___________________________
In the Matter of
Docket No. 93-116-DA
The Proposed Debarment of
BARBARA HEROLD
___________________________
This DECISION is issued by the United States Department of
Education (Department) pursuant to 34 CFR § 85.314. I have
jurisdiction to act in this matter by virtue of a Delegation of
Authority from the Secretary to me to act as the Department's
Designated Deciding Debarment and Suspension Official. The
regulations, 34 CFR Part 85, and the Nonprocurement Debarment and
Suspension Procedures mailed to Barbara Herold with the notice of
August 26, 1992, govern this debarment.
On August 26, 1992, Barbara Herold, President of the Smith
Business School of Washington, D.C. (Smith), was issued a "Notice
of Proposed Governmentwide Debarment from Federal Nonprocurement
Transactions" pursuant to 34 CFR § 85.312. The notice informed
Ms. Herold that the proposed debarment was based upon the adverse
findings of a program review conducted at Smith by the
Massachusetts Higher Education Assistance Corporation (MEHAC),
and on conduct imputed to her by virtue of her position as
Smith's President, pursuant to 34 CFR § 85.305(b) and (d). Ms.
Herold was also given notice of her right to submit information
and argument in opposition to the proposed debarment.
On July 1, 1993, pursuant to Ms. Herold's request, I held a
hearing on this matter in Washington, D.C. At such hearing, Ms.
Herold appeared pro se while the Department's Notice Official was
represented by Russell B. Wolff, Esq., of the Office of the
General Counsel. At the hearing, evidence was introduced after
which both Ms. Herold and Mr. Wolff presented oral argument. The
hearing was recorded by a court reporter and a transcript was
made. Post-hearing submissions were made by both parties. I
find that nothing presented during the hearing process raises a
genuine dispute as to material facts.
As stated earlier, the Department's action is based primarily on
the MEHAC findings. Those findings, virtually unrebutted,
include: 1) failure to make required tuition refunds to lenders
holding guaranteed student loans (GSL) on behalf of students,
pursuant to 34 CFR § 682.607(c)(1); 2) failure to implement
adequate procedures to refund GSL funds to lenders when a student
withdrew or graduated from Smith, as required by 34 CFR §
682.607; 3) failure to demonstrate administrative capability,
pursuant to 34 CFR § 668.14; and 4) failure to demonstrate
financial responsibility, as required by 34 CFR § 668.13. The
evidence presented at the hearing established the violations
enumerated above. Moreover, evidence was introduced indicating
Smith's failure to bring itself into compliance since the MEHAC
review. The Department argues that the violations are serious
and Ms. Herold, as Smith's president, knew or had reason to know
of the violations cited and, therefore, she should be debarred.
During her presentation, Ms. Herold argued that she has been the
owner of Smith since 1989, and many of the allegations against
Smith pre-dated her ownership. She asserted that she was not a
financial aid expert and relied on others for that expertise.
She argued that almost all the refunds have been paid, although,
in many cases, they were paid late. Since Smith was on the Pell
reimbursement system, she claimed that a major reason for the
late payments was that the Department had unreasonably withheld
funds that had been earned by the school. In addition, a Court
is holding some of their funds on an unrelated issue, which she
believes should be returned. Although conceding that the
offenses occurred, were serious, and could constitute cause for
termination of Smith, Ms. Herold asserted that she was not
responsible for the errors performed by her employees and that
she was not in a position to know much of what transpired.
Based on the presentations of the parties and evidence submitted,
I find that Ms. Herold knew or should have known that, during her
tenure as its president, Smith was violating regulations
applicable to the programs authorized under Title IV of the
Higher Education Act of 1965, as amended, 20 U.S.C. § 1070 et
seq. She was the owner and hands-on manager of the school,
exercising absolute control over the school's operations. As
such, she is fully responsible for the violations of federal
student financial assistance program requirements. It is
abundantly clear that these violations were significant and
resulted in the loss of program funds. Consequently, I find that
the Department has established by a preponderance of the evidence
that Ms. Herold is subject to debarment under 34 C.F.R. § 85.305
(b) and (d). In reaching this conclusion, I have attributed to
Ms. Herold only those violations at Smith which occurred during
her ownership. In addition, except for the fact that Smith is
closed, Smith would have been subject to termination of
eligibility from participating in the Title IV programs for these
violations.
The Notice Official argues that the proper standard to apply in a
debarment case is that officials in responsible positions, like
Ms. Herold here, are subject to debarment when violations occur
at schools under their control which are sufficiently serious so
as to constitute causes for termination of the school's
eligibility. I note, however, that 34 C.F.R. § 85.325(b)(2),
which is cited by the Department as a basis for attributing the
wrongdoing at Smith to Ms. Herold, provides that the fraudulent,
criminal, or other seriously improper conduct of the participant
(Smith) may be imputed to any officer (Ms. Herold), who
participated in, knew of, or had reason to know of that conduct.
In contrast, I note that 34 C.F.R. § 668.86 (a), which governs
termination of eligibility of institutions, provides that the
eligibility of an institution to participate in Title IV programs
may be terminated for the violation of any Title IV provision.
A comparison of the bases for debarment with the bases for
terminating the participation of an institution in any Title IV
program reveals that the tests for each are dramatically
different, i.e. "fraudulent, serious, or other seriously improper
conduct," as opposed to a violation of any provision of Title IV.
As such, I cannot agree with the position of the Notice Official
as to the degree of culpability necessary to debar an individual.
The proper standard to be applied is that the conduct of an
individual sufficient to constitute grounds for debarment must be
fraudulent, criminal, or other similarly serious, improper
conduct.
The debarment of an individual has extremely serious
consequences. The individual is precluded from initiating,
conducting, or otherwise participating in any covered transaction
under the nonprocurement programs and activities of any Federal
agency, and is not eligible to receive any Federal financial and
nonfinancial assistance or benefits from any Federal agency under
nonprocurement programs and activities. Also, such individual
may not act on behalf of any person in connection with any
covered transaction.
As stated in 34 CFR § 85.115, the policy of the Federal
Government is to conduct business only with responsible persons.
It seems clear that in order to support the governmentwide
debarment from federal nonprocurement transactions of an
individual, a greater degree of personal culpability than what
the Notice Official argues is appropriate must be shown. Merely
establishing the violation of program regulations which could
constitute the violation of the fiduciary status conferred upon
Title IV participants and thereby lead to termination of
eligibility is not sufficient.
Applying the correct standard, my review of the facts and
circumstances in this case reveals the seriousness of the
violations and the degree of personal wrongdoing envisioned by
the debarment process has been established. Ms. Herold was
directly responsible for the violation of statutory and
regulatory provisions dealing with her responsibility to account
for federal funds. This clearly and adversely affects her
present responsibility to participate in federal programs. See
generally Sellers v. Kemp, 749 F.Supp. 1001 (W.D.Mo. 1990). I
note as significant that the failure to pay refunds in the Title
IV Program can now lead to criminal penalties. 20 U.S.C. §
1097(a).
In light of the foregoing, I find that the Department has met its
burden of proof and persuasion that the debarment of Ms. Herold
is warranted. Under the provisions of 34 C.F.R. § 85.320, the
period of debarment is to be commensurate with the seriousness of
the cause(s) of debarment, generally not to exceed three years.
Based upon the circumstances here, I have determined that the
period of debarment shall be three years.
I order that Barbara Herold be DEBARRED from initiating,
conducting, or otherwise participating in any covered transaction
under the nonprocurement programs and activities of any Federal
agency, and is ineligible to receive Federal financial and
nonfinancial assistance or benefits from any Federal agency under
nonprocurement programs and activities. She may not act as a
principle, as defined in 34 C.F.R. § 85.105(p), on behalf of any
person in connection with a covered transaction. This debarment
is effective for all covered transactions unless an agency head
or authorized designee grants an exception for a particular
transaction in accordance with 34 C.F.R. § 85.215.
ERNEST C. CANELLOS,
Deciding Debarment and
Suspension Official
Dated: January 5, 1994