Feb 10 (Reuters) - Class-action lawsuits recently filed against fifteen law schools for fraud are "credit
negative" because they could cause reputational damage and a
decline in tuition revenue, according to a report released this
week by the ratings agency Moody's Investors Service.
The analysis of credit ratings for law-school bonds was
released on Monday as part of the agency's weekly credit
outlook.
Law-school graduates sued three schools in 2011, and twelve
more on Feb. 1, alleging they committed fraud by publishing
misleading job-placement statistics. The wave of litigation
comes at a bad time for law schools -- especially those that are
lower ranked, the report said.
"The outlook in general is that law schools are looking at
fewer applications," said Emily Schwarz, who authored the
report. "Students are starting to question the value of the
degree because of high tuition rates and more limited job
prospects. They're concerned they won't get their money's
worth."
Moody's maintains credit ratings for eight of the fifteen
schools sued, including: Southwestern Law School; California
Western School of Law; Brooklyn Law School; New York Law School;
Golden Gate University; DePaul University; Hofstra University;
and the University of San Francisco.
None of the fifteen law schools facing lawsuits are among
the top 50 in the latest US News & World Report rankings, and
six are not ranked by the magazine at all.
Experts in legal education said they agreed with Moody's
findings.
"In general, my sense is that credit agencies are not
reliable, as their track record prior to the Great Recession
amply confirms," Brian Leiter, a professor at the University of
Chicago Law School who runs a popular blog on legal education,
said in an email. "But in this case, the diagnosis seems to me
exactly right."
STANDALONE SCHOOLS AT RISK
The report noted that standalone law schools -- including
New York Law School and Southwestern Law School in Los Angeles
-- are more likely to suffer the negative effects of the
lawsuits than those that are part of a larger university.
Standalone schools have less operating revenue and smaller
balance sheets than those attached to universities, the report
said.
Brian Tamanaha, a professor at Washington University School
of Law in St. Louis, agreed on this point.
"Standalone law schools are especially vulnerable because
there is no institutional support behind them to help out in
difficult financial times," said Tamanaha. "At lower-ranked law
schools ... the situation can quickly deteriorate if they
experience year-after-year double digit declines in the numbers
of applicants."
There are already troubling signs for some
standalone law schools.
In January, Moody's revised its outlook on New York Law
School from "stable" to "negative," reflecting "recent
enrollment volatility" -- a 25-percent decrease in the size of
the 2011 entering class -- and uncertainty about the outcome of
the pending lawsuit. (The agency affirmed an underlying "A3"
rating on New York Law School's bonds, the lowest grade of "A"
bonds with above-average creditworthiness.)
Carol A. Buckler, interim dean of New York Law School, did
not respond specifically to the Moody's reports, but said the
lawsuit filed against the law school last year is without merit.
"We are vigorously pursuing it in court and believe that we will
prevail ," she wrote in an email.
Leslie Steinberg, associate dean for public affairs at
Southwestern Law School, said that the lawsuit against the
school is also without merit.
"Southwestern carries insurance to protect against financial
instability and to preserve institutional resources," Steinberg
said.
(Reporting by Moira Herbst)
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