UNITED STATES DEPARTMENT OF EDUCATION
WASHINGTON, D.C. 20202
In the Matter
of Docket No. 95-16-SA
Financial Assistance Proceeding
Respondent. ACN: 06-20003
Appearances: John Allen Chalk, Esq., of Michener, Larimore,
Whitaker, Flowers, Sawyer, Reynolds & Chalk, Fort Worth, Texas, for National Beauty
Stephen M. Kraut, Esq., Office of the
General Counsel, United States Department
of Education, Washington, D.C., for Student Financial Assistance Programs.
Before: Judge Ernest C. Canellos
National Beauty College (NBC) of Baton Rouge, Louisiana, is
a proprietary institution which operated two campuses, Baton Rouge and Lake Charles, each
offering programs in
cosmetology. Both campuses were closed in 1992. The schools were licensed by the Louisiana
State Board of Cosmetology and were accredited by the National Accrediting Commission of
Cosmetology Arts and Sciences. Each of these schools participated in the Federal student aid
programs authorized under Title IV of the Higher Education Act of 1965, as amended, (Title IV),
20 U.S.C. § 1070 et seq. and 42 U.S.C. § 2751 et seq.
On November 21, 1994, the Chief, Audit Resolution Branch, Institutional Monitoring Branch, Office of Student Financial Assistance Programs (SFAP) of the U.S. Department of Education (Department) issued a final audit determination (FAD) to NBC. The FAD was based upon a final audit report, dated December 3, 1993, which was issued by the Department's Office of Inspector General (IG). The IG review examined NBC's administration of the student financial assistance programs for the period July 1, 1988, to March 31, 1992. On December 30, 1994, NBC, through counsel, timely appealed the four adverse findings of the FAD and requested a hearing. After briefs were filed by both parties, an oral argument was held.
The audit report, FAD, and request for hearing all involve the same
four findings. First,
NBC is alleged to have failed to document the high school diploma, General Education
Development (GED) certificate, or ability-to- benefit (ATB) test for five students, as required.
For this violation, the FAD demanded the return of $8,552 in Pell Grants and $3,200 in Stafford
loans. Second, NBC is alleged to have failed to obtain or retain financial aid transcripts from
previously attended eligible institutions for seven students, as required. For this violation, the
FAD demanded that $8,924 in Pell Grants and $2,625 in FFEL loans be returned. Third, NBC is
alleged to have overpaid twelve students who withdrew prior to entering into the payment period
for which the funds were paid and failed to make appropriate refunds to students who had
withdrawn.See footnote 1
For the appealed portion of this finding, the FAD demanded the return of $1,153 in Pell
Grants and $2,013 in Stafford loans. Finally, on the basis of evidence that was discovered
during the IG audit that NBC's owner had directed a scheme to fraudulently alter student records,
SFAP determined that all of NBC's records were suspect, and, therefore, NBC was unable to
verify whether any of its students were eligible to receive Title IV funds. Despite this
determination, SFAP offered NBC the option of performing a full file review of the records
required to be maintained by Title IV regulations and having such review attested to by a
certified public accountant. Such action could have alleviated SFAP's concern regarding the
viability of those records, but NBC apparently did not avail itself of that opportunity.
Although SFAP's counsel conceded that a large percentage of the
records may not have
been tampered, as a consequence of not being able to determine which of the records was
the FAD demanded the return of all the Title IV funds expended by NBC during the audit period.
In an attempt to reach a final determination of the amounts to be refunded to the Department,
SFAP reasoned that students who graduated and received licenses from the State of Louisiana
could be presumed to be eligible; therefore, SFAP credited NBC for the federal aid given to the
70 students it found to have received a license from the Louisiana authorities . After such credit
($217,304) was applied, SFAP demanded the return of $431,049 in Pell Grant funds and
$334,952 in Stafford loans.
First, based upon my review of the evidence, I find that NBC failed
to meet its burden of
proof in establishing the ability-to-benefit qualifications for five students; therefore, that finding
is affirmed. As to the second finding, I find that NBC failed to meet its burden of proof in
presenting the financial aid transcripts for the seven students; therefore, that finding is affirmed.
Third, I find that NBC failed to make timely refunds to three students; therefore, that finding is
affirmed. Since the return of the Title IV funds relative to these three findings is subsumed into
the final finding, I make no separate finding as to the amounts that should be returned to the
Department for those findings.
As to the fourth determination, I find that the evidence of fraud
uncovered by the IG team
is substantial. Such evidence includes statements from the owner's son, who was also a Director
of NBC, that his mother, the owner of NBC, directed employees to alter records in order to make
them appear to be in compliance with Title IV regulations; a statement from the former office
manager at NBC that he credited students with hours of attendance which they did not attend and
manufactured reports and altered student files at the direction of the owner; a statement from the
former financial aid officer to the effect that NBC paid Pell funds to students who were not
attending the school and then fraudulently altered attendance records to cover up that fact; and,
statements from a number of former students attesting to the fact that NBC's management
falsified information on their financial aid applications, such as marital status, resulting in the
award of higher federal student aid than they were entitled. Although NBC argues that these
statements were the result of disgruntled former employees "getting even," the scope and the
diversity of that information convinces me that the allegations are clearly supportable.
With this information in hand, SFAP was placed in a dilemma.
SFAP determined that
some of NBC's files were fraudulent, but readily agreed that most were not tainted by fraud. In
its responsibility to protect federal funds, SFAP had to decide which Title IV funds were
improperly spent and recoup them. At the same time, since NBC acts as a fiduciary as to those
Title IV funds, it had a duty to account. Faced with this situation, SFAP determined that, since
it had no practical method of ascertaining which files were not tainted, it opted to declare that all
federal student financial assistance was unsupported. However, SFAP allowed NBC to review
and have independently certified those files which were correct - full credit could then be given
for those students. I find that SFAP's position on this issue is reasonable and is supported by the
law. It is well established that the nature of the enforcement of Title IV programs, through the
use of audit review determinations, creates the need for institutions to cooperate with SFAP by
providing the agency with complete file reviews when that information is needed to determine
whether any, if not all, Title IV funds disbursed by the institution were spent contrary to
or regulatory requirements. See, e.g., In re Pan American School, Docket No. 92-118-SP, U.S.
Dep't of Educ. (October 18, 1994). Under circumstances where an institution fails to fully
comply with SFAP's reasonable request for a complete file review, SFAP has no choice other
than to require the return of all Title IV funds disbursed during the period at issue. Given the
option that was offered to NBC by SFAP to establish that the Title IV funds were correctly
NBC had the burden of complying, otherwise, all the Title IV funds it expended during the audit
period would be returned. I find that NBC has not met such burden. It has neither accomplished
the file review with independent certification, nor provided adequate alternative evidence
sufficient to convince me that federal aid was properly expended; therefore, I find that it has not
established that the Title IV funds were properly expended. 34 C.F.R. § 668.116(d).
Having determined that NBC has not meet its burden of
establishing the correctness of its
Title IV expenditures, I must determine the amount of such funds which must be returned to the
Department. SFAP has established reasonable ground rules as to how that calculation should be
accomplished, and I adopt those rules herein. I will give full credit for the Title IV aid given to
students who graduated from NBC and who received a license to practice from the State of
Louisiana. SFAP found that number to be 70. However, based on NBC's evidentiary
submissions, I find that the number of such students is 155.
On the basis of the foregoing, it is ORDERED that National Beauty
College repay to the
United States Department of Education $776,001, less an appropriate credit for the additional 85
students whom I found both had graduated and were licensed.
Judge Ernest C. Canellos
Dated: May 3, 1996
A copy of the attached initial decision was sent by certified mail, return receipt requested to the
John Allen Chalk, Esq.
Michener, Larimore, Swindle, Whitaker, Flowers,
Sawyer, Reynolds & Chalk
3500 City Center Tower II
301 Commerce Street
Fort Worth, Texas 76102-4186
Stephen M. Kraut, Esq.
Office of the General Counsel
U.S. Department of Education
600 Independence Avenue, S.W.
Washington, D.C. 20202-2110