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Trump University went wrong when its boss lunged for bigger profits

·Senior Columnist

Trump University began as a high-minded effort to revolutionize education. It ended as a lowbrow scheme to charge gullible consumers thousands of dollars for dubious wealth-building seminars. Why the shift?

Donald Trump says he was just offering services people wanted, but some of his associates at the time feel Trump was under financial pressure when he changed the company's mission, and may have lunged for the bigger profits available in the shady world of get-rich-quick seminars. “I think Donald Trump was in bad times,” says Roger Schank, a former professor of computer science and psychology at Yale, Stanford and Northwestern who was the chief learning officer for Trump University during its first two years. “It changed because Donald Trump needed the money.”

Trump denies financial pressure had anything to do with the shift. "The reason the focus of the business changed from online learning to live events was due to student demand," Trump spokesperson Jill Martin says. "Trump University was a very small deal for Mr. Trump." Yet it's having an outsized impact now that Trump is the likely Republican nominee for president. Had he left Trump University as it began, he might now be lauded as an education innovator. Instead, he’s fighting two class-action lawsuits alleging students were ripped off, and another fraud suit filed by the New York attorney general. Trump says the organization never did anything wrong and insists it will win all legal cases.

He even tweeted that he plans to reopen Trump University after winning in court. But which one? The  Trump University that tried to democratize business education with novel online programs? Or the seedier Trump University that has now given Trump’s Democratic rival, Hillary Clinton, an arsenal of material to use against him in negative attack ads?

Capitalizing on reality TV success

Trump University got its start in 2004 when an entrepreneur named Michael Sexton pitched Trump on the idea of an educational outfit that would capitalize on Trump’s popularity as star of the hit TV show “The Apprentice.” The original idea was to offer online courses that would help business owners improve profitability and ordinary people build wealth more effectively. Schank was a longtime advocate of education reform – calling for less theoretical and more practical coursework -- and Trump University hired him to develop its curriculum. “When I was recruited, they wanted to build something really radical and different in education,” Schank told Yahoo Finance. “Phase 1 was something I was proud of.”

Trump U. recruited other prominent academics to design courses, but after two years, something changed, and Schank was out. “Michael Sexton said, ‘we’re not going to build any more courses, and we can’t pay you any more,” Schank recalls. (Sexton did not respond to a request for comment.) Schank left the company in early 2007. Around the same time, Trump University entered a licensing deal with a Florida company called Business Strategies Group, which began to conduct seminars city-by-city on real-estate investing, using the Trump name.

That shift in focus, from entrepreneurship to real-estate investing, led to the lawsuits and reputational problems Trump is still battling today – and prompted regrets among some of the academics Trump had recruited. “I was intrigued with the idea of online courses, “ says John Vogel of Dartmouth’s Tuck School of Business, who designed and taught one class on how to buy a house. “I hoped Trump University would do it well. Had I known where it was headed, I would not have gotten involved.” Professor Don Sexton of Columbia Business School, who developed courses for Trump University on small-business management, says he, too, was intrigued by the opportunity to reach ordinary people online. “If the allegations are true,” Sexton says now,” then they took something that was designed to help struggling small business owners and corrupted it.”

Housing bubble riches

Business Strategies Group was one of several companies run by Mike and Irene Milin of Boca Raton, who specialized in running infomercials promoting ways to make money. The Milins also had a long history of battling fraud charges and changing their business practices to appease legal authorities, which would continue. In collaboration with Trump, they devised a plan to use Trump’s name to lure consumers to “free” seminars on how to get wealthy through real-estate investing. At those seminars, Trump University staffers would try to upsell attendees on more extensive courses costing as much as $35,000 -- often encouraging them to put the whole expense on a credit card. One Trump University employee later testified that he felt the operation was a “fraudulent scheme [that] preyed upon the elderly and uneducated.”

One of the puzzling questions about Trump University is why a famous businessman obviously concerned with status would join forces with law-bending carnival barkers like the Milins. Sexton, in an affidavit filed in one of the class-action suits, suggests the online courses simply weren’t catching on, saying consumers showed “some lack of familiarity with e-learning-only based courses.” He also said Trump University “received feedback from customers reflecting strong interest in learning more about real estate investing, given the state of the real-estate market at the time.”

The housing bubble was near its peak when Trump allied with the Milins, and many seminar companies were conducting road shows, preceded by radio and TV ads, on how to flip houses and make other types of lucrative investments—usually seeking the same high fees Trump University began to seek. So Trump may have simply decided to go where the money was, without worrying too much about the integrity of the business model.

At the time, Trump was also struggling to save the casino empire he has since largely abandoned. His casino company, Trump Entertainment Resorts (previously called Trump Hotels & Casino Resorts), had just emerged from bankrtupcy. In 2005, with costs cut during bankruptcy, it turned its first annual profit in 11 years, according to S&P Capital IQ. But Trump Entertainment Resorts lost money again in 2006 and would lose money every year through 2009, when it declared bankruptcy again. Trump eventually sold his entire stake in the company – now owned by Trump pal Carl Icahn – though it still bears his name.

Trump University was not directly affiliated with other Trump companies, and since it was privately owned, its finances aren’t public. But Trump personally owned 93% of Trump University. He funded it, and court documents suggest he was involved in all major decisions involving the company. He certainly had the authority to change the business model any time he wanted, whether squeezed by other business dealings or not.

In the end, Trump University’s new business model turned out to be no better than the original one. The housing bust that was in full eruption by 2009 pushed the Milins’ company into bankruptcy, and while Trump University never went bust, it stopped operating in 2011. Schank, however, says he has been in touch with Trump representatives about possibly relaunching Trump University, as Trump pledges to do. That suggests a reincarnation would be more like the company’s first iteration, with established acamedicians helping guide the curriculum, than its second. Maybe that will help us forget all about seminar shakedowns and class-action lawsuits.

Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.