Academy of Art University: Building Deal, Wage Suit, and Data Breach

Academy of Art University, the for-profit San Francisco art school owned by the Stephens family, has faced a string of major lawsuits over the past fifteen years: a $60 million settlement with the City of San Francisco over dozens of buildings converted without permits, a federal False Claims Act case alleging illegal recruiter bonuses, a $3.095 million wage-and-hour class action brought by part-time instructors, a data breach settlement covering more than 3,300 employees, and a pending discrimination and retaliation lawsuit from a former administrator. The school is also under a formal “Warning” sanction from its accreditor as of February 2026 and is in the middle of selling off roughly $130 million worth of San Francisco real estate.

The $60 Million San Francisco Building Settlement

In May 2016, then–San Francisco City Attorney Dennis Herrera sued AAU in San Francisco Superior Court, calling the university’s real estate operation an “unlawful real estate scheme.” The complaint said AAU had converted more than 22 residential and office buildings into dorms and classrooms without proper permits, pulling over 300 housing units off the market and violating historic preservation rules. At least 33 of the school’s roughly 40 buildings were identified as non-compliant.¹² AAU’s attorney called the suit “totally premature” and “without merit,” saying the university had already spent $8 million and nine years working on an environmental impact report.

By December 2016, the parties reached a deal valued at roughly $60 million. AAU agreed to pay $20 million in fines and fees and spend an estimated $40 million converting two buildings into 160 units of affordable senior housing, leased to a nonprofit for 66 years. Seven million dollars of the fines went to the city’s Small Sites Program, which helps nonprofits buy rent-controlled buildings. The university also had to shut down operations at three specific locations, cap future enrollment at its available housing capacity, reroute shuttle buses off major traffic corridors, and give students and staff free Muni passes.³²

A supplemental term sheet finalized in July 2019 spelled out the specifics. AAU had to vacate nine properties, bring 34 others into code compliance, restore 12 historic buildings, and convert 39 tourist hotel rooms at 860 Sutter Street into residential single-room-occupancy units. The final financial package came to $58 million: $37.6 million for affordable housing, $8.2 million for the Small Sites Program, $8.3 million for enforcement costs and penalties, and $3.8 million in impact fees. The Board of Supervisors approved the deal in January 2020.⁴⁵

The agreement runs 25 years and requires AAU to house at least 32 percent of full-time students on campus at the start, rising to 45 percent by July 2023. A consent judgment and stipulated injunction give the city fast-track access to court if AAU falls out of compliance.⁴

The Federal Recruiter-Kickback Fraud Case

In 2009, four former AAU admissions representatives — Scott Rose, Mary Aquino, Mitchell Nelson, and Lucy Stearns — filed a whistleblower suit under the federal False Claims Act against the Stephens Institute, AAU’s corporate parent. They alleged the school violated the federal ban on “incentive compensation,” which prohibits colleges receiving federal student aid from paying recruiters based on how many students they enroll.⁶

The complaint described a system running from 2006 to 2009 in which admissions reps had enrollment targets. Hitting the targets could mean salary increases of up to $30,000; missing them could mean cuts of the same size. One admissions team earned an expense-paid trip to Hawaii based purely on enrollment numbers. The school said the pay adjustments reflected both quantitative and qualitative performance, but employees said the swings tracked enrollment alone.⁶⁷ Starting in 2009, AAU switched to a “scorecard” under which enrollment-driven performance could account for up to $23,000 in salary adjustments while qualitative performance capped at $6,000. Managers were told not to share the scorecards with their teams because of compliance concerns.

In 2018, the Ninth Circuit affirmed the trial court’s refusal to dismiss the case, finding that a reasonable jury could conclude the violations were “material” to the government’s decision to pay federal aid.⁶⁸ After twelve years of litigation, the case settled in December 2021 in U.S. District Court in Oakland. The settlement amount was not publicly disclosed.⁵

The Part-Time Instructor Wage Class Action

In April 2011, lead plaintiff Jorge Trelles and other part-time instructors sued AAU in San Francisco Superior Court. They said the school paid them only for classroom teaching hours and moderated online sessions, and paid nothing for grading, corresponding with students, or preparing lessons. The suit brought claims for breach of contract, unpaid minimum wages, waiting-time penalties, wage-statement penalties, unreimbursed expenses, and violations of California’s Private Attorneys General Act.⁹

AAU tried to push the dispute into arbitration. The trial court denied that motion in May 2013 because the university president’s required signature was missing from the employment agreements, and the California Court of Appeal unanimously affirmed in November 2014.⁹

The court certified a class of roughly 3,800 part-time instructors who taught at least one live or online class between April 2007 and February 2017. The parties settled for $3.095 million — an average of about $814 per class member before attorneys’ fees. A San Francisco judge granted preliminary approval in May 2017 and final approval that September. An earlier, separate suit over similar claims had produced a $500,000 settlement shortly after Trelles filed.⁹¹⁰

The 2016 W-2 Data Breach Settlement

In April 2016, an AAU employee fell for a “spoofing” email and sent W-2 tax forms for more than 3,300 current and former employees to an unauthorized third party.¹¹ Two affected employees, Matthew Pagoaga and Anthony Jones, filed a class action in San Francisco Superior Court (Pagoaga v. Stephens Institute, Case No. CGC 16-551952).

Judge Curtis Karnow granted preliminary approval in February 2018 and final approval on July 30, 2018. AAU agreed to reimburse class members for out-of-pocket losses tied to the breach, capped at $250,000 in total, with individual caps of $2,500 for professional services and $1,000 for other expenses. The school also had to provide two years of three-bureau credit monitoring through Experian and put in place additional technical safeguards and cybersecurity training.¹¹¹²

The Yanehiro Discrimination and Retaliation Lawsuit

In 2023, Jan Yanehiro, a longtime Bay Area television personality and former director of AAU’s School of Communications and Media Technologies, sued the university in San Francisco Superior Court. Yanehiro said her work on diversity, equity, and inclusion initiatives put her in constant conflict with university president Elisa Stephens, who she alleged tried to censor her, remove her from faculty committees, and press her to scale back her DEI work. She said her mid-2022 termination was motivated by discrimination based on race, color, and ancestry.¹³

AAU responded that Yanehiro was laid off as part of a pandemic-related consolidation of curriculum and staff. The suit seeks economic and non-economic damages and demands a jury trial; no specific dollar figure was disclosed. As of the most recent reporting, the case was still in its early phases.¹³

A Related Federal Civil Rights Finding

Not every federal action against AAU has been a lawsuit. The U.S. Department of Education’s Office for Civil Rights investigated the school (Case No. 09-16-2299) over race and disability discrimination, harassment, retaliation, and physical accessibility complaints tied to its 740 Taylor Street facility. OCR found AAU’s grievance policy deficient under Section 504 of the Rehabilitation Act, citing inadequate investigations, no meaningful chance for parties to present evidence, and no clear timelines. Investigators also flagged concerns about retaliation against a student who had filed a grievance and noted that a senior administrator lacked training on Section 504 and Title VI. AAU signed a voluntary resolution agreement on July 24, 2018, committing to fix its grievance procedures and step up compliance training.¹⁴

Accreditor Warning and What It Means for Students

AAU has been under accreditation scrutiny since well before its current warning. In 2014, the WASC Senior College and University Commission (WSCUC) issued a formal notice of concern, citing graduation rates of 32 percent for full-time students and 3 percent for part-time, plus problems in institutional decision-making, shared governance, and faculty engagement. The Commission kept that notice in place through spring 2018 after a special visit.¹⁵¹⁶

On February 13, 2026, WSCUC escalated to a “Warning,” an official sanction that means the school is out of compliance with one or more accreditation standards. The Commission found AAU noncompliant with Standard 2 (CFR 2.10) and Standard 3 (CFR 3.4) and set a deadline of February 27, 2028, for the school to correct the deficiencies. A progress report is due in fall 2026, a special visit follows in spring 2027, and a full accreditation visit is scheduled for spring 2029.¹⁷¹⁸ AAU has said it remains fully accredited during the warning period and that students’ access to federal financial aid is not affected.

Federal loan repayment data help explain the scrutiny. According to Department of Education figures reported by EdSource, about 37 percent of AAU’s undergraduate Stafford loan borrowers were in default or delinquent three years into repayment; the rate was 42 percent for graduate PLUS borrowers and 30 percent for parent PLUS borrowers.¹⁹

Where the School Stands Now

The combination of the building settlement, falling enrollment, and a shift to online learning has forced AAU to shrink dramatically. The university once owned more than 40 San Francisco buildings. In October 2025, it listed 10 properties totaling roughly 375,000 square feet and valued at about $130 million. The portfolio includes St. Brigid Church on Van Ness Avenue, a 138,000-square-foot office building at 150 Hayes Street, the Concordia-Argonaut Club, several residential buildings, and a former church near Union Square. Earlier sales included the Commodore Hotel at 825 Sutter Street for $13 million and a Russian Hill housing complex for $16.5 million. AAU also discontinued its intercollegiate sports program in April 2025.²⁰²¹

Enrollment stood at 5,498 in 2024, down from a peak of roughly 18,000 in 2011, with nearly half of students part-time. The graduation rate was 34 percent and undergraduate retention 75 percent.²² The Stephens family continues to control the school through the Stephens Institute. In 2026, Elisa Stephens moved from the presidency to a newly created chief executive officer role, and Chris Visslailli, a two-decade AAU veteran, took over as president, saying his focus would be financial sustainability, student retention, and degree completion.²³

1
KQED. S.F. City Attorney Sues Academy of Art for Unlawful Real Estate Scheme
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SFGate. Academy of Art Agrees to $60 Million Settlement
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KQED. Academy of Art Settles With City of San Francisco in $60 Million Zoning Dispute
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SF Planning Department. AAU Fact Sheet: Resolving Violations and Litigation
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San Francisco Chronicle. Academy of Art University in San Francisco
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U.S. Court of Appeals for the Ninth Circuit. United States ex rel. Rose v. Stephens Institute
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vLex. United States ex rel. Rose v. Stephens Inst., 909 F.3d 1012
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Findlaw. United States ex rel. Rose v. Stephens Institute
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RHDT Law. Trelles v. Academy of Art University, et al.
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Top Class Actions. San Francisco Grants Preliminary Approval Academy Art Wage Hour Settlement
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Top Class Actions. Academy of Art University E-Mail Security Incident Class Action Settlement
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Stueve Siegel Hanson. Academy of Art University Data Breach Settlement
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The San Francisco Standard. Alleging Racism, High-Profile TV Host Sues SF Art School for Retaliation
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U.S. Department of Education. Academy of Art University OCR Resolution Agreement
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BPPE. WSCUC Notice of Concern
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Forbes. The $800 Million Family Selling Art Degrees and False Hopes
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Academy of Art University. Accreditation
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WSCUC. Academy of Art University
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EdSource. Student Loan Default Rates by Type of Loan
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San Francisco Chronicle. Academy of Art to Sell Downtown SF Property
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The Real Deal. San Francisco Art Academy to Sell $130 Million Portfolio
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Data USA. Academy of Art University
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Academy of Art University. Our Leadership