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Higher Education Act Title IV - Taxpayers Against Fraud


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									Fraud in Higher

Gaming the honor system
Higher Education Act Title IV
 Student Financial Assistance Programs

    20 USC §§ 1070 et seq.

   34 CFR §§ 602.10 et seq.

   34 CFR §§ 668.8 et seq.
NEW application of OLD law

FCA has always said that if you lie to
get the money, such is illegal

Congress, when first considering
1986 Amendments, specifically
declared that false statements
creating eligibility, where none would
otherwise exist, states a claim
           Three cases
United States ex rel. Main v. Oakland City
University, 426 F.3d 914, reh. den. (7th
Cir. 2005), cert den. (April 17, 2006)

United States ex rel. Hendow v. University
of Phoenix, ___ F.3d ___ (9th Cir.
September 5, 2006)
      Three cases (cont.)

United States ex rel. O’Connell v.
Chapman University, 2006 WL 1562231
(C.D. Cal. May 23, 2006)
Sally Stroup appointment at DOE

Hansen “backroom memo” at DOE

Investigative support by DOE

Amicus support by DOJ
        Legislative history

Congress intended FCA to apply
whenever a defendant was ineligible for
program payments

“Claims may be false even though the
services are provided as claimed if, for
example, the claimant is ineligible to
participate in the program.”
   Legislative history (cont.)

False claims "may take many forms, the
most common being a claim for goods or
services . . . provided in violation of
contract terms, specification, statute or
regulation . . . ."

See S. Rep. 99-345 at 9, reprinted in 1986
U.S.C.C.A.N. 5266, 5274
              The specs
Program Participation Agreement (“PPA”)

Several requirements: civil rights, drug
abuse prevention, no gov‟t money for
lobbying, incentive compensation ban,
meeting standards of accreditation agency

Conditions eligibility to receive Title IV
funds on compliance with requirements
  Incentive Compensation Ban
Bans paying commissions or incentive
payments to recruiters based “directly or
indirectly” upon # of students enrolled

Enacted in 1992

Unscrupulous and dishonest school
operators victimizing students

Huge debts and little or no education
                  The Lies

Two categories:

(1) express false certification

(2) Implied false certification
          The lies (cont.)
Two types of express lies:

(1) Program participation agreement
“PPA” with DOE (lies about future
compliance – i.e., UOP will comply with
the incentive compensation ban)
          The lies (cont.)

(2) Management assertion letter to
DOE (lies about past compliance, i.e.,
UOP was in compliance over the past )
           The lies (cont.)

In the implied category, one lie is repeated
numerous times. Every time the institution
requests Title IV funds, it lies, because it is
implying compliance with the incentive
compensation ban, a prerequisite to
submitting the payment requests.
    Oakland City University

4-year Baptist liberal arts college,
Evansville, Indiana, founded 1885

675 students at main campus; 1,125 at

Real university, with basketball

Branches: Bedford, Evansville, &
Oakland City U. (“Main”) Decision

“. . . [P]hase-two applications would not
have been granted had the truth been told
earlier, for all disbursements depended on
the phase-one finding that the University
was an eligible institution.”
  OCU (“Main”) case (cont.)

Damages: “but for” causation in 7th Circuit

But for the statement, the Government
would not have paid a dime
  OCU (“Main”) case (cont.)

ALL money recoverable under United
States ex rel. First Nat’l Bank Cicero, 957
F.2d 1362 (7th Cir. 1992)

Would the Gov‟t have paid the money but
for the misrepresentation in the first place?
OCU (“Main”) case (cont.)

Case gets worse and worse for
Oakland City, day by day

Jury reaction to religious
institution being sued
  OCU (“Main”) case (cont.)

Delay of discovery process

University president “retired”
effective May 30, 2007

Jury trial begins June 4, 2007
  OCU (“Main”) case (cont.)

President‟s press release
declared OCU does not owe
anyone a dollar

At least $10 million damages
before trebling
Oakland City U. (“Main”) Status

Still on liability discovery until
December 1

June 4, 2007, trial date

DOJ meeting with both sides and
taking active role in case
      University of Phoenix

Founded in 1976 by John Sperling

United States‟ largest accredited university

Bills itself as having “170 campuses”

Over 320,000 students (>99,000 on-line)

$1.7 billion in federal funding for 2005
      DOE report on UOP

Extensive DOE investigation precipitated
by qui tam lawsuit by two top-performing
enrollment counselors

Scathing 45-page report – September „04

Enrollment managers, enrollment
directors, and > 60 enrollment counselors
 DOE report on UOP (cont.)

UOP in direct violation of incentive
compensation ban

Hires recruiters with promise of lucrative
compensation for success in securing
 DOE report on UOP (cont.)

Provides substantial incentives to recruit
unqualified students and students who
cannot benefit from the training offered

Systematically and intentionally operates
in a duplicitous manner

Regulatory fines

Limitation or termination of institution‟s
participation in Title IV, HEA program

False Claims Act
       UOP-DOE Settlement

$9.8 million

Less than one penny on the dollar

Expressly excluded FCA claims
     UOP (“Hendow”) decision

Two doctrines attach potential FCA liability
to claims for payment that are not explicitly
and/or independently false:

(1) false certification (express or implied)

(2) promissory fraud
 UOP (“Hendow”) Decision (cont.)

False certification requires 4 elements:

1) Element of falsity, above mere
  regulatory violation

2) Palpably false statement, known to
  be a lie when made
 UOP (“Hendow”) decision (cont.)

3) False statement material to the
  government decision to pay out
  monies to the claimant

4) An actual claim, i.e., a call on the
  government fisc
UOP (“Hendow”) decision (cont.)

Promissory fraud - liability in absence
of explicitly false claim

Promissory fraud - does not require a
false statement of compliance with
government regulations
UOP (“Hendow”) decision (cont.)

Promissory fraud - broader than false
certification theory

Liability attaches to each claim
submitted to the government under a
contract, when the contract or
extension of government benefit was
originally obtained through false
statements or fraudulent conduct
UOP (“Hendow”) decision (cont.)
Distinction between conditions of
participation and conditions of payment
are meaningless (a key issue raised
among the circuits)

Condition of participation is condition of

A condition of participation satisfies the
materiality test, since payment is
conditioned on satisfying the conditions of
UOP (“Hendow”) Decision Quotes
"The university and the district court below
have taken our holdings to mean the
'certification' has some paramount and
talismanic significance, apparently
believing a palpably false statement does
not bring with it False Claims liability, while
a palpably false certification will. This
distinction would make it all too easy for
claimants to evade the law."
UOP (“Hendow”) Decision Quotes

“So long as the statement in question is
knowingly false when made, it matters not
whether it is a certification, assertion,
statement, or secret handshake. Claims
liability can attach."
    FCA recovery from UOP
Grant money: > $400 million thru 2004-05

Loan defaults: > $370 million thru 2004-05

Total of $2.2 billion after trebling

$10K-per-incident statutory fine, interest,
and statutory attorney fees
        UOP Business Plan

"This is a corporation, not a social entity.
Coming here is not a rite of passage. We
are not trying to develop their value
systems or go in for that 'expand their
minds' bullshit."

“Use of smoke and mirrors to fly under the
radar” of the incentive compensation ban

“Asses in the classes”
Your taxpayer dollars at work

$31 million home for UOP Chairman and
CEO John Sperling

$80 million jump-ship package for UOP
President Todd Nelson

Lavish getaways
           For-profits versus nonprofits
                (public & private)
      recruitment & advertising:                                 28% versus 1% & 2%

      profit:                                                    15% versus 0%

      taxes:                                                     10% versus 0%

      services & support:                                        19% versus 40% & 43%

      instruction:                                               33% versus 38% & 44%

       research:                                                 0% versus 18% & 14%
Samuel C. Wood, Professor, Stanford University, The Chronicle of Higher Education, May 5, 2006
For-profits vs. nonprofits (cont.)

52% devoted by for-profits to services &
support; 0% to research

91% to 95% devoted by nonprofits to
services & support, services, and research
         Victims of UOP

Taxpayers (because enrolling ineligible
students wastes taxpayer money)

Hundreds of thousands of students
impacted – many uniquely vulnerable,
e.g., previously did not perform well in
school, from disadvantaged backgrounds

Dreams shattered and lives ruined
     Victims of UOP (cont.)

UOP completion rate of 7% for its
undergrad program (only 3% of the
student body)

UOP will not release true and accurate
completion rates for the other 97% of the
student body
      Chapman University
Private non-profit in Orange, CA, with
satellite “University College” campuses

More than 6,000 students per term

Founded 1861 as Hesperian College

75-acre campus, football team, and ABA-
accredited law school
    26 “University College”
      satellite campuses
California: Antelope Valley, Coachella
Valley, Concord, Diamond Springs,
Edwards AFB, Fairfield, Hanford, Irvine,
Lemoore NAS, Los Angeles, Modesto,
Monterey, Moreno Valley, Ontario,
Sacramento, San Diego, Santa Maria,
Travis AFB, Twenty-Nine Palms,
Victorville, Visalia, Yuba City

Washington: Bangor, Ft. Lewis, McChord
AFB, Whidbey Island
       Chapman‟s problem

3 Ph.D adjunct professors

Systemic failure to teach # hours required
by standards of accreditation entity & DOE

Failure to police hours taught

Lie to accrediting entity = lie to gov‟t
      Accreditation in U.S.

Accreditation by private entity rather than

Contrary to system in most other countries

Accreditation certifies an institution meets
or exceeds established standards and is
achieving its own stated objectives

Western Association of Schools and
Colleges (“WASC”)

California ,Hawaii, Guam, American
Samoa, Micronesia, Marshall Islands,
Palau, Northern Marianas Islands, and
Pacific East Asia

One of 5 regional associations in the U.S.
          WASC (cont.)
Grants institutional accreditation after
comprehensive self-study followed by on-
site evaluation of programs and services

WASC has three accrediting commissions:

1) Senior Colleges and Universities
2) Community and Junior Colleges
3) Schools
    Accreditation standards
Program Participation Agreement (“PPA”)
with DOE

Eligible institution must meet the
standards and responsibilities required by
the accrediting agency

20 USC § 1099(b); 34 CFR § 602.10
Classroom hour requirements

Student Financial Assistance Regulations
interpreting the HEA

False certification of any document used
for or pertaining to accreditation is false
certification to the DOE

DOD also involved, via base MOA‟s
       45 Carnegie hours

WASC accreditation requires class to
meet a minimum of 45 Carnegie units with
students each term

Evening classes for 5 continuous hours
Chapman (“O‟Connell”) Decision

Main case provides a persuasive analytic

Phase 1: Submission of documents for
accreditation by WASC.

Phase 2: Submission of documents for
gov‟t loans and grants, which depend on
  Chapman decision (cont.)
Allegation that but for false allegations in
Phase 1, Chapman would not have been
granted loans and grants = FCA claim

False certifications to accreditation entity
actionable as part of the two-step fraud

Makes no difference whether accreditation
standards have force and effect of statute
Victims of Chapman University

General public (faced with inadequately
trained MFT‟s and other professionals)

Students shortchanged

Taxpayers cheated
    Chapman at the trough
Approximately $200 million in HEA funds
per annum

Federal HEA damages from grants and
loans for 2001-2005 alone: $36,050,267

Additional State of California funds
    Chapman‟s position

No government standard violated

No WASC standard violated

WASC permits preparation time
to count toward classroom hours
 Chapman‟s position (cont.)

Lie to a non-gov‟t entity doesn‟t count

Lie is not material (i.e., Chapman
would not have lost its accreditation
based on the misrepresentation)
  Defense PR campaigns

Litigation lottery; clever lawyers;
cottage industry; disgruntled
employees; poor performers; in it
for the money; frivolous

Lost “skirmish” but war far from
Defense PR campaigns (cont.)

Enrollments can be a factor

DOE got it all wrong
Defense PR campaigns (cont.)

Opinions greatly expand scope of
FCA liability beyond what Congress
intended or what other courts have

Sky is falling

This “should scare the hell out of you”
         Cogent thought

Government by organized money is just as
dangerous as government by organized
                Franklin D. Roosevelt

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