how it compensates recruiters, and even its right to call itself a university, according to interviews and documents obtained under a state Freedom of Information Law request. One state review said introductory algebra was less demanding than a high school course. Phoenix has 455,600 undergraduate and graduate students, slightly less than the State University of New York’s 464,981 enrollment. “The last thing we need to do is open a college that’s not successful,” Joseph Frey, New York’s deputy commissioner for higher education, said in a Dec. 11 interview in his Albany office. “I’m not bringing anything in front of the Board of Regents until I’m confident the university is playing by the rules of the U.S. Education Department and complies with our requirements.” SEC Investigation Investors are beginning to share New York’s skepticism. While the benchmark Standard & Poor’s 500 Index of stocks has advanced 6.8 percent, Apollo shares have fallen 17 percent since Oct. 27, when the company said the Securities and Exchange Commission opened an informal probe into its accounting practices. Apollo said its accounting is appropriate, and it intends to cooperate with the inquiry. Apollo’s swoon partly reflects concern that federal authorities may follow New York’s lead and keep closer tabs on for-profit colleges, said Trace Urdan, an analyst at Signal Hill Capital Group in San Francisco. “In the Obama administration, the pendulum has swung back closer to where New York state has been the whole time,” Urdan said in a telephone interview. The absence of a New York campus hurts Phoenix’s efforts to boost enrollment and revenue. Phoenix described New York in a June 2004 planning document as having “the highest number of potential students” of any state. Growth ‘Deceleration’ A “deceleration of growth” in Phoenix’s two-year associate degree program, which accounts for 45 percent of enrollment, is worrying investors, said Ariel Sokol , an analyst at Wedbush Morgan Securities in New York. The slowing growth reflects the school’s shift to higher-quality bachelor’s degree candidates, he said. The U.S. Education Department also is prodding Phoenix to disclose more information about costs and course requirements to prospective students, which could deter some of them from enrolling, he said. While 39 for-profit colleges operate in the state, including ITT Educational Services Inc. and DeVry Inc ., New Yorkers have to attend Phoenix online or cross the Hudson River to the university’s Jersey City, New Jersey, campus. Phoenix, which generated 95 percent of Apollo’s $3.97 billion in revenue in the year ended Aug. 31, enrolls students in face-to-face and online classes. More than 15,000 New Yorkers are enrolled at Phoenix online “to take advantage of our innovative, accredited education to help their careers during these difficult economic times,” Sara Jones, an Apollo spokeswoman, wrote in an e-mail. No Vote Phoenix’s application has never reached a formal vote by the New York regents, who oversee education in the state, Frey said. Phoenix students don’t qualify for the state tuition assistance program, which provided $813 million of aid in the 2008-09 academic year, he said. New York officials’ questions are similar to those that the Obama administration is asking about the for-profit college industry generally. The U.S. Department of Education is considering restrictions on paying recruiters for enrollments and on giving misleading information to prospective students, and may require for-profit colleges to show how much their programs increase graduates’ earnings, according to department documents. The department is examining institutions that increasingly rely on federal financial aid, Robert Shireman, the U.S. deputy undersecretary of education, said in a Sept. 1 interview. Phoenix derived 86 percent of its $3.77 billion in revenue in fiscal 2009 from Education Department grants and loans to students, up from 48 percent in 2001, according to its Oct. 27 10-K filing with the Securities and Exchange Commission. Late Refunds Apollo was late in paying federal financial aid refunds for dropouts, according to a government report the company disclosed in its 10-Q on Jan. 7. The findings by the Education Department will cost about $1.5 million, Phoenix-based Apollo said. Apollo rose 13 cents, or less than 1 percent, to $60.37 in Nasdaq stock market composite trading on Jan. 15. Phoenix’s failure to gain approval in New York is one of its few defeats since Apollo went public in 1994. Founded in 1976 by John Sperling, a faculty-union organizer and former San Jose State University history professor, Phoenix pioneered a model that used part-time faculty with practical experience to teach five-week courses to working adults. The university has expanded nationwide, aided by well-connected board members, campaign contributions and extensive lobbying. Educational Access The quality of Phoenix’s educational offerings and its policy of admitting any applicant who has completed high school or earned an equivalency degree have driven the university’s growth, said Jones, the Apollo spokeswoman. Phoenix “provides access to those who otherwise might not have the opportunity to pursue higher education,” she said. In Pennsylvania, Phoenix managed to overturn a ban on for- profit colleges. In Texas, with the support of then-Governor George W. Bush and his education adviser, Margaret Spellings , later U.S. secretary of education, it outlasted the state higher education commissioner who tried to block its entry. For-profits are freer than most nonprofit colleges to form political action committees and donate to candidates for state office, said Miriam Galston, a law professor at George Washington University in Washington. “In all my time there, New York was the only state we didn’t win,” Charles Seigel, a former Apollo senior vice president for government affairs and now vice president for public policy at Cornell Companies Inc. in a telephone interview. Saga Begins The New York saga began in 1995, when Seigel got in touch with New York education officials. Phoenix applied for a license two years later, seeking to open a Manhattan campus for graduate and undergraduate students. Three years later, a state review team visited the university’s campuses in Phoenix and Tucson, Arizona. The university “really wanted New York very badly,” Miller , Apollo’s New York lobbyist from 1999 to 2006, said in a telephone interview. By 2001, Phoenix was growing impatient. “I am beginning to believe all of this is intentional delay,” Seigel wrote to Gerald Patton, then New York’s deputy commissioner for higher education. “It is becoming my view that this process will never end.” In a January 2002 letter to a university official, Frey proposed a compromise — licensing Phoenix only for graduate programs, which had received better reviews than its undergraduate offerings. Against Miller’s advice, Phoenix spurned the offer, Miller said. ‘Worst Enemy’ “The university was its own worst enemy,” he said. After a 2002 site visit to a Phoenix campus in Philadelphia, a state review team found fault with the college’s newly designed general-education courses for undergraduates. First-year algebra “is not a college-level mathematics course” and “does not demand as high a level of critical thinking as the high school curriculum” in New York, according to a 2003 draft report. Courses in human nutrition and in environmental issues and ethics lacked basic science, and instructors were unqualified, according to the report. “The reviewers continue to question that college-level content in the liberal arts and sciences, in particular in the math and science disciplines, can be covered in a five-week session,” the authors wrote. Phoenix’s general-education courses “are at the appropriate level and quality,” Manny Rivera, an Apollo spokesman, wrote in an e-mail. The school continually evaluates and updates its curriculum and has won Arizona awards for course development, he said. Graduate Program While New York criticized Phoenix’s undergraduate quality, the state’s graduate-only proposal remained on the table. “We are ready to move forward” with five proposed graduate programs in business, Frey wrote in April 2004 to Susan Mitchell, a Phoenix vice president who is now Apollo’s senior vice president for government affairs. This time, Phoenix acquiesced. The school, which didn’t offer enough doctoral programs in academic fields to describe itself as a university under state rules, would go by “Phoenix.edu” in New York, Mitchell wrote Frey in June 2004. The New York market had “astounding” potential, Phoenix said that month in a planning document submitted to state officials. “In the past year, the university has been contacted by 20,000 residents, many of them from the Manhattan area,” according to the document. “These numbers represent the highest number of potential students approaching the institution in any state.” Local Colleges The state then canvassed area colleges for their views on Phoenix opening a graduate campus. Fordham University in the Bronx, Pace University in Manhattan, Polytechnic University in Brooklyn, and the Association of Proprietary Colleges in Albany all opposed Phoenix and requested a public hearing. “The MBA program is just a foot in the door for the initiation of additional programs in direct competition,” wrote David Chang , then Polytechnic’s president and now chancellor of Polytechnic Institute of New York University. In response, Mitchell wrote to Frey in November 2004 that Phoenix “fully understands the limitations on registration and approval in New York.” New York has barred Phoenix to protect local colleges, said Thomas Triscari Jr., an associate professor at Rensselaer Polytechnic Institute in Troy, New York, who served on the six- member state review team that visited Phoenix campuses in 2000. Vision, Foresight Phoenix’s approach to education “is well-structured, well thought-out,” Triscari said in a telephone interview. “These guys have vision and foresight. Competition is in the fabric of our society. Why have we precluded that in academic circles?” Another member of that team also said the state should approve Phoenix. “They’re as good as any of those other for-profits operating in New York,” said David Breneman , a professor at the University of Virginia in Charlottesville and former dean of its school of education. “I don’t see any reason you’d single them out for retribution.” New York was about to schedule a hearing on the local colleges’ objections when the news broke in September 2004 that Apollo had agreed to pay $9.8 million to the Education Department to settle alleged violations of a 1992 law banning incentive compensation for recruiters. The company didn’t admit wrongdoing. State officials pulled back, complaining that Phoenix had failed to alert them to the federal probe. Hearing Delayed “We cannot proceed as planned to schedule a hearing,” Barbara Meinert, coordinator for the state education department’s Office of College and University Evaluation , wrote Mitchell in October 2004. Laura Palmer Noone , then Phoenix’s president, apologized in a September 2005 letter to a New York official “for any embarrassment or concern this delay in providing the information caused for the Board of Regents.” She defended the university’s compensation policies. “There is no correlation between the number of students recruited and the amount the enrollment counselors were paid,” she wrote. “We were set for the final hearing and then everything blew through the moon,” Miller said. The hearing on Phoenix’s application for a graduate campus was never scheduled, Frey said. Another Tack Stymied, Sperling took another tack. After meeting Spitzer, then state attorney general and the frontrunner in the governor’s race, through mutual friends at a dinner, Sperling suggested a fundraiser for him, said Kristie Stiles, the candidate’s national finance director. “I knew Phoenix wasn’t operating in New York,” she said in a telephone interview. At least 15 executives and board members of Phoenix and Apollo Group attended the 2006 fundraiser in Sperling’s Arizona home, according to campaign finance filings . The event reaped at least $50,000, Stiles said. Sperling and Phoenix were accustomed to politics. In his 2000 autobiography, “Rebel With a Cause,” Sperling described his skills as “primarily educational and political.” Before obtaining a license in Pennsylvania, Phoenix had to persuade the Legislature to overturn a century-old state law prohibiting a university from operating as a for-profit, according to Sperling’s autobiography. Phoenix officials met with each member of the state’s House and Senate education committees, and brought some of them to visit its campuses, Seigel said. The repeal was adopted in 1997 as an amendment to an elementary-school budget bill, he said. ‘Bitterly Opposed’ “The private colleges were bitterly opposed to us, but by the time they found out” about the maneuver, “it was too late,” Seigel said. When Phoenix sought entry into Texas in the mid-1990s, Kenneth Ashworth, then the state’s higher education commissioner, was skeptical of the school’s reliance on part- time faculty, he said in a phone interview. “I stood in the breach and tried to keep the University of Phoenix out of Texas,” Ashworth said. Phoenix hired Diane Allbaugh, wife of then-Governor Bush’s chief of staff, Joseph Allbaugh , as a lobbyist, according to records of the Texas Ethics Commission, a state agency based in Austin. Bush’s education adviser, Margaret La Montagne, later Margaret Spellings, prodded Ashworth to expedite the license, he said. ‘Unshirted Hell’ “She called and gave me unshirted hell,” Ashworth said. “Why wasn’t I letting Phoenix into Texas?’ I said they couldn’t meet our standards.” While Spellings doesn’t recall specific discussions about Phoenix with Ashworth, she talked to him all the time on educational policy, Holly Kuzmich, Spellings’s spokeswoman, said. Spellings and Bush supported “new and innovative developments in higher education,” including Phoenix, Kuzmich said. Diane Allbaugh declined to comment. Ashworth’s retirement in 1997 cleared the university’s path. Phoenix “was offering better-quality degree programs than those offered at some public institutions in Texas,” Ashworth’s successor, Don Brown, said in a telephone interview. Phoenix’s first Texas campus, in Dallas, was approved in February 2001. Apollo created a political action committee in 1994, and Sperling encouraged the company’s top seven executives to contribute the maximum $5,000, he wrote in his autobiography. He soon persuaded the next two levels of executives to donate, and Apollo formed three more PACs. Political Contributions “If we were to be in the ‘game,’ it required contributions to members of Congress and the Senate, not to mention presidential candidates — this, on top of a growing number of state legislators and governors,” Sperling wrote. Phoenix studded its board with political insiders such as Richard Bond , former Republican National Committee chairman; John Burton , chairman of the California Democratic Party and former president of the California Senate; Alan Wheat, a former U.S. House member from Missouri; and William Goodling , former chairman of the House education committee. Board members were unavailable for interviews, Apollo’s Rivera said. Sperling and Nancy Pelosi , speaker of the U.S. House of Representatives, are longtime friends, as well as neighbors in San Francisco, where Sperling owns a home, Jorge Klor de Alva, Phoenix senior vice president for academic excellence, said in a Sept. 9 interview at the university’s Arizona headquarters. Pelosi’s Attendance Pelosi attended a Democratic Congressional Campaign Committee fundraiser that Sperling hosted in Arizona last May, according to two people familiar with the event. In 2003, Pelosi went to a small gathering at Sperling’s home and discussed with him how to position the Democratic Party to retake the House and make her speaker, according to a Pelosi aide and to a person acquainted with both Pelosi and Sperling. Sperling co-wrote a 2004 book, “The Great Divide,” advising Democrats on how to win the “red” states and citing Pelosi’s views. Sperling hasn’t asked for the speaker’s help on any legislation affecting the university, the Pelosi aide said. Sperling declined to comment. Phoenix experienced success with Congress. In 2008, for example, the university helped pass a provision expanding federal financial aid to for-profit colleges beyond vocational programs to include liberal-arts students, House aides said. Phoenix plans to offer more liberal-arts courses for aspiring teachers who need degrees in academic fields, William Pepicello , the university’s president, said in a Sept. 9 interview at its Arizona headquarters. Spitzer Fundraiser In New York, Sperling thought the Spitzer fundraiser “would take care of everything. He thought he had positive signals from Eliot,” Miller said. “If I was Sperling, I would have been the same way. ‘We’ve done this the honorable way, we get no results, let me try another route.’” Miller said he warned the university that the fundraiser would be futile because the regents are appointed by the Legislature, not the governor, and because he thought Spitzer wouldn’t go out of his way to reward contributors. In July 2006, Spitzer returned $2,000 donations from Sperling and Hedy Govenar , the founder of Governmental Advocates Inc. , a Sacramento, California, lobbying firm that represents Apollo. Govenar has served on the boards of Phoenix and Apollo. The campaign refunded the money after learning about Apollo’s 2004 incentive compensation settlement, Stiles said. Apollo said in December 2009 that it paid $78.5 million to settle a lawsuit over the same issue of recruiter compensation. The company did not admit wrongdoing. ‘Nice House’ Spitzer remembers the fundraiser, not why it was held or why he gave back the money, he said in a telephone interview. “I recall being in a nice house, chatting for about 15 minutes,” he said. “I raised $40 million around the nation. People supported what we were doing.” Spitzer was elected governor in 2006 and served until his March 2008 resignation. The fundraiser was Sperling’s personal undertaking, “separate and distinct from Apollo Group’s political activism, which is expressed through the company’s nonpartisan PAC,” Apollo’s Jones said. Apollo has donated $10,150 to New York state legislators and to state Democratic Assembly and Senate campaign committees since 2001, according to campaign finance documents. The company gave $1,000 in 2006 to Ron Canestrari , then chairman of the Assembly’s higher education committee and now majority leader; $400 in 2007 to Kenneth LaValle , now ranking Republican on the Senate’s higher education committee; and $500 in 2007 to Kevin Parker, a member of that committee. The university currently doesn’t have a lobbyist in New York and isn’t engaging in political activity on behalf of its application, Rivera said. Dropout Rate State officials remain concerned that Phoenix’s dropout rate is too high, said Saul Cohen, a regent and a former president of Queens College in New York. Only 8.9 percent of first-time, full-time college students who enrolled at Phoenix in 2001 completed their degrees in six years, according to the National Center for Education Statistics , in Washington. Including transfer students, 26 percent of candidates for associate degrees finish in three years, and 36 percent of students pursuing bachelor’s degrees graduate in six years, according to Phoenix’s 2009 academic annual report. “You bring in bodies that may not have much of a chance of completion,” Cohen said in a telephone interview. “That certainly is part of the issue.” Apollo is introducing a three- week orientation course for unprepared students, the company said Jan. 7. Waterfront Campus Phoenix continues to seek approval in New York and is updating the information in its application at the state education department’s request, Jones said. At the same time, “we look forward to continuing to serve our New York students through our neighboring New Jersey campus,” Jones said. At the campus on the Jersey City waterfront, which New Jersey approved in 2003, about a fourth of the students come from New York, according to a December 2004 letter from Mitchell to Frey. Phoenix student Maurice Murphy, a 32-year-old Bronx resident, takes a subway under the Hudson six days a week to school. If all goes smoothly, his commute takes half an hour, Murphy said as he headed to class Dec. 17 in Jersey City. He is majoring in human services management and wants to become a social worker. “Now we’ve got a resource center with TVs and computers,” Murphy said. “This is like I’m really going away to college.” To contact the reporter on this story: Daniel Golden in Boston at dlgolden@bloomberg.net