In the Matter of MR. ARNOLD'S EXCELLENCE BEAUTY SCHOOL,
Docket No. 92-121-ST
Student Financial Assistance Proceeding
Steven Z. Finley, Esq., of the Office of the General Counsel, U.S. Department of Education, for the Office of Student Financial Assistance
A program review was conducted at Mr. Arnold's by two reviewers
from ED's Regional Office in Atlanta, Georgia, between November 12-15, 1991. Based upon their review of student files and other
pertinent information, program reviewers concluded that Mr.
Arnold's had committed the following violations: 1) failure to
fully implement default reduction measures outlined in 34 C.F.R. §
668, Appendix D; 2) falsification of Ability-to-Benefit test
answers; 3) failure to refund tuition and fees of students who
withdrew; and 4) failure to meet the standards of administrative
capability and fiduciary standard of conduct.
On October 26, 1992, on the basis of the findings in the program
review, SFAP issued a notice advising Mr. Arnold's of its intent to
terminate its eligibility to participate in federal student
financial programs under Title IV of the HEA, and to impose a fine
of $45,000. Mr. Arnold's timely requested a hearing. By SFAP
letter of April 30, 1993, an additional violation was added and the
proposed fine was increased to $70,900.
I held a hearing on this matter between October 28-29, 1993, in
Miami, Florida. Evidence was submitted in the form of sworn
testimony and documentary evidence. The hearing was transcribed
verbatim by a court reporter and a record was made and provided to
both sides. The parties were authorized to submit a post-hearing
brief, which each side accomplished in a timely manner.
Before proceeding to discuss the merits of the allegations before
me, I must address a threshold jurisdictional issue. That is, is
the additional charge of failing to file the required bi-annual
audit before me for adjudication? Put another way, do I have
jurisdiction to consider that allegation in deciding whether or not
to terminate and/or fine Mr. Arnold's?
The facts pertinent to this issue are not in dispute. Ronald D.
Lipton was, during the time of the issuance of both the Notice and
the amended Notice, dated October 26, 1992, and April 30, 1993,
respectively, the Acting Director, then Director of the Compliance
and Enforcement Division of OSFA. As such, he was the Designated
ED Official as envisioned in 34 C.F.R. § 668.81(f), the one who
initiates either a termination or fine procedure by sending a
Notice to the Respondent to that effect. 34 C.F.R. § 668.86 and
668.84. Mr. Lipton did, in fact, execute the original letter of
notification to Mr. Arnold's. The amended letter, however, was
executed by Mark A. Gilbert, "for Mr. Lipton." At the hearing, Mr.
Lipton testified, "When I was absent from the office . . . from
April 22 through May 4, I signed an absence from the office
memorandum stating that Mr. Gilbert would be acting in my position
while I was absent from the office." In a colloquy with me he
stated, in essence, that: he believed he could appoint someone to
be the acting Director; he did not utilize a Standard Form (SF) 50,
Notification of Personnel Action; he did not believe it was
significant that Mr. Gilbert signed for him rather than for
himself; and he believed that Mr. Gilbert was doing both what he
would do if he were there and what Mr. Gilbert would do himself.
After taking evidence, I inquired if the Respondent had any issue
to raise; the respondent had none. In its post-hearing submission,
however, Mr. Arnold's claims, for the first time, that the amended
Notice of Intent to Terminate was not issued by the Designated
Departmental Official and should be dismissed.
The issue of whether someone may act for the Designated ED Official
during periods of short absences has been litigated before me
recently. See In the Matter of Pan American School, Docket No. 92-118-SP, U.S. Dep't of Education (Order of Dismissal)(December 27,
1993), and the cases enumerated therein. In each instance, I have
dismissed the letters of notification finding that: the Secretary
had barred redelegation when he delegated the authority to act as
the Designated ED Official; any attempt to avoid that limitation by
redefinition or otherwise would fail; administrative inconvenience
could not constitute a reason to avoid the clear prohibition set
out by the Secretary; and this error was jurisdictional, could be
raised at any time during the proceedings, and could not be waived.
Consistent with the above, I find that the April 30, 1993 Letter of
Notification, signed by Mark A. Gilbert, was not executed by the
Designated ED Official, and therefore is jurisdictionally void. It
is returned to SFAP for whatever further action it deems to be
appropriate. I will not consider it as part of this proceeding.
SFAP claimed that Mr. Arnold's fraudulently changed answers from incorrect to correct on certain students' Ability-to Benefit tests. The result of these "corrections" was to give some students passing grades, thereby enabling them to gain federal student financial assistance. These intentional falsifications call into question its exercise of due care and diligence as a fiduciary. As proof of this violation, one of the program reviewers testified that when he reviewed some of the student files, he noticed that some of the answers on the Ability-to-Benefit tests had been covered over with "white out" correction fluid, and a different answer entered. In almost all instances, the new answers were correct and the changed answers resulted in a passing score. The reviewer went on to testify that he did not ask officials of the school about these findings nor did he attempt to ask the students in question about these "corrections," because he believed that the only explanation was that the school officials had fraudulently made them.
At the hearing, however, six of the students in question testified
under oath. They stated, in essence, that they recognized their
answer sheet from their Ability-to-Benefit test; the use of "white
out" was common in their locale and they used it on their exams;
they were authorized to do so by the proctor of the exam; they did
it because it was neater that erasing; and, they did not receive
any help with their answers. Counsel for SFAP cross-examined these
witness, however, they persisted in their testimony.
These witnesses appeared to be credible. It is inexplicable why no
verification was attempted by program reviewers when they first
discovered the suspicious alterations. Their lack of diligence in
questioning witnesses before they had an opportunity to consult has
made it difficult to determine if there was fabrication.
The procedures for initiating the termination of eligibility of an
institution to participate in the Title IV, HEA programs are set
forth at 34 C.F.R. § 668.86. Section 668.86(a) provides that the
Secretary may terminate or limit the eligibility of an institution
to participate in any or all Title IV, HEA programs, if the
institution violates any provision of Title IV of the HEA or any
regulation or agreement implementing that Title.
ED seeks termination for fraud, which SFAP asserts is the most
serious violation which can be committed. I agree with the
categorization of fraud. However, as discussed above, the record
clearly fails to support such a violation. In further support of
its proposed termination, ED points to the violation of failure to
timely make refunds to students who have either graduated or
dropped out, as required by 34 C.F.R. §668.21. Mr. Arnold's does
not dispute the violation, but does point out that the liability is
relatively small and is being liquidated automatically through
I find that Mr. Arnold's did, in fact, violate the rules regarding
the timely repayment of refunds due. I find further that, although
failure to properly pay refunds is serious, the facts of this case
are such that the imposition of the most serious form of sanction,
that of termination, is not appropriate.
I find that SFAP has failed to meet its burden of establishing that
Mr. Arnold's did not meet the standards of administrative
capability and fiduciary standards of conduct, or did not implement
the Default Reduction Measures outlined in 34 C.F.R. § 668, App.D.
In addition to the proposed termination of eligibility, ED seeks a
fine of $45,000 pursuant to §487(c)(3)(B) of the HEA, and 34 C.F.R.
668.84. ED describes Mr. Arnold's as a medium sized institution
because its students received approximately $640,000 in student aid
in the 1990-91 award year, the latest year in which complete data
is available. However, in light of its withdrawal from the
guaranteed student loan program with its corresponding reduced
access to federal student aid, I believe Mr. Arnold's should more
appropriately be described as a small institution.
ED treats the violation for fraudulent alterations of test answers
as serious and seeks a fine of $30,000. Because of my finding
above, no fine will be assessed for this claim. ED also treats the
failure to timely pay refunds as serious and seeks a fine of
$15,000. ($2500 for each of the 6 violations). It seeks no fines
for the other alleged violations.
In Puerto Rico Technology and Beauty College, and Lamec, Inc., U.S.
Dept. of Ed., Docket Nos. 90-34-ST & 90-38-ST (June 11, 1993), the
Secretary iterates the statutory and regulatory requirement that in
setting an appropriate fine, one must take into account the gravity
of the violations as mitigated by the size of the institution.
No doubt, Mr. Arnold's erred in not meeting its timely refund
requirements. However, I find no evidence of fraud. Therefore, I
believe a fine of $6,000 ($1,000 for each violation) is warranted.
Because Mr. Arnold's is a small school and there is no evidence of
bad faith, such a mitigated fine is adequate and reasonable.
Evidence was introduced as to the positive impact the school had in
the neighborhood for helping the disadvantaged. Also, because of
their financial condition, the school would have to close if it
were terminated or an excessive fine was imposed. Finally, current
school management attributes its problems to a dispute between the
current partners, which they are trying to rectify through a
purchase of the interest of the absentee owner.
(1) ED has failed to meet its burden of proving
that Mr. Arnold's committed fraud by altering Ability-to-Benefit test answers.
(2) ED has failed to meet its burden of proving that
Mr. Arnold's did not meet the standard of administrative
capability and the fiduciary standard of conduct.
(3) Mr. Arnold's did not make timely refunds as required by 34 C.F.R. § 668.21.
(4) ED has failed to meet its burden of proving that Mr. Arnold's did not implement the default reduction measures of 34 C.F.R. § 668 Appendix D.
(5) Mr. Arnold's participation in federal student financial assistance programs under Title IV of the Higher Education Act of 1965, as amended, should not be terminated.
(6) Mr. Arnold's should be fined $6,000.
On the basis of the foregoing it is hereby ORDERED, that the
eligibility of Mr. Arnold's Excellence Beauty School to participate
in the student financial assistance programs under Title IV of the
Higher Education Act of 1965, as amended, not be terminated.
It is further ORDERED, that Mr. Arnold's Excellence Beauty School
immediately and in the manner provided by law pay a fine in the
amount of $6,000 to the United States Department of Education.
Judge Ernest C. Canellos
Issued: January 3, 1994