Guaranteed student loan program hearings before the Permanent Subcommittee on Investigations of the Committee on Government Operations, United States Senate, Ninety-fourth Congress, first session .... United States. Washington : U.S. Govt. Print. Off., 1976http://hdl.handle.net/2027/mdp.39015078623025
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GUARANTEED STUDENT LOAN PROGRAM
57^923
HEARINGS BEFORE
THE
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 07 THE
COMMITTEE ON
GOVERNMENT
OPERATIONS
UNITED STATES SENATE NINETY-FOURTH CONGEESS FIEST SESSION NOVEMBER
PART Printed for the
use
AND
14, 17, 19,
of the Committee
20, 1975
1
on Government Operations
GUARANTEED STUDENT LOAN PROGRAM
HEARINGS BEFORE
THE
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS OF THE
COMMITTEE ON
GOVERNMENT
OPERATIONS
UNITED STATES SENATE NINETY-FOURTH CONGEESS FIRST SESSION NOVEMBER
PART Printed for the
20, 1975
1
use of the Committee on Government Operations
U.S. GOVERNMENT 63-570
AND
14, 17, 19,
PRINTING
WASHINGTON
For sale by the Superintendent
Washington,
OFFICE
: 1976
of Documents, U.S. Government D.C. 20402 - Price $3.40
Printing
Office
COMMITTEE ON GOVERNMENT OPERATIONS ABRAHAM
JOHN L. McCLELLAN, Arkansas HENRY M. JACKSON, Washington EDMUND S. MUSKIE, Maine LEE1 METCALF, Montana JAMES B. ALLEN, Alabama LAWTON CHILES, Florida
RIBICOFF,
Connecticut,
Chairman
CHARLES H. PERCY, Illinois JACOB K. JAVITS, New York WILLIAM V. ROTH, JR., Delaware BILL BROCK, Tennessee LOWELL P. WBICKER, JE., Connecticut
SAM NUNN, Georgia
JOHN GLENN,
Ohio RICHARD A. WEGMAN, Chief Counsel and Staff Director
PERMANENT SURCOMMITTEE
ON
INVESTIGATIONS
HENRY M. JACKSON, Washington, Chairman CHARLES H. PERCY, Illinois JOHN L. McCLELLAN, Arkansas JACOB K. JAVITS, New York JAMES B. ALLEN, Alabama WILLIAM V. ROTH, JB., Delaware SAM NUNN, Georgia BILL BROCK, Tennessee LAWTON CHILES, Florida JOHN GLENN, Ohio HOWARD J. FELDMAN, Chief Counsel DOROTHY FOSDICK, Professional, Staff Director STUART M. STATLER, Chief Counsel to the Minority RUTH YOUNG WATT, Chief Clerk ROLAND L. CRANDALL, Staff Editor
(n)
CONTENTS Page Testimony of— Bell, Hon. T. H., Commissioner of Education, Department of Health, 259 Education, and Welfare Bouxsein, Peter, Acting Assistant General Counsel for Civil Rights, 283 Department of Health, Education, and Welfare Cooke, Charles M., Jr., Special Assistant to the Secretary for Student Assistance, Department of Health, Education, and Welfare 283 Daly, Patrick, Supervisory Auditor, Manpower and Welfare Division, 7 General Accounting Division Dameron, O. A., consultant 87, 105 Duffy, LaVern J., assistant counsel, Permanent Subcommittee on In 151 vestigations 196 Evans, Phillip K., former student at West Coast Schools 217 Ewing, Andy, fraud division, Los Angeles district attorney's office Hastings, Richard A., Deputy Assistant Secretary for Legislation (Ed 283 ucation), Department of Health, Education, and Welfare Hoffe, James, former Senior Program Officer for Financial Assistance for Office of Education, Department of Health, Education, and 177 Welfare, Region IX Kohl, Kenneth A., Associate Commissioner, Office of Guaranteed Student Loans, Office of Management, Office of Education 283 Lancaster, Gregory F., assistant vice president, Security Pacific Na 240 tional Bank, Los Angeles, Calif Lauve, Ronald, Assistant Director-in-Charge, Manpower and Welfare 7 Division, General Accounting Office Martin, James D., Deputy Director, Manpower and Welfare Division, 7 General Accounting Office 76 Peters, Ulla Wallin Phillips, John D., Deputy Commissioner, Bureau of Postsecondary Education, Office of Education, Department of Health, Education, and Welfare 283 196 Ponce, Enrique E., former student at West Coast Schools 196 Ponce, Sarah, former student at West Coast Schools Schnupp, Alfred, Supervisory Auditor, Manpower and Welfare Division, 7 General Accounting Office 87 Schoessner, Edmund, Van Nuys, Calif 217 Vigen, Gregory L. , General Accounting Office Walsh, John J., investigator, Permanent Subcommittee on Investiga tions 40, 67, 173, 217 York, Edward T., Jr., Deputy Commissioner, Office of Education, 283 Department of Health, Education, and Welfare
EXHIBITS 1.
2.
Article of incorporation dated June 13, 1966, and certificate of filing and suspension issued by the State of California to Automation Institute of Los Angeles, Inc., May 1, 1975. Letter from Ruth Crowley, HEW, May 6, 1969, to Automa tion Institute of Los Angeles, confirming eligibility in student loan program for the purchase and sale of assets between Computing and Software, Inc., and Automation Institute of Los Angeles, dated November 5, 1971
3. Agreement
*May be found in the files of the subcommittee.
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IV Intro-
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Article of incorporation
dated December 20, 1975, and certificate of filing and suspension issued by the State of California to Group II, Equities, Inc., August 5, 1975 HEW memorandum April 14, 1972, re investigation of U.S. Life Savings and Loan Association, Los Angeles, Calif Articles of incorporation dated May 26, 1972, and certificate of filing and suspension issued by the State of California to Equities, August 5, 1975 Group Institute of Redemption agreement between Automation Los Angeles, Inc., and the Tokeshi Group Letter dated January 11, 1973, from HEW to Fred Peters, contract of president, West Coast Schools approving insurance Articles of incorporation of PFC Investments, Inc., dated February 6, 1975 Memorandum dated February 14, 1973, from HEW San Francisco office to William M. Simmons, Director, Division Institute, Los of Insured Loans, HEW re Automation Angeles, California Letter dated March 7, 1973, from S. W. Herrell. Acting Associate Commissioner of Higher Education, Deputy HEW, to Fred Peters, president, West Coast Schools re continued eligibility in the student loan program Memorandum dated March 9, 1973, from Director, Division of Insured Loans, HEW, to S. W. Herrell, Acting Deputy Associate Commissioner for Bureau of Higher Education re West Coast Schools eligibility continuation Letter dated April 20, 1973, from R. L. Mappus, Senior Program Officer, HEW, to Fred Peters, president, West Coast Schools re federally insured student loan program. . Letter dated April 26, 1975, from National Association of Trade and Technical Schools to William M. Simmons, Jr., Director, Division of Insured Loans, U.S. Office of Educa tion reaffirming decision to deny accreditation to West Coast Schools Memorandum dated May 1, 1973, from William M. Simmons, Jr., Director, Division of Insured Loans to S. W. Herrell, Acting Deputy Associate Commissioner, BHE re denial of accreditation to West Coast Schools Memorandum dated May 2, 1973, from William M. Simmons, Jr., Director, Division of Insured Loans to S. W. Herrell, Acting Deputy Associate Commissioner, BHE re irregular activities at West Coast Trade Schools Copy of check for $290,000 cashed May 22, 1973, by Fred Peters Notice of closing to students of West Coast Schools, May 24, 1973, from Fred Peters, president Memorandum from S. W. Herrell to John R. Ottina, dated May 3, 1973, re termination of eligibility of West Coast Schools Letter dated June 4, 1973, from John Ottina, commissioner of education-designate to Fred Peters, president, West Coast Schools re termination of guaranteed student loan program to West Coast Schools. Letter dated June 11, 1973, from Alexander Grant & Company to D. W. Stepnick, Director, HEW Audit Agency re allega tions of impropriety concerning the financial condition and operation of West Coast Schools Reporter's transcript of proceedings July 10, 11, and 12, 1973, in the matter of First City Bank versus Automation Insti tute of Los Angeles, Inc., and Fred Peters West Coast Schools invoices to HEW for interest and special allowance
III
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Draft memorandum dated April 29, 1974, from Assistant Secretary for Planning and Evaluation, HEW, to the
Secretary re preventing recurrence of cases like West Coast Schools Memorandum dated April 1974 from Commissioner of Edu cation, HEW, to the Secretary re West Coast Schools problem in Los Angeles — and attendant problems Certification of military service for Fred Braneff Personnel file for Freddy Laverne Braneff from the Chicago Bridge and Iron Co List of current holders and their West Coast Schools student loan portfolio Letter dated October 28, 1975, to Senator Claiborne Pell from Senator Henry M. Jackson requesting information regarding guaranteed student loan program Letter dated November 10, 1975, to Senator Henry M. Jackson from Senators Claiborne Pell and Jacob K. Javits re supplying of material concerning administration of Fed eral student assistance programs "Pell bill" — A comprehensive education proposal, including provisions regarding student aid programs S. 1229 — "Student Loan Amendment of 1975"; provisions in focusing on improving student loan administration; troduced March 18, 1975, by Mr. Beall (for himself, Messrs. Javits, Schweiker, and Stafford) Hearing before the Subcommittee on Education of the Com mittee on Labor and Public Welfare, U.S. Senate, March 5, 1975, entitled, "Review of Higher Education Programs, 1975" Hearings before the Subcommittee on Education of the Committee on Labor and Public Welfare, U.S. Senate, November 26 and 27, 1974, entitled, "Higher Education Oversight, 1974" Hearings before the Subcommittee on Education of the Committee on Labor and Public Welfare, U.S. Senate, September 18 and 19, 1974, entitled, "Examination of the Guaranteed Student Loan Program, 1974" Hearings before the Subcommittee on Education of the Committee on Labor and Public Welfare, U.S. Senate, September 12 and 13, 1974, entitled, "Accreditation of Post-secondary Educational Institutions, 1974" Report issued by the American Council on Education, March 1975, entitled "Federal Student Loan programs".H.R. 10470, a bill to eliminate certain abuses in Federal student aid programs, introduced by Mr. Michel, for himself and others, October 30, 1975 Floor statement by Senator Javits May 14, 1975, "Student Loans: Successes and Remedies" State, and Private Programs of Low-Interest "Federal, Loans to Students in Institutions of Higher Learning," Federal Register, February 20, 1975 "GSLP Loan Estimation Model" issued by the Office of Planning, Budgeting, and Evaluation, U.S. Office of Edu cation, September 1974 Letter of transmittal dated March 12, 1975, with executive summary "Analysis of Student Loan Special Rate Allow ances and Servicing Costs" from T. H. Bell, U.S. Com missioner of Education, to Senator Jacob Javits A study comparing default rates in the student loan pro gram conducted by the Congressional Research Service Correspondence between the Permanent Subcommittee on Investigations and the Criminal Division of the Depart ment of Justice
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VI Intro-
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Agreement dated July 25, 1973, between Clark Parker, University, and Fred Peters, Windsor chancellor, president, West Coast Schools for the disposition of student loan funds Check No. 102, dated October 25, 1972, for $1,000 payable to Cash, drawn on West Coast Schools Division I account at the Union Bank, Century City Office, endorsed by Edmund Schoessner Work sheets prepared by Edmond Schoessner of the Group Equities account at the Lincoln Bank, Van Nuys, Calif. Check dated November 28, 1972, payable to Edmund Schoessner, drawn on the Lincoln Bank, Van Nuys, Calif.. Edmund Schoessner's notes — recording check cashing transactions Affidavit of Karen Steen Check No. 1337, dated February 19, 1973, for the amount of $1,125, drawn on West Coast Schools account at the Pan American National Bank and endorsed by Mr. Dameron.. Letter dated November 14, 1975, from T. H. Bell, U.S. Com missioner of Education, to Senator Charles H. Percy re garding the eligibility status of trade and technical schools. Affidavit of Frank Covaro of Alexander Grant & Co., dated October 20, 1975 Alexander Grant & Co.'s report to Automation Institute of Los Angeles, Inc., doing business as West Coast Schools,
II
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52.
53. 54.
June
30, 1972
Copy of section 561 of Statement on Auditing Standards No. 1 of the American Institute of Certified Public Accountants 56. 1973 Chronology of Events Alleging Irregularities in West Coast Schools prepared by Frank Covaro of the Alexander
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Grant&Co
57. 58. 59. 60.
61. 62. 63. 64. 65. 66. 67. 68. 69.
Letter dated June 11, 1973, from Alexander Grant & Co. to Dr. Leonard Spearman, U.S. Office of Education Letter dated May 30, 1973, from Alexander Grant & Co. to Fred Peters, president of West Coast Schools Letter dated May 31, 1973, from Fred Peters, president of West Coast Schools, to Alexander Grant & Co Letter dated June 5, 1973, from Bernard Elias of the law firm of Ball, Hunt, Hart, Brown & Baerwitz, 450 North Roxbury Drive, Beverly Hills, Calif., to Robert Bernstein, 1888 Century Park East, Suite 900, Los Angeles, Calif Letter dated also on June 5, 1973, from Bernard Elias to Robert Bernstein Letter dated June 8, 1973, from Robert Bernstein to Bernard Elias Letter dated June 13, 1973, from Bernard Elias to Robert
Bernstein Letter dated June 20, 1973, from Robert Bernstein to Bernard Elias 1 Letter dated July 18, 1973, from Bernard Elias to Robert '. Bernstein Affidavit of David L. Smith, assistant vice president of First National Bank of Arizona, dated June 29, 1973 Extract from broadcast by Gene Ferguson of KPOL in Los Angeles, dated August 9, 1973 Affidavit of William M. Simmons, Jr., former official of HEW, dated November 7, 1975 Letter of June 11, 1973, from Alexander Grant & Co. ad dressed to D. W. Stepnick with his handwritten notation in the margin
•May be found In the flies of the subcommittee.
Appears on page
95
VH Intro
70. Report of investigations of West Coast Schools dated April investigator, 17, 1975, prepared by S. D. Butterfield, Office of Investigations and Security, HEW, Washington,
D.C
."
71. Memo dated March 9, 1973, from William M. Simmons, Jr., Director, Division of Insured Loans, HEW, to S. W. Herrell, Acting Deputy Associate Commissioner for the Bureau of Higher Education 72. Buck slip from Rudy Mappus to William M. Simmons, Jr., transmitting Gene Ferguson's transcripts of broadcasts in July and August 1973 concerning west coast schools 73. Telegram dated November 18, 1975, from Dr. Raymond E. Weston to Howard J. Feldman re physical condition of Fred Peters 74. Reserved dated November 18, 1975, from Robert M. 75. Telegram O'Reilly, counsel for David Carmen to Howard Feldman..76. Letter dated October 31, 1975, from Richard H. Kirschnerto Howard Feldman re subpoena of Franklin Peter Fisher 77. Telegram dated November 18, 1975, from Senator Henry M. Jackson to Robert M. O'Reilly re appearance of David M. Carman 78. Telegram dated November 18, 1975, from Senator Henry M. Jackson to Harlan W. Braun re appearance of Fred Braneff aka Fred Peters 79. Telegram dated November 18, 1975, from Senator Henry M. Jackson to Richard H. Kirschner re appearance of Franklin Peter Fisher 80. Letter dated April 26, 1974, from Casper Weinberger, Sec retary of Health, Education, and Welfare to Philip K. Evans re federally insured student loan 81. Letter dated May 16, 1974, from Henry Goltz, program officer, HEW, to Philip K. Evans re federally insured 82.
83.
84. 85.
86. 87. 88. 89.
90.
91.
92. 93.
studentloan Mailgram dated March 6, 1974, from U.S. Office of Educa tion to Enrique E. Ponce re payment of federally insured studentloan
Schedule of funds received by West Coast Schools from various financial institutions from FISL purchases March 1, 1972-March 1, 1974 Summary of certain diversions of West Coast Schools' funds, May 1972 to March 1974 Letters dated October 31 and November 3, 1975, re physical condition of Deryl E. Fleming Documents and bank records of WHAM Inc. of Memphis, Tenn Affidavit of Edward Aguirre Affidavit of R. L. Mappus Letter dated November 10, 1975, from W. A. Giraldin, presi dent, USLIFE Savings and Loan Association to Senator Sam Nunn re Federally Insured Student Loans and the Office of Education Letter dated August 29, 1975, from Virginia Y. Trotter, As sistant Secretary for Education to Brooke E. Sawyer, director, Office of Financial Aid and Career Planning, Pomona College, with attachments List of significant legislative changes to GSLP Graph — cumulative commitment amounts of GSLP for fiscal years 1966 through 1977 — Graph cumulative new loan commitments of GSLP for fiscal years 1966 through 1977
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Graph — changes in authorized staffing levels of the Office of Guaranteed Student Loans for fiscal years 1966 through
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Table— Cost of Operating
1976
the Program: Federal expendi 1966 through fiscal year 1974 and
tures — fiscal year through fiscal year 1975 Proceedings of — November 14, 1975 November 17, 1975 November 19, 1975 November 20, 1975 *May be found in the files of the subcommittee.
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67 173 255
GUARANTEED
STUDENT LOAN PROGRAM
FRIDAY, NOVEMBER
14,
1975
U.S. SENATE, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS OF THE COMMITTEE ON GOVERNMENT OPERATIONS,
Washington, D.C. The subcommittee met at 10 a.m., in room 3302, Dirksen Senate Office Building, under authority of section 4, Senate Resolution 49, agreed to July 26, 1975, Hon. Sam Nunn presiding. Members of the subcommittee present : Senator Sam Nunn, Demo crat, Georgia ; and Senator Charles H. Percy, Kepublican, Illinois. Members of the professional staff present: Howard J. Feldman, chief counsel ; F. Keith Adkinson, assistant counsel ; LaVern J. Duffy, assistant counsel; John J. Walsh, investigator; Gregory L. Vigen, General Accounting Office; Stuart M. Statler, chief counsel to the minority; Jonathan Cottin, investigator to the minority; and Ruth Y. Watt, chief clerk. Senator NTTNN. The subcommittee will come to order. The Permanent Subcommittee on Investigations today opens hear ings into alleged abuses in the guaranteed student loan programs and similar financial assistance programs administered by the Department of Health, Education, and Welfare. Our goal is to determine if allegations are true that this program is riddled with bureaucratic bungling and lax administration that may cause the Government to lose more than $1 billion of an estimated $8 billion in Federal loan guarantees to date. According to the subcommittee's preliminary inquiry, there is no way to determine exactly how much money has or will be lost, appar ently because of incredibly inaccurate or nonexistent records kept by the Department of HEW. the Government loses $1 billion because of this program, it can only be described as bureaucratic bungling at its worst. Should the allegations prove to be true, it will be absolutely astound ing that the Department of HEW could be so careless with the tax payers' money at a time when our national deficit approaches $70 bil lion or more a year. The average taxpayer already is in an economic bind, yet the Gov ernment must take more of his money because of a program that ap parently has not been properly administered. Students who were eager "to advance themselves through further study financed with guaranteed student loans were allegedly made the innocent victims of unscrupulous businessmen who posed as educators. We will receive testimony about such practices, which are inexcus able in a country which values education and prides itself on self-
If
reliance.
(l)
In addition to examining all the allegations made about the guar anteed student loan program, the subcommittee will attempt to suggest appropriate improvements in order to protect both the students and the taxpayers who are paying the bills. Senator Jackson has asked me to chair these hearings. Senator Jack son has an opening statement which will be submitted to the record, , without objection. of statement Senator Jackson follows :] [The OPENING STATEMENT OF SENATOR HENRY M. JACKSON Senator JACKSON. Our examination of the Federal guaranteed stu dent loan program and other related financial assistance programs administered by the Department of Health, Education, and Welfare again focuses on a theme repeated over and over again in past hearings before this subcommittee : a lack of monitoring, accounting, and audit ing controls which create a fertile climate for abuse and mismanage ment. But here the stakes are even higher than normal : an approximately $8 billion guaranteed student loan program with perhaps $1 billion in potential defaults. say "approximately" and "perhaps" because, in credibly, precise figures on this program are not available because of the apparent failure of the Office of Education to maintain adequate records as to its commitments on Government-insured loans. A mong those who suffer are : ( 1) The taxpayers who are laving out millions of dollars on defaults and interest payments on obligations that may be totally without merit; (2) the students — basically the. disadvantaged — who may enroll in a course and obligate themselves for large student loans, drop out and then be unfairly "dunned'' for a debt which is invalid; (3) the schools that operate within the letter and spirit of the Federal program to aid and assist in the education of many who would otherwise not benefit from further education ; and (4) the many dedicated employees of HEW who are committed to make this program work so that its benefits can be utilized as foreseen by the enacting legislation. Benefiting are a small group of unscrupulous individuals who prey on unsuspecting young people and parlay Federal funds into financial empires. Today we begin a careful study of this important program which hope will lead to a correction of the abuses we have isolated. This is a program which, if operated effectively and efficiently, can benefit countless Americans. In closing want to thank Senator Sam Xunn for assuming the chair for these hearings and commend him and Senator Charles Percy for their cooperation and participation in an area that cries out for the kind of oversight that only this subcommittee can provide. am sure you have opening com Senator NUNN". Senator Percy, ments you would like to make. am would like to say first, Mr. Chairman, that Senator PERCY. very pleased, indeed, that you are chairing these hearings in Senator Jackson's absence. Just having completed successfully the magnificent piece of legislation 10 minutes ago on the floor that has been the cul look for mination of several vears work, the Productivity Center, ward to working with you on this program.
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would like to say that the first year came to the Senate, 1967, thought it we enacted the federally insured student loan program. was one of the most magnificent concepts that had heard of and was not the originator of it and did not take a very active though role in and encouraged because the con certainly supported cept was so eminently right. Its aim was to pledge the credit of the Federal Government so that undereducated or untrained Americans could, with borrowed money, course of instruction that would make them valuable addi pursue tions to the work force of the country. Once they completed this education and were employed, they paid back the money. What could be simpler What could be more noble What could be more in line with the American dream than that approached the program with considerable enthusiasm. It simply gave what we could, credit, to people who had faith in themselves and then put them in back and position where they could pay then continue to be larger contributors to society. Very sadly, this loan guarantee system, with an annual volume exceeding $4 billion today, was started with the noblest of intentions but now seems faltering because of bureaucratic myopia. Seven months ago we sat in this room listening to how the Depart ment of Health, Education, and Welfare had failed to establish ade quate controls over the prepaid health plans administered by the
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State of California. Again, we convene today to hear another account of HEW failure. While our March hearings involved the health of millions of Amer icans, the sessions beginning today focus on the education of millions of Americans. The responsibility of HEW for the health and educa tion of the needy cannot be overstated. What we cannot overstate, either, Mr. Chairman, the fact that in trying to carry out federally mandated programs, our first inclina tion always to entrust the operation of as much of those programs as we can to the private sector. In assessing programs promoting homeownership for the poor, we found that with federally backed loans and federally subsidized loans, there was no way that we could overcome totally and completely the getting together of realtors, builders, and developers to defraud the Government and defraud the poor when there was relatively slight oversight by HUD. In this case shared responsibility once again. We have to look very carefully at what oversight we can expect and should expect from that agency that administering the program, HEW. As these hearings proceed, we expect to hear testimony that HEW has not satisfactorily protected either the students or the taxpayers. With 19,000 institutions eligible for student loan guarantees and mil lions of Americans eager for better education, the situation tailormade for ripoffs by certain fly-by-night promoters, unqualified schools, and lender institutions which all too often do not exercise due care. Most of the schools which are operating under the loan guarantee program are making good faith effort to deliver quality training to enrollees. Some are not, and these schools which concern us here They should also concern HEW. But, unfortunately, mounting evi dence assembled over the past several months indicates that HEW may
lack the information and may even lack the resolve necessary for the responsible management of this program. For example, HEW has no way of knowing how many of the schools involved in the program are dependent upon the student loan program for their survival since it has no figures indicating what percentage of enrollees at each approved school have federally guaranteed loans. HEW has developed no reliable system to determine when a student leaves school, a fact which is essential if a determination is to be made as to how much money the student or HEW is obligated for. HEW has apparently not established a definition of what is "due diligence" on the part of lending institutions in seeking repayment for default of a guaranteed loan, thus thoroughly confusing the schools and the lenders involved in the delivery of education to those in need. For instance, in the small business area, minority business, 90 per cent of those loans are guaranteed, not 100 percent, because we want the bank hanging out there for the 10 percent. We want them to exer cise some due diligence. Maybe we were at fault at the legislative end. Maybe we provided too much of a bailout for the banks ahead of time and didn't provide that the banking function should be performed and maybe they re ceived too much money with a 100-percent guarantee. We are not sure. Those are the kind of things we really want to look at in these hearings. the Congress is at fault, we want to know that. we HEW to tell us that. But if we find HEW has been expect Certainly
If
lax in their oversight responsibilities in administering this program, we intend to bring that out, too. It simply is not sufficient that HEW contemplates the implementa tion of a more advanced computer system over the next 3 years, as they tell us. How many more ripoffs and raids on the Federal Treasury amount ing to how many more hundreds of millions of dollars will occur in the interim ? Why didn't they anticipate this when this program was en acted into law 8 years ago ? The program is designed to foster what is essentially a private rela tionship between the student and the lender. The Department must insist that the institutions involved in this program, specifically the lending institutions, the accrediting organizations and the schools themselves, assume far greater direct responsibility for its orderly operation, and not expect the Government to do the job which they should be doing. this is not done, it should be made clear by HEW that these insti tutions and not the Federal Government will be left holding the bag. Congress has imposed on HEW a major responsibility for assisting the citizens of this country in realizing their American dream. Too often HEW has turned that dream into a nightmare. Certainly, what we envisioned in 1967 when this was put into law certainly has not been fulfilled by the program that we will see unfolded. would like to comment on the staff work that has Mr. Chairman, been done. These hearings are not held until such time as we have thoroughly analyzed the work of the staff. It is their inclination and
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feeling that there is a problem here. have consulted, as have you and Senator Jackson, with the staff in depth and in detail to make abso lutely certain that the inquiry that we are going to make warrants the cost and the expense and effort that it is going to take and the obvious public notice that it will receive. just want to commend the staff once again. It is one of the finest staffs that any Senate or any congressional committee could have. It is a privilege to see the very thorough way in which they have started and conducted this investigation and the way that the program has been outlined so that we can thoroughly understand it and reach a judgment as to what should be done next.
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Thank you.
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Senator NUNN. Thank you very much, Senator Percy. share those comments about the staff work. They have done a very thorough job. think the next few days' hearings will demonstrate that. also appreciate your comments about our working together on other legislation and have a sneaking suspicion that after these hear ings are over we are going to have to have legislation in this area. So do express my appreciation to you for working so diligently on look forward to working with you in these hearings and this matter. to continuing with you to provide oversight in this important area. Senator PERCY. It has also been an area where there has been no partisanship of any kind. The minority and majority staffs have worked together as one, supplementing, complementing each other. So that is the spirit this committee should carry on as a tradition. Senator NUNN. Some of the student loan program has been admin istered at the State level rather than the HEW level. think it would be very interesting and would be a real lesson for us to examine the differences between the way the States have adminis tered this program and the way HEW has administered the program. We will look into that next week. Our first witness is Mr. James D. Martin, Deputy Director, Man power and Welfare Division, U.S. General Accounting Office. Mr. Martin has several colleagues with him who will probably testify also. Mr. Martin, we are delighted to have you. know you have worked on indepth study of this for the last several months. Before we get started would ask all of you who are going to testify to please stand and take the oath which we administer to all witnesses. Do you swear that the testimony you will give this morning before this subcommittee will be the truth, the whole truth, and nothing but the truth, so help you God ? Mr. MARTIN. do. Mr. LAVUE. do. Mr. DALY. do. Mr. SCHNUPP. do. Mr. FELDMAN. Could make one statement before we start ?
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Senator NUNN. Certainly.
Mr. FELDMAN. You inserted Senator Jackson's statement in the record. would like to convey, on behalf of Senator Jackson, to you and to Senator Percy, his thanks for the work that both of you have done on this important project.
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If I could
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want to thank Senator Sam Nunn for assuming the chair for these hearings mid commend him and Senator Charles Percy for their cooperation and participa tion in an area that cries ont for the kind of oversight that only this subcom mittee can provide.
He is unfortunately unavailable today and he is very pleased that we are able to carry on and with vigor in this very important area. Senator NUNN. you would like to read any other portions Mr. FELDMAN. No thank you. In the interest of time think we should move ahead. have talked to the General Accounting Office representatives. We would like to put, their entire statement in the record and they will just read portions of their statement since know that .you and Senator Percy have had a chance to review their testi mony beforehand. So with that in mind, perhaps we can commence. Senator NUNN. Thank you. Senator PEKCY. Mr. Chairman, might ask what the pleasure of the Chair would be with respect to an executive session of the full Govern ment Operations Committee. We have a vote coming on the floor at 10:20 which would suggest we might be able to alternate on so that we can keep going. That is an hour vote as understand it. It lasts an hour. Senator NUNN. Ending at 11 :20 ? 11 :40, 1 understand. Mr. FELDMAN. It began at twenty to 11. Senator PERCY. We might begin early and alternate on that. But then we will have to have a short recess for our executive session at 10:30. Senator NUNN. agree. We have a very important matter being brought up before the full committee right after the first vote. We will alternate as much as possible to continue the hearings. Then we will both have to go for a brief period and we will return as soon as we can. It is my idea that we will continue these hearings right through the lunch hour and until we get through with both of these witnesses this morning, perhaps that would be 1 o'clock, perhaps it will be 1:15. Perhaps it will be 12:45. But we will complete our witnesses this
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morning.
Mr. Martin, why don't you proceed
?
[At this point Senator Percy withdrew from [The letter of authority follows
:]
the hearing room.]
U.S. SENATE, COMMITTEE or? GOVERNMENT OPERATIONS, SENATE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, Washington, D.C. Pursuant to Rule Ji of the Rules of Procedures of the Senate Permanent Sub of the Committee on Government Operations, committee on Investigations permission is hereliy granted for the Chairman, or any member of the Subcom mittee as designated by the Chairman, to conduct hearings in public session, without a quorum of two members for administration of oaths and taking of testimony in connection with Hearings on the Guaranteed Student Loan Program and Other Related Financial Assistance Programs Administered by the Depart ment of Health, Education and Welfare on Friday, November 14, 1970. HENRY M. JACKSON, Chairman. CHARLES H. PERCY, Ranking Minority Member.
TESTIMONY OF JAMES D. MAKTIN, DEPUTY DIRECTOR, MANPOWER AND WELFARE DIVISION, GENERAL ACCOUNTING OFFICE; RON ALD LAUVE, ASSISTANT DIRECTOR IN CHARGE, MANPOWER AND WELFARE DIVISION; PATRICK DALY, SUPERVISORY AUDITOR, MANPOWER AND WELFARE DIVISION; AND ALFRED SCHNUPP, SUPERVISORY AUDITOR, MANPOWER AND WELFARE DIVISION
Mr. MARTIN. Thank you, Mr. Chairman.
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would like to introduce my associates here at the table. On my left is Mr. Ron Lauve, Assistant Director, Manpower and Welfare Division. Mr. Lauve is responsible for our work at the Office of Education. On my immediate right is Pat Daly. He is a supervisory auditor, also assigned to the Office of Education, and responsible for audits of student assistance programs. Al Schnupp. supervisory auditor, on my far right, is also at the Office of Education, and he works with Mr. Daly on the student assistance program. Mr. Chairman and members of the subcommittee, we welcome this opportunity to discuss the guaranteed student loan program admin istered by the Office of Education, Department of Health, Education, and Welfare. We will provide you with background information on the pro gram and describe some major weaknesses that we have noted during our program audits. Since 1969, we have issued several reports on the program. We are required by law to examine annually the financial statements of the student loan insurance fund. We are now auditing the fund's fiscal year 1975 financial statements and looking at the Office of Education's procedures for collecting defaulted loans. PROGRAM
HISTORY
The guaranteed student loan program was authorized by the Higher Education Act of 1965. There are two components: A program of direct federally insured loans and a reinsurance program for eligible State or private nonprofit agency loans. Under both, loans are made by commercial lending institutions, State lending agencies, or schools. The overall program was conceived as an incentive for States to establish lending programs for students to pursue education beyond the high school level. The Federal component was initially viewed as temporary based on the premise that eventually each State would have a program. At the time the act was approved, 17 States had independent agen cies which administered student loan insurance programs; now, 25 States, the District of Columbia, and one private nonprofit organiza tion have such programs. In the future, when refer to State agency programs, that means all programs having reinsurance agreements with the Office of Education. Generally, a lender cannot participate in the direct federally insured component if eligible schools in the State have reasonable access to the State agency component. Lenders may participate in the direct Federal component if (1) the school that the student wishes to attend
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is not recognized as eligible by the State agency, but is recognized by the Office of Education; (2) the student is unable to meet State resi dency requirements for participation; or (3) the residences of pros pective borrowers make it impossible for a lender to have access to a single State agency to guarantee its loans. Presently, lenders in all 50 States and the District of Columbia participate in the direct Federal component. Our first chart shows the growth of the Federal and State compo nents in terms of the dollar value of loans made. During the first 2 years only the State agencies made insured loans. In fiscal year 1968, the Office of Education implemented the direct Federal portion and insured about $67 million in loans compared to about $369 million insured by State agencies. However, in fiscal year 1972, more loans were insured by the Office of Education— $708 million — than by State agencies — $594 million. In total, through June of this year, the Office of Education had insured about 3% million loans amounting to $3.8 billion, while State agen cies had insured about 4!/£ million loans totaling $4.5 billion. However, contrary to the initial intent, the trend has been toward greater use of the Federal component. Most of what have to say today will be directed toward the fed erally insured component of the program becaiise most of the prob lems seem to lie there. State agencies are more selective in their loan approval process and have reported much lower default rates. Within requirements set forth in the law each State agency can establish its own policies and procedures for loan origination and collection, and make its own agreements with lending institutions.
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BRIEF DESCRIPTION
OF HOW
THE PROGRAM WORKS
Students generally find out about the existence of the program from financial aid officers at the schools they are planning to attend or from Office of Education publications. Students may apply for a loan if they have been accepted for enroll ment in an eligible school or are already attending a school on at least a half-time basis and are in good academic standing, and are citizens or nationals of the United States. School eligibility is determined by the Office of Education and is based largely on the accreditation process which will touch on later. Students may borrow up to $2,500 in each academic year for educa tional costs. Total loans outstanding may not exceed $7,500 for under graduate or vocational students and $10,000 for graduate students. The current maximum annual interest rate which lenders may charge is 7 percent. The Federal Government pays lenders a special allowance of up to 3 percent a year on the average quarterly unpaid principal balance to provide an equitable yield to the lenders. The repayment period usually begins from 9 to 12 months after the student graduates or ceases to be at least a half-time student, and nor mally extends from 5 to 10 years with a minimum repayment of $360 per year. Repayment may be deferred for military, Peace Corps, or VISTA service, or resumption of full-time study. The Federal Government pays lenders all interest accruing on the loan prior to the beginning of the repayment period for a student who
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qualifies. Students automatically qualify for interest subsidies on loans up to $2,000 a year if their adjusted family income is less than $15,000. the student applies for a loan in excess of $2,000 or has adjusted family income of more than $15,000, the amount of the loan to be sub sidized is recommended by the school based on its assessment of the family's ability to pay for the cost of education. The interest subsidy and special allowance applies to loans made under both the Federal and State components. Claims against the Government may arise from death, disability, bankruptcy, or default on the part of the student borrower. The Gov ernment pays 100 percent of all lender losses on death and disability claims for both program components. On default claims, the Federal Government pays 100 percent of lender losses for the Federal component and reimburses State, or pri vate guarantee agencies for 80 percent of their payments to lenders.
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LENDER
ELIGIBILITY
The Office of Education approves lenders for participation in the direct federally insured component. It has designated banks, savings and loan associations, credit unions, and similar institutions that are subject to Federal or State examination as regulated lenders ; lenders such as insurance companies, pension funds, and educational institu tions are termed nonregulated. Institutions wishing to be approved as lenders must submit appli cation forms and their most recent financial statements to the Office of Education. According to an Office of Education official, approval of regulated lenders is fairly routine. Approval of applications from nonregulated lenders depends on the total amount of loans that the lenders wish to make. There are presently about 8,000 regulated and 300 nonregulated lenders involved in the Federal component. Of the 300 nonregulated lenders, over 200 are schools and, of these, 40 are proprietary schools. Once lenders are approved they enter into a contract of insurance with the Office of Education. The Office of Education has the authority to terminate the insurance contract of any lender that is not adminis tering the program in accordance with applicable regulations. ELIGIBILITY
OF
SCHOOLS
School eligibility for participation in the guaranteed student loan program and other Office of Education administered programs is de termined by the Office of Education's accreditation and institutional
eligibility staff. This staff determines whether the institution applying for eligibility
meets certain minimum statutory requirements and confirms its eli gibility status. For the most part, however, the key for achieving eli gibility is accreditation.
Thus, in making its institutional eligibility determinations the Office of Education relies, to a great extent, on the findings of private independent organizations; namely, the accrediting agencies. These agencies have no legal authority to require institutional com pliance with their criteria and do not view their role as regulatory. 63-570 — 76 2
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The Office of Education has little input into the accrediting process and performs limited monitoring of eligible institutions and programs. Wo are currently looking at how the accreditation process works. We intend to examine the various methods used to determine eligibility for all Federal student assistance programs and to what extent Federal agencies rely on accreditation and the accrediting bodies for eligibility determinations and program regulation and enforcement. We will also evaluate the extent of coordination among the Federal and State agencies, the accrediting bodies, and various educational committees and commissions. OFFICE
OF EDUCATION
PROGRAM FUNDING AND STAFFING
The guaranteed student loan program is funded from three appro priations. Expenses for interest subsidies, special allowances and death and disability claims are paid from higher education appropriations. Staffing and computer services expenses are included in the Office of Education salaries and expense appropriation. A third appropriation, for the student loan insurance fund is used to pay claims on all de faulted loans. Fiscal year 1975 appropriations totaled $197.6 million for defaults and $382,4 million for program activities. Fiscal year 1976 estimates for these two purposes were $201.8 mil lion and $452 million, respectively. The Office of Education does not keep its records in a manner that would permit a determination of charges to the salaries and expense appropriation for staffing and com puter services. Our second chart depicts the authorized and actual staffing levels for the program. The program was administered by the Office of Educa tion's Bureau of Post-secondary Education prior to March 1974 when the headquarters office of guaranteed student loans was formed under the Deputy Commissioner for Management, The headquarters office responsibilities include : developing program policies and procedures, developing and operating the computer-based information system, establishing and maintaining liaison with pro gram participants, and processing death, disability and bankruptcy claims. Responsibilities of the Office of Education staff in the 10 HEW regional offices fall mainly into two areas : program compliance and default claims and collections. Until the summer of 1974, all lenders' claims were processed at the headquarters office. At that time, responsibility for handling default claims was delegated to the regions and a backlog of claims was par celed out to them. Lenders were told to mail all subsequent claims directly to the regions. [At this point Senator Percy entered the hearing room.] DEFICIENCIES NOTED DURING
PRIOR AUDITS
Mr. MARTIN. Before beginning a more detailed discussion of pro gram processes and problems, it might be well to take a few moments to summarize shortcomings in the program that we have commented on in prior audit reports. Since fiscal year 1969 we have reported nu merous problems, and although HEW has taken some action, most of
the problems remain uncorrected. The most severe of these problems deals with the automated guar anteed loan system. The Office of Education uses this system to main
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detailed records
ing purposes.
of the program for control and financial report
"We began auditing the student loan insurance
fund in
1969 and
in
each year since have reported to HEW either (1) that we could not
express an opinion on the fund's financial statements because of inade quate records or (2) that the fund's financial statements did not fairly present its financial condition. The automated system began operating in fiscal year 1971, but has never provided the information needed for program control or accur ate statements of the program's financial condition. This is an extremely important point because all reported program statistics, including the data on our charts, must be viewed in light of the inability of the current automated system to provide accurate information. In responding to our latest report HEW generally agreed with our recommendations and described actions that would be taken to improve recordkeeping. However, these improvements might not take effect for another li/£ to 2 years. Other major problems that remain uncorrected are inconsistent methods used in estimating current and future program losses; a lack of procedures to determine whether defaulted loans are collectible; and a lack of consolidated information on program costs. Regarding the last problem, HEW has told us that a task force is reviewing and updating HEW's accounting procedures, and that this work should be completed by the summer of 1977. However, Office of Education officials estimate it will take another 12 to 18 months after that to implement any revised procedures. will discuss the various you will refer now to our third chart, program phases.
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APPLICATION
PROCESS
Students obtain loan applications from participating lenders, schools, State or private guaranty agencies, or HEW regional offices. The student is required to provide information on family income and other student assistance obtained and certifies that the guaranteed loan will be used only for educational purposes. The student then forwards the completed application to the school that he will be attending. The school, which may also act as a lender, certifies (1) that the student is enrolled or has been accepted for enrollment, (2) that he or she is in good academic standing, and (3) the amount of other finan cial aid that it has made available to the student. The school also provides an estimate of the student's college ex penses and shows the portion of the requested loan that is required to meet the student's immediate educational expenses. The school returns the application to the student, who then submits the application to the lender. The lender determines whether the loan will be made and, if so, the amount. Applications under the direct Federal component are processed by two private firms under contract with the Office of Education. Senator XUNN. Is this chart in reference to what you have just said verbally
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Mr. MARTIN.
Yes. sir. Senator XUNN. Would you just explain that chart a little bit? We can't read it from here. want to make sure we have it in mind. Mr. MARTIN. It appears in the back of the statement, sir. This is the general process flow in the federally insured loan program. It
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shows the various phases that a student goes through for the entire process of the loan. It begins with the application, which the student fills out. It rep resents the in-school phase, what takes place as far as the loans are concerned, while the student is in school. The third phase is the grace period after he completes school, the 9- to 12-month grace period that the student has. Senator NUNN. Let's slow down and back up to the application phase. Just walk us through, because this is important. Mr. MARTIN. The student, as indicated first, finds out about the loan from the institution. He then prepares an application which sets forth his family income and the need for the loan. This is submitted to the school which completes the form for certain data, indicating that he is enrolled or has been accepted for enrollment and he is a student in good standing. That then is returned to the student, who then submits it to the lender. Under the Federal program, the application is then forwarded to HEW which has two contractors that process the loan. Senator NUNN. The lender forwards the application? Mr. MARTIN. Into the Office of Education. Then it is checked for various reasons. They examine for the accuracy of certain information on the form, and then it is further processed, and OE would then approve or disapprove the loan. it is approved, then the lender disburses to the student the amount of the loan. Generally, as will get to later, it is disbursed in a lump sum at the beginning of the academic year. the lender is a school, it is disbursed when the student needs it. it is disbursed by other lending institutions, the student gets the total amount of the loan at the beginning of the year. Senator NUNN. When is the disbursement made, and what are the criteria on which it is made? Mr. MARTIN. the lender is other than the school, the disburse ment, is made to the student prior to the beginning of the academic year for the total amount of the loan. it is a school, it is paid as the student needs it. In other words, each semester he is provided with the amount needed. it is the school, the money is held back even Senator NUNN. though it is authorized, and it is disbursed on a quarterly basis to the student? Mr . MARTIN. Whenever the student has to meet his educational expenses. the lender is not a school, the entire amount of Senator N"uNN. the loan for 1 year is disbursed at one time? Mr. MARTIN.* That is correct. Senator NUNN. You could keep that mike up close. It is hard to hear. Mr. MARTIN. One contractor receives all loan applications and re views them for completeness, performs various clerical edits, and generates magnetic tapes containing all pertinent application data. The second contractor checks the magnetic tapes to insure that: (1) Schools and lenders are eligible to participate in the program, (2) loan amounts do not exceed $2,500 annually, and (3) errors do not exist in the data fields. All applications are screened against the
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loan control master file which contains historical records of students, loans, and associated statistical and demographic data. It is at this point that we have noticed a difference between the State and Federal programs. Under the State program, the lender submits the student's application directly to the State or private guarantee agency. the agency insures the loan, funds are disbursed to the student. The Office of Education is not notified by the lender until after the disbursement takes place. As a result, the Office of Education has no opportunity to review its records and determine whether the student has any outstanding federally insured loans or has defaulted on previous loans. An Office of Education official told us that under the present system, it is possible for a student to receive both a Federal- and State-insured loan. Before continuing, would like to point out that in an independent contractor's evaluation of the loan control master file, a sample of 50,000 records contained 205,000 errors. Also, we noted that the con tractor responsible for reviewing applications has not established internal controls to assure that all applications received are con sidered and placed in the file. As a result, we believe reliance on the loan control master file as an internal control mechanism is questionable. After the contractors complete their tasks, the lenders are notified of approval or disapproval. approved, the borrower must execute a promissory note before the lender can disburse funds. The note is to be signed by the student without a cosigner unless individual State laws require a cosigner to create a binding obligation. Lenders notify the Office of Education when funds are disbursed, and this information is recorded in the loan control master file. How would like to point out that an Office of Education report ever, showed that as of October 1975, approximately 295,000 loan disburse ments had not been matched with data in the file. Senator NUNN. That is obviously a flaw in the system. Is there any thing in the law that requires this ? Is this strictly up to the Office of Education and HEW? Could this be corrected by rules and regula
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Mr. MARTIN. think it could be, yes, sir, under the authority that the Office of Education has for administering the program. They could establish adequate controls. Program guidelines encourage lenders to make multiple disburse ments of loans to students. However, an Office of Education official stated that most lenders disburse the loan in a single installment before the academic year begins. In an April 1970 report to the Congress, we pointed out that multiple disbursements could significantly reduce the Government's interest costs and also might help reduce the potential loss on defaulted loans. Recent program regulations require schools that act as lenders to make multiple disbursements, but other lenders are not required to do so. The Office of Education's new automated system, which will discuss later, will require that multiple disbursements be made for all direct federally insured loans.
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PROGRAM
ABUSE
One area that bears special mention concerns propriety schools that act as lenders. The Office of Education's Deputy Commissioner for Management recently pointed out in testimony before a congres sional subcommittee that in assessing default problems, certain types of lenders have contributed to the problem in a manner that is dis proportionate to their loan volume. He stated that educational institutions acting as lenders are the worst and that the delinquency rate on loans made by proprietary schools acting as lenders increased from 38.5 percent in fiscal year 1973 to 46.3 percent in fiscal year 1974. He pointed out that the rate might be higher because many of the proprietary schools have sold their loans to other lenders. Educational institutions acting as lenders certify students as eligible for loans and also disburse the loan proceeds. This does not provide for the segregation of duties which a good internal control system would dictate. The absence of such controls can lead to program abuses. The possibility of such abuses occurring under State guaranty pro grams is not as great because most State agencies insist on a thirdparty lender rather than permitting schools to act as lenders. Pending legislation — H.Il. 4376 — would eliminate proprietary schools as lenders. Schools enrolling students Avho already have loans and needing additional loans to continue their education would be permitted to continue as lenders until June 30, 1978. IN-SCHOOL PHASE
The in-school period of a loan covers that period of time during which the student is enrolled, on at least a half-time basis, at an eligible school. During this period, the student has no obligation to begin to repay his loan. However, during this phase, the Office of Education bills lenders for insurance premiums; lenders bill the Office of Education for in terest subsidies and special allowances; and the Office of Education helps lenders keep abreast of student status. To obtain Federal insurance, lenders must pay the Office of Educa tion a one-time insurance premium based on each loan disbursed. The current average premium is $6.50 a loan which the lender either collects from the student, or deducts from the proceeds of the loan. The Office of Education bills lenders for premiums on the basis of lender lenders do not remit the premiums, the reports of new loans made. Office of Education will not insure the loans. The next transaction during the in-school phase occurs when lenders bill the Office of Education for interest subsidies and special allow ances. In fiscal year 1975, $212 million was paid to lenders for interest bringing the cumulative total for interest since inception of the pro gram to $1.1 billion. Also, for fiscal year 1975, $115.5 million was paid as special allowances, for a cumulative total of $259 million. Public Law 94-460, enacted in August 1968. set the maximum interest rate at 7 percent. For eligible loans made prior to December 1968. the Office of Education pays 3 percent interest during the repayment period, and the student pays the balance.
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As mentioned earlier, the Office of Education also pays a special allowance to lenders whenever existing economic or money market conditions impede or threaten the program and cause the return to lenders to be less than equitable. The special allowance rate is set at the end of each quarter by the Secretary of HEW, in consultation with the Secretary of the Treasury and the Director, OMB, and has ranged from three-quarters of 1 percent to the maximum of 3 percent. The rate for the third quarter of this calendar year— July to September 1975 — was 2.25 percent. Lenders generally bill the Office of Education every 3 months for interest subsidies and special allowances. Lenders are required to show the average quarterly unpaid principal balance for all eligible loans on their bills. These bills are received at the Office of Education and given a cursory manual review. The information is then keypunched and fed into the computer system. Normally, checks are to be mailed to the lenders within a month. There are weaknesses in the interest billing and special allowance process. The most serious were pointed out in our March 1973 report to the Secretary, HEW, and in a September 1973 HEW Audit Agency report.
In our March 1973 report, we recommended that the Office of Edu cation evaluate alternative methods for providing lenders with more timely information on the status of student borrowers. Lenders were not being provided with timely information when students dropped put of school. This decreased the possibility of collection and also increased the interest and special allowance costs because lenders con tinued to bill for them. The HEW Audit Agency reported in September 1973 that in a sam ple of 108 lending institutions, 96 made errors in interest billings to the Office of Education. Most of the errors were caused by lenders continuing to bill after the interest subsidy period had expired — usually because they were unaware that students had left school. Essen tially nothing has been done by the Office of Education since 1973 to alleviate this problem. Senator NUNN. Under the present rules and regulations, who is supposed to notify the lender that the student has dropped out of school ? Mr. MARTIN. That basically is the responsibility of both the school and HEW if they have that knowledge. The lender must be notified by one or the other if they have the information. Senator NUNN. AVho is supposed to notify HEW? Mr. MARTIN. The school. There is a student confirmation report that is sent twice a year to the school in which they are supposed to indicate the status of the student on the report. The report is furnished by HEW to the lenders. Another problem with interest billings is that the Office of Educa tion cannot verify the accuracy or propriety of lender billings. Mathe matical computations can be checked; however, this does not insure the accuracy of the base figures used by lenders in computing the amount of the interest billed —the average unpaid principal balances of the different subsidized loans. In its 1973 report, the HEW Audit Agency recommended that the Office of Education provide on-site guidance and monitoring of lending
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institutions. The Office of Education agreed that this should be done and admitted that the only way to determine the accuracy of interest billings would be to perform on-site examinations of lender records. At the 10 HEW regions, about 40 people are assigned as field examiners to carry out such reviews. Indications are, however, that these people are performing other duties, mainly in the area of claims and collections.
VERIFICATION OF STUDENT
STATUS
Another major aspect of the program discussed in our past reports is the verification of student status. The Office of Education has used a student confirmation report to provide lenders with this information. In the spring and fall of each year these reports are sent to par ticipating schools. Institutions are requested to indicate any change in a student's status and the effective date of such change. When the form is recevied by the Office of Education, the information is sent to a contractor, keypunched, and used to update the loan control mas ter file. The information is then relayed to lenders. The Office of Education views the student confirmation report as a lender service and does not take any type of followtip action on stu dents shown to have withdrawn, graduated, or never enrolled. One Office of Education official stated that the reports are not very effective because (1) schools often do not complete the reports ac curately, or fail to return the reports, and (2) about 10 percent of the students with loans are attending foreign institutions and the re sponse rate from these schools is poor. The contractor returns the batched reports to the Office of Educa tion for storage but they are not filed in any particular order. This makes it difficult to use successive reports from an institution for com parative purposes. However, we found and compared three successive reports from a small institution that had about 400 students with loans, and learned that the Office of Education did not update its computer files with the information shown on these reports. Also, some students appeared twice on the same report. Their names and birth dates were the same but their social security numbers dif fered. It is possible that these students received two loans under dif ferent social security numbers. Office of Education officials have stated that there is no easy way to check whether a student has two separate loans under different social security numbers. STATUS OF PRIOR GAO RECOMMENDATIONS
In response to the recommendation in our March 1973 report about student status, the Office of Education designed a two-section postcard system. The card was to be preaddressed with the lender's address and sent to the financial aid officer of the college the student was attending. The financial aid officer was expected to tear off the first section of the card and place it in the student's financial aid records and give the second section of the card to the registrar to place in the student's registration file. When the student terminated his enrollment, the registrar was expected to record the date and check the reason for the termination on the card and mail the preaddressed card to the ap propriate lender. However, the system was never implemented largely
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because the Office of Education has been developing a new automated system. The American Bankers Association task force on student loans listed one of the lenders' main complaints as the lack of notification by schools of students' status. In its March 1975 report, the association recommended that the Office of Education require schools to notify lenders when students graduate or leave school. REPAYMENT
OR
DEFAULT PHASE
A number of
possible actions can occur during the repayment phase flow chart. First, the student enters repayment status and could pay off the obligation. Second, pay ment of the loan principal may be deferred if a student resumes fulltime study in an eligible institution or serves in the Armed Forces, Peace Corps or Vista. Other possible action— default, death, disability, and bankruptcy — all result in claims against the Federal Government. Lenders are re quired to take collection action during the repayment phase until a claim is submitted to the Office of Education. The Office of Education is responsible for providing lenders with preclaims assistance, processing claims for purchase by the Govern ment, and in the case of defaults, attempting collection of the bal ance of the debt including interest. This next chart shows the dollar volume of default claims paid from the inception of the program through fiscal year 1975. On the average, defaults represented over 90 percent of the total number and dollar value of all claims paid for these fiscal years. It is easy to see why de faults on guaranteed student loans have become the single most pub licized aspect of the program in recent months. Default can be measured in a number of ways. The Office of Edu cation has chosen to define the default rate as the ratio of the total dollar amount of loans in default claims status to the total dollar amount of loans in repayment status. The Office of Education estimates that in fiscal year 1976 the default rate will be 19 percent for the Federal portion and 10.5 percent for the State portion, or an overall rate of 14.1 percent. In September 1974. we provided data to the Subcommittee on Edu cation, Senate Committee on Labor and Public Welfare, showing that the eventual default rate on all direct federally insured loans in re payment status as of December 31, 1973, could be as high as 24.3 percent. Mr. FELDMAN. It is a little difficult to see but think the color brings it out for the chairman and Senator Percy. Please explain the solid red line, the blue line, and the orange line. Mr. MARTIN. The red represents to total of Federal and State. The Federal is the orange ; the State is blue. Mr. FELDMAN. On the far right is that 1975 ? Mr. MARTIN. That is the actual. Mr. FELDMAN. What kind of dollars are we talking about, that red line total ? Mr. MARTIN. We could provide that to you. think Mr. Daly has that information. We can provide it for each of the years that is shown on the chart.
of
a
loan
as you can see on the process
I
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18
Mr. FELDMAN. For 1975. Senator Nuxx. On my chart it looks like it is about $115 million. Mr. DALY. The 1975 figures for the Federal portion Senator Nuxx. Is it $115 million ? Mr. DALY. About $111 million total. Senator Nuxx. In fiscal year 1975 ? Mr. DALY. Right, $71 million for the Federal and $40 million for
the State,
Senator Nuxx. That is in 1 fiscal year? That is not an accumulative chart? In other words, you have got $111 million worth of defaulted loans for the Federal Government in fiscal year 1975? Mr. DALY. Right. Senator Nuxx. How much to the State? Mr. DALY. The State was about $40 million. Senator Nuxx. So you have a total of about $151 million in default
on these loans. Mr. DALY. No. The total was $111 million, it is the State represent ing 40 and the Federal representing the balance of 71. Mr. FELDMAN. Am correct in assuming that these are just claims that have been processed ? Mr. DALY. These are claims paid. Mr. FELDMAN. So there might be many, many more outstanding that haven't been processed. Mr. DALY. Right. As of June 30, 1975, there were about 28,000
I
claims outstanding.
Mr. FELDMAN. Which could
claim?
be an average
of about how much
a
Mr. DALY. About $1,000, I would think. Mr. MARTIN. The cumulative figures, for the Federal program, are about $182 million and $119 million for the State program, or accumu lative total of $301 million. That is for 1975. GEXERAL PROCESSING
OF CLAIMS PAPERWORK
When lenders determine that claims exist for federally insured loans, they are required to submit applications for payment together with the supporting promissory notes and loan applications. In the case of death, disability, or bankruptcy, the lenders must also submit certain forms showing that they have made the required determinations in each case. These claims are processed by the Office of Education headquarters office, whereas defaulted loans are proc essed by the regional offices. Program regulations state that a loan is in default when the bor rower has failed to make a payment which in the case of a loan repayble in monthly installments has been overdue for 120 days, or in the case of a loan repayable in other than monthly installments, has been overdue for 180 days. Regulations also provide that the Office of Education can reimburse a lender for a loss incurred on a defaulted insured loan only if the lender has exercised due diligence in collecting the loan. These regu lations are incorporated by reference in the lender's contract of in surance with the Office of Education. When submitting default claims, the lenders are required to send their nayment records and any other documentation showing that rea sonable care and diligence was exercised in their collection efforts.
19
Upon
receipt of the default claims, regional claims examiners should: ; review the claims for com ; determine whether lenders have exercised reasonable care and diligence in collecting loans ; and approve valid claims for payment. When claims are approved, a record of approval is sent to the Office of PMucation headquarters, where payment of the claims is authorized. Prior to the Education Amendments of 1972, the Office of Education paid the interest subsidy until repayment status was reached, that is, through any grace or deferment period. The amendments authorized the Office of Education to insure interest, as well as principal, so that on claims for subsequent loans the Office of Education pays interest subsidy during the period that the loan is delinquent. To avoid penalizing lenders for processing delays, the Office of Edu cation recently authorized payment of insured interest up until the time that the claim is actually approved for payment. Data on claims activity comes from the automated system's claims and collection master file. We tested the accuracy of the file, by select ing a sample of claims for both federally insured and State insured loans and checking them against the loan control master file. Data for about 15 percent of the claims could not be found in the file. An Office of Education internal study of claims paid showed a similar percentage of missing data. In these instances, the Office of Education cannot be certain that the claims paid were supported byvalid loan commitments for insurance or reinsurance.
Establish physical control over the claims pliance with legal and policy requirements
WORK AT SELECTED HEW REGIONAL
OFFICES
Because of the default rate and the recent transfer of the claims purchase and collection function to HEW regional offices, we recently checked these and other operations at two of HEW's regional offices : Chicago and San Francisco. Office of Education records show that as of June 30, 1975, about 28,400 claims were being held pending review for acceptability for purchase, and the Chicago and San Francisco regional offices held about 11,000 of them or almost 39 percent. In the San Francisco regional office, claims are logged in and as signed a batch number in date sequence. They are stored in locked file cabinets until they can be reviewed by claims examiners. Reviews are made in batch number sequence. This allows for proc essing the claims on a first-in, first-out basis and also provides a safe guard for the promissory notes contained in the claims folders. These notes represent the Federal Government's legal proof of claim against the student. However, the Chicago regional office has not established accountabil ity or control over claims transferred from Office of Education head quarters, or received and purchased from lenders. We observed nu merous loan files containing borrowers' promissory notes stored on the office floor, on top of filing cabinets, and on window sills. Senator NUNN. Backing up to page 24 of your testimony, the data for about 15 percent of the claims could not be found in the file. When you say claims, are you talking about claims that are pending or claims that have already been processed and are being paid ?
20
Mr. DALY. Claims that were processed and paid.
Senator NUNN. Those that are being paid or have been paid, 15 per of them don't have any backup data in the file? Mr. MARTIN. On 15 percent of those that were paid. Senator NUNN. Fifteen percent, do not have any data in the file showing backup material on why they were paid ? cent
Mr. MAR-TOT. That is correct. Mr. DALY. Has no backup data in the file showing that
a
valid loan
commitment was made.
Senator NUNN. What is the explanation for that ? How could that ? What happens to it ? Mr. DALY. It could be through inadequate computer procedures, it could be that the loan was never insured. Senator NUNN. What is the second possibility ? Mr. DALY. It could be that the loan was in fact never insured ? Senator NUNN. You mean they might have been paying loans that weren't ever insured ? Mr. DALY. It is possible. Mr. MARTIN. From the file, since there is no data on the fact that there was a valid outstanding loan, we do not really know. Senator NUNN. What do they say about this? This to me is incredi ble. They can't even prove to you that the loans they are paying off. that they claim are in default, were ever loans insured by the Federal Government ? Mr. MARTIN. That is true. In 15 percent of the files that we ex amined, that is the case. Senator NUNN. Did you interview HEW officials on this point? Have they been given an opportunity to comment on this ? Mr. DALY. Yes. We have discussed this with them. We pointed this be
out about 2 weeks ago.
Senator NUNN. What is their response ? Mr. DALY. At that time believe they responded because of the ade quacies of the current system, these kinds of things happen. It relates
I
back to the computer system. Senator NUNN. Go ahead. Mr. MARTIN. Because a system had not been devised for storing claim files received from lenders, claims were not processed in the order re ceived. Also, in a sample of 120 claims, 12 promissory notes were not available in Office of Education files. As a consequence, the Govern ment will not be able to enforce collection on these notes. Senator NUNN. They lost some notes ? Mr. MARTIN. Correct, so the Government will not be able then to take collective action. Senator NUNN. How could they lose the notes? This is 10 percent. Do you think this is a representative sample ? Mr. MARTIN. To the best of my knowledge, they were just 120 ran domly selected. Senator NUNN. 120 were selected and 12 of them didn't even have a note
in the file
?
Mr. MARTIN. Right. The sample was not statistically selected. Therefore, I don't think we can project it to the total. But of those had no promissory notes. Senator NTTNN. What is the explanation of that? could be lost. But how could 10 percent be lost ? 120, 10 percent
I can see how one
21
Mr. DALY. Back in 1974 they transferred the claims and collections function from the central office to the regions. There was a period of time when notes and files were being shifted across country. This is what we have been told is the main reason. Senator NUNN. They mailed all of these files ? Mr. DALY. Right. Mr. FELDMAN. Senator, am to understand that these are claims that have been paid, the notes are not in the file, and then after the Federal Government pays the claims, they would go against the
I
student
?
Mr. DALY. That is true. Mr. FELDMAN. Assuming this is
a bona dent the Government would have to show lect. would like to represent the student have the note. think it would be a nice down the drain.
I
I
fide indebtedness of a stu evidence of the note to col in a case where they didn't defense. So that those are
Mr. MARTIN. Right. Senator NUNN. Who has the physical control of these promissory notes ? Was it the lender or the Office of Education ? Mr. MARTIN. They would be in the hands of the lender until they were submitted to the Office of Education. Senator NUNN. For claim ? Mr. MARTEN. For claim.
Senator NUNN. Presumably before the Government paid the de faulted claim there would have been a promissory note in the hands of the Office of Education ? Mr. MARTIN. That would be expected ; yes, sir. Senator NUNN. But is it possible that never happens ? Is it possible that they pay claims without having a promissory note? Mr. MARTIN. am sorry ? Senator NUNN. Is it possible these claims were paid without the Office of Education ever having promissory notes at all ? Mr. MARTIN. That is a possibility. We don't have any information as to whether or not that was the case. Senator NUNN. Do you have any samples where that has happened ? Mr. MARTIN. Not to my knowledge ; no, sir. Mr. DALY. We did check the claims processing procedures at the two regions. don't believe we found any case in which the claims was paid without a promissory note. Senator NUNN. Do you think the note was actually in the hands of the Office of Education and after they paid the claim, it was lost 1 Mr. DALY. would think so. Mr. MARTIN. As indicated, the Chicago regional office had not established adequate control on the files. It is possible for things in that kind of a condition to get lost out of the files. In Chicago, random processing coupled with the large backlog resulted in delays of up to 6 months in approving and paying claims. These delays result in the Federal Government paying unnecessary interest costs, and the collectibility of loans being reduced.
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COMPLIANCE WITH LEGAL REQUIREMENTS AND LENDER DUE DILIGENCE
To see how well the Chicago and San Francisco claims examiners were checking for compliance with legal and policy requirements and lender due diligence, we randomly selected and examined 245 claims.
22
Of
these, the majority had been, purchased by Office of Education headquarters and the remainder had been recently reviewed and approved by the regional offices. In a number of instances legal and policy requirements had not been met because default dates were inaccurate, claim amounts were incorrect, or the dates the student ceased at least half-time study were not verified. However, the most serious problem pertained to the check for lender due diligence. Program regulations do not provide specific procedures for lenders, but require them to use collection practices no less extensive and force ful than those generally used by financial institutions. The program manual states that lenders should explore all avenues of collection short of legal action prior to filing a claim. The program manual contains procedures for nonregulated lenders to use as a guide in their collection operations. These procedures in clude such things as exit interviews with borrowers, reminder letters prior to the date of first payment, personal contact in the event of missed payments, and periodic collection letters if personal contact is unsuccessful. We used these stated procedures in our checks for lender due dili gence for both types of lenders on the basis that the Office of Educa tion would not expect regulated lenders to be less forceful and aggres sive in their collection actions. We believe that 235 of the 245 claims, or 96 percent, should not have been approved for purchase, but should have been returned to the lenders either because they had not met typically acceptable collec tion procedures or the files did not show if the lenders had taken the required actions. Senator NTJNN. You examined 245 claims ?
Mr. MARTIN. Yes, sir.
Senator NUNN. 235 or 245 should not have been approved ? Mr. MARTIN. Should not have been approved. Senator NUNN. What were the reasons they should not have
approved
been
?
Mr. MARTIN. The lender had not followed the typically acceptable collection procedures or the files did not show the lender had taken
the required action. Senator NTJNN. Did you get a breakdown of whether the lenders in these 245 claims were lending institutions or schools? Mr. MARTIN. don't know personally don't have that information. if my associates do. We do not, sir. In contrast, the San Francisco regional office processed 14,600 claims during the year ended June 30, 1975. Of these. 3,272 were re turned to lenders but only 146 were returned for failure to exercise due diligence. The Chicago regional office processed 3.900 claims from December 1974 through June 1975 and a total of 110 were returned" to lenders. The San Francisco office had one supervisory claims examiner and three full-time examiners, and. as of June 30, 1975, a backlog of about 2,600 claims. The Chicago office had one full-time claims examiner with some staff assigned on a temporary basis; and, as of June 30, 1975, there was a backlog of about 8.600 claims. The size of the col lection staffs combined with the large backlog of claims in both regions' allowed the examiners to give each claim only a superficial review.
I
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23
To alleviate the backlog of unexamined claims in some regions, the Office of Education in June 1975, instituted a limited claims review process for certain lenders. Under this process the claims examiners are to review the claim package for the correct forms, the accuracy of mathematical computations, and the proper expiration of any grace or deferment periods. The claims examiners are not to check for lender due diligence; this review is to be made by the collection staff after the claim is purchased. The limited review process is authorized until December 1975.
LENDER COLLECTION
PRACTICES
with the Because our sample showed almost total noncompliance Office of Education's acceptable collection practices, we visited four lenders : two in each region, and looked at their collection procedures. Senator NUNN. you proceed to pay the claim and then check with the lender for due diligence, what good does it do you ? Mr. MARTIN. It is our understanding that the Office of Education was going to go to the lender and get an agreement with them that if due diligence had not been applied and they should not have purchased the loan, that they would get a refund from the lender until he took the necessary action. Senator NUNN. Have they done this ? Mr. MARTIN. To the best of my knowledge, they have not. Three lenders were financial institutions and one was a school. As of June 30, 1975, the four lenders had about 80,200 federally insured stu dent loans outstanding totaling $87.4 million. The school — which had the smallest number and dollar volume of loans outstanding — had procedures which met the Office of Education collection criteria but generally they were not followed. Our sample check at the three financial institutions showed that their federally insured loan collection procedures were not as aggressive and forceful as their practices for commercial loans. Senator NUNN. Why would they be aggressive ? Are they losing any money if the Government doesn't pay for it ?
If
Mr. MARTIN. No, sir. Senator NUNN. What is the incentive for them to go out and col
lect
?
Is there
any incentive at all
?
Mr. MARTIN. None ; no, sir, not as far
as the lender is concerned. Senator NUNN. they have some loans in default which is their money and other loans in default which is the Government's money, would there be any reason at all they would assign personnel to collect Government claims instead of their own claims ? Mr. MARTIN. Only to the extent they entered into an agreement when they become lenders that they would attempt to collect it. Senator NUNN. There are no sanctions, no penalties ? There is abso lutely no reason or incentive they have except the original agreement to go out and collect this money ? Mr. MARTIN. Other than the fact that HEW could withdraw them from the acceptable eligible lenders list. Senator NUNN. How much of that has happened ? Has HEW ob served certain lenders? Mr. MARTIN. don't know. Mr. DALY. Some, yes. Not to any great extent.
If
I
24
Senator NUNN. Go ahead.
Mr. MARTIN. Officials from the largest of these lenders
:
$73
million
in outstanding federally insured loans, told us that their procedures for collecting student loans are different from those for collecting com mercial loans because they do not view student loans strictly as loans. They consider them a special type of credit because collateral is not required.
Officials from three of the four lenders told us that the Office of Education needs to more clearly define what constitutes due diligence in collection efforts. This lack of a definition had led to varying inter pretations.
This problem has been widely recognized within the financial com munity. The American Bankers Associations' task force report on the Guaranteed Student Loan program issued last spring included the lack of a clear definition of due diligence as one of the persistent problems plaguing the program. OFFICE
OF EDUCATION
COLLECTION
ACTIVITIES
Once the Office of Education has purchased a default claim from a lender, it must attempt to collect the debt due the Government. It has authority within certain limits to compromise, suspend or terminate collection of such claims. Also, in instances where the debtor's ability to pay can be established, but collection efforts have been exhausted, it we cannot collect, the can refer the claim to GAO for further action. claim may be referred to the Department of Justice for litigation. Since 1971 we have periodically reported to the Office of Education that it needed to establish and maintain an effective collection opera tion for defaulted loans. As mentioned earlier, we are again involved in reviewing Office of Education collection activities. Information developed to date indicates that the regional offices are not following HEW collection guidelines or the Federal claims collection standards.
If
I
EXISTING AUTOMATED
SYSTEM CONTROL PROBLEMS AND THE OFFICE OF PLANNED NEW SYSTEM
EDUCATION'S
Aside from the data reliability problems in the present automated have been discussing, we have also noted basic problems system that in the system's organization, control, and contract management func tions. We believe these latter problems have kept the Office of Educa tion from improving the system's reliability. In recent years, the Office of Education has been almost entirely dependent on private contractors for the program's data processing services. In fiscal year 1975, 6 contractors are involved in the daily processing of information, and 10 others had contracts for other services. We believe the Office of Education has been lax in its contract management. For example, it did not always evaluate thoroughly the tasks to be contracted; estimate the total contract costs; coordinate well with contractors; or evaluate the contractors' final products before acceptance. We also believe that the Office of Education needs to develop adequate computer controls for the flow of documents in the existing system. These controls are critical because of the involvement of so many different parties in the processing, and are needed to minimize
I
25
?
it
it,
inadvertent or intentional destruction or distortion of processed in formation. As an example of what can happen, the Office of Education, in reply to this subcommittee chairman's request for information on the payment of interest subsidies and special allowances, stated that such information was lost in April 1973 for a significant number of lenders. The data is available in hard copy form, but it is no longer available in the computer system. Senator NLTSTN. When they feed this information into the computer, or do they then throw do they take the original information and file do information? they do once they What the away original- backup into the computer feed Mr. MARTIN. In this particular case they did have the hard copy information. It would have to be manually figured or put back into
is
a
is
the computer. new developing To cure these ills, the Office of Education automated management information system for the program. The system being developed, however, without documented studies of alternatives and associated comparative cost analyses required by
GSA.
The new system rests on two basic concepts: The regionalization of default claims processing and collection activities, and the use
of an escrow account. According
to
HEW's General
Counsel,
regionalization
violates
of the General Education Provisions Act. Senator NUNN. At this point we will have to have recess. The 5-minute warning has just sounded. We will probably be gone for about 15 minutes. Either Senator Percy or will be back. members at the of brief recess: following present taking [The a
I
a
section 403
is
1,
I
Senators Nunn and Percy.] Senator PKRCY [presiding]. The subcommittee will come to order again, please. Mr. Martin, would you proceed, please? Could you tell me where you left off? Mr. MARTIN. am at the bottom of page 31, sir. This particular section, added by the Education Amendments of 1974, provides that the Commissioner of Education shall not delegate to any regional office, any function which was not carried out in accordance with regulations effective prior to June 1973, by em ployees in such offices unless the delegation of the function expressly authorized by law enacted after the effective date of the Education
may have. [The attachments follow 63-570 — 76
:]
is
it is
Amendments of 1974. The Office of Education preparing legislation to correct the viola tion, but in the meantime, proceeding with regional claims and collection activities. The concept of escrow has been approved by the Secretary of HEW, but the Office of Education has not decided how to implement it. Office of Education officials told us that some ques tions regarding the legality of an escrow arrangement still remain. As should be evident by my remarks, we think that major improve ments in program operations and controls are necessary. Mr. Chairman, that concludes our statement. We will be happy to answer any questions that you or the other subcommittee members
26
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Senator PERCY. We want to thank you, very much, indeed. On page 5, the first place stumbled, you mentioned that the Fed eral Government pays lenders the special allowance up to 3 percent a year on the average quarterly unpaid principal balance to provide an equitable yield to the lenders and the current maximum annual interest rate which lenders may charge is 7 percent. What do you consider an equitable yield when you have to really say that the Government pays 100 percent to the lenders? It is not like our small business loans where we only guarantee 90 percent. Here we guarantee 100 percent of it. The student paper is as good as wonder gold. It is as good as the Federal Government's credit and what you consider an equitable yield under those conditions. Mr. MARTIN. think the concept of paying a special allowance was to be sure that money would be available to students in the market when the lenders could get a higher interest rate on the general econ omy. So money would be available to students so that they could con tinue their education, the special allowance was put in. The amount of the allowance is determined by the Secretary of HEW in consulta tion with the Treasury and OMB. Senator PERCY. Don't you feel there would be somewhat less of a freewheeling trading of this paper if the Government guaranteed a smaller percentage of the loan, say, 90 percent ? Mr. MARTIN. That is a possibility. Yes, sir. That could occur. Senator PERCY. Shouldn't the lender assume some of the respon sibility for recovery ? In other words, to a banking institution, a lend ing institution, if the Government guarantees 100 percent, why should they even look to see whether there was a body behind a loan or not ? In a small business loan, when they are out only 90 percent, they will take some look at it, more so than if they were 100 percent. It is our intention to induce them to participate but we still want them hanging out there for some loss. We thonght at the time we did that,
I
I
I
it was about
a 2-year interest loss.
Now, at the present rates, it is about 1 year ; but still it is something. In this case, 90 percent or 80 percent, do you have any feeling as to what percentage would be best if something less than 100 percent would be more equitable and would put more responsibility into the program ? Mr. MARTIN. No ; don't think we have any specific figure in mind as to what would be a more equitable percent to insure. It is possible that if the lender would be responsible for some of the funds that were not recovered, he may take more aggressive collection action. Senator PERCY. But in principle, would you say that we should move to the private sector some of the responsibility for the collection of these loans where that belongs ? don't think, Senator, gotten into Mr. MARTIN. We really haven't, that to see what impact that would have. So really don't know, per sonally, whether or not that is the way we ought to move. That certainly is a possibility that might make this program more viable in terms of collection from the student if the lending institutions had some responsibility for that. Mr. DALY. would like to also add that three of the States that par ticipate in the State guarantee fee program have a 90-percent reinsur
I
I
I
I
31
ance, 90-percent insurance with their lenders. As we pointed out, the States show a much lower default rate. Mr. MARTIN. Possibly some of that lower default rate could be in the manner in which those States are computing their default lists. There is no consistency that we know of among the 50 States. Senator PERCY. You say that the student loan audit — want to quote your words — "did not thoroughly present its financial condition." am not an accountant, but have worked with auditors and account ants for 30 years. What is an accountant supposed to do to determine fair financial condition for the organization ? Isn't that the worst thing that could be said about HEW accounting ? You are a professional in that field.
I
I
I
I am not.
Mr. MARTIN. It certainly is one of the most critical things you could say about funds such as this. Senator PERCY. That statement by you, mild as it sounds, is almost like saying to a doctor, he is engaging in malpractice in a sense, just not fulfilling the function and responsibility. That is a pretty strong condemnation.
Mr. MARTIN. For the accounting profession, it is
a
yes, sir.
strong statement
;
is
?
is
a
I
?
it
it
is
a
a
I
I
it
it,
Senator PERCY. In your judgment, does the Office of Education have a good system for gathering up information indicated on student status ? Mr. MARTIN. Not at the present time. do you presume? Senator PERCY. How 'bad is Mr. MARTIN. know, as said in the statement, very difficult to get statistic that you can really place total reliance on from the system that they have now. new system which They are in the process of trying to develop should, if properly implemented, provide better statistical data. not true that lenders rely on the Office of Edu Senator PERCY. Is cation for information on the student status Mr. MARTIN. Yes, sir. As indicated in the statement, they do have report in the fall and in the spring which the school fills out, sends back to HEW, indicating the student status. That information then forwarded on to the lenders. Senator PERCY. Lenders bill the Office of Education for interest based on information fed them from the Office of Education, isn't that right, on the student attendance
essentially
private transaction between the lender and
?
is
since this the student
a
is
it
it
Mr. MARTIN. Yes, sir. Senator PERCY. You say in your statement that many of these lenders are billing for interest well beyond the time that the students have actually left school. Wouldn't be more appropriate for the lenders to be made responsible for keeping track of student status clear that the Office of Education has not done the job and since
system
of students. It think
is
the status
it
is
Mr. MARTIN. That certainly an alternative that may improve the information that we have or that the HEW and the lenders have on possible
if OE
designs an adequate
that they could provide that information to the lenders.
32
It might be better as far as the schools are concerned, if they pro vided that information to one source such as the Office of Education. It might 'be less work on the school rather than responding to a number of individual lenders that may have loans outstanding to students enrolled in that school. think HEW could design a better system. Senator PERCY. Looking at the redress that the Federal Govern ment has now for obvious wrongdoing, what recourses we have avail able to us, can you or your colleagues tell the subcommittee whether presently there are any criminal penalties that could be applied for lenders for falsely billing HEW for interest payments on students who are no longer in school ? Mr. MARTIN. Mr. Chairman, don't think the lenders, at least as far as we have been able to find in our audits of the program, are doing it intentionally. They are using the information as provided by the Office of Education and do bill the Office of Education for that
I
I
interest.
I think in order to be
liable for any wrongdoing, it would have to intentional on their part. We have not found any information to indicate this. Senator PEROY. They just didn't have the information? Mr. MARTIN. That is correct, sir. To the best of our knowledge, that be
is correct.
Senator PERCY. Wouldn't it be a good idea for HEW to require all lenders to notarize their billings to HEW so they can be held crimi nally accountable for submitting any false statements so we at least take due diligence in HEW in trying to ascertain what the facts are ? Mr. MARTIN. That certainly is an alternative. think if HEW was providing to the lenders adequate information and if their system was adequate to the point they could audit the billings received from the lenders, it would not be a problem. This could be resolved admin istratively if they had, in fact, information to audit the billings. am quite concerned that the Chicago regional Senator PERCY. office failed to establish accountability or claims controls when the San Francisco regional office seems to have done a far better job. Doesn't HEW require all its regional offices to folloCv the same procedures on these claims and why do we have this problem in the Chicago office? Do you have any insight that you can provide to us
I
I
or.
that?
It
is my understanding, Mr. Chairman, that the re gional people do not report to the Office of Guaranteed Student Loans here in Washington HEW headquarters. They report to the regional
Mr. MARTIN.
directors.
We know that while our work was underway in Chicago, they made some improvements in their controls. At least, they now have file cabinets in which the loan files are stored. They are not batch-con trolled in the manner that San Francisco is doing. have often thought that it must be very frustrat Senator PERCY. ing indeed for GAO to, year afttr year, point out in their reports sometimes wrongdoing in certain areas, and have nothing happen. think that we just sit here and ask GAO to go out and make reports and make their analyses and when they come in, we don't do anything about them.
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pointed out to the chairman — Chairman Ribicoff — recently, for think there are almost a half dozen instance, in the LEAA program, reports that have been made now on things that are wrong with that program and yet, what committee has done anything about it? It doesn't do any good to have that report made and filed. It doesn't give me any feeling of comfort at night to know we have not done our part. You have gone out and found things that are wrong and we have done nothing about it. Certainly, hope we intend to do something about those reports and f ollowup on them. GAO has been reporting to HEW and the Congress for 6 years now about the problems in the system. Yet, can't see any evidence that anything has really been done. When you go to HEW every year, what do they say to you to explain this inaction ? How can you account for the fact that the Congress hasn't done anything? We should take full blame for that. Yet, HEW has the administrative responsibility for carrjung out the law and seeing that it is carried out properly. We really have to rely upon it. We are not the executive branch. They have to rely upon them to follow up. Why don't they do something about it? Mr. MARTIN. think generally, Mr. Chairman, in the past, they have blamed it on working out bugs in their automated system. In more recent times they are saying they are working on the new sys tem, and that the new system should correct all the deficiencies that we have noted. The new system is not on line yet. That generally has been the answer to our questions. We do plan to continue to follow up to be sure that if and when that new system does go on line, that it does correct the deficiencies. not, we will certainly report to the Congress and HEW any deficiencies. have recently written Secretary Mathews suggest Senator PERCY. ing that we have a meeting. suggested in my letter that the meeting be held shortly after the first of the year because thought the pres sure of the matters here would make it difficult to have a leisurely meeting this year. will certainly add this to the agenda. there is a degree of we will move the meeting up this year, to the month urgency about of December, if would help. want GAO to know to the best extent that Certainly, possibly can — and am certain Senator Nunn and Senator Jackson feel the same way — we will move on this. Now we have new Secretary, a new approach, and a new broom maybe we cannot sweep this under the rug, but do something about it. He not, obviously, responsible for any of the practices of the past. Maybe he can take a good, hard look at now. What do you think the lending institutions should do to show that they execute due diligence in collecting loan Mr. MARTIN. think certainly, in the record that they submit to HEW at the time they are attempting to get HEW to purchase claims, there should be adequate evidence that they follow whatever their formal procedures are for collecting on commercial paper. That would include the normal followup letters, phone calls, contacts with the individual, trying to get them to make payment of the loan that they have outstanding.
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it it,
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Senator PERCY. Do you mention how much more the lending insti tutions get, would get, if they just owned the Government bond on
an average as an interest payment? Mr. MARTIN. don't really have any information on that. Senator PERCY. But they are getting something beyond that?
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Mr. MARTIN. Yes, sir.
is
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Senator PERCY. Beyond the yield on a Government bond? A Gov ernment bond, they don't have to do anything; they just wait and collect it. Here, if there is a default, they just turn it over and wait and collect don't they? They really don't perform an additional service. There ought to be some additional service performed. speak as past director of large Chicago bank and the Chase Manhattan in New York. There ought to be something done for that extra interest. extra cost, but there ought to be some performance in the Maybe collection. think up to us to make certain that they are earning their money. Mr. MARTIN. As indicated in the statement, Mr. Chairman, HEW required to determine whether or not the lender has exercised due diligence before they purchase the loan. As we also indicated in num ber of instances that we looked at, HEW had not always insured itself that the lender had taken adequate action before they agreed to pur chase the loan and reimburse the lender. So think HEW could do lot more than they have done in this area. the repre Senator PERCY. We will put that question to HEW, sentatives are in the room. you don't have the information right now, make think couple of phone calls and get it. perfectly proper thing to know what the lending institutions themselves are doing to perform fiduciary functions in this regard. You tell us that HEW relies on private accreditation agencies for approval of the schools in the program. Are they paid by the schools to do this accrediting? Mr. MARTIN. would like to ask Mr. Lauve if he would respond to that.
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Mr. LAUVE. The Office of Education recognizes certain independent organizations that are called accrediting associations. These associa tions send accreditation teams to visit the schools. Their purpose to determine whether or not quality education available there. The school must pay for the visit of this accreditation team. As think, roughly be understand they also must pay an annual fee, tween $150 and $300, depending upon the particular accrediting association.
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Senator PERCY. Does HEW hold these agencies responsible where these schools provide an inferior education or an unscrupulous oper ator sells off the student loans and closes up the school, leaving the stu dents stranded and holding the bag? Mr. LAUVE. This very touchy subject with the accrediting: asso ciations. They do not see their role as one of enforcement. HEW has the authority, in the case of this particular program for example, to render particular school as ineligible and not allow to participate. But neither the Office of Education, nor the accrediting associations, who really don't see their role as regulatory or enforcement, has taken strong actions in this regard.
35
Senator PERCY. The accrediting agencies actually make their money by accrediting schools, don't they ? There is a financial incentive for them to accredit a school. Is that correct ? Mr. LAUVE. It is a source of revenue. How much of a financial incen tive it would be, really can't answer that. Senator PERCY. Is that one aspect of it that should be possibly looked at by HEW to see whether there really is the check and balance there, whether the accrediting agency is really truly in a position where they have no incentive to rule favorably or unfavorably ? They can come up with an objective judgment and not have a penalty
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themselves ? Mr. LAUVE.
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suppose that is a possibility. might add that we are involved right now in a survey of the accreditation process in which we hope to find out what degree of reliance is placed upon accredita tion. We do know that there are somewhere in the neighborhood of nine departments and Federal agencies which turn to accrediting asso ciations as a means of determining school eligibility. We know that in OE, for example, there are some 20 programs which tie to accreditation. So we are involved in the process of trying to find out this reliance and how well this accreditation process is be ing carried out, especially the enforcement aspect, enforcement mean ing that the school does not live up to the standards that it was accred ited to have. Senator PERCY. My last question is a very general one. Possibly it is answered by your testimony in some respects, but would like to give you the opportunity to specifically make any recommendations off the top of your heads that you would want to make — and you have lived with this problem now and we are grateful to you for it— in two areas,
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one to
HEW.
What should HEW do now to in your judgment fulfill their respon
sibilities internally, from tive standpoint ; secondly, to eliminate the abuses in lative status of it so that
fulfill and accomplish
the policy standpoint, from an administra what do you think the Congress ought to do this program and really tighten up the legis it fulfills the responsibility that we want to the end goal and objective that we had in mind
without abuses? It is almost like the food stamp program. You don't want to throw the whole program out because of abuses, but the whole program is in jeopardy because of abuses. you let the abuses continue to grow and fester, you are going to have to kill a good program. So if it is possible for you to make any such comments or recom mendations now, know the subcommittee would appreciate it very think about and much, indeed. you would like to reflect on send in anything, we will keep the record open for you. Mr. MARTIN. think one of the things as we did mention in the statement, one of the most critical areas to get the lenders to exer cise due diligence in collection. That problem we noted and think one of the more serious ones we noted. the lenders would exercise due diligence and try to get the loans an area HEW needs to do think that lot of work in. collected, now has think HEW also needs better automated system than it,
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on line.
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don't know whether any of my associates have anything further they want to add. We can, as you suggested, give some thought to it and provide anything additional in that respect for the record. As far as the Congress is concerned, think these types of hear ings that we are having, starting here today, should go a long way to getting HEW to improve their administration of the program.
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[Additional material supplied follows :]
We do not have any new recommendations to make to OE regarding the man agement of the program. Since 1966 we have issued about 15 reports dealing with the financial statements and the administration of the Guaranteed Student Loan program. We have made recommendations on multiple disbursements, interest billings, student confirmation reports, and the need for accurate finan cial data. OE has done very little to implement these recommendations, some of which were made several years ago. believe OE should review our past reports on the program and make every effort to implement our recommendations.
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Senator PERCY. Would any of you like to comment in your indi vidual capacities? Mr. DALY. Kegarding interest and special allowances, OE now relies on the lenders to tell them what the balances are and then submit the bills. We think it would be better if OE would tell the lenders we are going to pay you as number of dollars in interest or special allowances. think this new system that they are contemplating has a feature such as this. think that would go a long way toward reducing any
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unnecessary costs. Senator PERCY.
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wonder if we could call our next witness, Mr. John Walsh, investigator, and if you would mind staying there for a few moments, gentlemen, Senator Nunn might want to ask you a couple
J.
questions.
Mr. Feldman ? Mr. FELDMAN. If
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could complete the record Senator PERCY. We ought to release you until Senator Nunn re turns. Mr. FELDMAN. Senator Percy, one thing that struck me is that part of your opening statement where you recalled our prepaid health hear ings and some of the problems we examined there are some of the problems we are looking at today. At that time, recall — think you hit this during our hearings — we pointed to the fact that HEW had very few investigators to look into the problems that we have been pointing out today. Could you tell me, Mr. Martin, of the 307 people in fiscal 1976 and the 437 people in fiscal 1977, how many of those are investigators? [At this point Senator Nunn entered the hearing room.] Mr. MARTIN. personally don't have that information, Mr. Feld man. don't know if possibly one of my associates has it or has some estimate of what they would be. Mr. DALY. Yes. We have the estimate for fiscal 1976 ; there are 47 field examiners and 6 compliance investigators.
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Mr. FELDMAN. How many ? Mr. DALY. Six. Mr. FELDMAN. In the guaranteed student loan program Mr. DALY. Yes. Mr. FELDMAN. How many in HEW in total ?
?
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Mr. DALY. What was speaking of before was the regional office. Now they have shown here seven in the compliance staff in the central office.
Mr. FELDMAN. Of HEW in total or guaranteed student loan pro
gram?
Mr. DALY. This would be in the guaranteed student loan program. Mr. FELDMAN. How much in HEW, total? Mr. DALY. I have no idea. Mr. FELDMAN. Do you know how many employees are in HEW ? Mr. LAUVE. HEW-wide ? Mr. FELDMAN. All of HEW. Mr, LATTVE. would guess, several years ago it was something
like
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80,000.
Mr. FELDMAN. How many? Mr. LAUVE. 80,000. A big block of that is Social Security Adminis
tration.
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Mr. FELDMAN. understand. Senator, the point was making here is at one time when we studied the prepaid health program it was determined that the subcommittee had more investigators on its staff than HEW had on its staff, which thought was a little out of proportion with regard to the budget they administer as opposed to the budget we administer. know that they now have some additional people, but found that to be a basic defect in the HEW program —the lack of an in vestigative staff to followup on many of the things that you can turn up in your simple file checks. File checks are one thing, but the investigations based on those file checks are another. And think that is going to lead into the west coast schools study, which we are going to put on, commencing right after your testimony with some general staff testimony, fol lowed by testimony from some of the principals of west coast schools. It is going to show how investigative, trained investigators, could have taken up file check leads and turned them into a full-fledged case, showing massive problems involving Federal funds. Thank you. have several questions that Senator NUNN. Mr. Martin, don-t think have been covered. any of them have, make sure you just tell me because we have a time problem here. Why does the federally insured student loan program operate in all 50 States if 25 States and the District of Columbia have State
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insured programs? Mr. MARTIN. Generally a lender cannot participate in a direct fed erally insured component if it has reasonable access to a State pro gram. Lenders, however, may participate in the direct Federal com ponent if the school the student wishes to attend is not recognized as eligible by the State agency and is by the Office of Education. Senator NUNN. Could we just eliminate the Fedral program in all States that have State insured programs? Mr. MARTIN. There are some cases, for example, if the State does not recognize a school as eligible, the Commissioner of Education may recognize it as eligible and, therefore, that student would only be able to get a loan through the Federal component.
38
There are other instances where the student is unable to meet the State residency requirments for participation or if it is such that the prospective borrowers residency makes it impossible for the lender to have access to a single State agency, he would have to deal with more than one State agency, in that case he would be entitled to come in through the Federal program component. Senator NTTNN. What is the main reason that the State insurance programs have lower default rates than the Federal program? Mr. MAKTIN. think would ask Mr. Daly to respond. Mr. DALY. The States are generally more selective in their loan approval process, both in terms of who can obtain a loan and which lenders can participate and what types of schools. As Mr. Martin mentioned, the home study schools cannot participate in many of the State programs. They will not insure a loan for a student who wants to attend a correspondence school. Another possible reason is the 80 percent reinsurance in the Fed eral portion. Because of this, the State agencies are likely to be more stringent with their lenders in forcing them to comply with the due diligence because they are only receiving 80 percent of the claim. Senator NUNN. On page 7 you mention accreditation. Once a school is accredited participation in HEW programs is nearly automatic. Do you feel the Office of Education should take a more active part in the accreditation process and take more responsibility for monitorIns: the performance and institutions after they are accredited? Mr. LATTVE. We did discuss accreditation some while you were out. don't know that "But that particular question covered. That is, OE has taken a somewhat hands-off position regarding the accredi tation process. Neither do they do much monitoring. As was saying earlier, we are looking into the overall accredita tion process. This is one area that we do hope to cover. Senator NTTNN. When will you have your recommendations and findings on this? Mr. LAUVE. We are in the very early stages. We will finish our first phase in January of 1976. So we are some time away from any kind of report or recommendations. It would be late 1976. Senator. NUNN. Is it fair to say that deficiencies in HEW's data system cast doubts on all the basic data reported by HEW for this program ? think, as we have indicated in our audits of their Mr. MARTIN. financial statements, we have been unable to determine whether or not the statistics generated from their accounting system and their automated data system present fairly the status of the program. think, as we pointed out. all of the statistics that we presented here today have to be viewed in light of that, that they are taken basically from HEW's records. Senator NTTNN. Is your estimate of a potential default rate at 24.3 percent also based on data which is of questionable validity ? would like to have Mr. Daly respond to how that Mr. MARTIN.
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and the basis of the data we used. Mr. DALY. We used the same data that the Office of Education uses to make their annual projections. We just put it in terms of a pro jection over time ; that is, an eventual default rate based on loans in repayment status as of the end of December 1973.
-was computed
39
Senator NUNN.
Is it
possible this figure could be higher?
it,
Mr. DALY. Assuming errors in the data, yes, it is. Senator NUNN. The Office of Education sometimes attempts to con trol the volume of loans of a problem lender, a particular lender which is also a school. Is this type of control effective? Mr. DALY. Pardon me ? Senator NUNN. The Office of Education sometimes attempts to con trol the volume of loans of a problem lender, a particular lender which is also a school. Does the Office of Education have any effective con trols in this area? Mr. DALY. As we understand no, they do not. As the nonregulated lenders come in each year they are given an annual maximum loan
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amount. We understand that only manual checks are made and we don't believe that these are sufficient to police this type of thing. Senator NUNN. Does the Office of Education process lender billings for interest and special allowance in a timely manner? Mr. DALY. No, we don't believe that they do. One reason for this that the billings cannot be paid until the special allowance set. The special allowance for the third quarter ended September 30 was not set until some time in late October. this special allowance rate set? Senator NUNN. How Mr. DALY. This set by the Secretary of HEW in consultation
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with representatives of OMB. Senator NUNN. What based on? Mr. DALY. believe based on current economic conditions. It
is
processors.
Senator NUNN.
Is the
staff too limited
Mr. DALY. In Chicago they have
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to provide the lenders a more equitable yield on the loans. Senator NUNN. Is there any indication that there are large num bers of claims which are being held in the hands of lenders because the regional offices are swamped with the number of unprocessed claims already submitted to them? Mr. MARTIN. think safe to say that each of the regional offices do have don't know that there are any intention large backlog. ally held by the lenders. You are referring to the fact that they are collecting interest while they are holding these? am not sure really understand your question. Senator NUNN. Is there backlog in processing of claims? Mr. MARTIN. Yes, sir. When you have limited staff of claims
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Senator NUNN. But under this particular scholarship program,
there any malapportionment of employees under this program
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backlog of 8,600 claims. They have one claims examiner. They have assigned some people part time, usually the field examiners, to help them out. In San Francisco, believe they have one supervisory examiner and three full-time examin ers for backlog of about 2,600. Senator NUNN. think would be hard case to convince many people that HEW doesn't have enough employees. Is there any other division in this particular program or in the Office of Education that In other words, can thev shift employees into this area overloaded from another area that you know anything about Mr. MARTIN. We don't have any information, think, to that effect. We have not looked at all of the other programs to see what the status as compared to this and see whether or not shifts could be made.
40
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Mr. MARTIN. don't think we have any information that would in dicate that is the case, that there are any particular sections of the program that are overstaffed. Senator NUNN. How many paid default claims has the Office of Education referred to the General Accounting Office ? Mr. MARTIN. believe that total is in excess of 500; believe the figure is 565. Senator NUNN. How many of these claims have been referred to the
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Justice Department for civil suit for collection? Mr. MARTIN. About 70. Senator NUNN. Seventy ? Mr. MARTIN. Yes, sir. Senator NUNN. Mr. Martin, do you have any other matters that you have not covered that you think you ought to bring to our attention or any questions that were raised that you want to clarify ? Mr. MARTIN. No, sir. We have nothing to add. Senator NUNN. At this point, we have got another vote on. We also have an executive meeting of the full Government Operations Commit tee in the Capitol, so we will recess until 12 :30, at which time we will hear our next witness. [Whereupon, at 11 :45 a.m., the subcommittee recessed, to reconvene at 12 :30 p.m. the same day.] [Members of the subcommittee present at time of recess : Senators Nunn and Percy.] SESSION
AFTERNOON
[The subcommittee reconvened at 12:30 p.m., Senator Sam Nunn presiding.] Senator NTTNN. The subcommitee will come to order. [Members of the subcommittee present at time of reconvening r Senator Nunn.] Senator NTTNN. Our next witness is a member of our staff, Mr. John Walsh, investigator, who has done a very thorough and good job at this stage. Mr. Walsh, will you hold up your right hand ? Do you swear that the testimony you are about to give before this subcommittee shall be the truth, the whole truth and nothing but the truth, so help you God ? Mr. WALSH. do.
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TESTIMONY
OP JOHN J. WALSH, INVESTIGATOE, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
Senator NUNN. Mr. Walsh has done a very thorough job with this investigation. have been very impressed with the work that has been done so far. We are delighted to have you here today to testify, Mr. Walsh. You proceed in whatever wav you see fit. Mr. WALSH. Mr. Chairman, have a prepared statement here which will read for the record. My name is John J. Walsh and am an investigator on the staff was as of the Senate Permanent Subcommittee on Investigations. Insured Student the on the of Federally investigation signed to work Loan program and the direct grant programs in the spring of 1975. participated in meetings with the General Accounting Office where it was agreed that to complement the general review of management
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controls and practices to be done by the General Accounting Office, the subcommittee staff would focus on specific case examples involving the programs. The first step was a review of HEW files involving problem schools. Some 30 or 40 files were reviewed. The files were in deplorable shape. There was no one master file on any school. Pertinent documents were scattered through many different files in many different offices. Mate rial in the files was not maintained chronologically, by subject matter or in any kind of order. Incoming correspondence was found with no record of a reply ; out going correspondence was found which referred to incoming letters which could not be located. In most cases, it was necessary to com pletely rearrange the file before one could understand the nature of the school's problems. It was apparent from the files reviewed that a major problem existed in the Advance Schools located in Chicago, Il1. Advance is a cor respondence school which went bankrupt in 1975, leaving about 70.000 students stranded and about $150 million in guaranteed student loans in the hands of some 45 financial institutions, a substantial part of which could become default claims against the Government. Another major problem area was in the Dallas region where a num ber of schools had been suspended or removed from the program. In this region several investigations were already under way ; and a sub stantial number of cases were awaiting investigation when personnel became available. A number of HEW officials in the Dallas office had been suspended from their duties because of alleged improprieties. More will be set out later concerning these cases but because of the advanced state of these investigations, it was decided that subcommittee efforts might be duplicative of work already done. The file reviews showed problem schools in every region of the coun try but it was noted that there was a large number of problem schools in California. The file reviews indicated a possible pattern where schools had been operated intensively for a short period of time to build up the student body, usually immediately after opening or after a change in ownership. A large cash inflow would be provided from the sale of guaranteed loans. The school would be closed abruptly and the students would be unable to complete their classes. Financial institutions which had obtained these loans would have substantial claims but the school would be out of business and many of the students would be unable to pay or had not finished their courses so that they were not accountable for the full amount of their loans. The files reviewed failed to show any pending prosecutions or, in fact, even any pending investigations in California. After a review of a number of California problem schools, it was decided to focus atten tion on the operations of Automation Institute of Los Angeles, Inc., doing business as West Coast Schools. The HEW file showed that this school closed down in May 1973, leaving many students unable to complete their education ; that there had been a change in ownership shortly before the school closed ; and that a large number of student loans had been sold to financial institu tions in the last few months of the schools' existence.
42
An audit had been started by HEW but had never been completed because the current owner, one Fred Peters, had moved the books and records to an undisclosed location. There was no indication in the HEW files of any ongoing investigation or even of any attempts to locate the books and records. The major question addressed in the file appeared to be whether HEW should pay default claims to the financial institutions which held the students' notes as there was some unresolved question as to whether refunds were due to students because of the schools' closing. As testimony will later show, the investigation disclosed some start ling facts as to this school and its principals' activities but there was no reason to suspect the existence of these problems from the HEW file. This, of course, raises the question as to whether the same types of problems and even criminal acts could be found in other schools in California or elsewhere if an adequate effort was made to discover them. The investigation of West Coast Schools began at the Los Angeles office of the HEW audit division. It was found that an audit of West Coast Schools had commenced after the school was closed on May 24, 1973.
While the audit was never completed, it was found that Government funds paid to the school for the grant programs could not be ac counted for. However, the audit had been dropped indefinitelv because the books and records had been moved and HEW was unable to find out their location. The Los Angeles audit office reported to the subcommittee staff in June 1975, that while no one in the Federal Government was showing any interest in the West Coast Schools case, the fraud section of the Los Angeles County District Attorney's office was interested and was talcing some action. It was felt that the logical approach was to look into th° matter of how much money was obtained by the sale of guaranteed loans and from grant programs and try to determine what happened to this money — whether the money was actually used for the school or whether it was used for the benefit of the owners. The Los Angeles County District Attorney's Office was contacted and that office was interested in pursuing this matter. However, a major problem was encountered. Within the last 2 years of the school's operations, nearly 50 bank accounts had been opened and the funds received by the school had been shuttled through these accounts. These included local accounts, out-of -State accounts, accounts of West Coast Schools, accounts of dummy corporations set up bv the West Coast Schools' officials, and personal accounts of West Coast Schools' officials. It was agreed that the Los Angeles County District Attorney's office and the subcommittee staff would work together to trv to trace the movement of these funds through this maze of bank accounts, and try to determine whether the money was being spent for legitimate purposes or whether it was being diverted for personal gain. Mr. Andrew Ewing, investigator for the Los Angeles District At torney's fraud section, was designated to work with the subcommittee
43 staff and his cooperation and assistance has been invaluable. Mr. Ewing will testify with us later on, Mr. Chairman. want to present at this time a chronology of the pertinent events ask that the chronology be printed pertaining to West Coast Schools. but to save time, will read at this record of the in the hearings, in full time only highlights from the chronology. am going to have to go vote. will Senator NUNN. At this point be back just as soon as the vote is completed, which will be in about 10 minutes, and we will have the rest of your testimony at that time.
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[Brief recess.]
[Recess taken with the following members of the subcommittee present: Senator Nunn.] [Members of the subcommittee present at the time of reconvening after a brief recess : Senator Percy.] Senator PERCY [presiding]. Our distinguished witness may con tinue his testimony. Mr. Walsh? Mr. WALSH. also present a list of documents to support the chron ology and ask that the list be printed in full in the record and that the documents be introduced as exhibits. Senator PERCY. They shall be entered in the record. We will mark exhibits 1 through 28 for the record. [The documents referred to were marked "Exhibit Nos. 1 through 28" for reference and may be found in the files of the subcommittee.] Mr. WALSH. The Automation Institute of Los Angeles is also known as West Coast Schools and we will refer to it as West Coast Schools generally, to save a little time. Automation Institute was incorporated on June 13, 1966. Its presi dent was Edward Tokeshi. In 1969, it was accredited, and was approved by HEW as a lender for participation in the HEW programs. Again, in 1969, Fred Peters appeared in Los Angeles, unemployed. He was employed by the Jane Arden Employment Agency in the summer of 1969. On April 1, 1970, Fred Peters was hired as a placement manager for Automation Institute. In 1971, he was promoted to vice president and he bought 20 percent of the stock and he was loaned money to buy the stock by the president
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of the company. In 1971, Fred Peters was made president of Automation Institute
and assumed active control over the affairs of the corporation. In November of 1971, Automation Institute purchased five schools known as the West Coast Trade Schools from a company known as Computing & Software, Inc. These five schools had been operating in the federally insured student loan program since 1967, without accreditation. They had been given a grace period by HEW to secure accreditation from the National Association of Trade & Technical Schools by September 1, 1972, or be dropped from the program. On March 1972, HEW reminded West Coast Schools that the Sep tember 1 deadline for accreditation for the five nonaccredited schools was approaching.
44
On July 7, 1972, West Coast Schools was notified that the eligibility of the five unaccredited schools would be extended to October 31, 1972. On September 1, 1972, Fred Peters and associates, Pete Fisher and David Carman, bought the remaining 80 percent of the stock in Auto mation Institute, and assumed full control of the company. This stock was paid for out of the school's own funds. On December 31, 1972, Mr. Peters was notified that HEW was ex tending the eligibility of the schools to participate in the insured student loan program until February 16, 1973. In January 1973, the National Association of Trade & Technical Schools denied accreditation to the five West Coast Schools.
Again, in January of 1973, HEW wrote Fred Peters and informed him that the Automation Institute was instructed not to write more than $300,000 in loans during the next 12 months. As we will see, be tween that date and May of the same year, when the school closed, about 2 million loans were written, and the comment is that HEW has no mechanism to be informed on a current basis as to how much in loans a school is writing nor does it have any means to enforce any limita tion it imposed. [At this point Senator Nunn entered the hearing room.] Mr. WALSH. On February 14, 1973, the senior program officer for guaranteed student loans in San Francisco, wrote Washington, re porting of some irregularities on the part of West Coast Schools in the handling of student loans. The following is quoted : The aforementioned facts and the exhibits attached clearly indicate * * * above and beyond reasonable suspicion of irregular practices on the part of the subject * * *. A program review will be conducted on this school prior to the end of March 1973. In the meantime, it seems logical that we further restrict or suspend this school contract as a lender. 7, 1973, the Acting Deputy Associate Commissioner, of of Education in Washington, informed Fred Peters that the eligibility of the five schools was continued until April 14, 1973, pend
On March
the Office
ing action by the accrediting agency on appeal. On March 9, 1973, the Director of the Insured Loans Division of HEW in Washington, wrote the Acting Deputy Associate Commis sioner, and said : I would be remiss in my duty to you and to the program if I did not apprise
you of my concerns and strongly recommend that we suspend any further instirance for students in these schools until both the schools' accreditation status and Mr. Peters' performance under his contract of insurance becomes more clear.
On
April
26, 1973, the
accreditation agency advised that their action
in denying accreditation to the West Coast Schools was reaffirmed. On May 1, 1973, Mr. Simmons wrote a memorandum to Mr. Herrell, saying, "We urge in the strongest possible terms that eligibility for further participation in the GSL program by these schools be denied." On May 2, 1973. Mr. Simmons sent another memo saying: "In view of this and other irregular activities previously reported, we would like to reaffirm our prior recommendation that no further extension of these schools' eligibility be granted." Beginning on May 4, 1973, the three principals of West Coast Schools converted approximately $300,000 worth of student loans into$100 bills, and we will have more about that a little later.
45 On May 24, 1973, Fred Peters announced that all six schools op erated 'by Automation Institute would be closed indefinitely. On June 4, 1973, almost 2 weeks after the school closed, the Com missioner of Education signed a formal notification that the five West Coast Schools not accredited were no longer eligible to participate in the federally insured student loan program. On June 11, 1973, Alexander Grant & Co., certified public account ants, made a number of telephone calls and wrote a number of letters to officials of the HEW in Washington, D.C., and in San Francisco, relating that they had received information indicating irregularities on the part of the schools' officials. We will have more details concern ing this incident later. On June 11, the same day, Messrs. Peters, Fisher, and Carman ap peared at the First National Bank of Arizona with a briefcase full of $100 bills which they exchanged for $278,000 in cashiers checks. This incident became known to Gene Ferguson, a Los Angeles newscaster, who gave it wide publicity on his broadcasts in that area. Early in August 1973, Mr. Ferguson met with HEW officials in San Francisco, gave them copies of his news broadcasts, setting out allegations of fraud and also a copy of an affidavit from an officer of the First National Bank in Arizona, giving full details concerning the conversion of the $278,000 in cash. These officials retained copies of the documents in their files and sent copies of the documents to Washington, but no action was ever taken either in San Francisco or Washington to make this information avail able either to the HEW audit staff, to the HEW Office of Investiga tions, to the U.S. attorney, or to the FBI. On August 9, 1973, HEW auditors began an audit of West Coast Schools records. No attempt was made during this audit to contact the Alexander Grant agency to learn what information that company had concerning West Coast Schools, nor was any effort made to look into the disposition of the $278,000 in cash. In December 1973. a draft of the audit report was prepared and this report stated primarily that the records of the West Coast Schools were inadequate to account for the national direct student loan funds and the college work study funds received by the school, during the period of the audit, which amounted to $1.2 million. It was indicated the school did not have adequate accounting records, procedures or controls to manage these funds, and it was recommended that the school be required to refund $462,000 and possibly as much as $600,000 or more, that might not be accounted for. However, no action was ever taken to try to collect this money. In February 1974, West Coast Schools continued to submit invoices to HEW, requesting the payment of interest and special allowances directly to West Coast Schools on notes held by West Coast Schools even though the school had been closed since May of 1973. On April 29, 1974, the HEW files contains a draft memo by William A. Morrell, Assistant Secretary for Planning and Evaluation, on the subject of preventing recurring cases like the West Coast Schools. The following is quoted : We must have the mechanism and the will to take what will undoubtedly seem drastic action. There is no question that such action will in some cases force the closure of schools * * *. But we must be willing and able to make up our minds
46 quickly when the risk to prospective students and the Federal Government tips the scales in the direction of closure. It seems likely that considerable losses would have been avoided in the West Coast Schools case had action been taken more quickly.
[The complete chronology and the list of supporting exhibits follow :] WEST COAST
SCHOOLS
CHRONOLOGY
Throughout the chronology, reference will be made to West Coast Schools even though the true name is Automation Institute of Los Angeles, Inc., d/b/a West Coast Schools. June 13. 1966: Automation Institute of Los Angeles was incorporated under the laws of the State of California. The President was Edward Tokeshi ; the Vice President was Tale Lasker. The purpose of the company was to operate a computer training school at 451 South Hill Street, Los Angeles, California. Tokeshi and his family owned 80 percent of the stock ; Tale Lasker, 20 percent. 1969: Automation Institute of Los Angeles was accredited by the National Association of Trade and Technical Schools and was approved by HEW as a lender. 1969: Fred Peters appeared on the streets of Los Angeles, unemployed and penniless. He was employed as a telephone interviewer by the Jane Arden Employment Agency, salary $450 per month. His supervisor was O. A. (Dan) Dameron, Branch Manager. April 1, 1970: Fred Peters was hired as Placement Manager for Automation Institute of Los Angeles by Edward Tokeshi at a salary of $850 per month. 1971 : Fred Peters was promoted to Vice President of Automation Institute of Los Angeles. He bought 20 percent of the stock from Yale Lasker. The money for this purchase was loaned to Peters by Edward Tokeshi. 1971 : Fred Peters hired Dan Dameron as his assistant. 1971 : Fred Peters was made President of Automation Institute and Edward Tokeshi became Chairman of the Board. Peters assumed active control over the affairs of the corporation and intensified the efforts of the school to obtain funds by selling guaranteed student loans and by applying for financial assistance grants. November 1971 : Automation Institute purchased five West Coast Trade Schools in the Los Angeles area from Computing and Software. Inc. These five schools had been operating in the Federally Insured Student Loan Program since July 7, 1967, without accreditation. They had been given a grace period by HEW to secure accreditation from the National Association of Trade and Tech nical Schools by September 1, 1972, or be dropped. After the purchase of the five trade schools, the corporation now was known ns Automation Institute of Los Angeles doing business as West Coast Schools. Salesmen were hired and an intensive advertising campaign both in the press and on television was initiated to sign up new students and to increase the en rollment in the new schools. September 20. 1971 : Fred Peters was appointed by James Hoffe. Senior Pro gram Advisor for Financial Assistance, HEW San Francisco, to the Advisory Panel for Region IX of HEW. The function of the panel was to review applica tions for financial assistance grants from schools in Region IX and to recom mend how much in Federal funds should be awarded to each school. Equities was incorporated this date under the December 2. 1971 : Group laws of the State of California with 20,000 shares of common stock authorized at a par value of $10 per share. Directors were listed as F. P. Fisher, D. M. Carman, and Edward Tokeshi. As of May 31, 1973. officers were identified as D. M. Carman. President ; Fred Peters. Arice President ; F. P. Fisher, Secretary/ Treasurer. As of August 1, 1974, the charter of the corporation was suspended. Peters had brought Fisher and Carman into the management of West Coast Schools about the time of the purchase of the new schools. March 1972 : HEW reminded West Coast Schools by letter that the September 1, 1972, deadline for accreditation of the five non-accredited trade schools was approaching. April 14, 1972: An investigation was being conducted by the Federal Home Loan Bank Board into irregularities by certain Savings and Loan Associations in their acqusition and handling of Federally Insured Student Loans. Warren Tappin, HEW San Francisco, contacted the local office of the Federal Home
II
47 Loan Bank Board and wrote a lengthy report to William M. Simmons, Chief of the Insured Loans Division in Washington, D.C. The following is quoted from page 10 : "It is quite apparent from the delinquent accounts that we are also going to experience difficulty with Automation Institute of Los Angeles, California. The Association [U.S. Life Savings and Loan] accepted over $1 million ol paper from the school . . . This is another school that we have been watching as I am confident that we will experience basically the same problem with this institution that we have and are experiencing with Airlines Schools Pacific." The report was never sent to the HEW file on Automation Institute and as
far as
is known no action was taken on the report. Equities was incorporated under the laws of the 26, 1972: Group State of California. 7,500 shares of no par value stock authorized. Directors were F. P. Fisher, Fred Peters and David M. Carman. The corporate charter was suspended as of July 2, 1973. July 7, 1972: West Coast Schools was notified that the eligibility status of the five unaccredited schools for insured student loans would be extended to Octo ber 31, 1972. The unaccredited schools were not eligible to receive the direct grant of Federal funds from the College Work Study and National Direct Student Loan Programs. September 1, 1972 : Fred Peters, Peter Fisher and Dave Carman bought the remaining 80 percent of stock from Edward Tokeshi and his family and assumed full control of Automation Institute. The price was $141,900 and this sum was paid to the Tokeshi family from the Schools' own funds. December 31, 1972 : Mr. Peters was notified that HEW was extending the eligi bility of the schools for the insured student loan program until February 16, 1973. January 1973 : The National Association of Trade and Technical Schools denied accreditation to the five newly purchased West Coast Schools. January 11, 1973: Lenora W. Mallory, HEW Washington, wrote Fred Peters Informing him that the HEW Division of Insured Loans had approved the con tinuation of Automation Institute's participation in the insured loan program for the next 12 months. However, the letter stated that Automation Institute was instructed not to write more than $300,000 in loans during this period. Actually, between January 1, 1973, and May 24, 1973, the date the school closed, over two million in loans was written. HEW had no mechanism whatsoever to be informed on a current basis as to how much in loans the school was writing nor did HEW have any means to enforce any limitation it imposed. Fred Peters thus could and did ignore the restriction with impunity. February 6, 1973: PFC Investments was incorporated this date under the law of the State of California. 7,500 shares of no par value stock were authorized. Directors were listed as F. P. Fisher, W. Fred Peters, and D. M. Carman. Cali fornia records indicate that as of August 5, 1975, the corporation was in good standing. February 14, 1973 : R. L. Mappus, Senior Program Officer, Guaranteed Student Loans, HEW, San Francisco, wrote William Simmons, Director, Insured Loans Division, Washington, D.C., of some irregularities on the part of West Coast Schools in the handling of student loan paper. The following is quoted : "The aforementioned facts and the exhibits attached clearly indicate * * * above and beyond reasonable suspicion of irregular practices on the part of the subject * * *. A program review will be conducted on this school prior to the end of March 1973. In the meantime, it seems logical that we further restrict or sus pend this school contract as a lender." March 7, 1973 : S. W. Herrell, Acting Deputy Associate Commissioner, Office of Education. HEW, wrote Fred Peters saying a decision on the continued eligibility of the five West Coast Schools was deferred until April 14, 1973, pending action by the accrediting agency (NATTS) on an appeal hearing set for April 6, 1973. March 9, 1973 : William M. Simmons. Jr.. Director, Insured Loans Division, wrote to S. W. Herrell, Acting Deputy Associate Commissioner, referring to cer tain complaints and investigations made concerning West Coast Schools and says : "I would be remiss in my duty to you and to the program if I did not apprise you of my concerns and strongly recommend that we suspend any further insur ance for students in these schools until .both the schools' accreditation status and Mr. Peters' performance under his contract of insurance becomes more clear." April 26, 1973 : R. L. Mappus. HEW, San Francisco, wrote Fred Peters saying that. be
May
III
48 West Coast Schools made refunds of $550,000 and reimbursed HEW for excess interest billed HEW effective June 1, 1973. April 26, 1973: Phillip A. Taylor, NATTS, advised HEW that the previous ac tion in January 1973, denying accreditation, had been reaffirmed following an April appeal hearing. May 1, 1!)73 : William M. Simmons wrote S. W. Herrell. Acting Deputy Associ ate Commissioner, saying "we urge in the strongest possible terms that eligibility for further participation in the GSL program by these schools 'be denied." 'May 2, 1973 : William M. Simmons sent another memo to S. W. Herrell report ing further information on the activities of Fred Peters and saying : "In view of this and other irregular activities previously reported, we wouid like to reaffirm our prior recommendation that no further extension of these schools' eligibility be granted." May 3, 1973 : The HEW file shows a draft memo dated this date setting out a chronology of pertinent actions in the West Coast Schools case which says: "In view of the denial of accreditation of the schools by a nationally recognized accrediting agency, we can see no loophole in the law which would permit the commission to grant continued eligibility to these schools." -May 4, 1973 : A package of $323,500 worth of Federally Insured West Coast Schools' student loans were sold to the Kern County Employees Credit Union, Bakersfield, California. David Sawaya, a money -broker, and Dan Dameron, a West Coast Schools employee, delivered the package of loans and received three $100,000 Ginnie Mae certificates in payment. May 9, 1973 : Officers of Automation Institute of Los Angeles were listed on this date as Fred Peters, President ; D. M. Carman, Vice President ; F. P. Fisher, Secretary/Treasurer. May 18, 1973 : The three $100.000 certificates were sold by the City Xational Bank for net proceeds of $290.717. A $3.000 commission was paid David Sawaya Equities at the and $2S7,717 was deposited this date to the account of Group Union Rank. Century City Branch, Los Angeles, California. May 22. 1973 : A check for $290,000 signed jointly by Peters, Fisher and Carman was cashed at the Union Bank and taken out in $100 bills. May 24, 1973 : Fred Peters announced that all six schools operated by Automa tion Institute would be closed indefinitely. June 4, 1973 : On this date, almost two weeks after the school closed. John Ottina. Commissioner of Education, signed a formal notification to Fred Peters that the five West -Coast Schools not accredited were no longer eligible for partici pation in the Federally Insured Student Loan Program. June 11, 1973 : Alexander Grant and Company, certified public accountants, had made in the fall of 1972, an audit of the books of Automation Institute for the period ending June 30, 1972. and published a qualified report. In the spring of 1973, information was reported to Alexander Grant 'by employees of the school indicating improprieties on the part of the management of the school. Officials of Alexander Grant attempted to obtain access to the records of the school to determine whether their qualified report should be reviewed and withdrawn, but the school officials rebuffed them. On this date, a letter from Alexander Grant was directed to D. W. Stepnick, Director of HEW Audit, Dr. Leonard Spearman, Director of Student Assistance, and Mr. William M. Simmons, Jr., Director of Insured Loans, all in Washington, D.C., advising these officials of the existence of these allegations. More details concerning this incident will be set out later. June 11, 1973 : Peters, Fisher and Carman appeared at the First National Bank of Arizona with a brief case full of $100 bills which they exchanged for $278,000 in cashiers checks. This incident became known to Gene Ferguson, a Los Angeles newscaster who gave it wide publicity on his broadcasts over Station KPOL. July 12. 1973 : A $100.000 package of Federally Insured Loans was sold by Automation Institute to Ralph's Credit Union, Los Angeles. Ralph's Credit Union was not aware that the schools were closed and that the paper was of doubtful value. This transaction will be examined further. August 1973 : Gene Ferguson met with HEW officials in San Francisco. Dr. Edward Aguirre. Regional Commissioner of Education. Florence Van de Camp, Regional Legal Counsel. Rudy Mappus. Senior Program Officer and others. He gave them copies of transcripts of his broadcasts setting out allegations of fraud and a copy of an affidavit from an officer of the First Xational Bank of Arizona giving details concerning the $278.000 in cash. Although these officials retained copies of these documents and sent copies of the documents to Washington, no netion was taken either in San Francisco or Washington to make this informa tion available to HEW auditors: to the HEW Office of Investigations; to the United States Attornev or to the FBI.
III
49 August 9, 1973 : HEW auditors commenced an audit of West Coast Schools rec ords in Los Angeles. No attempt was made during this audit to look into the dis position of the $278,000 in cash or to contact Alexander Grant to learn what information that company had concerning West Coast Schools. December 12, 1973 : HEW submitted a draft of a proposed audit report pre pared by the Regional HEW Audit Agency based in Los Angeles. The audit began August 13, 1973, and the period covered in the audit was from July 1, 1970 through July 31, 1973. The audit was concerned primarily with the accountability for National Direct Student Loan Funds and College Work Study Funds received by the school which amounted to $1,209,827 during this period. The conclusion was that the school did not have adequate accounting records, procedure or con trol to effectively manage these funds. It was recommended the school be re quired to refund $462,588 in program funds and concluded that as much as $666,319 or more of these program funds were not accounted for. Fred Peters dis puted the conclusions in this draft audit report and no action was ever taken to try to collect the money. February 11, 1974 : West Coast Schools continued to submit invoices to HEW requesting payment of interest and special allowance direct to West Coast Schools even though the school was closed 5/24/73. March 1, 1974 : A package of Federally Insured Student Loans amounting to $480,317 was sold to the Big Spring Savings Association, Big Spring, Texas, by a group of people working out of Phoenix, Arizona. Fred Peters and Pete Fisher were part of this group. Included in this package of insured loans was $159,284 of West Coast Schools' loans. These were of doubtful value since the school had been closed almost one year. The Big Spring Savings Association remitted the purchase money before the actual delivery of the loan files. The purchase money was divided toy the group in Phoenix. Fred Peters received $100,000. An investigation of this incident was initiated by the United States Attorney's Office in Phoenix, Arizona later in 1974, but nothing came out of it. April 1974 : A memo to the Secretary of HEW was sent by John R. Ottina, Commissioner of Education. The following is quoted : "Needless to say Mr. Peters and the loan proceeds have left the scene but we have had some indications recently from his attorneys that he may be willing to come to the conference table (privately) with OE personnel and our legal coun sel. Our future course is not set because many pieces of the puzzle are yet missing." April 22, 1974 : An investigation into West Coast Schools was initiated by the Office of Investigations and Security for HEW. This investigation was based upon a complaint made by a letter dated December 12, 1973, addressed to Congressman Edward R. Roybal by Ricardo Livas, a former employee. Livas was found to have been employed prior to 1971 and his allegations were found to be largely non-specific and not relative to the operations of Fred Peters. The investigation was also based on a memorandum dated April 12, 1974, pre pared by John R. Ottina setting out some information about Peters and West Coast Schools. Nothing was mentioned in this memorandum concerning the reports of alleged improprieties made to HEW by Alexander Grant Company, or about the $278,000 in $100 bills. April 29, 1974 : The HEW file contains a draft memo by William A. Morrell, Assistant Secretary for Planning and Evaluation, on the subject of preventing the recurrence of cases like West Coast Schools. The following is quoted : "We must have the mechanism and the will to take what will undoubtedly seem drastic action. There is no question that such action will in some cases force the closure of schools * * * But we must be willing and able to make up our minds quickly when the risk to prospective students and the Federal Government tips the scales in the direction of closure. It seems likely that considerable losses would have been avoided in the West Coast Schools case had action been taken more quickly."
LIST
OF EXHIBITS
FOR
CHRONOLOGY
Incorporation Papers, Automation Institute. Letter from Ruth Crowley, HEW, to Automation confirming eligibility. 1.
2.
June May
13, 1966 : 6, 1969:
3. November 5, 1971 : Sales Agreement, Computing and Software. Equities. 4. December 20. 1971 : Incorporation Papers, Group 5. April 14, 1972 : Memo Warren Tappin re Federal Home Loan
II
Investigation. 6.
April
14, 1972 : Incorporation
Papers, Group
III Equities.
Institute
Bank Board
50 7. September 1, 1972 : Agreement to purchase balance of stock from Takeshi family. 8. January 11, 1973 : Letter. Lenora Mallory, HEW to Fred Peters. 9. February 6, 1973 : Incorporation Papers, PFC Investments. 10. February 14, 1973 : Memo, Rudy Mappus, HEW, San Francisco, to William M. Simmons, Director, Division of Insured Loans. 11. March 7, 1973: Letter, S. W. Herrell, Acting Deputy Associate Commis sioner to Fred Peters. 12. March 9, 1973 : Memo and exhibits, Win. Simmons to S. W. Herrell. 13. April 26, 1973 : Letter, Rudy Mappus, San Francisco to Fred Peters. 14. April 26, 1973 : Letter, P. A. Taylor, National Association Trade and Tech
nical Schools to Wm. Simmons. 15. May 1, 1973 : Memo, Wm. Simmons to S. W. Herrell. 16. May 2, 1973 : Memo, Wm. Simmons to S. W. Herrell. 17. May 22, 1973 : Copy of check for $290,000 cashed at Union Bank. 1S. May 24, 1973 : Notice by Fred Peters closing school. 19. .Tune 3, 1973 : Memo from S. W. Herrell to Commissioner of Education. 20. June 4, 1973 : Letter from Commissioner of Education to Fred Peters. 21. June 11, 1973 : Letter from Alexander Grant Company to Dr. Leonard Spearman; D. W. Stepnick and William Simmons, HEW, Washington, D.C. 22. July 10-12, 1973 : Transcript of testimony re Automation Institute, First City Bank and Ralph's Credit Union. 23. February 11, 1974 : West Coast School invoices to HEW for interest and special allowance. 24. April 29, 1974 : Draft memo, Assistant Secretary Planning and Evaluation, HEW to Secretary. 25. April 1974 : Memo, Commissioner of Education to Secretary of HEW, re West Coast Schools. 26. Certification of Military Service for Fred Braneff, furnished by DOD. 27. Chicago Bridge and Iron Company Personnel file for Fred Braneff. 2S. List of current holders of West Coast Schools Student Loans and amounts held.
I
Mr. WALSH. At this point. Mr. Chairman. would like to present concerning the true identity of Fred Peters, who was the president of West Coast Schools : Once the investigation of West Coast Schools moved into the field, it was quickly obvious that very little was known of the past history of the president of West Coast Schools, the man who called himself Frod Peters. The files of HEW showed that he had contact with HEW officials a statement
at all levels both in Washington and at the regional level and while there was a dearth of information as to his previous education and background, no Government official had ever raised a question or sufffrested that a check be made of him. We immediately found that it was no secret among employees of West Coast Schools that Fred Peters was not his real name. Peters gave different stories about his background to different individuals: stories which while differing slightly in detail were similar. All of his stories were so nonspecific as to dates, places, and names as to make immediate verification an impossibility. He related that his parents were refugees from Nazi Europe and that thev were killed in an automobile accident in Texas. He said that he and his identical twin brother were raised in an orphanage which burned down and that they were adopted by an elderly couple who died lonpr aeo. He said his twin brother had also died. He told many people that he served in the Korean war; that he was captured by the North Koreans; that he was tortured by them and that he escaped. He claimed to have multiple battlefield wounds: to have been awarded the Purple Heart with three clusters, the Bronze
51
Star with three clusters and the Silver Star ; to have received personal commendations from Generals Ridgeway and MacArthur, a battlefield commission and finally the Congressional Medal of Honor, awarded personally by President Truman. After the war, he claimed that he received a degree in engineering from the University of Puerto Rico. He claimed that he worked on unidentified construction projects in South America and Africa as an engineer. He also claimed that his real profession was that of soldier of fortune, a-gain in unidentified countries and at unidentified times. He also related a story that he had been involved in an attempt to assassinate Patrice Lumumba in Africa and had been placed in pro tective custody by the State Department and flown back to the United States. Another story which he related frequently was that he had worked as an administrative assistant to unidentified Members of Congress and that he had actually drafted the statutes pertaining to federally insured student loans and other financial assistance programs. It would seem likely that such fanciful stories as these would arouse suspicion, but it is a fact that no one, particularly no one in the Fed eral Government, made any attempt to check out Fred Peters' true identity until this was under-taken by the subcommittee staff in July 1975.
I
will not The following is what the staff investigation disclosed. all of this. will hit some of the highlights on this. would agree that these last two statements would Senator NUNN. at least create suspicion in a reasonable and prudent man, whoever that is. How much of this information was known or should have been known by HEW officials either in Washington or at the regional level about Fred Peters, first of all ? have is that the people Mr. WALSH. Senator, the best information in HEW took him at his face value and made no attempt to find out where he came from, what he had done, what his qualifications were for the job that he had. saw no indication that anyone had done any thing at all to try to dig into the man's background. but you Senator NUNN. You are not saying that they knew about are saying they didn't exercise diligence in trying to find something out about his background Mr. WALSH. Yes, sir that right. Senator NUNN. You didn't get this information from HEW? Mr. WALSH. No, sir. The first indication we had that his identity was not as appeared was from employees in the school. It seemed different background than he to be no secret there that he had
I
read
I
I
a
it
;
is
?
it,
I
related.
If
is
I
?
;
Senator Nuxx. anyone had questioned the employees of the school or had any dialog with them from HEW, they probably would have learned some of this would they have not Mr. WALSH. Yes, sir. believe they would have gotten the same in formation that we got. His true name Freddy Laverne Braneff. He was born on May 27, 1931, in Monroe, La. His foster parents, Frank and Eunice Braneff, are still alive and still live in DeQuincy, La.
52
He does have an identical twin brother. His brother is still alive and he lives in Pompton Lakes. N.J. The information we have was that he attended high school in Texas and that he did not graduate from high school. Concerning the claims of receiving an engineering degree from the University of Puerto Rico, the best information we have is that he attended in 1963, but he did not graduate. Senator NTTNN. 1962 ? Mr. WALSH. 1962, yes, sir. He was married. He has been married three times. He was married to Thelma Love Braneff in 1951. They were divorced in 1958. They were separated in 1958 and were divorced in 1965. At that time she was awarded an alimony and child support of $300 a month and about $30,000 she considers is still unpaid. He had four children by this first marriage. He married again in 1970, shortly after he appeared in Los Angeles, Calif., and after he adopted the name of Fred Peters. He married Ulla Wallin and they were divorced in December 1972. He is now remarried for the third " time. Concerning his military records, we made exhaustive efforts to try to verify his military service. We have been advised that the records — guess it is the 201 file concerning him — was destroyed by fire. This fire took place in St. Louis several years ago. We were able to obtain records that show that he was in the military service from 1948 to 1956. These records show that he did have assign ments in Germany. They also show that he apparently falsified his age on enlistment, giving his birth date as 1929. There was no record available confirming his battlefield wounds or his alleged capture by Koreans or his escape. There are no records concerning his alleged decorations. The only decorations shown were the Good Conduct Medal and the Army of Occupation Medal for serv ices in Germany. There are records available which show that he was not awarded the Congressional Medal of Honor. AVe checked the Veterans' Adminis tration records and they show no claim or no record of any hospitalization, any medical benefits, or any educational benefits ever received
I
by him. Concerning his employment, some of these employments have not been verified. He is shown in 1956 as buying and selling cattle in Texas, employment by the Firestone Rubber Co. in New Jersey, opera tion of a garage in New Jersey. The first employment that we were able to verify was with the Chicago Bridge and Iron Co., and here he was employed for about 3 months and was assigned to Accra, Ghana, as a sheet metal pusher and the personnel file shows, "Braneff was sent home because of political difficulties and/or personal indiscretions." "The reason Mr. Braneff left is his work was unsatisfactory." The records of Chicago Bridge and Iron Co. show further that he was employed in Surinam as a welder from January 1966 to February 1967, and the report shows. "Fred quit — C.G. (F. Markell) feels no potential, no ambition, too interested in 'la dolce vita.' Can't plan work, can't control crew. Lacks sufficient knowledge to be good super visor, apparently lacks desire to improve."
53
Braneff later claimed employment with other construction com panies in South America, but we have not been able to verify those. The next employment that we were able to verify was the employ ment from 1968 to April 25, 1969, where he was employed as a fore man at the Bethlehem Steel Co. in Beaumont, Tex. The records there show that on April 25, 1969, he disappeared and that before he dis appeared, he told fellow workers that he suspected some people were stealing material from the company and he hoped to catch them in the act. His bloodstained hardhat was found on a riverbank near a par tially completed barge. His car" was found in the lot. He had not punched out on the time clock. An investigation to locate him was conducted by the sheriff's office of Jefferson County, Tex., with negative results. It might be worthy to note at the time he disappeared — might also mention that his wife had filed a claim for insurance, but since no body was found, the insurance claim was not paid. In any event, the disappearance took place on April 25, 1969, and he appeared in Los Angeles on May 16, 1969, where using the name of Fred Peters, he was hired by the Jane Arden Employment Agency, Los Angeles, as an employment counselor, at a salary of $450 per month. Our investigation shows that he has used three social security numbers, that he has applied for passports under two names, that he has a pilot's license issued on March 17, 1974, under the name of
I
Fred Bran. He was arrested on August 15, 1975, in Los Angeles, Calif., on a charge of passport fraud, and there has been no disposition of that case
as yet.
We have no information on any previous arrests or convictions. We have received information from the CIA that they have no record of Fred Braneff as an employee or in any way known to that agency, nor do they have any record of his being involved in any assassination
attempts.
Senator NUNN. Thank you very much for a very thorough job. A couple of questions and then Senator Percy has some, know. Have you located Mr. Peters now ? Mr. WALSH. Mr. Peters is in Los Angeles. He is represented by an attorney. Any contact we have with him is through his attorney. We have not interviewed him. All our contacts with him have been through his attorney. Senator NUNN. understand he has been subpenaed ? Mr. WALSH. Yes, sir ; he has been subpenaed. Senator NUNN. Have you made an effort to interview him yet ? Mr. WALSH. Yes, sir. We have made several efforts to interview him and his attorney declined to make him available to us. Senator NUNN. He is subpenaed for Wednesday of next week ? Mr. WALSH. He is subpenaed to appear here ; yes. Senator NTTNN. Senator Percy ? Senator PERCY. Mr. Walsh, you say that the files of HEW were in deplorable shape? Mr. WALSH. Yes.
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Senator PERCY. Can you give us specific examples of what you found when you began to go through these documents ? Mr. WALSH. No, sir. didn't keep a record of those because it was just too time consuming. What had to do was take the file, most of the files, had to take them completely apart and then try to put them in some kind of order and see chronologically, at least, and to find out how events transpired. Senator PEROY. Have you had occasion to work with other activities within HEW, other sections at any time to be able to compare the shape of those files with other areas ? Mr. WALSH. No, sir. Senator PERCY. How do they compare, generally, with the Govern ment files that you have handled ? Mr. WALSH. would say that these were some of the poorest files
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Senator PERCY. Did you question anyone in HEW as to why these files were in that shape ? Do you know what the reasons are ? Do they have a turnover of people ? Mr. WALSH. Yes. Generally, they told me that there was a large turnover of people; there were not enough people to do the work; that they were under a great amount of pressure to handle the claims and the paperwork that related to the guaranteed student loans and there just wasn't time to keep that type of a record. Senator PERCY. Can you tell us a little about the investigative work that HEW does ? am somewhat surprised that their own investigative activity, and they must have one, has not pursued this particular area. Is there an investigative staff in HEW ? so, how many investigators do they have ? Mr. WALSH. The information we have on that, Senator, is this: that at the time that we are talking about, the time of these events that took place with West Coast Schools in the summer of 1973, at that time there was a grand total of one investigator for the entire
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Department of HEW. This investigator, as we were told, reported to an official in the audit section. That was the only investigator that was on the staff. Some time in 1973, a division of investigations and security was established and during the remainder of 1973 and 1974, this agency was staffed. But it was not staffed very adequately because in the summer of 1975 when found that there began this investigation, were only seven investigators assigned to the staff of the Office of Investigations. These men had the responsibility of covering all the programs of HEW, not only guaranteed student loan. visited in the office where they were assigned. For example, in Chicago, they had an investigator assigned in Chicago. This man had to cover 17 States. He didn't have a girl to answer the telephone, to type up his reports. So thought that was an impossible task to try to expect anything concrete out of investigators who were burdened with the situation such as that. Senator PERCY. Can you give us some general impression as to how or what your feeling is about the way HEW administers the student home program ? You spent a good deal of time talking with the HEW officials and working on the files. What is your general impression of the way they administer it ?
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Mr. WALSH. This is an impression
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have gained from talking to officials, particularly from the Office of Education, that a good many officials feel that the program should be operated on the basis of trust and faith in the people who operate the schools and the people who operate the lenders, that the people in the education field should not be subjected to criminal penalties or restrictions or rules and regulations which are enforced, that this is the type of thing that does not or should not be concerned within the educational process. Senator PERCY. How many of these schools do you suppose operate on a nonprofit basis and how many are on a proprietary basis ? couldn't don't have information on that, Senator. Mr. WALSH.
HEW
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say. Senator PERCY. Do you have a general impression as to whether it is a large number that are proprietary ? would gather in the vocational schools, Mr. WALSH. Again, pre sume most of those operate on a profit basis. Senator PERCY. Is it your presumption that HEW officials oversee ing this program are so naive as to think that all of us are angels ? Mr. WALSH. shouldn't say that all officials in HEW feel that way, but did get that impression from him that talked to. feel probably that the explanation for that is that many of these people have not really been exposed to the business world, the rough-and-tumble of
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Senator PERCY. They have been exposed to human nature, though.
Mr. WALSH. That is true, sir. That is true ; it is difficult for me to understand this. I think that it should be made easy for people to be honest and you make it easy by having rules and regulations and requirements to follow. Senator PERCY. So you are really saying then that HEW, in its ad ministration of this program, has been naive ? Mr. WALSH. think that is a fair statement. Senator PERCY. The naivete may be dereliction of duty and their responsibility, that no reasonable, prudent man could ever consider that that attitude can be responsibly taken in administering the kind of sums of money that are involved here ?
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Mr. WALSH. Yes, sir.
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Senator PERCY. would like to ask this internal question. Has the Committee on Labor and Public Welfare, to your knowledge, had oversight in this area ? Have they done anything to take a look at these programs? They have really the original senatorial jurisdiction in this field. Mr. FELDMAN. Could answer that question, Senator ? Senator PERCY. Yes. Mr. FELDMAN. We have talked to them and they have been very cooperative. As a matter of fact, would like to place in the record at this time a complete set of their hearings and materials they pre pared for us, including a letter of October 28, 1975, from Chairman
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Jackson to Chairman Pell, with copies to yourself, Senator Javits, Senator Nunn, as well as Senator Pell's response which forwarded these materials.
His response is dated November 10. They have sSt forth the over sight hearings they have had, the legislation that is being proposed, and the legislation pending before their committee.
56
Senator NUNN. Without objection, that will
be made a
part of the
record.
[The documents referred to were marked "Exhibit Nos. 29 through 43" for reference ; exhibits 31 through 43 may be found in the files of the subcommittee ; exhibits 29 and 30 follow :] EXHIRIT No.
29
U.S. SENATE, COMMITTEE ON GOVERNMENT OPERATIONS, SENATE PERMANENT SURCOMMITTEE ON INVESTIGATIONS, Washington, D.C., October 28, 1975. Hon. CLAIRORNE PELL, Chairman, Subcommittee on Education, Committee on Labor and Public Welfare, U.S. Senate, Washington, D.C. DEAR SENATOR : The Permanent Subcommittee on Investigations has been con ducting a preliminary inquiry into the Guaranteed Student Loan Program and other financial assistance programs of the Department of Health, Education and Welfare. "We have been primarily focusing on the abuses in the program as well as the lack of monitoring and auditing by HEW. Since your Subcommittee has taken extensive testimony and accumulated materials in this area, would appreciate it if such information could be made available to the Subcommittee so that we might have as complete a record as possible in this inquiry which we would hope would be of assistance to you in reviewing upcoming legislation. I have been informed that staffs of the Investigations Subcommittee and the Education Subcommittee have already been in contact and we appreciate any assistance which you might be able to give us in this very important inquiry. Sincerely yours, HENRY M. JACKSON, Chairman.
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EXHIRIT No. COMMITTEE
30
U.S. SENATE, AND PUBLIC WELFARE, Washington, D.C., November 10, 1975.
ON
LABOR
Hon. HENRY M. JACKSON, Chairman, Permanent Subcommittee on Investigations, Committee on Govern ment Operations, U.S. Senate, Washington, D.C. DEAR SENATOR JACKSON : As discussed in your letter of October 28. staffs of the Permanent Subcommittee on Investigations (PSI) and the Subcommittee on Education have been cooperating on the scheduled PSI hearings on the administra tion of the Federal student assistance programs. We welcome the opportunity to add to your investigation the work already undertaken by the Education Sub committee. We are forwarding separately to PSI staff the materials listed in the attachment. These materials may be classified in four groups : 1 ) new legisla tion before the Education Subcommittee affecting the student aid programs, 2) hearing records of four sets of oversight hearings by the Education Subcom mittee covering a total of seven days, 3) a selection of the most significant of the many studies, evaluations and reports done on these aid programs, and 4) sum mary of a study comparing default rates currently being carried out by Con gressional Research Service of the Library of Congress at the request of the Ed ucation Subcommittee. As you have recognized in convening PSI hearings on this topic, the student problems which assistance programs have experienced many administrative inhibit their effectiveness. The tremendous record of expansion of opportunity for postsecondary education created by Federal student aid is being tarnished by these serious management problems, which have in some cases caused studenis to be victims not beneficiaries of these programs. It is our belief that the ad ministrative improvements contained in bills currently before the Education Sub committee will do much to curb the abuses. Further, we hope that findings and recommendations from the PSI hearings can provide additional administrative changes to strengthen these vital programs which benefit over two million students each year.
57 Pursuant to the request by your staff for suggested witnesses, we recommend a panel of organizations which participate in administering these programs appear as a part of your hearings. The Education Subcommittee staff would assist PSI staff in arranging this panel of witnesses should you decide to accept our suggestion. We recommend a panel of the following organizations :
that
American Bankers Association ; American Council on Education ; Association of Independent Colleges and Schools; National Association of College and University Business Officers ; National Association of Student Financial Aid Administrators ; National Association of Trade and Technical Schools. While many other knowledgeable' witnesses could provide useful testimony, we judge that this group has the broadest representative view from the major aspects of program administration and is small enough in number to fit easily into the schedule of hearings already planned without disruption of that schedule. We appreciate your request to provide assistance to your Subcommittee in this
important inquiry. With best wishes, Sincerely,
PSI
CLAIRORNE PELL, Chairman, Education Subcommittee. JACOR K. JAVITS, Ranking Minority Member.
HEARING ON ADMINISTRATION
OF FEDERAL
STUDENT
ASSISTANCE PROGRAMS
This attachment describes four groups of materials. Group
I — New
legislation before the Education
Subcommittee affecting Student
Aid Programs : 1. "Pell Bill" —A comprehensive education proposal, including
provisions regarding student aid programs ; anticipated introduction by Mr. Pell during the week of November 10, 1975. 2. S-1229 — "Student Loan Amendments of 1975"; provisions focusing on improving student loan administration; introduced March 18, 1975 by Mr. Beall (for himself, Messrs. Javits, Schweiker, and Stafford) — Oversight Hearings of the Education Subcpmmittee : Group Programs, 1975" — Hearing of March 5, 1. "Review of Higher Education 1975 focusing on default rates and HEW policy regarding student refunds with respect to the Guaranteed Student Loan Program. Oversight, 1974" — Hearing of November 26 and 27, 2. "Higher Education 1974 focusing on financial circumstances of institutions of higher education. 3. "Examination of the Guaranteed Student Loan Program, 1974" —Hear ing of September 18 and 19, 1974 focusing on defaults and interest rates of the Guaranteed Student Loan Program. of Postsecondary Educational Institutions, 1974" — Hear 4. "Accreditation ing of September 12 and 13, 1974 focusing on accreditation and eligibility regarding participation in Federal education programs. — Significant Studies, Evaluations, Group Reports and Certain Other
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III
Information
:
American Council on Education, Policy Analysis Service. "Federal Stu dent Loan Programs." March, 1975 2. House of Representatives. H.R. 10470 — "Student Aid Abuse Act of 1975". Introduced: October 30, 1975 by Mr. Michel (for himself and others) 3. Jacob K. Javits, U.S. Senator. "Student Loans : Successes and Remedies." Floor Statement, May 14, 1975. Congressional Record, S-8114-15. 4. USOE. "Federal, State and Private Programs of Low- Interest Loans to Students in Institutions of Higher Learning: Guaranteed Loan Program." Federal Register, Feb. 20, 1975. 5. USOE. "Guaranteed Student Loan Program: Proposed Requirements and Standards." Federal Register, Oct 17, 1974. 6. USOE. "GSLP Loan Estimation Model." Sept. 1974. 7. USOE. "Guaranteed Student Loan Rate Allowances and Servicing Costs." Letter of transmittal and Executive Summary, dated 3/12/75. 8. USOE. "Private Accreditation and Public Eligibility." Letter of trans mittal and Executive Summary, dated 3/12/75. Group IV —A Study Comparing Default Rates conducted by the Congressional Research Service at the request of the Education Subcommittee. This study is 1.
63-570—76
5
58 designed to provide a comparative analysis of variations in default rates experi the Guaranteed Student Loan Program and enced by agencies administering reasons for such variations. Data collection focused on : 1 ) administrative prac tices of state-level guarantee agencies (by written questionnaire) ; and 2) activ ities of the U.S. Office of Education with respect to the Guaranteed Student Loan Program. CHS staff indicate that the report will focus on six critical administra tive practices identified by the study, and how variations among administering agencies regarding these practices affect rates of default. The report also will discuss certain other factors that may affect default rates. CRS staff indicate that the report will be available during the week -of November 10, 1975.
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Mr. FELDMA.N. think they have done an excellent job in their over think we have the investigative talent to do the kind sight hearings. of indepth study that perhaps no other subcommittee or committee
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can do.
I don't mean to boast on this, but that is our job. That is our man I think we can supplement the work that the Labor and Educa
date.
tion Subcommittee has done and help them to give a basis to formulate legislation programs. So think we are working hand in hand on this. We hope to estab lish a record which will form the basis for viable legislative proposals to deal with many of the problems we have seen here today. think that is very important to point out. think Senator PERCY. it is an appropriate way for us to have a relationship. Could it be said that our getting into this field was as a result then of regular oversight hearings that the Labor and Public Welfare Com mittee had held, but that they simply did not have the resources, in vestigative personnel, to further it and that we have then supplemented that and that their relationship with us now is such that they will carry the primary burden of new legislation that would be required, or regu lations to tighten up this matter. Mr. FELDMAN. Absolutely, Senator. Also, think we should say that the press has written and covered this area well and has done some excellent investigative reporting. We have also touched base with and had a good liaison with the House side on this matter. They have various proposals which we have talked about, too. So think in the end we are going to have some very good, solid legislative recommendations coordinating with Senate committees and House committees on this matter. Senator PERCY. think we should also note that Senator Javits serves as the ranking Republican on the Labor and Public Welfare Committee. He used to be ranking on the minority side on this com mittee and is one of our most prominent and hardworking members. The duties on the floor require that he could not be with us, but that he has carried on some very useful work and provided a very valuable link to us. Mr. Walsh, after West Coast Schools closed in 1973, you say HEW initiated an audit of the school, but were unable to complete it because the books and records were missing. Have these books and records been found yet? Mr. WALSH. Yes, sir; they have. Senator PERCY. Do you now have access to this data for this investigation ? Mr. WALSH. No, sir. Senator PERCY. Why not?
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Mr. WALSH. The story on that, sir, is this : That when we started our investigation in the summer of 1975, the first thing we wanted to do was to find the books and records. To do that, we had to find Mr. Peters. We had a subpena that was drawn up from the committee for Mr. Peters to produce the books and records. We attempted to locate him through his attorneys, both in Los Angeles and in Phoenix, Ariz., but we were unsuccessful. However, information was developed about his real identity and the fact that he might have violated the laws pertaining to passports. This information was made available to the State Department, who got out a warrant for his arrest. Senator PERCY. Could interrupt for just a moment to yield for the chairman for an announcement? will have to leave Senator Percy to chair the Senator NUNKT. hearings. We will continue our hearings into the guaranteed student loan program and related financial assistance programs ad ministered by the Department of Health, Education, and Welfare on Monday, November 17, 1975, at which time the subcommittee will begin its detailed examination of a case study involving Automation Institute of Los Angeles, also known as West Coast Schools. Monday's witnesses will include Edmund Schoessner, former vice president of West Coast Schools ; O. A. Dameron, former vice presi dent, West Coast Schools; and Ulla Peters, former wife of Fred Peters, who is the past president of West Coast Schools. West Coast Schools relied heavily on Federal guarantees of student loans as well as direct Federal subsidies, sold substantial amounts of such loans to banks and financial institutions and eventually went out of business, leaving 26 banks, credit unions and savings and loan associations holding over $6 million in insured loans. The hearings will begin at 10 o'clock in this room, and on Wednesday, of next week we will have Mr. Fred Peters, Mr. Pete Fisher and Mr. D. M. Carman as witnesses. On Thursday of next week, we will hear from some of the victimized students, people who the program has been set up to help. We will also talk about the problems in Texas, and we will also have as wit
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nesses
HEW
officials.
be expected next week. All of witnesses and schedules are subject to some change, but this should be our basic format. Senator Percy, will leave you. [At this point Senator Nunn withdrew from the hearing room.] Senator PERCY [presiding]. Thank you. Mr. Walsh, will you please continue ? Mr. WALSH. We had a subpena dated July 24, 1975. Fred Peters was arrested on August 15, 1975. At the time of his arrest, he was served with our subpena by the TT.S. marshal. At the same time, how ever, he was served with the subpena issued by the U.S. Attorney's Office, dated August 12. Mr. Peters and his attorney conferred with the TT.S. attorney and he turned the books and records over to the U.S. attorney. We were barred from access to these books and records by the TT.S. Attorney's Office. So we have not had an opportunity to review those.
That is the rundown of what can
these
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Senator PERCY. How much of investigation ?
a
problem has this caused
you in
the
Mr. WALSH. It has caused quite a bit of a problem because we have had to operate from secondary records. We have had to try to re construct what happened to the funds of West Coast Schools through the use of bank accounts, which is a very tedious and time-consuming process. As you know, you have been connected with banks ; you have to get from the microfilm information as to individual checks. So you have to limit very stringently the request you make for copies of checks from microfilm because of just the sheer volume of work it takes to get one check. It has been a severe limitation to us. We have not been able to trace all of the funds. We have not been able to look into areas concerning the use of funds for personal purposes that we would have looked. at if we had had access to these. Senator PERCY. Are you aware of any further steps that can be taken or should be taken or authority that we possess to get access to these records? Mr. WALSH. Senator, there was a letter that was written to the Attorney General by the chairman of the committee, and there -was a reply back from that. Senator PERCY. Have we had a reply ? Mr. FELDMAN. May go into that ? After Mr. Walsh called me from California and told me of the unusual situation, since think it should be understood that we were the ones who tracked down Fred Peters. In fact, we located him and we did some good hard work on this case. called the U.S. Attorney's Office and tried to work out an accom modation. That was in the spirit of cooperation we always try to exhibit in working with the Department of Justice. We wanted to share this information. Before we wrote any letter, wanted at first to explore the possibility of working out an accommodation. discussed it with minority counsel, Mr. Statler, and he agreed that we would take this approach. Unfortunately, they did not see fit to accommodate us in this area to work out some sort of sharing arrangement, claiming that we could jeopardize some of their prosecu tions. Therefore, on September 24, recommended that the chairman send a letter to the Attorney General, spelling out this whole matter, a draft which was also gone over carefully by minority counsel. We agreed on the wording. It was factually correct, we feel, and it was dispatched and signed by the chairman on September 24, 1975. It generally laid out the chronology of what happened, how we had given the Marshal our subpena prior to the U.S. attorney's subpena and the fact that Chairman Jackson said :
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I am deeply disturbed
by the unilateral action by the United States Attorney's in that it gave no prior notice of its intention to bar this subcommittee from access to the documents, and by the fact that this office refused to meet in advance of the turnover to work out an arrangement for access to the specific documents in which we were interested. Office,
On October
23, 1975, the
Assistant Attorney General of the Crim the letter, and quote :
inal Division, replied ; acknowledged
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61 As you know, the U.S. attorney's investigation may yield significant crim inal prosecutions, including possible cases of corruption of government officials. Disclosure of these records prior to completion of the appropriate Investigation could jeopardize successful prosecution of these cases.
Prior to receiving the final word from the Assistant Attorney Gen talked to people in the Criminal Division. They felt that we eral could not get access to these documents. That is where we stand
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think this should be incorporated in the record Senator PERCY. at this point. Without objection, it is so ordered. [The documents referred to were marked "Exhibit No. 44" for reference and follow :] EXHIRIT No.
44
U.S. SENATE, COMMITTEE ON GOVERNMENT OPERATIONS, SENATE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, Washington, D.C., September 24, 1975. Hon. EDWARD H. LEVI, Attorney General. MY DEAR MR. ATTORNEY GENERAL : The Permanent Subcommittee on Investiga tions, which I chair, has for some time been conducting a duly authorized pre liminary inquiry into mismanagement, malfeasance and fraud in federally guar anteed student loan programs. Our investigation has focused upon West Coast Schools and the activities of the principals involved therein. After several months of investigation a sub poena dated July 24, 1975, was issued over my signature commanding the pro duction of certain documents and records relating to the operations of West Coast Schools and other related companies. As we have done on many occasions, on July 28, 1975, we delivered the subpoena to the United States Marshal's office in Washington for transmittal to California and service on William Fred Peters, who we understood had custody of such records. This subpoena was duly served by a Deputy United States Marshal on Au gust 15, 1975, after considerable investigative effort by Subcommittee staff and Deputy United States Marshal Vernon Moss in locating the subpoenaed party, whose real identity we discovered was Freddy LaVerne Braneff. Subcommittee investigative efforts had also resulted in the discovery of possible passport fraud of the individual subpoenaed and a warrant on this charge was also served on him on August 15, at which time he was arrested. A third document was served on Mr. Peters on August 15 which is the reason for this correspondence. This was a subpoena issued by the United States Attor ney's office in Los Angeles dated August 12, 1975, requesting certain books and records, but not all of the books and records which had been included in our subpoena. Apparently our discovery of the true identity of the individual through passport checks triggered the issuance of the United States Attorney's subpoena. It is our understanding that prior to the issuance of the subpoena by the United States Attorney there was no active investigation being carried on by that office. It is our further understanding that after the West Coast Schools closed under suspicious circumstances in May of 1973, an audit effort was undertaken by the Department of Health, Education and Welfare. We under stand that at the request of HEW a subpoena was issued in 1974 to obtain the books and records of the school to assist in the audit effort of HEW. Finally, we understand that this subpoena was cancelled in September 1974, when the attorney for West Coast Schools refused to accept it. It is our understanding that after the individual was arrested the following events transpired : On August 18, 1975, the Deputy United States Marshal seized certain docu ments covered by our subpoena and presumably the subpoena of the United States Attorney. On August 19, 1975, the United States Attorney directed the United States Marshal to turn over the documents to him. There was a ques tion as to who had claim on the documents because of the two subpoenas. On
62 the afternoon of August 19. 1975, the United States Attorney convened a grand and made the Deputy Marshal an agent of the grand jury, ordering him to deliver the documents to the grand jury. In the meantime our staff heard that the United States Attorney was about to seize the books and records. Staff calls to the United States Attorney's office were unanswered. Accordingly the United States Marshal's office was asked to request the United States Attorney's office to take no action until a staff member could fly out to California to work out arrangements on the documents. By the time our staff member arrived in Cali fornia on August 19, 1975, the records had been turned over to the United States Attorney. The United States Attorney's office has now refused to provide us access to these records. I am deeply disturbed by the unilateral action of the United States Attorney's office in that it gave no prior notice of its intention to bar this Subcommittee from access to the documents and by the fact that this office refused to meet in advance of the turnover to work out an arrangement for access to the specific documents in which we were interested. This action is extremely puzzling in light of the prior issuance of our subpoena and our efforts in locating this
jury
individual. The records of West Coast Schools and the other related companies were law fully subpoenaed by this Subcommittee in connection with a properly approved legislative inquiry. Under the circumstances I would consider the continued refusal to deny access to these records as an infringement upon the legislative rights and duties of the Congress. In the spirit of cooperation I had the Chief Counsel telephone the United States Attorney's office to work out an accommodation so that both the Sub committee and the United States Attorney's office could proceed in their duly authorized areas. Our efforts were rebuffed. Accordingly, I deem it necessary to bring this important matter to your attention.
It would be greatly appreciated if you could have your representative contact the Subcommittee, so that a mutual accommodation could be worked out and a recurrence of this incident be prevented in the future. In closing let me again thank you for the cooperation you have extended to the Subcommittee and to me personally. Sincerely, HENRY M. JACKSON, Chairman. DEPARTMENT OF JUSTICE, Washington, D.C., October 23, 1915.
Hon. HENRY JACKSON, V.8. Senate, Washington, D.C. DEAR SENATOR : Thank you for your letter of September 24, 1975, to the Attor ney General which related to a Grand Jury subpoena issued in the Central District of California and served upon William Fred Peters requiring the pro duction of records of West Coast Schools. The matter of West Coast Schools has been the subject of an investigation by the United States Attorney's office in Los Angeles since July 1974. However, the investigation encountered difficulties when the United States Attorney's office found itself unable to locate either Mr. Peters or the records of West Coast Schools which were the subject of the subpoena discussed in your letter. Since Mr. Peters has now been located and possession of the records obtained, the investigation is again proceeding expeditiously. A team of 6 auditors has been assembled to examine the subpoenaed records which are contained in approxi mately 126 cartons. As you know, the United States Attorney's investigation may yield significant criminal prosecutions including possible cases of corruption of Government officials. Disclosure of these records prior to completion of the appropriate inves tigation could jeopardize successful prosecution of these cases. We are aware of the assistance provided by your staff members in locating Air. Peters and we are grateful for that assistance and the beneficial effects on the criminal investigation and we .will, of course, appreciate any further assist ance you or your staff can provide. Hopefully, when the present auditing efforts are completed, we will be in a position to assist you through disclosure of some
63 or all of the records now in the possession of the United States Attorney without jeopardizing any prosecutions which may result from these investigations. We look forward to working with you and your staff in the future in other areas of mutual interest. Sincerely,
RICHARD L. THORNRURGH, Assistant Attorney General.
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wonder if you could talk about your feelings Senator PERCY. regarding the accrediting system that HEW utilizes for approving the schools under this program ? made a request to the Department that they clarify for me policy and practice in this regard. Could you tell us what your feelings are, Mr. Walsh, about the system that they used for approving schools in the program? have not made a detailed examination of the Mr. WALSH. Senator, can impressions. They are these : have talked you my give process. to people in the Office of Education, both in the field and at the Central
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Their philosophy has been generally that they do not feel that HEW has any responsibility for the quality of education that is provided in schools; the responsibility for the quality of education should be vested in the agencies, the private agencies outside the Government that accredit these. So they have delegated or relegated total responsibility for what type of education and performance of these schools to people outside the Government. My personal feeling is that since the Government is providing tax payers' money to support these institutions that the Government must see that the students who attend these schools are not cheated out of what they go to the school for. How this should be done, really can't define exactly, but feel that it is a responsibility that can't be evaded as long as the Government is providing this money, that it must see that the education is relevant and valuable. Senator PERCY. We had testimony from GAO this morning that HEW paid 100 percent on default of loans. raised some questions about that. How do we establish that policy? Is that mandated by
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Congress? Is it something the banks demanded before they would grant tho loans or is it policy internally of HEW ? Mr. WALSH. can't respond exactly to that, Senator, except to say this : That it was my impression that the policy of HEW, when this program was first initiated, was to get the maximum amount of money out in the field and get the maximum amount of students in school and getting the value out of these loans. the percentage of insurance was set at 80 percent or 90 percent, and believe — this is my belief —that the banks and financial institu tions would have applied more rigorous standards towards the loan that they would accept. they had a more — higher percentage of risk in that loan, they would probably have applied the same type of standards that they used for the regular commercial loans. That would have limited the number of loans that were made and the number of students that went to school.
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can only speculate that this might have been the viewpoint of they wanted to maximize the number of loans that were made. Senator PERCY. Is there any provision that the student must attempt to obtain a loan someplace else and in the event that he can't get then he can resort to Government guaranteed loan, or can any stu dent, regardless of need, regardless of their financial circumstances, or demon obtain such loan without any demonstrated need for strated attempt to borrow the money from some other source? Mr. WALSH. Senator, the student completes an application. In the can't application the student has to submit certain financial data. tell you exactly what those requirements are, but this data that on the application form then put in computer. The computer out if programed to process this data and kick the data does not fall within certain limits. So the answer yes, there are some reqiiirements that the student has as far as financial obligations are concerned. But again, say that this processed largely by a computer
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it
is
a
is
is
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it
a
it,
HEW, that
operation. Senator PERCY. The student cannot get a loan if the computer shows that he has the financial resources to pay for the education himself? Mr. WALSH. he puts data on the application that shows he has certain types of resource, financial resource, again, would hesitate to say Senator PERCY. Is there spot-check basis, any verification of the application Mr. WALSH. Not that know of. sir. Senator PERCY. Do you feel that there would be greater respon sibility evidenced by the financial institutions loans were established at 90 percent Federal guarantee level Mr. WALSH. certainly think that the financial institutions would apply different standards. They would probably insist that the student come in and they would, am sure, handle that as they handle regu
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lar loans.
it
Senator PERCY. Do you feel would cut down materially the num ber of students who would have applied or would have been approved
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?
for loans Mr. WALSH. Yes, sir, think probably would have reduced the number of loans that were made materially.
a
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is
is
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is
Senator PERCY. Can you give us some idea as to the extent again the Government losing a year now on an annual basis and how much might that have been cut down if we had a 90 percent provision in there and greater care had been exercised Mr. WALSH. don't think could respond to that. have informa tion that was in the General Accounting Office statement that the HEW asking for about $200 million year to pay claims. would hesitate to speculate how much 90-percent limit would Senator PERCY. Do you know offhand right now how much the total outstanding indebtedness guaranteed by the Federal Government? Mr. WALSH. Again, with the limitations that were stated in the about $8.5 billion in outstanding loans, GAO testimony, there
of the defaults, how much
65
little more than half are in the federally managed part of the pro gram, a little less than half in the State program.
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Generally, think the estimate has been that the Government might lose as much as $1 billion or perhaps a little more. Senator PEROY. Ten percent or more of the total outstanding
2
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is
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amount? Mr. WALSH. But again, think the majority of that will be lost in the federally insured part of which would be possibly $4.5 to $5 million— $4.5 to $5 billion. Senator PERCY. It perfectly obvious that certain types have been running schools and benefitting from this program, that have no real interest in education or the students, the vocational guidance after wards or anything else. They are just out to make a fast buck. What wrong in HEW that permitted people of that character to be accredited under their program Mr. WALSH. think goes back to this: that there must be the will in HEW to cope with people like that. The first thing that you could have to have — this something that HEW has adopted only recently. It wasn't until this year that HEW had any procedures by which they could legally expel school from the program. In order to do this properly, in order to find some reason to expel a program, school from the program, there must be an investigation to collect the evidence that admissible under the Administrative Procedure Act and then you have to follow through legally with due don't believe there has been process to take action against them. So the will to do this. Senator PERCY. Thank you very much. The hearings are adjourned until 10 a.m. on Monday morning. [Whereupon, at :15 p.m., the subcommittee recessed, to reconvene at 10 a.m., Monday, November 17, 1975.] [Member of the subcommittee present at time of recess: Senator Percy.]
GUARANTEED
STUDENT LOAN PROGRAM
MONDAY, NOVEMBER
17, 1975
U.S. SENATE, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS OF THE COMMITTEE ON GOVERNMENT OPERATIONS,
Washington, D.O. The subcommittee met at 10 a.m., in room 33O2, Dirksen Senate Office Building, under authority of Section 4, Senate Resolution 49, agreed to July 26, 1975, Hon. Sam Nunn presiding. Members of the subcommittee present : Senator Sam Nunn, Demo crat, Georgia : and Senator Charles H. Percy, Republican, Illinois. Members of the professional staff present: Howard J. Feldman, chief counsel ; F. Keith Adkinson, assistant counsel ; LaVern J. Duffy, assistant counsel: John J. Walsh, investigator; Gregory L. Vigen, General Accounting Office; Stuart M. Statler, chief counsel to the Minority; Jonathan Cottin, investigator to the Minority; and Ruth Y. Watt, chief clerk. Senator NUNN. The subcommittee will come to order. [Members of the subcommittee present at time of reconvening: Senators Nunn and Percy.] Senator NTTNN. Our first witness this morning is John Walsh, who is staff investigator, who has supplementary remarks he would like to make.
TESTIMONY OF JOHN J. WALSH, INVESTIGATOR, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS— Resumed Senator NUNN. You have already been sworn ? Mr. WALSH. Yes. sir. So far our testimony has concerned the fed
erally insured student loan program. There was another source of Government funds aA.ailable to West Coast Schools in addition to the sale of Government insured student loans. This source was from the so-called campus based financial assistance programs, also administered by the Office of Education. These programs were the college work study program and the na tional direct student loan program, and the supplemental educational opportunity grant program. Tinder the college work study program, the school finds employ ment for the student, either at the school itself or at an outside em ployer- which had to be either a public or a private nonprofit corpora tion. Eighty percent of the salary paid to the student would be paid from funds advanced by the Government to the school. The remaining 20 percent would be paid either by the school or by the outside employer.
(67)
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Under the national direct student loan program, the school makes direct loans to students. Ninety percent of the money loaned to stu dents was to come from money advanced to the school by the Govern ment and the other 10 percent was supposed to come from the school's own money. The interest on the loan was 3 percent simple interest and the school was supposed to obtain a note from the student and collect the interest and principal. Funds collected were to go into a revolving fund main tained by the school to make further loans to students. However, because of the many forgiveness provisions contained in the legisla tion, the repayment of these loans takes place only rarely. The third program is the supplemental educational opportunity grant program in which the school makes direct grants of money to individual students from money advanced by the Government to the school. These grants do not have to be repaid. The eligible schools apply in the fall of each year for the funds which they estimate they will need for the following fiscal year begin ning July 1. One application is submitted for all three programs and the estimates are based primarily on projections of future enroll ments. The applications are submitted to the regional office where they are reviewed by an advisory panel directed by the senior financial aid program officer. In the past, the members of this panel who are officers of the schools participating in the program were selected by the program officer. Now, the panel is selected by a "random sampling" process which also involves screening to insure proper ethnic and other representation. The members of the panel are brought in to the regional office for about a week usually in November. They have 1 day for orientation and then about 4 days to review all the applications. The panel is broken down into several subpanels, each of which is headed by a Government program officer. The siibpanel reviews the individual applications and prepares a worksheet on which the estimates are factored until the panel agrees on a recommended amount for each program for the school being reviewed. This worksheet is not signed. There are no written records whatso ever made of the deliberations of the panel, the positions of the in dividual subpanel members or even of the names of the subpanel who reviewed the school ; the reason given was lack of time to keep minutes or prepare written, signed recommendations. In the San Francisco region between 400 and 500 applications are processed, some of which involve many schools under one ownership. The processing of these 400-500 applications in about 4 days has re sulted in recommendations for about $250 million annually for the San Francisco region for the last few years. The unsigned recommendations are sent to Washington for further processing. The processing usually results in a cut in the amount rec ommended, but the cut is usually based upon factoring in the amount of money available for each region after the money is appropriated by Congress. In any event, the school is notified by about May of the following year how much money has been approved for it for each program. As soon as the school receives this notification, it can apply for and receive all or part of the money approved.
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This application and payment is handled directly by a computer operation in the National Institutes of Health in Washington, D.C. The regional offices are not in the payment cycle and never know when and how much money any school receives. In fact, the investigations disclosed that because of computer diffi culties, it is not possible for HEW to know exactly how much money has been paid to a particular school for these specific programs. We next examined what requirements have been placed on the schools to account for Government funds. We were advised that HEW's com pliance policies for these programs are based on faith in the integrity
of
the schools.
The schools are requested to submit an annual report giving totals as to their past enrollment figures and the past disbursements of these funds. There are no binding requirements as to what type of records must be maintained; it is recommended that the Government funds received by these schools be kept in separate accounts from other school funds, but it is not required that this be done. There has been no program to audit the annual reports of the schools or to audit the disbursements of the Government funds provided to the schools. There is no specific penalty provided in the legislation making it an offense for a proprietor of a school to use these funds for the general operation of the school or even for his own personal use.
Senator PEROY. Let's just say these funds were used for personal use, for home expenses of an owner of one of the schools or an administra tor. What would he be guilty of doing if he did that? Is there a specific penalty provided for in this particular legislation ? Mr. WALSH. Senator, I don't know whether he would be guilty of anything. That is one of the problems we are going to get into. Senator NUNN. Are there some general fraud statutes on the books for the U.S. Government ? Mr. WALSH. Yes, sir, there are. There are statutes making it a crime to submit a false claim to the Government, but I don't think that would be applicable in this case. Senator NUNN. Are there any sworn statements required either be
fore the money is received or after the money is spent? Mr. WALSH. There are no sworn statements ; no, sir. The only thing that is submitted is an application form that is signed by an officer of the school, which gives his estimate of how much money will be needed for the next year. He does not have to submit any statements ac counting for this. Senator NUNN. $250 million was spent in this way in the San Fran cisco region alone ? Mr. WALSH. don't believe that much was spent, sir. That was the amount that was requested. don't have specific numbers as to exactly how much was spent. As say, it is difficult to get those out of the computer setup. HEW's computer doesn't provide that. we were to ask HEW what the West Coast Senator NUNN. Schools received in 1974 and 1973 or 1972, are you saying the com puter couldn't tell us and nobody in HEW could tell us ? Mr. WALSH. have asked that. made a request for that informa tion this summer. Day before yesterday, guess it was last Thursday, received copies of checks that were paid to West Coast Schools in connection with this program.
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The way the computer operation of the National Institute works, it combines all payments made to a school for all HEW programs, and it doesn't differentiate as to what programs are involved. So you can get data from the computer as to how much money the school has re ceived in total from HEW, but you will have a very difficult time breaking down how much is applicable to separate programs or to these programs. Senator PERCY. Mr. Walsh, as you go through in your testimony now, and your followup later, as t indicated at the outset, think it is our job to find out where the legislative process has broken down and then the administrative process in HEW. To the extent that you are so familiar with this as an investigator on it, wherever you can determine is the Congress' fault, would like to know about that. think the subcommittee would want to know. Wherever you can clearly discern it is HEW, we would like that. We don't want the implication that HEW is totally at fault. There is fault in the legislation. As see it quite clearly, this legislation should have provided for the misuse of funds. Isn't it appropriate that that legislation should incorporate that? We should have anticipated as a legislative body the possibility of misuse of funds, of fraud, and so forth. This would clearly seem to be then — from the statement that was made — in the drawing up of this
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legislation.
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Mr. WALSTT. Yes. sir. would agree with that. Senator PERCY. Thank you. Mr. WALSH. The following is a tabulation of the Federal grant money which was approved for allocation to West Coast Schools. National defense student loans
Record Jan July Jan July Jan July July
1 1970to Dec l' 1970to June 1 1971to Dec l' 1971to June 1 1972to June l' 1972to June 1 1973to June
31, 1970 30, 1971 31 1971 30 1972 30 1972 30 1973 30' 1974
$121,986 . 183 582
Total
College work study
Supplemental educational opportunity grants
$50 099 67 913
376 292 i 383 784
112 907 329 900 1 195,583
i $132,781
1,065,644
756,402
132,781
1, 954,827
Grand total i West Coast Schools closed May 24, 1973.
As you can
grand total of
see, $1.9
from January 1, 1970. through June 30, 1974, a million for these three programs was approved for
the West Coast Schools. As an epilog, it is noted that when West Coast Schools closed May 24-, 1973, HEW had approved $712,14*8 for payment to the school for the CWS, NDSL, and SEOG programs for the fiscal year from .July 1. 1973 to June 30, 1974. On August 31, 1973, James Hoffe transmitted to Washington a re quest for the transfer of these funds from West Coast Schools to
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Windsor University. HEW files in San Francisco fail to show whether this transfer ever took place. The Los Angeles Times, March 19, 1975, shows the following con cerning Windsor University of Los Angeles: It was founded in the spring of 1973 only a few months before West Coast Schools closed. It was a "university without walls," with no formal classrooms and no formal curriculum. Its chancellor was "Dr." Clark Parker, who listed his degrees at various times as "B.S.," "M.S.," "M.A.," "L.L.B.," and "L.L.D." from the University of California at Los Angeles, but in quiry at this institution failed to show any record of his attendance. He refused to tell reporters where or under what name he received his degrees.
Windsor University was never accredited, but it was approved by participation in the student loan program and in the direct grant programs because it was a "candidate" for accreditation. Senator Nuxx. Who made this decision ? Was that the regional level under Mr. Hoffe ? Mr. WALSH. No. That was a decision that was made in the central office of HEW. Senator Nuxx. In Washington ? Mr. WALSH. Yes, sir. Windsor University is no longer in the student
HEW for
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loan program or the direct grant program, but there is no available information as to how much was approved in guaranteed student loans for or how much received in direct grants. No audit of Windsor University has been scheduled by HEW. Senator NUNN. Even at this date Mr. WALSH. No, sir. There submitted as an exhibit, copy of an agreement dated July 25, 1973, between Fred Peters and Clark Parker of Windsor University as to how funds transferred from West Coast Schools to Windsor University would be handled. The accounting investigation also disclosed that after the West Coast Schools closed in May 1973, $150,000 in West Coast School funds was transferred to Windsor University and from there to personal bank account of Fred Peters. Mr. FELDMAN. Mr. Chairman, that exhibit will be 45. [The document referred to was marked "Exhibit No. 45" for refer ence and follows EXHIBIT No.
45
AGREEMENT
This is to certify an agreement between West Coast Schools, hereinafter re ferred to as "WCS," and Windsor University, hereinafter referred to as "WU," for the application of student loan funds currently in the possession of WCS. These funds will be transferred from WCS to WU for the training of students by WU. The funds will be placed in an account requiring signatures of both Mr. Fred Peters and Mr. Clark Parker to transfer the funds. Said funds can only be used for the training of students and will be represented by individual loan documents signed by students in accordance with the National Defense Student Loan Program and application of funds under the HEW College Work Study Program. WU will be liable directly for these funds to WCS and, in turn, to the federal government in the event they are not properly applied for student fund ing. Except if WCS elects the option below to have the funds returned to WCS. WU agrees that WCS can direct the unused portion of these funds to be re turned to WCS at the option of WCS.
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WU hereby agrees to indemnify WCS from any liability occasioned by reason of the transfer to or use by the funds to WU, for reasons other than those stated above, whether party. Agreed.
asserted by the United
or any other
States Government
third
CLARK PARKER, Chancellor, Windsor University. FRED PETERS,
DATE
:
July
President, West Coast Schools. 25, 1973.
Senator NUNN. You mean HEW hadn't done anything to date about examining Windsor University or this transfer? Nothing has been done?
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Mr. WALSH. Again, directed correspondence or had some corre spondence prepared for the chairman's signature asking whether or not this transfer of funds ever took place. We have not received a reply from HEW on this. When we were at the regional office, we inquired of
the audit group at the San Francisco audit whether they had been notified of this transfer and whether they had scheduled any audit of Windsor, and they said none had been scheduled and none was in the process of being scheduled. Senator NUNN. Does this university without walls have a particular
location ? Mr. WALSH. There was an office in Los Angeles. Senator NUNN. Is there an office ? Mr. WALSH. There was. Senator Nmsrsr. Is there a building or group of classrooms, or what is the physical arrangement? Mr. WALSH. just don't know. We did not make an investigation into Windsor University. Senator NUNN. Let me back up just a minute. As your statement indicates, in the student work program 80 percent is paid by the Gov ernment and the other 20 percent is paid by the school. Is that right ? Mr. WALSH. Yes, sir. That is the way it is supposed to be. Senator NUNN. What accounting mechanism is available to make sure this other 20 percent is paid by the schools ? Does HEW have any way of determing that? Mr. WALSH. In order for that to take place, they would have to have requirements that certain types of records be kept and there would have to be an audit made periodically on a spotcheck basis. That mechanism does not exist. As said, they depend upon the faith in the school, that it is done this way. there were 10 students in the school and the Gov Senator NTTNN. ernment were paying them, say, $400 a month, assuming that the school was paying the other 20 percent, HEW doesn't have any mechanism at all to determine whether that other 20 percent is being paid ? Mr. WALSH. Not without an audit program and without requiring certain records. Senator NUNN. Are you saying they don't have that audit program 1 Mr. WALSH. No, sir. Senator NUNN. Is this just in the region in San Francisco or all over the country ? Mr. WALSH. know it was true in San Francisco. We were told that it was probably true in other districts as well, that the audit group of HEW is limited in size and they have other programs to check into.
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Senator NUNN. Is the same thing true of the national direct student loan program where 90 percent of the money comes from the govern ment and 10 percent, supposedly, comes from the school? Mr. WALSH. Yes, sir. These programs are considered together. They are operated as, believe they call it a tripartite program. Senato NUNN. You are saying there is no mechanism by which this 10 percent of the schools' funds can be checked by HEW ? Mr. WALSH. Not without assigning auditors to it and having a regular program to do it. Senator NuNjr. You found no evidence that that existed ? Mr. WALSH. No evidence that this was being done. Senator NTTNN. The third program is the supplemental educational opportunity grant program in which the school makes the direct grants of money to the individual students from money advanced by the Federal Government. These grants do not have to be repaid. Mr. WALSH. Yes, sir. Senator NUNN. What is the criteria for being eligible for one of these grants? Is this failure to qualify for a loan or what is the criteria ? Mr. WALSH. Sir, don't know the exact criteria of that. believe there are some requirements, financial requirements, financial need requirements ; but don't know the exact details. Senator NUNN. What mechanism exists at the regional level in San Francisco or any other HEW level as to what happens to these funds once the Government makes them available to a school ? Is there any mechanism to determine what the school does with the money? Mr. WALSH. Again, not unless there is an audit made of it. My understanding was that when the school closes, as West Coast Schools did, then there is a determination audit made when the school closes down. At that time, they try to determine whether or not the funds are accounted for. In the case of the West Coast Schools, as reported earlier, after the school was closed down and a determination audit was made, they found the school could not account for these funds. Senator NUNN. They found they could not account for the funds ? Mr. WALSH. Yes. The school could not account for these funds ; but again, as stated earlier, there was no effort made to take any action to collect it. Senator NUNN. Who made the audit you are talking about ? Mr. WALSH. This was an audit that was made by the San Fran cisco Office of HEW after the school closed. Senator NUNN. Although these were funds intended for students, no one in HEW now can tell us whether the students ever received these funds? Mr. WALSH. No, sir. Senator NUNN. Could this money have gone to other purposes with out anybody being able to say one way or the other ? think our investigation shows this money was Mr. WALSH. Yes. merged with the regular school funds. We looked at the bank accounts. We certainly can't tell where it went. Senator NUNN. Based on the withdrawal of large sums of money, you could surmise that there is a strong likelihood this money did not go to the intended beneficiaries, the students. Is that a correct
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assumption
?
63-570 — 76
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Mr. WALSH. Yes, sir, that would
be our assumption. Senator NUNN. There is certainly no evidence that it did go to the students. Is that correct ? Mr. WALSH. Nothing that we saw. Senator NUNN. Let me ask one other question along that line. As understand your testimony, too, you are saying that there is an ad visory panel set up in each region of the country. suppose San Fran
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Mr. WALSH. Yes. sir. That is true. Senator NUNN. This advisory panel is composed of people who are
associated with the eligible schools. Is that right? Mr. WALSH. Yes. sir, that is right. Senator NUNN. There were no records kept of who made the de cisions, how the decisions were made and how the priorities were set in determining who was going to get these funds. Is that right ? Mr. WALSH. No. sir. Senator NUNN. Do you have a list of the people who participated on this panel ? Mr. WALSH. Yes, sir. We have a list for 1 year. This is the year that. Fred Peters, who was the president of West Coast Schools, was ap pointed to serve on that panel. Senator NUNN. So you have a panel that is composed of people who are both receiving the discretionary funds and making decisions oil them. Is that right ?
Mr. WALSH. Yes, sir.
Senator NUNN. Is this unique in HEW or is this something that happens very often in HEW or is this program the only instance of it? Mr. WALSH. don't know about other programs because these are have looked into; but it certainly took place in this the only ones program. Senator NUNN. Is this permitted by law ? Mr. WALSH. There is nothing that prohibits it that have seen. Senator NUNN. Is there any statute that directs this advisory panel to be composed of potential recipients of the grants or is this an ad ministrative decision made by HEW? Mr. WALSH. don't know the answer to that. think you will have
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HEW.
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Senator NUNN. The total amount of money for the year in question, at least the recommended amount, is $250 million, but you don't know whether that much was actually appropriated ?
Mr. WALSH. No, sir.
Senator NUNN. There were
4 days?
400
or
500
applications reviewed in about
Mr. WALSH. About 4 days, yes. Senator NUNN. By people who, like Mr. Fred Peters, were also associated with the school ? Mr. WALSH. Yes. Senator NUNN. Was that review directed to all four programs, the student scholarship program, the college work study program, the national direct student loan program, and the supplemental educa tional opportunity grant program ? Mr. WALSH. Yes, sir. They are all considered at the same time.
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Senator NTJNN. Actually, the scholarship program is sort of an open-ended thing anyway, isn't it ? They wouldn't have to determine priorities on the student scholarship program ? Mr. WALSH. don't believe we have discussed the scholarship
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program. Senator NUNN. named it as one of the four. probably should have just named the three. Mr. WALSH. That program was not included. The application only includes three programs. Senator NTTNN. The national student scholarship program would not be included within the jurisdiction of this review panel. Let us call it the guaranteed student loan program. Mr. WALSH. The guaranteed student loan program would not be involved with the application for these programs. That is a different
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mechanism altogether. .Senator NTTNN. This advisory panel would have had jurisdiction and made priority decisions on the college work study program.
Mr. WALSH. Yes. sir. Senator NUNN. And on the national direct student loan program ? Mr. WALSH. Yes. Senator NUNN. And on the supplemental educational opportunity
program ? Mr. WALSH. Yes. Senator NUNN. Yet, there is neither a record of who made what de cision nor a record of any amounts going to individual schools ? Mr. WALSH. No. sir. We talked to officials of HEW at the region and they concurred that this program was rather lax, but they said because of a lack of personnel and lack of time, that they had no al ternative except to handle it this way. Senator NUNN. Did anybody raise the question or did anybody say it might be worth considering whether the people who are to receive large amounts of funds should also make the decisions about who is going to be the recipient? Mr. WALSH. Senator, I, frankly, was absolutely incredulous when heard this. have been involved with government contractors for many years. have never heard of such a thing where a panel of people who had an interest in the award were permitted to sit on the panel and make recommendations. presume that the people who were on the panel didn't sit on the panel that considered their own school, al know of that would though, again there would be no record that
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prevent them. Senator NtiNsr. Was Mr. Hoffe the final decisionmaker in this process ? Mr. WALSH. It is difficult to document who made the decision. Again, as say, the recommended amount comes out on a worksheet which is not signed. Then this worksheet is typed and it is transmitted by a transmittal letter to Washington and then Washington processes it over a few months and it comes put with a recommended amount. Senator NUNN. Then the region never knows what happens when the letter gets to Washington ? Mr. WALSH. That is right. The region gets a copy of advice saying that a certain total amount has been approved for the school ; but that is many months after they submitted their request.
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Senator NUNN. We have a situation where three different programs are being administered by the regional office, the panel that decides priorities are the ultimate recipients and there is no record about who makes what decision and whether a person from a particular school is on the panel making that decision. Then you have an unsigned sheet of paper, the formal recommenda tions, that goes into a computer in Washington and the computer sends checks out without the HEW office in San Francisco knowing who got the check. And now nobody can tell us how much any school received under
a
particular program?
Mr. WALSH. That is about right, sir.
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Senator PERCY. have no questions. Senator NTTNN. Our next witness this morning is Mrs. TJlla Peters, if you would come on up, please. Mrs. Peters, would you remain standing and take the oath ? We have all our witnesses sworn in. Will you swear that the testimony you are about to give this morn ing before this subcommittee will be the truth, the whole truth, and nothing but the truth, so help you God ? Mrs. PETERS. do.
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TESTIMONY
OF
ULLA WALLIN PETERS, LOS ANGELES, CALIF.
Senator NUNN. Have a seat, Mrs. Peters. Mrs. Peters, under the rules of procedure for the Permanent Sub committee on Investigations, you have the right to have an attorney do not see an attorney here this morn present during your testimony. ing. Do you have one present with you ? Mrs. PETERS. No. don't feel need one. Senator NTTNN. You do not feel you need an attorney ? You under stand you have a right to have an attorney here if you so desire ? Mrs. PETERS. Yes ; do. Senator NUNN. Do you waive your right to have an attorney
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Mrs. PETERS. Yes ; do. Senator NUNN. Mrs. Peters is the former wife of Fred Peters, past president of the West Coast Schools. Do you have a statement this morning that you would like to read to the subcommittee ? Mrs. PETERS. Yes ; do. Senator NTTNN. We appreciate, very much, your being here this morning. Mrs. PETERS. Shall start ? Senator NUNN. You may proceed. Mrs. PETERS. I, IJlla Wallin Peters, reside at 505 South Lafayette Place, Los Angeles, Calif., freely and voluntarily make the following statement to LaVern J. Duffy and John J. Walsh, who have identified themselves to me as members of the staff of the U.S. Senate Permanent Subcommittee on Investigations of the Committee on Government Operations. am currently employed at the San Vicente Hospital in Los An was born Ulla Wallin in Sweden and grew up in Chi geles, Calif. cago, I11., and moved to Los Angeles about 10 years ago.
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In 1969 was employed as a secretary, and met the man who calls himself Fred Peters at a party at my apartment in the fall of 1969. We were attracted to each other; began going out together, and we were married January 10, 1970. Fred Peters had been employed as a telephone counselor at the Jane Arden Employment Agency in Los Angeles since the summer of 1969. Dan Dameron, manager of the Jane Arden Employment Agency, was Fred Peters' best man at the marriage ceremony. didn't know much about Fred Peters' background. When we were married, he told me that his real name was not Peters, but Braneff. His parents had been from the Balkans. He had a twin brother named Frank. He told me his parents were killed in an automobile accident in Waco, Tex., and he and his twin brother were adopted by an elderly couple. He said his foster parents are dead ; his twin brother is dead ; and the orphanage burned down. Fred said that he served in the U.S. Army in the Korean war; that he was a second lieutenant. He claimed that he had received many war wounds; that he was captured and tortured by the North Koreans. Among the tortures inflicted by the North Koreans was the amputation of part of his little finger or his left hand. Also, he said the North Koreans had performed a vasectomy op eration on him. He said he escaped from the North Koreans and re turned to the Army where he received many medals and recommenda tions, including the Congressional Medal of Honor awarded personally by President Truman. After the war, he said he worked as an engineer on many construc tion projects in the United States, the Caribbean area, South America, and Africa. He said he also served as a soldier of fortune and claimed lie was involved in a scheme to commit assassinations in Africa. He was very indefinite about exact dates, places, and names relating to all of these incidents. wondered how much of what he told me was true and how much he had failed to tell me ; but was in love with him, had some private and did not press him for details even though knew he was making about $450 per month at the employment doubts.
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agency.
The early part of 1970, Fred Peters resigned from the Jane Arden Employment Agency and was employed by the Automation Institute of Los Angeles, a school teaching computer operations and program ing. He started as placement manager for the school and he impressed Mr. Tokeshi, owner of the school, who soon promoted him to vice president.
comparatively happy, normal, married life the balance of early part of 1971. Fred began making trips to San Fran cisco to meet with Government officials about Government programs providing money for the school. accompanied him to San Francisco on some of these trips and met some of these Government officials, in cluding Jim Hoffe, an official who had charge of several of these programs. However, Fred Peters began showing signs of a distinct personality can establish the date of this change very exactly. It began change. on his 40th birthday, May 27, 1971. This was on Memorial Day week end, and we went on a houseboat trip on the Sacramento Kiver with We lived a 1970 and the
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Jim
Hoffe and his wife. The weekend was a disaster. Fred was in a state of rage or in a temper tantrum as the weekend progressed — per sonality traits he had not shown as readily in the past. For the next 2 months, nothing could do was satisfactory to Fred and we lived in an increasing state of tension and conflict. It was dur recall Jim Hoffe was a visitor at our home on ing this period that were alone, talking business, and brought He and Fred one occasion. in some drinks from another room. saw ten $100 bills handed to Jim Hoffe. In fact, was able to count them. then asked Fred what this was all about and he told me it did not concern me, and should forget all about it. Senator NTTNN. May interrupt you for one question here? Where was your home ? Mrs. PETERS. In Los Angeles. Senator NUNN. Thank you. Mrs. PETERS. This is the only time have any actual knowledge of Fred paying any Government official any money, although, as will relate later, he told stories about making such payments. Finally, in August 1971, Fred told me he had been living a lie all the time we were married ; that he was not like the person he had been pretending to be at all. He said that he was now in a position when he could make a lot of money in a hurry, but it would involve doing things that he didn't want me involved with. He also said he was not in reality a one-woman man, and that if wanted to see him, it would be as a mistress and would have to share him with others. wanted no part of such an arrangement, and we sep arated in August 1971 and never lived together again. However, we did talk to each other and saw each other several times until our divorce became final in December 1972. When we saw each other during this period, Fred volunteered much information about what was going on at the school and how successful it was. He seemed particularly insistent upon telling me about im portant political figures, Senators, Congressmen, and so forth, to whom he was paying money for favors. He never gave names or specifics about these, so do not know whether these stories were true or whether he told them for some ego gratification. The schools closed down in the spring of 1973. N"o one from HEW or from the FBI or from any Government agency contacted me for any information about Fred Peters or the West Coast Schools until July 1975, when was contacted by Andrew Ewing of the Los An geles County District Attorney's Office and John Walsh of the subcommittee. have read the foregoing statement and it is true to the best of my knowledge and belief. Senator NUNN. Mrs. Peters. believe this statement was given before a notary public on October 2. Is that correct ? Mrs. PETERS. Yes. Senator NUNN. You swore to the statement at that time and you bas ically reaffirm that statement this morning by giving it as the sworn
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testimony this morning? Mrs. PETERS. Yes ; do. Senator NUNN. Did Fred Peters tell you his real name after you were married ?
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Mrs. PETERS. Actually, he told me before. Senator NUNN. He told you before ? Mrs. PETERS. Yes. Senator NUNN. Just before ? Mrs. PETERS. Right. Senator NUNN. In your statement, you make reference to the fact that you and your former husband, Fred Peters, began taking trips to San Francisco and socializing with James Hoffe, senior program offi cer for HEW in San Francisco. Can you give us a better estimate of the time when Fred Peters began socializing with Mr. Hoffe ? Mrs. PETERS. It was early 1971, believe. We saw them more and more and then that led up to the houseboat trip and then several times thereafter, including the time when saw the ten $100 bills. Senator NUNN. About when was that houseboat trip ? Mrs. PETERS. That was the Memorial Day weekend of 1971. Senator NUNN. When was the visit by Mr. Hoffe to your house ? Mrs. PETERS. would say approximately 2 weeks thereafter. Senator NUNN. It was after the houseboat trip ? Mrs. PETERS. Yes. Senator NUNN. You say that your first recollection of an association between Mr. Hoffe and Mr. Peters was before that, early 1971 ? Mrs. PETERS. Early 1971. Senator NUNN. In the January-February frame, or in the MarchApril frame? Mrs. PETERS. would say more March, that can recall. Senator NUNN. Do you know who picked up the bills for this social izing ? Do you know who paid for it ? Mrs. PETERS. Mr. Peters did. Senator NUNN. Did Mr. Peters pay for the houseboat trip ? Mrs. PETERS. No, we split that. Senator NUNN. Where did that trip take place ? Mrs. PETERS. That was on the Sacramento River, in the little islands and all, the inlets. Senator NUNN. wonder if you could better pinpoint for the record the time in 1971 when you witnessed the $1,000 cash payment to Mr. Hoffe in your home in IMS Angeles ? Mrs. PETERS. It had to be in June of 1971. That is as close as can pinpoint for you. Senator NUNN. This was after the houseboat trip ? Mrs. PETERS. Yes ; it was shortly thereafter. Senator NUNN. Within, say, 30 days thereafter, you think ? Mrs. PETERS. Within 30 days. Senator NUNN. Your best estimate would be June of 1971 ? Mrs. PETERS. Yes. Senator NUNN. When did you separate from Mr. Fred Peters ? Mrs. PETERS. In August of 1971. Senator NUNN. Did you witness this $1,000 payment before you sep arated in August of 1971 ? Mrs. PETERS. Yes. Senator NUNN. You witnessed this after the Memorial Day house
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boat
trip?
Mrs. PETERS. Right.
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Senator NTHSTN. So it would have been between this Memorial Day houseboat trip and August of 1971, when you separated? Mrs. PETERS. Yes. Senator NTTNN. Do you remember the exact date of separation ? Mrs. PETERS. remember it exactly. It was August 18.
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Senator NUNN. August 18 ? Mrs. PETERS. 1971. Senator NTTNN. Do you remember what day of the week it was ? Mrs. PETERS. Wednesday. am sure it was Wednesday. Senator NUNN. Is there any particular reason that you remember that date? Mrs. PETERS. remember those things. Senator Ninm. Did Fred Peters ever indicate to you that he was really interested in helping to improve the life of minority groups that attended the vocational schools in Los Angeles that he controlled ? Mrs. PETERS. He never indicated that to me. He did tell me on occa sion that the school was mostly blacks and chicanos, and he was really pleased about it because that is where the gravy was. Senator NUNN. That is where what was ? Mrs. PETERS. That is where the gravy was. Senator NTTNN. What did you think he meant by "that is where the gravy was" ? Did he expand on that ? assume that it was easier to Mrs. PETERS. knew what he meant. get loans for minority groups than for nonminority. Senator NTTNN. The testimony already developed in these hearings would indicate your former husband lived a double life. Prior to your marriage, were you aware that he had a former wife and he and his wife had four children? Mrs. PETERS. No. Senator NUNN. When did you first learn of this ? Mrs. PETERS. Mr. Walsh told me. Senator NTTNN. Mr. Peters never told you that ? Mrs. PETERS. No ; he never did. Senator NTTNN. Where and when, if you know, did Fred Peters learn to be, these are my words, such an expert con artist ? Mrs. PETERS. He told me a lot of stories about his past. He said he was an actor at one point on the summer stock circuit in New Jersey don't know what years. and the summer theaters. But am interested in knowing, of course, what kind Senator PERCY. of personality Peters was. The chairman has used the term "con man." You indicated in your testimony that you were attracted to him at the first party that you met him at and went together for a while and then you married. Was your marriage and your decision to marry him based upon rep resentations, statements that he had made about his background, his experience, and in a sense, you relied upon the truth of those state ments in the decision that you made, important decision to marry this
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Mrs. PETERS. Yes ; absolutely believed what he told me. Senator PERCY. In other words, most of what he told you, going right on straight up through the Congressional Medal of Honor, were told to you prior to the decision and the time that he asked you to marry him?
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Mrs. PETERS. That is correct. Senator PERCY. In evaluating and making your judgment of this, one of the most important decisions in your life, you went on those repre sentations ? Mrs. PETERS. Indeed did. he had told you what he had been, his previous Senator PERCY. life, what he had done and so forth, do you suppose you would have married him? Mrs. PETERS. don't think so, no. Senator PERCY. So to the extent that you understand the term "con
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Mrs. PETERS. understand the term. Senator PERCY [continuing]. Would you describe him in his rela tionship with you as having been a con man ? Mrs. PETERS. It was a con job ; yes. Senator PERCY. You say that his personality changed on the Me morial Day weekend in 1971 during a houseboat trip with Mr. Hoffe. Could it be or how was it possible for him to hide his previous person ality so completely and have it unfold on that weekend ? am not sure understand what happened on that weekend that caused the Dr. Jekyl and Mr. Hyde to come out in him. just kind of sat Mrs. PETERS. am not sure understand it either. back and watched. Senator PERCY. How long were you on the weekend? Was it 3 days? Mrs. PETERS. Approximately 3 days. Senator PERCY. Was it just the confined quarters and the fact there were four of you there ? Mrs. PETERS. He was frustrated because of the fact that he was get ting lost on the river. He would not take the main courses. We were losing shear pins, broke the prop and we got beached. It was exasper ating. The weather was bad. It was cold and the bugs attacked. It was awful. Senator PERCY. A lost weekend ? But in a sense it was probably a fortuitous weekend for you, wasn't it ? Mrs. PETERS. It was the handwriting on the wall. Senator PERCY. Because something came out about him that you had not previously known ? Mrs. PETERS. That is correct. Senator PERCY. What sort of a settlement did you make in your divorce ? Did you ask for the divorce yourself ? Or did he just simply 'lay down the conditions under which your marriage would continue and those were unacceptable to you ? Mrs. PETERS. He definitely wanted the divorce. Senator PERCY. He did ? Mrs. PETERS. Yes, because he said he would be into a lot of things should not be and would have to sign things as his wife and involved and for personal reasons, too, he wanted to get away. Senator PERCY. He decided he wanted out and said he wanted the
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divorce
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Mrs. PETERS. Absolutely. Senator PERCY. Having him sue for divorce, is he paying you ali mony now? Mrs. PETERS. No. He did for approximately a year and a half.
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Senator PERCY. How much did he pay to you ? Mrs. PETERS. $250 a month. But then he stopped. Senator PERCY. Was an agreement reached between your lawyer and his lawyer or between the two of you ? Mrs. PETERS. Between the lawyers. Senator PERCY. You feel that you had a capable lawyer ? Mrs. PETERS. Yes. did. Senator PERCY. Who would obtain for you something that was
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necessary ? Mrs. PETERS. Yes. Senator PERCY. In 1069, he was a telephone counselor for an employ ment agency. Three years later he was running the West Coast Schools. Can you tell us how you feel that he moved so far so fast and moved from a position of such lesser responsibility, authority and potential to the position that he achieved by then? How did he do it? Mrs. PETERS. kept asking him each time he came home with a promotion, "How are you doing this?" He said, "I have Mr. Tokeshi in the palm of my hand." Senator PERCY. He said what ? Mrs. PETERS. He said he had Mr. Tokeshi, who was the owner at the time, in the palm of his hand. Senator PERCY. Is it your feeling that his ability to do this, that his skill was in the ability to get people to do things for reasons other than the fulfillment of their responsibility? Did he ever demonstrate to you managerial skill, competence, abil ity, the ability to problem-solve, even on a lost weekend, to adapt to changing conditions, any mechanical dexterity ? Mrs. PETERS. never saw it. Senator PERCY. In other words, his sole competence that you saw was in the ability to manipulate people ? Mrs. PETERS. That is correct. Senator PERCY. Including yourself? Mrs. PETERS. Including myself. Senator PERCY. When you saw each other before the divorce was final and Peters told you about his contacts with important political fig ures, he did this in sort of a braggadocio, name-dropping way; is that correct ? Mrs. PETERS. That is correct. Senator PERCY. Did he ever tell you, in other words, he was able to show that important figures — he mentioned Congressmen and Sena tors— bv title, not by name. Is that correct ? Mrs. PETERS. More with title. Yes. he did say any names Senator PERCY. Did he mention any specific names ? . Mrs. PETERS. Not that recall. Senator PERCY. But he dropped these titles then ? Mrs. PETERS. Yes. Senator PERCY. And he indicated that he was paying them? Mrs. PETERS. That is right. Senator PERCY. So in a sense he was equating himself with them? "T know after all they are holding public office and important, respon sible roles, am naying them off, but they are accepting it?" Mrs. PETERS. That is right.
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Senator PERCY. So "I am at their level or they are at my level" whichever way you look at it. Mrs. PETERS. That is right. Senator PERCY. Did he ever tell you what kind of favors they were performing for him for the payments being made ? Mrs. PETERS. He said it was all connected with the loan appro priations with the school. Senator PERCY. He directly stated to you that they were accepting payments ? Mrs. PETERS. Yes. Senator PERCY. In connection with the schools? Did he ever get specific about what kind of favors they were able to perform for him ? Mrs. PETERS. Not specifically, no. Senator PERCY. So you never knew what the quid pro quo, the exchange was? Mrs. PETERS. No. do not. Senator PERCY. But there was money passing and he flatly told you
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that? Mrs. PETERS. Yes. Senator PERCY. You had actually seen money pass ? Mrs. PETERS. On the one instance, yes. Senator PERCY. And is there any other instance that you know of ? Mrs. PETERS. No. Senator PERCY. Any other time that you have any ideas to the
amounts ? Mrs. PETERS. No. Senator PERCY. Were they small, or large ? Do you have any idea ? Mrs. PETERS. have no idea. want to thank you very much indeed. You were Senator PERCY. not contacted, you never told this story until you were contacted ; is that correct, by the State's attorney, was it ? Mrs. PETERS. That is correct. Senator PERCY. In California and the district attorney in Los
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Angeles County ? Mrs. PETERS. Right. Senator PERCY. And by Mr. Walsh ? Mrs. PETERS. Right. Senator PERCY. What motivated you to talk with them about Mr. Peters and your experience with him ? Mrs. PETERS. feel 1that Mr. Peters should not be able to continue with what he is doing and not even if he is out of the west coast operation now, there is no saying what else he will get into next. He should stop harming people because he has hurt a lot of people along the way. Senator PERCY. You feel that Mrs. PETERS. That is not right. Senator PERCY. You feel your life was seriously injured as a result of his tactics? Mrs. PETERS. Yes. Senator PERCY. You are afraid others might be used and you feel it your duty to stop this kind of activity ? Mrs. PETERS. It has to stop.
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Senator PERCY. And
see that justice is done. you very much and join with the chairman pressing our deep appreciation to you for your appearance here It is not an easy job for you but think you have performed a valuable service. Mrs. PETERS. Thank you. Senator NUNN. Would you let me ask just a couple of questions ? On the occasion between the Memorial Day weekend and August when Mr. Hoffe was at your house, was he there for dinner that nig-lit ? Was it a night meeting ? What time of day was it ? Mrs. PETERS. We were at our place for cocktails and then we out for dinner thereafter. Senator NUNN. You went out for dinner ? Mrs. PETERS. Yes. Senator NTJNN. Where did the actual exchange of money take place ? Mrs. PETERS. At our apartment. Senator NUNN. In what room ? Mrs. PETERS. In Los Angeles in the dining area. Senator NUNN. Were you having cocktails then? Was that before
In
I want to thank
ex
today-
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went
dinner ? Mrs. PETERS. That was before dinner. Senator NUNN. Was Mr. Hoffe and Mr. Peters seated or were they standing ? Mrs. PETERS. think they were standing at the table. Senator NUNN. Were you walking through the room? Did you happen to be there? Were you just participating in the conversation? Mrs. PETERS. had just come out of the kitchen and was refreshing their cocktails. Senator NTJNKT. Did you actually see Mr. Peters hand Mr. Hoffe the
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Mrs. PETERS. Yes ; did. Senator NUNN. You say you saw the bills
so
you could actually
count the bills? Mrs. PETERS. They were counted. Yes. Senator NTNN. Who was counting the bills ? Mrs. PETERS. Mr. Peters was counting the bills as he gave them to
Mr. Hoffe.
Senator NUNN. You were there during the counting of all those bills? Mrs. PETERS. Yes. Senator NUNN. Were there any words spoken about what the money was for? Mrs. PETERS. No. Senator NUNN. Did Mr. Hoffe say anything ? Mrs. PETERS. think he said thank you. Senator NTJNN. He said, "Thank you"? Did Mr. Peters say any thing that you recall ? Mrs. PETERS. Words to the effect mind my own business. Senator NUNN. He told you that? While he was counting out the bills? Mrs. PETERS. After asked what is that for ? Senator NUSTN. Did you ask that in Mr. Hoffe's presence ?
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Mrs.
PETERS. Yes.
Senator NUNN. When you saw
Mrs.
PETERS. Yes.
the money being counted out
?
Senator NUNN. You said, "what is that for" or something similar
Mrs.
?
PETERS. Something to that effect. Senator NUNN. What was Mr. Peters' response ? Mrs. PETERS. Something to the effect mind your own business. Senator NUNN. Did Mr. Hoffe have anything to say ? Mrs. PETERS. He didn't say anything. Senator NUNN. The only thing you recall him saying is "thank you" ? Did you have any subsequent conversations with your former husband, Mr. Peters, about this money ? Mrs. PETERS. He had told me that he wanted to get something started with HEW so that things would run smoother for him for the loans and that he thought Mr. Hoffe would be prime because his wife thought he wasn't a success and that he should make more
money.
Senator NUNN. His wife thought he should make more money ? PETERS. Yes. That this would make her happy and Mr. Hoffe too. So he thought Mr. Hoffe would be agreeable to that kind happy, of an arrangement, to smooth things out for Mr. Peters. Senator NUNN. To smooth things out with HEW in Mr. Peters dealing with the Department ?
Mrs.
Mrs. PETERS. Right.
Senator NUNN. Do you have any comment on this agree. met Mrs. Hoffe. Senator NUNN. You agreed ?
Mrs. PETERS.
Mrs. PETERS.
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Senator NUNN. Was Mrs. Hoffe there at the night the money was
being exchanged ? Mrs. PETERS. No.
Senator NUNN. Was anybody else there besides Mr. Hoffe, and you
And Fred Peters? Mrs. PETERS. No.
Senator NUNN. No one else was at your house that night
?
Mrs. PETERS. That is correct. Senator NUNN. Did you go to a particular restaurant that you remember ? Mrs. PETERS.
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would be willing to guess it was somewhere in the Marina-Del Rey area. am only taking a guess. Senator NUNN. You don't remember the exact restaurant ? Mrs. PETERS. No. Senator NUNN. Do you have any idea what hour of the day it was ? Was it daylight at your house ? Mrs. PETERS. It was early evening, 6 or 7. Senator NUNN. Do you remember how long you were out that night or what time approximately you got back? Do you remember any other details? Mrs. PETERS. don't think it was too late. Senator NUNN. Did Mr. Hoffe come to your apartment? Was it an apartment or house? Mrs. PETERS. Apartment. Senator NUNN. Did he come to your apartment in an automobile?
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Mrs. PETERS. In an automobile. Senator NUNN. He came in his own automobile ? Mrs. PETERS. Yes. Senator NUNN. Do you remember whether all three of you went in his automobile or your own ? Mrs. PETERS. We went in our own. Senator NUNN. What did you do? Come back to the apartment together ? Or do you recall ? Mrs. PETERS. You are really asking for me to remember something a long time ago. think we dropped him off somewhere where he was staying. Senator NUNN. You don't remember the transportation arrange ments exactly ? Mrs. PETERS. It was our car. Senator NUNN. There were just three of you in the apartment ? Mrs. PETERS. That is right. Senator NUNN. There were just three of you who went to dinner ? Mrs. PETERS. That is right. Senator NUNN. No one else joined you ? Mrs. PETERS. That is correct. Senator NUNN. Do you recall whether Mr. Hoffe had any other meetings during this particular visit to Los Angeles ? Mrs. PETERS. think he was doing something during the day on some other business. Senator NUNN. Was business discussed at dinner? Did you hear any other conversation ? Mrs. PETERS. No. After that, it was social. Senator NUNN. Thank you very much. We appreciate it. would like to ask this question: Do you know Senator PERCY. who paid for the dinner ? Mrs. PETERS. Mr. Peters. Senator PERCY. So that it might possibly be on an expense account voucher someplace. Mrswould like to ask just one final question. As understand Peters, this your first marriage and you have not remarried since Mrs. PETERS. That correct. Senator PERCY. Mrs. Peters, we thank you very much for appear ing here today and your testimony certainly will be of assistance to this subcommittee in its deliberations about this entire matter and in our deliberations about what changes are needed both in the law and the administration of this program. We appreciate it. Mrs. PETERS. Thank you. Senator NUNN. Mr. Edmund Schoessner? Would you come for ward, Mr. Schoessner you will, hold up your right hand and take the oath before you take your seat. Do you solemnly swear that the testimony you are about to give to this subcommittee will be the truth, the whole truth,, and nothing but the truth, so help you God
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TESTIMONY
OF EDMUND SCHOESSNER,
VAN NUYS, CALIF.
Senator NUNN. Mr. Schoessner, have a seat. Under the Bules of Procedure for the Permanent Subcommittee on Investigations, your attorney may be present during your testimony. Do you have an attorney present with you this morning ? Mr. SCHOESSNER. No, don't. Senator NUNN. Do you have an attorney engaged to represent you in this particular matter ? Mr. SCHOESSNER. No. Senator NUNN. Do you understand that you do have that right and that if you want an attorney here this morning, you will be able to have one ? Mr. SCHOESSNER. Yes, waive counsel. Senator NUNN. You what ? Mr. SCHOESSNER. waive counsel ; don't need counsel. Senator NUNN. You do waive counsel and do not need an attorney here this morning in your opinion ? That was a question. You do waive
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Yes, sir; do waive counsel. SCHOESSNER. Senator NUNN. Mr. O. A. Dameron, if you would, come forward ? Mr. Schoessner, you can keep your seat. Mr. Dameron, would you please take the oath ? Do you solemnly swear that the testimony you are about to give to this subcommittee will be the truth, the whole truth, and nothing but the truth, so help you God ? Mr. DAMERON. do, sir.
Mr.
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TESTIMONY OF
0.
A. DAMERON, CONSULTANT, TORRANCE, CALIF.
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would like to advise you of your Senator NUNN. Mr. Dameron, rights and obligations as a witness before this subcommittee. First, you have the right not to provide any testimony or information which
may tend to incriminate you. you do so testify, anything you say here may be used against you in any other legal proceeding. Second, you have the right to consult with an attorney prior to answering any questions or any question. Third, under the Rules of Procedure for the Permanent Subcommit tee on Investigations, your attorney may be present during your testimony this morning or in any other appearance before the subcom mittee. Do you have an attorney with you this morning ? Mr. DAMERON. No, sir. waive the right to counsel. Senator NUNN. You understand that you have the right to counsel ? Mr. DAMERON. Yes. Senator NUNN. You understand that counsel could be here with you this morning if you so desire ? Mr. DAMERON. Yes. Senator NUNN. Do you waive your right to counsel ? Mr. DAMERON. Yes, sir ; waive my right to counsel.
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Mr. FELDMAN. Mr. Chairman, thought the order we would follow Mr. Schoessner has a brief prepared statement, which is in the form of an affidavit which he can read. We can run through that fairly quickly. Then we can go Q. and A. on Mr. Schoessner, and then go into an expanded Q. and A. on Mr. Dameron. All of Mr. Dameron's testimony is supported by a lengthy affidavit. think we can cover it through exchanges between the chairman and the ranking minority member and Mr. Dameron, if that is all right. here is
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TESTIMONY
OF EDMUND SCHOESSNER— Resumed
Senator NUNN. Mr. Schoessner, why don't you proceed by giving understand you do have a copy of your any testimony you want. affidavit here.
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SCHOESSNER. Yes. Senator NTJNN. believe your affidavit was given on October 1, 1975, before a notary public in Los Angeles County ? Mr. SCHOESSNER. That is right. Senator NUNN. you would like to share that affidavit with us this morning, we would like for you to do so. Mr. SCHOESSNER. I, Edmund Schoessner, reside at 6206 Lang-don, Van Nuys, Calif., freely and voluntarily make the following statement to LaVern J. Duffy and John Walsh, who have identified themselves to me as members of the staff of the U.S. Senate Permanent Subcom mittee on Investigations of the Committee on Government Operations. No threats, force, or duress has been used to induce me to make this received any promise of immunity from any con statement, nor have sequences which may result from submission of this statement to the aforementioned Senate Permanent Subcommittee on Investigations. am currently employed at SCW Corp., in the San Fernando Valley,
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Calif.
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In the summer of 1972, was employed by Automation Institute of Los Angeles, California, Inc., doing business as West Coast Schools. was vice president in charge of finance. was hired by Fred Peters, whom met due to the fact that he had married my former secretary Ulla Wallin. Fred Peters offered me a salary substantially in excess of what was making then and took the job primarily because of the salary. Shortly after began my employment with Automation Institute, found that the affairs of the school, and particularly the financial matters, were being run in a very haphazard manner. As vice president of finance, had serious questions about the way certain financial transactions were being handled on the books. This went to Pete Fisher, who was matter was so disturbing to me that senior vice president, and discussed the issue with him. Pete Fisher told me not to concern myself with this matter but to go was told by Mr. ahead and make the entries as he had instructed. Fisher not to worry about having to explain the entries or justify them to anyone else. said nothing further about this matter to Mr. Fisher or the other began making notes for top officials of the organization. However, felt the time myself and keeping copies of certain transactions as would come when Mr. Fred Peters, Pete Fisher, Dave Carman, and myself would be questioned about these financial transactions and I wanted to be able to protect myself.
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The first improper cash withdrawal from West Coast Schools that was given came to my attention occurred in October 1972. remember a check for $1,000 drawn on an account of the West Coast Schools at
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the Union Bank in Century City, Calif. was told by Dave Carman to cash this check, obtain 10 $100 bills, remember this transaction specifically and give them to Fred Peters. took the check to because it was the first check drawn on the account. the main office of the Union Bank to cash it and they had to check with the Century City branch. could get the cash. had to wait about an hour before definitely recall that Dave Carman told me the money was for Jim Hoffe of the office of education in San Francisco as they had to give him $1,000 a month. gave the cash to Fred Peters. have been shown by staff members of this subcommittee, check number 102, dated October 25, 1972, for $1,000 payable to cash, drawn on the West Coast Schools division 1 account at the Union Bank, Century City office endorsed by me. identify the check described above as a copy of the check cashed at the Union Bank on October 25, 1972. request that a copy of this check be made a part of the record and filed as exhibit number to my affidavit. Senator NUNN. Without objection, a copy of this check dated Octo ber 25, 1972, will be made part of the record and identified as exhibit
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46.
[The document referred to was marked "Exhibit No. 46" for refer ence and may be found in the files of the subcommittee.] Mr. SCHOESSNER. have been shown a copy of work sheets by staff members of the subcommittee analyzing Group Equities account at the Lincoln Bank located at Van Nuys, Calif., now operating under the name Manufacturers Bank in Van Nuys. identify this work sheet as a work sheet prepared by me. request that this work sheet be made a part of the record and filed as exhibit No. 2 to my affidavit. Senator NUNN. Without objection, this will be made a part of the
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Mr. FELDMAN. Could you identify that work sheet ? Mr. SCHOESSNER. Yes. This is a copy of the work sheet. Senator NUNN. Would you also identify the check that we have
made an exhibit
Mr.
?
Yes. Senator NUNN. The check that has been made an exhibit and the work sheets are the documents you are referring to, is that correct ? Mr. SCHOESSNER. That is correct, sir. Senator NTTNN. The work sheet without objection will be made exhibit No. 47. [The document referred to was marked "Exhibit No. 47" for reference and may be found in the files of the subcommittee.] Mr. SCHOESSNER. This work sheet was prepared by me when was employed by West Coast Schools to determine just how much money in the Group Equities account actually represented money belong Equities and how much represented West Coast ing to Group Schools' money which had been deposited in the account to make it unavailable to the creditors of West Coast Schools. These work sheets show the account was opened July 1, 1972, with deposits of $50 each from Fred Peters, Pete Fisher, Dave Carman and SCHOESSNER.
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63-570 — 76
7
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Ed Tpkeshi.
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believe this represented their investment in Group never saw the corporate books of Group Equities, although Equities. Group Equities had two sources of income; one was from fees paid by lending institutions handling the collection of interest and principal payments of guaranteed student loans sold by the school to them. The other was from fees paid by schools to Group Equities for helping them prepare applications for Government grants. In reviewing this work sheet, see two entries, one dated Novem
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ber 29, 1972, and one between January 5 and January 15, 1973, each for $1,000 cash for Dan Dameron. recall these entries which were made by me and they represented checks on the Group account at the Lincoln Bank in Van Nuys, Calif., and made out to me and given
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by David Carman. took these checks on two separate occasions to the Fidelity Sav had an account. cashed the checks and each ings and Loan where time received 10 $100 bills and each time gave the cash to David Car man. was told by David Carman this money was for Jim Hoffe and that Dan Dameron was to carry the cash to him. This disturbed me and this is why made these notes on the work sheet and why kept other notes on these transactions. would like to relate an incident that occurred during October or November of 1972, when the auditors of Alexander Grant were audit remember time was of the ing the books of West Coast Schools. essence and we had to have the audit completed in order for West Coast Schools to secure its accreditation. Dave Carman was concerned about certain records falling into the hands of the auditors. In order to prevent this from occurring, Mr. Carman told me to take possession of the records and keep them out of sight of the auditors. took two boxes of records consisting of about 50 files and put them in my garage for about a week. These were files which showed the student had dropped out of school and there was an obligation by the school to make a refund to the student or the holder of the promissory me
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note.
Senator NTTNN. These would have been funds that were already received by the school and yet not completely earned. When a student dropped out of the school, it became an obligation on the part of the school to either reimburse the student or the holder of the note ? Mr. SCHOESSKER. Yes. They would have to refund the unused portion. was employed by West Coast Schools until it closed in May 1973 and for some time thereafter trying to straighten out the tangled finan cial affairs of the organization. [At this point Senator Percy withdrew from the hearing room.]
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[The letter of authority follows
:]
U.S. SENATE, COMMITTEE ON GOVERNMENT OPERATIONS, SENATE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, Washington, D.C. Pursuant to Rule 5 of the Rules of Procedure of the Senate Permanent Sub committee on Investigations of the Committee on Government Operations, per mission is hereby granted for the Chairman, or any member of the Subcom mittee as designated by the Chairman, to conduct hearings in public session, without a quorum of two members for administration of oaths and taking of
91 testimony in connection with Hearings on the Guaranteed Student Loan Pro gram and Other Kelated Financial Assistance Programs Administered by the Department of Health, Education, and Welfare on Monday, November 17, 1975. HENRY M. JACKSON, Chairman. CHARLES H. PERCY, Ranking Minority Member.
Mr. SCHOESSNER. In early June of 1973, auditors of Alexander Grant were again on the scene attempting to conduct another audit. met with Frank Covaro and some of his associates of the Alexander Grant Co. I told Mr. Covaro in confidence about a number of irregu larities which had been going on concerning West Coast Schools.
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recall on one occasion, the audit team wanted to review the rec Equities which were sep Equities and Group ords of Group arate corporations that Peters and his associates had set up. Also, the auditors wanted to review the records of a corporation in Tennessee called WHAM, which had received money from the school. Senator NUNN. Do you know what WHAM stands for? Mr. SCHOESSNER. Yes. There was a corporation in the construction of modular homes. They had the monolithic, consisting of beam and the scaffolds. ramp — how do you call You don't know precisely what those initials stand NUNN. Senator for That was just the name of the corporation WHAM Mr. SCHOESSNER. am sure was only WHAM. believe those are the initials of the in Mr. FELDMANT. Senator, ventor and the president of the corporation. con Mr. WALSH. Yes. The name John Willingham. WHAM traction of the name of the president of the company. Senator NUNN. Go ahead. Mr. SCHOESSNER. Pete Fisher refused to make these records available to the auditors on instructions from Fred Peters. recall when this subject came up, Pete Fisher said he had spoken to Peters who was in Washington, D.C. Fisher told us that Peters was upset with the questions about WHAM, Group Equities, and Group Equities. Further, he said was Peters' decision that the audit team confine their work to the audited statements. The audit team could trace June 30, 1972, balances and that was all. Mr. Covaro asked that was as far as the audit team could go. Fisher said the audit could go no further. Covaro in disgust said that was unsatisfactory and there was no point in continuing the discussion and he left. Later that same day in June 1973, met with Mr. Covaro and a Mr. Landis at restaurant and agreed to furnish them with certain documents and additional information of irregularities relating to Fred Peters and his associates. Another incident would like to relate here. remember being in the office of Fred Peters when he told me about cashing a check and suitcase full of cash. obtaining was just thought at the time few days later Pete Fisher's secretary another tale by Peters until bank statement showing a $290,000 check made out to brought me cash that had been drawn on the Union Bank account at Century City,
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The check was cashed at Union Bank. It is significant to note that the West Coast Schools closed on May 24, 1973, and the $290,000 check drawn to cash was dated May 22, 1973, and cashed the same day. After my meeting with Mr. Covaro and Mr. Landis, it was my un derstanding they were going to report what told them to the proper officials. expected to be contacted by HEW or the FBI concerning this matter. However, no one ever called me about West Coast Schools until was contacted by Andrew Ewing of the Los An July 1975, when geles County District Attorney's Office and John Walsh of the Senate Investigations Committee. have read the foregoing statement and it is true and accurate to my best recollection and belief. Senator NTJNN. Thank you very much, Mr. Schoessner. We have several questions here. Mr. Schoessner, we have corroborative evidence from Covaro of the Alexander Grant accounting firm that you did supply him with in formation on irregularities and misuse of funds of West Coast Schools. We have further evidence that we will place in the record that the Alexander Grant & Co., both by letter and by telephone, had advised top officials of HEW concerning these matters as early as June 1973. Could you explain to us, or give your opinion why no one from TV or the FBI contacted you concerning this matter ? understand they did not contact you and still have not. Mr. SCHOESSNER. Not as yet. am at a loss. don't know why not. As a matter of fact, when secured the other position again and told them where came from, my present boss told me you might be in court for 5 years. But don't why anybody, why nobody asked me any questions about it. Senator NUNN. After 2 years elapsed understand you were con tacted first on this matter by members of our subcommittee investigat ing staff. Is that correct ? Mr. SCHOESSNER. That is right.
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Senator NDNN.
Mr.
In July
1975
?
The first one asking me was Mr. Ewing from the district attorney's office. think they had a separate investigation. After talked with Mr. Ewing, he introduced me to Mr. Walsh. Senator Nuxx. You talked to Mr. Ewing first? Mr. SCHOESSNER. Yes. Senator NUNN. On page 3 of your statement you refer to a work sheet you prepared showing you cashed two separate checks for $1,000 each at the Lincoln Bank in Van Nuys, Calif., and turned over the cash to David Carman. According to your testimony, Carman told you that this money was paid to Jim Hoffe; that Dan Dameron was the party that trans mitted or was to transmit the cash to Hoffe. Is that correct? SCHOESSNER.
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Mr.
SCHOESSNER.
That is correct.
Senator NUNN. When you were told this, had cash already been transferred ? Were you being told after the fact or were you told that this was what was supposed to happen in the future ? Mr. SCHOESSNER. knew already when cashed the check.
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Senator NUNN. But this was the plan. This was what was sup posed to happen. Is that right ?
Mr.
SCHOESSNER. Yes ; that is right. Senator NUNN. We will have the staff show you a copy of a check dated November 28, 1972, drawn on the Lincoln Bank, made payable to you, and ask you to identify this check. Is this one of the checks you referred to in your work sheets whereby you obtained 10 $100 bills and turned the cash over to Dave Carman ? Mr. SCHOESSNER. That is correct ; that is one of the checks. Senator NUNN. For transmittal to Dan Dameron, who allegedly gave the cash to Jim Hoff e ? Mr. SCHOESSNER. That is correct. Senator NUNN. You do identify this check ? Mr. SCHOESSNER. do identify it. Senator NUNN. That will be made exhibit No. 48. [The document referred to was marked "Exhibit No. 48" for ref erence and may be found in the files of the subcommittee.] Senator NUNN. Did you on any occasion cash a check from corporate funds and hand over the cash to Dan Dameron for transmittal to Jim
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Hoffe? Mr. SCHOESSNER.
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do believe On one occasion gave it to Mr. Dameron directly. But it was in the presence of Mr. Carman. Senator NUNN. It was in his presence ? Mr. SCHOESSNER. Yes. Senator NUNN. You cashed the check and handed it over to Mr. Dameron in the presence of Mr. Carman ?
Mr.
SCHOESSNER.
Mr.
SCHOESSNER.
That is correct.
Senator NUNN. Where did this take place
?
That was at the office at the school. Senator NUNN. Mr. Schoessner, I hand you a copy of a document with handwritten figures on it. Would you examine the document and tell us if it was prepared by you and what it signifies ? Mr. SCHOESSNER. Yes. This document was prepared by me and this lists certain airline ticket numbers on Pacific Southwest Airlines, PSA, from Los Angeles to San Francisco. This shows which tickets were used to transmit on three
Francisco.
Senator NUNN.
Mr.
different occasions
How many trips does it show
It
$1,000
to San
?
shows six trips, but three occasions. Senator NUNN. Six trips on how many occasions ? Mr. SCHOESSNER. On three occasions $1,000. Senator NUNN. It shows six trips and it shows three occasions where $1,000 was taken? Mr. SCHOESSNER. Was taken to San Francisco. Senator NUNN. By whom ? SCHOESSNER.
By Mr. Dameron. it show to whom these funds were to go? Mr. SCHOESSNER. No ; it did not show where those funds did go to. But these are the dates when I cashed those checks and if you relate — let's see one here. There is a check dated November 28, for $1,000, and I cashed the check on November 29, the trip to San Francisco was on November 29. It definitely relates to the one incident for this Mr.
SCHOESSNER.
Senator NUNN. Does
trip.
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Senator NUNN. You are saying that these two documents bring you to what conclusion about these trips and the money ? Mr. SCHOESSNER. Actually the money was carried to San Francisco. Senator NUNN. By whom ?
Mr.
By Mr. Dameron.
SCHOESSNER.
Senator NUNN. To
be delivered to be delivered,
Mr. SCHOESSNER. To to Mr. Jim Hoffe.
whom?
I was told, they are to be delivered
Senator NUNN. Do you have the dates of those trips, or does the rec ord reflect those dates ? Mr. SCHOESSNER. Yes. They are always around the first of the month, November 29. Senator NUNN. Could you read those dates for us into the record ? Mr. SCHOESSNER. OK. November 29, 1972; December 7, 1972; and
January
10, 1972.
Senator NUNN. Each trip this corresponded with when you cashed checks and delivered cash ? Mr. SCHOESSNER. That is right. Senator NUNN. Did you turn the cash over to Mr. Carman on each occasion
Mr.
?
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or twice to Mr. Carman. That could which do not have the record. Once gave them to Mr. Dameron directly. Senator NUNN. Which you just referred to ? Mr. FELDMAN. Why did you keep this document ? Mr. SCHOESSNER. 1 kept this document, first of all the checks were made payable in my name. had to cash them. Should the IRS ever ask me about who got $3,000 or $4,000 from, would have told them that is what had to do. Senator NUNN. You wanted to show cash in, but you also wanted to show cash out ? Mr. SCHOESSNER. That is right, because how would explain $4,000 in a lump sum ? Senator NUNN. think that was very wise. The subcommittee staff has obtained a sworn affidavit from Karen Steen, dated October 28, 1975. Her affidavit will be filed as an exhibit for reference at this point in the record as exhibit No. Mr. FELDMAN. The one before will be 49 — Mr. Schoessner's notes. The Karen Steen affidavit will be exhibit No. 50. Senator NUNN. Without objection, the document will be made ex SCHOESSNER. gave them once have been the one transaction, of
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hibit
49.
[The document referred to was marked "Exhibit No. 49" for ref erence and may be found in the files of the subcommittee.] understand the staff has gone over her affidavit Senator NUNN. with you and you are able to corroborate and elaborate on a number of points she made. At this point the affidavit will be admitted to the record. Will you show him the affidavit so he could identify it? Have you seen that affidavit ? Mr. SCHOESSNER. Yes ; have seen that affidavit. Senator NUNN. You have looked over that affidavit with the sub
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committee staff?
Mr.
SCHOESSNER.
Yes.
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Senator NUNN. That will be made a part of the record without ob jection as exhibit No. 50. [The document referred to was marked "Exhibit No. 50" for ref erence and follows :] EXHIBIT No.
50
AFFIDAVIT OF KAREN STEEN
I, KAREN STEEN, declare that the following is true and correct to the best of my memory. was employed by the West Coast Schools on July 5, 1972, in the capacity of an assistant to the financial vice-president. I was hired by a Mr. Zoltan have had Pongracz. My duties were to be the supervisor of accounts receivable. previous background and experience as a bookkeeper as I worked for a certified public accounting firm of Alexander Grant & Company, prior to my employment with West Coast Schools. I was hired at the rate of $850.00 and received no re muneration other than the aforementioned salary. My parking was paid for and if worked any overtime was paid at an hourly rate of one and one-half times per hour. This hourly rate was computed upon the monthly base divided by received no other remuneration or pay of any kind other than monthly hours. the aforementioned salary, parking and overtime. Late in 1972, Mr. Pongracz was replaced by Mr. Ed Schoessner. Mr. Schoessner advised me that I would eventually become controller of the company but first was to assist him while in training for the aforementioned position of controller. Prior to Mr. Pongracz' leaving the company, he advised me personally that he had personal knowledge that could "hang the company." Mr. Pongracz did not go any further than that nor did I inquire as to what the information was. was taken to lunch Sometime after my employment with West Coast Schools, by an employee named Ralph Collela. At that luncheon, he informed me as to some unusual activities that were taking place at this School, for example : Mr. Car mine, an executive of West Coast Schools, had a boat (later I heard that that boat had been stolen ) , and that repairs were made on the boat at the East Los was further informed that Mr. Car Angeles School and charged to the School. mine had installed air conditioning and put carpeting in his home and charged the repairs and maintenance to a School. believe this was accomplished as the School was also in the process of redecoration or some construction and charges were made to that School. was warned at that point that if this, or any of these matters, were discovered by the auditors, would be in a great deal of trouble as was the only one who would tell them. On another occasion, Mr. Carmine bawled me out in front of the staff because of missing files. I later found that these files had been pulled and hidden was told at this occasion by Mr. to prevent the auditors from looking at them. Collela that if I revealed this to the auditors again, I would "be in a lot of was called by a student in regard to the fact that trouble." Another occasion, she had been sent notice requesting payment of her tuition by the lending insti tution and that she had in fact attended school for only a short time. Her file was missing and looked for days and days to locate it. When finally located the file, her attendance record reflected she had a genuine, bona fide, legitimate com plaint and had in fact only been at the institution for several days. On another occasion, West Coast Schools was to be visited by the accreditation investigating committee. When the aforementioned committee left a particular School that it was investigating, the administrator of the School would call Mr. Schoessner or myself and advise us as to which students the investigating committee had re quested information concerning and that Mr. Schoessner or myself would update the files in order to have the files meet the standards of the accrediting committee. We would check the files and based upon information provided us, would update the students' attendance records. In regard to the aforementioned boat belonging to Mr. Carmine, I was advised one afternoon by someone that the boat had been stolen. later mentioned this fact to Mr. Schoessner and surmised from Mr. Schoessner's response that the boat had in fact been taken to Mexico to be hidden and was not really stolen. Mr. Schoessner indicated that the boat was moved pur suant to instructions from Messrs. Carmine, Peters, Fisher and Collela. During the course of my employment, I felt that my phone calls were being intercepted and/or monitored. recall one particular occasion Mr. Schoessner
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96 made a telephone call to Mr. Fred Peters, and in the course of that conversation Mr. Carmine went into Mr. Schoessuer's office in what appeared to be a highly emotional state and told Mr. Schoessner he never wanted him (Mr. Schoessner) to speak directly to Mr. Fred Peters again. It would seem clear that the only way Mr. Carmine would have had knowledge as to this phone call would be through telephonic intercept or monitoring. During the course of my employment with West Coast Schools, I received telephone calls in regard to checks written on West Coast Schools' accounts that had been returned for nonsufficient funds and even had bill collectors call me in regard to the financial condition of the School. For example, at one point the School was overdrawn in the amount of approxi mately $180,000 Security Pacific National Bank went so far as to cancel the
School's account. On many occasions, was asked by students as to interpretation of School policy. Mr. Carmine made various interpretations as to the contract between the students and the School. I believe many of Mr. Carmine's interpretations to have been incorrect and the net result was the students were treated unfairly. Some of the names of my fellow employees at West Coast Schools are : Fred Peters, also had known as Fred Lavern Braneff. Mr. Peters was an executive of some kind. little connection with him as he moved to an office at the One Wilshire Building, as did a Mr. Peter Fisher, another executive with West Coast School. At one point in time, believe a Ms. Ruth Reed, also known as June Lindly, was Mr. Fisher's secretary. Other employees' names are as follows : Carol Wiender ; Karen Whyler ; Gay McCollum ; Marilyn Donacheck ; I believe the four aforementioned ladies to have been employed with West Coast School in the capacity of secretaries. I was greatly confused and upset by what had heard was going on with the finally decided that School. would no longer be able to work for the School but was advised of endorsements of government checks for student loans over to a company of which Mr. Carmine was president. I believe the company's name Equities, but of this I am not sure. At any rate, a bank account was Group was opened with Lincoln Federal Savings and Loan and a deposit made in that bank in the San Fernando Valley Branch. The day after the account was opened, the bank called and asked that the account be closed and the deposit removed in that they felt the account was illegal. At this point in time, I felt that I had no alternative but to leave the company and begin to look for alternate employment. In the course of discussing alternate employment with various agencies, I believe that my telephone conversations were once again monitered. Shortly after nay conversation with Lincoln Federal Savings and Loan and decision to find alter nate employment, I called Mr. Robert Santa Cruz. Mr. Santa Cruz is employed by Alexander Grant and Company, the certified public accounting firm that was con ducting the audit of West Coast Schools. advised Mr. Santa Cruz about the boat situation, about what had heard as to carpeting, air conditioning, remodeling, missing files, bank account indiscretions, and the fact that was very disturbed about it. did this because felt an allegiance and loyalty to Alexander Grant and Company as a former employee and wanted to make sure that they were not hurt because of the audit. I waited to have this conversation with Mr. Santa Crnz partially because I wasn't sure as to what was going on with West Coast Schools and partially because of Mr. Ralph Collela's threats. I was employed with West Coast Schools for approximately eight months, from July of 1972 through January of 1973. I worked at the office at Fifth and Hill Streets building. When I left West Coast Schools, I was physically ill. The pressure of the employment, the constant worry and aggravation of perpetual uncertainty whether or not they were conducting ethical legal business, the inmiendos, threats, the monitoring of telephone calls. the unfair treatment of stu dents took its toll on my health. On several occasions, I was asked to go home from work because I looked pale and unhealthy. I truly and honestly believe that working in that atmosphere made me ill, nervous and tremendously upset. Sometime in early February, 1974, contacted the Department of Health, Edu cation, and Welfare, the San Francisco, California Office, in regard to the nondon't recall the receipt of my W-2 Forms for Federal Income Tax purposes. name of the gentleman with whom I spoke. However, was advised by a recep tionist in the office that this man was in a supervisory capacity with the Depart ment of Health, Education, and Welfare. We discussed the situation and he took my telephone number 'and advised me that the would call back. I have yet to hear from this gentleman. I hope this declaration will be of some service to you. DATED : October 28, 1975. KAREN STEEIST, Declarant.
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97 STATE OF CALIFORNIA, County of Los Angeles, ss: On October 28, 1975, before me, the undersigned, a Notary Public in and for said State and County, personally appeared KAREN STEEN, known to me to be the person whose name is subscribed to the within instrument and acknowledged that she executed same. Witness my hand and official seal. VlVIENNE CONRAD.
Senator NUNN. Are you familiar wtih Karen Steen ? Yes. Karen Steen was employed by West Coast SCHOESSNER. Schools and was my assistant until she quit her job. Senator NUNN. What time frame did that cover? Mr. SCHOESSNER. Miss Steen was hired with me at the same time. So she must have started on July 5, 1972, and think she worked until January or February. Senator NUNN. How long did she work for you ?
Mr.
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Mr.
SCHOESSNER.
Senator NUNN.
Only half
Half
a year.
year ? Mr. SCHOESSNER. That is right. Senator NUNN. What year was this ? Mr. SCHOESSNER. July 1972 to December or January of 1972, Decem ber 1972, January 1973. want to read part of Miss Steen's affidavit and Senator NUNN. will quote from this ask you to comment on this particular part. affidavit : a
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Late in 1972, Mr. Pongracz was replaced by Mr. Ed Schoessner. Mr. Schoessner advised me that would eventually become controller of the company but first was to assist him while in training for the aforementioned position of controller. Prior to Mr. Pongracz leaving the company, he advised me personally that he had personal knowledge that could "hang the company." Mr. Pongracz did not inquire as to what the information was. go any further than that nor did
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Do you have any comment to make on this quote from Miss Steen's affidavit ? Mr. SCHOESSNER. Mr. Pongracz was the comptroller of West Coast Schools and Automation Institute and, of course, he had all the finan cial records. recall distinctly when told Mr. Pongracz— he said he will have to be leaving the school, he will be fired, that Mr. Tokeshi, who was then chairman of the board, grant him — he wanted to talk to Mr. Tokeshi. Mr. Tokeshi and Mr. Pongracz were approximately an hour, or even longer, together. After that session, Mr. Tokeshi came into the execu tive offices of the school and told Mr. Fisher, in my presence, don't know, certainly he wants to bring Dave Carman behind bars. Senator NUNN. Would you repeat that last part ? Mr. SCHOESSNER. Certainly Zoltan Pongracz wants to bring Dave Carman behind bars. didn't go further and Mr. Tokeshi didn't go into it deeper in front of me, but this is all know, is that Mr. Pongracz was discharged. But he was on the payroll, even though he didn't work at the school any more until the end of February and the same salary as he had before. Senator NUNN. He was making the same salary after he left the
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SCHOESSNER. Yes. The only thing he was not at school and he didn't work. Senator NUNN. He didn't have any duties to perform but he was kept on the payroll ?
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Mr.
SCHOESSNER. On the payroll. Senator NUNN. Do you know why he was kept on the payroll ? Did anybody explain that to you ? Mr. SCHOESSNER. No ; this was at the point where didn't ask any questions because didn't get the answers anyhow. Senator NUNN. Did you have any thoughts about why he was kept on the payroll ? Mr. SCHOESSNEH. Of course, had thoughts and made my conclu sions. But, mean, those are my thoughts. thought he must know
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Senator NUNN. On page 3 of Miss Steen's affidavit, she refers to cer tain employees of West Coast Schools. What can you tell us about a woman named Gay McCollum ? Was she in fact an employee ? Mr. SCHOESSNER. No. Mrs. McCollum was not an employee, but think Mrs. McCollum was Mr. Fisher's ex-wife. Senator NUNN. Mr. Pete Fisher's ex-wife ? Mr. SCHOESSNER. Mr. Pete Fisher, who was the senior vice president of West Coast Schools. She lived somewhere in one of the Northern States, Northwestern States, and whenever Mr. Fisher fell in arrears on child support and alimony, he had pressure from courts. They paid out of the funds a check which was charged off as a consulting fee. Senator NUNN. She was being paid as a consultant ?
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SCHOESSNER.
As
a consultant.
Senator NUNN. Did she do anything? Mr. SCHOESSNER. No. This was in effect alimony payments to her. Senator NUNN. This was alimony payments ? Mr. SCHOESSNER. Yes ; because asked how do you want me to charge off alimony payments, and he said charge it to consulting fees. OK, consulting fees. Senator NUNN. Who told you this ? Mr. SCHOKSSNER. Mr. Fisher. Senator NUNN. So Mr. Fisher himself was the one who told you
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Mr.
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Payments. Senator PERCY. Did you report to Mr. Fisher ? Mr. SCHOESSNER. No. Actually, my superior was Mr. Carman, and Mr. Carman came to me and said write a check, and pay his alimony and give him the check for his wife, but keep a record of it. He said to me because want to know exactly how much Fred and Pete rip off so can match them. Senator PERCY. How much Fred and Pete ripoff ? Mr. SCHOESSNER. Yes. This was the conversation, but am sorry, that is what he said. want to know how much Fred Peters, and how much Mr. Fisher are ripping off, so can match the funds. Senator NUNN. He wasn't worried about it being paid improperly, he just wanted to have a corresponding ripoff: is that correct? Mr. SCHOESSNER. That is correct. Senator NUNN. In Miss Steen's affidavit she spells the name of Dave Carman — which we understand is spelled C-a-r-m-a-n — she spelled it C-a-r-m-i-n-e. Mr. SCHOESSNER. That is a mistake. don't think Miss Steen knows how to spell the name. Perhaps she forgot how to spell it. SCHOESSNER.
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Senator NUNN. But the correct spelling C-a-r-m-a-n ?
Mr.
so
far
as you
know is
That is correct.
SCHOESSNER.
Senator NUNN. Do you think Miss Steen is referring to the same Dave Carman even though she spelled it C-a-r-m-i-n-e? Mr. SCHOESSNER. There was only one name in the organization. Senator NUNN. You don't know anybody by the name of C-a-rm-i-n-e that she could be referring to ? Mr. SCHOESSNER. No. Senator NTJNN. will read one other quote from her affidavit and ask you to comment : "I was further informed that Mr. Carmine had in stalled air-conditioning and put carpeting in his home and charged the repairs and maintenance to a school." Do you have any comment on that ? Mr. SCHOESSNER. Yes ; there was a company called Design by Denice redecorating the executive offices of the West Coast Schools this, of course, was a good opportunity for the principals of the schools to get their homes refurnished. The Design by Denice, don't know the lady's last name anymore. Denice was her first name, was actually a friend of Mr. Fisher, and Mr. Fisher came to me and said, you have to pay her a little bit earlier than normal, because she is a friend of mine. said that is fine, but what are all of those things we have here? Carpet, where is that discount carpet ? He said that is for our house. We take the opportunity to refurnish our apartments in Marina Del Eey, and so on. This was all charged off to improvements because the school did buy the carpet for the school itself and the principals took the opportunity to furnish their homes. Senator NTTNN. These are expenses that were basically to refurbish the apartment, the individual property of these four people, Mr. Tokeshi, Mr. Carman, Mr. Peters and Mr. Fisher? They were actually paid by the corporate funds, charged off as if they were made to the
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?
Mr. SCIIOESSNER. That is correct. Senator NUNN. Did Design by Denice work for the school ? Mr. SCHOESSNER. I think she did, a little bit, because there was not much in the office. There was not much to do. Most of the work she did was for the residences. Senator NUNN. But you know for a fact that this work was not done on the school
Mr.
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know for a fact, because there are items on saw in any one of the offices, coffee tables. Senator NUNN. You saw the actual invoices ? Mr. SCHOESSNER. That is correct. Senator NUNN. With whom were you dealing on this? Who asked you to make these payments ? Mr. SCHOESSNER. In this case, so far as Denice was concerned, it was SCHOESSNER.
invoices which
Mr. Fisher.
This
I never
Senator NUNN. Were you ever told by Dave Carman to keep a de tailed record of what Fisher and Peters drew from the corporate ac count so they could not cheat him ? Mr. SCHOESSNER. Yes. Senator NUNN. Mr. Carman told you that ?
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Mr.
SCHOESSNER. Yes. Senator NUNN. Do you remember his words or approximately what
he said
?
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Yes ; think stated it. He said to me, want to know exactly what he and Fred are ripping off so can match it. Senator NUNN. Do you know if Miss Steen received threats from Ralph Collela, and became physically ill ? Mr. SCHOESSNER. One day recall she came back from lunch. She was a little bit late. She was shook up. didn't know what had hap said, "Karen, what is asked her, pened. The next morning she was, the matter?" She told me she had lunch with Ralph Collela and Ralph Collela threatened her because he told her, you have access to the books ; you see the records ; you see invoices. something, if certain misappropriations were to go to Alexander Grant, the auditors of the school, we know that it could only come from you because you are a former employee of Alexander Grant and you had better be careful. You will get in serious trouble if something leaks out from here. Senator NUNN. Who was this Ralph Collela ? Mr. SCHOESSNER. He was the purchasing agent. As a matter of fact, Mr. Carman gave him the title facility manager. Senator NUNN. He worked for the school ?
Mr.
SCHOESSNER.
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Mr.
SCHOESSNER.
For the school.
Senator NUNN. Miss Steen told you that he basically told her that if the Alexander Grant auditing company found out about some of these improprieties, that it would have come from her? Mr. SCHOESSNER. That is right. Senator NUNN. Did he physically threaten her? Did he tell her she would be subject to physical harm ? Mr. SCHOESSNER. That is what she told me. don't know whether it was physical harm or not, but the woman was scared. She wanted to tried to hold her. think it was, couldn't get out as fast as possible. do much in 1 month that she left the company. Senator NUNN. Did she work for you long after this ?
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SCHOESSNER.
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Not too long.
Senator NUNN. How much longer ? Mr. SCHOESSNER. She was working for Mr. Pongracz. Mr. Pongracz left to the end of February, guess. She worked with me directly. wanted her to replace, take Mr. Pongracz' position. She had the quali fications. Then, all of a sudden, she didn't come anymore ; she was sick and she left the company. [At this point Senator Nunn withdrew from the hearing room.] Senator PERCY [presiding]. Mr. Schoessner, you mentioned that you were hired by Fred Peters, whom you had met due to the fact that he had married your former secretary. Mr. SCHOESSNER. Yes. Senator PERCY. Could you tell us what kind of position you had before, what kind of a company where Miss Wallin was your secretary ? Mr. SCHOESSNER. Yes. was the secretary-treasurer of SCW, Inc. It is a newspaper advertising service. We supplied approximately 3,000 newspapers in the United States and Canada, England, with art work to illustrate their display ads. This was the nature of the busi
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Senator PERCY. How did you happen to meet remember the circumstances ?
Mr. Peters; do you
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Mr. SCHOESSNER. Yes. Miss Wallin at this time, Mrs. Peters, had a party and she invited me, of course, to her party. There were quite a few people of the office staff and a lady had a friend, which was Mr.
SCHOESSNER.
That
is
Mr.
1970
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Peters. Senator PERCY. How long had Miss Wallin been your secretary Mr. SCHOESSNER. Since 1964, August 1964. Senator PERCY. That was up until when ? Mr. SCHOESSNER. Up until their marriage. Senator PERCY. That was 1969, was the marriage of Peters so she worked for you or years correct.
is
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Senator PERCY. She has testified before us and obviously the credi bility of her testimony important as relates to her former husband. Could you describe Miss Wallin to us as to her character, her integ rity, what kind of person she was Mr. SCHOESSNER. Of course. Miss Wallin was a very competent sec retary because she had to interpret my letters into proper English. She was also very cheerful lady and liked by every employee in the company. As a matter of fact, she would still be with that company but she afraid, driving the freeways in California, and the company moved from the Los Angeles area far, far out because of the property values.
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little bit less out there. She decided not to work for the They are company anymore. As a matter of fact, prior to this, she was with the don't know many, many years before. president of our company. The president brought Miss Wallin from Chicago to Los Angeles to the company and we were working together. Senator PERCY. Did she describe to you when she advised you that she was marrying Mr. Peters the circumstances and anything about Mr. Peters? will tell you something that she told me, yes. She Mr. SCHOESSNER. called me, as matter of fact, and said my friend wants to marry me. very short time you don't know him. hope you wait said, "It little bit," and Miss Wallin and Fred We met Fred socially, my wife and took some trips and he looked like a fine man. He told us similar stories, also, what he did and he told me about Germany and all of these things. He told us also that he never was married, and he told us also that his finger was chopped off in Korea, and similar stories. But he was a very likeable person at this time. [At this point Senator Nunn entered the hearing room.] Senator PERCY. Did she give the description of him at all and char acterize him at the time she married him or at the time you were offered position and was she the entree to you in being offered the position with Mr. Peters, or did he approach you directly Mr. SCHOESSNER. No. As a matter of fact, she described Mr. Peters before she was married and all she described saw in him also, because what that was. Later on, was already with the school. Mr. Peters himself told me, said he divorce and at this time didn't seeking even call Mrs. Peters because Mr. Peters was extremely jealous. Senator PERCY. He was extremely what Mr. SCHOESSNER. Jealous nobody could talk— no man could talk to his wife — Mrs. Peters. So didn't call her. called friend of Mrs.
102
Peters, and told Mrs. Peters to call me. She also said he had changed completely and he did change. Mr. Peters got more and more nervous; he was tense. He had no time. He couldn't eat anymore. He couldn't do anything at this time. And they sued for divorce. But before this, he was — well, he was a Senator PERCY. Did you know that Mr. Peters had an alias at all at any time? Mr. SCHOESSNER. He told me once, said he had many aliases and knew him then already, and said, "Well, it is one of began to think. his stories." believed and then later when was with the school, said he was a storyteller. You know, Senator, it could be, mean he didn't say this but the way he dropped names, he could have said am Senator Percy. That is the way he dropped the names around. didn't believe any think there was thing, but there might have been some truth to it. quite a bit. Senator PERCY. In your testimony, you have testified that you were directed in your work by others in the company. Could you describe for the subcommittee the direct line of authority and who your immedi ate superiors were and who they reported to ? Mr. SCHOESSNER. My immediate superior was Mr. Carman. Mr. Car man was in charge of all of the schools. So far as school matters were had to report to Carman. Mr. Fisher was in charge of, concerned, think his title was vice president of corporate development. He went out and tried to buy more schools or other enterprises. When he had some financial data, some financial information, he wrote them to me and would have to give a report and evaluate and say it's so and so, don't buy or what would do in the case. Mr. Peters hadn't seen too often because he was in Washington or away from the city and at school briefly. Senator PERCY. The ultimate authority was Mr. Peters
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Mr. SCIIOESSNER. That correct. Senator PERCY. You have testified here that you were requested by, and directed by certain other officers of the company to do these irregu lar acts. What knowledge did you have that Mr. Peters knew about
this?
?
Mr. SCIIOESSNER. Mr. Peters told me, he said he gave Mr. Hoffe money. Senator PERCY. He did what Mr. SCHOESSNER. Mr. Peters told me, he said he gave Mr. Hoffe money.
it
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Senator PERCY. How would you describe Mr. Peters and your char acterization of him as a person as developed in your relationship Senator PERCY. We have used the term that he was
a
?
?
the company Mr. SCHOESSNER. Could you rephrase that question
con man. As ?
a
;
is
that your characterization of him you understand that term, Mr. SCHOESSNER. Yes he was con man. He was an excellent
con
of
:
man because he conned me into taking this position. Senator PERCY. You said in your statement In November of 1972, Dave Carman was concerned about records getting into the hands auditors from the Alexander Grant Co., and you report that you took
Ttwo boxes home.
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"Would
why
files?
you explain in more detail what these files contained
and
Mr. Carman was concerned about the auditors reviewing these
IVIr.
They were files of approximately 50 students. Auditors usually go by a certain sample. They take a certain section of the student files and those who have the refund liability shown on the balance sheet of the school is correct or appears to be correct. they would have found some more files where refunds were due, they would have increased their sample. There were about 50 students where refunds should have been made and Carman said, as soon as we get the new funds, we pay those things off, just take them out of their sight and bring them back as soon as they have left to make the re funds and everything is done. This way the defaulted student loans, of dropouts, where the school was required to pay back to the lender the unused portion or the un earned portion of the loan. Senator PERCY. You told us also that Fred Peters told you about a suitcase full of cash. SCHOESSNER.
If
Mr.
SCHOESSNER.
That is correct.
Senator PERCY. That you first believed this just to be another tale by Peters. Was he in the habit of telling tales that were not true ? didn't know; yes. At this time Mr. SCHOESSNER. Right now, know. But was always a little bit cautious about the big names in had a strange feeling his stories. just couldn't believe it. Somehow always. But for instance, I, myself, didn't believe the Congressional Medal of Honor because would have seen it somewhere in his apart ment on display or somewhere. At least would do it if had it. did believe he did tell us tales about his colorful life. So, yes, Senator PERCY. In an affidavit to the committee, Karen Steen says that you would update files on students to satisfy the accrediting
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Would you actually falsify these records ? Who instructed you to update these files ? Mr. SCHOESSNER. There was no update of files. There was the ac creditation committee to check on the schools. The plan was as fol lows: He goes to School A, and examines some students' records and they would call in the names of the students and we would check to see that all required documents are there such as : Do we have the loan approval ? Just to see that all of the files would be intact. This was actually all that was contained. But there was nothing in the file, the documents were here. All they wanted to see is every single document is in the file pertaining to a particular student there. Senator PERCY. Karen Steen also refers in her affidavit to a boat that belonged to Mr. Carman. Tell us what you know about the boat, why was it moved to Mexico ? Mr. SCHOESSNER. You see, didn't even know to the point until read the affidavit that they had a boat in Mexico. knew that they had a boat and know that the boat was purchased with school funds, cor didn't know. porate funds. But that this boat was stolen, this read this a little bit later. So perhaps somebody must have told Miss Steen about the boat being in Mexico. But yes, they did have the boat which they used for water skiing on Lake Meade. This boat was pur chased through school funds.
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Senator PERCY. Finally, Karen Steen also recalls a point at which West Coast Schools had overdrawn its checking account by $180,000. They had a tremendous cash flow, did they not, from the student loans ? Why didn't West Coast Schools have any money in its account? Mr. SCHOESSNER. They drew it out faster than it came in. This was a very simple thing. Yes. The West Coast Schools was overdrawn by $180,000.
Senator PERCY. Didn't it amaze you that HEW, who has the admin istrative responsibility for this program, did not actually contact you as the financial officer of the school and that you were really not con tacted until Andy Ewing of the Los Angeles County District Attor ney's Office. John Walsh of this subcommittee actually contacted you ? Mr. SCHOESSNER. That is correct. was amazed by it because my sig nature was on the signature cards at any bank for the school. figured was everybody would be the first one talking to me, especially since the last one. Senator PERCY. Did it bother you that you had this information and knowledge that could have revealed corruption and yet, no one seemed
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Mr.
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This proves one point that Mr. Carman and Mr. Peters were the ones talking just before the school closed, where they said HEW is such a mess, they won't even know what hit them. Senator NUNN. Would you repeat that ? Mr. SCHOESSNER. Mr. Carman and Mr. Peters were talking and said we are getting now into trouble. said it is time to run, for you two fellows, without kidding about it. Mr. Peters said HEW is in such a mess, they don't even know what is going to hit them. Senator PERCY. What other ripoffs did you keep a record of from Mr. Fisher? Mr. SCHOESSNER. That is all. Senator PERCY. This is all ? Mr. SCHOESSNER. Yes. mean that is all, they had the house, the apartments furnished, and they also had some expense accounts. So a fellow made a trip to Houston and they also had to go to Chicago and so forth. Senator PERCY. Were there any other cash payments to anyone else besides Hoff e and did you have cause to question any of them ? Mr. SCHOESSNER. didn't even question the payment to Mr. Hoffe. Senator PERCY. Were there any other cash payments ? Mr. SCHOESSNER. There was one where they withdrew close to $300,000 in cash from a different 'account, but these were school funds, presume, because the accounts didn't have any funds from other activities. Senator PERCY. Do you know where that went ? Mr. SCHOESSNER. don't know where it went ; but Mr. Peters told me it went to the Van Nuys Airport and chartered a small plane, with a brief case full of cash. He never had that much cash in his hand and he didn't even tell the directions where he would go. He was in the air and flight was in this direction because he was afraid somebody might take it away from him. Mr. FELDMAN. We are going to trace that one as we go on with these hearings, Senator Percy. We have subpenaed records. We will get into that. SCHOESSNER.
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Senator PERCY. Mrs. Peters mentioned that her former husband on did not drop names, but dropped titles occasion name-dropped ; that of people that he was involved in payoffs with. Did he at any time ever, or any other officers, ever mention to you or infer that payoffs were
being
going?
made to public officials in order to keep West Coast Schools
Mr. SCHOESSNER. No. This was not told to me. So far as the names are concerned, when he came back from Washington, he says, well,
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had dinner with Congressman so-and-so, or Senator so-and-so, and believed these were just names he picked. He picked some out of the paper at least that what believed. Senator PERCY. Are there any names that you recall Mr. SCHOESSNER. No, not really. mean, couldn't say many names of Congressmen which know from the paper, but don't know that the — well, wouldn't recall a specific name. Senator PERCY. We do not want to take any hearsay statements here. We won't press you further on that. want to thank you, very much indeed, for your testimony today. Senator NUNN. Mr. Schoessner, we would like for you to remain there, you would. We will be asking Mr. Dameron good many ques tions. you need to leave, come back. We would be glad to give you brief recess at this time. We would like for you to remain there while !Mr. Dameron testifying. is
a
If
Mr.
SCHOESSNER.
OK.
TESTIMONY OF
0.
A. DAMERON—
Resumed
63-570
— 76
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Senator NUNN. Mr. Dameron, we appreciate your being with us rather detailed analysis of today. The subcommittee has given me their conversations with you and your cooperation. understand that you did make a sworn statement in the form of a deposition in Los Angeles, Calif., to the subcommittee staff, on Sep tember 22, 1975. Is that correct? Mr. DAMERON. Yes, sir, that correct. Senator NUNN. The subject of that deposition was your involve ment in West Coast Schools and other related matters Mr. DAMERON. Correct. Senator NUNN. At that time, did the subcommittee staff give you complete analysis of your right to counsel, that you could have a lawyer there at that time Did they tell you that Mr. DAMERON. Yes. spoke to, initially, a Mr. Moss and Mr. Walsh. later had the right to counsel. They both independently told me met Mr. Duffy and he in turn told me and then talked also to Mr. Vigen. He was present when was mentioned. So was well-advised. Senator NUNN. You were well-advised you had right to counsel before that deposition was given? Mr. DAMERON. Yes. Senator NUNN. You understand this morning, we have already been over that you have right to counsel now Mr. DAMERON. Yes. Senator NUNN. You have been very cooperative witness so far as our subcommittee staff tells me, and you have been of great assistance during the course of this investigation. know you spent lot of hours
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soul searching before you arrived at your decision to cooperate with this subcommittee. commend you for your cooperation. It is difficult to come forward in a situation like this, particularly when you have been personally involved in possible improprieties ; but you have indicated to the subcommittee staff that you regret any mistakes you may have made. You also advised the staff that since you made a full disclosure to them, you have felt a great sense of relief for the first time in 2 years. It is our understanding that your wife has also suffered physically from carrying this part of her burden and that she encouraged you to cooperate with this subcommittee. want to commend you. certainly will strongly urge Federal prosecutors to review your testimony if there is any prosecution of anyone involved in this, and to take into consideration your cooperation with this subcommittee and that they give vou every con sideration, based on your cooperation, as well as other factors. Your 25-page sworn deposition given to the subcommittee, dated September 22, 1975, will be printed in the record following your testi mony here today. Mr. FELDMAN. Mr. Chairman, would also like to state for tlie record and make it clear that Mr. Dameron is not testifying under any grant of immunity before this subcommittee. Senator NUNN. Mr. Dameron, you understand that ? Mr. DAMERON. Yes. Senator NUNN. There has been no immunity granted here, and that your testifying is strictly on your Mr. DAMERON. Definitely on my own, understand. Senator NUNN. Senator Percy and will have quite a few questions. will anticipate what we will do is continue until we complete your testimony without taking a lunch break, if that is satisfactory with Senator Percy. We will have one other witness after lunch. You have been sitting there quite a while. don't want any of you to be uncomfortable. Do any of you need to take a brief recess ? Mr. DAMERON. am fine.
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Senator NUNN. Mr. Dameron, a review of your sworn deposition indicates that in February 1959, you went to work for the Atlas Em ployment Agency in Los Angeles which later started another agency in conjunction with Atlas, called the Jane Arden Employment Agency. Is that correct ?
Mr. DAMERON. That is correct. Senator NUNN. Did you become manager in December
1962, when both organizations were under a common ownership ? became manager of the Jane Arden Agency. Mr. DAMERON. Senator NUNN. You were the manager of the Jane Arden Agency ? Mr. DAMERON. Yes.
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Senator NUNN. Did you work from 1959 through 1971 for this organization ? Senator NUNN. In July 1971, did you go to work for Automation Institute, an accredited trade school in Los Angeles specializing in computer programing ? Mr. DAMERON. Yes.
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Senator NUNN. Was the president of the company Mr. Edward Tosheki? Mr. DAMERON. Yes, sir. He was the president and chairman of the board. Senator NUNN. At that time, was Mr. Fred Peters the vice president ?
Mr. DAMERON. He was the vice president. Senator NUNN. Did Mr. Fred Peters hire you ? Mr. DAMERON. Yes. Senator NUNN. Automation Institute, in addition to being involved in the guaranteed student loan program, also had other sources of
HEW
income;
namely, the national defense student loan and college
work study programs.
In order to receive grants under these programs, schools such as Automation Institute must make out an application for HEW grant money to the regional office of HEW in San Francisco. Is that correct ? Mr. DAMERON. That is correct.
Senator NUNN. Was the senior program office in San Francisco, the responsible official for this program, Mr. James Hoffe? Mr. DAMERON. James Hoffe. Senator NUNN. That is correct ? Mr. DAMERON. That is correct. Senator NUNN. In October or November of 1971, did Fred Peters negotiate the purchase of five West Coast Schools and the organization from that time on became known as Automation Institute, Inc., doing business as West Coast Schools ? would like to correct Mr. DAMERON. That is substantially correct. just a little bit. The schools they purchased were named West Coast Trade Schools and they didn't immediately combine all the schools. So a few months elapsed, then they named all of them West Coast Schools. From then on, it was Automation Institute Inc., doing business as West Coast Schools. Senator NUNN. As your deposition shows, you admit, believe, to having made payments or payoffs to Mr. Jim Hoffe, the senior pro gram officer of HEW in San Francisco. Is that correct ? Mr. DAMERON. That is correct, sir. Senator NUNN. Were these payments to Mr. Hoffe for his assistance in preparing the application for HEW money grants such as national defense student loans and college work study programs that were processed through his own office of HEW in San Francisco? Mr. DAMERON. Yes. That is correct. Senator NUNN. Before we get into details of these payments, was it arranged that Mr. Hoffe would be paid through a separate corporation called Group Equities, which performed a consultive service to assist clients such as vocational schools to prepare applications for HEW grant moneys that were to be processed to Mr. Hoffe's office? Mr. DAMERON. In essence; however, will have to defer, think to Ed here, Mr. Schoessner because don't know specifically what accounts these were drawn on. Group Equities was supposedly the company that was handling the consulting, but as to whether the Equities, money may have come from West Coast or from Group don't happen to know. Senator NUNN. We have already covered some of that this morning. We will get back to that if necessary.
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In the fall of 1972, you went to San Francisco and met with Mr. Hoffe when this deal with him was first conceived. Is that correct?
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Mr. DAMERON. That is correct. Senator NTTNN. Would you tell us the details concerning this trip to San Francisco in the fall of 1972 ? Mr. DAMERON. Mr. Peters, Mr. Carman, and myself went to San purchased tickets, airplane Francisco; Mr. Peters had arranged tickets on PSA. We checked into the Del Webb Town House, which small hotel on Market and Eighth Street in San Francisco, very
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near to the Federal building. Shortly after we arrived and checked into our room— we had one room; there was no plan to stay overnight. We didn't, and shortly believe had after we arrived, Mr. Hoffe then came into the room been called by Mr. Peters. Mr. Peters then approached him with the idea of putting him on think he referred to whatever consultant basis, retainer basis, call the way Mr. Peters phrased so believe that as consulting fee, much month to assist in many ways on helping to prepare these ap plications and to help in any way that we could to get the applications
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through. The amount agreed upon for the monthly payment was $1,000, which relates to the $1,000 that has been discussed here previously by Mr. Schoessner. The final arrangements were not really totally ironed out that particular day. believe he was there to con Mr. Hoffe later was in Los Angeles duct seminar, official HEW business of some type during the day. This week, let me say approximately days after we were in San Francisco discussed this with him. minute to the San Francisco Senator NUNN. Let us back up just It more precisely was in the fall of 1972. Can you pinpoint trip. Mr. DAMERON. October sometime. It remotely possible could have been the latter part of September; but because of other dates which shall come out, think can safely say October. was either the latter part of Septem Senator NUNN. You think ber or sometime during October? Mr. DAMERON. Yes, sir. Senator NUNN . Who was on that trip with you Mr. DAMERON. Fred Peters, Dave Carman, and myself. Senator NUNN. Mr. Peters bought the airplane tickets Mr. DAMERON. Yes. Senator NUNN. You checked into what hotel in San Francisco Mr. DAMERON. Del Webb Town House was called at that time. It on the corner of Eighth and Market. It now just called the "Town House." Senator NUNN. Did you spend that night there? Mr. DAMERON. No, sir, we didn't. Senator NUNN. You checked in at what time of the day, in the morning or afternoon Mr. DAMERON. It was in the morning. would say we arrived in downtown San Francisco approximately 10:30 a.m., something like that. Senator NTTNN. You went directly to the hotel Mr. DAMERON. Yes. We took cab from the airport to the hotel.
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Senator NUNN. You checked in and you had one room more or
to use for meetings that
Mr. DAMERON.
day
less
?
That is right.
Senator NUNN. So you had no intention of spending the night
Mr.
DAMERON. No.
Mr.
DAMERON. Yes.
Mr.
DAMERON.
?
Senator NUNN. Did you, in fact, return to Los Angeles that night
?
Senator NUNN. All three of you ?
All three.
Senator NUNN. What was your first contact with Mr. James Hoffe ? IMd someone call him on the telephone ? How did he know to come to that particular hotel, do you know ? Mr. DAMERON. don't know how the arrangements were made. assume Mr. Peters had spoken to him and said we will be up to meet was trying to think a •with you at such and such a place. Frankly, moment ago. can't recall whether Mr. Peters called from the room to verify the fact that we were in town. He may even have done this. cannot factually say that this was done. Senator NUNN. But you do recall going to the room, all three of
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Mr. DAMERON. Definitely,
yes.
Senator NUNN. Did Mr. Hoffe join you after you got to the room or was he already there ? Mr. DAMERON. No. He joined us shortly after we arrived. Senator NUNN. Did you go anywhere before Mr. Hoffe arrived ? Mr. DAMERON. No. We just waited there for Mr. Hoffe. Senator NUNN. Is that the first time you ever met Mr. Hoffe ? Mr. DAMERON. No. had met him, believe twice before, both times at the school. He was down on the weekend one time and the school happened to be open on Saturday at that time. So went down to do a little catch-up work. Mr. Peters introduced me to Mr. Hoffe. Then part of my responsibility to the school was to attend seminars conducted by HEW. met Mr. Hoffe at a seminar at UCLA, as recall. Senator NUNN. So you had met him a couple of times before ? Mr. DAMERON. had met him a couple of times prior to this. Senator NUNN. Did most of the discussion about the consultant ar rangement take place in the room or did you go to lunch ? Mr. DAMERON. The discussion per se took place in the room. We did go to lunch, but we stayed in the hotel in the coffee shop. It is a rather public place and under the circumstances, it was social conversation rather than discussing the other matter. Senator NUNN. Who initiated the conversation regarding consultant
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Mr. DAMERON. Mr. Peters. Senator NUNN. Mr. Peters ? Mr. DAMERON. Mr. Peters. Senator PERCY. Mr. Chairman, before we get into that conversa have a question. Mr. Dameron, while you were waiting for tion, Mr. Hoffe to come into the room, was there any prior conversation among the three of you? Did Mr. Peters lay out your strategy? How did he describe what the purpose of the meeting was ? Did you all de
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cide what you were going to do ahead of time ? Were you notified as to what the purpose of that meeting was ? Mr. DAMERON. was told in general, think that is the best choice of words, that they were going to try to work out some arrangement. It was pretty much put this way. The reason that was taken along, apparently, was because was going to be the one that would be con tacting and flying back and forth and things like this. think they wanted Mr. Hoffe, who didn't know me very well at think they the time, as know, he had met me a couple of times. wanted him to realize that knew what was going on so he would not be adverse to having me Senator PERCY. When you say you would be the contact man, does that mean to transfer information or pass cash ? Mr. DAMERON. Both, both information and cash ; yes, sir. Senator PERCY. Thank you. Senator NUNN. At the time you initiated the discussion then you had a general idea about what was going to take place, but you weren't told specifically ?
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Mr. DAMERON. That is correct. Senator NUNN. What did Mr. Peters say to Mr. Hoffe
call approximately what he said
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?
Do you re
Mr. DAMERON. In effect, as said, he said something about he would like to have Mr. Hoffe work as a consultant. You can help us out a great deal on these things, with your expertise of the programs and Dan will be working with you to help gather the information you need, to make the applications. Senator NUNN. You say Dan. Is that your nickname? Mr. DAMERON. Right; yes, sir. So this was pretty much the way it was arranged. Mr. Hoffe, if am not jumping ahead too far, when he came down to Los Angeles just a few days later to work out the final arrangements on how the payments were to be handled Senator NUNN. We will get into that meeting in just a moment. What was Mr. Hoffe's response to Mr. Peters' overture of a con sultant arrangement? Mr. DAMERON. can't swear to this, but sort of had the feeling that perhaps it had been discussed a little bit earlier or maybe sort of hinted around at or something. In other words, perhaps to rephrase that, what am trying to say is he did not seem extremely surprised. Senator NUNN. He did not seem like this was the firet time he had ever heard of such a possibility ? Mr. DAMERON. Right. Senator NUNN. You don't recall any specific words he used or any thing he said or any comment he made ? Mr. DAMERON. You are speaking of Mr. Hoffe now ? Senator NUNN. Yes, Mr. Hoffe. Mr. DAMERON. He seemed to feel that private schools per se were not getting a fair shake in the money market from HEW, the public schools were better equipped to prepare the applications, things like this. He said in addition to being nice. guess meaning the money part, this could be very, very beneficial to a lot of these small private schools that don't have the staff or the knowledge or the knowhow to put together a good application.
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Ill Senator NUNN. By this, you indicate that he meant the consulting arrangement would be beneficial to private schools? Mr. DAMERON. Yes. Senator NUNN. Did Mr. Carman take pa it in this conversation ? Mr. DAMERON. Yes, he did. Senator NUNN. What did he say ? Mr. DAMERON. He didn't say a great deal; the conversation pri marily was between Mr. Peters and Mr. Fisher. Senator NUNN. Mr. Peters and Mr. ? Mr. DAMERON. Mr. Peters and Mr. Fisher — am sorry. Mr. Hoffe and Mr. Peters. Senator NUNN. Mr. Fisher wasn't there, was he ? Mr. DAMERON. No, he was not. Senator NUNN. You don't remember anything in particular that Mr. Carman said? Mr. DAMERON. No. He was just an observer. Senator NUNN. Did you have any comments to make during the meeting that you remember on this point ? Mr. DAMERON. Very little. Senator NUNN. When you left to go down to lunch, was anything firmed up? Had there been specific amounts of money or anything similar talked about ? Mr. DAMERON. The $1,000 per month had been decided. It was left in sort of a nebulous state whereby at the end of the year, any profits that had been garnered by the company would be split on some arrangement; but that was not determined until later. Senator NUNN. Who made the first mention of the $1,000 a month ? Mr. DAMERON. believe that was Mr. Peters. Senator NUNN. Was that an offer of $1,000 a month? Mr. DAMERON. In a sense, you mean offer. think it was a flat state ment where he said we will pay you $1,000. Senator NUNN. What did Mr. Hoffe say to that? Did he say any thing? Mr. DAMERON. think he said something like OK, and then Mr. Peters said we will work out the details on this a little later on. Senator NUNN. About the splitting of profit ? Mr. DAMERON. Right. Senator NUNN. When you talked about splitting of profits, what corporation was he referring to? Mr. DAMERON. Group Equities. Senator NUNN. Group Equities ? Mr. DAMERON. Right. Senator NUNN. At this initial meeting in San Francisco, is it your recollection that the details of the cash payment to Mr. Hoffe were to be worked out at a subsequent meeting? Mr. DAMERON. Yes. Senator NUNN. As far as the profit splitting is concerned? Mr. DAMERON. Yes. Senator NUNN. But the $1,000 a month was firmed up that day ? Mr. DAMERON. Correct. Senator NUNN. Let us go into the second meeting in Los Angeles. Senator PERCY. Mr. Chairman, could I ask was there any discussion at any time as to a conflict of interest since you had a senior program
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HEW becoming a consultant to one of the participants in the program, or the illegality of it when we all know no Government em
officer of
ployee can accept a gift of over $50 ? You are talking about $1,000 a month. Was there any discussion about the legality of it ? so, how would
that
be
handled
If
?
Mr. DAMERON. Not any great deal of discussion as to the legality of It was stated by Mr. Peters to Mr. Hoffe, of course, you realize that this will have to be paid in cash, and consequently, you shouldn't go around putting it into bank accounts or something like that. Senator NUNN. Mr. Peters said that to Mr. Hoffe ? Mr. DAMERON. Mr. Peters said that to Mr. Hoffe. Senator PERCY. I think that is very important to establish, that at that first meeting, it was pointed out that this will have to be paid in cash. What were the implications ? Mr. DAMERON. That it was wrong to be doing it. Senator PERCY. Therefore, Mr. Peters wanted to make certain that the recipient, Mr. Hoffe, did not enter into any records? Mr. DAMERON. Yes, that is correct. Senator PERCY. Obviously, he did not pay income tax on it ? Mr. DAMERON. I am not aware of that. Senator PERCY. That it should not be entered in any record? Mr. DAMERON. Eight. Senator PERCY. If he paid income tax and put it in the Federal tax return, that is putting it on the record. Mr. DAMERON. Yes. I don't have firsthand knowledge of it. Senator PERCY. He was told not to make any entry of it and it was it.
paid in cash
so there
wouldn't
be any record
?
Mr. DAMERON. That is correct. Senator PERCY. That was understood by everyone there ? Mr. DAMERON. Definitely. Senator PERCY. That clearly was established at that first meeting? Mr. DAMERON. Definitely. Senator PERCY. Thank you. Senator NUNN. Did Mr. Peters state clearly that there was not to be any record kept of it or did he just say it was to be kept for the
cash payment ? Mr. DAMERON. He said it would be paid in cash and that no record, not to put it in the bank or some place where it can be traced. Senator NUNN. Go back over that again. Mr. DAMERON. Don't put it into a bank account or some place where it can be traced. Senator NUNN. Did he mention what the corporation would do with regard to its books on the $1,000 a month payment ? Mr. DAMERON. No, sir. Senator NUNN. He was admonishing Mr. Hoffe not to make any
written record of this ? Mr. DAMERON. Correct. Senator NUNN. Did Mr. Hoffe have anything to say in response? Did he protest that arrangement? Mr. DAMERON. Not to my knowledge. don't recall any protest on that.
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Senator NUNN. Did he specifically say, understand or did he just acquiesce by his demeanor ? Mr. DAMERON. am sorry. That is going back quite a ways ; don't just hate to say something if it isn't true. remember that detail. honestly can't answer that for you. Senator NUNN. You went to lunch that day in the hotel ? Mr. DAMERON. Yes, sir. Senator NUNN. All four of you were present, including Mr. Hoffe ? Mr. DAMERON. Right, at the coffee shop.
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Senator NUNN. Who paid for that lunch? Mr. DAMERON. Mr. Peters. Senator NUNN. Did you discuss anything further along this line
after lunch
?
Mr. DAMERON. Not at lunch, but after lunch. Senator NUNN. What happened after lunch ? Where did you go ? Mr; DAMERON. We went back up to the room again and talked it over. Then it was more or less a matter of how this could work me chanically; in other words, how would we get the information that was necessary to make the applications to Mr. Hoffe and it was de cided would gather the pertinent information, carry it up to him and then also it was set up so that I would have more or less a crash course in preparation of these applications so that I would spend some — I am sorry. That was not arranged that day. That was arranged at a later meeting; but I subsequently did spend the weekend with Mr. Hoffe, more or less on a crash course studying how to fill out these applica
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tions. Senator NUNN. At that first meeting, still in San Francisco, either after lunch or before lunch, at anytime during the day, was it made clear what Mr. Hoffe was to do for the $1,000 per month ? What were his duties in relation to the $1,000 ? Mr. DAMERON. Primarily, he was to either make out, or help make out, once gained a little expertise, the applications for the schools, the West Coast Schools, and for any other schools that were signed up on a client basis with Group Equities, and do anything that he could to help get them through. Senator NUNN. That is the second point wanted to ask you about. Was he simply to make out the applications or to help you or the school to make them out or was it ever mentioned that he would assist after the applications were made out in pursuing those applications ? Mr. DAMERON. Yes. Senator NUNN. In his capacity as Regional Director of HEW? Mr. DAMERON. Yes. Senator NUNN. Expand on that in your own words. don't want to put words in your mouth. You tell us what the understanding was on that. Mr. DAMERON. He had a list of the schools that we were concerned with, that we had applications to make for. He would sort of try to make sure that those went to a particular panel where he had some little bit of control over the panel. Senator NUNN. Where he had what ? Mr. DAMERON. Where he had some control over the panel ; in other words, they were referred to as one panel, but they have many sub
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114 panels. They had three to four people on the subpanels and various HEW people are in charge of one, two, or three of these panels when they are running. So he tried to make it a point to guide those appli cations so they would come across his panel's table as opposed to going across someone else's table. Senator Nuxx. He participated then individually as an HEW official in some of these subpanels. Who made the statement that he would guide the applications to those subpanels? Did Mr. Hoffe make the statement or did Mr. Peters make the statement ? Mr. DAMERON. At that particular time, sir, can't answer. Over a period of time that we worked together on these things, Mr. Hoffe clearly stated a number of times that it was due to his influence that he could get these things through the panels and get a better recom mendation than if we didn't have his assistance. Senator NTTNN. So although you don't recall who said that that day, the understanding that first day in San Francisco was that Mr. Hoffe's duties were not only to help fill out the forms, but also to help guide those forms through the office ? Mr. DAMERON. That is correct, sir. Senator Nuxx. That was a clear understanding between Mr. Peters, Mr. Hoffe, and all of those concerned ? Mr. DAMERON. Definitely. Senator NUNN. But you do not know exactly the words that were spoken and who spoke those words ? Mr. DAMERON. No, sir, don't. Senator Nuxx. Is there anything else we need to know about that first meeting in San Francisco ? think we have covered pretty much Mr. DAMERON. think not. everything that happened there. Senator NUNN. Let us go on to the next meeting in Los Angeles. believe you were attending a seminar in Los Angeles. Would you tell us about that? Where was the seminar held and approximately the
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time frame ?
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Mr. DAMERON. That was not quite correct. think Mr. Hoffe was attending the seminar. So he was busy during the dav. We arranged an evening meeting at the Group say we, Equities office. When Mr. Peters was there, Mr. Fisher was there. Mr. Carman was there, and then Mr. Hoffe came down to joint us in the office. Senator NTTNN. The same people that were at the San Francisco
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meeting? Mr. DAMERON.
With the exception of Mr. Fisher. Senator Nuxx. Mr. Fisher was an additional party ? Mr. DAMERON. He was in the second meeting, but not in the first
meeting.
Senator NTTNN. Go ahead and tell us about that meeting. What hap
pened
?
Mr. DAMETJON. They debated back and forth percentages, how they were going to work it out. Senator
NTTNN.
Whom do you mean by they
a
little bit on what
?
Mr. DAMERON. Mr. Peters. Fisher, Carman. In this case, Mr. Fisher did most of the talking. Mr. Peters excused himself very shortly after the meeting
started.
He had some place to go, he said. So he left
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Carman, Fisher, and myself and Hoffe there. He said you guys work way you see fit and everything will be okay. So then we went to dinner and we continued our discussion at the restaurant. It was a nice, quiet steak house sort of restaurant. Senator NUNN. Do you remember the name of it ? Mr. DAMERON. I think, sir, it was Cook Steak House. There are two of them on the same block there; it definitely is one or the other. I have given sort of a description directionwise there. So it would be easy to find out what it was ; but let us say it was Cook Steak. I am certain of this. Then they made an offer of splitting after deducting expenses, after
it out any
$12,000 that would have been paid over a year's time at $1,000 a month. They said we will split 50-50 of the balance. In Equities other words, Mr. Hoffe would receive 50 percent and Group would receive 50 percent of any money garnered through this par ticular consulting business. Senator NUNN. Who said that ? You are using the word they. Mr. DAMERON. Mr. Fisher was doing most of the talking. Senator NUNN. Mr. Fisher was doing most of the talking ? Mr. DAMERON. Right. Mr. Carman was speaking some to it and was talking a little bit ; but they were the owners, they had the money. They were deciding what to do. Mr. Fisher is a rather dynamic, take charge sort of person. He and Mr. Peters complement each other very
deducting the
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well.
Mr. Hoffe would not settle for the 50-50 percent. Finally, after little debate, it was decided that they would give him 60 percent and the company would retain 40 percent after all of the expenses and
a
the $1,000 per month had been deducted. Senator NUNN. What did Mr. Hoffe say when you say he would not settle for the 50 percent? Do you recall any direct words? Mr. DAMERON. He said he felt it was worth more than that, that he was putting himself in danger of his job and that he felt he should get the lion's share of it. Senator NUNN. He was putting himself in danger of his job. Did he say what he was doing was illegal or did he just make the state ment about danger to his job ? Mr. DAMERON. He didn't specifically say it was illegal ; but that was the obvious implication. Senator NUNN. So the final agreement reached at that Los Angeles meeting was 60 percent, not 50 percent would go to Mr. Hoffe ? Mr. DAMERON. That is correct. Senator NUNN. Forty percent would be retained by the company ? Mr. DAMERON. Yes. Senator NUNN. How did the $12,000 per year or $1,000 per month figure into this. Was this to be deducted ? Mr. DAMERON. That would be deducted from the 60 percent at the end
of the year.
Senator NUNN. Did anybody talk about the projected profits and " how much they might be ? Mr. DAMERON. A little bit, but it was so new. There had not been anything like this before. So it was strictly wild guesses, strictly wild guesses.
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Mr. Hbffe, going back to the San Francisco meeting, the original meeting, did say something to the effect I don't think he used a dollar figure, but he said this could grow into something quite large or words to this effect.
Senator NUNN. Quite large ?
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don't know a relative thing. what he Senator NUNN. Who said that ? Mr. CAMERON. Mr. Hoffe. Senator NUNN. Mr. Hoffe said this could grow into something quite large? Mr. DAMERON. Yes, but that was at the San Francisco meeting. Senator NUNN. That was at the San Francisco meeting that you talked about the possibility that it could grow into something quite large ?
Mr. DAMERON. Quite large becomes
Mr. DAMERON. Right.
Senator NUNN. Not the Los Angeles meeting
Mr. DAMERON. Yes.
?
That was the the first
?
Senator NUNN. Where did this meeting take place in Los Angeles ? Was the meeting all around the meal ? Mr. DAMERON. The meeting, you are speaking of that specific meeting
?
Senator NUNN. This meeting we are talking about that was held in Los Angeles ? Mr. DAMERON. That took place in the One Wilshire Building, which is where Group Equities offices were located, and then in the steak
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house.
Senator NUNN. You don't recall precisely what was said? Do you remember all of 50 percent and 60 percent was being talked about both at the Group Equities office and at the steak house ? Mr. DAMERON. Yes, primarily though where it was really settled was over at the steak house. Senator NUNN. That was where the final agreement was reached ? Mr. DAMERON. Yes, sir. Senator NUNN. Everybody agreed on 60 percent, 40 percent, 60 per cent to Mr. Hoffe and 40 percent to the company ? Mr. DAMERON. They agreed at that time. However, Mr. Fisher later said am not going to be held up like this. The heck with him. am not going to pay him any 60 percent. But he superficially agreed at that point and he figured he would cross that when he came to it. Senator NUNN. But he did agree at that point ? Mr. DAMERON. He agreed at that point. Senator NUNN. Mr. Peters was not at that meeting when the agree ment was made ? Mr. DAMERON. No. Senator NTTNN. He was at the office when the conversation began but he was not at the steak house when it concluded ? Mr. DAMERON. That is correct. Senator NUNN. Mr. Carman was ? Mr. DAMERON. Mr. Carman, Mr. Fisher, myself, and Mr. Hoffe, Senator NUNN. Did you have any other meeting after dinner that
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night?
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think Mr. Hoffe and may have gone back up to can't recall whether they went with us or not, meaning Mr. Carman and Mr. Fisher. think we went up so that he could mark would need some of the more important pertinent information that to help gather the information for the application, tripartite applica Mr. DAMERON.
the
office.
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tion. Senator NUNN. Were his duties and what he was going to do in exchange for this financial arrangement discussed in any more specific details than at the first meeting in San Francisco ? Mr. DAMERON. Somewhat on that second meeting. The one where we finally hammered out the 60-40 agreement, the one at the steak would have talking. house. After that, it was a matter of he and am carrying this information up to will be up. to call and say, you. Where can you meet me? This sort of thing. How soon can have it back and get it typed up ? Senator NUNN. Details were discussed ? Mr. DAMERON. Details ; yes. Senator NUNN. Was there any money passed at this meeting either at the office building or at the steak house ?
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Mr. DAMERON. In the steak house. Senator NUNN. Tell us about that. Mr. DAMERON. Mr. Carman had an envelope inside his coat pocket.
So after everything was settled, he pulled the envelope out, a normal legal size envelope, No. 10 envelope, and handed it to Mr. Hoffe and said, here is your down payment, or here is your first payment, or something like that. Mr. Hoffe immediately put it in his pocket. Mr. Carman said some thing half jokingly about don't you want to count it? Mr. Hoffe said no, that is OK. That is about it. Senator NUNN. Do you know specifically where Mr. Carman ob tained the money he gave to Mr. Hoffe ? Mr. DAMERON. No, sir. But assume it is from the check Mr. Schoessner wrote because the date would clearly well coincide. be lieve Mr. Schoessner had one there in the latter part of October. That is when this meeting took place. Senator NUNN. Mr. Dameron, how much time elapsed between the meeting in San Francisco in October of 1972 and the subsequent meet ing in Los Angeles when this first payoff was made to Mr. Hoffe ? Mr. DAMERON. That is what wasn't sure about a moment ago. know it wasn't over took a time frame of 4 days to perhaps a week.
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a week.
Senator NUNN. 4 and 7 days
It
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was not more than a week, somewhere between
?
Mr. DAMERON. Right. Senator NUNN. That would place the meeting in Los Angeles also
sometime during October 1972 ? Mr. DAMERON. Yes ; right. Senator NUNN. Could it have been in November 1972 ? Mr. DAMERON. No ; because was able to pin down the date when met with Mr. Hoffe in Oakland over the weekend. That date hap pened to be in October. Senator NUNN. What has the Oakland meeting got to do with this 1 Is that after the Los Angeles meeting ?
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Mr. DAMERON. Yes. Senator NUNN. What was the date of the Oakland meeting ? Mr. DAMERON. I don't recall the date offhand. It is in my affidavit
here.
Senator NUNN.
It was in October 1972 ?
Mr. DAMERON. I believe it was October Vigen—is it the 29th ? Yes. October 29. Senator NUNN. That is in your affidavit ? Mr. DAMERON. I believe it is in there, sir.
29.
If I
may defer to
Mr.
Senator NUNN. Let's pinpoint this Los Angeles meeting. You are saying the Los Angeles meeting was after the San Francisco meeting, but prior to the Oakland meeting ?
Mr. DAMERON. That is correct. Senator NUNN. You are saying your best recollection is that Oc tober 29 was approximately the date of the Oakland meeting? Mr. DAMERON. That is correct.
Senator NUNN. So you are saying that the Los Angeles meeting had to take place before that October 29 date ? Mr. DAMERON. Yes. Senator NUNN. Do you know approximately how long it was be tween the Oakland meeting and the Los Angeles meeting ? Mr. DAMERON. Again, not too long. would say a time frame of to 2 weeks. 1 week like perhaps something Senator NUNN. The record of these hearings has corroborating evi dence that Edmund Schoessner, former vice president of West Coast Schools with respect to a $1,000 cash payoff with Mr. Jim Hoffe in late October 1972, and want to read you Mr. Schoessner's affidavit which imagine you are familiar with ?
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The first improper cash withdrawal from West Coast Schools that came to my attention occurred in October 1972. Our member was given a check for1 $1,000 drawn on account of the West Coast Schools at the Union Bank in Century City, California. was told by Dave Carman to cash this check, obtain 10 $100 bills, and give them to Fred Peters. definitely recall that Dave Carman told me the money was for Jim Hoffe of the Office of Education in San Francisco, as they had to give him $1,000 per month. I gave the cash to Ffed Peters.
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After this first payoff to Hoffe around October 25, 1972, in Los Angeles, did Hoffe within a few days assist you in preparing grant Equities that were seeking applications for clients of Group money from HEW ? Mr. DAMERON. Not a matter of a few days, but we did start doing the groundwork as far as trying to gather the information and trying to secure clients. We did start working on the West Coast Schools' applications. Senator NUNN. When did that take place ? Mr. DAMERON. would say it was November, sir. Senator NUNN. What about the October 29 meeting in Oakland? What was the nature of that ? Mr. DAMERON. That was primarily to try to educate me as quickly as possible into some of the more detailed problems in making out the applications. Senator NUNN. You are saying you did not actually fill out appli cations on the October 29 meeting in Oakland, but you were given instructions how to fill them out?
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Mr. DAMERON. Yes. In other words, we had sample applications. Senator NUNN. You weren't dealing with any specific applications
at that point ? Mr. DAMERON. No.
Senator NUNN. Where did the Oakland meeting take place ? Mr. DAMERON. I don't recall the name of the hotel or motel. It is very near to the Oakland Airport, within about two blocks of the can determine the Oakland Airport. I don't have it in my paper.
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name if necessary. Senator NTTNN. Did you call Mr. Hoffe and arrange that meeting or did Mr. Hoffe call you and tell you he was going to be in town ? Do you recall? Mr. DAMERON. We originally were going to meet in San Francisco. But had to change it to Oakland because they had a national dental convention going and we couldn't find a room in San Francisco. This believe is why we met in Oakland. called him to arrange that
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meeting.
II
Equities have Senator NUNN. What kind of contracts did Group with corporate funds? Mr. DAMERON. They had two basic contracts. If the client school had never participated in the programs before and had not made applications on the tripartite application, they would charge them 5 percent of the amount of moneys that were granted to them under all three total programs.
If
a school had made an application and they were unhappy with what their initial award happened to be and wished to make an appeal which they can do at the regional level and later at the national level, they would charge 10 percent to the school of the difference between what they would have gotten as a result of their initial application and what they were granted as a result of their appeal application being handled by Group Equities. Senator NTTNN. Senator Percy will take over here. Senator PERCY. Subsequent to the payoff to Hoffe in Los Angeles in October of 1972, did you make several trips to San Francisco at which time you personally made cash payments to Hoffe ? Mr. DAMERON. Prior to the payoff in the restaurant ? Senator PEROY. Yes. Mr. DAMERON. No, sir. That was the first payoff. Senator PERCY. Subsequent to that ? Mr. DAMERON. Yes, did make several. Senator PERCY. Do you know about how many trips you made ? Mr. DAMERON. He was paid, think, five payments totally, by Group Equities. That would include the first, the initial one. Senator PERCY. So you made five trips ? Mr. DAMERON. So would have made four. Senator PERCY. Who gave the money to transmit to Mr. Hoffe? Mr. DAMERON. Carman gave me some once. Mr. Schoessner gave me cash one time directly, at Mr. Carman's direction. Then one time Mr. Carman gave me a check for $1,125. He was trying to make it an un even figure so it wouldn't match $1,000 and had me take that to San Francisco, cash it there. It was cashed at the Bank of America on Market Street, at approximately Market and 10th. was told to take the $125 out of the $1,125, payment to Hoffe of $1,000 and then use the $125 as the advance on expenses. utilized that on my expense
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Senator PERCY. We will enter into the record, without objection, as exhibit 51, a check for $1,125, cashed at the Bank of America, Branch 292, 9th and Market Streets, San Francisco, teller stamped on the face of the check reads 292 over the Bank of America. Senator NUNN. Would you look at this and identify it for the record Mr. Dameron? Mr. DAMERON. Yes. Senator NUNN. Would you state what it is and how you are familiar with it ? Mr. DAMERON. carried it up and cashed it at the bank on Market. wasn't sure of the exact address but 9th and Market would be ap proximately it. In my testimony just now, it is called 10th. and Mar ket, but this is the bank where cashed the check. Senator NUNN. You are now looking at and identifying that check as the one you had in your possession ? Mr. DAMERON. It matches with the amount. It is difficult to read the endorsement on the back, but this is my writing where have en dorsed it. They have marked my driver's license number down as identification. Senator NTTNN. That will be entered in the record without objection. It is identified as exhibit 51. [The document referred to was marked "Exhibit No. 51" for reference and may be found in the files of the subcommittee.] Senator PERCY. Corroborating your testimony, Mr. Schoessner has identified a second $1,000 check, dated November 28, 1972, when he obtained 10 $100 bills and turned the cash over to Dave Carman for transmittal to you. Mr. Schoessner has also testified that he directly handed to you $1,000 in cash for transmittal to James Hoffe. Is that true? Do you recall what Mr. Schoessner said to you when he handed you
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the $1,000 in cash? Mr. DAMERON. Not exactly, sir. But it was something to the effect that here we go again or something, because Mr. Schoessner and had, think, a very good working relationship. We were both doing some thing we didn't enjoy doing. So we tended to make our little comments when we had our chance to. Senator PERCY. Were there delays in payments beyond the agreed upon schedule and what happened in case there was a delay ? Mr. DAMERON. The answer is yes. There was no definite schedule. It was understood that we would try to get the money up to him, at least early every month. A couple of times it was let slide. went to Mr. Carman because Mr. Hoffe in speaking to me on the phone would say when am going to get another envelope ? Senator PERCY. That is the way he referred to the payoff — as an other envelope ? Mr. DAMERON. will have to talk to Mr. Carman or said, well, someone and see what can arrange. Many times would try to make the trip coincide with going up for other business rather than just run up to carry the check up. Senator PERCY. How much cash was turned over to Mr. Hoffe ? Mr. DAMERON. From Group Equities ? am qualifying this be cause there is something else you will find later.
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In total
Senator PERCY.
?
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Equities about $5,000. Later on, from went a little think would say approximately $20,000. myself, think 20 is a more higher than that in my affidavit. In retrospect, realistic figure. From a Mr. Berson, which will come out later in the would say probably in am strictly ball parking this, testimony, the range of $10,000. Senator PERCY. 'So in the monthly payments was the figure of $6,000 ? Mr. DAMERON. Monthly payment was either $5,000 or $6,000. Senator PERCY. Five or $6,000 ? Mr. DAMERON. Yes. Senator PERCY. Can we decide which amount it is ? would say $5,000. Mr. SCHOESSNER. Senator PERCY. Where were these payments made ? Mr. DAMERON. The first one of course was made in the restaurant that we have already discussed. Others were made in the San Francisco area ; some were made in the Del Webb Town House in the restaurant ; some were made in my room. When say some, it may have been one of each or something. One payment was made as Mr. Hoffe was driving me back to the Oakland Airport from a seminar at one of the junior colleges near there. One, at least one payment, was made in the St. Francis Hotel in San Francisco. Senator PERCY. In May of 1972, West Coast Schools closed down. Did you quit Group Equities around June of 1973 ? Mr. DAMERON. resigned. had the title with West Coast and with both as being vice president. Group qualified that by saying had the title. resigned effective June 15, 1973 from both organizations. Senator PERCY. Would you tell us about your discussion in June of 1973 with Fred Peters about continuing servicing the plans of Group Equities under a new organization called O. A. Dameron Asso
Mr. DAMERON. From Group
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ciates?
Mr. DAMERON. Yes. Since
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had been somewhat instrumental in help the information and ing gather getting the thing put together, and it was obvious that they were going pretty much down the tube, ap proached him. said need something to make a living. said would you be willing to consider selling me the consulting contracts that we have for 25percent of moneys that are collected in ? He said yes. went to an attorney, had a very simple letter-type contract made up, about 2% pages. The committee has a copy of it. That is about what happened. Then when Mr. Peters disappeared, made one payment of $6,000, of the $24,000. made one payment of $6,000. He told me he would not be at home but to leave it in his mailbox. Senator PERCY. Deliver it where? Mr. DAMERON. To leave — put it in the mailbox at his apartment ; at his home. So left a $6,000 check of which the staff has a photostatic copy. From then on, didn't know where Mr. Peters was. Fisher was the only one knew where to find and didn't wish to pay money directly to Mr. Fisher. feel very strongly against the man.
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Senator PERCY. When was the agreement signed to take over the Equities as O. A. Dameron ? consulting business from Group on that was June 23. believe the date Mr. DAMERON. Senator PERCY. Our records indicate it was June 27, 1973. Mr. DAMERON. The date is on the check, on the bottom of that $6,000 had written in there : per agreement dated so-and-so. It could check, am going from memory. thought it was the 23d. be the 27th. Senator PERCY. Did you have any discussions with Mr. Hoffe as to how he fit into this new consulting business ? could no longer afford to Mr. DAMERON. Yes. told him that the that was to have to wait until the people paid pay going $1,000, their fees to me, and that also could not afford to go with the 60-40 split and the $12,000. So we finally agreed upon a 50-50 split with a continuation of the relationship. Senator PERCY. Was that after 25 percent was paid to Group Equities ? Mr. DAMERON. Yes, sir. That was understood that that would come out and that expenses would come out. However, because did not finish paying Group Equities when Mr. Peters disappeared, ultimately split the money that would have gone to Group Equities, with Mr. Hoffe. Senator PERCY. Did you have a discussion with Hoffe around late July or early August of 1-973 at which time he suggested you meet with Marvin Berson and consider the possibility or combining forces in a consulting business ? Mr. DAMERON. Yes ; did. Senator PERCY. Were you aware Berson, along with Harvey Tsutsui, had already formed a consulting firm called Student Aid Adviser ? Mr. DAMERON. Student Financial Aid Advisors, Inc.; yes. was aware. They were the first in the business. This indirectly, or really Equities came to get into the business. Mr. directly, is how Group Tsutsui worked for West Coast at one time. Mr. Peters called him over to ask him to make out the applications for the West Coast Schools under their consulting arrangement that he had with Mr. Berson. But he didn't want to pay Mr. Tsutsui the fees. Senator PERCY. You met with Berson, as Hoffe suggested? Mr. DAMERON. Yes ; did. Senator PERCY. What was discussed ? Mr. DAMERON. Beg your pardon ? Senator PERCY. What was discussed at that meeting? Mr. DAMERON. The fact that he had Student Financial Aid Advisors and had never issued stock on it, had a few clients, that had some clients would carry over from the preceding year; so we decided to join forces, issue 2,000 shares of stock at $1,000 par value on a 50-50 basis, Mr. Berson paying $1,000; myself paying $1,000; and then conduct the business as Student Financial Advisors, Inc. Senator PERCY. Where did that discussion take place ? Mr. DAMERON. That was in Mr. Berson's home in Beverly Hills. Senator PERCY. This is actualy how Student Financial Advisers be came an entity and stock was actually issued ? Mr. DAMERON. Yes, sir ; that is correct. Senator PERCY. What were the financial arrangements between the parties involved in this reorganization of Student Financial Aid Ad visers ? What was the financial arrangement of Mr. Hoffe ?
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Mr. DAMERON. Again, it was the case of expenses coming out first, then taxes with neither Mr. Berson nor myself drawing any salary and then the remainder would be split three ways: one-third, one-third and one-third between Mr. Hoffe, Mr. Berson, and myself. wonder if you would clarify the situation that ex Senator PERCY. isted in the fall of 1973 with respect to Hoffe. Your arrangement was with Mr. Hoffe where you had money which would be due to Hoffe from contracts that you had issued with your clients prior to 1973. Mr. Berson had contracts of his own when money was due to Mr. Hoffe, and then you jointly had contracts where you were going to pay each partner on a one-third basis. Would you confirm this ? Mr. DAMERON. Yes. The money, for example, moneys that had joined, still was paid on the 50-50 arrange before Mr. Berson and ment which explained earlier. Mr. Berson at that time was turning in all of his to Mr. Hoffe. Then on any moneys coming in from duel arrangement with Mr. Ber son, then it became the one-third, one-third and one-third. Senator PERCY. Did Berson relate to you how much cash he paid to Hoffe? Mr. DAMERON. No ; that is why can't confirm. am aware. have seen him pay money. He has dropped a couple of numbers here and there to me. But couldn't pin it down exactly. am estimating $10,000 to $15,000. Senator PERCY. With respect to the third share Hoffe was to receive under the new arrangement, did Hoffe insist on cash ? Mr. DAMERON. Yes; in fact, Mr. Berson and myself on at least two occasions, if perhaps not some more than that, suggested to Mr. Hoffe that it might be wise for all concerned if we take any money that we could garner as profit on this and invest it in a mutual investment for later on. Mr. Hoffe wanted no part of it. He said if he needed investment, he would make his own. He wanted the cash. Senator PERCY. You have estimated that you, yourself, personally paid to Hoffe $22,000 to $28,000? Something' like that, and these pay ments were made in the Del Webb Town House in San Francisco ; one payment in the St. Francis Hotel in San Francisco ; and you indicated one was made in Hoffe's car on the way to the Oakland Airport from the seminar that you had been attending ; is that correct ? Mr. DAMERON. That is correct. Senator PERCY. Was anyone ever present when these payments were
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made
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anyone else
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Mr. DAMERON. Mr. Berson was present on at least one occasion
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in the St. Francis. Senator PERCY. How much money was passed at that time ? Mr. DAMERON. am not sure. Mr. Berson paid some money that think that paid approximately — am going did also. evening. to have to go from $1,000 to $2,000 and Mr. Berson paid someplace from $500 to $1,500 ; something like this. This is as close as can come. Senator PERCY. It is said there is honor among thieves. Was Mr. Hoffe always satisfied that he was getting his fair share, or did he have any suspicion at that time ? Mr. DAMERON. He felt that — by the way, quite wrongly so — that we were trying to take advantage of him or that we had our expenses. which he thought these were things that he should have.
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Our expenses were not a compensation, you know. They were for plane flights back and forth and things like
strictly reimbursed this.
He consequently always tried to keep a running record which wasn't always correct. So the particular night in question when said wasn't sure how much paid, I had to go back into all of my state ments that had sent out. Then where would receive moneys, go back and in effect recon struct it to show him that had paid not only everything owed him, but in effect a few hundred dollars more than really owed. But he is a difficult man to convince on that sometimes. Senator PERCY. In other words, was he or was he not getting his fair share according to the agreement ? Mr. DAMERON. He was getting more than his fair share as it turned
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Senator PERCY. Did Hoffe keep a set of his own accounting records ? think you would call it that. He 'had a chart, a legal size laid out like so, for example, with columns and what have you, showing schools and what he had been paid. So a very primitive form of accounting, but at least it was sufficient for his purpose. Senator PERCY. Was the accounting sheet that he left on his desk en titled "My Share," which was turned over to the FBI for investiga tion, was this the way he kept his records ? Mr. DAMERON. That happens to be a different document, sir. That was a list of schools that we had not collected money from that were granted the money. In other words, they had received a panel recom mendation, but actual funding had not taken place on those schools. don't know if made that clear enough for you or not. Did you under am making? stand what distinction Senator PERCY. What happens when he is presented with this docu ment and asked if this is his and labeled "My Share"? What did he have to say at that point ? Did he admit that it was his document ? Did he deny it was his document ? How did he react ? this Mr. DAMERON. As understand second hand from him after he met me the FBI to the FBI agent, he speaking agent, telling was his, but he felt at that point he should have legal said, yes,
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counsel.
was his document
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In his own words
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Senator PERCY.
Mr. DAMERON. Yes.
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Senator PERCY. He needed legal counsel, but he did admit Mr. DAMERON. Yes, as far as understand. was not present.
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Senator PERCY. In your deposition you made the point that Hoffe kept another set of accounting records separate and apart from the sheet of paper that was turned over to the FBI. Have you covered that in your testimony Mr. DAMERON. Would you please repeat that Senator PERCY. You made the point in your deposition that Hoffe kept another set of accounting records separate and apart from the sheet of paper that was turned over to the FBI. Mr. DAMERON. Yes. Senator PERCY. Can you explain that, or have you already Mr. DAMERON. thought had.
125 records, to make sure that he was getting his fair share, they were represented by the one sheet of paper, more or less laid out lengthwise, horizontally like this. The famous ''My Share" paper was laid out vertically up and down this way. was referring to those being two separate sets of So that is why
His accounting
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records. Senator PERCY. Did Mr. Peters ever know that he kept these docu recall, at the firsL meeting Mr. Peters said, don't ments because as keep any records, don't record this, or something along that line. Did Mr. Peters become concerned at all that he was keeping records showing what his share should be ? Mr. DAMERON. am sure he felt that he was keeping some form of don't think he had a great deal of concern about it record, Mr. Peters. because Mr. Peters and some of the other principals in the school didn't worry too much about the realities. They just sort of felt they were a little bit above those things. Senator PERCY. Were you ever visited personally by an FBI agent and did they ask you about these records ? Mr. DAMERON. No, sir. Senator PERCY. Were you contacted by telephone ? Mr. DAMERON. received a call from an FBI agent a year ago in October and at that point he invited himself over the phone. said think prior to my speaking to you, perhaps should get legal counsel. So subsequently did, along with Mr. Berson. Senator PERCY. But you gave him no information on the phone?
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Mr. DAMERON. None whatsoever.
Senator PERCY. You just simply stated you should get legal counsel?
Mr. DAMERON. That is correct. Senator PERCY. Did they ever f ollowup with you and ask you to have
legal counsel and talk with them ? Mr. DAMERON. No, sir, the first contact that was ever actually made with me was the staff of the Senate subcommittee. Senator PERCY. Is your first contact when this subcommittee con tacted you; no other law enforcement official ever contacted you to get the story on this ? Mr. DAMERON. No, sir. Senator PERCY. Was Mr. Berson contacted, do you know, by the
FBI?
Mr. DAMERON. He was contacted the very same day. They called him at his office and called me at mine on the same day. Senator PERCY. Was there any followup made by the FBI or any other law enforcement official concerning Mr. Berson's involvement in
this matter ?
Mr. DAMERON. Not to my knowledge. Senator PERCY. After the FBI made inquiries concerning this matter, you and your wife were concerned and discussed this matter with Mr. Hoffe and his wife. Would you give us the details of these meetings ? Mr. DAMERON. Yes, this was at the time that Mr. Hoffe had received his visit from the FBI concerning the paper that they had found on his desk. So he called from San Francisco. My wife and flew up and met with he aj)d his wife. We were all sort of shaken up as it were. So we
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tried to think rationally for want of
a better term. guess we didn't think too rationally. We ended up flying back to Los Angeles, taking them home with us for the night and then meeting the following day with Mr. Berson and his wife. The six of us then discussed the situation and Mr. Berson, Mr. Hoffe, and myself went to a legal firm on Wilshire Boulevard and talked it over with some criminal attorneys there. They, in turn, suggested that since the case would probably be brought to court in San Francisco, if it were brought to court rather than in Los Angeles, that we should find a San Francisco attorney. So, again, the three of us arranged to be in San Francisco a couple of days later and went to an attorney there. He immediately separated \is after we had sort of laid our story out. He said there is going to be a definite conflict of interest between you and Mr. Berson on the one side, Mr. Hoffe on the other. He said can suggest a number of other attorneys if Mr. Hoffe is interested. Then Mr. Hoffe retained another separate attorney, whom assume he still has. Mr. Berson. as far as know, still has our attorney that we had in common. terminated his services as far as was concerned a week ago this past Monday. Senator PKRCY. In other words, following the meeting, along with Mr. Hoffe, Mr. Berson, you visited a Los Angeles attorney and did the L.A. attorney suggest that you might be better to contact an attorney in San Francisco because if any prosecution were it to occur, it would occur in San Francisco ? Mr. DAMERON. Yes; he did. Senator PERCY. Was an attorney in San Francisco recommended to you at the time ? Mr. DAMERON. Yes. Senator PERCY. Did you contact Mr. Alvin Goldstein in San Fran
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cisco?
Mr. DAMERON. That is the attorney. Senator PERCY. What advice did he give you ? Mr. DAMERON. He talked to both Mr. Berson and myself at the
same time. The first thing he wanted was any records that might be pertinent to this so he could see if there might be anything incrimi
nating. So we sent our records up or carried them up. He didn't find any thing of that sort because it was strictly working files that we had to have. had the feeling, Senator, that he was trying, without telling us directly what to do, that he was trying to tell us that it might be Avise to contact the U.S. attorney through him and seek immunity, just had a very strong feeling that but lie was giving alternatives. tried discussing this with Mr. Berson later. .he was leaning this way. He in no way wanted to have any part of this. He went so far as to say. if necessary, we will go to a different attor ney, toll him a different story and then not have to worry about per jury. So was not exactly Senator Xuxx. Who said that ? was not exactly for that idea. So Mr. DAMERON. Mr. Berson. did terminate Mr. Goldstein's services, he did make recently, when an interesting comment. He assumed — told him very little.
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just told him was discontinuing his services. He said, "Have you been contacted by someone in the Government?" said, "Yes, have, but think since we have no longer an attorney-client relationship that shouldn't discuss it with you." He said, ''It sounds like you are doing what advised you to do before." He said, "I think you are very wise to do so." He said, "I wish you the best of luck." So this is the way our relationship ended. Senator PERCY. Mr. Dameron, a few remaining points: Our prin cipal objective, of course, is to exercise oversight, to plug up looseness in legislation, and to make certain that the agency responsible for carrying out these programs follows through to plug up the loopholes that might be reviewed in their programs, but also because this mate rial wall be turned over to the Justice Department for possible prose cution or will be made available to other law enforcement officials, we want to make the record as complete as possible. When payments were made for lunches and dinners by Mr. Peters or other people who might have picked up checks, were they generally made on behalf of the company in cash or did they ever use credit
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cards ?
Mr. DAMERON. Usually, credit cards.
Senator PERCY. So there could be corroborating evidence from the records of the corporation and credit cards as to dates and restaurants and hotel bills, and so forth ? Mr. DAMERON. In fact, think Mr. Peters and Mr. Fisher, if might just interject one other thing, and Mr. Carman, think they live basic ally on credit cards. Senator PERCY. wonder if you could tell us a little about Fred Peters. There is a presumption on the part of HEW, because of the lack of their investigations into character background, quality of the schools and the personalities who run those schools, that most of these people are motivated by education. Yet, they are a proprietary institution, organized for profit. The principal objective of the corporation organized for profit, the prin cipal objective is to make money just right on the face of it. Mr. DAMERON. Right. Senator PERCY. From what you saw of Mr. Peters, what was his interest in education ; what was his interest in helping other people ? Would you describe him as a man who had a dual objective to engage in the business that would help his fellow man or was he just interested in this because he saw the possibility to make a fast buck? Mr. DAMERON. have ambivalent feelings on this because, as a person, Mr. Peters treated me pretty well at some times. However, in the overall sense, looking back from where stand today and Mrs. Peters and some of the others that has been involved, he didn't really do us any favors; he has been called a con man here. think that is an understatement of the year. He talked a beautiful game as to helping his fellow man, helping the downtrodden, helping the minority groups and what have you. As far as am concerned, it was all talk. Senator PERCY. He talked the language of an educator ? Mr. DAMERON. But it was strictly for money, in my opinion. don't think he would have cared if one kid was educated.
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Senator PERCY. What sort of a motivation? He wanted to make money. How did yon see him use this money? In what way did he benefit from it? Did he stash it away like a squirrel for some rainy clay, or did he live in a lavish lifestyle ? Mr. DAMERON. He did both. He lived in quite a lavish lifestyle. am like Mr. Schoessner, Again, never knew whether to believe the stories or not, because some of them got a little wild. He told me one time that he always kept $10,000 stashed away at home, his mad money, in case he wanted to split someplace real fast. Senator PERCY. In case he wanted to what ? Mr. DAMEKON. In case he wanted to split someplace real fast. That is almost a quote verbatim of what he said.
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Senator NUNN. What did he call it? Mr, DAMERON. Mad money.
Senator NUNN. M-a-d ? Mr. DAMERON. Yes ; m-a-d. Senator PERCY. So that his lifestyle was high living ? Mr. DAMERON. Yes ; he had a new car all the time ; Mark IV. He had a beautiful apartment at the Marina. He went only to the best places to eat, bought expensive suits, very much a grand lifestyle. Senator NTTNN. believe your acquaintance with him dates back to the time when he hired you ? Mr. DAMERON. No, sir, it is the reverse. He worked for me for a time at the Jane Arden Agency. Senator NTTNN. He worked for you for awhile ? Mr. DAMERON. Yes. Senator NTJNN. At that time he was earning about $450 a month, according to his former wife. Mr. DAMERON. Right. Senator NUNN. What was his lifestyle like at that time ? Mr. DAMERON. It was a little bit rough, think. It didn't leave a great deal of money left. Senator NUNN. So you saw over the course of your acquaintance with Mr. Peters quite a change in his lifestyle ? Mr. DAMERON. To put it very mildly, yes. Senator PERCY. Can you tell us what motivations, we can see the motivations for Peters to make money and who engaged in prac tices that would further that objective. But what was the real incentive for you yourself, for Mr. Fisher, for all of you who were involved in this illegal activity, the coverup of and so forth Was just that your salaries were higher than they had been before? Did you become accustomed to a better lifestyle, higher living yourself, reluctance to give that up What was the motivation in the individual cases, as you saw it? don-t happen to think this Mr. DAMERON. good analysis. what was making, He knows was making. know what Mr. Schoessner since he wrote the checks, but we weren't overly paid. think you are reluctant comfortable salary. We had, let's say, going to up, the job, as long as you figure somebodv else to give get caught in the thing themselves and caught in their own web. If yon don't do what you are told, then you are out of job. Here you are saying to yourself, you are such-and-such an age. going to go for have to raise, where am have x number of kids happy you did. are not too that you job? You tend to do some things
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Senator PERCY. His hold upon all of you depended upon just salary payments beyond what you could get in a straightforward, legitimate business, commensurate with your capability ?
Mr. DAMERON. Right. Senator PERCY. You know you were making money, an awful lot more until you moved into an equity situation, but at that time it was
just strictly salary?
Mr. DAMERON. Yes. Senator NUNN. What was your salary ? Mr. DAMERON. I believe when I left I was making $22,000. Senator PERCY. That was how much more than you had ever made
before ?
Mr. DAMERON. It had been steadily going up as long as I had been with the schools. Prior to my joining them, I had made about $12,000;
something like this. Senator PERCY. So really you are almost up around, doubling it and with inflation it hasn't gone up that fast. Were there other emoluments of office or hidden compensation that you were cut in on ? Obviously, he lived at a style where he wasn't paying taxes on his income. Did you get automobiles? Mr. DAMERON. had a car. Senator PERCY. You had a company car which you did not consider compensation ? Mr. DAMERON. Right. Senator PERCY. Did you use it in the business at all ? Mr. DAMERON. We used it all the time. Senator PERCY. All the time in the business. Did you use the same car for personal purposes ? Mr. DAMERON. Much of the time ; yes. Senator PERCY. The company paid for gasoline, maintenance and upkeep ? Mr. DAMERON. Correct. Senator PERCY. So that again was nontaxable income to you ? Mr. DAMERON. Yes. Senator PERCY. Were there any other ways that he had of giving you nontaxable income? Mr. DAMERON. A' company credit card, which didn't use a great deal. didn't use it very much. It was primarily for taking people to lunch, and things like this. Senator PERCY. Was there a laxity about putting in expense ac counts, though, entertainment at home? Could you broadly interpret this so that you were getting income beyond, above and beyond the $28,000? Mr. DAMERON. don't think so. always thought someone who has to steal off an expense account shouldn't have one in the first place. Senator PERCY. How about the other officers or employees of the company ? WTas this a way that he had of getting them to go along and shut their eyes to his — he was really coining was where the others, small chicken feed in was still proportionate to what sense, but was enough they were getting before, Mr. DAMERON. There one thing that perhaps we are not speaking on the same wavelength. Mr. Carman and Mr. Fisher were principals in this company. They were living just as well as Mr. Peters was.
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Senator PERCY. Did Peters and Carman or Fisher ever discuss with you the possible illegality of paying Hoffe? There was the inference at the first meeting this had to be done in cash. But did you ever sit down and discuss it philosophically? Mr. DAMERON. No. Senator PERCY. Or discuss it from a practical standpoint : "Let's be awfully sure that we don't leave any tracks in this situation?" Mr. DAMERON. think something to this effect came up a couple of times when Mr. Carman sent Mr. Schoessner for the checks. He said be sure to get this up to him ; but not, don't believe in the sense that you are saying no one sat down and said gee, look how bad we are and this is all illegal. think they felt themselves above it. Senator PERCY. Was much concern expressed about bribing a public official? Mr. DAMERON. No. Senator PERCY. Not at all ? Mr. DAMERON. No. Senator PERCY. But there was expression of concern at some point or other about getting caught ? Mr. DAMERON. Yes. Senator PERCY. That was the only concern ? Mr. CAMERON. Eight. Senator PERCY. No moral issue involved at all ? It is just a matter of don't get caught doing it ? Mr. DAMERON. That is correct. Senator PERCY. The last question involving the wives. At what point did your own wife get brought into this and at what point did the other wives get brought in, including Mrs. Hoffe, and what was the reaction to wives ? Were they a part and parcel of this ? Did they understand that their higher standard of living came from this ? Did they express concern ? Mr. DAMERON. My wife was very concerned, was very much against it. was not benefiting from it at the time, except that was drawing a salary. So she in effect said, look, we are not going to do it. said said am going to have to have a job someplace. well, the problem, hate to be without one. Mr. Hoffe stated that his wife was not aware of the arrangement which may not be true. But felt that she was. can't give you any definite reason, except he did have some special bank accounts and what have you, and am sure she knew something was going on some where. Mrs. Berson was aware of it. She knew everything. think the chairman Senator PERCY. would just like to say, and would feel the same way, that to you and your wives, we can well imagine the agony that you have gone through on this matter. We can well understand that the thought of requesting immunity might have crossed your minds. Certainly to appear here without an attorney, just the freedom of your conscience to bare your soul and lay it all on the line and not worry about whether it incriminates you or not, hope you feel much more relieved when you walk out that think in our judgment we are very grateful to you indeed. door. You will have accomplished a service to our responsibility in the Senate and to the responsibility know that a new Secretary of HEW will feel that he has in dispatching and carrying out his job now.
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You have made our job much easier. You served your Government in this capacity. trust that that will be fully taken into account and wish, to express our appreciation to you, and our thanks. Senator NUNN. share that, Mr. Dameron.
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Mr. DAMERON. Thank you.
Senator NUNN. Just a few more questions. We have a vote. We will be recessing in a few minutes. Mr. Schoessner, what was your salary during this period of time? Mr. SCHOESSNER. had $24,000 salary and $3,000 expense.
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Senator NUNN.
$25,000 salary ? Mr. SCHOESSNER. $24,000. Senator NUNN. $24,000 salary and ? Mr. SCHOESSNER. And $3,000 allowances
for expenses.
Senator NUNN. Mr. Dameron, did Dameron Associates or Dameron Corp. merely make a profit ? Mr. DAMERON. Made a little bit, not that much. Senator NUNN. How long were you in business in your own equity held corporation ? Mr. DAMERON. Keally, because you have a 1-year lag there ; in other words, the papers had been prepared initially and those were the months was collecting on. So think the profit on it would have run approximately, this is after paying Mr. Hoffe, after paying taxes, after everything, would have been about $18,000 to $20,000. Senator NUNN. $18,000 to $20,000? Was that split between you and Mr. Hoffe? Mr. DAMERON. No; that would have been my portion. He made roughly about $20,000. The rest went for taxes and expenses. Senator NUNN. Mr. Berson earned a similar amount? Mr. DAMERON. No, sir ; because that was separate. In other words, that was before we joined forces. Senator NUNN. So you earned about $18,000 to $20,000. That was not in addition to your salary ? You weren't drawing a salary at that time, were you? Mr. DAMERON. was not working for Group Equities, but was working two jobs. Senator NUNN. You were drawing a salary from the equities ? Mr. DAMERON. No; said was not working for Group Equi ties. was working for Sawyer College, so was drawing salary from Sawyer College, plus the money. Senator NUNN. How much were you making at Sawyer College?
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Senator NUNN. So you made $24,000 and your share of the profits were about $18,000 to $20,000 ? Mr. DAMERON. Yes, sir. Senator NUNN. Did you participate in any way in the disburse ment of these large sums of money that left West Coast Schools through Mr. Peters and the cashier's check and the $100 checks? Did you participate in that ? Mr. DAMERON. can state categorically didn't take a penny out of West Coast Schools except my salary and expenses. Senator PERCY. Could ask unanimous consent to insert in the record a letter from T. S. Bell, U.S. Commissioner of Education, and in response to an inquiry from myself and my staff on the clarifica
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tion of the Office of Education policy and practice in dealing with the eligible status of trade and technical schools and some details on what happened in this particular case ? Senator NUNN. Without objection. [The document referred to was marked "Exhibit No. 52" for refer ence and follows :] EXHIRIT No. DEPARTMENT
OF
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HEALTH, EDUCATION, AND WELFARE, OFFICE OF EDUCATION, Washington, D.C., November H, 1975.
Hon. CHARLES H. PERCY, U.S. Senate, Washington, D.C. DEAR SENATOR PERCY : This letter is to clarify the Office of Education's policy and practice in dealing with the eligibility status of trade and technical schools following the recognition of a nationally recognized accrediting agency to accredit such schools in August 1967. The statutory provisions (Section 435 (c) ) of the Higher Education Act of 1965, as amended (Public Law 89-329) require that, to be eligible to participate in the Federally Insured Student Loan Program a vocational school must be -"accredited (A) by a nationally recognized accrediting agency or association listed by the Commissioner pursuant to this clause . . . and (C) if the Commis sioner determines there is no nationally recognized or State agency or association qualified to accredit schools of a particular category, by an advisory committee appointed by him and composed of persons specially qualified to evaluate training provided by schools of that category, which committee shall prescribe the stand ards of content, scope and quality which must be met by those schools in order for loans to students attending them to be insurable under this part and shall also determine whether particular schools meet those standards." The special standards which were developed by the Commissioner's Advisory Committee for the Evaluation of Training in Vocational Schools contained a provision that the eligibility of schools approved under such special standards would cease within five years after the Commissioner had recognized an appropriate accrediting agency or association. Five years was considered to be ample time to give the accrediting agency an opportunity to develop administrative procedures in order to deal with a large number of schools within established accreditation proce dural guidelines, and would avoid the necessity of dealing with pressures which might be generated by the schools if a short deadline for obtaining accredited status existed. At the time each unaccredited school was approved under the special standards it was notified that this approval was of a temporary nature pending recognition by the Commissioner of Education of a nationally recognized accrediting agency to accredit its particular category of school. After the Commissioner of Educa tion recognized the Accrediting Commission of the National Association of Trade and Technical Schools (AC-NATTS) each unaccredited school received three letters reminding it that its eligibility status for the Federally Insured Student Loan Program would be terminated on September 1, 1972, unless accreditation by the AC-NATTS had been awarded. As the September 1, 1972, deadline drew near, although no written policy existed, a decision was made by the Office of Education to permit those schools which were able to demonstrate a good faith effort in attempting to secure accredited status to retain their eligibility status until the next meeting of the AC-NATTS. Of the one hundred and seventy five schools which had been approved under the special standards, one hundred seventeen were still unaccredited on September 1, 1972. Sixty three of this latter group of schools had not applied for accredited status by September 1, 1972, whereas fifty four schools were under active consideration for accreditation and were to be considered at the ACNATTS' next meeting in October 1972. Therefore, in accordance with our policy, as stated above, this latter group of fifty four schools had their eligibility status extended to November 1972. At the October 1972, AC-NATTS' meeting, ten of these schools obtained accredited status. Of the other forty four, twenty six were still under consideration by AC-NATTS and therefore the Office extended their eligibility status until February 1973 ; the other eighteen schools were
133 terminated. At the January 1973 meeting of the Accrediting Commission, eight of the twenty six schools received accredited status and the other eighteen were denied accredited status. Among the eighteen schools which were denied accredi tation were the five West Coast Schools. These schools were granted an additional hearing by the Accrediting Commission in order to appeal the decision reached during the Commission's January meeting. These were the only schools among the eighteen which appealed. Therefore, the eligibility status of these five schools was continued, as a due process consideration, until their appeals hearing which occurred on April 6, 1973. After the Office was notified by the Accrediting Com mission regarding the results of the appeals hearing, this last group of five un accredited schools had their eligibility status terminated by the Office on June 15, 1973.
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trust that this information may be of interest and assistance to you. Thank you for your interest in Office of Education administered programs. Sincerely, T. H. BEIX, U.S. Commissioner of Education.
Senator NUNN. Did you participate in any of these so-called with drawals from West Coast Schools ? Mr. SCHOESSNER. Do you mean withdrawal of funds ? Senator NUNN. Yes. Mr. SCHOESSNER. No ; didn't. Senator NUNN. You didn't receive anything other than your salary and your expenses during this entire time ? Mr. SCHOESSNER. As said before, had the expense allowance ; yes. Senator NUNN. Thank you both for appearing this morning. We may need to call you back at some point. We will have further hearings at 2 :15 this afternoon when we will hear from Mr. La Vein Duffy about some of the documented responses from HEW on their participation in this entire matter. Mr. FELDMAN. Mr. Chairman, two quick things. First of all, Mr. Hoffe was accorded the opportunity to testify today but wishes to review the testimony with his counsel. He will testify on Wednesday morning. We have no hearing tomorrow because of the conflicting
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will announce this afternoon the rest of the Senator NTJNN. schedule. would also like to clarify a point in the affidavit Mr. FELDMAN. on page 23 where Mr. Dameron talks about other people who might have known about payments. We tried to run these people down. Mr. DAMERON. would like to change that because in retrospect, am afraid might be charging someone with something that is not true. Mr. FELDMAN. So you have no knowledge ? Mr. DAMERON. Right. Mr. FELDMAN. Thank you very much. [The document follows :]
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SWORN STAFF INTERVIEW WITH O. A.
(DAN)
DAMERON
Mr. DUFFY. I would like to make this statement for the record. My name is LaVern J. Duffy, Assistant Counsel for the Senate Permanent Subcommittee on Investigations,
Government Operations, United States Senate. The date is Septem
ber 22, 1975. The time is 9 :25 a.m. The purpose of this meeting today in room 520 of the Federal Court House, 312 North Spring Street, Los Angeles, California, is to interview Mr. O. A. (Dan) Dameron, former Vice President of West Coast
Schools located in Los Angeles, California. Also present at this interview are Mr. John Walsh of the Subcommittee Staff and Greg Vigen on temporary assignment with this Subcommittee from the United States General Accounting Office.
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Mr. Dameron before we begin the questioning would like to ask you if you have any objection of having this Interview tape recorded? Mr. DAMERON. No. Mr. DUFFY. You are aware, of course, that you have right to counsel if you so wish. Mr. DAMERON. Yes. Mr. DUFFY. Do you desire counsel at this time? Mr. DAMERON. No, do not. Mr. DUFFY. You waive the right of counsel and you are prepared to proceed and answer all questions propounded you, is that correct? Mr. DAMERON. That is correct. Mr. DUFFY. Now, any statements that you make here today are made freely and voluntarily, is that true? Mr. DAMERON. That is true. Mr. DUFFY. No threats, force or duress have been used to induce you to dis close or discuss matters related directly or indirectly to West Coast Schools, is that correct ? Mr. DAMERON. That is correct. Mr. DUFFY. No one here, or anyone else representing the Senate Permanent Sub committee on Investigations has promised you any immunity for your cooper ation, is that correct? Mr. DAMERON. That is correct. Mr. DUFFY. stated to you on September 19th and will repeat it again for the record here today — Mr. Walsh and myself will recommend to our superiors that they consider giving you immunity for your cooperation with this Subcommittee, however, want you to clearly understand, and cannot emphasize this too strongly before we begin, can make no promises or commitments to you for your cooperation. That is entirely the responsibility of my superiors, is that understood? Mr. DAMERON. Yes. Mr. DUFFY. With that understanding, are you ready to begin? Mr. DAMERON. Yes. Mr. DUFFY. Mr. Dameron would you give your name, your address, and your present occupation for the record please? Mr. DAMERON. O. A. Dameron, 1812 Plaza del Amo, #3 Torrance, California 90501. I am a consultant. Mr. DUFFY. And what is your telephone number? Mr. DAMERON. 320-8225 or 320-7569. Mr. DUFFY. Would you give us a very brief summary of your employment record before you became associated with Automation Institute, Los Angeles, please. Mr. DAMERON. Yes, originally, as of February '59, went to work for Atlas Em ployment Agency, who later started another agency in conjunction with Atlas eventually became manager of the Jane called Jane Arden Agency, of which Arden Agency in December 1962. As I explained, both organizations were under common ownership so consequently, I, in reality worked from '59 through June of '71 for this organization. Mr. DUFFY. Now around April, 1970, you went to work for the Automation In stitute, a trade school in Los Angeles, is that correct? Mr. DAMERON. No that is not. I started in July of '71 with Automation Institute Mr. DUFFY. July of '71?
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Mr. DAMERON. '71. Mr. DUFFY. I see. Who were the officers of the school at that time, do you recall? Mr. DAMERON. At that time Mr. Edward Tokeshi. Mr. DUFFY. How do you spell his name? Mr. DAMERON. T-O-K-E-S-H-I was Chairman of the Board and President, and Mr. Fred Peters was Vice President. Other officers I am unaware of. Mr. DUFFY. Who hired you? Mr. DAMERON. Fred Peters. Mr. DUFFY. Can you tell us the circumstances, very briefly, how you were hired? Mr. DAMERON. Yes. Peters had at one time worked for me. We had become acquainted through his working for me at the Jane Arden Agency. Through con tacts of Jane Arden Agency that he had with Automation Institute in order to help place their graduates on jobs, he became acquainted with Mr. Tokeshi and others employed at Automation Institute. He learned that there was a position open as Placement Director with them and applied for the job, and was employed
by them as Placement Director. Mr. DUFFY. What were your duties at the school?
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Mr. DAMERON. When I initially started my official title was Assistant to the Vice President. My duties were quite varied. It was a case of almost a quotation : "to try to get the thing in shape. Start where you have the worst trouble and work from there." The placement department was, in my opinion, the main trouble spot so I originally started there, ultimately I was responsible for operations generally speaking. I was responsible for marketing. I was responsible for the educational department from the standpoint of seeing that it was run properly from a supervisory standpoint. About the only area I did not come into and have some responsibility for was accounting. Mr. DUFFY. Was the school accredited when you joined it? Mr. DAMERON. Yes it was. Mr. DUFFY. How many students did it have? Mr. DAMERON. I would say approximately, and this is strictly a gross approxi
mation, 200-250. Mr. DUFFY. And it specialized in what? Mr. DAMERON. In computer programing and computer operations training. Mr. DUFFY. Now the school, in effect, was run by Fred Peters, is that correct? Mr. DAMERON. Yes. Mr. DUFFY. He was Vice President at the time? Mr. DAMERON. Right. Mr. DUFFY. Was it in bad financial condition when you joined it? Mr. DAMERON. I explained I am not aware of the exact situation but I have a feeling that it was. I had heard it was and had heard that at one time, either at that time or very shortly before that it was almost on the verge of bankruptcy. Mr. DUFFY. It became successful under Mr. Peters, is that correct? Mr. DAMERON. That is correct. Mr. DUFFY. Did the success of the school have anything to do with the Federal Insured Student Loan Program (FISL) ? Mr. DAMERON. I would assume so because understand he was instrumental in getting that program utilized by the school. Mr. DUFFY. Can you, very briefly, give us a summary as to how he handled FISL paper for the school, can you explain that to us a little bit? Mr. DAMERON. I can explain what I have heard again. The FISL application, of course, had to be made out, the applications by the students when they came in and processed through, under the Lender Number, Automation Institute was what they call a self -lender as opposed to some schools who do not have a lend ing number of their own. This means that if you have your own lending number you can sell those papers directly to eligible financial institutions as set forth in Federal regulations or statutes. He, in turn, would then sell this paper to convert it into money to be utilized in the school. Mr. DUFFY. What were the other sources of income for the school do you recall? have specific reference to Federal grants at this time. Mr. DAMERON. All right. The only other sources I know of were National Direct — I am sorry, at that time it was called National Defense Student Loans and the College Work Study Program. Mr. DUFFY. What about the secondary educational opportunity grants, were they involved? Mr. DAMERON. Private schools, at that time, were not eligible for that particu lar program. Mr. WALSH. I wanted to ask how the Automation Institute obtained money from the Department of Health, Education, and Welfare (HEW) to utilize in the college based studies, or the college based program? Mr. DAMERON. In the college work study? Mr. WALSH. That's right, how did they get the money? Mr. DAMERON. Okay, this is pretty much a standard procedure where once a year the school makes application through the regional office, in this case it happens to be in San Francisco, through the proper division of that office, which in this case is headed by Mr. James Hoffe and with his staff they hold an annual meeting of panels made up of people drawn from various sectors of the school industry, private and public. These panels make certain decisions as to whether the application should be granted as applied for or reduced. Notification is sent to the school as to the amount approved on each program and notification of the approval is also forwarded to Washington. This generally occurs in the fall of the year. There is a right for appeal to a regional panel later, if the school is not happy with what they were awarded, they have a later right to make a Federal appeal. After this occurs it's generally in December or January of that year, then
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13G the following spring, grant letters are sent to each school stating that this is what the school's actual grant will be. The grant will always be less than what the panel had approved because there is not enough money in the State allocation to distribute total moneys approved by the panel, so they cut it down propor tionally. the state funding is 40 percent then the school will get 40 percent of what was approved by the panel. Mr. WALSH. All right, Mr. Dameron, then to summarize, the school applies to the regional office for a sum of money to be used in these programs. The applica tion is processed through the regional office. Eventually the school is awarded a fixed sum of money to be disbursed by the school for the benefit of the students under these programs. Is that correct? Mr. DAMERON. That is correct. Mr. WALSH. Mr. James Hoffe was the Senior Program Officer in the regional office in San Francisco who was the responsible official for this program, is that correct? Mr. DAMERON. Yes. He was the one who beaded up the section of the regional office in San Francisco which is concerned with the NDSL, CWS, SEOG and BEOG programs. Mr. DUFFY. Now, Mr. Dameron around October, November 1971, Mr. Peters negotiated the purchase of five West Coast Trade Schools from Computing and Software Company, were you aware of this? Mr. DAMERON. Yes. Mr. DUFFY. And so the organization was known, from that time on as Automa tion Institute, Inc., doing business as West Coast Schools, is that correct? Mr. DAMERON. Yes. Air. DUFFY. Did you become Vice President in charge of those schools? Mr. DAMERON. I became General Manager after a couple of months with the schools. I was transferred to one of the new locations as of December of '71 and became General Manager of five schools at that time. Mr. DUFFY. Were you aware in September of 1972 that Mr. Peters bought the remaining 80 percent interest of the Automation Institute, and now he had 100 percent interest in the company ? Mr. DAMERON. No, I was not, however, I understood that Mr. Tokeshi had been bought out, but I also understood, from hearsay I suppose, that Mr. Peters, Mr. Carman and Mr. Fisher were the owners. I did not know exactly when the pur chase occurred, but it was within that timeframe I should say. Mr. DUFFY. I would like to discuss with you, in some detail, the role of James Hoffe, the senior program officer of HEW in San Francisco, and his relationship with West Coast Schools. Before I get into that, were you aware that Marvin Berson, who operated several schools including Sawyer College of Pomona, Cali fornia, and Harvey Tsutsui, former employee of Automation Institute, formed a consulting firm called Student Financial Aid Advisors ( SFAA) ? Mr. DAMERON. Yes, I was. I would like to make one correction. Mr. Berson did not operate several schools. He had at one time, but as of the time you refer to, he operated only Sawyer College at Pomona. Mr. DUFFY. That is the firm that prepared applications for HEW grants that were processed through Mr. Hoffe's office in San Francisco, is that correct? Mr. DAMERON. That is correct. Mr. DUFFY. You were also aware that Fred Peters contacted them to help prepare applications to receive HEW grants for Automation Institute and West Coast Trade Schools, were you aware of that? Mr. DAMERON. Yes, I was. Mr. DUFFY. But apparently they were charging too large a fee so he declined their services, is that correct? Mr. DAMERON. That is correct. Mr. DUFFY. It was then that Pete Fisher conceived the idea of starting a con sulting service of his own, is that correct? Equities, yes. Mr. DAMERON. For Group Mr. DUFFY. And they were to prepare applications for HEW grants, is that correct? Mr. DAMERON. That is correct. Mr. DUFFY. This consulting firm was a separate corporation called Group Equities, is that correct? Equities, Inc. This was only one facet of their opera Mr. DAMERON. Group tion. They originally had been set up to be a billing service on the FISL program. Mr. DUFFY. In other words they would collect interest and pay it to the parties who held the FISL paper, is that correct?
If
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137 Mr. DAMERON. That is correct. Mr. DUFFY. When was Group II Equities set up? Mr. DAMERON. I don't know when it was formed as a corporation. It first went into operation at the address, One Wilshire Building, and I am unable to give you the date on that, however, they were in operation one month after the lease •was signed. So
if
the lease could be found, the date of that lease could be deter
mined and then that would pin down the actual start of Group II Equities as an operating entity. Mr. DUFFY. Did you have a position with Group II Equities ? Mr. DAMERON. I was called the Vice President with them also. Mr. DUFFY. Who were the other officers of the corporation? Mr. DAMERON. Mr. David Carman, Mr. Pete Fisher, and Mr. Fred Peters. Mr. DUFFY. What positions did they hold? Mr. DAMERON. I am not sure, again I did not see the legal papers but I under stand Mr. Carman was President, and that Mr. Peters and Mr. Fisher were Vice Presidents of Group II Equities. Mr. DUFFY. When did you first meet Jim Hoffe? Mr. DAMERON. The latter part of 71. Mr. DUFFY. Would you tell us the circumstances surrounding your first meet ing? Mr. DAMERON. He was down visiting the school to, I assume, check the pro grams and look the school over, and it happened to be on a Saturday because our school did run on Saturday at that time. I came in to do some work and met him through Mr. Peters, who introduced me to him. Mr. DUFFY. Did Jerry Craft come down at that time also? Mr. DAMERON. No, Jerry Craft was down at later dates. Mr. DUFFY. Did they ever come together, Mr. Craft and Mr. Hoffe, to review the operations of the school? Mr. DAMEBON. Not to my knowledge, I never saw them together at the school. Mr. DUFFY. In the fall of 1972 you went to San Francisco and met with Mr.
Hoffe, is that correct ? Mr. DAMEKON. Yes, that is correct. Mr. DUFFY. Can you tell us how this came about and what happened? But first would you give us the specific date you went to San Francisco, if you can recall ? Mr. DAMERON. I can't recall the exact date it would have been in October or at the very latest, early November. Okay, Mr. Peters came to me a day or so before this trip and said I want you to go to San Francisco with me, and so it was arranged that we would meet at his apartment on the date in question to go to San Francisco along with Mr. Carman. So the three (Peters, Carman, and I) of us met at Mr. Peters apart ment, drove to the Los Angeles International Airport, LAX, flew to San Fran cisco, took a room at the Del Webb Town House on 8th and Market. Mr. DUFFY. Prior to your departure were you advised as to what was the purpose of the trip? Mr. DAMERON. No I was not. Mr. DUFFY. You didn't learn the purpose of the trip until later? Mr. DAMERON. Right. Mr. DUFFY. Proceed. Mr. DAMERON. Okay. Mr. Hoffe then came up to the room and the four of us sat around a small table and talked. Mr. DUFFY. Who led the discussion? Mr. DAMERON. Mr. Peters. And present also, of course, Mr. Carman, Mr. Hoffe and myself. Mr. Peters eventually came around to the point with Mr. Hoffe that he would like to hire him in conjunction with the government job as a consul tant, was the way it was expressed, and at so much money (I do not believe the exact amount was discussed at that particular meeting). The idea being that he would later be paid so jnuch a month, or some arrangement would be worked out, and it was, in my mind unclear as to what details were worked out at that particular meeting, because in a subsequent meeting definite details were worked out. Mr. DUFFY. Well, they wanted the assistance of Mr. Hoffe with respect to these applications that would be filed through his office, is that correct? Mr. DAMERON. Yes, that is it, that is correct. Mr. DUFFY. Okay. What else transpired that you can recall during the course of that meeting? Mr. DAMERON. Mr. Hoffe at first, seemed somewhat surprised, but not totally reluctant. He brought up what a great thing it would be for private schools 63-570 — 76
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138 they would be able to garner more Federal money as opposed to public schools getting most of it, getting the lions share on a prorata basis. He said that he felt that it could grow into quite a large size organization and cannot give any figures, I don't recall them, but I know some figures were tossed around as to the possible potential that might be involved. I couldn't tell you within hundred of thousands of dollars or fifty thousands of dollars, how much that might be. Mr. DUFFY. Do you believe there was a meeting of minds arrived at during this meeting that Mr. Hoffe would be paid in cash? Mr. DAMERON. Yes, I do. Mr. DUFFY. Can you explain that a little bit more in detail to us? Mr. DAMERON. Well, it was discussed, again to the best of my recollection, with out specific numbers being named that he would be reimbursed, on a consulting basis of some sort, in cash. Mr. DUFFY. Cash was definitely discussed? Mr. DAMERON. Yes. Mr. DUFFY. Now, did you go to lunch after that, and then return? Mr. DAMERON. Yes, we did. Mr. DUFFY. Can you tell us the details? Mr. DAMERON. Well, not much to tell on lunch. We merely had lunch and went back. Mr. DUFFY. Was there anything further discussed with respect to cash pay ments ? Mr. DAMERON. Not during the lunch because we were in quite a public place in the coffee shop of the hotel there, the Del Webb Town House. Mr. DUFFY. You returned to the hotel after lunch? Mr. DAMERON. We were in the hotel all the time, we returned to the hotel room after lunch. Mr. DUFFY. And did the discussions continue? Mr. DAMEBON. The discussions continued about working something out and it was arranged that a later meeting would be held with Mr. Hoffe to iron out the details. Mr. DUFFY. Did Mr. Hoffe display a keener interest in this arrangement after lunch? Mr. DAMERON. I would say no, I would say he was keenly interested before we went to lunch. Mr. DUFFY. So his enthusiasm continued? Mr. DAMERON. Yes. Mr. DUFFY. What time did the meeting break up do you recall ? really don't, I would say roughly mid-afternoon because we Mr. DAMERON. flew back that same late afternoon or evening to Los Angeles. Mr. DUFFY. Who flew back to Los Angeles ? Mr. DAMERON. Mr. Carman, Mr. Peters and myself. Mr. DUFFY. What airline did you travel on? Mr. DAMERON. That was PSA. understand you next met Mr. Hoffe in Los Mr. DUFFY. PSA Airlines. As Angeles, is that correct? Mr. DAMERON. That is correct. Mr. DUFFY. While he was attending a seminar? Mr. DAMERON. I believe he was here for the purpose of attending a seminar I did not meet him at the seminar. He came down — this seminar occurred in, again I am not exact on the date, but possibly October or November of '72. This was, of course, conducted during the day time so it was arranged for Mr. Hoffe Equities at the One Wilshire Building in Los to meet in the offices of Group Angeles. These were the executive offices at the time, they were quite nice, quite plush, quite well decorated and quite impressive. Mr. Hoffe came down that evening, I would judge the time to be approximately 7 p.m. in the evening, 6 :30 to 7 :00 something like that. He met with, initially with Mr. Peters, Mr. Fisher, Mr. Carman and myself. Shortly afterwards Mr. Peters excused himself and left Mr. Carman, Mr. Fisher and myself with Mr. Hoffe. Mr. DUFFY. Now before Mr. Peters left did he make any statement indicating how the details should be worked out on these payments? Mr. DAMERON. To the best of my recollection he said something to the effect that, okay, it's all set, you gentlemen work out the details. Mr. DUFFY. Proceed. because
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Mr. DAMERON. Okay. We sat and discussed various possibilities for awhile and finally decided to go and have dinner at, believe it was Cook's Steak House. It's a steak house located on Olive Street, just off the parking lot that is utilized by the One Wilshire Building, so it would be one block back. One Wilshire Building is on Grand, faces on Grand, this would be one block back behind it and to the south just slightly. Okay, the four of us sat at a table, two on each side of the table, and various proposals were handed back and forth. Mr. DUFFY. Who did most of the talking?
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Mr. DAMERON. Mr. Fisher. Mr. DUFFY. Did he seem to be the real brains behind this organization? (Mr. DAMERON. He was spokesman and the bright boy. Mr. DUFFY. Between Mr. Fisher and Mr. Carman, Mr. Fisher was the bright boy of this whole group, in your judgment? Mr. DAMERON. Yes in my judgment, right. Mr. DUFFY. Proceed. Mr. DAMERON. Okay. He ultimately came down to offering to Mr. Hoffe, $1,000 monthly in cash against commissions that would be earned from the clients of Group II Equities consulting and then at the end of the year when the monies were paid in, Mr. Hoffe was to receive 50 percent-50 percent, in other words an equal split, Group II Equities would get 50 percent and he would get 50 percent of
the profits over and above the expenses less the $12,000 that he would have been paid during that year or $1,000 a month, however many months that might happen to run. Mr. Hoffe would not agree to this and subsequently an agree ment was reached whereby he would be paid $1,000 a month but instead of 50 Equities would receive 40 percent, he was to receive 60 percent and the Group percent of the profits, after expenses, and after the $1,000 a month was deducted. Mr. DUFFY. Was there any money passed during this meeting? Mr. DAMERON. Yes, there was. Mr. DUFFY. Would you explain that in detail to us. Mr. DAMERON. Okay. believe it was Mr. Carman that had the envelope in his pocket. Mr. DUFFY. Can you describe the envelope to us and the precise time it was handed over and the other circumstances, as best you can recollect? just mentioned Mr. DAMERON. Okay. Once this agreement was reached that about the 60-40 and what have you, Mr. Carman reached into this pocket, it was in his inside coat pocket, pulled out a business size, a number 10 believe you call them, envelope. Mr. DUFFY. Now you are saying Mr. Carman did this? Mr. DAMERON. Yes. Mr. DUFFY. So it was Mr. Carman that had the envelope? Mr. DAMERON. Yes. Mr. DUFFY. All right, go ahead. Mr. DAMERON. And handed this to Mr. Hoffe and said words to the effect "Well, here's the downpayment," or something like that. Mr. DUFFY. Do you know that there was actually cash in the envelope, from your own personal knowledge? Mr. DAMERON. did not see it, no. But know that it was there, mean because it was obviously what they were discussing. Mr. DUFFY. That was the understanding of the group that was present? believe that Mr. Hoffe immediately stuck it Mr. DAMERON. Yes, to continue, believe that someone said don't you In his pocket without looking at it, and don't know, whether it was Mr. wish to count it? Now who that someone was, Fisher or Mr. Carman, but something was said to the effect don't you want to check it or count it or something like that, and Mr. Hoffe's reply paraphrased would be something like, "No, that's okay." Mr. DUFFY. Do you know where Mr. Carman got that money? Mr. DAMERON. No, do not. Mr. DUFFY. But he was head of the accounting department? Mr. DAMERON. The accounting department was under him. Mr. DUFFY. Under him so he had access to this money? Mr. DAMERON. Yes. Mr. DUFFY. Was this the first payment made to Mr. Hoffe? Mr. DAMERON. To the best of my knowledge, yes. Mr. DUFFY. Was there a comment made a few days after this payment by Mr. Fisher objecting to the method of payment?
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140 Mr. CAMERON. He was not objecting to the payment per se he was objecting to the arrangement on the 60-40 percent split. Mr. DUFFY. What did he say about it? Mr. DAMERON. Again I'll have to paraphrase but he said something about "To hell with him, we'll straighten that out later because I'm not going to be held up like that" or "pay that sort of money" or words to this general effect. Mr. WALSH. Mr. Dameron. did you get the impression that Mr. Fisher had no intention of paying Mr. Hoffe anything except the thousand a month? Mr. DAMERON. I had that impression, yes. Mr. DUFFY. You, yourself, made several payments to Mr. Hoffe in San Francisco, is that correct ? Mr. DAMERON. Carried payments to him for them, right. Mr. DUFFY. Tell me first who gave you the money to transmit to Mr. Hoffe? Mr. DAMERON. Mr. Carman believe in most instances. It's possible that Mr. Fisher may have at one time. On one occasion. Mr. Schoessner, I believe his title at that time was Vice President in charge of accounting, was directed to get the money for me by Mr. Carman. Mr. DUFFY. How do you spell his name? Mr. DAMERON. Mr. Schoessner was spelled, believe, S-C-H-O-E-S-S-X-E-R, his first name is Ed. He was in charge of the accounting department which was combined for all entities involved. In other words, the West Coast Schools. Auto mation Institute and Group Equities, all accounting was in one department, all intermixed as West Coast School's Accounting Department. Now on the occasion when Mr. Schoessner brought me the money, I do know that he was directed to do so by Mr. Carman. Because Mr. Schoessner felt very unhappy to put it very, very mildly about tiie whole situation. He felt that it was not his job and yet he was doing things like some other people were because he worked there. Mr. DUFFY. In other words, Mr. Schoessner made the statement to you that he objected to this money being disbursed in this manner? Mr. DAMERON. Yes, and he objected to being put on the spot by having to get the money. Mr. DUFFY. How was the money paid to Mr. Hoffe? Mr. DAMERON. It was in cash, and except for the first occasion discussed in the restaurant, I would generally fly up to San Francisco, sometimes for the express purpose of carrying the money up to him, and sometimes because I was going up for other reasons and would carry money at that time to make the payments. Mr. DUFFY. Did Mr. Hoffe ever talk to you on the telephone and make a statement that the payments were overdue? Mr. DAMERON. Yes, but not quite in those words. His phrase for it was "When are you going to bring me an envelope?" Mr. DUFFY. When he would do that would you have a discussion with Mr. Carman? Mr. DAMERON. Generally, I would have to go to him because he had the authority would say I had a call from Jim Hoffe and he is anxious to get the money and definitely recall they skipped it for to be paid the money. On one occasion that two months and he was getting rather Mr. DUFFY. Irate? said, Mr. DAMERON. Antsy, about — irate is a better term yes, about this so yon know, if we are going to pay him we have to get the money. Mr. DUFFY. Where were these payments made, in San Francisco, to your best recollection? Mr. DAMERON. These payments were made at the Del Webb Town House, either in the dining room on certain occasions, or on other occasions in my room at that hotel. Mr. DUFFY. How many payments were made in total can you recall? will say approximately six of the monthly payments of $1,000. Mr. DAMERON. Mr. DUFFY. So a total or an aggregate figure, to your best recollection would be around $6,000 that was paid to Mr. Hoffe? Mr. DAMERON. That's correct. Mr. DUFFY. Can you establish the dates that these payments were made? Mr. DAMERON. There is no way that can think of right off the top of my head that I could establish a definite date on them. Unless you have the accounting records of West Coast Schools, and in case a thousand dollars was unexplained nt. any particular time.
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141 So, in summary, we are saying here that all the payments to Mr. were made by you. respect to Group Equities Equities. Mr. DAMERON. Group Equities were made by you with the exception of the Mr. DUFFY. Group first payment which was made by Mr. Carman, or Mr Fisher, is that correct?
Mr. DUFFY.
Hoffe with
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Mr. DAMERON. Right. Mr. DUFFY. Did we establish that Mr. Carman made that first payment? Mr. DAMERON. I am sure that he is the one that pulled it from his pocket. Mr. DUFFY. Now, before I get into additional payments to Mr. Hoffe by you and j\Ir. Berson, B-E-R-S-O-N, is that correct? Mr DAMERON. That's correct. Mr. DUFFY. I would like to go back to some more details about these services that Mr. Hoffe performed for Group II Equities. Now, the purpose of Group Equities was to help private schools on their applications for the HEW tri partite programs, is that correct? Mr. DAMERON. That is correct. Mr. DUFFY. The forms, the operations of the program, the accounting pro
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?
Mr. DAMERON. Yes. That one thing I want to emphasize, Group II Equities car ried more than two hats, so the consulting is only one segment of Group II Equities, but that particular segment was to fulfill the duties you just mentioned. Mr. DUFFY. Group -II had two types of contracts, would you explain that briefly please? Mr. DAMERON. Okay. The first contract was for a school applying for these programs for the first time which had not previously applied on their own, and these applications were made up from information submitted by the school. We had a contractual agreement with each school and for this they would pay a certain percent. In this case it was 5 percent of the monies they actually re ceived, not what was approved, when the grants came out the following spring. These monies were then due to Group II Equities as of the beginning of the Federal fiscal year, because at that point July 1st, they could then draw these monies down. The second contract was for people who had made their own applications that particular year were unhappy with what they had been awarded
and wished to make an appeal. On these contracts, we would make the appeal and the charge on that was 10 percent of the difference between what they would have gotten, based on their original grant, and what they would get as a result of the appeals being made by Group Equities. Mr DUFFY. Both contracts required $200 down payment, is that correct? Mr. DAMERON. A $200 down payment and in the event no funds were granted, the $200 was returned, there was no charge. Mr. DUFFY. Now the original applications were due in October for the school year beginning the following July, is that correct? Mr. DAMERON. Yes, but this varies from year to year and the tripartite applica tions were due sometime in December that particular year. Mr. DUFFY. But the HEW funding commenced in July? Mr. DAMERON. Yes, that's when the money is available, correct. Mr. DUFFY. That's what I wanted to establish. In order for you to gain ex pertise in these HEW grant programs, Mr. Hoffe assisted you, is that correct? Mr. DAMERON. Very much so, yes. Mr. DUFFY. Initially Mr. Hoffe prepared the applications that Group Equities sent to him, is that correct? Mr. DAMERON. Initially, it's not quite correct. Initially I spent a weekend in Oakland with Mr. Hoffe in a hotel while he tried to give me a crash course in how to prepare these applications. Now I had some expertise in them because I had been working in the field of financial aid for Automation Institute and of course with West Coast Schools as well. So I was neither an expert nor a total nov ice. So he tried to bring my knowledge up within the two days that we worked, and went over the applications as best we could. He then assisted me in filling out the applications. In fact, I designed a questionnaire to go to the schools and pick up the information we needed for the apnli cations. I would get this infmtnation and I would go out and work with Mr. Hoffe in the evenings, and working on the applications and completing those. Then I would bring the applications back, have them typed up, and submit it to the various clients for signature and then submit them back to the regional office. Mr. DUFFY. After March of 1973, West Coast Schools was having financial problems, is that correct?
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Mr. DAMERON. That's right. Mr. DUFFY. And in June of
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Equities and became O. A. 1973, you quit Group Dameron, independent consultant ? Mr. WALSH. I wanted to ask some questions about your resignation Mr. Equities and from Automation Institute Dameron. You resigned from Group in June of 1973, is that correct?
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Mr. DAMERON. June 15th. Mr. WALSH. June 15th, 1973. Now. at that time the West Coast Schools had closed down, is that correct? Mr. DAMERON. Yes. Mr. WALSH. And it was obvious to you that they were probably not going to be opened again? Mr. DAMERON. They had a skeleton crew, they had pulled everything back into the offices over on Hill Street, had closed down the One Wilshire Building offices and maintained very much a skeleton crew. One secretary for all three people.
probably all together a dozen people counting the principals. Mr. WALSH. Okay. Now did you have some discussion with Mr. Peters at the time you resigned as to what business you could carry on in the future? Mr. DAMERON. Yes, I did. I told him that I had no idea what I was going to be doing and that inasmuch as I had helped set up the mechanism of Group II Equities, the consultant service, and had the clients, that I would like to maintain that, and if he were willing I would like to buy it on a percentage payout basis. In other words, I would pay Group II Equities instead of him, a cei-tain percent of monies collected in as a result of the consulting agreements which we had signed and worked on the preceding year. This constituted nine schools. He Myself,
agreed to do this. The agreed upon payment was 25 percent of monies I collected in. Mr. WALSH. Now, you entered into a written agreement with Mr. Peters, Equities 25 representing Group II, and that you would agree to pay Group percent of the monies that you collected in the consulting business? Mr. DAMERON. That is correct. Consulting only as it applied to these particular
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Mr. WALSH. The agreement identified the particular schools that you had as clients at this time?
Mr. DAMERON. Right. Mr. WALSH. And you have given us a copy of this? Mr. DAMERON. Yes. right. Mr. WALSH. All right. Now after you entered into this agreement to take over
the consulting business. Mr. DAMERON. The date,
if
you would like it, on that agreement was June 27th,
1975.
Mr. WALSH. Very good. Now, after you entered into this agreement to take over Equities as O. A. Dameron Associates, is the consulting business from Group that correct? Mr. DAMERON. Consultants. Mr. WALSH. Consultants. Now, did you have some discussions with Mr. Hoffe as to how the consulting business would be carried on? Mr. DAMERON. Yes, told him at that point that I could no longer afford to pay the $1,000 a month. I tried to work out some percentage agreeable with both he and myself to continue the agreement that had been made to him previously. And we finally settled on 50 percent, 50 percent, in other words, he received 50 per Equities. cent after expenses and after the 25 percent is paid out to Group Mr. DUFFY. Did you have a discussion with Mr. Hoffe concerning Mr. Berson? Mr. DAMERON. Yes. Mr. Berson and I had never met, but I knew of him and he apparently knew somewhat of me. Mr. Hoffe, of course, knew both of us, he made a suggestion possibly in the latter part of July '73. may have been into the first part of August of '73. I think July is more the correct date on that. And at that time he suggested that it might be wise for Mr. Berson and I to meet with the idea that we might want to form some sort of an association and combine our forces on the consulting business. Mr. DUFFY. Did Mr. Hoffe indicate to you at that time that Mr. Berson was paying him money? Mr. DAMERON. No, he did not. I had heard rumors from where I don't recall, from just around the school business because you know word gets around on these things that this was going on and it was. of course, assumed that it was. Mr. DUFFY. Did you have any discussions with Mr. Berson at a later date which indicated to you that he had been paying Mr. Hoffe money all along?
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contacted each other DAMERON. Yes, a number of them. Mr. Bersou and made arrangements to meet at his home and discuss the possibility of going together. He had originally been the person instrumental in forming a corpora tion called Student Financial Aid Advisors, Inc. No stock had been issued on this corporation. He kept it intact by the normal filing fees and what have you. It was originally incorporated in December of '72. In our discussion in July and August of '73, we agreed to issue 2,000 shares of stock at a par value of $1.00 per share on an equal basis. 1,000 for Mr. Berson and 1,000 to myself, and this is how Student Financial Aid Advisors became an active entity with stock actually issued. Mr. DUFFY. Did Mr. Berson act as a broker on the sale of West Coast Schools
and
earlier? Mr. DAMERON. He had told me he did. Mr. DUFFY. Okay. What was the financial arrangement between the parties in this new company? Mr. DAMERON. All right, between Mr. Berson, myself, and Mr. Hoffe as a socalled silent partner we were to receive a third, a third, and a third, each of the three people would receive one third. This was after expenses, normal expenses had been deducted. Mr. DUFFY. Now was there any discussion as to how much Mr. Hoffe was to be
paid? Mr.
DAMERON. Yes, he would be paid as money came in, his proportion on it, or approximate proportion since you can't tell what the taxes would amount to in advance. Mr. WALSH. wanted to ask about the situation that existed then in the fall of 1973. Your arrangements with Mr. Hoffe were that you had money which would be due to Mr. Hoffe from contracts that you had issued with your clients prior to 1973. Mr. Berson had contracts of his own where money was due to Mr. Hoffe, and then you jointly had contracts where you were going to pay him on the %, %, and % basis, is that correct? Mr. DAMERON. This is approximately correct. think had better clarify that. The monies that had coming in separately from Mr. Berson were those due from the consulting agreement had purchased from Group Equities. had made an arrangement with Mr. Hoffe which have already explained to you on that. Mr. Berson did not have contracts with his clients, his was done on a handshake basis sort of thing. In his case, so he has told me, and believe it to be true, he passed that money on en toto to Mr. Hoffe. In other words, he did not retain any of that monies himself. This was off the original group that he had had prior to our joining forces. Then, when we joined forces, between the two of us as Student Financial Aid Advisers, as have indicated then the agreement was reached of the i/s, ys, and %, which I mentioned just a few minutes ago. Mr. DUFFY. How much did Mr. Berson pay Mr. Hoffe, did he ever tell you? Would you say it would be substantial sum of money over a period of time? Mr. DAMERON. would say that it would, and this is strictly a ballpark guess but it has to be someplace from $10, 12-15-16-18,000. Now that's quite a spread admit but was not aware of what he was paying him all the time. Mr. DUFFY. Now, in your discussions as to how Mr. Hoffe was to be paid. Was he to be paid in cash? Mr. DAMERON. Yes, definitely. Mr. DUFFY. Was there any suggestion that you would like to give him some stock and he objected to that ? Mr. DAMERON, Well, what we attempted to do, Mr. Berson and myself both, on several occasions, we suggested instead of paying him the money as it was coming in that we tried to take certain profits, invest them for the benefit of all three of ourselves into something worthwhile which would be available to Mr. Hoffe at a later date if he left the Government or at some time down the road, rather than to pay cash right now. Mr. DUFFY. He objected to that? Mr. DAMERON. He objected to that. Mr. DUFFY. He wanted cash? Mr. DAMERON. He wanted cash. Mr. DUFFY. When did the first meeting between you and Mr. Berson take place, do you recall? Mr. DAMERON. Yes, again in July or August, 1973. would say late July. Mr. DUFFY. How much money was paid to Mr. Hoffe by you? Mr. DAMERON. Again, can dig this out of my records. would say in the range of $22-24, perhaps as high as $28,000. Mr. DUFFY. You made all those payments yourself?
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144 Mr. DAMERON. Yes I did. Mr. DUFFY. Can you tell us how you made those payments ? Mr. DAMERON. I made them in cash. Mr. DUFFY. Where and when? Mr. DAMERON. Some were made at Del Webb Town Hou.-c, at least one that I can recall, if not more were made at the St. Francis Hotel ;n San Francisco. One was made in his car on the way to the Oakland Airpoi , from a seminar
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Mr. DUFFY. Was anyone ever present when these payments were made? Mr. DAMERON. I can only recall one time, and that was Mr. Berson when he was making payments to Mr. Hoffe and I was making some payments and this occurred in a hotel room I believe that was in the St. Francis. Mr. DUFFY. What year? Mr. DAMERON. That would have been in 1974. Mr. DUFFY. How much money was passed at that time? Mr. DAMERON. I am not sure. Mr. Berson, I am sure, gave someplace from about $1,000 upwards. It could have been a couple of thousand. I myself, I think, mine amounted to, at that point, probably $1,500 or thereabouts. Mr. DUFFY. That was the only time when you ever accompanied Mr. Berson to Mr. Hoffe's office where money was paid by both of you? Mr. DAMERON. Well yes, not in his office, in the hotel room. Mr. DUFFY. In the hotel room at the St. Francis? Mr. DAMERON. Right. Now we had gone up there numerous times together. Mr. Berson and myself, but as far as I can recall this was the only time when money was paid out. There may have been one other time. There may have been two times, but one I am definitely sure of. Mr. DUFFY. And the amount of money that you feel Mr. Berson paid at that time ranged possibly from $500 to $2,000 ? Mr. DAMERON. I would say this is a good approximation. Mr. DUFFY. How do you make that judgment? Mr. DAMERON. Well, Mr. Hoffe was, for want of a better term, suspicious, he felt we were trying not to pay him and we were always paying him. He kept a set of records that were not the best accounting records going. So finally Mr. DUFFY. Well, again that was a bit later. Mr. DAMERON. I am just trying to explain why I was not aware of the amount, why I did not see the actual amount of money, I was busy trying to total up my accounts to show him that I had paid everything that I should have paid to him, while Mr. Berson was actually paying him. So I wasn't sitting there watch ing money being counted out. I was in the room and I know he was giving him money, but I don't know how much. Mr. DUFFY. You mentioned an overpayment of $5,000 to Mr. Hoffe in our prior interview, can you elaborate on that? Equities was Mr. DAMERON. Yes, I can. When my agreement with Group to pay them the 25 percent as the monies came in, when Mr. Peters who had Equities disappeared and I had no way of signed the agreement for 'Group knowing where he was, I held onto the money, as it came in, that normally I Equities. When the final payments came would have been sending to Group in for that particular year, and I was settling up with Mr. Hoffe, I gave him — I am approximating the -$5,000, understand, but I gave him approximately a $5,000 overpayment because that would have been money that would have been Equities had they still been a going entity. I split with Mr. due to Group Equities. Hoffe. I split what normally would have gone to Group Mr. DUFFY. Mr. Peters had disappeared at this time? Mr. DAMERON. Yes, he had. Mr. DUFFY. Where was he ? Mr. DAMERON. I have no idea. Mr. DUFFY. Or why he disappeared? Mr. DAMERON. Well, apparently because of all the irregularities in the West Coast Schools and because of the Government funds that apparently were being messed with. Mr. DUFFY. The next matter I would like to go into with you Mr. Dameron relates to the unproductive FBI investigation concerning this matter. The FBI conducted an unsuccessful investigation of monies paid to Mr. Hoffe, is that correct? Mr. DAMERON. Unsuccessful in what sense? Mr. DUFFY. There was no prosecution on the case?
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145 Mr. DAMERON. As of this point there has not been. Mr. DUFFY. That's why I used the word unproductive. Mr. DAMERON. Okay, all right. Yes, he was called in by the FBI. Mr. DUFFY. Will you tell us, to your best recollection exactly what occurred concerning this matter? Mr. DAMERON. I can only tell you from what he, of course, told me. Mr. DUFFY. Who told you ? Mr. DAMERON. Mr. Hoffe. He said that he was called in. Mr. DUFFY. When did he tell you this ? Mr. DAMERON. I would say about September, October of "74. Mr. DUFFY. And when had the FBI called him in ? Mr. DAMERON. Apparently it had been just like that week or a day or two before or something like that. Mr. DUFFY. All right, proceed. Mr. DAMERON. And he said that they had called him in. Apparently they inter viewed him in the Federal Building, in other words, in the Office of Education. He was told to come up to some office, which one I can't tell you, and the FBI men introduced
themselves and interviewed
him and asked him about certain
ir
regularities and what have you. And Mr. Hoffe apparently denied any wrong doing and at this point the FBI agent pulled out a mimeographed sheet of paper that would be approximately legal size whereon certain figures were listed in columns and he asked Mr. Hoffe if this was his handwriting. If these were his figures or something to this effect, was this his paper? Mr. Hoffe then said, well I
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believe at this point should seek legal counsel. Mr. DUFFY. Now, in his description of that piece of paper to you. Does that re fresh your memory as to your ever having seen that piece of paper yourself in your dealings with Mr. Hoffe? had never seen that particular one. The paper that I spoke of Mr. DAMERON. previously where he was keeping accounts was a separate thing. The one that I was speaking of. I know this is going on tape, but it was like laid out — the one saw was laid out horizontally this way for purposes of graphing out to keep fig ures of what he was being paid by Mr. Berson and by myself. The one that the FBI agent had apparently was vertical like this and have since seen a copy of it. Mr. DUFFY. You have since seen a copy ? Mr. DAMERON. have since seen a copy. Mr. DUFFY. Can you describe it in a little bit more specific detail to us? Mr. DAMERON. I saw it only briefly. Mr. DUFFY. Where did you see it? Mr. DAMERON. He had it with him when he came down to Los Angeles which am sure we will come into later on. Because he had the original and the one that the FBI had was a copy from this apparently, xeroxed a copy. It had a column of schools listed like this, then it had some other columns and can't tell you all the various headings on them. don't know whether my name was on the top of one of the columns, Berson another, or what. I think it went more in the line of pos sible grant, possible fee, things like this. I think that's the way it was set up. Then the third column, third and final column had something headed up that said "My share." Mr. WALSH. Did this appear to be a projection of possible grants and fees that would be entered into in the future, is that correct? Mr. DAMERON. No, this apparently, gathered it to be a projection based on previous year's work. Mr. WALSH. This was a projection then on fees which might be due on applica tions for grants which had already been submitted? Mr. DAMERON. These had already been done the previous year. Mr. AVALS H. And then with an indication as to how much of a fee would go to particular individual, particularly a note by Mr. Hoffe that a certain amount would be his share, is that correct? Mr. DAMERON. Correct. Mr. WALSH. Do you remember what amount was that was indicated as Mr. Hoffe's share? Mr. DAMERON. No, because he listed school by school and had a total, as I said I only saw the thing very briefly. I will say this the list was totally incorrect from the standpoint that he, even though he had access to communications with us ob viously, otherwise we couldn't have worked together. He apparently had made these up from where I don't know, someplace in the office or something because several of the schools that were listed on there were not granted money because
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146 they did not become accredited. To further explain it just briefly. We would take a school that was on the verge of accreditation as a client but if they did not receive accreditation, even though they had received an approval, a panel ap proval, they didn't get money so he had several schools on there that went by the wayside. Mr. DUFFY. Were you questioned by the FBI concerning this matter? can't identify. A Mr. CAMERON. Only on the phone. An FBI agent, whom gentleman from the Los Angeles Office called. Mr. DUFFY. How much time lapsed between the time Mr. Hoffe had been inter viewed and you were contacted on the telephone, do you know? am Mr. DAMERON. I think it was the other way around, and am sorry that so nebulous on that. Mr. DUFFY. Do the best you can. think that was called first. Let me back up and try to put it Mr. DAMERON. was still working in Sawyer College. in sequence. They apparently assumed They went out with the purpose. Mr. DUFFY. I think you should explain. I don't think you made a record of that point that you had worked for Sawyer College. worked for Mr. DAMERON. From a period October 1973 to March 31st, 1974, Sawyer College concurrently with doing these other things as executive director of the school. Mr. DUFFY. Mr. Berson was head of the school? Mr. DAMERON. He owned the school and was running the school for him. So the FBI agent apparently went out there assuming that I was still there, talked to Mr. Berson. What was said was apparently very little. Mr. Berson said well don't always feel should have legal counsel when anything comes up that received a call in my office know what am talking about here, and so then at home from the FBI agent and he did identify himself by name but couldn't tell you who it was now. And said you know that he would like to talk to me said, well, and am afraid would have to seek legal counsel as well. And then shortly after he hung up I received another call and it was Mr. Berson telling me that he had been called upon -by the FBI, had they contacted me? And I said only by phone and I told them, you know, had to have legal counsel, or was going to seek legal counsel. The truth of the matter is we had already re am trying to determine tained legal counsel prior to this and at this point whether Mr. Hoffe was spoken to first or not. In retrospect, believe Mr. Hoffe was spoken to first. I think this is why we decided to get legal counsel. Mr. DUFFY. Dirt you ever hear from the FBI agent after that? Mr. DAMERON. No, did not. Mr. DUFFY. Did Mr. Berson? Mr. DAMERON. Xo, he did not, not to my knowledge. Mr. DUFFY. Did you both obtain counsel? Mr. DAMERON. Yes. Mr. DUFFY. Would you explain that to us please? Mr. DAMERON. We talked to an attorney here in Los Angeles, with the firm of Simon, Sheridan, Murphy, Thornton, and Hinerfeld. Mr. DUFFY. How do you spell those names for the record? Mr. DAMERON. Okay. Simon, S-I-M-O-N and S-H-E-R-I-D-A-N, M-U-R-P-H-Y, T-H-O-R-X-T-O-N. and H-I-N-E-R-F-E-L-D. Mr. DUFFY. What is their address? Mr. DAMERON. That is, 2404 Wilshire Boulevard, Suite 400, Los Angeles 90057. We spoke to a Mr. Hinerfeld. Well, the circumstances were this. Would you like to know who was present at this meeting? Mr. DUFFY. certainly would. Mr. DAMERON. Mr. Hoffe contacted, believe it was Mr. Berson. He may have called me directly, but think he called Mr. Berson. Told him of the visit of the FBI and what have you and Mr. Berson in turn called me or it could have been visa versa, anyway, Mr. Iloffe did contact us, tell us of his problem, and we de cided it was time for the three of us to see what we should do relative to counsel. So we went to this firm and Mr. . . . Well, flew to San Francisco to talk to Mr. Hoffe and then he and his wife flew back down. Mr. DUFFY. Did you meet with Hoffe alone in San Francisco? Mr. DAMERON. He and his wife. Mr. DUFFY. His wife was present during this discussion? Mr. DAMERON. Right. Mr. DUFFY. What was discussed?
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147 DAMERON. Oh just the general thing that it looked like we were probably trouble, that something had blown up somewhere, and we'd better start trying to do something about it. And also my wife accompanied me because I was quite shook up about this whole thing and wanted her, for the want of a better term guess, to hold my hand. Before the evening was over and about all we did was have dinner and no one ate too much, that sort of thing. It was decided that they would, that Mr. and Mrs. Hoffe would, fly down here so that we could all meet with Mr. Berson. So they stayed overnight at our apartment and by that time we had arranged with Mr. Berson to meet at his home. So the two couples, Mr. and Mrs. Hoffe and my wife and myself went to Mr. Berson's home and Mr. Berson's wife was present, and the six of us sat and talked this over at some length, and finally decided. . . . Mr. DUFFY. Was the real substance of the many issues involved in this case discussed at this time? would say, if I understand the question correctly, yes, because Mr. DAMERON. there were very few things held back. Mr. DUFFY. In other words, the fact that monies had been paid improperly that you people were in trouble. Mr. DAMERON. Yes. Mr. DUFFY. And that is the discussion that took place? Mr. DAMEBON. Right. So then we went to this firm. Now the three of us were there. We left the wives at home. So Mr. Berson, Mr. Hoffe and myself spoke to someone at this firm. Now there were two people we talked to eventually, we made two different visits. The second time only Mr. Berson and myself attended because we felt it was ridiculous to have to bring all three people in, to have him come down from San Francisco. We talked at one time to a Mr. Sheridan, and at one time to a Mr. Hinerfeld and unfortunately I can't tell you which one paid in May. we spoke to first. They did send a statement which Mr. DUFFY. How much was the statement? Mr. DAMERON. $495.44, and their statement was dated October 31st, 1974, so that helps pin down a little bit closer to when all this took place, so it would have cannot say say they, I am not, been in October. Their advice was and when whether Mr. Hinerfeld we spoke to first, or Mr. Sheridan, but the last person we spoke to on the second visit suggested that inasmuch as they felt that this would be brought to trial in San Francisco as opposed to here that we would be better off having a San Francisco attorney. So they recommended a Mr. Alvin Goldstein in San Francisco. We arranged an appointment with him, and again the three of us went to his office. Mr. Hoffe, Mr. Berson and myself. We started telling our story, giving him, being very candid with him and in very short order he said, stop right now. I feel there is going to be a conflict of interest involved here, and consequently it is not ethical for me to know anymore than I already know about the operations of either Mr. Hoffe or you two if there is going to be a split between the two, or between the three. So the way it was resolved, he sug gested Mr. Hoffe seek other counsel because he felt that there was a definite conflict of interest and he said if you have one fine, but if not I'll be happy to suggest two or three to you. As a result of this, Mr. Cecil Poole's name was brought up. P-O-O-L-E and so he was brought into the discussion for a couple of moments and he and Mr. Hoffe left and had their own private conference while Mr. Berson and I had ours with Mr. Goldstein. Mr. DUFFY. So Mr. Poole is representing Mr. Hoffe?
in
Mr.
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Mr. DAMERON. Right. Mr. DUFFY. Now after these discussions with your attorneys, was there ever any pursuit of this case by the FBI or any other government agency until this
Subcommittee came onto the scene? Mr. DAMERON. Not that I am aware of. Mr. DUFFY. In other words no one has made any contact with you? Mr. DASIERON. The only things that have happened, Mr. Hoffe was contacted and was supposed to have some sort of an internal investigation within the Office of Education and I am not clear as to what it was going to be, but in other words, he was supposed to appear before some review board. Now they have moved him out of his office of responsibility. He is working in a different office up there now. Mr. DUFFY. In other words, Mr. Hoffe has been reassigned in the same office? With different duties? Mr. DAMERON. Same building. But having nothing to do with these particular things, and he was supposed to have this meeting or this review by the Office of Education.
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Mr. DUFFY. Mr. Berson, have you been in touch with him since then? Mr. DAMERON. Yes. Mr. DCFFY. Has he been pursued at all in this matter with reference to the FBI ? Mr. DAMERON. He knows nothing about it anymore than I do. In other words, he has not as far as we can tell. Mr. DUFFY. Now one last question. Mr. DAMERON. May I interject one thing that may be of importance and it may not. Our attorney contacted the U.S. Attorney up there and or perhaps they con tacted him, I think they wanted us to testify and he said no way would I let them testify unless we know we can work out something, immunity or what have you. And that's the last he had heard. Mr. DUFFY. When was that Mr. Dameron? Mr. DAMERON. Oh, that would have been Mr. DUFFY. Sometime ago? Mr. DAMERON. Several months back, yes. I don't think, by the way, that this review has taken place yet. Supposedly we were supposed to hear about it once it had taken place. Mr. DUFFY. Is there a $5.000 retainer involved in this at all? Mr. DAMERON. I paid Mr. Goldstein $5,000 and Marvin Berson paid him $5,000. Mr. DUFFY. Now, as I say the last question I have here, maybe Mr. Walsh has some questions. Did Mr. Hoffe and Mr. Berson let it be known that for a fee things could happen with respect to private schools obtaining HEW funding? Mr. DAMERON. I was never present to where I could swear that this was said, but from speaking to, let me call them the original clients of Mr. Berson, two or three of them knew what was going on. So he obviously had said something to them. Mr. Hoffe had a tendency, he was a very intelligent man in one way, IQ wise. Very disoriented people-wise. For want of a better way to put it. I don't know how to explain what I am trying to say. But he, someone would call him about how to do something on an application and he would say what you really need is some expert help so he would recommend either our company or another one or two or three, and he would always try to recommend two or three. even know of one occasion when he recommended they not use us. Well, frankly the reason they didn't is because we didn't want that particular person ns a
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client anyway. But that's the, about all think can say unless you have any specific questions. Mr. DUFFY. Can you identify any of the two or three schools that knew of these payoffs ? Mr. DAMERON. believe that Mr. Frank Hollar, he's a retired Colonel from the Marine Corps. He owns two schools down in San Diego. Mr. DUFFY. Can you identify him further and where these schools are located? Mr. DAMERON. Yes, they are both located on El Cajon Boulevard. Mr. DUFFY. How do you spell that? Mr. DAMERON. E-L C-A-J-O-N in San Diego. Now there is one in the City of El Cajon, but this is El Cajon Boulevard in San Diego. And this would be approximately 5900 block I think it is. And both schools are located in the same building, well he has since then bought another building which is an extension. One of the schools is American Business College and the other one is San Diego College of Medical and Dental Assistants. Another one, can't remember his last name. George Adamache. Mr. DUFFY. And where does he live? Mr. DAMERON. He is in, where he lives I am not sure but he operates a school in Ventura, whether he lives in Oxnard, I don't know. Mr. DUFFY. Ventura, California? Mr. DAMERON. Yes. And that's a Sawyer College that originally was owned by Mr. Berson and it has since been sold to Mr. Adamache. Mr. Adamache under stand, is in the process of trying to sell out to his wife because they have agreed to disagree on a marital basis. One other one would be Al, don't know whether his name is Allen or Alvin or what, Al Mentzer, and he owns United College of Business in Hollywood, and that's on the corner of Sunset and Vine, or just off the corner of
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Mr. DUFFY. What's the basis of your feelings? Mr. CAMERON. Comments that were made. Mr. DUFFY. By whom? Mr. DAMERON. By them. For example, Frank Hollar, let's take him as a prime example, had brought up several times that Mr. Berson has an ego trip and
lie
always
has to satisfy his ego by letting people know how he can get things
done and stuff like this. He like everyone else in the school business has heard about these cases, not yours, but they'd heard about the FBI and the whole thing. So it's reached a point where they are figuring now they don't have to pay the money that they owe. As far as I am concerned the last couple of years has come through straight and honest, they owe it. Mr. Hollar called me down a couple of months ago and wanted to make a deal with me where I would settle for something like 20 percent on the dollar. And there is quite a great deal of money involved and I have a family and have to make a living so I just can't afford to go that way. He made the comment at that time, and this is why I am coming around to this, he made a comment at that time, "Well, I just thought we could work something out because I'd hate to stir up anything else." Which to
me was a veiled threat. Mr. DUFFY. Now, have you destroyed any records yourself Mr. Dameron? Mr. DAMERON. The only one that I can recall is the one where I was trying to prove to Mr. Hoffe that I paid him the payments that I paid to him and I had these written down on a piece of paper just like you're using there, a legal pad, destroyed that, that was one sheet. and so when came back Mr. DUFFY. Any other records you've destroyed ? Mr. DAMERON. I've destroyed some records but not in relation to this. I have destroyed some old records, having nothing to do with this case. In other words, applications that were from three years ago when I started going through the files to see what I had. Mr. WALSH. Mr. Dameron I would like to ask you if you have any first hand knowledge of improprieties that took place with respect to the processing, han dling of FISL money? Mr. DAMERON. Well, number one, I think it's a well known fact just a matter of record that refunds were not made. In fact I understand there were several hundred thousands, perhaps getting into the millions of unrefunded monies that should have been refunded a long time ago. Mr. WALSH. Excuse me just a minute. Mr. DAMERON. Yes. Mr. WALSH. When you speak of that you're speaking of money which was due to the student to reduce the obligation he had on the promissory note that he signed, right? Mr. DAMERON. Either to the student or to the financial institution. Mr. WALSH. Where the students had for one reason or another dropped out. Mr. DAMERON. Dropped out of school. Mr. WALSH. Therefore, he didn't have an obligation to pay the full amount on his note? Mr. DAMERON. Yes, yes. Mr. WALSH. So the school had an obligation to refund this money to reduce this obligation and the school had not done this, is that right? Mr. DAMERON. Correct. Plus the fact that on their billing service, and I can't prove this by standing there watching a machine or something, but I feel that they were charging interest on all this unrefunded money, and perhaps they weren't keeping it. but they were forwarding it on to credit union or whoever is holding the FISL, but nevertheless the point is they should not have been charging interest on money that should not have existed on paper at that time. Mr. WALSH. Mr. Dameron, let me try to clarify that a little bit then. That the Government pays the interest on the promissory note for the student while he is a student at school, is that right? Mr. DAMERON. Correct, plus three months after. Mr. WALSH. Plus three months after?
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Mr. DAMERON. Right. Mr. WALSH. So that where
a student drops out of school then the interest which should be charged, which might be payable by the Government would not be for the full amount of the loan, it should only be on the reduced amount after the refund has been made? Mr. DAMERON. Correct.
150 Mr. WALSH. So that if the school continues to bill the Government for its client, for interest at the full face amount of the loan then it was billing the Government for an amount which the Government was not actually obligated to pay, correct? Mr. CAMERON. That's correct. I don't know if I mentioned brokers, was thinking about it but they were using brokers to sell the paper which of course is a no no. As a self lender they legally can sell the paper but it should be sold at par to whomever they sell it to you're not supposed to discount it at all. Mr. DUFFY. They were discounting? Mr. CAMERON. I don't know that they were discounting but I feel they were. Mr. DUFFY. Were they selling FISL paper after the schools were out of operation? Mr. DAMEROST. Well, definitely because they sold, as a matter of record, they sold to Ralph's Credit Union in July or August or someplace like that. And when in effect the schools closed in May. Mr. DUFFY. Is there anything else you have, Mr. Walsh? Mr. WALSH. I believe that will be all. Mr. DUFFY. Well, Mr. Dameron, I want to thank you very much for your cooper ation and we are going to forward this information on to Washington to our superiors for evaluation and final decision. We make no promises to you for your cooperation but we deeply appreciate your assistance. I think you have been very helpful to the Committee.
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Mr. DAMERON. Thank you. Mr. DUFFY. Mr. Dameron. after this interview has been typed would you review it for accuracy. Please make any corrections that you feel are merited. I would then appreciate it if you would initial each page and them we will have you sign this staff interview before a Notary Public so we can have all of your
answers under oath. Do you agree to this procedure? Mr. DAMERON. Yes. I have read my answers to all questions propounded to me in this staff inter view and they are true and accurate to my best recollection and knowledge. O. A. (DAN) DAMERON. Subscribed and sworn to before me this 30th day of September, 1975, Hazel B. Gavion, Notary Public in and for County of Los Angeles, State of California.
Senator NUNN.
At this point
Thank you both for being here.
we
will recess until
2 :15 p.m.
[Whereupon, at 1 :25 p.m., the subcommittee recessed, to reconvene at 2 :15 p.m., the same day.] [Members of the subcommittee present at time of recess : Senators Nunn and Percy.] AFTERNOON
SESSION
[The subcommittee reconvened at 2 :15 p.m., Senator Sam Xunn, presiding.] Senator NUNN. The subcommittee will be in order. [Members of the subcommittee present at time of reconvening: Senator Nunn.] Senator NUNN. Our next witness this afternoon is one of our sub committee staff members, Mr. LaVern Duffy. You have not taken the oath yet, have you? Mr. DUFFY. No, sir. Senator NUNN. Do you swear that the testimony you are about to give before this subcommittee shall be the truth, the whole truth, and nothing but the truth, so help you God? Mr. DUFFY. do.
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TESTIMONY OF LaVERN J. DUFFY, ASSISTANT COUNSEL, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS Senator NUNN. Mr. Duffy has done a tremendous amount of work on this and has done an excellent job. Mr. Duffy, you have a prepared will let you present it in any fashion you wish. statement here. Mr. DUFFY. Thank you, Mr. Chairman. Mr. Chairman, from the testimony of Edmund Schoessner and others, the subcommittee has heard allegations of corrupt and ques tionable practices at the West Coast Schools in the expenditure of Federal funds. The staff of the subcommittee sought to determine the validity of these allegations. What the staff has found is that the Department of Health, Education, and Welfare — at the headquarters level in Washington and at the regional office in San Francisco — neglected to pursue considerable evidence that West Coast Schools and its principal officers were involved in serious irregularities that came to their atten tion as early as June of 1973. I will now testify in connection with information and documenta tion the staff obtained concerning these irregularities. Alexader Grant & Co. is a firm of certified public accountants with accounts throughout the United States and in many foreign countries. Its headquarters are in Chicago at No. 1 First National Plaza. Alexander Grant & Co. was retained by Automation Institute of Los Angeles, Inc., to serve as auditor. Automation Institute of Los Angeles, Inc., was also known as West Coast Schools and will be re ferred to by that name throughout my testimony. West Coast Schools was audited by Alexander Grant & Co. for the fiscal year ending June 30, 1972. The results of that audit were issued December 15, 1972, in an audit report. Mr. Chairman, the subcommittee has obtained from Alexander Grant & Co. a copy of the audit report. We have obtained several other perti nent documents. ask that each of these documents be received as exhibits following my testimony. Senator NUNN. Without objection. Mr. DUFFY. Frank Covaro is the director of personnel and recruit ment of Alexander Grant & Co. Mr. Covaro gave the subcommittee an affidavit dated October 20, 1975. Mr. Covaro made part of his affidavit a chronology of events he began writing in diary form in April of 1973, when persons associated with West Coast Schools told him and other Alexander Grant officers of improprieties at West Coast
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Schools.
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will now briefly refer to some of the highlights set forth in Mr. Covaro's five-page chronology to show how Alexander Grant & Co. tried to interest HEW authorities in allegations of serious irregulari ties at West Coast Schools. might add that Alexander Grant & Co. was unsuccessful in pro voking the interest of HEW authorities — and the allegations of wrong
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f ul practices at West Coast Schools may never have come to light had this subcommittee not become involved. On May 29, 1973, Andrew Ippolito, an accountant for West Coast Schools, met with Frank Covaro and told him that the principal offi cers of West Coast Schools had diverted the school's funds to their own bank accounts. After receiving this information, Mr. Covaro asked to see certain records at West Coast Schools. F. P. (Pete) Fisher, senior vice presi dent of West Coast Schools, refused to let Mr. Covaro see these records. On June 4, 1973, Fred Peters, the president of West Coast Schools, F. P. Fisher, and the school's counsel, Robert Bernstein, met with Frank Covaro and attorneys for Alexander Grant & Co. In his chronology of events, Mr. Covaro described the June 4, 1973, meeting this way : Peters and Bernstein belligerent and bellicose. They said the audit firm had no for period of allegation.
right or responsibility
Attorneys for Alexander Grant & Co. told Robert Bernstein that the allegations implied the commission of a Federal crime. On June 6, 1973, Mr. Ippolito supplied specific information to Mr. Covaro alleging the diversion of Federal funds and other improper will read from page 2 of Mr. Covaro's chronology : acts.
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$425,000 had been diverted in recent months. $285,000 in FISL funds had been transferred Union Bank and then drawn off by the principals
1.
at
2.
to a Group
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bank account
— Peters, Fisher, and Carman.
3. Ed Schoessner had documents at home which identified the dates and amounts of moneys diverted. He had kept these documents for his own protection. 4. NDSL funds had been used by the principals to invest in WHAM Corp. and other ventures. Possibly as much as $375,000 had been diverted. 5. Ralph Collela had bragged of converting a large sum of money into travelers checks for Dave Carman.
7, 1973 — again,
according to Mr. Covaro's chronology — F. P. Fisher met with Frank Covaro and one of Covaro's assistants. Mr. Fisher said he had spoken to Fred Peters in Washington. On June
Peters was said to be iipset about the auditors reviewing the records
III
of WHAM, Group II, and Group Equities. Mr. Fisher said it was Mr. Peters' decision that the auditors should confine their work to the already audited statements. Mr. Covaro said this was unacceptable. The meeting ended. Also on June 7, Mr. Covaro and his associates agreed that they
should obtain the documents in Edmund Schoessner's possession. They met with Mr. Schoessner and he agreed to supply copies of checks to the auditors. For example, he agreed to furnish advices for three $15,000 cashier's checks, each payable to a principal officer — Peters, Fisher, and Carman. According to page 3 of Mr. Covaro's chronology, Mr. Schoessner supplied the following information to the auditors of Alexander Grant & Co. 1. The Union Bank account on which the $290,000 check was drawn was a Group account. 2. $265,000 in commissions had been paid to place $1 million in FISL paper. 3. The man in charge of the Teachers Credit Union had permitted replace ment of "good" FISL paper for "bad" rather than required cash refunds. 4. The principals had purchased 75,000 shares of a San Bernardino bank presumably with FISL or NDSL funds. 5. Peters told Schoessner a story of flying to an undisclosed location with a large amount of cash.
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153 6. A prepaid legal fee of $15,000 stein ; Schoessner believed this was sible charges against the principals.
had been paid by the school to Bob Bern to cover bankruptcy of the schools or pos
invested in WHAM. of records referred to by Karen Steen were withheld from HEW, not Alexander Grant & Co. 7. More than $200,000 had been 8. He said that the three boxes
Senator NUNN. Let me ask you a couple of questions. Going back 3 : The man in charge of the credit union had per mitted replacement of "good" FISL paper for "bad" rather than required cash refunds. Can you give us a more complete opinion about that allegation? Mr. DUFFY. We are talking here about FISL promissory notes where refunds were due. Refunds should have been made to the par ties and were not made. Senator NUNN. What does the Teachers Credit Union have to do with this? think Mr. Mr. DUFFY. They had purchased this FISL paper. do. "Walsh has more knowledge about this specific incident than Senator XUNN. Mr. Walsh, why don't you join Mr. Duffy so we can get a complete picture of this ? Mr. DUFFY. am not positive. Mr. Walsh may have the figures as don't to how much FISL paper Teachers Credit Union purchased. have those figures. Mr. Vigen is the accountant. He is getting those papers for us now. John, do you want to explain about good FISL paper versus bad
to allegation No.
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FISL paper.
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Mr. WALSH. The Teachers Union, was just informed, had pur chased approximately $900,000 worth of federally insured student loans. The Teachers Union and some of the other credit unions and savings and loans which purchased these loans from West Coast Schools had an arrangement whereby when the student dropped out of school and didn't complete his education and therefore the amount that was due on the face of the loan was not the full amount, that the school would take that loan back and give them a new loan for another student. So when they are speaking about replacing bad loans for good loans, they are speaking about taking paper for students who had dropped out of school and replacing that with new loans where the student had just entered school. Senator NUNN. These were purchases by the Teachers Credit Union directly from the West Coast School? Mr. WALSH. Yes, sir. can understand why somebody would want to Senator NUNN. replace bad paper with good paper, but the way this reads, its says don't understand why replacement of good FISL paper for bad. that. anybody would want to do think that must be a typographical error. Mr. WALSH. Mr. DUFFY. It is a typographical error, Senator. frankly didn't think we have established in our independent notice that before. investigation that is exactly what they were doing, replacing bad FISL with good paper. Mr. WALSH. Yes, sir; that is right. They had an arrangement whereby the student dropped out of school, there were some problems that came up as far as collection, that then the school would take
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63-570 — 76
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that loan back and give another loan for the same amount to the bank or the credit union and the bank would not pay them any money for it. Senator NUNN. Let's go a little further. What is wrong with that arrangement
?
Mr. WALSH.
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don't believe there is anything illegal about that, Senator. Of course, guess the question might be what eventually happened to those notes that were taken back ? We are not in a position to answer that. Senator NUNN. The Federal Government is still standing behind them 100 percent whether they are good or bad, aren't they, according to your previous testimony ?
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Mr. WALSH. Yes, sir. Senator NUNN. The Federal Government is still paying them even if they are holding bad paper ? The Federal Government is 100-percent guarantor of it. How does it get to be bad ? can see how the holder of the note wouldn't be entitled to collection from the student, but the holder of the note is still entitled to collect from the Federal Govern ment, aren't they ? Mr. WALSH. Yes. think probably — am surmising there — but believe that the banks or the credit unions would prefer not to have to go through the Senator NUNN. They didn't want to have to go through the motions of collection ? Mr. WALSH. That is right, go through the claim cycle. There will be testimony that the claim cycle takes a very long time indeed to get
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the money back.
Senator NUNN. They didn't want to have to go through all the reel of collecting the money from the Federal Government. They wanted to have good paper that they could collect directly from the borrower ? Mr. WALSH. Yes, sir ; that is right. Senator NUNN. But the school was willing to take that bad paper and go through the cycle as a condition of being able to sell that paper readily : is that right ? can't say what they did with it, Mr. WALSH. They took it back. whether they filed claims for it or whether they did something else with it. might say this : We have asked HEW to advise us how much money has been paid directly to West Coast Schools for claims for defaulted loans. don't know whether HEW has not responded as to any figure. there were no direct payments or whether they are unable to locate it. Senator NUNN. Let me ask one other question. No. 7 : More than $200,000 had been invested in WHAM. No one sets forth in whose name these $200,000 investments were made. Is this in exchange for stock and, if so, whose name did the stock go into ? Mr. PUFFY. Mr. Chairman, we are sroing to have specific testimony on WHAM from Mr. Walsh later. you want to hear it now, we
tape
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can hear
If
it now.
Senator NUNN. No, as long as we connect that up. It seems to me we are talking about investment that could even be in the name of the school. Mr. WALSH. will get into the details now. The stock was issued in the name of Fred Peters personally. After the stock appeared to be of
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155 no value, it was then later transferred into the name of West Coast Schools. But it was originally bought for Fred Peters personally. think it probably would be just Senator NUNN. We have a vote. as well for me to leave now. Senator Percy may or may not be back am not certain. He has other meetings. We will this afternoon. recess until return, which will be in about 10 minutes.
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[Brief recess.] [Eecess taken with the following members of the subcommitteepresent : Senator Nunn.] [Members of the subcommittee present at the time of reconvening
after a brief recess : Senator Nunn.] Senator NUNN. Mr. Duffy, why don't you proceed where we left believe was discussing the eight allegations on page 4. off, which don't have any other questions at the present time. Mr. DUFFY. Karen Steen, who was employed by West Coast Schools as an $850-a-month "supervisor of accounts receivable," gave the subcommittee an affidavit October 28, 1975, in which she said that cer tain files had been missing during the Alexander Grant audit for the fiscal year ending June 30, 1972. Miss Steen said D. M. Carman, executive vice president of West Coast Schools, admonished her in front of other employees for hav ing mislaid the files. But she said she later learned that these files had been pulled and hidden to prevent the auditors from looking at
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Mr. Schoessner clarified this 1973 statement to Mr. Cpvaro with respect to Karen Steen when he stated in his sworn testimony that he had been directed to keep boxes of records from the auditors of
Alexander Grant & Co. As have indicated earlier in my statement, Frank Covaro and his associates at Alexander Grant & Co. tried to interest HEW au thorities in the West Coast Schools matter. On June 11, 1973, they wrote this letter to HEW officials :
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This firm was engaged by West Coast Schools ("Schools") to audit its books and records for the period ended June 30, 1972. The engagement was completed and OUT report for said period was issued on December 15, 1972. "We understand that "Schools" has been and may continue to be a participant in the Federally Insured Student Loan ("FISL") and the National Defense Edu cation Act ("NDEA") programs administered by the Department of Health Education and Welfare, although its eligibility to participate in such programs may have been suspended. Recently certain former employees of '"Schools" have brought to our atten tion several allegations of impropriety concerning the financial condition and operation of "Schools." These allegations relate to, among other matters, im proper use of proceeds received by "Schools" under the "FISL" and "NDEA" programs during 1973. We advised "Schools" of the substance of certain of the allegations and re quested permission, at our own expense, to perform whatever procedures we thought appropriate to verify the allegations. We made such request in order to determine whether these allegations are true. It is our opinion that "Schools" has not, to our satisfaction, cooperated with us in this effort and at this timewe are unable to confirm or deny the substance of the allegations. Under these circumstances we believe it is in order to advise you of the fore going, for such purposes as you may deem appropriate.
The letter was sent to the following officials of HEW : Dr. Leonard Spearman, Director of Division of Student Assist ance, U.S. Office of Education, HEW, Washington, D.C.
156
William M. Simmons, Jr., Director, Division of Insured Loans,
HEW, Washington, D.C.
Edward W. Stepnick, Director, HEW Audit Agency, Washing
ton, D.C.
Herbert Witt, Regional Audit Agency, HEW, San Francisco, Calif. Telephone calls were also placed to HEW officials alerting them to the contents of the letter. Frank Covaro referred to the telephone calls in his chronology. He said :
[Ira] Landis, [Melvin] Cowen and [Richard] Sarazen [officials of Alexander Grant & Co.] attempted to contact HEW at 4:45 PM (EDT) [June 81. This call was to be official notification of the allegations which had been brought to our attention. No one answered in Washington. June 11, 1973 — Landis and Covaro contacted William M. Simmons at HEW and read the letter. Later they contacted Edward Stepnick, Director of HEW Audit Agency. Stepnick asked that we send a copy of the letter to HEW Audit in San Francisco. Four attempts to reach Dr. Spearman failed. June 12, 1973 —called Dr. Spearman : He did not return our call. June 13, 1973 —called Dr. Spearman again, he was not available. Subsequently, Pat Hopson, Assistant Chief Program Support Branch, called at request of Dr. Spearman. Landis read letter to her. West Coast Schools closed down May 24, 1973. On June 11, 1973 — the same day Alexander Grant & Co. was writing to the Federal Government to report possible irregularities at West Coast Schools — three men walked into a bank in Phoenix, Ariz., with a briefcase con taining about $278,000 in $100 bills. According to the assistant vice president of the bank, the three men were Fred Peters, president of West Coast Schools ; D. M. Carman, executive vice president of West Coast Schools; and F. P. Fisher, senior vice president of West Coast Schools. David L. Smith was, on June 11, 1973, assistant vice president in a Phoenix branch of the First National Bank of Arizona. Mr. Smith gave an account of his dealings the morning of June 11, 1973 in an affidavit he swore to June 29, 1973. David L. Smith said that it was between 9 :30 and 10 o'clock the morning of June 11, 1973 when 3 men walked up to his desk at the bank, identified themselves as being owners of West Coast Schools and asked him to convert into cashier's checks about $200,000 they said they were carrying with them in a large briefcase. Mr. Smith said the men told him they hoped to conduct the trans action and still make a 10 :30 a.m. flight back to Los Angeles. Mr. Smith said he told the men he could not have the cash counted and issue the cashier's checks in time for them to make a 10 :30 a.m. flight. Mr. Smith said one of the men told him they would have to take later flight. Mr. Smith said a bank employee, Priscilla Karl, arranged for the vault teller, Shelby Scott, and two other tellers, Beverly Thorn and Elizabeth Slater, to count the cash in the office of another bank officer. Mr. Smith said he asked Fred Peters where the cash came from. Mr. Peters asserted that the money was from the Union Bank of Cali fornia and named a bank officer there who would verify that, Mr. Smith said, adding that he called the officer and the previous transaction
a
was verified.
Mr. Smith said he could not remember the name of the Union Bank of California officer he spoke with.
157
Mr. Smith said he then spoke with E. J. Tinsley of the Arizona bank's security section and had him check with the U.S. Secret Service to "verify that there were not a lot of $100 bills in circulation." Tinsley "also made a review of the $100 bills Mr. Smith said E. and felt there was no problem with them." Meanwhile, the tellers counted the cash, arriving at a total of $278,000, Mr. Smith said. He said that Fred Peters, D. C. Carman, and F. P. Fisher told him they wanted 16 cashier's checks each in the amount of $5,000 and a 17th cashier's check for the remainder. Mr. Smith said he asked Peters, Carman, and Fisher why they had this cash in Arizona. He said they explained that "someone was trying to get the money in California." Mr. Smith said that was the extent of the explanation he received. Mr. Smith said he and Fred Peters discussed the possibility of leav ing the money in a time certificate of deposit in the First National Bank of Arizona, but that neither Mr. Peters nor the other two men wanted to do that. Mr. Smith concluded his account of the June 11, 1973 transaction this way : . . . the 17 cashier's checks were signed by Fred Peters, he thanked the three tellers for being so fast in counting the money, and I have not seen the gentle
J.
men or heard from them since.
By June 29, 1973 — the date of David L. Smith's affidavit— six of the cashier's checks had been cashed, including check No. T186736 for $197,983. Independent inquiry by the subcommittee staff has
shown that the remaining 11 cashier's checks were also paid. In addi tion, documentation obtained by the staff, and which will be introduced as evidence later in these hearings, indicates that most of the $278,000 was traced to Fred Peter's bank account. Senator NUNN. Excuse me just a second. This June 29, 1973 affidavit by Mr. Smith, who was that affidavit to ? At whose request was it given ? Mr. WALSH. can respond to that, sir. The affidavit came about in this fashion. When the school closed — think as related in my earlier testimony — after the school closed the school sold $100,000 worth of insured loans to Kalph's credit union. These were notes that had been held, believe, by the First City Bank of Alhambra. At the time the school closed the First City Bank of Alhambra had filed a suit against West Coast Schools, alleging that the notes which they held as collateral for the loans that they had made to the West Coast Schools, that these loans were worthless. During this suit, an attorney, believe his name was Mr. Sanchez, learned of this incident. He contacted the bank in Arizona and obtained an affidavit. That affidavit was used in the proceedings by the First City Bank of Alhambra against West Coast Schools. Senator NUNN. Could we have a copy of that affidavit?
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Mr. WALSH. Yes.
Senator NUNN. Has it been made a part of the record ? Mr. DUFFY. It is pait of the record of my testimony, Senator. will now return to the other events of June 11, 1973 ; that is, the letter sent and the calls made to the three Washington officials of HEW by Alexander Grant & 'Co. in which the question of alleged irregularities at West Coast Schools was raised.
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interviewed the three HEW officials who were John Walsh and sent the letter by Alexander Grant & Co. One of the men — Dr. Leonard Spearman, Director of the Division of Student Assistance at HEW — told us that he had no recollection of receiving the letter or the phone calls. Dr. Spearman told us that no such letter could be found in his files. According to Frank Covaro's diary, Alexander Grant & Co. tried to call Dr. Spearman, but Dr. Spearman did not return the call. However, Mr. Covaro's chronology did show that, after the second call to Dr. Spearman, a person associated with Dr. Spearman, Pat Hobson, called Alexander Grant & Co. Mr. Covaro's diary noted that Ira Landis of Alexander Grant & Co. read the letter over the phone to
Ms. Hobson. talked to Mr. Landis in Los Angeles about this matter. He recalls specifically talking to Ms. Hobson about this matter over the telephone. Mr. Walsh and interviewed Pat Hobson, who is the Assistant Chief of the Program Support Branch at HEW. Ms. Hobson denied that anyone read the letter of June 11, 1973, to her, and she denied knowing anything about the existence of the letter. However, William M. Simmons, Jr., Director of the Division of Insured Loans at HEW, told Mr. Walsh and me that he did receive the June 11, 1973, letter from Alexander Grant & Co. In a subcommittee affidavit, sworn to November 7, 1975, Mr. Sim mons said he received the phone call from Alexander Grant & Co. June 11 and received the June 11 letter itself on or about June 16,
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1973.
Mr. Simmons said that upon receipt of the letter, he had his secre tary make 6 to 10 copies for distribution to persons within HEW who would be interested in its contents. He said he contacted Maurice Tansey, Chief of the Claims and Collection Branch of the Division of Insured Loans at HEW. Mr. Simmons said Mr. Tansey was in frequent communication with the Internal Revenue Service, and he asked Tansey to have the letter referred to an office at IRS with an interest in matters of this kind. Mr. Simmons said Maurice Tansey agreed to do this. Mr. Simmons said the notification of IRS was to be done on an informal basis because going through established channels would take an unnecessarily long period of time. He said that Mr. Tansey had assured him November 5, 1975, that IRS had received the letter. Mr. Simmons said that on June 19, 1973, some 3 days after his re ceipt of the letter, he sent a memorandum to Edward A. Stepnick of the HEW Audit Agency. wish to point out that Mr. Stepnick himself was one of the three Washington-based HEW officials who were sent
I
tho letter.
Mr. Simmons said he sent the memorandum, entitled "Renewed for Emergency Audit, West Coast Schools, Los Angeles," to Mr. Stepnick, but that he routed the memorandum through S. W. Herrell, Acting Deputy Associate Commissioner for Health and Request
Education. Mr. Simmons said that in his memorandum he urged that a full HEW audit be begun at once. Mr. Simmons said that his original memorandum of June 19 with the June 11 letter attached were returned to him by S. W. Herrell
July
3, 1973.
159
Mr.
Simmons said there was
a
notation on the memorandum
in
which Mr. Herrell indicated that he, Herrell, had been notified that an audit would be conducted July 23, 1973, by the HEW Audit Agency.
Mr.
Simmons said : "I considered the return of my original memo to Stepnick, with the Alexander Grant Co. letter attached, to be highly
unusual." The subcommittee obtained from Mr. Stepnick
a copy
of the June
11,
1973, letter he received from Alexander Grant & Co. Mr. Stepnick wrote on the upper right-hand corner of the letter : have called Herb Witt on this for necessary action. Please advise OE —Office of Education — that we will look into. Mr. Stepnick made a second notation beneath the first in which he
I
wrote
:
Called Bill Walsh Simmons.
on
June
19. Asked
him to notify Len Spearman and
Bill
In his affidavit, William Simmons, Jr., Director of the Division of Insured Loans, also acknowledged that he was aware of the affidavit sworn to June 29, 1973, by David L. Smith, assistant vice president in a First National Bank of Arizona branch office in Phoenix. But, Mr. Simmons said, it was not until November 5, 1975, while reviewing HEW files, that he learned of the Smith affidavit. Plowever, Mr. Simmons said, November 5, 1975, was not the first time he had received information concerning Fred Peters' reported movement of more than $200,000 in cash. Mr. Simmons said :
I do recall, some time during the summer of 1973, a conversation with Rudy Mapus [Mappus], Senior Program Officer, Guaranteed Student Loan Program, San Francisco Regional Office, USOE. Rudy mentioned during our telephone conversation that he had heard a rumor that some individual, thought to be Fred Peters, had visited some bank in the State of Arizona and attempted to purchase a cashier's check. Again, as I recall, the individual was alleged to have had a briefcase with cash in the approximate amount of $250,000. It is my recollection that he was not sold the cashier's checks, however, I suggested to Rudy that if he heard anything further concerning this matter to please let me know.
It is noteworthy that no one at HEW — neither Dr. Spearman, Mr. Simmons, Mr. Stepnick, nor Mr. Witt — went to the trouble to acknowl edge by mail the June 11, 1973, letter from Alexander Grant & Co. Gene Ferguson is a reporter with a Los Angeles radio station, KPOL. In July of 1973, Mr. Ferguson obtained a copy of the David L. Smith affidavit of June 29, 1973. think Mr. The subcommittee staff interviewed Gene Ferguson. Mr. that interview. not Walsh interviewed him. was present during July in of 1973 broadcast into the KPOL said he inserted Ferguson announcements of the contents of the David L. Smith affidavit of
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June
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29.
9, 1973, Mr. Ferguson said, he went to San Fran cisco where he met with four HEW officials, Dr. Edward Aguirre, the Regional Commissioner of the Office of Education ; Bob Fout, Florence
Then, on August
Van de Bogart and Rudy Mappus. Mr. Ferguson told the subcommittee staff that he turned over copies of the David Smith affidavit to the HEW officials in San Francisco. He said he told them everything he knew about the money transac
160
tions and about West Coast Schools. Mr. Ferguson said the HEW officials told him they found his information very interesting. Mr. Ferguson said he sent a copy of the Smith affidavit and other per tinent information to William M. Simmons, Jr., Director of the Divi sion of Insured Loans, HEW. That is a buck slip, Mr. Chairman. has already been incorporated as an exhibit to my testimony. The staff has obtained documentation which shows that the material Mr. Ferguson said he sent to Mr. Simmons was, in fact, received in Mr. Simmons' office. On August 9, 1973, Gene Ferguson made another news broadcast referring to the West Coast Schools' situation. A copy of the transcript of that show has been provided the subcommittee by Mr. Ferguson. The transcript is as follows : Three weeks after KPOL News told of the financial problems at West Coast Trade Schools, a Federal HEW audit was launched. KPOL reported some strange
It
money transactions by West Coast. Gene Ferguson has an up-date. Ferguson : Last month, we reported on how West Coast dealt with federally insured student loans totaling millions of dollars. Three weeks after the school closed, corporate officers were running around Phoenix, Arizona with what they admitted was $300,000 cash, most of the school's operating money. Rudy Mappus, HEW loan officer, explained what the Government auditors will look for. Mappus : How the funds were used in various programs, what funds are available whether those funds are available for reimbursement to the Govern ment . . . and so forth. Ferguson : The audit could take three to six months. Any irregularities will [be] referred to the Justice Department. Gene Ferguson, KPOL News.
Despite Mr. Ferguson's information and the David L. Smith affi davit, no investigation was begun concerning these matters at either in the regional level in San Francisco or at HEW headquarters Washington. Frank Covaro of Alexander Grant & Co. said a copy of the June 11, 1973, letter to the HEW officials in Washington was sent to Herbert Witt of HEW Eegional Audit Agency in San Francisco. In addition, Mr. Stepnick on his copy of the letter, had written that he had called Herbert Witt about the Alexander Grant letter. interviewed Mr. Witt in On October 31, 1975, John Walsh and San Francisco. Mr. Witt said he did receive a call from Mr. Stepnick in connection with the June 11, 1973, letter from Alexander Grant & Co. He said that on June 13 he received a copy of the letter. Mr. Witt said he turned the letter over to James Macauley, HEW Assistant Regional Audit Director in San Francisco. We interviewed Mr. Macauley October 31, 1975. Mr. Macauley was vague and could not be specific aboiit the letter or what he did when he read it. He said he was quite sure he had placed a call to Alexander Grant & Co. and talked to Frank Covaro about it but Mr. Macauley could not remember when the call was placed or what was discussed. Mr. Macauley said he did remember telling Mr. Covaro that he might possibly get in touch with him later on this subject. Mr. Macauley said he made no memorandum for the record concerning the call. Mr. Macauley said he made no further contact with Alexander Grant & Co. regarding this matter. xVfter our interview with Mr. Macauley, we talked to Mr. Covaro Mr. Covaro reiterated his earlier "assertion that no one from
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HEW
June
had contacted him concerning the issues raised in his letter of
11, 1973.
Macauley's failure to pursue the Alexander Grant letter in June in the San Francisco regional audit failed to make available the June 11 letter to the auditor in Los Angeles who was to make a termination audit of West Coast Schools. On May 24, 1973, West Coast Schools closed down. On May 30, 1973, the Office of- Education had requested a termination audit of the school. This audit was approved on or about June 16, 1973. This termination audit was to be conducted out of Los Angeles regional office and was handled by Dennis G. Norris, the branch manager. The actual audit began on August 13, 1973. On November 1, 1975, Mr. Norris was interviewed by Mr. Walsh and myself in San Francisco and asked why he failed to pursue the Alex ander Grant matter during the course of his audit. He said he had not seen the June 11 letter until recently. The San Francisco office also had a copy of David L. Smith's affidavit of June 29, 1973, but this document was not given to Mr. Norris either. Thus far have discussed the manner in which HEW officials responded to the June 11, 1973, letter of Alexander Grant & Co. ; and to the manner in which they responded to information supplied by Gene Ferguson. Another opportunity to look into the West Coast Schools matter came along April 24, 1974, when the HEW investigation unit in Washington initiated an inquiry into the school. The Commissioner of Education in Washington requested the in vestigation on the basis of allegations of wrongdoing at West Coast Schools brought to the attention of HEW by Congressman Edward R. Roybal of California. In the request for the inquiry, no mention was made of the Alexander Grant & Co. letter of June 11. The inquiry by the HEW in vestigative unit was conducted by Sidney D. Butterheld, who worked out of Washington, D.C., and was conducted in the Los Angeles area. During the course of the investigation, Mr. Butterfield was assisted by William T. Dooley, Jr., who was in charge of the investigative unit of HEW in San Francisco. A review of Mr. Dooley's file in San Francisco disclosed that on April 24, 1974, the San Francisco regional audit office transmitted to him a copy of the June 11 letter from Alexander Grant & Co. It was further established that on April 24. 1974. Mr. Dooley spoke on the telephone to Ira Landis, an official of Alexander Grant & Co. Details of the telephone call were supplied to me on November 3, 1975, in an interview with Mr. Landis, who now lives in Bel Air, Calif., and is no longer associated with Alexander Grant & Co. Mr. Landis said that on April 24, 1974, he received a telephone call from Mr. Dooley. Mr. Landis could not speak to Mr. Dooley when the call came in. Mr. Landis said later in the day he returned the call to Mr. Dooley and the two men spoke for a few minutes. Mr. Landis said that Mr. Dooley told him he, Dooley, was conducting an inquiry into West Coast Schools based on complnints brought to HEW's attention by a Congressman. Mr. Landis said Mr. Dooley. who was in San Francisco, said he would be in Los Angeles the following was followed by a similar failure office. In late 1973 the same office
I
162 week and might call on him. Mr. Landis said Mr. Dooley did not visit him and did not call him again. Sidney D. Butterfield's final report made no mention of the July 11, 1973, letter; nor did it refer to the call which Mr. Dooley made to an official of Alexander Grant & Co. April 24, 1974. To summarize, our inquiry reveals that : 1. Department of Health, Education, and Welfare officials in Wash ington, D.C., and in San Francisco, were put on notice as early as June of 1973 that there was evidence of corrupt and questionable practices at West Coast Schools. But none of the officials seemed concerned enough to see to it that this evidence was checked out. William Simmons, Jr., director of insured loans, received the June 11, 1973, letter from Alexander Grant & Co., as well as a phone call from the CPA firm, and referred the matter to another office at HEW. But he did nothing to follow up to determine what the other office did with this information. Edward Stepnick, Director of the HEW Audit Office, referred the letter to his San Francisco regional office. But Mr. Stepnick, like Mr. Simmons, did not pursue the question and was unconcerned or un informed, or both, as to what disposition the San Francisco office had made. As for Dr. Leonard Spearman, Director of the Division of Student Assistance in the Office of Education, he asserted that he knew nothing of the June 11, 1973, letter. His files, he said, contained no such letter. Nor did he know anything, he said, of Alexander Grant & Co.'s efforts to alert him to the contents of the letter by phone. Mr. Stepnick and Mr. Simmons in Washington and Herbert Witt in San Francisco did receive the letter. In addition, Mr. Stepnick directed that the matters raised in the letter be brought to Dr. Spearman's attention. At best, the failure of Dr. Spearman to learn of the questions raised in the June 11, 1973, letter reflects unfavorably on the efficiency of the avenues of communication into Dr. Spearman's office. Herbert Witt turned the June 11 letter over to an assistant, James Macauley. Mr. Macauley did not even open a case file on this matter. He wrote no memorandums of record or report of investigation to stipulate precisely what he had done in carrying out Herbert Witt's orders to look into this matter. Moreover, Mr. Witt apparently demanded no such accounting from Mr. Macauley. In turn, Mr. Stepnick required no accountability from
Mr. Witt.
Overall, then, the handling of the June 11, 1973, letter by HEW officials was slipshod, suggesting the Department was either incom petent in investigative audits or uninterested in the potential for corrupt and questionable practices. 2. The information given to HEW concerning the transactions by West Coast Schools' principals on June 11, 1973, in the branch office of the First National Bank of Arizona in Phoenix should have been pursued by HEW to ascertain its relevance to the West Coast Schools' situation. It was not, on its face, illegal for Fred Peters and his associates to have gone to Phoenix to convert a quarter of a million dollars in $100
bills to cashier's checks.
163
But it
was
highly unusual, particularly when the three men were
owners of a federally funded gone out of business.
If HEW officials had
school which had, only 2 weeks before,
alert and receptive to the idea that corrupt questionable practices might exist on occasion in some of their programs — if, in fact, they had only read their mail — they would have moved quickly to determine just what did happen in Phoenix
and.
June
'been
11, 1973.
William Simmons
conceded that he learned from Rudy Mappus the existence of "rumors" about the Arizona transaction ; informa tion of such consequence should have been checked out. The conversion of $278,000 in cash to cashier's checks is not a difficult
of
transaction to trace. The lack of action of HEW officials is especially regrettable when contrasted with the actions of a Los Angeles newscaster who put the Phoenix bank transaction story out over the air and then tried to keep HEW officials informed of what he had learned. 3. William T. Dooley, Jr., as head of the investigative unit of the San Francisco regional office of HEW, ignored an important source of information when he neglected to pursue background on the June 11,
1973, letter from Alexander Grant & Co., to the Department. Mr. Dooley should have interviewed Ira Landis and other Alex ander Grant & Co. officials. Then he should have asked to review their audit records in connection with the work they performed on the West Coast Schools' account. Instead, he did none of these tilings and a good investigative lead was ignored. Similarly, critical information was lost when the San Francisco regional audit office failed to make available to Mr. Dennis Norris a copy of the June 11 letter. Norris said if he had received a copy of the letter or had been instructed by the regional staff, he would have contacted Alexander Grant & Co., to obtain all relevant information. 4. The Department of Health, Education, and Welfare should im pose more strict rules and regulations regarding the way HEW per sonnel are to make record of their official activities. Throughout this inquiry, the subcommittee staff has been struck by the sloppy way HEW files are maintained, when files are main tained at all. Accordingly, the Department should have the machinery in place to pursue leads that suggest corrupt or questionable practices. 5. Alexander Grant & Co. wrote letters and made phone calls and, in general, made itself available to assist the Government, if only the Government would begin an investigation. No investigation was initiated. The only contacts HEW made to Alexander Grant & Co., were two perfunctory telephone calls from Department field auditors indicating they might, at a later date, get in touch with the accounting firm. However, no additional efforts were made to contact Alexander Grant & Co. The subcommittee staff, John Walsh, specifically, was the first to make genuine investigative inquiry at Alexander Grant & Co., and that was in July of 1975. In that regard, had HEW begun an investigation in June of 1973, as it should have, the Department could have come upon the infor
164
mation revealing the activities of Mr. Hoffe, Mr. Peters, and others, and this particular aspect of these hearings would not have been think that is very clear. necessary. HEW's budget is larger than the Defense Department's. Yet it is not properly equipped to conduct investigations into possible misuse of Federal dollars. HEW's response to the West Coast Schools' issue reveals that De partment officials were not receptive to the possibility that with the expenditure of billions of dollars a year, there is a likelihood that fraud will be attempted. As a final consideration, Mr. Chairman, would like to point out that at the time these allegations of fraud and questionable practices surfaced — in the summer of 1973 — HEW's entire investigative staff
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consisted
of one man.
Since 1973, HEW has created a Division of Investigations and Security. But, as of July of 1975, this division had only seven investigators. Senator NTTNN. When you say one man, are you talking about at the national level or at the regional level ? Mr. DUFFY. am talking about one, across the board. Mr. WALSH. In 1973, they had one investigator for the entire United States and that was to cover all HEW programs. This investigator at that time reported to the Division of Audit. Senator NUNN. They have got more than that in every school in Georgia.
I
Mr. WALSH. Not HEW.
Senator NUNN. They may not be investigators. They are all over the place, though. They have thousands of employees. Mr. WALSH. am sure they do, sir. They are not given the task of investigating allegations of fraud and corruption. Senator NTTNN. How many people does HEW have working for them? Mr. WALSH. 80,000. am sorry. It is closer to 130,000. Senator NUNN. 130,000 people, and they have one investigator? Mr. DUFFY. Senator, to put this in the proper time frame, they had at that time one. They have more now. Mr. WALSH. In this summer, in July, they had seven. believe they have about 12 now, Senator. But they have been authorized 12. don't know whether all 12 are on board. Mr. DUFFY. think the House committee has some recommenda tions that they be beefed up substantially. We are hopeful that that will take place. Senator NUNN. What is the total budget of HEW ?
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Mr. WALSH. I don't know that, sir. Mr. FELDMAN. $125 billion. Senator NUNN. Let the record show someone in the audience thinks
it is
$118
billion.
It sounds
pretty reasonable.
Mr. DUFFY. Mr. Chairman, could I conclude here
?
Senator NUNN. Go ahead. Mr. DUFFY. have a number of exhibits. won't list those. have them set forth in my statement. They are in their proper order. would request at the completion of my testimony that the Frank Co
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varo affidavit be printed in the record and also his diary also be printed thereafter. That is all have, Mr. Chairman. Senator NUNN. Are all of these documents attached to your state ment? Mr. DOTTY. They are. Mr. Frank Covaro's affidavit incorporates specific individual exhibits which have identified and also additional exhibits have listed at the end of my statement. Senator NTJNN. We will mark them exhibit Nos. 53 through 72. These 19 documents will be attached as exhibits 53 through 72, without objection. [The documents referred to were marked "exhibit Nos. 53 through 72" for reference ; exhibits 54, 55, and 57 through 72 may be found in the files of the subcommittee ; exhibits 53 and 56 follow :]
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EXHIRIT No. 53 State of Illinois Cook County, ss : Before the undersigned, Dolores Brown, a notary public duly authorized in the jurisdiction aforesaid, there appeared Frank Cavaro, to me personally known, who in my presence affixed his signature to the affidavit attached. My commission expires December 19, 1975. Date : October 20, 1975. DOLORES
BROWN,
Notary Public.
AFFIDAVIT
OF
FRANK COVARO
I, Frank Covaro, resident at 25W101 Cape Road, Naperville, Illinois, freely and voluntarily make the following statement to and at the request of LaVern 3. Duffy, identified to me as a member of the staff of the United States Perma nent Subcommittee on Investigations of the Committee on Government Opera tions of the United States Senate. am Director of Personnel and Recruitment of Alexander Grant & Co., an international accounting firm with national offices at One First National Plaza, Chicago, Illinois. have set forth at Mr. Duffy's request my best recollection of the facts re lating to Alexander Grant & Company's examination of the financial statements of the Automation Institute of Los Angeles, Inc. (a California Corporation) d b a West Coast Schools for the fiscal year ended June 30, 1972. recall that Robert Santa Cruz was the auditor in charge of the examination for our company. I was the account administrator. The audit was performed with respect to the financial statements for the year ended June 30, 1972. Our firm submitted a final report, dated December 15, 1972, with regard to such financial statements, which was qualified with respect to our indicated inability to satis fy ourselves as to the adequacy of the company's allowance on its books for possible future Federal insured student loans refunds. Attached as exhibit 1 to this statement is a copy of Alexander Grant & Com pany's report to the Board of Directors, Automation Institute of Los Angeles Inc. dated December 15. 1972. After the issuance of our report in December, 1972 certain employees of West Coast Schools indicated to me and members of our staff that principals of the com pany were diverting its funds to their private bank accounts. Our examination had revealed no indication of any such diversion. I was deeply concerned about these allegations and we attempted to investigate them. Had we substantiated them with respect to, and had we ascertained that they had material impact on, the company's financial statements which we had reported upon or the period covered thereby we would have withdrawn our report. I attach as exhibit 2 to this statement a copy of Section 561 of Statement on Auditing Standards No. 1 of the American Institute of Certified Public Accountants which substantially codifies and describes an independent auditor's obligations upon receipt of information which might bear upon financial statements upon which he has reported. Because
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166 of the seriousness of the matter, I kept a written chronology, attached hereto as exhibit 3, of what transpired starting in May of 1973 when these alleged irregu larities were brought to my attention. As indicated by the chronology, Andrew Ippolito, an officer of West Coast Schools, first contacted me by telephone on May 29, 1973, and at my request met in our offices with me and Ira Landis, then our Regional Director of Accounting and Auditing for the western United States. After we received Mr. Ippolito's allegations, Landis sought the advice of Melvin P. Cowen, then our Managing Partner for the western region and Richard Sarazen, then the Managing Partner for our Los Angeles office. At their suggestion we sought legal advice. The matter was concluded within the relatively short time of approximately 2 weeks. It was an intense period of activity for our firm, requiring substantial efforts by our own personnel and counsel. Charles A. Werner, of our National Office in Chicago, who was then and is now our senior technical officer, partici pated extensively. William R. Mette, then and now the firm's Executive Partner,
was also consulted. As the copies of correspondence attached as exhibits hereto will indicate, our efforts to investigate the matter were resisted by the company and its repre sentatives. We encountered, however, substantially less resistance to our efforts to investigate matters relating to the period covered by the financial statements upon which we had reported. This, contrasted to the adamant refusal of the company and its representatives to permit us to investigate events occurring subsequent to the period upon which we had reported, suggested to us at the time that it was likely, if the allegations were true, that they concerned the period subsequent to that covered by the financial statements. We were thus concerned that we might well not have a basis for withdrawing our report upon the financial statements ; we were deeply troubled, nonetheless, by the serious nature of the allegations and the refusal of the company and its representatives to permit us to investigate them fully. Since we were frustrated in our attempts to investigate the allegations our selves, we determined that the matter should be referred for investigation to the Directors of the Division of Student Assistance of the U.S. Office of Education, the Division of Insured Loans and the Audit Agency of the Department of Health, Education and Welfare, all in Washington, D.C., and to a representa tive of the Regional Audit Agency of the Department of Health, Education and Welfare in San Francisco. Attached hereto as exhibit 4 is our letter of June 11, 1973, which we prepared and sent for that purpose. As my chronology indicates, we attempted as well to bring the matter to the attention of appropriate federal authorities by telephone. . We had no further involvement in the matter until contacted by Mr. Walsh of the Subcommittee staff in July, 1975. I attach as additional exhibits copies of the following correspondence relat ing to the matters recounted herein : Exhibit 5. — Letter dated May 30, 1973 from Alexander Grant & Company to Fred Peters, President of West Coast Schools. Exhibit 6.— Letter dated May 31, 1973 from Fred Peters, President of West Coast Schools to Alexander Grant & Company. Exhibit 7. — Letter dated June 5, 1973 from Bernard Elias of the law firm of Ball, Hunt, Hart, Brown and Baerwitz, 450 North Roxbury Drive, Beverly Hills, California to Robert Bernstein, 1888 Century Park East, Suite 900, Los Angeles, California. Exhibit 8. — Letter dated also on June 5, 1973 from Bernard Elias to Robert Bernstein. Exhibit 9. — Letter dated June 8, 1973 from Robert Bernstein to Bernard Elias. Exhibit 10. — Letter dated June 13, 1973 from Bernard Elias to Robert Bern stein. Exhibit 11. — Letter dated June 20, 1973 from Robert Bernstein to Bernard
Elias. Exhibit
12. — Letter dated July 18, 1973 from Bernard Elias to Robert Bern stein. have read the foregoing statement consisting of three pages and it is true and correct to my best recollection.
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OCTORER 20, 1975.
FBANK COVAEO.
167 EXHIRIT No.
56
1973 CHRONOLOGY OF EVENTS ALLEGING IRREGULARITIES PREPARED RY FRANK COVARO, OF THE ALEXANDER
May
IN WEST COAST SCHOOLS GRANT
AND
COMPANY
29, 1973
Andrew Ippolito called— came to office. Met with him and Ira Landis. Ippolito alleged that principals had diverted FISL funds to their own bank accounts thereby defrauding the school and government. Landis contacted Cowen and Sarazen for instructions on how to proceed. They suggested contacting attorneys. Sarazen, Landis, Covaro discussed matter with Bernard Elias and Jack Samith of Ball, Hunt. Attorneys suggested letter to client requesting meeting.
May
30, 1973
Letter written by Landis, approved by attorneys. Letter delivered by hand after clearance with Gowen and Mette. May 31, 1973 Attorney Bernstein called Covaro and suggested Friday (June 1) or later for meeting. Covaro set Friday (June 1) for meeting at AG&Co offices.
June
1, 1973
Fisher appeared for meeting unaccompanied. AG&Co represented by Elias, Samith, Sarazen, Landis and Covaro. Covaro stated allegations which had been made and requested access to books and records of West Coast Schools, Group II, Group III and WHAM. Fisher said he could not see our concern since period was subsequent to audit responsibility. Fisher said he would contact Bernstein and Peters who had gone to Washington. After meeting, Landis His secretary stated he was in office. and Covaro telephone Bernstein's a conference. Contacted Peters' office and secretary indicated he left for the day. Pete
June 4, 1973 Fisher, Peters and Bernstein to AG&Co offices for meeting with Landis, Covaro, Sarazen, Elias and Samith. Peters and Bernstein belligerent and bellicose. Stated firm had no right or responsibility for period of allegation. Approved access to records related only to our audit. Elias and Samith in a separate meeting with Bernstein told him that the allegations implied the commission of a federal crime. Client agreed to inspection of June 30, 1972 documents to trace disposition of funds. AG&Co counsel suggested acceptance of the offer and further suggested it opened the door for inspection of subsequent period. Agreed on Thursday June 7, start date. June 5, 1973 Landis and Covaro telephoned C. Werner. Werner adamant that if we are "dealing with crooks" we should pull our opinion and disassociate ourselves. Contacted attorney Elias to convey Werner's message that we must have access to all records we deem necessary. Conference call arranged between attorneys, Werner, Landis and Covaro. Attorney Elias discussed requirements with attorney. Bernstein sending a letter to document our request for access to all records. Attorney Bernstein agreed to request that all records be available to us. He further agreed that we could begin our work on Thursday, June 7. June 6, 1973 Landis, Crossland, Vincent and Covaro met to discuss how to proceed. Werner was called to review the approach. He agreed to a two-prong approach suggested by Paul Crossland ; i.e., secure evidence to support or refute the allegations, and determine whether the period of our responsibility was affected. Bob Santa Cruz called Karen Steen, a former employee of AG&Co and West Coast Schools. She said that three boxes of records were withheld from AG&Co auditors. Ippolito contacted Covaro at home. He stated that : 1. $425,000 had been diverted in recent months.
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III
bank ac to a Group 2. $285,000 in FISL funds had been transferred count at Union Bank and then drawn off by the principals — Peters, Fisher and Carman. 3. Ed Schoessner had documents at home with identified the dates and amount of monies diverted. He had kept these documents for his own protection. 4. Our audit period was not affected; the diversion occurred between March and May of 1973. 5. NDSL funds had been used by the principals to invest in WHAM and other ventures. Possibly as much as $375,000 had been diverted. 6. Ralph Collela had bragged of converting a large sum of money into travelers checks for Dave Carman.
June
7, 1973
Bob Santa Cruz was instructed to call Karen Steen and set up a meeting. He did and she agreed to see us on Monday, June 11. Audit team assembled and given instructions. Landis, Crossland, Covaro. Agnor and Santa Cruz went to audit site at 448 South Hill Street. Audit- team met with Fisher and Schoessner. Covaro identified specific period and records to be reviewed that day. Requested that Fisher provide records of WHAM, Group and Group at earliest possible time. Fisher requested jus and Group I. tification of why we wanted to review WHAM as well as Group Covaro and Crossland went to an office with Schoessner. Agnor and Santa Cruz joined Gary Lewis to review the handling of FISL paper. After lunch Crossland and Covaro returned to the office where they had met with Schoessner. Fisher came in and summoned them to his office. In his office, Fisher stated that he had spoken to Peters in Washington, D.C. He said that Peters was upset with the question about WHAM, Group and Group III. Fur ther, he said it was Peters' decision that we should confine our work to the audited statements. We could trace June 30, 1972 balances to their disposition and that was all. Covaro asked if that was as far as we could go. Fisher affirmed. Covaro stated that there was no point in continuing and left. Covaro, Landis, Sarazen, Cowen and Crossland spoke to attorney Blias by telephone. Elias suggested that we try to see to get copies of the documents in Schoessner's possession. We agreed to do so. Cowen instructed Elias to prepare a letter notifying HEW of the allegations. Covaro and Landis went to Schoessner's home in Van Nuys. Schoessner was busy and suggested we meet at Dupar's Restaurant later. Covaro and Landis proceeded to the restaurant and subsequently were met by Schoessner. Schoessner agreed to furnish us with a copy of a check signed by Peters, Fisher and Carman, drawn at Union Bank. In addition, he agreed to furnish us with advices for (3) $15,000 cashiers checks, drawn on Manufactures Bank. Each check was payable to a principal. Schoessner states : 1. The Union Bank account on which the $290,000 check was drawn was a Group account. 2. $265,000 in commissions had been paid to place $1,000,000 in FISL paper. 3. The man in charge of the teachers' credit union had permitted replace ment of "good" FISL paper for "bad" rather than required cash refunds. 4. The principals had purchased 75,000 shares of a San Bernardino bank, presumably with FISL or NDSL funds. 5. Peters told Schoessner a story of flying to an undisclosed location with a large amount of cash. 6. A prepaid legal fee of $15,000 had been paid by the school to Bob Bern stein ; Schoessner believed this was to cover bankruptcy of the schools or possible charges against the principals. 7. More than $200,000 had been invested in WHAM. 8. He said that the three boxes of records referred to by Karen Steen were withheld from HEW, not AG&Co. After the meeting we returned to Schoessner's home. He gave us a copy of the $290,000 check and the three certified checks. He said that he had copies of other documents but would not divulge their content We agreed to meet for lunch on
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III
June
8, 1973.
June
8, 1973
Landis, Sarazen, Cowen, Covaro and Crossland met to discuss developments. A call was placed to Bill Mette to discuss tentative conclusions reached on procedure. Mette agreed that notification to HEW was our most pressing issue.
169 Attorney agreed
HEW.
Ellas called. We updated Mm with notification
to our proceeding
on the meeting with Schoessner. to HEW and read a draft letter
He to
Schoessner arrived at our office. He said he had been at West Coast Schools in He said that Bernstein, Fisher, Peters and Carmen were concerned that we would go to the U.S. Attorney General. Also, he said that he was assigned responsibility for determining the company liability to the NDSL fund. Crossland and Covaro joined Schoessner for lunch at the Brown Derby. Schoessner said that when he returned to the school, he was supposed to go to the bank. He thought that the purpose of this trip was to make a deposit to cover NDSL shortage. He said that the other documents he had were copies of deposits and withdrawals for large amounts. After lunch, he agreed to meet with us later. Landis, Cowen and Sarazen attempted to contact HEW at about 4:45 p.m. (EDT). This call was to be official notification of the allegations which had been brought to our attention. No one answered in Washington. Schoessner called. He said he had gone to UCB to pick up new signature cards. He agreed to meet us on Monday, June 11, 1973. the morning.
Juno 11, 1973 Landis and Covaro contacted William M. Simmons at HEW and read the letter. Later they contacted Edward Stepnick, Director of the HEW audit agency. Stepnick asked that we send a copy of the letter to HEW audit in San Francisco. Four attempts to reach Dr. Spearman at HEW failed. Schoessner did not call or appear. Karen Steen called Santa Cruz and declined to meet with us. June
12, 1973
Called Dr. Spearman
June IS,
;
he did not return our call.
1973
Called Dr. Spearman again, he was not available. Subsequently, Pat Hopson, Assistant Chief, Program Support Branch, called at request of Dr. Spearman. Landis read letter to her.
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Senator NTJNN. Am to understand that right now we have a total of investigators in all of HEW ? Mr. WALSH. believe that is approximately correct. There has been some additional investigators hired since July. Senator NUNN. What is your definition of investigator ? Is this in a particular division ? Mr. WALSH. These are men who would be charged with the in vestigation of allegations of fraud, corruption or illegal activities or that type of thing. It would be in contrast to people who perform audit functions. They are a separate audit group. There are other individuals who are not investigators, but who perform reviews of the schools, who visit the schools but who are not trained as investigators and are not trained to look for evidence of fraud and corruption. Senator NUNN. You are using the word "investigator" in connec tion with some kind of criminal fraud charge ? Mr. WALSH. That is right. Senator NTJNN. You are saying auditors are not investigators ? Mr. WALSH. No, sir. They are not. Senator NUNN. Do you know how many auditors they have in seven
I
HEW?
Mr. WALSH. No, sir. I couldn't say. Mr. DUFFY. They have a substantial number of auditors. They are not investigative trained. That is the problem there. I think we would agree that my review is that the audits in many instances over there have been perfunctory. They don't get into the areas of real alleged improprieties. These auditors are not trained for that. That has been 63-570—76
12
170 the problem. Hopefully, we will have staff investigators who can go into these areas. Senator NTJNN. Who is the top senior man in charge of all criminal fraud investigations in HEW ? Mr. WALSH. Mr. Dick. Senator NUNN. D-i-c-k ? Mr. WALSH. Yes, sir. Senator NUNN. Was he on board in 1973 ? Mr. WALSH. In 1973, believe he was in charge of the Division of Security which related to the physical security of the premises, the conducting of personnel clearance investigations. There was not a funtcion in HEW at that time which was devoted solely to the investigation of criminal frauds. Senator NUNN. But now there is such a function ? Mr. WALSH. Yes. In 1973, such a function was added. Mr. Dick be came the head of the Division of Investigations and Security. be lieve Mr. Richard Campbell became his assistant in charge of inves tigations. Senator NUNN. That is the division that has six total ? Mr. WALSH. That is right. That is the division that this summer had seven investigators. think testified earlier that that is not even one for each region. In some cases the one investigator has to have, has to cover as many as two or three regions. Senator NUNN. Are these all home based in Washington, D.C. ? Mr. WALSH. No, sir. They are based out in the field. For example, think mentioned this the other day, we had an investigator in Chi cago who handled, believe, 17 States. He had to investigate all viola tions of possible criminal activity that were occurring in HEW pro grams in these 17 States. might also add, as did the other day, that he didn't have a girl to take his dictation or to answer his telephone. He had to write, type up his own reports, and answer his own telephone calls. Senator NTJNN. Do either of you have any other comments or any material that we have not covered ? have completed all the questions
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I have.
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Mr. Duffy, do you have any additional comments? Mr. DUFFY. No. Senator NUNN. We will continue our hearings into the guaranteed
student loan program and related financial assistance programs ad ministered by HEW on Wednesday and at least tentatively on Thurs day, November 19 and 20. On Wednesday, the subcommittee will conclude its case study of West Coast Schools which relied heavily on Federal money and guar antees, which sold substantial amounts of federally backed student loans to banks and financial institutions and which eventually went out of business, leaving 26 banks, credit unions, and savings and loans associations holding over $6 million in insured loans. Witnesses will include Mr. James Hoffe, senior financial aide, pro gram officer of HEW in charge of campus-based financial assistance
programs, who allegedly had financial relationships with West Coast Schools and the principals of those schools, Mr. Fred Peters, also known as Fred Braneff, former president of West Coast Schools, and
171
Mr. David Carman,
and Mr. Peter Fisher, former officials of West Coast Schools. We have just been informed that there may be an executive session of the Senate on Thursday from 9 o'clock until 1 to hear testimony, or hear a report from the Senate Intelligence Investigating Committee. that meeting takes place, we will probably not have a hearing Thursday morning. We may set up a hearing Thursday afternoon, but in any event, hopefully sometime this week, we will be able to hear from the victimized students who received a report from a Texas official of the experiences of that program and receive testimony of representatives of the financial institutions of the deficiencies they have found in their dealings with HEW. We will certainly hear from HEW officials. The Wednesday sched ule is firm. The remainder of the week is undetermined at this time except that we will have these witnesses as soon as we can find time to
If
get to them.
Mr. Duffy, Mr. Walsh, we thank you for your testimony and we ap preciate the good job. [Whereupon, at 3 :25 p.m., the subcommittee recessed, to reconvene Wednesday, November 19, 1975.] [Members of the subcommittee present at time of recess : Senator Nunn.]
GUARANTEED
STUDENT LOAN PROGRAM
WEDNESDAY,
NOVEMBER
19, 1975
U.S. SENATE, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS OF THE COMMITTEE ON GOVERNMENT OPERATIONS,
Washington, D.G. The subcommittee met at 10 a.m., in room 3302, Dirksen Senate Office Building, under authority of section 4, Senate Resolution 49, agreed to July 26, 1975, Hon. Sam Nunn presiding. Members of the subcommittee present : Senator Sam Nunn, Demo crat. Georgia, and Senator Charles H. Percy. Republican, Illinois. Members of the professional staff present : Howard J. Fledman, Chief Counsel; F. Keith Adkinson, Assistant Counsel; LaVern J. Duffy, Assistant Counsel; John J. Walsh, Investigator; Gregory L. Vigen, General Accounting Office; Stuart M. Statler, Chief Counsel to the Minority ; Jonathan Cottin, Investigator to the Minority ; and Ruth Y. Watt, Chief Clerk. Senator NUNN. The subcommittee will come to order. [Members of the subcommittee present at the time of reconvening : Senators Nunn and Percy.] Senator NUNN. Our first witness this morning will be Mr. John Walsh, who will have some up-to-date developments. As those of you who followed this hearing probably know, we had announced that Mr. Fred Peters would be testifying this morning. Mr. Walsh is going to explain that development. TESTIMONY OF JOHN J. WALSH, INVESTIGATOR, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS— Resumed Senator NUNN. You have already been sworn ? Mr. WALSH. Yes, sir. On the morning of November 18, 1975, 1 received a phone call from Fred Braneff, also known as Fred Peters, in which he stated that he had suffered a back injury on Sunday, November 16, 1975, and was unable to travel.
His physician, Dr. Raymond Weston, Beverly Hills, Calif., was contacted by me and confirmed that his patient was suffering, from what appeared to be, a slipped disc in his back. Dr. Weston stated that Peters was confined to his bed, was under sedation and would be given tests in the hospital to confirm the diag nosis. Dr. Weston said that at best his patient would not be able to travel for a week or two and travel thereafter would depend upon the course of treatment and his progress. requested that Dr. Weston
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(
173)
174
confirm the statements made to me by wire and he did so November 18, 1975. request that this wire be made an exhibit. Senator NUNN. Without objection. Is this the wire that reads, "My patient, Fred Peters, suffered injury llth month, 16th day, 1975, will be unable to sit or to travel for about
I
2 weeks"?
Mr. WALSH. Yes, sir. Senator NUNN. That will
be made a part of the record as exhibit No. 73. [The document referred to was marked exhibit No. 73 for reference and may be found in the files of the subcommittee.] Mr. WALSH. requested Mr. Braneff's attorney, Harlan Braun of Los Angeles, to confirm by wire that if his client had appeared on November 19, 1975, he would have invoked his constitutional privilege not to testify on the grounds of self-incrimination. This wire has not been received as yet, but request that when it is received that it also be included in the record as an exhibit. Mr. FELDMAN. Can we reserve that for No. 74 ? As understand it, Mr. Walsh, you did talk to Mr. Braun and he did confirm that if Mr. Peters appeared he would exercise his fifth amendment rights ? [The document, when received, will be marked exhibit No. 74 for
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reference.]
Mr. WALSH. Yes ; that is true ; he did. He stated at my request that he would send a wire confirming it. Senator NUNN. Has he sent a wire ? Mr. WALSH. It has not been received yet. Senator NTTNN. He told you that if Mr. Peters appeared he would be taking the Fifth Amendment? Mr. WALSH. Yes, sir. Senator NTTNN. And would not Mr. WALSH. Yes, sir.
be
testifying?
I
received Shortly after the original phone call from Mr. Braneff, call from Mr. Robert M. O'Reilly, San Diego, Calif., attorney for David M. Carman, Dallas, Tex. Mr. O'Reilly stated that he had al ready heard that Mr. Peters would request to be excused from testify ing on November 19, 1975, because of illness. He asked if his client could be excused. asked him to confirm by wire the information he gave orally that his client would invoke his constitutional privilege not to testify on grounds of self-incrimination if he did appear. request that this wire also be made, an exhibit. It is in the package that have here. Senator NUNN. Without objection. [The document referred to was marked "Exhibit No. 75" for refer ence and follows :] a
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EXHIBIT No.
75
[Telegram]
SAN DIEGO, CALIF., November 1S, 1975. FELDMAN, Chief Counsel, Russell Senate Office Building, Washington, D.C. Re phone conversation, this date, with John Walsh of your office, it is under stood that David Carman's appearance before your committee on November 19, 1975, will not be required because of his intentions to invoke all of his constitu tional privileges if so appearing. RORERT M. O'REILLY, Counsel for David Carman. HOWARD
175
!Mr. WALSH. Mr. Richard Kirschner, attorney for Franklin Peter had already submitted a letter to the subcommittee that his client would invoke his constitutional privilege not to testify on the grounds of self-incrimination. request that this letter be made an exhibit. Senator NUNN. Without objection. [The document referred to was marked "Exhibit No. 76" for refer ence and follows:]
Fisher,
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EXHIRIT No.
76
LAW OFFICES
Re
:
KIRSCHNER & GREENRERG,
Los Angeles, Calif., October
31, 1975.
Subpoena of Franklin Peter Fisher.
HOWARD FELDMAN, Chief Counsel, U.S. Senate, Permanent Subcommittee on Investigations,
Senate Office Building, Washington, D.C.
DEAR MR. FELDMAN: To recapitulate our telephone conversation of today, please be advised that I have discussed the Committee's subpoena with Mr. Fisher. He has been advised of his Fifth Amendment privilege and intends to assert that privilege during the course of the proceedings vigorously. It would appear that the only consequence of his appearance would be his invocation of his Fifth Amendment privilege, and the concomitant negative inference drawn by the members of the Committee. The American Bar Association, in its Standards Relating to the Prosecution Function and the Defense Function, §3.6(e), is applicable to the instant situa tion in spirit, and provides, in pertinent part; The prosecutor should not compel the appearance, of a witness whose activities are the subject of the inquiry if the witness states in advance that if called he will exercise his constitutional privilege not to testify. Please call and advise me if there will be a change in your previous position. Sincerely, KIRSCHNER & GREENRERG
By RICHARD H. KIRSCHNER.
Mr. WALSH. Mr. Howard Feldman, Chief Counsel, spoke to Mr. Kirschner on the morning of November 18 and Mr. Kirschner reaf
firmed that intention. Senator NUNN. The telegram from Mr. O-Reilly, counsel for David Carman says that "David Carman's appearance before your commit tee on November 19, 1975, will not be required because of his intentions to invoke all of his constitutional privileges if so appearing." Did he tell you that he would be invoking the fifth amendment and refusing to testify? Mr. WALSH. Yes, sir, he did. Senator NUNN. Do you assume that that is what he means by invok ing his constitutional privileges ? Mr. WALSH. Yes, sir. Because Mr. Peters would not be available, it was the feeling of staff that the appearance of all three individuals should be deferred. On November 18, 1975, the subcommittee, by telegram, informed the attorneys for Fred Braneff, also known as Fred Peters, Franklin Peter Fisher and David M. Carman, that they were excused from testifying on November 19, 1975, because of the illness of Fred Peters and that the subpenas calling for their testimony before the subcommittee remained in force subject to establishing a later date for their testimony. request that copies
I
of these telegrams also
be made
exhibits.
176
Senator NTJNN. You made it plain to them that they were not excused from testifying, that they were simply excused temporarily because of the illness of Fred Peters ? Mr. WALSH. Yes, sir. Senator NTJNN. And that they could be called by the subcommittee at a later date ? Mr. WALSH. Yes, sir. Mr. FELDMAN. Those are exhibits 77, 78, and 79. [The documents referred to were marked "Exhibit Nos. 77, 78, and 79" for reference and follow :] EXHIRIT No. SENATE
77
PERMANENT SURCOMMITTEE
ON
RORERT M. O'REILLY, 38T1 Basilone Street,
INVESTIGATIONS, November 18, 1975.
San Diego, Calif. Your client, David M. Carman, is excused from appearing before the subcom mittee on November 19, 1975, because of the illness of Fred Braneff, also known as Fred Peters. He is excused subject to being recalled at a later date under the same subpena which remains in force. HENRY M. JACKSON, Chairman, Senate Permanent Subcommittee on Investioations.
EXHIRIT No.
78
SENATE PERMANENT SURCOMMITTEE
ON
INVESTIGATIONS, November 18, 1975.
HARLAN W. BRAUN, Esq., Plaza East, Suite 2200, Los Angeles, Calif.: Your client, Fred Braneff, also known as Fred Peters, is excused from testifying before the subcommittee November 19, 1975, subject to being called at a later date under the same subpena which remains in force. HENRY M. JACKSON, Chairman, Senate Permanent Subcommittee on Investigations. 1801 Century
EXHIRIT No.
79
SENATE PERMANENT SURCOMMITTEE RICHARD H. KIRSCHNER,
ON
INVESTIGATIONS, November 18, 1975.
Kirschner & Oreenberg, 10850 Wilshire Boulevard, Los Angeles, Calif.: Your client, Franklin Peter Fisher, is excused from appearing before the sub committee November 19, 1975, because of the illness of Fred Braneff, also known as Fred Peters. He is excused subject to being called again at a later date under the same subpena which remains in force. HENRY M. JACKSON, Chairman, Senate Permanent Subcommittee on Investigations.
Senator NUNN. Mr. Walsh, do you have anything else for the record or have you submitted all the exhibits this morning? Mr. WALSH. am going to testify later on today, Senator', and will have some additional exhibits then. Senator XUNN. This completes your testimony at this time ? Mr. WALSH. At this time ; yes, sir. Senator NTJNN. Our next witness is Mr. James Hoffe, former Senior Program Officer for Financial Assistance for Office of Education, Department of Health, Education, and Welfare, region IX.
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Is Mr. Iloffe
here this morning
?
Mr. Hoffe, before you sit down, would you please raise your hand and take the oath ? Do you solemnly swear the testimony you are about to give before this subcommittee will be the truth, the whole truth, and nothing but the truth, so help you God ? Mr. HOFFE. I do. TESTIMONY OF JAMES HOFFE, FORMER SENIOR PROGRAM OFFICER FOR FINANCIAL ASSISTANCE FOR OFFICE OF EDUCATION, DE PARTMENT OF HEALTH, EDUCATION, AND WELFARE, REGION IX, ACCOMPANIED BY CECIL F. POOLE, ATTORNEY AT LAW, STATE OF CALIFORNIA, CITY AND COUNTY OF SAN FRANCISCO
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Senator NUNN. Mr. Hoffe, would like to advise you of your lights and obligations as a witness before this subcommittee. First, you have the right not to provide any testimony or informa tion which may tend to incriminate you. If you do so testify, anything you say here can be used against you in any other legal proceedings. Second, you have the right to consult with an attorney prior to answering any question or questions. Third, under the rules of procedure for the Permanent Subcommit tee on Investigations, your attorney may be present during your testi mony. In that regard, may the record reflect that you do have a gentle man here with you ? Is this your attorney ? Mr. HOFFE. Yes, Mr. Poole. Mr. NUNN. Mr. Poole, could you identify yourself? Mr. POOLE. Mr. Nunn, my name is Cecil F. Poole. am an attorney at law, State of California, city and county of San Francisco. am Mr. Hoffe's attorney. Senator NUNN. You are Mr. Hoffe's attorney ?
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Mr. POOLE. That is correct. Senator NUNN. Mr. Hoffe, this is Mr. Poole, your attorney ; is that
correct
?
Mr. HOFFE. Yes ; this is Mr. Poole, my attorney. Senator NUNN. As I indicated, besides your rights
as a witness, you also have an obligation while testifying before mis subcommittee. You have sworn to testify truthfully. you do testify, you are obligated to provide truthful responses so as not to subject yourself to the laws and penalties regarding perjury. Mr. HofFe, do you understand your rights and obligations as a wit ness before this subcommittee ? Mr. HOFFE. Yes, do. Senator NUNN. Mr. Hoffe, would you give us your full name and your place of residence ? Mr. HOFFE. Yes. My name is James Francis Hoffe. reside at 370 North Civil Drive, Walnut Creek, Calif.
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Senator NUNN. Walnut Creek ? Mr. HOFFE. Walnut Creek. Senator NUNN. Is Walnut Creek near or part of the suburb or area
of San Francisco ? Mr. HOFFE. Yes, it is in the East Bay.
178
Senator NUNN.
It is a municipality
?
Mr. HOFFE. Yes.
Senator NUNS-. Mr. Hoffe, were you the senior program officer for financial assistance for the Office of Education, Department of Health, Education, and Welfare, region IX, San Francisco, Calif. ? Mr. HOFFE. Yes, was. Senator NUNN. How long did you hold that position ?
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Mr. HOFFE.
10 years.
Senator NUNN. When were you first employed by HEW? Mr. HOFFE. That began, believe, approximately September 1965. Senator NUNN. At that time, did you start off as a senior program officer in that region, or did you start in some other capacity ? Mr. HOFFE. No, the title m those days was field representative. There were two of us. There was no such thing as senior program officer. That is an invented title, simply to separate the program
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in the
office.
In other words, you started HEW, in 1965 ?
Senator NTTNN. ment,
to work
for the Govern
Mr. HOFFE. Yes.
Senator NUNN. What did you do before that? Did you have any governmental job before 1965 ? Mr. HOFFE. Not a governmental job; not with the Federal Government.
Senator NUNN. Whom did you work for before joining HEW? was with the California State college system. Senator NTTNN. That would be under the State of California? Mr. HOFFE. In the State of California at Humboldt State College,
Mr. HOFFE. one
of the
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Senator NUNN. What was your job there ? Mr. HOFFE. It was a combination job. One was placement officer and the other had to do with what was the brandnew national defense student loan program. Later, chose the national direct student loan program. Senator NTTNTST. Have you ever worked for HEW in Washington, D.C., or was your HEW employment strictly in California ? Mr. HOFFE. Strictly out of region IX, San Francisco. Senator NTTNN. How large is region ? Does that cover anything other than California ? Mr. HOFFE. Now region has been reduced. It covers the States of Hawaii, Nevada, Arizona, California, and the trust territories of Guam and American Samoa. Senator NUNN. How many people worked under you in the finan cial assistance area ? Mr. HOFFE. There were two professionals, two paraprofessionals and a clerk or typist, if you will. Senator NTTNN. That will be a total of five people ?
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Mr. HOFFE. Five persons. Senator NUNN. Including the typist. Mr. HOFFE. Yes. Senator NTTNN. Who was your immediate supervisor in region IX? Mr. HOFFE. Regional ? Senator NUNN. Yes, sir.
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Mr.
HOFFE. Originally, it was Dr. Howard Krietzer, who, at that the Director of Higher Education. Senator NUNN. Who was your Mr. HOFFE. Dr. Howard Krietzer was my immediate superior. His title at the time was Director of Higher Education. Senator NUNN. How long was he your immediate superior? You put it in the past tense. He is not your immediate superior now ? Mr. HOFFE. No. Dr. Krietzer retired about 19 — am guessing.
time was
.About
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1969, 1970.
Senator NUNN. Who became your immediate superior at that time ? Mr. HOFFE. A year lapsed where I had no immediate superior except for the regional commissioner. That was Dr. Paul Lawrence. Senator NUNN. How do you spell his last name ? Mr. HOFFE. L-a-w-r-e-n-c-e. Senator NUNN. Lawrence
?
Mr. HOFFE. Right. Senator NUNN. Dr. Paul Lawrence ? Mr. HOFFE. That is correct. A year lapsed between the time of Dr. Howard Krietzer's retirement and the coming on board of a Dr. Warren Tappin, T-a-p-p-i-n, who became the Director of Higher Education. Senator NUNN. When did Dr. Lawrence leave
Mr. HOFFE.
I believe about April of 1972.
?
Senator NTTNN. How much later did Dr. Tappin come ? Mr. HOFFE. There was no — let's see how to put this. Dr. Lawrence, as a regional commissioner, was the superior of Dr. Tappin. The
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am assistant commissioner, or regional commissioner, sorry, regional commissioner of education, had under him the Direc tor of Higher Education who, in turn, had under him myself and others. That is the hierarchy. believe Dr. Tappin came on board shortly before — perhaps a year before Dr. Lawrence left. Senator NDNN. Dr. Tappin and Dr. Lawrence were there at the same time ? Mr. HOFFE. Yes, believe they were. Senator NUNN. Dr. Tappin would have really been under Mr. Lawrence in the chain of command ? -regional
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Mr. HOFFE. That is correct. Senator NUNN. Who took Dr. Lawrence's place? Was that Dr. Tappin? Mr. HOFFE. No, Dr. Lawrence was replaced by a Dr. Edward Aguirre. Senator NUNN. How do you spell that? Mr. HOFFE. A-g-u-i-r-r-e, who then became the regional commis sioner.
Senator NUNN. You put in the past tense your own employment with
HEW. Do you still work with HEW ? Mr. HOFFE.
I will work with HEW until November 30.
Senator NUNN.
Until November 30 ?
Senator NUNN.
Of this year ?
Mr. HOFFE. Of this year. Mr. HOFFE. Right.
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Senator NUNN. with HEW?
At that
time you
will terminate your employment
Mr. HOFFE. That is correct. Senator NUNN. What was the
cause of that termination ? Did you or terminated were you resign by HEW ? Mr. HOFFE. Excuse me. Senator NTJNN. will simplify the question. Did you resign or did HEW terminate your employment ?
I
Mr. HOFFE.
I resigned.
Senator NUNN. When did you resign ? Mr. HOFFE. The resignation will be effective November 30. Senator NUNN. It will be effective November 30 ? Mr. HOFFE. Yes, sir. Senator NUNN. Have you notified HEW of your resignation ? Mr. HOFFE. Yes. have. Senator NUNN. When did you notify HEW of your resignation? Mr. HOFFE. That would have been about November 12 of this year. Senator NUNN. About November 20 ?
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Mr. HOFFE. November
12.
Senator NTJNN. November 12 of this year I Mr. HOFFE. Of this year. Senator NUNN. To whom did you give notice ? Mr. HOFFE. believe it was to Dr. Edward Aguirre. Senator NUNN. Mr. Hoffe. to whom did you give notice of your resignation ? Mr. HOFFE. believe gave notice to Dr. Edward Aguirre. Senator NTJNN. Dr. Aguirre. Mr. HOFFE. Aguirre in the English and Aguirre, if you want to put the Spanish twist to it. Senator NTJNN. What is Dr. Aguirre's position ? Mr. HOFFE. Dr. Aguirre is the Regional Commissioner for Educa tion in region IX. Senator NUNN. Do you consider him your immediate superior? Mr. HOFFE. Not my immediate superior. My immediate superior then would be Dr. Warren Tappin. Senator NUNN. What is his position ? Mr. HOFFE. His title has been changed from Director of Higher Education to Assistant Regional Commissioner of Education. Senator NUNN. That notice went out in the form of a letter or was it a phone call ? How did you give notice ? am Mr. HOFFE. There is a form, a standard form that one signs. can't identify it. The form numbers are many. sorry Senator PERCY. Mr. Hoffe, you have been in education for years. This is a public hearing. would like you to speak up, please. No one has any trouble hearing me when speak up. They shouldn't have trouble straining to hear you. This is not a secret conversation be tween three of us. This is a public hearing. Will you please pull that mike up and speak right into it and let your voice be heard ? Senator NUNN. See if you can adjust that mike. Mr. HOFFE. Is that any better, sir ? Senator PERCY. That is much better. Just keep it right up there. Thank you. Senator NUNN. you could, keep it as close as comfortable.
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This was in the form of
termination
a
written notice then on
a
regular form of
?
Mr. HOFFE. Yes, Mr. Nunn, it was. Senator NUNN. Do you have
Mr. HOFFE. No, sir,
I do not.
a copy
of that with you today ?
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Senator NUNN. Do you get back an acceptance from HEW or is any acceptance required ? Is it strictly a unilateral notice of termination ? Mr. HOFFE. It to use your phrase, am sure, unilateral notice. There no Senator NUNN. Did you have any discussions with Dr. Tappin or Dr. Aguirre prior to giving this notice about your intention? Mr. HOFFE. No, not that recall. Senator NUNN. Were you requested to Mr. HOFFE. Counsel reminds me that my counsel had discussion with
Senator NUNN.
Prior
a discussion
to your making the decision
?
Senator NUNN. Your counsel had Mr. HOFFE. Yes.
?
Dr. Aguirre.
Mr. HOFFE. Yes, prior to my signing off on this resignation form.
?
is
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Senator NUNN. believe you were interviewed by the subcommittee staff, Mr. Walsh and Mr. Duffy, in the latter part of October. Do you recall that meeting the latter part of October October 31, 1975 Mr. HOFFE. Yes, recall that. Senator NUNN. At that time, had you made the decision to resign from HEW When did you make the decision Mr. HOFFE. believe the decision was made the evening of Novem ber 11. Senator NUNN. The evening of November 11 Mr. HOFFE. Right. Senator NUNN. Just before you sent the formal notice Mr. HOFFE. Yes. Senator NUNN. Mr. Hoffe, would you describe for the subcommittee the scope of your responsibility in your job with HEW prior to your termination assume you are still working at HEW officially right now because your termination has not taken effect yet. Is that right Mr. HOFFE. That correct. Senator NUNN. You are still on the payroll Mr. HOFFE. Yes. Senator NUNN. You are being paid through November 30. Is that
is
;
?
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your understanding Mr. HOFFE. That is my understanding, yes. Senator NUNN. Are you in the same job? Are you still senior pro gram officer was detailed in May to work with the regional Mr. HOFFE. No. commissioner on his staff. That would be Dr. Aguirre. Senator NUNN. You are no longer senior program officer for nancial assistance Mr. HOFFE. No. Senator NUNN. Could you give us your present title then? Maybe you already have maybe you could just repeat it. Mr. HOFFE. The title, to the best of my knowledge, has never been changed. It simply that my work has been changed.
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Senator NUNN. Let us describe your present work then. Give us the of your responsibility right now in your job. Mr. HOFFE. Just now, was — well, until about 3 days ago, my job had to do with a study, a managerial study of the federally insured student loan program with a view toward bettering the delivery system of student aid throughout region 9. Senator NUNN. What was the scope of your responsibilities prior to scope
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the change being made ? Mr. HOFFE. As senior program officer, was involved in the moni toring of the national direct student loan program, the college work study program, and the supplemental educational opportunity pro gram. These are called college-based student aid programs. There is a position description which describes the job more fully, and that is available through the Office of Education, San Francisco. Senator NUNN. Those programs were the college work study pro gram, the national defense student loan program, and the supplemental
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educational opportunity program for that region ? Mr. HOFFE. Yes. National defense, later called national direct student loan program. Yes ; that is correct. Senator NUNN. As senior program officer, you had five people work ing for you. Is that right ? Mr. HOFFE. Five. On balance, it was about five. It shifted occa sionally, but five could be a good number. Senator NUNN. Could you give us those names ? Mr. HOFFE. Yes. There was a Lawrence Mersmann M-e-r-s-m-a-n-n ; believe ; Jerry Craft, C-r-a-f-t ; Phyllis Pampiani, P-a-m-p-i-a-n-i, Lois Watson and a typist, a Mary Anne — am sorry. Her last name
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escapes me.
Senator NUNN. We can get that for the record. Under these programs, was it your job to make the final decision about discretionary grants, discretionary contracts, and that kind of thing under these particular programs? As senior program officer, did you make the final decisions ? Mr. HOFFE. Excuse me just one moment. Mr. Nunn, as you know, there have been certain allegations made think it is at this against me in this hearing and because of that, point would be Senator PERCY. Before you get into that statement, quite interested in your evaluation — you, after all, were a senior program officer for financial assistance and were in a policy cate gory, generally speaking, and can give this subcommittee some very think, into the nature of its inquiry. valuable insight, What we are reallv after is to determine the value of programs on which we legislate. We would very much appreciate an opinion from you as to what you feel because these programs have been to a degree discredited because of the statements made that of $8 billion of out standing loans, $1 billion is in default, and Congress might see fit to change these programs because of this. Could you give us your opinion as to what you feel the underlying purpose was of, say, the college work study program, and the pro gram engaged in 2 years ago, the national defense student loan program, and the supplemental educational opportunity grant pro gram ? Can you evaluate those as to how much good you saw them do ?
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Was it a worthy, noble cause as it was outlined before the Congress ? Do you feel those programs have proven a value to the Nation and the young people of this country ? Mr. HOFFE. Yes. As a matter of fact, would like very much to
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speak to that. Probably the most worthwhile program, the student aid or in the student aid field of student assistance programs is the college work study program ; worthwhile in the sense that a student could earn a portion of his educational costs without sinking himself into that much more debt. You see, he is providing a service for the institution and/or the public. The little community colleges, of which we have in excess of 100 just in California, benefited as did their communities. The idea is that the student would work. As an example, he would provide, say, a dollar's worth of work and the employer would pay 20 cents on that dollar. The Federal Government would pick up the remainder of that student's paycheck.
The national direct student loan program was most helpful over the It has been subject, of course, to constant change and legisla tion, as you know; but it still remains extremely helpful for those years.
students who are perhaps academically marginal in the sense that they cannot earn wages and grades simultaneously. For them, the opportunity to buy time, if you please, so that they can study and they are buying time at the cheapest interest in the country today, the 3 percent simple interest. It is a godsend to students in need.
The supplemental educational opportunity grant program, straight grant for which there is no repayment due, seems now to have been outmoded by the huge basic grant program. That is a tremendous program. So we have perhaps now an appendage that needs to be don't think you need both the basic grant sloughed off or changed. program and the supplemental educational opportunity program. You had, in effect, a three-legged stool supporting needy students. . You had long-term, low-interest loans as one leg of the stool. Senator PERCY. Direct to the school ? Mr. HOFFE. The loans were made by the school to the students. You had the college work study program. So you had the work element. For those in the most dire need of financial aid, you have the supple mental educational opportunity grant program so that you had loans, grants, and work ; the three of them supporting the students. The incredible problem was that there simply was no way to assure ourself of the stewardship of these programs in the field among all the institutions. When you consider that you have maybe 400, 450 institutions in a geographical area that have described earlier and you have es sentially two persons that can travel, one has to mind the shop, there simply are not enough hours in the day. There never was enough travel funds. HEW auditors could never oblige you when you called for audit. We just didn't have the support. It wasn't there ; to support or to ride herd, if you please, on these programs. Senator PERCY. These programs might have had their origin, were the circumstances entirely different, in the GI bill which since World we have found is one of the best investments this Nation has War
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184 ever made. We have gotten our money back many fold. We have in creased the earning capacity in addition to the ability to enjoy life to our GI's. This principle was established on a loan and grant basis for all young, regardless of age, in a sense. Whatever the deficiencies, how ever, in the program, the GI bill has never had a serious criticism made against it. What went wrong in these programs, the three programs that you administered? Why are they being subjected now to attack? What are the deficiencies in those programs? Could you maybe take each of the three and discuss the deficiencies in them ? Mr. HOFFE. believe that, if we will take the national direct student loan first ; schools, as you know, are not only in the business of educat ing students. They found themselves in the hotel business, in the food serving business, and then suddenly, with the coming of the national defense student loan program, they found themselves in the collection business, something that they were not prepared to be in. The idea of having to follow a student as much :>s 15 years after he left their institution because that program had a 10-year repayment which could have been delayed and delayed and delayed. The collec tion efforts on the part of the institutions require amounts of money, time, energy that they simply couldn't have or didn't have or couldn't afford. So the NDSL program suffered a bit from that. Senator PERCY. So your point is that for one thing, it got into areas where the schools and their administrators really did not have the competence in charging the organization to follow through with their responsibilities placed upon them. Is that right? Mr. HOFFE. Essentially, that was it. Senator PERCY. Did it also attract the people whose interests were not essentially education, or essentially the welfare of students, whereas most people in education come through because of the devo tion to purpose and cause? Did it attract other kinds of people who were profit-oriented more than education-oriented? Mr. HOFFE. You may recall the legislation allowed proprietary edu cation to participate in the student college based programs. believe you will find that that is where the bulk of the trouble began, the troubles that we find, although it is not to say that your more tradi tional institutions were not involved in these problems. It was simply that the Office of Education could not supply the technical assistance. It simply required an army to do this and an army was not available. You had two men available. Senator PERCY. Have you seen evidence of some proprietary schools that did at least as good a job as nonprofit schools ? Mr. HOFFE. have indeed. Senator PERCY. And there has been nothing inconsistent with their making a profit, but also having a very high quality school that has a good record of not only providing excellent education, but also because they are in the private sector, helping the student make that transition into a paying job so that he can repay these loans and find a place in society, in the economy? Mr. HOFFE. Yes. Out of the 100 or 105 of such proprietary schools, you are bound to find — — Senator PERCY. In your jurisdiction?
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Mr. HOFFE [continuing] . Schools— right. Senator PERCY. There were
150
proprietary
?
Mr. HOFFE. I think the last count, I believe that half of our schools — our clients, if you please — are proprietary schools now.
Senator PERCY. Of those, what proportion would you have con sidered to be of a quality at least comparable to the nonprofit schools ?
Mr. HOFFE. Percentagewise?
Senator PERCY. Percentagewise.
Mr. HOFFE. Very small.
Senator PERCY. So that the percentage of schools, proprietary schools that you maintained is small that have high-quality perform ance. Is that right ? Mr. HOFFE. By performance ? Senator PERCY. From the standpoint of the quality of education and what affect it has on the student, their ability to take that educa tion and enjoy life more with it and also find the better opportunity
in economic
society ? you had previously testified that there were good schools were comparable in quality, even though they have a proprietary
I thought
that
interest.
Mr. HOFFE. Yes. There seemed to be. That was so ; but essentially, from a bureaucratic point of view, we wear our blinders and we are
involved essentially in our programs without looking to measure the quality of education. That was not, we were not — that was out of our jurisdiction. Senator PERCY. As senior program officer, you and your colleagues were not essentially concerned with the quality of that education that was being delivered and that you were paying for? Mr. HOFFE. Not that we were not concerned, Senator, but we were not allowed, it was simply not our job. We would be admonished. It was not criteria, the funding. The only criteria that we could entertain or were allowed to enter tain was the fact that if a course of study were 6 months in length and that it would have been accredited, the school had been made eligible, should say — let me correct that— not accredited, made eligible for participation in the programs under the office of John Proffit, the in stitutional eligibility section, that was totally out of our hands. Senator PERCY. Could you name some of the proprietary schools that you considered to be good schools, relatively high-quality education, motivation high by the administrators of the schools and a reasonably good record of turning students out who were able to succeed after ward ? Could you name some of them specifically ? Mr. HOFFE. Yes. There was the Sequoia Automotive, Sequoia Auto motive School. Senator PERCY. They trained automobile mechanics? Mr. HOFFE. Yes, all phases of automotive industry; Empire Col lege, believe would have been another. Senator PERCY. Empire College is a proprietary school ? Mr. HOFFE. Yes, it is. There is a court reporting school in San Diego, was quite im the name of which escapes me at the moment; but pressed with the plant, the quality of the teachers, their mechanics, and so on, who had the equipment and, of course, the curriculum of the school was very good.
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Again, you understand that when we would visit the schools, not to do an audit, we were not auditors, we were not accountants, but simply to view the performance, the operations of their programs. Senator PERCY. But who in HEW had the responsibility for cer tifying as to the quality of education provided ? In other words, you
don't really know ? Mr. HOFFE. sus really — no. The quality of education, you see, pect, and this is an opinion — suspect that that question was skirted for political reasons as much as anything else. No one wanted to be in the position of saying that school A provides a quality product for its students whereas college B does not. Senator PERCY. How could they get certified or made eligible or
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accredited ? Mr. HOFFE. By simply meeting mechanical standards, as had sug gested earlier; at least a course of study that is 6 months in length, for example, that they accepted students only with high school diplomas or the equivalent thereof. That sort of mechanical thing. Senator PERCY. Could you name any other good schools that you know of ? think it is very important that we place right on the record the fact that all of them are not being painted with the same brush, that some of them were good, and certainly you are in a position to know some of them. Mr. HOFFE. know that there were some few, but know it indirectly in a sense that would hear it from other proprietary school owners and they would comment. Senator PERCY. They would be in the position to know ? Mr. HOFFE. Who is turning out a quality product. Senator PERCY. Any others that you can remember ? Mr. HOFFE. At this moment, no. Senator PERCY. You haven't mentioned West Coast Schools. What category would you put them in ? Mr. HOFFE. have never — the only school of that West Coast group that ever visited was the Automation Institute. That was one school, original school. Senator PERCY. But you didn't mention them as being in the good category. What category would you put West Coast Schools in ? couldn't or didn't evaluate the Mr. HOFFE. couldn't because was told about high records of placement quality of their services. was told that equipment was first-class ; but am not a com there. couldn't tell you. puter type and so when they show me computers, Senator PERCY. But they didn't come to your mind when pressed you for another school. You couldn't think of any. Mr. HOFFE. No ; there are just so many of these schools. Senator PERCY. But their name has been rather prominent in the news lately. They didn't come to your mind ? Why not ? Mr. HOFFE. Because it made no — you know, can't. just did not measure the quality or was in position, had no reason to and indeed had been told that we are not to be concerned with the quality of these schools. hadn't heard Senator PERCY. Were you told that ? Were you told you were not to be concerned with the quality of these schools and if so, by whom? Mr. HOFFE. This was understood. Senator PERCY. Understood in what way ?
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Mr.
HOFFE. Understood by all senior, or all program officers. Senator PERCY. But this was none of their business ?
Mr. HOFFE. That is correct.
Senator PERCY. How did you get that understanding, in writing or
verbally ? Mr. HOFFE. That would
have been verbal over the years in meetings when we would talk. Senator PERCY. Can you think of anyone in Washington who you remember saying that is none of your business or someone else's ? Mr. HOFFE. Yes ; that would have been — would be hard pressed to you time and date, but this would have come from people like five ill Shaw, Dr. Leonard Spearman who was the Director of the pro grams at that time, certainly out of Kuth Crowley's office. There can begin to pinpoint a little more. Senator PERCY. don't want would like you to pinpoint because in any way, when you say people like them, that is not specific. you can pinpoint much more helpful to us because really, when a policy given you from on top, then you have got to carry that policy out or fight or get out. We would be most interested in determining
in Washington
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it
is
it
it,
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who
?
6
6
a
it
?
it
a
it
;
is
it
a
is
is
a
a
it,
a
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if
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set that policy. Specifically, can you remember any words that were said or any particular person that gave you that impression that that was none of your business as to the quality of education that was being delivered Mr. HOFFE. am convinced that would have had to come from Bill Shaw. Senator PERCY. Did come from Bill Shaw Mr. HOFFE. time and date said, yes, then would have to give or a time and place, and so on. can't. Senator PERCY. Not necessarily in lot of meetings that you held, but if you can readily distinctly remember that Bill Shaw said this Mr. HOFFE. cannot distinctly remember, but, sir, you are truly interested in this, trying to pinpoint this, suspect that if you pose that question to Dick Rowe who Deputy Director of the student financial aid program or Dr. Leonard Spearman or Bill Shaw, the head honchos, you see, of the programs, and certainly John Prossit's office, am sure that you can come closer than can bring you here. Senator PERCY. am sure you have seen when someone buys lemon for car, they put bumper sticker on "I bought lemon." When you found that you had a lemon on your hands with a school that had a lot of students there and the purpose of this program was worthy, an unsuspecting student when he noble purpose, and the student school that eligible for these loans and the school goes out goes to and says we are eligible, you can come in here, we can get you the a 3-percent note but when you found money, you sign this note, had bad what and what were did you do about school, really you under your policies as Program Director you supposed to do about Mr. HOFFE. We complain to one another, play the game of God awful the games people play. We would try to make sure that ain't they had at least, you know, going to our limits to see if they had at months in length. We couldn't touch the least course that was was beyond us. quality of it. That You mean in other words, what was in the course PERCY. Senator wasn't really looked into, but they had to have a course that the body could go to for months and stay there
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Mr. HOFFE. Yes. The language of your legislation says only that the course must lead to an occupation recognized or a recognized occupation. Senator PERCY. When you found the content wouldn't meet that standard and didn't really lead to anything and the student would become disillusioned and quit, discouraged by his expenditure of time, even though with Federal advance money, what could you do about it ? Mr. HOFFE. We could do nothing, nothing of substance. Senator PERCY. Is this what you are painting as a picture of the bureaucracy, that you just feel Mr. HOFFE. am. Senator PERCY [continuing]. You just can't do anything, you can't fight your way out of this thing. There are too many layers up above you and too much insensitivity to the real purpose of these programs ? Mr. HOFFE. You will find, am sure — your investigators will find from records in our files, my files, month after month, endlessly, reports to my superiors, the fact that schools would disappear -with funds — and literally disappear — Jackson College, Tahoe Paradise, the list goes on and on. We would make these, we would report, what kind, is there any standard operational procedure to follow up with litigation, whatever ? In other words, where is the machinery ? To this day, it has yet to be developed and, hopefully now something will come of it. want to yield back to you. Senator PERCY. Mr. Chairman, have just one further question on the line of question that you followed before. don't want to get into client relationships here, Mr. Poole. By the way, were you a former U.S. attorney ? Mr. POOLE. Yes, sir, northern district of California, from 1961 to the end of 1969. thought so. You have very well-known counsel Senator PERCY. am and very able counsel. So if you will stop at any point that certainly do not want infringing on the client relationship, which to do, but am interested in the decisions you made to resign. Were you just fed up and you wanted to get out? Did you have a said, "What do feeling ? had a fellow come in to see me one time. was just said, "Gee, you want to see me about"? He said, "I quit." about to fire you." He said, "I knew it. That is why quit." He got the word in first. Were you in any way feeling the ax was going to fall and someone was going to ask you to resign and decided to resign first ? Do you feel privileged to tell this committee what was in your mind ? Or were you fed up with the bureaucracy? Were you frustrated? Mr. POOLE. Senator, may object, if may? Mr. Hoffe told you don't that there were discussions that were conducted through me. do believe know what his response would be to your question, but it would be appropriate for him to seek some advice on it. Senator PERCY. thought might be getting into a sensitive area. yield back to the chairman. Senator NUNN. Let me ask you a couple of questions here. What was the total amount of money that was under your jurisdiction, say, in 1 year, in approximately all of these programs? We have heard $200 million. Would $200 million be an approximate amount ?
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Mr. HOFFE. No; it wouldn't. When you say jurisdiction over these months, you recognize that none of these student aid programs were decentralized
kind
;
that is, the final decision
of money was always out of
a
as to which schools got what central office in Washington.
Recommendations were made. The amount, think the amount that finally was guess, in 1974, available to schools, about 450, roughly, 420, somewhere in there; was about $185 million to $187 million in fresh Federal funds each year. Each year the figure would tend to go up. To this amount, you see, institutions would add their contributions. In the case of the national direct student loan program, it is a 9-to-l relationship, 9 Federal dollars to 1 institutional dollar. In work study, it was 80 percent Federal, 20 percent, on the average, 20 percent institutional. The SEOG, or supplemental educational oppor tunity grant program, was a straight Federal grant to the schools, \vith no matching involved. So to come back now to your question, would say the last one, 1974, that recall, was about $185 to $187 million. Senator NUNN. How many applications would come through your office, just roughly speaking, in a year in all of these programs? In other words, what kind of paperwork volume did you have to deal with? know it has got to be a rough estimate, but just give your best estimate. Mr. HOFFE. would say we would entertain something in excess of 400 applications which were tripartite ; that is, each application would be a request for one or more of the three programs, request for funds for one or more of the three programs. Senator NUNN. You really might not deal with it 400 times ; maybe you might have to deal with 800 separate applications on separate programs ? Mr. HOFFE. As say, each application would represent anywhere from one to three programs. So the actual applications would be any where from 400 to 430. think this year, it is something like 470, over 500. It is over 500, yes. Recognize too, won't you, that four or five schools could come in on a single application. Senator NUNN. So you might be dealing with as many as 1,200 to 1,500 separate applications if you divided it ? Mr. HOFFE. you wanted to look at an application, if you wanted to look at a single application as one up to three, yes, you could look at it in that fashion. Senator NUNN. You had four people in your office, including a
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secretary ? Mr. HOFFE.
That is correct.
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Senator NUNN. You had jurisdiction which included, suppose, two people whose job was to visit schools in the field? Only two? Mr. HOFFE. Yes. There would never be more than — never, very rarely would all three of us be in the field at the same time. Senator NUNN. Did you have an opportunity with this workload to properly analyze the separate applications or was your workload just too srreat to do them justice ? Mr. HOFFE. This was another point that vou will find in various reports and so on. that schools would spend as much as 2 weeks to complete an application. The applications became so complicated over the years that schools finally went to consultants.
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The term the other day brought up in the hearing was something like grantsmanship. It seemed that schools would simply, many schools, would spend a good deal of time and effort to submit an application ; but a panel, a subpanel in reviewing that application could seldom take on an average of more than 10 minutes to review the reasonable ness of that application. Senator NUNN. How many pages would an individual application
be?
Mr. HOFFE. Pages ? It could run 12 pages with supplements to it : 10 to with literally hundreds of data cells involved. Senator NUTSTN. Would it be fair to say that in your own region because of the lack of manpower, that the handling of these applica 12 pages,
tions was inadequate
Mr. HOFFE.
?
I think that would be true very much
across the country. Senator NUNN. You think that would probably be true everywhere in this particular program? Mr. HOFFE. In all 10 regions. Senator NUNN. am also interested in these panels. Are these panels appointed by the HEW in Washington or by the people at the regional level? Mr. HOFFE. Mr. Nunn, if you will excuse me just a moment. Mr. Nunn, in view again of the allegations that have been made, feel that Senator PERCY. Before you get that feeling too deeply, can pur sue just one other area? think you could be of immense help to us on it. am looking at it from the standpoint, because we did subpena your presence, the Federal Government is paying your expenses to come out here. want to get a return on that investment for the tax
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payers.
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It wasn't a volunteer thing, Senator. Senator NUNN. Pardon? Mr. POOLE. It wasn't exactly a volunteer thing. • Senator PERCY. am understand they don't pay your expenses. sorry. What would you say would be the recommendations you could make to this committee, this subcommittee for improvements in the legislation? What did we overlook? say "we." We weren't sitting there drafting this legislation. We are now left with the aftermath of it. What should we have done in the legislation that would have strengthened this legislation and made it much more effective and made it less conducive to abuse and some of the kind of problems we have gotten into? Also, what could HEW have done that they didn't do to make this much more effective, to have less default, less waste, and to have the noble purpose of this legislation fully implemented and acted upon, that they had responsibility for and they had legislative and statutory background for and backup for? don't think this gets into this area, but it would be tremendously helpful. Mr. HOFFE. The legislation in each of the three colleges, as all col lege-based programs, the national direct student loan, college work Mr. POOLE.
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SOAG program,
the legislation itself was written just about tight as to be administratively impossible. this point Senator Nunn withdrew from the hearing room.]
study, and
right ; that is, it wasn't
[At
so
U.S. SENATE, COMMITTEE ON GOVERNMENT OPERATIONS, ON INVESTIGATIONS, PERMANENT SUBCOMMITTEE Washington, D.C. Pursuant to Rule 5 of the Eules of Procedure of the Senate Permanent 'Sub committee on Investigations of the Committee on Government Operations, permission is hereby granted for the Chairman, or any member of the Subcom mittee as designated by the Chairman, to conduct hearings in public session, without a quorum of two members for administration of oaths and taking of testimony in connection with Hearings on the Guaranteed Student Loan Program and Other Related Financial Assistance Programs Administered by the Depart ment of Health, Education, and Welfare on Wednesday, November 19, 1975. HENRY M. JACKSON, Chairman. CHARLES H. PERCY, Ranking Minority Member.
Mr. HOFFE. But it is the relations to this day — and I would like for you to hear this one — to this day the national student direct loan pro
gram has yet to have Federal regulations. You will recall that that original program, the national defense student loan program, was mounted in 1958, began in earnest in 1959. We have yet to have Federal regulations governing the program. This is why technical assistance Senator PERCY [presiding]. But the legislation is drawn in such a •way that there is nothing prohibiting it from being issued. HEW had, in your judgment, responsibility to issue such regulations, but it simply failed to do so ? Mr. HOFFE. They have the responsibility to issue regulations. Senator PERCY. Why haven't they done that? Mr. HOFFE. can't answer that. don't know. Senator PERCY. At any time, did you or your colleagues out in the region indicate that it would be helpful if you had such regulations ? Mr. HOFFE. That was our theme song ; yes. Senator PERCY. In other words, you just kept playing that theme song. Did you play it from San Francisco as well as back at meetings here in Washington ? Mr. HOFFE. We did indeed. Senator PERCY. What reasons did they give you for not issuing such regulations? Mr. HOFFE. The difficulty of having draft regulations clear one desk after another, signing off on various aspects of proposed regulations. The work study program has yet to have regulations, you see. Here you have schools all over the nation trying to administer, according to the broad language of the law, these programs and coupled with that, the inability to provide technical staif to assist them in the ad ministration and interpretation of the law. It is just too little too late. Senator PERCY. Was there a reason, was there any pressure put on HEW by any of the schools (a) to get regulations or (b) not to have regulations ? Did they ever take the position ? Mr. HOFFE. To the best of my knowledge, through their national association and State associations of student financial aid offices, they,
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too, carried the theme of, for heaven's sake, will you give us lines; will you give us regulations. Senator PERCY. In other words, the schools themselves wanted
lines ?
guide guide
Mr. HOFFE. Yes, indeed.
Senator PERCY. Were there any schools that didn't want such guide lines that prospered and did better without them ? Mr. HOFFE. Not to my knowledge. Senator PERCY. Specifically, though, can you pinpoint any legisla tive areas that we could work on — this would originate with the Labor and Public Welfare Committee; but recommendations this subcom mittee could pass on to them for legislation that should be introduced ? Mr. HOFFE. Yes. think if someone were to review the criteria for providing the student financial aid to students, review it with a view toward at least making the criteria the same, it has now reached the point where even the criteria, the criteria varies. It is almost ambiguous
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cases.
We are still trying to serve the same students, but one program requires one thing, another another thing, and not just because of the
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nature of the programs. They are just at odds. The administrators of student aid financial programs, many of them have reached the point where they are almost — well, they are never sure of whether they are in compliance or not with the law because of ambiguities and so on. So if somehow legislation could provide for a standard kind of criteria for the delivery of student financial aid to those target students that it really wants to focus in upon, it would be helpful. Senator PERCY. Do you think it would be necessary for us by legis lation or could it be done by regulations ? Mr. HOFFE. It could be done by regulations, there is no question. Senator PERCY. Also in the area of personal surveillance, actually going out visiting the school, having a committee of peers look at the performance of that school, look at their records, determine and come back and evaluate whether that school should stay on the eligible or accredited list, how can we accomplish and do that so that it is not just paperwork filled out ? someone wants to misrepresent and mislead as to what their school on paper very easily if that their inten they can do actually tion, and get by sometimes the most careful scrutiny but they might not be able to get by a personal audit, personal investigation, inter views with students, and so forth. Mr. HOFFE. think you would have to include in the criteria of eligi bility for institutions to participate in these programs. You would have to include something which gets to the quality of the education provided students. For student financial purposes, very truly nonexistent at this point. Senator PERCY. Do you think we ought to have some program for responsible for determining the character, the type of person who these schools hire for an office, When secretary administering you you run sort of check to determine what kind of person you are bringing in. financial officer, you take an awfully Certainly, when you hire good check on it. When you entrust sometimes millions of dollars and school administrator, shouldn't thousands of students to the care of
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you know something about the character, background, and quality of that person ? Mr. HOFFE. I believe, Senator Percy, that again if you would pose that question to the man in charge of the Institutional Eligibility Sec tion, this again is out of the area of Student Financial Aid Offices ; but
I am sure that they
would have or could make many recommendations to get at your concern. Senator PERCY. would like you, if you could just take a pencil, if you have a pencil there and make a note, or maybe Mr. Poole could do it for you. We have a vote on, and have just about 4 minutes to get down to make the vote. would like to leave a couple of questions. When the chairman comes back, they can be the questions that you can pick up on. would like to follow through on, first, what you think the re sponsibility of financial institutions should be. Do you think it is a good idea to guarantee 100 percent of the note and place no re sponsibility on the part of the financial institution? What is the re sponsibility of the students ? How much of this default problem is a defect in the students themselves, and why do they get the attitude they didn't have to pay these loans off ? Then would like to get your judgment on this whole mountain of paperwork, the complexity of getting a school declared eligible, and all of that that required the hiring of, say, an expert to help the school see their way through this bureaucracy — a constant complaint of businessmen and everyone else. It is so complicated to do business with the Government that we have to hire all of these experts. That creates jobs for accountants, lawyers, consultants, everyone else. What could we do to simplify this ? leave those questions. We will recess until the chairman returns. Mr. FELDMAN. He should be on his way. you would stay in place, think we can finish up fairly rapidly. [A brief recess was taken with the following present: Senator Percy.] Senator NUNN. The subcommittee will come to order. Mr. Hoffe, does counsel need further time? will be glad to let you consult. Mr. POOLE. No ; will do it as the occasion may require. Senator NUNN. Mr. Hoffe, have several other general questions. Perhaps Senator Percy covered this question, but one of the things see as a real dilemma in this program, perhaps a problem of the guaranteed student loan program, is the 100-percent financing. When the Federal Government backs up a loan 100 percent, what kind of incentive does the financial institution or a school serving as a quasilender, have when a loan is in default, to collect that loan if they really aren't going to lose any money ? Mr. HOFFE. Mr. Nunn, am not knowledgeable of the guaranteed
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student loan. Senator NTTNN. That wasn't part of your jurisdiction ? Mr. HOFFE. No, sir. Senator NUNN. What about the paperwork on the applications that you did deal with? Was it too much paperwork or was it too little in terms of questions ? How would you analyze that ? What could be done to improve that situation ?
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Mr. HOFFE. Mr. Nunn, again, your question is dealing with and is part of allegations made against me previously. must say have to decline to answer that question on the grounds that to do so may tend to incriminate me. Senator NUNN. Mr. Hoffe, did you have final approval over amounts of grants that were to go to certain schools under the direct grant program ? Mr. HOFFE. am sorry ? Senator NUNN. Did you have the final approval or final recom mendation— that responsibility — over amounts of grants that were to go to the schools under the direct grant program Mr. FELDMAN. Before you answer that question, Mr. Poole, haven-t had the record read back, but this was a question in which he had passed previously before we digressed. Mr. POOLE. don't think so, Mr. Feldman. Mr. FELDMAN. It was my understanding. just wanted to give you my feeling. Senator NUNN. Did you have final approval over amounts of grants that were to go to schools under the direct grant program, or did you make final recommendations on those Mr. HOFFE. Excuse me just moment. must decline to answer the question on the ground that Again, to do so may tend to incriminate me. Senator NUNN. Mr. Hoffe, do you know the man who called him self Mr. Fred Peters Mr. HOFFE. decline to answer the question on the same ground which stated before. Senator NUNN. Did you know Mr. Pete Fisher?
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Senator NUNN. think you perhaps had better give the answer each time to your grounds. Mr. HOFFE. decline to answer the question on the same ground which stated before. Senator NUNN. You are declining to answer on the grounds that the answer, would tend to incriminate you gave the answer, you? Mr. HOFFE. That to do so may tend to incriminate me. Senator NUNN. Do you know Mr. Dave Carman Mr. HOFFE. decline to answer the question on the ground that to do so may tend to incriminate me. sum of money, $1,000 Senator NUNN. Mr. Hoffe, did you accept in $100 bills from Mr. Fred Peters at his residence in Los Angeles
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in the summer of 1971 Mr. HOFFE. decline to answer the question on the grounds that
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to do so might tend to incriminate me. Senator NUNN. Mr. Hoffe, did you meet with Fred Peters, Dave Carman, and Dan Dameron at the Del Webb Town House in San Francisco in the fall of 1972 Mr. HOFFE. must decline to answer the question on the ground that to do so may tend to incriminate me. meeting with Mr. Senator NUNN. Mr. Hoffe. did you attend Fred Peters, Mr. Pete Fisher, Mr. Dave Carman, and Mr. Dnn Dame ron in Los Angeles shortly after November or the fall of 1972
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Mr. HOFFE.
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must again decline to answer that question on the to do so might tend to incriminate me. Senator NUNN. Did you agree to accept $1,000 a month, plus 60 percent of the profits of that business after expenses in return for your assistance and expertise ? Mr. HOFFE. Again, Mr. Nunn, must decline to answer the ques tion on the ground that to do so may tend to incriminate me. Senator Nroor. Mr. Hoffe, did you prepare or assist in a crash course to train Mr. Dan Dameron in the preparation of applications
ground that
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Mr. HOFFE.
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must decline to answer the question on the ground tend to incriminate me. Senator NUNN. Mr. Hoffe, in the course of your job in HEW, did you actually draft application forms for some of the people who were applying for participation in the programs under your super
that to do so may
. vision? Mr. HOFFE. I have to decline to answer the question on the ground that to do so may tend to incriminate me. Senator NUNN. Mr. Hoffe. as senior program officer, did you of ficially review and recommend for approval the applications for grant funds prepared by clients, in the consulting business? Mr. HOFFE. I must decline to answer that question on the ground that to do so may tend to incriminate me. Senator NUNN. Do you know Mr. Marvin Berson ? Mr. HOFFE. I decline to answer the question on the ground that to
do so may tend to incriminate me. 'Senator NUNN. Mr. Hoffe, after West Coast Schools closed, did you suggest to Dan Dameron and Marvin Berson that they get together so that you could deal with them jointly ?
Mr. HOFFE.
I have
to decline to answer the question on the same
ground, which was stated before. Senator NUNN. Did you accept sums of money from Marvin Berson and Dan Dameron, both jointly and separately, for your participa tion in their consulting business ? Mr. HOFFE. again have to decline to answer the question on the stated before. same ground as Mr. FELDMAN. Mr. Hoffe, have you been in touch with Mr. Marvin Berson within the last 2 weeks ? Mr. HOFFE. have to decline to answer that question on the grounds that it might tend to incriminate me. Mr. FELDMAN. Mr. Chairman, for the record, would like to state that for several weeks the subcommittee staff has been attemping to serve Marvin Berson, who has been mentioned in some of the questions and previous testimony, with a subpena, demanding his appearance for this hearing Over 3 weeks ago assistant counsel LaVern Duffy, contacted Mrs. Berson and notified her of our intention to serve the subpena on Mr. Berson. She professed to have no knowledge of his whereabouts. After that discussion, assistant counsel Keith Adkinson, enlisted the assistance of the U.S. marshal's office in Los Angeles, concerning Mr. Berson. All efforts to serve the subpena failed. Mr. Berson's attorney was identified as Alvin Goldstein of San Francisco, said Mr. Adkinson contacted him.
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Mr. Goldstein and Mr. Adkinson talked on several occasions and Mr. Goldstein, who was in contact with his client at this time, was most helpful to the subcommittee in trying to impress upon his client his be lief it 'would be in this client's best interest not to avoid service of process of our subpena. Mr. Goldstein advised Mr. Adkinson last evening that these efforts had -been to no avail and we can therefore conclude that Mr. Berson continues to maintain the posture of evading the service process of our subpena. We would like to have that in the record. When he is served, he still will be subject to the subpena and will appear before this subcommittee. Senator NDNN. Thank you, Mr. Feldman. Mr. Hoffe, Mr. Poole, we appreciate your appearance here this morning. Mr. POOLE. Thank you, Mr. Chairman. think the record should also show that Mr. Hoffe has at no time avoided or attempted to evade
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the service of process. Mr. FELDMAN. would like to endorse Mr. Poole's comment. Senator NUNN. The staff agrees with that assessment. Mr. Poole, do you have any other statement you would like to make ? Mr. POOLE. No ; have none, Mr. Chairman, except to thank you and Senator Percy for your courtesy and the manner in which you have conducted the examination this morning. Senator NUNN. Thank you very much. Mr. Hoffe, do you have any other comment ? Mr. HorrE. No, sir, do not ; thank you. Senator NDNN. Thank you. Our next witness this morning, whom we appreciate very much ap believe his wife, Mrs. Sarah pearing, is Mr. Enrique Ponce, and Ponce, and also Mr. Phillip K. Evans. All of these people 'who have come a great distance are former all three of you could come up, we students at West Coast Schools. would appreciate it. see we have another vote. We are going to have to be interrupted. will ask you to take the oath at this Senator Percy may come back. time, and you can be seated. We will be back. Will all of you hold up your right hand? Do you swear the testi mony you will give this morning before this subcommittee will be the truth, the whole truth, and nothing but the truth, so help you God? Mr. PONCE. do. Mrs. PONCE. do. Mr. EVANS. do.
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TESTIMONY OF ENRIQUE E. PONCE, MRS. SARAH PONCE, AND PHIL LIP K. EVANS, FORMER STUDENTS AT WEST COAST SCHOOLS Senator NUNN. Mr. and Mrs. Ponce and Mr. Evans, under the Rules of Procedure for the Permanent Subcommittee on Investigations, your attorney, if you have an attorney, may certainly be present with you this morning. do not see an attorney with you this morning. Do any of you have an attorney ? Mr. EVANS. No, sir.
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Mr. PONCE.
No, sir. Senator NUNN. Would you like to have an attorney with you as you testify ? You have the right if you like. Mr. EVANS. No, sir. Mr. PONCE. No. sir. Senator NUNN. Do you then waive your right to have an attorney j each of you ? ,-•• Mr. PONCE. Yes. Mr. EVANS. Yes. jX ...^ Senator NUNN. Thank you. Before we get started think this would be a good time to recess until either Senator Percy or come back.
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[Brief recess.]
[Recess taken with the following members of the subcommittee present : Senator Nunn.] Senator PERCY (presiding). The subcommittee will come to order. [Members present at time of reconvening after a brief recess: Senator Percy.] Senator PERCY. Mr. Evans, you may proceed. Mr. EVANS. Mr. Chairman, my name is Phillip K. Evans and live at 1350 East 63d Street in Long Beach, Calif. am employed by the Long Beach Unified School District as a building custodian. On also work as a barber in Long Beach to help supplement•weekends,
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In the spring of 1972, I was becoming concerned about advancing myself professionally and took an interest in advertisements for a
television repair course offered by West Coast Schools, Inc. In May 1972, visited a branch of West Coast Schools at 11442 South Atlantic in nearby Lynwood, Calif. A woman admissions officer explained the course to me and told me it would cost $1,300. told her did not have that kind of money, but she said that money was not a problem, since could obtain a federally insured student loan, which would not have to begin paying back until 9 months after completed the course. This sounded very attractive to me and signed the loan papers. The admissions official also asked me to have my wife sign the note, which she did on May 18, 1972. On the night of May 18, discussed the program at length with my wife and we decided that the $1,300 was too much of an obligation for us. did not earn much money and the extra payments appeared to be beyond my ability to pay. The next day, went back to the school and told the woman who had signed me up the day before that wished to withdraw from the course and cancel the loan. She told me not to worry about anything and that the loan would be terminated. thought she was completely honest. West Coast Schools had done could a lot of advertising on television and in the newspapers, and only believe that it was a reliable organization. didn't think that any institution which had Federal approval would be anything but ethical. Senator PERCY. So you were really relying on the feeling that the Federal Government must have looked into this, must have approved the school and what they told you must be in accordance with the ethics and the standards of this program ?
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Mr. EVANS. Yes, sir ; absolutely. Senator PERCY. Thank you. Go right ahead. Mr. EVANS. However, nearly 2 years later, in March
1974,
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book from Student Loan Services, a division of EDCO Financial Services of Los Angeles, notifying me of the debt had to SDC Federal Credit Union. also received a payment book. was confused at first, since nowhere in the papers sent me was there a men tion of West Coast Schools. finally realized that the loan papers were for the course Then, never began at West Coast Schools. was extremely concerned about the matter and called the SDC Federal Credit Union. A representative told me that had to pay the told him never money and there was no way out of my obligation. attended a single class. He told me that that was a shame but there was nothing that could be done. called the Bureau of Consumer Affairs in Los Angeles County. called the American Civil Liberties Union. They could do nothing. called the Legal Aid Society. No one could help. wrote to Caspar W. Weinberger, the Secretary of Health, Educa tion, and Welfare and the Los Angeles County District Attorney, ex plaining what had happened. On April 22, 1974, Mr. Weinberger wrote me telling me "be patient during the time these problems are worked out." He also said to keep all records so that when "the time comes for you to answer questions about your West Coast School enrollment, you will have the facts at a payment
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hand." The entire question became even more confused when, a month after Mr. Weinberger wrote me, received a letter from Henry Goltz, pro gram officer in the Office of Education of the HEW Regional Office in San Francisco, telling me that HEW could not "absolve a student/ borrower of his obligation to repay in the rare instance where loan funds are invested in a school which fails to perform on its enrollment contract." He. advised me to seek legal counsel. Senator PERCY. Without objection, the two letters that you have referred to will be accepted for the record as exhibits. [The documents referred to were marked "Exhibit Nos. 80 and 81" ' for reference afid follow :] ' ; ; >.
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THE Mr! PHILIP
K.
SECRETARY OF HEALTH, EDUCATION,
EVANS,
6SA Street,
AND WELFARE, April 26, 1974.
Washington, B.C.,
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80
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1350
EXHIRIT No.
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Long Bench, Calif. DEAR MR. EVANS Thank you for your recent letter regarding your experience federally insured student loan was made with the West Coast Schools where to you, even though you state you did not at any time attend this school in Cornpton. The closing of West Coast Schools at time when the schools had not delivered all of the educational services for which the students had been charged in ad vance under the Federal Insured Student Loan Program will require the Office of Education to make careful survey of the situation which then existed. We must determine the amount of each student's loan, whether or not the student/ borrower ever actually attended the school, and if so, the amount of tuition ac tually earned by the school during each student's course of study. In addition
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there are a number of other complex determinations which will have to be made to processing any applications for adjustments on each student's account. My advice to you, and to other students in the same situation, is that you be patient during the time these problems are worked out. In order to enable us to lielp you, please preserve all papers you signed with the school — your copy of the school contract, your promissory note, and any other documents you may have signed upon entering the school, or may have received after the school closed. Make a careful record of the date on which you signed the papers in the school and the date you actually advised the school of your decision not to enroll, and keep this information with your other school and loan papers so that when the time comes for you to answer questions about your West Coast School enrollment, you will have the facts at hand. It will not be necessary for you to write again, as these loans will be considered on an individual basis, so that all students will receive every possible considera
prior
tion
in the settlement of their accounts. Sincerely,
CASPAR
EXHIRIT No. DEPARTMENT
OF
HEALTH,
W. WEINRERGER, Secretary.
81
EDUCATION,
AND WELFARE,
San Francisco, Calif., May
16, 1974.
Mr. PHILLIP K. EVANS, 1 350 East 63 Street, Long Beach, Calif. DEAR MR. EVANS : This is in response to your recent letter regarding your Federally Insured Student Loan to attend West Coast School which is now out
of business.
As I am sure you are aware, the purpose of the Federally Insured Student Loan Program is to assist students in obtaining credit with which they may finance their education and provide them with favorable interest rates and liberal repayment terms. This assistance is provided to the student in the form of a guarantee to the lender that the Federal Government will pay the loan in the event the student fails to meet his/her obligations. The participation of West Coast School as an "eligible institution" in the Federally Insured Student Loan Program was based upon its compliance with the legal requirements of eligibility (i.e., admissions policy, legal authority to operate, program offerings, type of control and civil rights compliance) in addition to accreditation by a nationally recognized accreditation commission. Under the provisions of this program, the Federal Government cannot guarantee satisfactory performance by the students, lenders, or educational institutions. It is unfortunate that conditions caused the West Coast School to discontinue operation. The Federal Government is interested and concerned that students receive full value and fair treatment from all participants of the program. How ever, our authority to take action is limited to violations of Federal laws, rules and regulations. While we appreciate your situation, we are unable to absolve of his obligation to repay in the rare instance where loan a student/borrower funds are invested in a school which fails to perform on its enrollment contract. I suggest that you obtain legal counsel or inquire of the State Attorney General's Office as to possible remedies which might be available to you. In ad dition, we have been advised that the California Association for Private Educa tion, a California nonprofit Association of Vocational Schools, will assist in relocating students to schools where they can complete their training without additional cost. You may obtain further information by contacting this organiza tion at the following address : Mr. Alvar Yelvington, Executive Director, California Association for Private Education, 926 Street, Suite 601, Sacramento, Calif. Thank you for calling this matter to my attention. Please advise if I can be of any assistance in the future.
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Sincerely,
HENRY GOLTZ, Program Officer.
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Mr. EVANS. interpreted Mr. Weinberger's advice to be patient as should not pay the loan, and did not, nor did seek legal meaning counsel, as Mr. Goltz suggested. However, the officials from Student Loan Services, the EDCO col lection agency, wrote me, and my sister and my father, all of whose names appeared on the loan application. They also repeatedly tele phoned me, my sister and my father, threatening to turn the matter over to the Federal Government for collection. was notified by the Los Angeles County District Attorney that my complaint had been turned over for investigation to the major frauds division, but have heard nothing since from them. owe. have continued to refuse to pay a bill do not believe About 8 months ago, after my sister telephoned student loan services that the district attorney of Los Angeles was investigating, stopped hearing from the collection agency. don't know what to expect now — maybe HEW will be after me for the amount -of the loan, or perhaps the collection agency is pre paring legal papers to take me to court. All know is never took a course at West Coast Schools and don't think should have to pay for an education did not receive. Senator PERCY. Thank you very much, Mr. Evans. Do you happen to know, because of this dilemma that you find yourself in, whether this has occurred, similar situations have occurred with other students ? know you didn't attend the school. You never went to class. YOTI never had a chance to talk to them. But because of your general inter est, have you found that there are other problems involved in this pro gram that place students or potential students in jeopardy just as you have been placed in jeopardy? called the SLC when Mr. EVANS. When first got the payment book and explained my dilemma to them, they said wasn't alone. There were probably 2,000 or 3,000 more in the area. Since have read in the newspapers since then, other people have had problems with the same school. Senator PERCY. But you have not had any firsthand knowledge or heard of any other students who have cases that would present a comparable problem? Mr. EVANS. Not directly. Senator PERCY. When you returned to the school to advise them that you could not afford to attend, what were you specifically told ? Mr. EVANS. They told me that there would be no problem, the loan would be canceled and if at any other time wanted to resubmit or reenroll in the school and take a student loan out, could. There would be no problem. Senator PERCY. But you were specifically told by a representative of the school that this loan would be canceled ? Mr. EVANS. Yes, sir. Senator PERCY. Did you believe them ? Mr. EVANS. Yes, sir. believed it because knew that the school was backed by the Student Loan, Federal Student Loan Program. knew it was a big organization, and being backed by the Federal Govern ment and the Department of HEW. didn't figure that thoy would try to cheat anybody.
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Senator PERCY. Did you receive any written agreement from the admissions official that the loan was to be canceled ? Mr. EVANS. No, did not. Senator PERCY. Did it occur to you that it might be a good idea to get her to sign a little piece of paper saying that this is canceled or give you back the papers that you had signed ? Mr. EVANS. did not, sir. took for granted that she was completely honest, because of the fact it was backed up by the Federal Government. Senator PERCY. You just took her word for it ? Mr. EVANS. took her word for it. Senator PERCY. On good faith ? Mr. EVANS. On good faith. Senator PERCY. Do you have any reason to believe that if that for mer admissions official was requested to appear here under oath, that she would in any way alter or change that story ? Mr. EVANS. Not if she is honest, sir. Senator PERCY. When Secretary Weinberger wrote you, you say that you interpreted this letter to be advice not to pay the loan ; is that
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right? Mr. EVANS. Yes, sir.
Senator PERCY. When you received the letter from the Office of Edu cation in San Francisco, telling you you could not be excused from paying the loan, you did receive such a letter; is that correct? Mr. EVANS. Yes, sir. Senator PERCY. What did you think after receiving the second letter? Mr. EVANS. was totally confused at that point and must admit was starting to lose my faith in the Department of Health, Education, and Welfare ; you know. Senator PERCY. They weren't looking after your welfare ? Mr. EVANS. No, sir, they weren't. Senator PERCY. All the time this was happening you continued to get threatening phone calls and letters from collection agencies; is that correct ? Mr. EVANS. Yes, sir. Senator PERCY. What did the collection agency threaten to do ? Did they threaten to ruin your credit rating ? Mr. EVANS. Yes, sir; they threatened that and to a great extent it has affected my credit because my wife tried recently to get a credit was turned down card from one of the major department stores and on that. can only assume that probably this is one of the reasons why. also received more threatening letters that they were going to turn this over to the Federal Government and the Federal men would be out to collect. Senator PERCY. You specifically, Mr. Evans, told everyone that con tacted you that you had never even started the course. It had been fully understood that you had never taken an hour of instruction ? Mr. EVANS. Yes, sir. Senator PERCY. And that you had notified the school before you started the course that you did not intend to follow through and that they had told you that is OK, this would be terminated ? Mr. EVANS. Yes, sir.
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Senator PERCY. When you told them that, how did they respond ' toyou? Mr. EVANS. Their response was, it is a shame this happens to you, but there is not a thing we can do about it. But you still have to pay for it. Senator PERCY. Thank you very much, Mr. Evans. Mr. Ponce, think you have a statement. you would just go right ahead and read that statement. You have already been sworn in. Mr. PONCE. Yes, sir. Mr. Chairman, my name is Enrique E. Ponce and live with my wife, Sarah, and four children at 14664 Valley Boulevard in La Puente, California. My wife is with me today to help answer any questions you may have concerning my experience with West Coast Schools. am a laborer employed by Gerald Lunden Associates, a contrac tor in Temple City, California. In early 1972, after growing despondent about the fact that had not even finished the eighth grade, decided to try and learn a skill. By this means, hoped to increase my income so that could better provide for my wife and children. [At this point Senator Nunn entered the hearing room.] Mr. PONCE. Having come from a broken home, realized the im portance of keeping my own family together. felt would have a better chance at this if could make a better living. saw advertisements on television for electronics courses being offered by West Coast Schools, and applied to one of its branches, Solar Electronic School, for a course in television repair. went to the school at 426 W. Durate Avenue in Monrovia and discussed with an admissions official the type of education could receive in TV repair. The official, Joni Bobbins, asked me to take a test to determine my had not even finished the ability to learn electronics. At the time, eighth grade, but it was a very simple test and Miss Robbins told me that the results demonstrated that was qualified to take the repair
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course.
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told her that was interested in taking the program, but that did could obtain a federally not have much money. She told me that would not have to guaranteed loan for the cost of the course, which finished the program. begin repaying until 9 months after She also told me that while the application for the loan guarantee to the Federal Government would be for $1,500, the cost of the course would be paid the difference of was only $1,280. She told me that the loan had been approved. started the course and $220 after to odd you, that you start a course of Did that seem PERCY. Senator study for your improvement and you were going to receive $220 in cash ? What was your reaction ? Mr. PONCE. My reaction was good because was in very bad shape at the time. Senator PERCY. This was sort of an irresistible deal ? Mr. PONCE. Yes. Senator PERCY. Mrs. Ponce ? Mrs. PONCE. Whpn you are out of money and thev tell you we are going to orivp> von $200 when you are broke, that feels great and then said. "Go into it : it is good." comin.w from the Federal Government. Senator P^RPY. Sure. After all, it is being given by a school, accred ited by the Federal Government and you signed a piece of paper.
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Mrs. PONCE. They say the Federal Government is going to lend you the money, no problems. He said that is good. Senator PERCY. Great country ? Mrs. PONCE. Sure. Senator NUNN. Did you ever get the $220 ?
Mr. PONCE. Sir? Senator NUNN. Did you ever receive the $200 ? Mr. PONCE. No, sir, I never received anything. Senator NTTNN. In other words, the price of the course was less than
the loan ?
Mr. PONCE. Yes.
Senator NUNN. The price of the course was about $1,200 and some dollars and the loan was $1,500, and you were promised by the school officials that you would receive the difference in cash? Mr. PONCE. Yes, sir. Senator NUNN. But you did not receive that ? Mr. PONCE. did not receive anything. Senator NUNN. Go ahead, Mr. Ponce. Mr. PONCE. signed for the loan with my wife, Sarah, as the co signer, and began the course shortly after the papers were completed. tried to follow the course, it was difficult for me, However, while since the subject matter was highly technical, involving ohms and volts and wiring schematics. Most of the material was well beyond my comprehension. After 2 decided to withdraw from the course and notified weeks of effort, the school of my action. I, of course, assumed that the loan be canceled when withdrew. was notified by Group But, in early 1973, Equities, Inc., of Los Angeles that West Coast Schools had sold my federally insured loan to the LACSE Federal Credit Union and that should pay the collection agency which was to send me payment coupons for the
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$1,500 loan. Student Loan Services of Los Angeles sent me a Subsequently, make the monthly checks payable payment book and requested that to LACSE Federal Credit Union and send them to Student Loan Services of P.O. Box 67541 in Los Angeles. visited with officials of the school : after receiving My wife and these letters and we worked out an agreement whereby would pay only for the amount of time actually attended classes. In May 1973, paid West Coast Schools a total of $50.49 to settle the debt. However, shortly thereafter, continued to receive bills and threats from collection agents for Student Loan Services. My wife received numerous telephone calls from Student Loan Services and told me that the callers were threatening and abusive. became so upset about this that lost 3 days of work. My wife and visited the local Legal Aid Society and also contacted the Better Business Bureau. The Legal Aid lawyer advised us not to pay. The Better Business Bureau took my complaint and sent it to EDCO Financial Services, the parent company for Student Loan Services. On February 8, 1974, the Better Business Bureau sent me a form letter saying that EDCO did not reply to my complaint and advised me to "contact the Bureau of Auto Repairs for further assistance." On March 6, 1975, received a Mailgram from the U.S. Office of
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Education warning me that the Federal Government would move to collect from me for my obligation to LACSE Federal Union unless contacted the lender "immediately." Mr. FELDMAN. At this point, Mr. Chairman, could insert as an exhibit the Mailgram referred to by the witness, exhibit 82 ? Senator NUNN. Without objection. [The document referred to was marked "Exhibit No. 82" for ref erence and follows :]
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EXHIRIT No. Union
[Westeta
82
mailogram]
MARCH 6, 1974. ENRIQUE E. PONCE, Monrovia, Calif. LACSE Federal Credit Union has advised us to the delinquent status of your federal insured student loan. You must contact them immediately to make the necessary arrangements to bring your loan account current. Unless you make these arrangements promptly, your loan will be assigned to the United States of America for collection. Protect your credit reputation and contact your lender immediately. MICHAEL A. McTioHE, U.S. Office of Education.
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Mr. PONCE. Unless did so, it warned, the loan would "be assigned to the United States of America for collection." This was 3 years after thought had settled the account. continued to ignore the bills and phone calls. About 8 However, months ago, still stopped hearing from anyone about the loan, but live in fear that Federal agents will some day call at my home and ask me to pay the loan. don't Senator NUNN. Mr. Ponce, don't want to be facetious and want to give you too much comfort here this morning, but based on the testimony we have had so far, the HEW people have already lost don't think you should worry quite as much about it be your note. am being facetious, cause doubt if they have it in the file over there. obviously. We appreciate very much both of you, all three of you being here this morning. Mrs. Ponce, do you have any statement you would like to make? Mrs. PONCE. Yes. belong to the PTA and get involved with a lot of things in my school. know a lot of people that are in the same position that we are. My husband was — and talked a lot and tried to get things done think justice has to be made. That is why wrote this letter when over here. don't know to who wrote it. don't know much English. think something is don't know how to write very good, but when right, want to get it in the right way. Senator NUNN. We appreciate it. think you are doing an excellent job expressing yourself in writing and orally here. Mrs. PONCE. There is a lot of girls that know who their husbands have told me, that their husbands went through the same thing that my husband went through. One day went to six offices all day, trying to get this done. thought had fixed it a long time ago, but they still come. Now, you are always in the fear that they will come back because you don't have nothing to go by saying that they are not going to come back.
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Senator NUNN. will make this suggestion to you. you get any more phone calls or if you get anymore letters, just please let our sub committee know. Mr. Feldman here will certainly lend his assistance. Mrs. PONCE. sure appreciate that. Senator NUNN. When you say other people that have had similar kinds of problems, do you mean with the West Coast Schools? Or was it related to some other school ? Mrs. PONCE. There was another school, but it was related to them because the same payment books were sent and all of that. So imagine it was from the same school, because mean she showed me, and she told me the same thing that happened to her happened to my husband. Even people that go to school now, they are in the public schools now, but they went through that, the same thing that my husband went
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through. Senator NUNN. Mr. Ponce, how many people did you actually meet over in the West Coast Schools ? believe you name in your statement one person, Joni Bobbins. Did you meet anyone else at West Coast Schools ? Mr. PONCE. Yes, sir, but don't know his name. Senator NUNN. That is the only name you remember ? Mr. PONCE. Yes ; she was the lady that took my application. Senator NUNN. When you were going to class, were the classes large classes, 20 or 30 people, or were there just a few people there? What was the condition of the classes that you did attend ? Mr. PONCE. There was about 15 persons in the classroom. Senator NUNN. Fifteen? Mr. PONCE. Fifteen ; very poor looking classes ; very poor. Senator NUNN. You are saying very poor in terms of the physical facilities or in terms of the instruction? In other words, what do you mean when you say very poor ? Mr. PONCE. Would you repeat that again ? Senator NUNN. When you attended classes, you were in classes for about 2 weeks ; is that right ? Mr. PONCE. Yes, sir. Senator NUNN. You say there were about 15 people in the class you were in? Mr. PONCE. Yes. Senator NUNN. How many hours a day did you go? Mr. PONCE. went for 3 hours for 10 days. Senator NUNN. Three hours for 10 days ? Mr. PONCE. At night. Senator NUNN. These were at night ? Mr. PONCE. Yes. Senator NUNN. Where was the school located? don't mean the address, but was it in a large building? Mr. PONCE. Medium size, pretty small building. Senator NUNN. What kind of physical condition were the class rooms in?
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Mr. PONCE. Very poor.
Senator NUNN. It was an old building ? Mr. PONCE. The rooms looked real bad,
old.
yes.
The building was pretty
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Senator NUNN. Would you say it was in a bad state of repair ? How would you describe the condition? Mr. PONCE. Yes ; it looked like an old garage. Senator NUNN. What about the equipment? You were taking an electronics course, a TV repair course ? Mr. PONCE. Yes, sir. Senator NUNN. What kind of equipment did you have to work with? Mr. PONCE. never got a chance to work with any equipment. Senator NUNN. You never worked with any equipment? Mr. PONCE. No, sir. Senator NUNN. What kind of course did you have ? Was the course instructional ; did someone get up and give you a lecture ? Mr. PONCE. Yes. 'Senator NUNN. The instructor gave you a lecture ? Mr. PONCE. Yes. Senator NUNN. Was that for 3 hours ? How did it break down ? Mr. PONCE. Yes, 3 hours ; would be one break in between. Senator Nunn. Did you have a chance to ask questions? Did you just have Mr. PONCE. Mostly just lectures. Senator Nunn. Did the students participate? You didn't stop and
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didn't see very much of that in the 10 days was there. Senator NUNN. You say that the subject matter was very compli
cated?
Mr. PONCE. Yes, sir. Senator NUNN. You had difficulty understanding it ? Mr. PONCE. Yes. Senator NUNN. Did you tell the instructor that you were having
any difficulty ? Mr. PONCE. Yes
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told the lady, Joni Bobbins. ; Senator NUNN. Was she the instructor ? Mr. PONCE. She was the one who took the application. Senator NUNN. She was not the instructor ? Mr. PONCE. No. Senator NUNN. What did she say when you told her that ? Mr. PONCE. She said hang on. Senator NUNN. She said hang on ? Mr. PONCE. Yes. Senator NUNN. Did you ever talk to the instructor about the prob lems you were having ? Mr. PONCE. No ; since was only spending 2 or 3 hours a night, only 9 days, didn't. Senator NUNN. You were working all day and then going to school ? Mr. PONCE. Yes, sir. Senator NUNN. You were given a written test before you started school ; is that correct ? Mr. PONCE. Yes, sir. Senator NUNN. Do you think that the test was a good test in the sense that it asked questions that you had to deal with in these
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courses ? Mr. PONCE. No, sir ; even now that
I look back, real simple test.
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Senator NUNN. Very simple test ? Mr. PONCE. Yes; I was desperate at the time. When you are des perate and very bad shape, you seem — you don't notice those things. Senator NUNN. You had a job at that time ; is that right ? Mr. PONCE. Yes, sir, I had just come from Tulare County to Los Angeles to look for a job. I had been working there about 3 months. Senator NUNN. Do you still have that same job ? Mr. PONCE. Yes, sir. Senator NUNN. What did you think when you started receiving bills from the collection agency for the education that you never received ? Mr. PONCE. felt very bad and I still feel bad about it. It bothered me very much.
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Senator NUNN. Mrs. Ponce, after you thought you settled the debt in understand that you started getting phone calls about 1973, the bills and that you personally talked to the people who were calling ? What did the caller tell you when you told them that your husband had not received an education and that you thought you had already settled the debt? Mrs. PONCE. That man told me that he didn't care, that he went 10 days to school or no days to school, he said he had the written con tract that me and my husband had signed and that is all he wanted was the money. Then he told me that my husband had gotten some
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equipment.
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said, "My husband didn't get no equipment. My husband paid for the books, whatever he got, the first day, he paid for it." The only thing that we signed was for the loan and we didn't get no letter saying that we did, that we passed or not, and he didn't get no — after, when went over there, said, we told them that he was going to quit. said they didn't tell me. It was going to be all right, that is what they told me. He said, "That is none of my concern. All want is the have your contract right here. want the money." That is all. money. He kept calling me and calling me. don't have very much patience for that. Then he started, one day he was real mad. He started cussing at me. cussed back at him. He told me, he said, "I am going to get you on tape." said, "You get me on tape, do whatever you want to because am not saying am not going to pay the money." said, "I already paid for what my husband went to school for." said, "I got the proof here. am going to mail it to you." mailed him a copy of my receipts. Then he called me back again. He told me that those receipts didn't interest him a bit. He said we want the money, that you signed for this contract. That is all we want. Senator NUNN. Mr. Ponce, understand that you have been back to school since this unfortunate experience ; is that right ? Mr. PONCE. Yes, sir. Senator NUNN. What school did you attend ? Mr. PONCE. La Puente Adult School, La Puente, Calif. Senator NUNN. What kind of courses did you take there ? Mr. PONCE. took high school. Senator NUNN. Did you take high school courses ? Mr. PONCE. Yes. Senator NUNN. Did you do that at night ?
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Mr. PONCE. At night, 2y2 years. Senator NUNN. You have completed that course now ? Mr. PONCE. Yes; have received my adult education high school
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diploma. Senator NUNN. Equivalent to the high school diploma ? Mr. PONCE. Yes. Senator NUNN. Have you upgraded your job since then ? Mr. PONCE. Sir, got my high school diploma. Then went right into — am taking .a course now at night — refrigeration, air-condition ing, hi the same school district, public school. Senator NUNN. Do you have to pay any money for that course ? Mr. PONCE. No, sir. Senator NUNN. So you didn't take out any other loan ? Mr. PONCE. No, sir. Senator NUNN. How many hours a night do you go to school now '? Mr. PONCE. reduced it down to half time, which is 15 hours a week at night ; before was going full time. Senator NUNN. congratulate you on that effort. certainly regret that you and your wife had that unfortunate experience. know that it is a very difficult thing to go through to sign up f or a course, to take a really simple test and to get into a very complex course and after you have dropped out of school and thought you settled the debt to have people harass you for 2 years. That is certainly, am sure, very perplexing. [At this point Senator Percy withdrew from the hearing room.] Mrs. PONCE. If you buy something and receive you don't mind paying for it. But if you don't receive anything you certainly are not going to pay for it. not equi Senator NUNN. certainly completely agree with you. It table or fair, nor reasonable. Mr. PONCE. Sir, wanted to say ever since they have been calling us up and threatening us, we would fight among each other, argue at each other. We wanted to — we have been married 13 years. We still haven't bought home. Now make $5 an hour when most of my life have made $1.35, since went to Los Angeles. To me that better wage than have ever had before. We wanted to buy house. We haven't been able to. Now we live in this house here, my family, six of us in two-bedroom apartment house. We are looking forward to getting house under the GI bill. But even then, will don't make enough for that. Then these people block us, never qualify for loan to buy house. Senator NUNN. Do you think this will be on your record? Will make very difficult for you to get loan to buy house Mr. PONCE. Yes, sir. Senator NUNN. You let us know if we can write letter in any way to clarify it. will be pleased personally to do that. Mr. PONCE. Yes, sir. Senator NUNN. In fact, would ask counsel to stay in touch, and vou need any kind of letter clarifying what happened in this situation, will be glad to based on your testimony here and what you told us, write such letter.
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don't know whether it will help or not, but we would write it any way. Also, Mr. Evans, if you have that experience, we would be happy to do what we can to clarify it. I would certainly ask the Office of Edu cation in HEW to do what they can to clarify it.
In fact, if you
have other friends who had similar experiences,
I hope
you would get them to let us know. We certainly will make every effort to see that the Department of Education that shares the large part of the blame for this inept operation, takes steps to clarify your credit rating. Mr. EVANS. We appreciate it. Senator NUNN. We can't guarantee what they will do. We can guar antee that we will make an effort to get them to correct it. Mr. FELDMAN. Mr. Chairman, minority staff has three more affi davits,
I believe,
to put in the record.
Mr. COTTIN. Mr. Chairman, the loans of Mr. Evans and Mr. Ponce have been turned over from the credit union to HEW for payment.
The payments have not yet been made. Senator NUNN. HEW has not made the payment yet to the credit union ? Mr. COTTIN. That is right. Also, these are affidavits from Pauline Wedgwood, Katheryne Bradley, and Frank Alejandre to be entered in the record. Mr. FELDMAN.
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would request they be printed in the record. Senator NUNN. Without objection. [The affidavits follow :] AFFIDAVIT
OF
FRANK
R. ALEJANDRE
I, Frank R. Alejandre, freely and voluntarily make the following statement to Jonathan Oottin, who has identified himself to me as a member of the staff of the Permanent Subcommittee on Investigations of the United States Senate Commit tee on Government Operations. No threats, force, duress, promises or representa tions have been used to induce me to make this statement. am a citizen of the United States and live at 13623 Beach Street in Cerritos,
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California.
In the early part of 1972, having worked for about 10 years as chief draftsman for an engineering concern in Long Beach, I began giving some thought to start ing my own business. Having had a year-and-a-half engineering training at Compton Junior College in Compton, California, I believe that a career as a television repair shop operator would be an interesting and potentially financially reward ing occupation after I retired from my job. I began studying television repair from books I obtained at the local public library. I grew more interested in the field and visited the Lynwood Branch of West Coast Schools at 11442 South Atlantic. I knew that West Coast Schools offered a TV repair course because it advertised heavily in the newspapers and
on television. The woman at West Coast Schools who interviewed me asked me to take a test that she said was designed to determine whether had the skills to succeed at the TV repair course. The questions were very elementary — such as how to con vert a fraction to a decimal. I felt that my eldest daughter could have done well on the examination. After the test was graded, the admissions officer told me had done well. She said that had the ability to complete successfully the tele vision repair course offered at West Coast School. She said the course would last for 10 months, with attendance required of me four nights a week for four hours each night.
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She told me that the cost of the course was $1,500, but that could take out a federally insured student loan and would not have to begin making payments completed the instructional program. decided to take until nine months after the course and signed for a $1,500 loan, guaranteed by the Federal Government under the Federal Insured Student Loan Program. While did not feel pressured into signing for the loan, was strongly encouraged to do so. A few months after signed for the loan, began receiving benefits from the Veterans Administra thought it would be wise to tion for my education. With this additional money, went to an official at West use it by paying off the student loan immediately. was discouraged Coast Schools and offered to begin paying off the loan, but from doing that and advised not to pay until well after completed my studies. started with was began my course work in June 1972. The only course mathematics, taught by a man who did not appear to be very steady on his feet. believed that he was slightly intoxicated. Quite often, he would stumble around. did not feel The course he taught seemed to be a high school level program. was getting much from the course, and neither did many of my fellow students. In withdrew temporarily from the course. late June, suffered a heart attack and began with the recovered and re-enrolled in the course in January 1973. mathematics course, and nothing but that was offered until March. Then I was continued to do until the school assigned to study wiring blueprints, which closed in May. The school was originally closed for a Memorial Day Holiday, but then we were told by letter to remove our possessions and those of any absent classmates from the school property. On May 24, we were notified by letter that West Coast Schools was closed until it could arrange reinstatement of its authorization to offer Federally guaranteed student loans. waited for three months for West Coast Schools to reopen, but it never did. Finally, gave up and enrolled in a television repair course offered by Western Technical Institute in Anaheim. have successfully completed that program and paid for it myself. After West Coast Schools closed, without having given me an education, assumed that any financial obligation that had to them was terminated. However, in November 1974 received a communication from SDC Federal Credit Union at 2500 Colorado Avenue in Santa Monica telling me that owed $1.500 for my education at West Coast Schools. paid six months' worth of payments to SDC, which was the amount of time I attended West Coast Schools. Then decided to pay no more. then received several written and telephone collection communications from student loan service and collection letters from Federal Credit Union some say ing that my credit would be hurt and that there was no way could avoid the obligation. They continued to bill me until January 24, 1975, when the SDC Federal Credit Union called the face value of the note — $1,342. have not heard any more from SDC or its collection agent since January 24,
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1975.
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have read, reviewed and initialed each page of this statement and swear, to the best of my knowledge and belief, that the statements contained therein are true and correct. FRANK R. ALEJANDRB. Sworn to and subscribed before me this 4th day of November, 1975 : JACQUELINE B. SHUTTLEWORTH,
Notary Public.
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Frank. Alejandre 13623
St. Calif."
Beach
Cerrltos,
Thi's letter is to express the appreciation of West Coast "Schools'. Your support and encouragement has been valuable. Our student, and the person you are pulling for, has reached This is an important milestone in the training program. significant because such achievement shows great dedication .and
effort.
As you
such as
know, luost people have just one opportunity and continued understanding and enthusiasm
well
this,
by you is vital to finishing. .This will bring job oppor'tunities that could launch a career with security and a „ higher standard of living. From time to time, you may discuss our training with Wo work very hard to your friends and acquaintances. ensure that your cements are complimentary. you do say something nice and recoiamend. us, then we are parti-
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cularly appreciative.
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want to let you know about our $25.00 and why program that we make available to students who refer new students to us.you make a referral, please call ;r,e in advance for the certificate- to make you eligible. also encourage you to call us if- any .problem. crops up thab you .think we can help with.
That's
$50.00
gift
I
If
Very
truly yours
^
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Career
,<«•« SOUTH ATLANTIC
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LOAN.SERVICES ,0067 •>
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LOAN SERVICES
675', I P. 0. BOX Los ANGELESf CA
90067 DUEBATE
KEEP YOUR RECORD ON THIS STUB
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566-40-8788
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12-10-74
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DATE CHECKNO
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ALEJANORE 13623 BEACH CERRITOS CA
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TOTAL CHECK »_ PLEASE RETURN THIS PORTION WITH PAYMENT
BRADLEY
AFFIDAVIT OF KATHERYNE
Katheryne Bradley, freely and voluntarily make the following statement to Jonathan Cottin, who has identified himself to me as a member of the staff of of the United States Senate the Permanent Subcommittee on Investigations
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Committee on Government Operations. No threats, force, duress, promises or representations have been used to induce me to make this statement. I am a citizen of the United States and live at 5353 Dockweiler Place in Los Angeles, California. In the Spring of 1973, while was working as an auditing clerk for the National was aware that data processing and keypunch operation General Corporation, was an important field for me to know more about if I was to improve myself had seen advertisements on television for West Coast and advance in my career. Schools and decided to visit the school and enroll in a data processing course. met with a Mr. Mallary, who identified himself to me as an admissions official. required and he outlined the school's explained to him the kind of course that curriculum. He also asked me to take a test that would give the school an idea took the test, it was graded. Mr. Mallary said I had passed of my ability. After would it. He went into further details on the educational program, telling me have to attend three nights a week. He also described the school's placement office, completed the course. He also which, he said, would find a job for me after signed up would be paid $10 a week in carfare by the school if told me that for a federally guaranteed student loan. Mr. Mallary told me that wouldn't have to pay immediately for my educa tion, since I was eligible for a federally guaranteed student loan. He told me would not have to begin paying back the obligation until nine months that after I completed the course. It sounded very good to me. felt that the school, having advertised on television, was a reputable organization. So enrolled and signed a note for the amount of the course, about $1,400. The note holder was West Coast Schools, Inc. was not told that they were going to sell my note began attending school a few days later, in the to a financial institution. middle of April, 1973. After a week or so, became disgusted with the course and did not attend for two or three days. subsequently received a letter from West Coast Schools inviting me to resume the course. Although was not very satisfied with the school, agreed to start the program again. During the period of my attendance, would pick up checks every two weeks from the administra tion office for $20 which, was told, was to pay for my transportation to and from school each week. Other students with federally guaranteed loans told me they were also paid $10 a week for transportation. Shortly after I resumed classes, West Coast Schools declared a Memorial Day Holiday, beginning May 23, 1973, a week before Memorial Day Shortly after the recess began, was notified by West Coast Schools that it had to close because of trouble continuing its eligibility for the guaranteed student loan program beyeral months later, I received a payment book and a bill from Academic Services Plan in Long Beach, California, which said it had been asked to collect my federally insured student loan for $1,218, payment of which had been assigned to the Kern County Employees Federal Credit Union
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had not completed the did not pay the bills, which arrived monthly, since course. In addition, representatives of Academic Services Plan called me fre quently, warning me to pay. became concerned that Academic Services Plan might attempt to damage my credit rating by claiming was not paying off an obligation, so turned copies of the bills, along with an explanation of what had transpired, to a credit rating bureau which services the Southern California area. explained that The Academic Services Plan representative told me, when was being billed for services that had not been performed, that other former West Coast Schools students had complained to him of the same thing, but that the financial obligation was still in effect. He said that all the calls and the bills to me and other students were designed to make Academic Services Plan look like it had done everything possible to collect the money, before going to the Depart ment of Health, Education, and Welfare to collect on the guarantee. In February 1974, 1 wrote KNBC-TV in Los Angeles, which operates a consumer ombudsman program, and told of my difficulty. In April, after an investigation, the television station turned the matter over to the Los Angeles County District Attorney. After stopped receiving telephone told that to Academic Services, calls from them. have not -received any bills or any phone calls for about a year. swear, have read, reviewed and initialed each page of this statement and to the best of my knowledge and belief, that the statements contained therein are true and correct. KATHERYNE BRADLEY.
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Sworn to and subscribed before me this 3rd day of November 1975 RORERT
My commission expires May
E.
:
MACGREGOR,
Notary Public.
16, 1976.
AFFIDAVIT
OP
PAULINE F. WEDGWOOD
I, Pauline F. Wedgwood, freely and voluntarily make the following statement to Jonathan Cottin, who has identified himself to me as a member of the staff of the Permanent Subcommittee on Investigations of the United States Senate Committee on Government Operations. No threats, force, duress, promises or representations have been used to induce me to make this statement. am a citizen of the United States and live at 1842 Buena Vista in Duarte, California, and am the mother of Dean E. Wedgwood, who attended an elec tronics course offered by West Coast Schools in Monrovia, California, beginning in November 1972. My son took out a federally guaranteed student loan at West Coast Schools to pay for the course. The amount of the loan was $1,300. He told me at thp time he signed up for the loan that he wanted to add to his high school education and develop a skill which would help him earn a decent living. After he completed the course, he prepared to leave home and seek employ ment in another city. However, he wanted to pay West Coast Schools for his education. He had recently come into a small inheritance of about $1,500 and turned over most of that money to me to pay off the loan when the bill came in. While he told me that he did not have to begin paying off the loan until nine months after completion of the course, he said he wanted that debt behind him as he sought his way in the world. After my son left town, and did not receive a bill for his education, called West Coast Schools in March 1973. asked how much was owed on the loan. was told to send a check to West Coast Schools for $1,068 to settle the loan. On March 9, 1973. wrote a check for that amount on check Number 166. That check was deposited to the West Coast Schools account on March 15, 1973. However, shortly after wrote that check, West Coast Schools notified me owed another .$237.03 to pay off my son's debt. On March 14, 1973. wrote a check for $237.03 in favor of West Coast Schools on check number 172 and it was deposited to the school's account on March 26, 1973. Copies of those checks are attached hereto and incorporated herein and made a part of this affidavit. In December 1973. my son began receiving bills from Student Loan Services, an affiliate of EDCO Financial Services in Los Angeles, California, asking him to pay to the SDC Federal Credit Union $1,300 on a loan he took out for his education at West Coast Schools. Since had already paid, with my son's money, for that course, did not believe should have to pay twice. repeatedly notified Student Loan Services repre sentatives, who called and wrote asking for the money.
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215 . CARL B.'WEDGWOOB
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. CARL B. WEDGWOOD -. PAULINE WEDGVyOOD, . . 1842 BUENAVlsfA'^0. 0.354-1 »44
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216 But they kept billing my son and calling, saying that he had an obligation to pay the loan. began marking the letters from Student Loan Services to my son "Not Here" on the unopened envelopes and the postman took them back. have not heard anything from anyone about the loan since early in 1974. still have not paid. have read, reviewed and initialed each page of this statement and swear, to the best of my knowledge and belief, that the statements contained therein are true and correct. PAULINE F. WEDGWOOD.
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Sworn to and subscribed before me this 4th day of November, 1975
:
CHERYL SMITH,
Notary Public.
Senator NUNN. Do any of you have any other comments you want to make this morning? Mr. PONCE. Yes. Let's say HEW doesn't come after us, but the other people can; right? Senator NUNN. According to the attorney, HEW has now been called on to pay for the guaranteed loan to the holders of your note. Once they make that payment the note would be transferred to HEW. HEW will then become the creditor. The legal status of it would then be in doubt. But as said, we will do what we can to help clarify the situation. Mr. FELDMAN. You just contact us. Mr. PONCE. Thank you. Senator NUNN. Mr. Evans, do you have any other statements you would like to make ? Mr. EVANS. No, sir. think Mr. Ponce's last question answers mine. get any contact from HEW Senator NUNN. You refer it to this subcommittee. Mr. EVANS. Thank you, sir. Senator NUNN. Thank you all for appearing. know it is not an easy experience to come to testify in Washington.
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You have all done an excellent job. You have expressed yourselves
very well. Don't worry about your English. You did a great job. Thank you very much. We will have a recess now and we will convene again at the hour of 1:45 p.m.
12 :30 p.m., the subcommittee recessed, to reconvene p.m., the same day.] [Members of the subcommittee present at time of recess : Senator
[Whereupon, at
at
1 :45
Nunn.]
AFTERNOON
SESSION
[The subcommittee reconvened at 1:45 p.m., Hon. Sam Nunn presiding.] [Members of the subcommittee present at time of reconvening : Sena tor Nunn.] Senator NUNN. We have been swearing in everyone, if you don't mind. Mr. Walsh has been sworn already. Do both of you swear that the testimony you are about to give to this subcommittee will be the truth, the whole truth, and nothing but the truth, so help you God ? Mr. VIGEN. Yes. Mr. EWING. Yes.
217
TESTIMONY OF ANDY EWING, FRAUD DIVISION, LOS ANGELES DIS TRICT ATTORNEY'S OFFICE, AND GREGORY L. VIGEN, GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY JOHN J. WALSH, INVES TIGATOR, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS OF THE SENATE COMMITTEE ON GOVERNMENT OPERATIONS Senator NUNN. We are pleased this afternoon to have Mr. Andy Ewing, who is with the Fraud Division of the Los Angeles District Attorney's Office, and Mr. Gregg Vigen who is employed by the Gen eral Accounting Office and who has been temporarily assigned to work with the subcommittee. Mr. Ewing, we particularly appreciate all of your help and support
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know you have shown a and we appreciate your being here today. great deal of interest in this case and have been working very closely with our staff, which we found helpful. We express our appreciation. Mr. EWING. Thank you. Senator NTTNN. Mr. Walsh, are you going to lead off this afternoon ? Mr. WALSH. Yes ; will lead off. Then will turn the rest of it over to Mr. Ewing at a point about halfway through. will read and there will be a have a prepared statement which comment or two as we go through that will add to the text. An accounting investigation of West Coast Schools was undertaken jointly by the Fraud Division of the Los Angeles District Attorney's Office and by the subcommittee. The purpose of this investigation was to determine the sources and the amounts of West Const Schools' in come and the purposes of disbursements made by school officials. The following documents and records were examined in this review : (1) Workpapers of HEW, Los Angeles Audit Office; (2) workpapers of Alexander Grant Co., Los Angeles Audit Office; (3) notes and copies of documents retained by Edmund Schoessner ; (4) records and documents subpenaed from PFC Investments, doing business as West Coast Realty Co.; (5) photographic copies of ledger sheets, deposit tickets, debit and credit memorandums, and checks of the accounts of Automation Institute ; West Coast Schools, Group Equities ; Group Equities; Fred Peters Associates, and miscellaneous bank ac counts and records of corporations and persons doing business with Fred Peters and West Coast Schools. might add to that that we contacted a number of the companies that bought loans from the West Coast Schools and obtained from them records to verify the amounts that they paid for the loans. The primary records reviewed were the bank records. After the ledger sheets of the account were received, selections were made of certain deposits and checks and photostatic copies were requested. It is a tedious and time-consuming task to get microfilm copies and it •was necessary to be very selective in picking items to be located on microfilm. Generally, requests were limited to items of $2,000 or more, although in some cases where a special reason existed, requests down to the $1,000 level were made. Because of the time limitations, our review of bank accounts was limited to the period beginning in 1972. want to say again for the record here that our accounting investiga tion was somewhat limited. We did not have access to all of the books and records. We did not have access to all of the bank accounts of the
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218 school. While we examined some, nearly 50 bank accounts, there were a number of accounts where we were not able to get the data that we would like to have had on checks or on deposits. The principal source of funds for "West Coast Schools was the sale of federally insured student loans to savings and loan associations and credit unions. When Fred Peters became active in the management, he initiated an advertising campaign to induce students, particularly those in disadvantaged areas, to enroll in the school. On their enrollment, they signed promissory notes for the entire amount of their tuition. The school sold these notes in packages of up to $1 million in value. The school thus received the entire tuition in cash, in advance, before the student completed his education and some times even before he started attending classes. We were able, through the examination of banking records, to de termine that for the period of March 1, 1972, through March 1, 1974, West Coast Schools received $5,384.609 from selling federally insured student loans to various financial institutions. T would like to present here a tabulation which we made as ail
exhibit. Senator Nuxx. Without objection, that exhibit will be admitted for the record as No. 83. [The document referred to'was marked "Exhibit Xo. 83" for refer ence and follows :] EXHIBIT No.
83
SCHEDULE OF FUNDS RECEIVED BY WEST COAST SCHOOLS FROM VARIOUS FINANCIAL PURCHASES, MARCH 1. 1972-MARCH 1, 1974 Name of financial institution purchasing FISL Account where paymentinitially deposited Guardians. & L. Association .. LACSE FCU Union Pacific California EFCU . Guardian S. & L. Association Do SDCFCU.. LACSE FCU Flying Tiger EFCU Do Do SDCFCU Do Kern County EFCU SDCFCU Kern County EFCU Do.. Union Oil Center FCU Retail Clerks Local 770 Credit Union Kern Schools FCU Union Pacific California EFCU Hemet Federal S. & L Kern Schools FCU . Orange County Postal FCU.. Orange County EFCU . Kern Schools FCU... Kern County EFCU Relph'sEFCU Big Springs Savings Association.
„
Al d.h.a. WCS Al d.b.a. WCS... Al d.b.a. WCS Al d.b.a. WCS .. Al d.b.a. WCS... Al d.b.a. WCS.... Al d.b.a. WCS.... Al d.b.a. WCS. Al d.b.a. WCS Al d.b.a. WCS.... Payee was First City Bank Al d.b.a. WCS.. Al d.b.a. WCS Al d.b.a. WCS Al d.b.a. WCS Al d.b.a. WCS Al d.b.a. WCS Group II Equities, Inc.. .do. do
...do
do .do do Al d.b.a. WCS Proup III Eauities, Inc Al d.b.a. WCS Fred Peters
..
Total Recapitulation: Al d.b.a. WCS Group II Equities, Inc Group III Equities, Inc Fred Peters. Total
INSTITUTIONS
FOR FIS
Date
Amount
Mar. 1,1972 May 12,1972 . May 19,1972 June 1,1972 June 2,1972 June 14,1972 June20,1972 June 27, 1972 do do June 29,1972 July 11,1972 July 21, 1972 Sept.20, 1972 Sept. 21. 1972 Nov. 2,1972 do Feb. 1,1973 .Feb. 8,1973 Feb. 16,1973 .. Feb. 23, 1973 Mar. 7, 1973 Mar. 8,1973 .do . ..Apr. 3,1973 May 8,1973 July 13,1973 Mar 1,1974
$51,00000 900,000.00 129,700.00 10,000.00 127.18 300,000.00 1,217.00 75,000.00 75,000.00 50,000.00 58,846.85 103,350.79 100,000.00 192,650.00 400,000.00 200,000.00 100,000.00 150,000.00 100,000.00 200,000.00 1,000,000.00 100,000.00 200,000.00 300,000.00 100,000.00 287,717.00 100,000.00 100,000.00 5,384,609.00
.. ..
..
2,946,892.00 2,050,000.00 287,717.00 100,000.00 5,384,609.00
Abbreviations: Al d.b.a. WCS— Automation Institute doing business as West CoastSchools. FCU— Federal Credit Union EFCU— Employees Federal Credit Union.
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Mr. WALSH. HEW records make it impossible to determine how many federally insured student loans were approved by HEW for
West Coast Schools or how much money West Coast Schools received from these loans. HEW is likewise unable to state what the potential loss to the Government will be as a result of the Government having to make good on insured loans approved for West Coast Schools. In fact, HEW found it necessary to let a contract to Systems Group, Inc., a Washington-based consulting firm in order to obtain a listing of West Coast Schools insured loans presently in the hands of lenders. A tabulation of these loans show 5,479 loans with a value of $6,612,289 are currently held by these lenders. Senator NtTxN. There is no way to know how many students would have been like the ones we had this morning who never received their educational benefits. There is no way to break that down ? Mr. WALSH. No, sir ; no way at all. No, sir. Senator Nuxx. HEW has no idea about how many students dropped out on that account ? Mr. WALSH. No, sir ; no way at all. Senator NTTNN. Isn't there a reporting mechanism that was alluded to earlier in the week whereby the schools are supposed to report when students drop out ? Mr. WALSH. Yes, sir; but again, these reports are not particularly accurate. don't believe there is any penalty that can be invoked upon the school if they fail to report. Senator NUNN. Do you have access to those reports? HEW should at least have some reports of the students who dropped out, shouldn't they? Mr. WALSH. would have to say this. We did not try to examine those reports because we had no basis, nothing to check them against, so we didn-t pursue that. But HEW should have some type of report, if they have in fact retained those. Mr. FELDMAN. Mr. Chairman, he might be alluding to the GAO testimony where they mentioned a postcard of some sort on which they would list the name of a student who had a loan with a portion to be torn off and mailed in if the student dropped out. Mr. WALSH. think the chairman is referring to a form that HEW requires to be submitted to them which indicated the names of students who were presently in school. think that what you have to do there would be to check to see whether the students who had an approved loan, whether they were on that list and if they weren't on that list it might be a presumption that they had dropped out. But again, say don't believe, that was ever used as an accurate determination of dropout data. Another major source of income to West Coast Schools was the receipt of funds from the direct grant programs of HEW; namely, the college work study program and the national direct student loan program. Information was made available indicating that West Coast Schools received about $1.9 million from these programs. That was from the period 1970 up until the time the school closed. Another source of income to West Coast Schools was by billing the Government for interest and special allowance on notes held directly by West Coast Schools. The subcommittee requested HEW to furnish
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220
information as to the dates and amounts paid by HEW to West Coast Schools for the quantity billings of interest and special allowance since 1972. On October 21, 1975, HEW replied : The Office of Guaranteed Student Loans (OGSL) has searched available records and cannot locate copies of OB Form 1166, Lenders Request for Payment of Interest on Student Loans or records of direct payment of interest to the Auto mation Institute of Los Angeles or West Coast Schools.
Our investigation disclosed that copies of invoices for interest and allowance for West Coast Schools were prepared by Fred Peters for 6 months after the school closed. Copies of these invoices have already been submitted as exhibits, but I would like to call your attention to them again, Mr. Chairman. think it is pertinent to note here that HEW is unable to state whether special
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or not these invoices have been paid; invoices submitted by Fred Peters, a substantial amount of time after the school closed. Senator NUNJST. They write checks for this. Checks are issued by the computer, if they have made these payments. HEW would have checks, -wouldn't they ? Mr. WALSH. Yes, sir; they would. Senator NTJNN. Why can't they make them available? Mr. WALSH, The way it was explained to me, we probably have to ask this more specifically of HEW, is that in order to find a record of a check you have to find the invoice. they can't go directly to The invoice is submitted by the school. the computer and query the computer to retrieve information identify ing payments to West Coast Schools for specific purposes, so what they have to do is they have to, after they start off with the basic document, which would be an invoice, if they can't find the invoice, then they don't know where to go in the computer to find out whether it has been paid. Senator NTJNN. Is that a normal method of bookkeeping? Mr. WALSH. No, sir. Senator NUNN. How are the invoices indexed? Wouldn't they be under the name ? Mr. WALSH. don't know how that is done. am told, not having seen them personally, they are just sort of maintained in piles some where in HEW archives. was going to pass understand it. Mr. FELDMAN. They are already an exhibit, as exhibits? already they Aren't Mr. WALSH. The Senator might want to see that. Senator NUNN. That is not attached to your statement ? Mr. WALSH. No. Senator NUNN. This was after the school closed ? Mr. WALSH. This was after the school closed, that these invoices
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were submitted and requests made for payment. As say, we can't determine whether these invoices were paid or whether there were other invoices which were paid prior to this. Senator Nusnsr. Do you know if they were submitted to HEW ? believe they were. The circumstances under which Mr. WALSH. we found these were that when the school closed — refer to the fact that there was a sale of notes almost a year after the school closed. These notes were turned over to a collection agency for collection.
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These invoices were found in the note files and the correspondence that related to these notes. Senator NUNN. Whose file
?
HEW's
file?
Mr. WALSH. They were found in the file of notes that were turned over to a collection agency for collection. Senator NUNN. The point is HEW can't locate them.
Mr. WALSH. HEW cannot locate these or any other invoices that "West Coast Schools has submitted for interest and special allowance
payments. Senator NUNN. That doesn't mean that they don't have them ? Mr. WALSH. That is correct, sir. think it is quite possible that they were submitted. think it is quite possible that they were paid. Senator NUNN. am just trying to get at the bookkeeping procedure that would allow this. In other words after an invoice is submitted to HEW, somebody has to make a decision whether or not to pay it ? Mr. WALSH. Yes, sir. Senator NUNN. Then if the decision is made to pay there a
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issued, presumably the check
?
Senator NUNN.
cashed
is
Mr. WALSH. Yes.
is
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check issued
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Mr. WALSH. think little more complicated than that, Senator. think the decision made to process the invoice. Then the invoice sent to this computer setup at National Institutes of Health, where, at is
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that point then the data from the invoice put into the computer sent and check, believe check request prepared by the computer, to the Treasury Department. The Treasury issues the check. Somewhere between the guaranteed" student loan program and the computer setup at the National In stitutes of Health and the processing of the requests for checks, the-
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original documents have been lost. Senator NUNN. Let me ask the General Accounting Office witness question on this. From your own observation would you make
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some comment about this procedure find incredible that the Gov ernment does not know and cannot find out whether has paid an invoice or not. find that incredible.
Mr. VIGEN. That
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very incredible. Senator NUNN. Is this the way the whole education part of HEW operated or just this program? Do you have any knowledge? Mr. VIGEN. would have to qualify little bit. was working primarily on the West Coast Schools' operation, not on the regular GAO testimony given Friday. So didn't get into the technical aspects of the Washington proc essing. From what was described earlier, would say just as routine accounting mechanism, very abnormal to not 'have any type of audit trail. Senator NUNN. You heard Mr. Walsh describe what he thinks happens when the invoice submitted and checks paid? Without commenting on the specifics of this case what are your observations on that procedure Mr. VIGEN. It very weak, as would say, because from this standpoint you would have no, what we call, audit trail at all. We couldn't follow something Senator NUNN. No what?
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Mr. VIGEN. Audit trail. In other words, you can't follow one thing all the way through. Senator Nuxx. Who is responsible for setting up something like this ? How could such a system evolve ? Mr. VIGEN. It is hard to say. Senator Nuxx. What system should take place? Let's just take a
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hypothetical case. somebody submits an invoice from the school, whether it is legitimate or not, who in the education department says this is money owed because of interest on the guaranteed student loan ? What procedure is the ideal kind from an accounting point of view to process that ? Mr. VIGEN. First of all, you want to make sure it was accurate, which would mean some way to verify it with the large volumes of loans going through, you can't, of course, verify every one. There would have to be some procedure to make spot checks. Senator Nuxx. Somebody has to check to see if money is owed. Are you saying nobody does that ? Mr. VIGEN. No ; am not saying that. Senator Nuxx. That is what Mr. Walsh is saying. Mr. WALSH. Yes ; sir, will say that. Senator Nuxx. You said nobody checks to see if it is owed ? Mr. WALSH. No. you will look at the invoice you will see the that invoice date on gives the number of loans and it gives a total, face value. That is the only thing that comes into HEW to be processed. It doesn't give a list of the loans. It doesn't identify the individual loans. So that HEW pays that invoice, again guess you would say on faith and trust. Senator NUNN. were to get a number of these forms, go down, set up just an ordinary typewriter and send one in, they would pay it? Mr. WALSH. believe they probably you had an approved lender,
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would pay it ; yes. Senator Nuxx. Nobody would check ? Mr. WALSH. That is my understanding. Senator Nuxx. Let's walk this one on through. What would hap pen? Let's assume somebody checks under the ideal procedure. Let's assume somebody checks and says it is owed from the General Ac counting Office point of view. What would be the proper procedure after the determination is made that it is owed so the transaction could be traced by an audit ?
Mr. VIGEN.
I
can't answer as
far
as the processing
area.
I
didn't
work that aspect of the case. Senator NUNN. am speaking hypothetically. Mr. YIGEN. Hypothetically. once the determination is made that it is a valid claim, then it should be sent to the next level, who would approve the loan. There should be some type of checks along the way to make sure that all claims that we have are valid, then we will go
I
to the next level.
Senator Nuxx. Should there be a cross-check to determine that the person to whom you are paying money actually owes the Government money ? Mr. VIGEN. Yes ; there has to be some sort of monitoring. With the volume of loans that the Government has, of course, 100 percent audit check would be impossible. Spot checks would be necessary.
223
If
Senator NUNN". West Coast Schools had been bankrupt for 6 months before a voucher is sent and the Government has untold num ber of loans that West Coast Schools is basically responsible for and are going to be in default, shouldn't everybody know by then? Shouldn't there be some cross-check mechanism ? Mr. VIGEN. Definitely. it has been pointed out ahead of time that it is a weak school or school that is in trouble, more effect should be expended in that area to try to find out if all the claims are valid. Senator NUNN. But you are saying that is not done, Mr. Walsh? Mr. WALSH. No, sir. What happened, these invoices are processed and paid solely on the basis of the information that appears on the face of the invoice itself. Senator NUNN. No check beyond that ? Mr. WALSH. No. would say there is no backup data submitted with the invoice. My information is there has been no audit program to go back and try to verify the number of loans that were in exist ence at the time that invoice was submitted or whether the face amount
If
I
was actual.
I
can Senator NUNN. We will take about a 10-minute recess until vote and return. [Brief recess.] [Recess taken with the following members of the subcommittee present : Senator Nunn.] [Members of the subcommittee present at the time of reconvening
after a brief recess : Senator Nunn.] Senator NUNN. Mr. Walsh, why don't you proceed where we left
off?
Mr. WALSH. We examined disbursements which might have been diverted to West Coast School's officials or other parties. As noted earlier, generally disbursements of $2,000 and over was examined. Senator Nuxx. When was the last time you reviewed the procedure for paying invoices like this one with HEW ? Was it in the last month half? Mr. WALSH.
and a
I
went over it in the summer with the HEW people and have gone over it with the people from the General Accounting Office who commented on it in their testimony. Senator NUNN. Have there been changes made in the procedures whereby they follow these invoices? Mr. WALSH. Not to my knowledge. Senator NUNN. What would happen right now if West Coast Schools sent in another invoice, say for $5,000 on interest? Mr. WALSH. Unless someone had placed some type of stop notice with the computer to stop payment of any type of invoices for any am as purpose whatsoever to West Coast Schools, it would be paid. suming that some type of stop notice has been placed. Senator Nuxx. You assume that has been done since these hearings? Mr. WALSH. haven't any idea when it might have been done. Mr. Edmund Schoessner testified on Monday as to the notations or the items that he noted while he was vice president for financial affairs for West Coast Schools as to the money of the school being used for the personal benefit of officers of the corporation, such as the purchase of articles of clothing, the purchase of articles for the officers' apart ments, the payment of alimonv, the payment of medical bills, the rental of luxury Mercedes, Cadillac and Lincoln automobiles, the pur
I
I
I
224
of a boat, the payment of boat expenses, extensive travel and entertainment expenses and other items. During our review of the bank records of the school we noted cer tain documentation indicating that this did take place. However, we did not attempt to schedule this information or to come up with any total for how much was spent for these items. The reason was that the total for the items that we examined was at such a level that many of the payments for this type of article would be under the $2,000 level. We did not have the time to try to examine every transaction of this type that occurred. We would like to present here an exhibit which lists certain totals for items which we noted as diversions of West Coast Schools. Senator NTTNN. Are you submitting that as another exhibit ? It will be exhibit 84 without objection. [The document referred to was marked "Exhibit No. 84" for refer ence and follows r] chase
EXHIRIT No.
Summary
84
of certain diversions of West Coast Schools Funds, May 1972 to March 1974
Money received by corporation salaries) : Fred Peters Franklin P. "Pete" Fisher David M. Carman
officials
(over
and above normal $312, 667 15, 000
15,000
Subtotal
342. 667
Corporate funds diverted investments :
for Peters, Fisher and Carman personal
WHAM, Inc Sterling Homex Stock (through Bateman/Eichler) Fred Peters & Associates
PFC
Investments
185, 54, 17, 11. 10,
.
L. T. Ranch
DIFCO
15,000
Subtotal
293. 966
Funds paid to money brokers for arranging John C. Lane David Sawaya Yale and David Lasker Kayne, Muh & Co Joseph Bogg and Gershon Fox John P. McGrain
FISL
sales
:
92, 102, 37, 37, 37, 28.
Subtotal
Deryl E. Fleming John J. Shilling John A. Propati In-Tech Corp
Subtotal
Grand total
500 250 500 500 500 882
336. 132
Moneys paid to other parties for legal, consulting and other services Robert Bernstein j
Leo Netzel Imperial Discount
550 916 000 500 000
Corp
:
47, 30, 18, 15, 15,
574 000 000 000 000
6. 000
26, 955 158, 529 1, 131, 294
225
Mr. FELDMAN. That is noted
Is that right, Mr. Walsh
as
exhibit G attached to your statement.
?
Mr. WALSH. Yes. Mr. FELDMAN. That is attached to the statement. That is the exhibit
you are referring to ? Mr. WALSH. Yes, sir ; that is right. would like to make a few comments concerning this summary. It shows a grand total of $1,131,294. It mentions money received by cor porate officials over and above their salaries. Our investigation disclosed that Fred Peters, Pete Fisher and Dave Carman each received a salary of $36,000 a year or $3,000 a month. That money is not included in this. Our examination of the bank records, though, did indicate that they did receive such a salary and that we noted payments that appear to verify this. So that the amount of money which is listed as being paid to the various officers over their salaries does not include that. We note here that we have an item of $312,667 that we identified as being traced to Fred Peters. would like to ask Mr. Vigen to present for the record and summarize or read briefly the summary of how this money that was received by Mr. Peters was broken down. Mr. VIGEN. We divided it into five categories here, mainly checks, going out of corporate funds and then based on those endorsements and based on the payees and the endorsements we traced it as follows : will just use Moneys taken out in cash by Fred Peters, $74,000. rough figures here. Moneys deposited into Fred Peters personal bank account, $111,650. Moneys deposited into Lindauer & Goldberg, PA, lawyers, client's trust account in Phoenix, Ariz., $100,000. Moneys deposited to Eobert Bernstein's client's trust account — Mr. Bernstein is the corporate lawyer for West Coast Schools — $6,000. Moneys of unknown disposition, $21,000, for a grand total of
I
I
I
$312,667.
Mr. WALSH. We also show money, corporate money that was diverted for investment in various transactions by Mr. Peters, Fisher and Car man, and we have a total for that of $293,966. We will discuss briefly several of these investments a little bit later. There is also a tabulation of $336,132 which represents fees that were paid to money brokers for arranging the sale of insured loans. It iden tifies a number of these brokers. We will have some more testimony again later on, concerning some particular transactions which we will refer to.
Finally, we have a miscellaneous category which represents money would like to mention paid for legal consulting and other services. one item here. We show an amount of $30,000 paid to Mr. Deryl E. Fleming. We also have additional information which is not includedjn this which indicates that Mr. Fleming received an additional $21,000 from West Coast Schools, for which we do not have checks. The records that we have, which again are not complete, but they show that these payments of some $50,000 to Mr. Fleming were described as payments for, first of all, a lobbyist fee, then second, loan and then third, commission on FISL loans. We found also that Mr. Peters had invested $20,000 in a company in which Mr. Fleming was a principal. That is the company that is called DIFCO, which is listed up above this in the exhibit.
I
226
The total there is given as $15,000. Since this has been typed up we found an additional $10,000. We also found that Mr. Peters had opened a personal bank account at a bank in Washington, D.C., and he had given his address as : care of Mr. Deryl Fleming, who had an office at the L'Enf ant Plaza in Wash ington, D.C. We attempted to contact Mr. Fleming to get an explanation as to the nature of these transactions. We found that Mr. Fleming has been a resident of Washington, but he also has been in California. We con tacted his attorney and he was served with a subpena to appear before the committee in these hearings. Under date of November 7, 1975, Mr. Fleming's attorney, Mr. James W. Riddell, submitted two letters from physicians, explaining the present status of the health of Mr. Fleming, that he was unable to testify before the committee today. So would like to ask to present these as an exhibit for the record. Senator NUNN. Without objection. [The document referred to was marked "Exhibit Xo. 85" for refer ence and follows :]
I
EXHIRIT No.
DAWSON,
85
TAYLOR, DAVIS & HOLROYD, Washington, D.C'., November 7, 1975.
RIDDELL,
J. FELDMAN, Esq. Chief Counsel, V.S. Senate, Committee on Government Operations, Senate Per Washington, D.C. manent Subcommittee on Investigations, DEAR MR. FELDMAN : Enclosed herewith are letters self-explanatory in nature relating to the health of Deryl E. Fleming. As you recall, Mr. Fleming was the subject of a subpoena issued by your office the 29th day of October, 1975. For the reasons stated in the enclosed letters, Mr. Fleming will be unable to appear and testify before your committee on Friday, November 14, 1975. Sincerely, JAMES W. RIDDELL.
HOWARD
OF SANTA MONICA, Santa Monica, Calif., November 3, 1975.
CARDIOLOGY CONSULTANTS
Re : Deryl Fleming. To Whom It May Concern: Mr. Deryl Fleming has been under my care since October 9. 1975. On October 10, 1975, he underwent coronary arteriography and subsequently the same day open heart surgery for replacement of two by-pass vein grafts to his coronary arteries. While he has done quite well post-operatively, lie is on a planned pro gram of rehabilitation which includes the avoidance of undue emotional stress as well as gradual progressive regimen of physical activity. Because of the need to avoid emotional stress, it is my opinion that he should not be required to give depositions in court or before Congressional Committees for a period of three months. Sincerely, JAMES A. MCEACHEN, M.D. SANTA MONICA, CALIF., October 31, 1975.
Re : Deryl Fleming. To Whom It May Concern: Mr. Fleming was admitted to St. John's Hospital in Santa Monica on 10/9/75. During the course of his hospitalization he underwent heart catheterization and subsequent heart surgery. He was having a heilrt attack at the time of his oper ation.
227
I
do his post-operative course has been strikingly uncomplicated, to subject himself to unnecessary pressures for the next
Although
feel it unwise for him three months. Sincerely,
PETER G. GAAL,
M.D.
Mr. WALSH. This next item relates to the information that we have discussed at length previously in the hearings about the $278,000 in $100 bills; where this money came from and where it went to. On May 9, 1973, a package of $323,500 worth of federally insured West Coast Schools student loans was sold to the Kern. County Em ployees Federal Credit Union, Bakersfield, Calif. David Sawaya, a money broker, and Dan Dameron, a West Coast Schools employe, delivered the package of loans and received three $100,000 Ginnie Mae certificates in payment. The three $100,000 certificates were sold May 18, 1973, by the City National Bank for net proceeds of $290.171. A $3,000 commission was paid David Sawaya and $287,717 was deposited on May 18, 1973, to the account of Group Equities in the Union Bank, Century City
III
Branch, Los Angeles. On May 22, 1973, a check for $290,000 signed jointly by Peters, Fisher, and Carman was cashed at the Union Bank and taken out in $100 bills. Also, on May 24, 1973, Fred Peters announced that all six schools operated by Automation Institute would be closed indefinitely. On June 11, 1973, Peters, Fisher, and Carman appeared at the First National Bank of Arizona, Phoenix, Ariz., with a suitcase full of $100 bills which they exchanged for $278,000 in seventeen cashier's checks. A statement from the officer of the First concerning this incident has been submitted cashier's checks were also obtained and An attempt was made to determine the $290,000 and a summary is set out below :
National Bank of Arizona as an exhibit. Copies of the are submitted as exhibits. ultimate disposition of the
Cash disappearance between May 22, 1973 and June 11, 1973 Cashier's check cashed by Fred Peters John C. Lane, money broker D.J.S. Financial Corp. (David J. Sawaya) money broker Robert Bernstein, attorney Anderson McConnell Advertising Agency
II
Equities Automation Institute/West Coast Schools bank accounts Automation Institute/NDEA student loan fund ($150.000 was trans ferred from this account to Windsor University and then to Fred Group
Peters' personal account)
,?12, 017
10,000 5.000 5,000
5, 000 5, 000
10,000 40, 000
107,983 290,000
On February chased a $1
23, 1973,
Hemet Savings and Loan Association pur
million package of insured loans from West Coast Schools.
This transaction is significant because : (a)
It
Schools.
was the largest single sale
of loans made by West Coast
(b) The sale was made only 3 months before the school closed. (c) $170,000 in finder's fees was paid by West Coast Schools for this transaction.
228
The investigation showed that the $1 million payment was deposited Equities, Inc., at the Pan American Bank. Immediately, three cashier's checks were purchased as follows : Senator NUNN. Mr. Walsh, am going to have to leave and come
in the account of Group
II
I
back.
[Brief recess.] [Recess taken with the
following members of the subcommittee
present : Senator Nunn.] [Members of the subcommittee present at the time of reconvening after a brief recess : Senator Nunn.] Senator NUNN. The subcommittee will come to order. Mr. WALSH. The three cashier's checks were purchased as follows : (a) Mrs. David Lasker, $75,000. (b) Kayne, Muh & Co., $37,500. (c) John C. Lane, $57,500. The investigation disclosed that these three checks were paid as finder's fees for arranging the sale to Hemet Savings and Loan. First of all, someone at West Coast Schools, whose identity was not disclosed, contacted Yale Lasker, who formerly owned 20 percent of West Coast Schools, and related that West Coast Schools had a pack age of loans to sell. Yale Lasker contacted Joseph Bogg, a promoter in Los Angeles. Joseph Bogg in turn called the firm of Kayne and Muh, who are promoters and money brokers in Los Angeles. This firm in turn called John C. Lane, a money broker and promoter in Los Angeles. John C. Lane made a telephone call to the Hemet Savings and Loan Associa tion to solicit the association to buy the $1 million package from West Coast Schools. Mrs. David Lasker is the daughter-in-law of Yale Lasker. The $75,000 check was made payable to her, but her endorsement appearing on the back of the check was actually written by her husband, David, the son of Yale Lasker. Joseph Bogg also endorsed the check along with David Lasker, and the proceeds were split, $37,500 to David and to Yale Lasker and $37,500 to Joseph Bogg and Gershon Fox. Thus it appears that $170,000 in finders fees was paid for one tele phone call to the Savings and Loan Association. Ralph's Credit Union: On July 13, 1973, a package of $100,000 federally insured loans of West Coast Schools was sold to Ralph's Credit Union, Los Angeles. Ralph's is a large supermarket chain oper ating in the Los Angeles area. Ralph's Credit Union has now filed suit alleging that Ralph's was not appraised of the true facts at the time of the sale. The investigation disclosed that the First City Bank of Alhambra had made loans to West Coast Schools amounting to $250.000. These loans had been secured by federally insured loans of West Coast Schools pledged as collateral, even though the pledging of such loans as collateral was forbidden by HEW. At the time the West Coast Schools closed, May 24, 1973. the loans had been reduced to $100,000 and the collateral to a similar amount. When West Coast Schools closed, the First City Bank filed suit, alleging that the collateral, the insured loans, was of doubtful value -because the school was closed.
229
On July 10, 11, and 12, 1973, a hearing in Los Angeles was held before Hon. John W. Dickey, judge pro tempore. On page 118 of the transcript of this hearing, Fred Peters, president of West Coast Schools, testified as to his current attempts to sell West Coast Schools' insured loans even though the school was closed and further stated that he was negotiating a sale of the $100,000 in notes to Ralph's Credit Union. As a result of this hearing, a settlement was reached with the First City Bank. The $100,000 in notes held by the bank was delivered to Ralph's Credit Union. Ralph's Credit Union obtained cashier's check 0212-60952 from the Gateway Branch, Bank of America, dated July 12, 1973, for $100,000 payable to the First City Bank. By the terms of the agreement, the
First City Bank accepted
$85,000
in full settlement and remitted $15,-
per the instructions of West Coast Schools to David Sawaya, a money broker, as a finder's fee. It was also learned that West Coast Schools paid an additional $6,000 to John C. Lane, a money broker as an additional finder's fee. HEW was not aware this transaction had taken place after the clos ing of the school until it was so informed by subcommittee staff. A copy of the transcript of the hearing in July 1973, is submitted herewith as Exhibit E. [Previously introduced as Exhibit No. 22.] On February 22, 1974, the Big Spring Savings Association of Big Spring, Tex., entered into a participation agreement with the Surety Trust Company of Phoenix, Ariz, to buy a 95 percent interest in a package of federally insured student loans worth $499,282. On February 28, 1974, the Big Spring Savings Association remitted $474,319.90 which was deposited to the account of the Surety Trust Company in the First National Bank of Arizona, Phoenix, Ariz. This remittance was made before the Big Spring Savings Association ac tually received the package of federally insured student loans which it was proposing to buy under the terms of the agreement. However, when representatives of Big Spring began experiencing difficulty in getting delivery of the actual loan files, they found that Surety Trust Company was in reality nothing more than an escrow agent under Arizona law and that Surety Trust Company was not authorized as a lender by HEW and could not legally transfer the loans to the association. It was determined that over half the loans Big. Spring contracted to buy were from the West Coast Schools and the Institute for Continuing Education, a correspondence school in Los Aiwreles, both of which were closed down. The notes purchased were therefore of extremely doubtful value and Big Spring Savings Association is now in litigation, alleging that it was defrauded. The investigation disclosed that the principals in this endeavor to obtain nearly $500.000 from the Big Spring Savings Association were Fred Peters and Pete Fisher of West Coast Schools, who were intro duced to Daniel L. Jerome, William Henrv Davidson, and Robert Cleveland, who were operating the Imperial Discount Corp. and the Surety Trust Co. in Phoenix, Ariz. They were introduced by John A. Propati. a promoter livin^ in Phoenix, Ariz., who had received fees from Fred Peters and West Coast Schools for unknown reavson at various times since 1972. 000
230
The actual contact with Big Spring was made by these individuals through Grant Richards, president, Houston Suburban Mortgage Co., Houston, Tex. Mr. Richards established contact with the brokerage firm of Hibbert, O'Connor, and Weeks, Inc., in Houston, which in turn put him in touch with its client, Big Spring Savings Association. After Big Spring remitted $479,319.90, the principals converted these funds into cashier's checks. Four of these cashier's checks were used by two of the principals, Pete Fisher and Robert Cleveland, to buy packages of federally insured loans from other lenders, such loans being ultimately delivered to Big Spring. These were: San Gabriel Valley Postal Credit Union California Pacific Bank Los Angeles Council of Churches Federal Credit Union Bank of California
II
$65, 80, 80, 32,
903
000 591 912
The amount of $100,000 was paid to Group Equities. Fred Peters endorsed the checks for this $100,000, and it was deposited in the clients trust account, Lindauer & Goldberg, lawyers, First National
Bank of Arizona. The amount of $36,269.08 received from the proceeds of the Big Spring remittance was paid to the Imperial Discount Corp., the firm of Daniel L. Jerome & William H. Davidson. In addition it was found that an additional $26,955 was paid to
this firm at the same time by PFC Investments, the initials standing for Peters, Fisher, and Carman, the principals in West Coast Schools. A review of bank records, for Imperial Discount Co., shows that checks were paid out of these funds to the partner of John A. Propati and to Ted Lindauer, attorney for Fred Peters. Finally, it was found that two cashier's checks for $38,350 and $41,300 were paid through the Bank of California to Mae Boyle, who with John Acord, formerly operated the defunct Institute of Continu ing Education (ICE) in Los Angeles. A check of bank records showed that $4,100 of these funds were drawn out in cash, $22,000 was dis bursed through the checking account of ICE, $30,000 was transferred to a bank in Mexico, $19.250 was paid to David Sawaya, a money broker, and $2,500 to one Richard Marre. The investigation also disclosed that the papers allegedly showing the transfer of the ICE notes delivered to Big Spring were fraudulent and forged with the possibility that the notes themselves might be fraudulent as well. Again, HEW officials were unaware that the sale of the West Coast Schools and ICE loans had been made after the two schools had closed until subcommittee staff so informed them. The investigation disclosed that Daniel L. Jerome, a principal in this sale is reported to have a record of two convictions for grand theft and one for mail fraud. Copies of the checks involved in the above transactions are main tained in the workpapers. Mr. EWING. Investment of West Coast Schools' funds in ventures for Fred Peters' personal benefit: WHAM, Inc., is a company based in Memphis, Tennessee, which was founded by John Willingham, president. Mr. Willingham is the inventor of a process to produce preformed concrete construction mem
231
bers in the shape of a "T" with special equipment located on the con struction job site. The process was called the WHAM-T process with the name being derived from the name of John Willingham. WHAM, Inc., was incorporated in January 1971. During the next few years, Willingham and the others in WHAM, Inc., attempted to raise capital to promote the process. In Febraury 1971, John Wil lingham accepted the position of Director of Special Projects for Operation Breakthrough of the Department of Housing and Urban Development and went on a leave of absence from WHAM, Inc. In the spring of 1972, John Willingham, who was at that time employed by HUD, was introduced to Fred Peters in Washington by "Red" Muntain, who was a HUD liaison officer with labor unions, and Deryl E. Fleming, a Washington lobbyist. Willingham presented Fred Peters at a meeting of the board of directors of WHAM, Inc., on May 6, 1972. Peters said he was willing to loan $250,000 to WHAM, Inc., with such loans being convertible to WHAM, Inc., capital stock to be issued to Fred Peters. He also proposed a plan to merge WHAM, Inc., with Versapak, a publicly held "shell" corporation which had gone through bank ruptcy. By merging with a public company, Peters felt WHAM, Inc., could expand by borrowing and by selling stock to the public. The directors agreed to his proposal. On June 3, 1972, Peters was elected to the board of directors and also elected president of WHAM, Inc. Peters caused the following checks to be delivered to WHAM, Inc. : May 8, 1972 June 5, 1972
July
3, 1972 8, 1972
Aug. Aug. 11, 1972 Aug. 17, 1872
_
$25,000 Aug. 28, 1972 25, 000 Sept. 11, 1972 50, 000 Sept. 18, 1972 2, 000 Sept. 22, 1972 4,500 Oct. 9, 1972 4,700
$14,500 5, 700 5, 000 43, 250
5,400
In addition, a check for $85,500 was submitted August 28, 1972, but $85,000 was returned September 4, 1972. Some of these checks were drawn on Fred Peters' personal bank account, but the source of all of the funds paid to WHAM, Inc., was from the income of West Coast Schools. By October 2, 1972, 36,600 shares of WHAM, Inc., stock had been issued in the name of Fred Peters and not in the name of Automation Institute or West Coast Schools. Peters assumed active control of WHAM, Inc., in the summer of 1972. but was not on hand in Memphis long enough to exercise this control. Peters brought in Pete Fisher who was named vice president of WHAM, Inc., but he was not active in Memphis. The merger of WHAM, Inc., with Versapak never took place and Peters proposed other vague plans to raise funds for WHAM's opera tion. In the fall of 1972, he spoke of having a deal which would pro duce $3.5 million. [Peters had applications for HEW grants pending at that time for the five unaccredited schools which would produce this amount if accreditation was granted.] By the late fall of 1972, Peters appeared to lose interest in WHAM, Inc., even though $185,550 had been invested in the company. There was some correspondence between Peters and the other directors of WHAM, Inc., concerning alleged expenses incurred by Peters for WHAM, Inc., in the amount of $66,489.49.
232
No documentation was ever submitted to support these claimed expenses. By early 1973, the directors found that all the money re ceived from Peters had been spent and other expenses had been in curred causing the company to be near bankruptcy. As of February 5, 1973, the 36,600 shares issued to Fred Peters were transferred from his name to Group Equities at his request. On September 10, 1973, the certificate for 36,600 shares to Group Equities was surrendered and certificates No. 200 for 57,823 shares and No. 203 for 1,200 shares were issued in the name of Automation Institute. Presumably these shares are still in the possession of Auto mation Institute. At the present time, the shares have no marketable value, although the corporation is still alive and trying to find sources of income. The results of Mr. Peters investments were 36,600 shares of WHAM stock being placed in his name. This stock was then subsequently trans ferred to the firm Group Equities and then later changed to the account of Automation Institute. The officials of WHAM, Inc., advised us that at no time did they ever value their stock less than $2.50 per share and on all occasions sold stock to Mr. Peters for not less than $6.50 a share. Senator NUNN. Does this mean he was paying more than market value for the stock? Mr. EWING. That was the indication that they gave me, that he in fact paid more than the stock was valued, but it was because he was attempting to help the corporation financially. Mr. FELDMAN. Was he also getting controlling interest? Mr. EWING. don't believe he ever gained controlling interest, but he did have a sizable amount of stock. Senator NUNN. Is this stock worth any money now at all ? see in the paper it is bankrupt. Does it have any book value ? Mr. EWING. No; they indicate that the stock has no value whatso ever now. would also like to bring the committee's attention to investments made by Mr. Peters, Mr. Fisher, in a firm called Sterling Homex. Mr. John McGrain was a stockbroker with the firm Bateman, Ickler,
III
III
III
I
I
I
Hill, Richards, in
1972.
Mr. FELDMAN. Are you reading from a prepared statement ? Mr. EWING. am attempting to summarize. Senator NUNN. Has that affidavit already been placed in the record ? Mr. EWING. No ; it hasn't. Senator NUNN. We will place that in the record without objection.
I
Go ahead. [The affidavit follows
:]
AFFIDAVIT
I
OF
JOHN P. MCGRAIN
John P. McGrain, resident at 477 So. El Molino Ave., Pasadena, California freely and voluntary make the following statement to and at the request of LaVern J. Duffy and John "Walsh who have identified themselves to me as members of the staff of the United States Permanent Subcommittee on Investiga tions of the Committee on Government Operations of the U.S. Senate. I am a stock broker in the city of Pasadena, California who at the request of Mr. Duffy will make the following statement regarding a stock transaction which took place on June 30, 1972. On the evening of Thursday, June 29th, 1972 around 11 :00 or 12 :00 P.M.. I received a long distance call from a Mr. Fred Peters, a client, who said he was
233 calling from Washington, D.C. He said he had been sitting in on a meeting with several men, names were not mentioned, and there was a stock he wanted to pur chase in his personal account the following morning, (Mr. Peters had two ac counts with me —a personal account and a corporate account, Automation In stitute). Fred Peters said they (Sterling Homex) were going to provide several thousand modular homes to flood victims in the south east. I told Mr. Peters I would buy the stock first thing in the morning June 30th. Early that morning about 2 :00 or 3 :00 A.M. I received another call from Fred Peters. He requested that I buy additional stock for his (partners) Peter Fisher and Edward Kokeshi. I said, I need certain information about them, i.e. social security numbers, addresses, telephone numbers, etc. I would have to have that information before I could open the accounts and execute the trades. Mr. Peters said he would call me before 7 :00 A.M. (time the stock market opens in Los An geles) with the information. I also mentioned at that time what price he and his partners wanted to pay. He said he didn't care — "buy it at the market". The next morning, Friday, June 30th, Mr. Peters called before the market opened with the information I requested regarding his partners. I told Mr. Peters would call his partners later that morning to confirm the purchases. At that time he asked me to call his ex-wife, Ulla Peters and a Mr. George Harb, his tailor, they also wanted to buy the stock. Mr. Peters said he would call back later that morning to get the details of the trades. I subsequently bought 10,000 shares for Mr. Peters, 5.000 shares for Mr. Kokeshi, 1,500 shares for Mr. Fisher, 1,000 shares for Mrs. Peters, and 500 shares for Sir. Harb. The stock was bought be
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tween 3% and 4% per share. Later that morning, Mr. Peters called again. mentioned we had purchased the had contacted his partners and that we would need nonstock and the prices. solicitation letters signed by the purchasers of the stock. These non-solicitation letters are a matter of course with someone who purchases large amounts of low priced stock. He said that would be fine. At that point, asked more details on the company (Sterling Homex). Mr. Peters said he had been in a meeting all night with representatives of government agency's Sterling Homex people and various other "influential people in Washington". This sale of housing for disas ters victim was gigantic and would clear the inventory of Sterling Homex would create large profits for the company and work out their financial problem. On that information, regret to say, bought 1,000 shares of the stock in my own ac count. told another broker friend about what my client had done and he bought 1,000 shares also. Later the next week, Mr. Peters phoned and said the news would be out on thecontracts Monday morning July 10th (per reliable sources). I went into the office early on Monday the 10th to make sure would not miss the news item on the broad tape. At approximately 7 :15-7 :20 A.M. Monday morning, Sterling Homes made an announcement that they were filing Chapter 11 of the bankruptcy laws. Besides being shocked, immediately called Mr. Peters and told him the news. He was not very pleased, however, he was remarkably calm. He asked me "what would happen if he didn't pay for the stock. replied, we would sue him to collect would be working for the rest of my life to pay if off if we the money, and couldn't collect. asked him if he wanted to sell it and at least get something for it, he said no. The stock had dropped from 4%'s to % in about 15 minutes. My broker friend sold his stock immediately on the announcement. He received $1.00 per share. couldn't get out until gave my clients a chance first. Mr. Peters said he would call me back in a few minutes. He called back and instructed me to transfer the stock from his personal account, and Mr. Kokeshi's account and Mr. Fishers account into the corporate account Automation Institute, and he would send me the check for the total amount, approximately $60,000. That was the last heard about Sterling Homex. The stock was transferred from their personal accounts to the corporation and then mailed out to the customer, Automation
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Institute.
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have read the foregoing statement consisting of 3 pages and correct to the best of my recollection.
it
is true and
JOHN P.
Mr. EWING. He furnished an affidavit relating to the details of the purchase of Sterling Homex stock by Fred Peters in the summer of 1972.
-
As the affidavit shows, Fred Peters purchased 10.000 shares of Sterling Homex stock for himself; 5,000 shares for Edward Tokeshij 63-570—76
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for Peter Fishier; and 1,000 shares for his estranged wife Ulla Peters. When it became known that the firm was bankrupt and this was prior to the time that the stock had been paid for, Peters had the stock 1,500 shares
transferred from his personal account and the personal account of his associates and his ex-wife to the account of Automation Institute. This was a total of 16,500 shares of the stock that had a value of $54,916. This was paid by check from the account of Automation Insti tute of Los Angeles. Senator Nuxx. What was the name of that second stock you men tioned ? Mr. EWING. Sterling Homex. Senator Nuxx. When was the stock first issued to Mr. Peters ? Mr. EWING. It was on June 28, 1972. The initial purchase was made at a price of 3y8. It cost $6,428. Senator Nuxx. Did he pay for it out of his own account ? Mr. EWING. It was assigned to his own account. But it wasn't paid for. He had not paid for it at the time. Senator Nuxx. When did he pay for it ? Mr. EWING. The check is dated July 14, 1972. Senator Nuxx. Whose check was it ? Mr. EWING. It is Automation Institute of Los Angeles. Senator Nuxx. He had transferred the stock to them after the com pany went bankrupt ?
Mr. EWING. That is correct. Senator Nuxx. Mr. Ewing, do you have anything
record
else to
put in the
?
Mr. WALSH. Mr. Chairman, we have here some records that we obtained from the WHAM Corp. and from the bank who handled the WHAM bank account, which would like to introduce at this particular time. [The document referred to was marked "Exhibit No. 86" for ref erence and may be found in the files of the subcommittee.] Senator Nuxx. Mr. Ewing, are you still on assignment from your office to this case ? Mr. Ewixo. Yes ; am. Senator Nuxx. Are you working with someone else in your office, or are you the sole person working on the case ? Mr. EWING. am the sole person. Senator Nuxx. Are you spending most of your time on it ? Mr. EWING. Yes ; am full time. Senator Nuxx. Your office is looking at it for possible violations of the criminal statutes of California ? Mr. EWING. That is correct. Senator Nuxx. We appreciate your cooperation with this subcommittee. Mr. FELDMAN. Is there anything else to add ? Mr. WALSH. Mr. Chairman, have several exhibits which would like to introduce at this time. The first exhibit is an affidavit of Ed ward Aguirre of the HEW office in San Francisco. He was requested to submit an affidavit as to his action or lack of action on the affidavit's reporting the $278,000 in cash. This was received today. would like to offer that as an exhibit in this case.
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Senator NUNN. Without objection. [The document referred to was marked "Exhibit No. 87" for ref erence and follows :] EXHIRIT No.
AFFIDAVIT OF EDWARD
87
AGUIRRE
STATE OF CALIFORNIA, City and County of San Francisco, ss: EDWARD AGUIRRE, being duly sworn, deposes and says : am the Regional Commissioner of Education, Office of Education, United States Department of Health, Education, and Welfare (HEW), Region IX, am fully familiar with the facts set forth in this San Francisco, California. affidavit. attended a meeting which, to the best of my recollection, took place in July or August of 1973, called by me at the request of Gene Ferguson. Mr. Ferguson, an investigative reporter, wanted to meet with HEW personnel regarding the closing of West Coast Trade Schools. In addition to myself, those present included Mr. R. L. Mappus of the Office of Guaranteed Student Loans, of the Office of Education in HEW Region IX and Miss Florence A. Vande Bogart. an Assistant Regional Attorney in HEW Region IX. do not at this time recall the names or functions of any other people who may have been present ; however, as recall, Mr. Ferguson was the only non-HEW person there. No list was made by HEW personnel of those who attended, to the best of my knowledge and recall, and directed specific belief. Mr. Ferguson used a recording device, as questions to Mr. Mappus. Mr. Mappus was answering the questions posed in what appeared to be a manner satisfactory to Mr. Ferguson, and had another appointment. Thus left the group after a period of approximately ten minutes and did not return for any further part of this meeting.
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EDWARD
AOTJIRRE,
Regional Commissioner, Office of Education, U.S. Department of Health, Education, and Welfare. Subscribed and sworn to before me this 17th day of November, 1975. M. A. BOHLING,
Notary Public.
Mr. WALSH. There is also a similar affidavit received from Mr. R. L. Mappus, of the HEW office in San Francisco, which would like to offer for inclusion in the record at this time. Senator XUNN. Without objection. Mr. WALSH. Concerning the same matter. [The document referred to was marked "Exhibit No. 88" for refer ence and follows:]
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EXHIBIT No.
88
AFFIDAVIT OF R. L. MAPPUS STATE OF CALIFORNIA. City and County of San Francisco, ss: R. L. MAPPUS, being duly sworn, deposes and says : am the Deputy Assistant Regional Commissioner, Office of Guaranteed Student Loans, Office of Education, United States Department of Health, Edu cation, and Welfare (HEW), Region IX, San Francisco, California. am fully familiar with the facts set forth in this affidavit. attended a meeting which, to the best of my recollection, took place between mid-July and the first week in August, 1973, called by Dr. Edward Aguirre, Regional Commissioner of Education in Region IX of HEW, at the request of Gene Ferguson. Mr. Ferguson, an investigative reporter, wanted to meet with HEW personnel regarding the closing of West Coast Trade Schools. In addi tion to myself, those present included Dr. Aguirre and Miss Florence A. Vande Bogart. an Assistant Regional Attorney in HEW Region IX. do not at this time recall the names or functions of any other people who may have been ; present however, as recall. Mr. Ferguson was the only non-HEW person there. No list was made by HEW personnel of those who attended, to the best
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236 of my knowledge and belief. Dr. Aguirre stated that he had another appoint ment and left the group after a period of approximately ten minutes ; he did not return to this meeting. Mr. Ferguson had a recording device and periodically held a microphone in front of me, with a request that I speak into it. Mr. Ferguson asked me a number of questions on the West Coast Trade Schools case specifically and also on procedures generally in the Guaranteed Student Loan Program. I answered all of the questions he asked, and he seemed satisfied with
my answers. During or shortly after this meeting, received from Mr. Ferguson a copy of an affidavit ("Smith affidavit"), a copy of which is attached hereto and made a part hereof as "Exhibit A". xeroxed a copy of the Smith affidavit and forwarded it to Mr. William Simmons, the then Director of the Guaranteed Student Loan Program in Washington, D.C. H. L. MAPPUS, Commissioner, Deputy Assistant Regional Office of Guaranteed Student Loans, Office of Education, U.S. Department of Health, Education, and Welfare.
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Subscribed and sworn to before me this 13th day of November, 1975. M. A. BOHLING,
EXHIRIT A
Notary Public.
After first being duly sworn, DA.VID L. SMITH deposes and says : On June 11, 1973 three gentlemen approached my desk at approximately 9 :30 to 10:00 a.m. requesting that I give them a cashiers check (or checks) in the amount of approximately $200,000. In talking with the gentlemen, they indi cated they were from the Los Angeles area, supposedly owners of West Coast Schools, Fred Peters, President ; D. M. Carman, Executive Vice President ; F. P. Fisher, Senior Vice President. I ask them what they were going to use to pur chase the cashiers checks. They showed me a large brief case which they said contained approximately $200.000 in cash. They explained that they were going to try to catch an airplane to Los Angeles at 10 :30. I told them that there would be no way possible to verify the $200,000 and issue a cashiers check in that short amount of time. One of the gentlemen said that would not be a major problem, they would catch a later flight. At this point I spoke to Priscilla Karl and explained that I needed at least two, possibly three people, preferably one being Shelby Scott, the vault teller, to verify this cash before issuing the cashiers check. She arranged for three tellers, Shelby Scott, Beverly Thorn, and Elizabeth Slater and the three proceeded to verify the cash in Mr. Dave Robbins' office. At this time I asked Mr. Peters where he had received this amount of cash. He explained that it was from Union Bank in California. I asked him the gentleman's name who gave him the money. He gave it to me and the office where this gentle man was located and I placed a telephone call to the Union Bank to verify that the money was given to West Coast Schools. This was verified by the gentleman from Union Bank (unable to remember the office or gentleman's name). I then called our Security Office and spoke to E. J. Tinsley and asked him to call the Secret Service and verify that there were not a lot of $100 bills in circulation, which he did. He also made a review of the $100 bills and felt that there was no problem with them. A count was made and the final figure was $273,000(7). The gentlemen from West Coast Schools then indicated they wanted 17 cashiers checks — 16 in the amount of $5,000 each and the 17th for the balance (?). We issued cashiers checks numbers 186719 through 186734 in the amounts of $5,000 and one caishiers check for $197,983. While the money was being counted I discussed with the three principals from West Coast Schools why the money was in cash and here in Arizona. They ex plained to me there was a problem and someone was trying to get the money in California. I was unable to ascertain any more information of why the money was handled in this manner. Most of my conversation was with Mr. Peters and discussing the possibility of leaving the money with First National Bank of Arizona in the form of a Time Certificate of Deposit until such time they decided what they were going to use the money for. This was not acceptable to Mr. Peters or the other two gentlemen. After all the above mentioned things were done, the 17 cashiers checks were signed for by Fred Peters, he thanked the three tellers for being so fast in count ing the money, and have not seen the gentlemen or heard from them since.
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At all material times mentioned herein, the undersigned David L. Smith was and now is Assistant Vice President of First National Bank of Arizona and as such has custody and control of all the bank records. Attached hereto are copies of Cashiers Check # T186736 for $197,983.00, and Cashiers Checks Numbers T186734, T186731, T186732, T186733, T186730, T186729, T186728, T186727, T186726, T186724, T186723, T186722, T186721, T186725, T186720, T186719, each for $5,000.00, all of which were issued on June 11, 1973. The following Cashiers Checks have been paid: T186730, T186729, T186734, T186733, T186736, T186732. DAVID L. SMITH, Assistant Vice President. STATE OF ARIZONA, County of Maricopa. Signed and sworn to before me on this 29th day of June, 1973.
My Commission expires Dec.
Mr. WALSH.
I have
Notary Public. 12, 1973.
also a letter which has been sworn to and from the U.S. Life Savings and Loan Association, in which he relates the problems that he has been having in dealing with the Department of Health, Education, and Welfare. He has requested that this material be submitted and made a part of that record. would like to offer that for inclusion.
Mr. W. A. Giraldin, president of
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Senator NUNN. Without objection. [The document referred to was marked "Exhibit No. 89" for refer ence and follows :] EXHIRIT No.
TJSLIFE
89
SAVINGS
AND LOAN ASSOCIATION, 10, 1975.
Los Angeles, Calif., November
Re Federally Insured Student Loans and the Office of Education. Hon. SAM NUNN, U.S. Permanent Subcommittee on Invesigations, Senate Office Building, Wash
ington, D.G. NUNN : TJSLIFE Savings and Loan Association is chartered by the State of California and has assets in excess of $400,000,000. Its savings accounts are insured by the Federal Savings and Loan Insurance Corporation so it is sub ject to both Federal and State Regulations. In the Spring of 1970, the Association entered the Federally Insured Student Loan Program under the impression that the full faith and credit of the United States government was behind the program because the statutory language seemed clear and the low interest rates on the loans reflected this "no risk" element. By the end of 1971, USLIFE Savings and Loan Association had approximately $17,000,000 in student loans, a large portion of these were made to students attending trade schools accredited by the Office of Education. In early 1972, the Association discontinued making student loans having ex ceeded the level of involvement authorized by its Board of Directors. Although the servicing of student loans has cost the Association a good deal of money, our biggest source of aggravation has been with the insurer of these loans, viz, the United States Office of Education. In 1973 and 1974, the default rate climbed precipitously reaching a high of over $4,000,000 of loans in claim status in June of 1974. The Association's Board of Directors and stockholders became alarmed at the magnitude of the outstanding claims which represented a non-earning asset of the Association. The Federal and State examiners also became concerned. At this time, our management commenced a continuous and ongoing program of attempting to ascertain why its claims have not been paid. The Office of Educa tion has rarely responded to our inquiries except when pressured by Senator Alan Cranston and has continuously given excuses or no reason for delaying the payment of our valid claims. As of this writing, the Association still has over $2,000,000 of loans in claim status, over $1,500,000 of these relate back to claims filed in 1973 and 1974. SENATOR
238 We have met with Mr. John Walsh, Investigator for your subcommittee and understand that hearings based upon his investigation of the Student Loan Program will commence on or about November 14, 1975. Although USLIFE Savings and Loan Association will not be called upon to testify at these hearings, we would like to suggest the following questions which you and the members of your subcommittee may wish to ask the representatives of the Office of Education who will be called to testify. 1. In order to honor its commitment we wonder why the Office of Education does not pay claims immediately, because if something is found which would invalidate a claim they can always demand that the lender repurchase the loan. 2. We wonder why the Office of Education has issued no written policy state ment on claim payments or defined the term "due diligence". 3. Under what statutory or regulatory authority does the Office of Education have the power to write an ''Interpretation" with retroactive applications such as it did in February of 1975? This was, in effect, writing regulations allowing no opportunity for public comment. 4. When an accredited school is closed, why does the Office of Education stop payment of all claims pertaining to students of that school without giving valid reasons for non-payment? continuously changes its personnel in Washington 5. The Office of Education without advising lenders who is responsible or in authority for day to day transactions. 6. Why are our inquiries ignored, and who in the Office of Education actually lias the authority to make promises or commitments? is giving preferential 7. There is strong evidence that the Office of Education treatment to some lenders in the payment of claims and quarterly interest checks. 8. It took us 106 days to receive our second quarter interest check this year. Several inquiries were made verbally and in writing but no response was forth coming from the Office of Education. The cavalier manner in which the Office of Education has treated this Associ ation and many other lenders of which I have personal knowledge, causes us to question the viability of the entire program as it is currently structured and administered. While we in private enterprises are profit oriented. T'SLIFE Savings and Loan Association did not enter this particular program to make money. However, we feel that it is not unreasonable to ask that we at least break even. We are losing hundreds of thousands of dollars per year in non-earning assets and lost oppor tunities while our claims sit in Washington unpaid and unacknowledged. We believe the situation would be even worse were it not for the efforts of Senator Cranston in our behalf. We support the Federally Insured Student Loan Program, hut we also believe it cannot survive without timely payment of claims to lenders, a restructuring of the Office of Education and open communications between the Office of Edu cation and private lenders. Sincerely, W. A. GIRALDIN, President. Subscribed and sworn to before me on 10 November 1975. CAROL HAXCOCK.
Mr. WALSTI. Finally,
I have
a statement here
concerning
I am not going to read it all, but I will ask it be printed
a problem. as read in the
record.
This concerns the fact that there are no criminal penalties at all in the Legislation dealing with the student loan program or with the other financial assistance programs of the Department of Health, Education, and Welfare. In this have enumerated a number of situations which illustrate abuses of these programs which would take place, which might take place, by either officials of schools or lending institutions, and which are not covered by any specific criminal statute. In some cases there are. other statutes on the books of the United States Code which might be used to prosecute, but which, because they
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were not aimed specifically
at these abuses, are
not very effective in
trying to control the people who want to rip off these programs. would like to present this for the record. Senator NUNN. Without objection. [The document follows :]
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LACK
OF
CRIMINAL
PENALTIES To COPE WITH ARUSES IN THE PROGRAM
One of the primary purposes of the Subcommittee's investigation of the HEW financial assistance programs was to determine whether the statutes are ade quate to cope with abuses in the programs. It was found there are no specific criminal penalties in any of the legislation concerned with the guaranteed student loan program or the direct grant programs. Our investigation was concerned principally with abuses committed by officers or employees of schools participating in the program. This means that the fol lowing abuses are not covered by any specific criminal penalties in the HEW legislation pertaining to student loans — although as indicated later, general federal fraud statutes may be applicable in a few cases : 1. The submission of a false or fraudulent application to a non-governmental
accreditation agency. 2. The submission of a forged or fraudulent application for a government in sured student loan. 3. The sale to a financial institution of a forged or fraudulent loan by a school official or by a broker. 4. The sale to a financial institution of a student loan where the student never attended school or dropped out of school. 5. The failure of a school officer or employee to notify a financial institution that the student dropped out of school after the note was sold. 6. The diversion of money obtained by the sale of insured loans to the personal use of officers and employees of the school. 7. The payment of finders fees or kickbacks to brokers and/or to officers or employees of financial institutions in connection with the sale or purchase of insured loans. 8. The failure to keep proper records to account for the proceeds of the in sured loans and to keep proper records of student attendance. 0. Causing a claim to be filed by a financial institution for default on forged or fraudulent loans or on a loan in which the amount due has been reduced be cause of the student dropping out or by the closing of the school. Concerning the programs to pay direct grants to schools for financial assist ance, there are no specific penalties in the HEW legislation for the following: 1. The submission of false or fraudulent information in the application for grants. 2. The use of grant money for purposes not intended by the government in cluding the use of such money for the personal benefit of a school officer or employee. 3. The
payment of consulting fees in connection with application for grants where the fee is based on a percentage of the grant received. 4. The failure to keep records to account for the disposition of grant money. There are some statutes on the books which might be used in a limited way to prosecute abuses in the financial assistance programs but the experience to date shows that these statutes have not been regularly applied to this program. These statutes are : Section 1001. Title 18, False Statements to an Agency of the Government. •Section 1014. Title 18, False statement or overvaluation of any security to defraud a federally insured bank, federally insured savings and loan or federally insured credit union. Section 649, Title 18. The failure by a custodian of U.S. funds to deposit them properly when required to do so (it is questionable whether a school receiving grant funds can he designated as a custodian of U.S. funds. ) Section 371. Title 18, General conspiracy statute. The investigation to date shows that the ability of the U.S. Government to use the above statutes to prosecute wrong-doers in the HEW assistance programs is limited and ineffective. In many cases, a major problem has been the difficulty in proving guilty knowledge on the part of a school official when a loan for a nonexistent student or a dropout was sold to a bank or savings and loan and the
240 negotiations were handled by brokers. Another problem relates to possible viola tions of the statutes prohibiting fraud against a federally insured bank or other financial institutions : If the Federal Government pays off the bank on a default claim for a fraudulent note, has any fraud covered by a Federal statute been committed?
Senator NTJNN. Does that complete the testimony
?
Mr. WALSH. Yes, sir, it does. Senator NUNN. Our next witness is Mr. Gregory F. Lancaster, assistant vice president, who is here on behalf of the Security Pacific National Bank of Los Angeles, Calif. Mr. Lancaster, we appreciate your being here today. We are swear ing in all the witnesses. Let me go ahead and give you the oath. Do you swear the testimony you are giving before this subcommittee be the truth, the whole truth, and nothing but the truth, so help you God?
will
Mr. LANCASTER.
I do.
OF GREGORY F. LANCASTER, AN ASSISTANT VICE PRESIDENT OF SECURITY PACIFIC NATIONAL BANK, LOS ANGE LES, CALIF.
TESTIMONY
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Senator NUNN. We appreciate very much your appearing. am reading your testimony ahead, anticipating we will be interrupted by another vote. There may be several in a row when get there. Mr. LANCASTER. My name is Gregory F. Lancaster, an assistant vice president of Security Pacific National Bank in Los Angeles, Calif., with assets totaling $14 billion. Security Bank has been involved in the guaranteed student loan pro gram since 1967 and issued its first federally insured student loan in July 1968. Our student loan portfolio totals 30,071 loans representing $29',710,199.22 as of October 31, 1975. appear here today on behalf of the bank to comment on certain deficiencies regarding the guaranteed student loan program and to recommend remedial steps. Most of the views are shared by other lenders in the federally insured student loan program, specifically United California Bank and Bank of California. I have been responsible for the administration of the bank's student loan section since January 1971. Participants have been faced with problems since the inception of the program in 1965. Numerous legisla tive amendments to the Higher Education Act have been enacted though the years since 1965 with the intention to improve and expand the coverage under the act. PTowever, very little progress has been seen in reaching solutions and many of these amendments have resulted only in enlarging the scope of the deficiencies. Using projections and figures from the Office of Education, a $2 bil lion potential loss can be anticipated with this program. This is based on testimony before the House of Representatives, Committee of Education and Labor, Special Subcommittee on Education, by Dr. John Phillips, Acting Deputy Commissioner for Postsecondary Edu cation, Office of Education, in which he indicated that the Office of Education anticipated a 25-percent default in the student loan pro gram. With $8 billion outstanding in this program, this would indi
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cate that the Office of Education anticipates a $2 billion potential loss. In April 1973 we presented a list of major problems to the Office of Guaranteed Student Loans identifying those situations, which, we believe, were directly controllable by the Office of Guaranteed Student Loans. The problems of April 1973 have not been resolved and, in fact, have increased manyfold and are now compounded by new situations. Large and small lenders alike under the federally insured student loan program continue to withdraw funding of loans with the demand for loans being transferred to a relatively smaller group of lenders.
Specifically on the west coast, in January 1975 the Bank of California curtailed their involvement in the program. In July 1975 United California Bank took the same action. Their decision was based on un resolved problems with Office of Guaranteed Student Loans. The following list highlights some of the problems experienced by us as participants in the federally insured student loan program :
Claims. (a) Our greatest problem is the Office of Guaranteed Student Loans failure to pay claims submitted for insurance payment in a timely manner. As of October 31, 1975, we were holding in excess of $710,549 in pending claims awaiting payment by the Office of Guaranteed Student Loans. This dollar amount represents funds due to the lender by the Office of Guaranteed Student Loans that could be used for further student loans or loaned to other borrowers. Since the balance owing at the time a claim is filed is in an interest free status, we are losing substantial income as well. The Congress apparently recognized this problem and the amend ment of June 1972 provided that loans made from July 1, 1972, through August 19, 1972, and all loans made after March 1, 1973, would earn interest up to the 120th day after default. We have recently been verbally informed that on the aforementioned claims submitted after July 7, 1975, interest will be paid to the date that the claim is approved by the Office of Guaranteed Student Loans. Interest is not paid for the time period from date of approval to date actually paid, which can be in excess of 30 days. During the months of September (and October 1975, we did not receive claim payments from the Office of Guaranteed Student Loans. Monthly letters listing outstanding claims are ignored or inade quate answers are given. It has been our practice to send monthly letters of outstanding claims since April 1973. We again propose to the Office of Guaranteed Student Loans that claims be paid when submitted, or within 30 days of receipt by the Office of Guaranteed Student Loans and audited by them after payment. for any reason the claim is not eligible, the Office of Griaranteed Student Loans would return the claim within 90 days for repurchase by the lender. (b) "The Pre-Claim Assistance Letter" sent bv Office of Guaranteed Student Loans to a student who has not met his repayment obliga tions is not generated in a timely manner. This letter sent by the Office of Guaranteed Student Loans is de signed to advise the student that he should immediatelv contact the lender regarding repayment of the loan. However, this letter is typi cally sent out 45 to 60 days after the lender has notified the Office of 1.
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Guaranteed Student Loans of a potential problem. By this time the bank is either demanding full payment or the loan has been brought up to date as a result of the bank's independent collection actions. These untimely letters result in customer complaints and considerable em barrassment to the lending institution. To explain our problems, let me discuss the preclaim assistance required by our regional office of Guaranteed Student Loans. As part of the due diligence performed by a lender, past due notices are sent to delinquent customers on the 10th, 20th, and 30th day of default. On the 60th day, our Guaranteed Student Loans Regional Office requires us to notify the Washington, D.C., Office through the use of the preclaim assistance form. The Office of Guaranteed Student Loans, upon receipt of the form, is required to produce a letter prompting the borrower to contact the lender. However, the Office of Guaranteed Student Loans fails to contact the borrower between the 60th and 90th day and the lender then follows the required procedure and demands payment in full on the 90th day. the lender has not received a response to the demand letter, the file is submitted to the Office of Guaranteed Student Loans for claim payment on the 120th day. As an example of the method of handling by the Office of Guaran teed Student Loans, in March 1974 a letter was addressed to the then Director of Insured Student Loans in Washington, D.C. It indicated that we had requested preclaim assistance on January 10, 1974, and that the mailgram was generated by the Office of Guaranteed Student Loans on February 22, 1974. It was indicated that a 30- to 40-day delay by the Office of Guaranteed Student Loans Avas the common procedure at that time. This problem continued and increased. In July 1975 the Office of Guaranteed Student Loans was again notified that their generation of the preclaim had now reached 82 davs and as recently as October 22, 1975, preclaim assistance forms dated Aug ust 1, 1975, were not generated by the Office of Guaranteed Student Loans until October 2, 1975. A time delnv of 62 days. On October 29, 1974. we recommended that the required preclaim assistance be delivered bv the lender to the nearest Western I'nion office and that utilizing the "Lender's I.D. number." Western Union will immediately wire the mailgram, thus eliminating the untimely delay being experienced with the Office of Guaranteed Student Loans. In December 1974. we were informed that the recommendation had been submitted to HEW legal counsel for comment. On March 7, 1975, we were told the suggestion could not be utilized as it was against the Jaw for a government official to delegate any authority to an outside contractor. On October 20, 1975. we received Bulletin No. L6. dated September 8, 1975, informing us to submit the request for preclaim assistance to a called the post office box in Arlington, Va. On October 29, 1975, Office of GSL in Washington. P.C.. and asked if this post office box was told "No" — this post was for a government office of the GSL. office box was controlled by an outside contractor. The letter dated September 8. 1975, and the information received on October 29, 1975. aro in direct conflict with the information given to the utilization of our suggestion of October me on March 7. 1975. 1974 was illegal, what legislative changes have taken place since that
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The proclaim assistance problem continues to be acute for the lend ers in the program. 2. Lack of adequate and prompt response to oral communications directed to the Office of Guaranteed Student Loans. Requests for inf ormation, claim status inquiries and other communi cations requiring a direct answer or interpretation of procedures have often been unanswered for as long as six months and we have a number of inquiries in our files which have gone unanswered for over 1 year. It typically takes 30 to 45 days to have routine questions answered •which results in substantially increased cost to the lender, borrower complaints and an inability to promptly answer inquiries from stu dent loan customers. It has been necessary on numerous occasions to direct communica tions to individual staff members of the Washington Office of the Stu dent Loan Section to their home addresses as it requires 3 to 6 weeks for a letter to reach the officer's assigned desk in the Office of GSL •when addressed to his business address. 3. Office of Guaranteed Student Loans Headquarters does not provide the regional offices with timely notification of policy changes or new legal interpretations affecting the management of the program. The last version of the federally insured student loan program book was issued on May 31, 1972, and does not include subsequent changes to the Higher Education Act. In the Office of GSL's covering letter dated July 25, 1972, which was received with the program book, lenders were informed that — We are currently in the process of preparing information and instructions to assist you on the changes required as a result of the new legislations. As soon as possible, changes will be made to the manual reflecting the legisla tion. When this has been completed, a copy will be forwarded to you.
The updated pages have never been distributed. As a result, the San Francisco regional office is unable to advise lenders of newly man dated procedural changes. In addition, due to the fact that the office of GSL's Legal Department does not distribute its interpretations in a timely manner, advice given by the regional office is often contra dicted at a later time. The resulting confusion causes rejected loan ap plications and/or claims and necessitates constant rewriting of each bank's internal procedures and guidelines. Interpretations and regulations are often on a retroactive basis. Funds loaned under current regulations and interpretations are re versed at a later date; such as, interpretations published in the Federal Register of February 20, 1975. The Office of GSL's interpretation seems to indicate that the lenders now must police each school's eligibility previously determined by the Office of GSL. As another example, the listing of eligible institutions under the guaranteed student loan program was printed in 1974 and, although numerous schools are now ineligible, their name still appears in this di lenders use these now ineligible institutions, they are penal rectory. ized through loss of interest by the Office of GSL. 4. Undue delay in Office of Guaranteed Student Loans' payment of quarterly interest and special allowance. There is an undue delay in the Office of GSL's payment to the lenders of the interest that is subsidized on the student loans. Thirty to ninety days is the usual processing time required by the Office of GSL after
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244 the lender submits the quarterly interest billing. The payment of the interest billing for the second quarter of 1975 ranged from 48 days to 108 days for the six lenders on the west coast. We have on numerous prior occasions brought the various defi ciencies in the Higher Education Act to the attention of members of the U.S. Congress, the Department of Health, Education, and Wel fare, the Office of Education, and particularly to the attention of the Office of GSL. The Office of GSL has admitted on numerous occasions that their management of the program has been less than desirable. Suggestions and recommendations that could easily be im plemented by the Office of GSL have been ignored. The Office of GSL must actively attempt to eliminate stated concli tions to encourage continued participation by the present federally insured student loan lenders, or additional lenders will continue tocurtail their lending and the program will fail. Basically, within the program we have $29.7 million outstand ing in the student loans. We have been reminding HEW of the defi am aware of. ciency of the program since 1971 that In 1973, we delivered a letter to them which we outlined the prob lems as we saw that they could control. am sorry to say that at this stage of the game, very little has been corrected. It has been going on continuously. Several banks, specifically two on the west coast, have withdrawn lending to new borrowers due to the problems that we have been faced with, with HEW. Our biggest problem has been the payment of claims submitted to HEW. As of October 31, the Security Bank had $710,549 out we had not been able to collect this standing in the. claim process. money we could be lending it either in new student loans or to other sources. It is taking approximately 104.9 days average to have a claim paid. We cannot submit that claim until the 120th day of the fall. So if you add the two together, it comes out to be a substantial number of days waiting for payment. Senator NTTNN. You mean during that entire period for as many as 200 days or more you are not getting any interest ? Mr. LANCASTER. On the majority of the loans, we are not. They have come up now and told us that those loans made under the amend ments of 1972 and we submitted for claim after July 7, 1975, we will receive interest up to the day they approve the payment. However, that is not helping much. We have received a total of $64. The preclaim assistance letter, which we are required to send out, we have had continuing problems with this. HEW requires that we tell them on the 60th day that the account is delinquent. On the 90th day we demand pavment in full if, through our own efforts, we cannot reach an amicable solution with the borrower. HEW, they are not sending thnt out. It is stretched. It has gone up to 80 davs, 90 days. October 2d of this year, the time delav was at 62 davs from the date of our request to the date they sent it. think that the preclaim assistance situation is a very good example of the problems that we are facing every day working with HEW. was told that December, We made a suggestion one year ago. that it had been referred to legal counsel. Our suggestion was in
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245 stead of going though the Office of Education with this proclaim assistance request, we would send it directly to Western Union and they would then send out the government's mailgram to the student. was told in March of 1975 that his was illegal because a government employee could not delegate the authority to an outside contractor. However, Mr. Kenneth Kohl signed a letter in September of this year, telling us now to send this to a post office box in Arlington, Va. called their office and asked is this an Office of the Guaranteed Stu dent Loans? was told no, this is an outside contractor. My question is if it was illegal last year, why is it now legal ? Also, the very form that they are sending out to the students, the revised form that we receive in our office on the 10th of the month, the instructions at the top of the form is in direct conflict with the instructions on the bottom of the form. That is from the HEW itself. Senator NUNN. That is the form they are sending to the student when there is a danger of default ? Mr. LANCASTER. Yes. Also, we receive a form. We are to get back to HEW. The top of the form say if you don't send it back, we are going to send them another letter. At the bottom of the form, it says if you don't send it back, we understand now that you have reached a solution with the borrower. What do we do? We have had to, on numerous occasions, direct communications to the home addresses of people at HEW. We cannot get a letter through to the individual. It takes 3 to 6 weeks. Senator NUNN. Did you bring that conflict on the face of the form to the attention of anyone in HEW ? Mr. LANCASTER. Yes, have.
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Senator NUNN. Who ?
Mr. LANCASTER. Alice Hansen, assistant to Kenneth Kohl. Senator NUNN. H-a-n-s-o-n?
Mr. LANCASTER, s-e-n,
I believe.
Senator NUNN. Where is
she located
?
Mr. LANCASTER. Right here in Washington. Senator NUNN. She is assistant to whom ?
Mr. LANCASTER. She is assistant to Kenneth Kohl, K-o-h-1, who is the Director in Washington here, of the guaranteed student loan program. Senator NUNN. He is the Director of the whole program? Mr. LANCASTER. Yes, to my knowledge. Senator NUNN. She works directly under him ?
Mr. LANCASTER. That is correct. Senator NUNN. How did you contact her ? Mr. LANCASTER. By phone. have made numerous contacts with her. We are like on a first-name basis because I call so much. Senator NUNN. You contacted her by telephone to point out this
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talked to her about 2 weeks prior to that time in to the problems on proclaim. spoke with John Hahn, told him then the problems H-a-h-n. He works also in that office. that he was creating for lenders. told him that we had to develop a form letter to go to the students to ignore the letter that they received from the United States Government because in many cases from the
Mr. LANCASTER.
reference
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time we request the preclaim assistance to the time that they send the customer and the lender have gotten together. solution to the problem. Then HEW sends We had come up to this preclaim assistance letter out that says, we have been informed by your lender Security Bank that you have been bad boy. You can imagine what kind of response we get. We get letters di rected to the president of the bank, to the chairman of the board. The names that they can't call us, you couldn't print. Senator NUNN. In that particular instance what was her response to the discrepancy between the instructions at the top and the bottom Have you heard back Mr. LANCASTER. No. She promised that she would respond to me by the 14th of November. However, was only in my office until noon on the 14th, but have not heard back from her. Senator Nunn. How long has been since you contacted her Mr. LANCASTER. talked to her on Monday of that week. Senator NUNN. Did she look at the form while you were talking to her? Mr. LANCASTER. No; read to her. believe that Alice understood had asked in prior phone calls with her and with John my dilemma. Hahn that when they are going to make change in this that they contact lender. don't care myself or any other lender, but ask that lender what this going to do to you How will this affect you am sorry to say that the suggestion has not been taken. Senator NUNN. What kind of interest rate do you get on the student loans you are making now Mr. LANCASTER. Right now? We get spe percent, plus we get cial allowance which approximately Qi/2 right now, 2^, so 91/2 actual yield. Senator NUNN. How does this compare with other loans you are
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Mr. LANCASTER. Consumer loans we can get around 17.08 percent. Senator NUNN. That on installment loans Mr. LANCASTER. Yes that correct. Senator NUNN. What your incentive to get into the student loan program What your incentive to participate Mr. LANCASTER. Public — would be part of our corporate responsi bility. It not moneymaker by any means. For just an example, the operating costs for my area alone for the bank this year will be cost of
$775,000.
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how much costs you to administer this Senator NUNN. That program Mr. LANCASTER. That correct. Senator NUNN. How much revenue do you get from it? don't know yet. That Mr. LANCASTER. projection. Last year was $650.000 cost. we had lent the funds instead of in the student loan program, if we had lent them to higher return, we could have not only saved perhaps the $650,000, but made money on top of it. Senator NUNN. You are not doing for remuneration? You are trying to be of assistance to the program itself and to the students? Mr. LANCASTER. That correct. That what we went into for.
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Senator NUNN. What is your incentive once there is a default on the do you have to go out and try to col
loan ? What kind of incentive
lect it? Mr. LANCASTER. We attempt to collect
as best we can up to the point actually bringing hardnose collection into it. At that point, we are trying to follow all of the guidelines by HEW — at that point we turn it over to HEW. Senator NUNN. What do you call hardnose ? Do you mean possible
of
lawsuit ? Mr. LANCASTER. Yes; legal action.
Senator NUNN. Sending your collection agents out officially to knock on the door ?
Mr. LANCASTER. That is correct. Senator NUNN. How far do you go ? Mr. LANCASTER. We send mailgrams. We send letters. We make per
sonal phone calls to the student. We do not go into the harassment tactics of certain collectors. We will not contact them at their job as repeatedly as have heard some collection agencies do. Senator NUNN. Do you send anybody out personally to talk to them ?
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Mr. LANCASTER. No ; we do not.
Senator NUNN. So the farthest you go is
a phone
call, really
Mr. LANCASTER. The actual personal contact would
?
be over
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phone. Senator NUNN. You do not bring lawsuits ? Mr. LANCASTER. No ; we do not. Senator NUNN. Or go to small claims court ? Mr. LANCASTER. No. Senator NUNN. Before that happens by law you have to turn it back over to HEW? Mr. LANCASTER. That is correct. May say one thing? Senator NUNN. What would happen if this is a 90-percent program instead of 100 percent ? Mr. LANCASTER. We would not be in it. Senator NUNN. That would eliminate you as a lender ? Mr. LANCASTER. That is correct. We would not make these loans, No. 1. We are loaning to an unsophisticated borrower. This is an 18year-old individual who has no credit at all. We have no collateral. We would not loan it. Senator NUNN. You wouldn't put your money in really Mr. LANCASTER. No, Also, one of the things that has bothered us that at the end of the loan now they are saying you are not following due diligence. we were following due diligence at the beginning of the loan, we would not have made the loans in many, many cases. Maybe should clarify that. we are going to use the same collection efforts to collect student loan, then we best use the same criteria going into the loan that we would we were going to make loan and use the same collection
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Senator NUNN. Do you think this am not talk good program ing about the way administered, but the goals of the program and what results you have seen Is doing some good Is helping the
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Mr. LANCASTER. The intent of the program; yes. But believe that the collection efforts by HEW has given the attitude to the students that they really don't have to pay. you were a student in school and you knew that your predecessors were not paying their loans— what would give you — why would you start making your loan payments to a bank ? believe that the program is good. But believe that the admin istration of the program is very, very bad. Senator NTTNN. Do you think it is because they don't have enough employees in HEW ? Mr. LANCASTER. believe that could be part of it. But do believe that the employees they have there could work a little harder, could answer requests for information, could give out correct answers. They could get their act together themselves by just issuing a book to us that tells us how to operate. We have a lenders manual that came out May 31, 1972, and with that there was a covering letter that said that the updated pages were being printed then and they would soon be distributed. We have never received those pages. Senator NUNN. What was the date ? Mr. LANCASTER. May 31, 1972. It did not include the changes to the law of 1972. So we do not have anything that is current. Senator NUNN. have gone through your statement which is very have read it. Could you summarize ? We have already talked good. about some points. Can you summarize the steps you think need to be taken from an administrative point of view by HEW to make this
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program work?
Mr. LANCASTER. No. 1, they should attempt to get some instructions out to not only the lenders, but to the schools. They should determine that this is a loan program and the loan must be repaid. they are going to use it as a grant program, don't call it the federally insured student loan program. Senator NTTNN. Just send the money in ? Mr. LANCASTER. That is correct, give it to them, and say thank you, Johnny, for taking our money and that is the end of it. believe that in Washington, D.C., they do not need an educator and they do not need a lender. They need an administrator. They need someone that can go out there and ask the staff what they are doing, why they are receiving complaints. Why do have to write to Mr. Kohl to get some simple question answered ? can't understand that. There is no way. Senator NUNN. You mean you have given up on the regional level ? Everything has to come to Washington ? Mr. LANCASTER. When write a letter, copy every one can think of and hopefully someone will answer me. have written letters that start out, "Are you deliberately ignoring me?" projected $2 billion loss to the U.S. taxpayer. Personally, Senator NUNN. You believe out of the $8 billion program, there is going to be a $2 billion loss ? Mr. LANCASTER. believe that. Senator NTTNN. Twenty-five percent? Mr. LANCASTER. That is correct. use the figures of John Phillips. He is with the Office of Education. Dr. Phillips said there is a 25-per cent default rate. Twenty-five percent of $8 billion is $2 billion that as taxpayers are going to have to absorb. It is going to fail you and if HEW does not get this thing straightened out. That is the way I
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249 -Senator NUNN. Are there any changes in the law itself that need made from a legislative point of view ? Mr. LANCASTER. The law right now is not that bad. have said many times at many meetings, the 1965 act itself isn't so bad. Maybe we should raise that $15,000 up to $20,000 adjusted income, $22,000 perdon't know. don't think the law itself is that bad. believe liaps. that HEW should publish the rules and regulations and tell us what we are here for. Don't base your opinion today and don't judge me did in 1969 or 1970, also. Tell me today. today on something that Starting from today on, you will do this. Senator NUNN. Have you found anybody in the program in HEW that really knows what is happening, who can understand and appre ±o be
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ciate the problems ?
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Mr. LANCASTER. believe the first line management is more aware ±han the Kenneth Kohls. Senator NUNN. Where is first-line management ? Mr. LANCASTER. am talking about Ealph Madden comes to my mind. He is in charge of insurance over there. Senator N UNN. In Washington ? Mr. LANCASTER, Yes ; believe that that man understands it. have have seen their offices. have seen the boxes stuck sky ^one there. had an official of HEW take high that they can't process the claims. one of their reports out and tear it out and give it to me; literally hand me part of their records. You asked me a question. do not think that the top management of HEW knows what is going on. Senator NUNN. What is diverting their attention? What else are they doing? For instance, Mr. Kohl, this program is his responsibility,
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is it not ? This is his job ? Mr. LANCASTER. Yes. Senator NUNN. How could these facts escape his attention? How is that possible? Mr. LANCASTER. I don't know. Senator NUNN. I find it incredible. Mr. LANCASTER. don't know. I believe that he is burdened with too many things to do. He may be in over his head. I don't know. do not know. believe that he is a sincere individual. He came to my
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a year ago and told me about that magic computer. said, "I have heard that from your predecessor and his predecessor." The have been in this program. trouble is have been here too long. attended meetings. attended task force in Washington, D.C. They asked 16 individuals there, what do you think we could do to solve the problem ? That was John Ottina. We came up with some beautiful suggestions. We haven't seen any results yet. Please keep us informed. We do. But we get nowhere. Senator NUNN. When you asked a question, "Am being intention ally ignored?" what kind of response do you get? Does that generate a response? Are those magic words? have Mr. LANCASTER. Sometimes. Sometimes get an answer. waited up to 1 year for replies. have letters outstanding since have not received — excuse me, 1973, and November of 1974 and have not received an answer yet. In April of 1973, when we wrote a letter outlining our complaints, -one of our complaints stated that we do not receive response to our office
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That was hand delivered by our Washington representative in 1973. We received an acknowledgement of that letter in October of 1973 that we were complaining about their lack of response. You asked a question. Senator NUNN. What would you do if you were in Congress about this program? What if you were on the committee dealing with it? This committee doesn't have legislative jurisdiction. We are an over letters.
April of
sight committee. But what would you do ? Would you abolish the program ? Or would you try to fire everybody in the administrative end of it? Mr. LANCASTER. 1 certainly would give them a time deadline that would want the number of complaints to cease or to reach a very
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acceptable level. You are going to have a complaint on any program you have. would like it to get to the point where lenders instead of dropping out of this program come back into this program. You understand that as long as they continue to drop, this program is going to fail. As more and more lenders cease lending, you will have no guaran teed student loan program. That is what it is boiling down to. The burden is being shifted to a relatively small number of lenders. This is where it is going to end up. You asked a question. You wanted to know, do you think, you asked me if thought that HEW officials were aware of this problem. am going to read from a letter that was addressed to Brook Sawyer who is in financial aid at the Pomona College dated August 29, 1975.
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of the private sector to expand its guaranteed loan volume by the amount necessary to absorb those loans currently made as NDSL loans. The administration disagrees with this assessment It is the belief of the administration that as the economy continues to improve guaranteed loans will prove increasingly attractive to private lenders who will therefore increase their level of participation in the program. Considering the fact that the volume of guaranteed loans currently being made is approximately $1 billion a year while the volume of NDSL loan is only approximately half that amount — You comment about the unwillingness
Senator NUNN. What is NDSL ? Mr. LANCASTER. National direct student loans. [Continues reading:] It would require only a moderate
expansion of the guaranteed loan program to absorb the volume of loans currently being made under the NDSL program. Such an expansion seems easily feasible.
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Would you tell me, am sitting here and am telling you, that we have got all of these problems. The administration says that it is the economy. Does the economy have any bearing on the fact that cannot get an answer ? Does the economy have any bearing on the fact that they will not pay my claims ? Does Miss Trotter really believe that am going to expand my guaranteed student loan program, a moderate expansion ? To me that is 50 percent. Would you like that letter ? Senator NTTKN. Has that been made an exhibit ? It will be No. 90. [The document referred to was marked "Exhibit No. 90" for refer ence and may be found in the files of the subcommittee.] Senator NUNN. Who wrote the letter ?
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Virginia Trotter, Commissioner Bell's superior,
understand. Senator NUNN. Superior
Mr. LANCASTER. That
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is correct. Senator NUNN. Actually, as the economy improves, you will have more loan demand from other sources. It will be just the reverse. Mr. LANCASTER. That is correct. As the economy improves and the prime rate would go up, this is held at straight 7, plus under the present law they can go up to 3 percent, special allowance. That would be an effective return of 10 percent. don't know how often you have attended these Senator NUNN. hearings, but one of the large abuses we have heard is that the stu dent comes in and makes the loan, pays the tuition, enters the school, two weeks later drops out. Administratively, what can be done to protect both the lender and the Government in that instance? What can be done ? Mr. LANCASTER. Not much; you can go to multiple disbursements. In other words, they can only disburse as the funds are earned by the school. But then we have the problem that we also disburse for not only tuition and books, but living expenses, travel. How would you allot this out ? That could present a problem. believe that closer policing of eligible schools by HEW — do not know, and mean this, too. don't know who is responsible for setting the eligibility of a school. They pass the buck down. It is an
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accreditation. Senator NTTNN. We had testimony this morning that no one is responsible. They have absolutely no quality control. We heard testi mony from the regional director in San Francisco that he had been told many, many times in meetings that quality has nothing to do with the program. Mr. LANCASTER. That is true. However, the regulations that were published in February of this year said that the lenders must police the schools. loan to students all over the United States. Senator NUNN. The regulations said the lenders must? Mr. LANCASTER. Yes ; lend to schools all over the United States, all over the world. They are eligible schools outside of the United
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know the quality of the education of a school, for in France, or how would know a school right here in Washington, B.C. ? Any office that is in Los Angeles, Calif. ? Why was it necessary, for had to cut off a school in Mexico for a while because example, that they were not cooperating and yet when notified HEW of this and told them if they didn't get it straightened out, am going to cut example,
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them off. They said, "You can cut anybody off you want to." That was their answer. You can cut off any school. It is your money. West Coast Trade Schools, we lent to those students at one time. ceased lending at the end of 1971. We made direct loans to those stu• dents. In December of 19 — excuse me. Let's say 1971. cut them off notified HEW in San Francisco that there was some completely. thing going on with that school. So just said no more loans. Senator NUNN. Did you notify them orally ?
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Mr. LANCASTER. Both orally and written.
Senator NUNN. Do you have a letter that you could find for us ? could search my records. had numerous conversa tions. We used to send, when we were writing to West Coast Trade Schools, we would carbon copy the regional office. Senator NUNN. Could you without great difficulty find those copies of letters on the West Coast Schools ? Mr. LANCASTER. would certainly try. have a package here. Senator NUNN. What made you suspicious of that school ? Mr. LANCASTER. The amount of refunds, the amount of customer •complaints. We had many students that were complaining that the education was poor, that they had dropped out of school. Part of the setup for a new student, the student signed a power of attorney, giving West Coast Trade Schools the power to endorse their check. So in many cases we found students who had, they would come back to us and say, •"What do you mean the loan that had with you ?" "Is this your signature ? "
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"Yes."
"Is this your "Yes."
signature ?"
When we came to look at the check, the check was signed by
of attorney.
a power
It is our understanding that when a student went in there, there were numerous forms they were signing and one happened to be a power of attorney. Sign this, sign this, sign this. Senator NUNN. The student would come down to the bank and sign the note? Mr. LANCASTER. Yes. Senator NUNN. You would issue the check to them or send it through the mail? Mr. LANCASTER. No ; it is our custom to make the check payable to the student and send it to the school. This is through recommendation of HEW. believe it to be a good way. Senator NTTNN. The school just takes the check and endorse it under the power of attorney and the student would never see the money ? Mr. LANCASTER. That is correct. We have a list of eligible schools that we use right now. But it is not current. To tell you the truth, don't know if West Coast is on that list or not. Senator NUNN. You have already testified that you brought these problems to the attention of HEW regional office in San Francisco,
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Mr. LANCASTER. Yes.
Senator NUNN. West Coast Schools?
Mr. LANCASTER. Yes. Senator NUNN. But you saw no response from them ? Mr. LANCASTER. No. Senator NUNN. Are there other schools that you are dealing with now that you brought to the attention of the regional office ? Mr. LANCASTER. We have been very fortunate. Our participation, shall we say, with vocational schools,, has been on a very limited basis. It is one of the restrictions that Security Bank has, is we will not lend
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to first-year students. There is not too many vocational schools that certificates
a second-year
student.
We feel that an individual should get through their first year.
shows
It
faith effort on their part. There are too many good com munity colleges that they can go to locally for a very reasonable fee. Mr. FELDMAN. Do you purchase any guaranteed student loans from schools that are lenders themselves ? Mr. LANCASTER. We have purchased one group. It was not actually a purchase. It was a loan that we had to a school under a collateral pledge. The collateral was the student loan paper. It was around $675,000 worth. Mr. FELDMAN. Is that legal under the HEW regulations? Mr. LANCASTER. Yes. Mr. FELDMAN. What do you think about the proprietary schools being lenders themselves ? Mr. LANCASTER. No. Absolutely not. don't believe any school should be a lender, whether it be proprietary, whether it be Harvard, Prince ton, UCLA. don't care who it is. Senator NUNN. What is your reason for that ? Mr. LANCASTER. There are too many hats. There is not enough con trol. We will lend and you educate. We promise not to educate if you promise not to lend. Let's keep it nice and clean cut. Senator NUNN. Mr. Lancaster, we appreciate very much your being here. Your appearance has been very helpful to the committee. hope progress will be made in this area. Mr. LANCASTER. That is all we hope for, too. Senator NUNN. Thank you. [A letter from Mr. Lancaster to Mr. Kohl, Associate Commissioner, Office of Education, was forwarded to Senator Nunn and follows:] a good
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SECURITY PACIFIC NATIONAL BANK.
Mr. KENNETH A. KOHL,
February
13, 1976.
Associate Commissioner, Division of Insured Loans, Bureau of Postsecondary Education, Office of Guaranteed Student Loans, Department of Health, Education, and Welfare, Washington, D.C. DEAR MR. KOHL : This is to notify you that Security Pacific National Bank will no longer accept applications for Federally Insured Student Loans from new borrowers effective March 1, 1976. We will, of course, continue to process ap plications for present borrowers who are controlled in an academiic program and have previously obtained a Federally Insured Student Loan from our Bank. This decision was made only after a careful analysis of all aspects of the Federally Insured Student Loan program. The burden of operational difficul ties and broad misuse of the program leads to the conclusion that we cannot continue to justify involvement in the program. Should the situation change or other more viable plans evolve, either on a State. Federal or Educational Institutional level, we will be pleased to review our participation at that time. Very truly yours, GREGORY
F.
LANCASTER.
Senator NUNN. The subcommittee will meet at 2:30 tomorrow afternoon. We will hear at that time from HEW representatives whom am certain will straighten out these allegations. [Whereupon, at 3 :45 p.m., the subcommittee recessed, to recon vene at 2:30 p.m., Thursday, November 20, 1975.] [Members of the subcommittee present at time of recess: Senator Nunn.]
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GUARANTEED
STUDENT LOAN PROGRAM
THURSDAY,
NOVEMBER
20, 1975
U.S. SENATE, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS OF THE COMMITTEE ON GOVERNMENT OPERATIONS,
Washington, D.O. The subcommittee met at 2 :10 p.m., in room 3302, Dirksen Senate Office Building, under authority of section 4, Senate Eesolution 49, agreed to July 26, 1975, Hon. Sam Nunn presiding. Members of the subcommittee present : Senator Sam Nunn, Demo crat, Georgia ; and Senator Charles H. Percy, Republican, Illinois. Members of the Professional staff present: Howard J. Feldman, Chief Counsel; F. Keith Adkinson, Assistant Counsel; LaVern J. Duffy, Assistant Counsel; John J. Walsh, Investigator; Gregory L. Vigen, General Accounting Office; Stuart M. Statler, Chief Counsel to the Minority; Jonathan Cottin, Investigator to the Minority; Ruth Y. Watt, Chief Clerk; and Andrew Ewing, Fraud Division, Office of Los Angeles District Attorney. will call Senator PERCY [presiding]. Senator Nunn is on his way. these hearings to order. [Members of the subcommittee present at time of reconvening: Senator Percy.] [The letter of authority follows :]
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U.S. SENATE, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, COMMITTEE ON GOVERNMENT OPERATIONS, Washington, D.C. Pursuant to Rule 5 of the Rules of Procedure of the Senate Permanent Sub committee on Investigations of the Committee on Government Operations, per mission is hereby granted for the Chairman, or any member of the Subcommittee as designated by the Chairman, to conduct hearings in public session, without a quorum of two members for administration of oaths and taking of testimony in connection with Hearings on the Guaranteed Student Loan Program and Other by the Department of Related Financial Assistance Programs Administered Health, Education and Welfare on Thursday, November 20, 1975. HENRY M. JACKSON, ffhairman. CHARLES H. PERCY, Ranking Minority Member.
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Senator PERCY. As have explained to Dr. Bell, have a regretful conflict now with the Foreign Relations Committee meeting that must attend.
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[At this point Senator Nunn entered the hearing room.] Senator PERCY. So have a short statement. With the Chair's per mission Senator NTJNN. Go right ahead.
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will make my short have to leave, Senator PERCY. Inasmuch as statement. Then the Chair can move right into the hearings. would like to say first, Mr. Chairman., officially to the Depart understand that he had ment, not to Dr. Bell particularly because think the Department should be on notice problems of clearance. that under rule 5(d) of the subcommittee witnesses are required to submit their testimony one day before its presentation unless a waiver is obtained. Commissioner of Education T. H. Bell obtained no such waiver. Yet, he did not submit his comments until 10 :15 this morning. This is despite the fact that he has known of these hearings for weeks. can't determine from first-hand knowledge whether it is Dr. Bell's or not. But it is uncharacteristic from what have known of Eroblem im. it is a matter of just getting clearance of hearings in HEW, this is one of the problems, Dr. Bell, we have been dealing with all along ; is that layer of bureaucracy that somehow prevents decisions being made. did not, because of our secret session this simply regret that morning in the Senate, then have a chance to carefully review the testimony. have, however, talked with staff and the staff informs me that the statement is not responsive to the considerable evidence of mismanagement that has been presented over the last week during the subcommittee's hearings. Because the statement does not directly address itself to the issues, and if the chairman's questions do not give you, Dr. Bell, an opportu nity to fully answer or you do not have with you all of the informa tion that would enable you to answer very serious allegations and charges that have been made against the Department and its manage ment, then would be very happy to return at any time that you could bring full and complete testimony that would be totally respon sive to the problem and the Chair would convene another hearing. would be very happy to participate in that hearing. Finally, Mr. Chairman, would like to say before leaving that the testimony that has been taken from other witnesses this week in my judgment should promptly be made available to all members of this subcommittee because of the very serious charges that may involve
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criminal activity, including bribery and fraud. think that after reviewing the testimony the subcommittee will want to forward the hearing transcripts to the Justice Department for possible prosecution. After an opportunity for such a review has been afforded, intend to request an executive session of the subcommittee for the purpose of considering such action and hope if Senator Jack son is not available, Mr. Chairman, that you would convene such a meeting so that we can move right ahead. think it is our duty and obligation particularly in this subcom mittee when we see wrongdoing. It is not our purpose to be prosecutors, but when we certainly see evidence of it we should turn that over to the proper authorities and in this case it would be the Justice Department. have no doubt that we will have full cooperation in this matter from the Commissioner. certainly welcome you and your colleagues here today and deeply regret the conflict in schedule does not permit
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257 me to stay.
Minority counsel, however, will
be present
during the
entire hearing. Senator Nuxx. Thank you, Senator Percy. [At this point Senator Percy withdrew from the hearing room.] don't envy your task Senator NUNN. Commissioner and gentlemen, of trying to answer and explain the charges, allegations and descrip tions of your operations that we have heard in this room over the past few days. We are on a factfinding mission, but we want to be fair and we want to hear your side of the story and your problems. There are had hoped today that scores of questions that come to mind. But you would be able to address yourselves at least in your opening state ment to the following kinds of questions : First of all, is there a system which can be developed to retrieve critical data on the scope of the Government's commitment and ex posure in these scholarship programs so that the executive branch and the legislative branch can make informed judgments and recom mendations ? Two, is there a process that can be developed to insure that pay ments made by HEW are valid ? Three, why did the West Coast Schools debacle occure when HEW had constant warnings from a variety of sources? Four, how can we dispense in the Federal Government huge amounts to institutions which even by a cursory examination would appear to
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?
Next, why can't the GAO get sufficient information from HEW to express an opinion on the financial statements relating to the admin istration of these programs ? Why does GAO hedge on its estimate because no accurate data is available ? Is the random sampling by GAO that found 10 percent of the claim files lacking the actual notes, a representative sample of the entire operation ? Is the random sample by GAO that found 235 of the 245 claims or 96 percent should not have been paid by HEW, but were funded to lenders because they had not made acceptable collection procedures, representative of the operation ? Finally, is there a way to control the flow of documents through the system ? Is there a better way to administer the program ? had hoped we could get into all of those details. Unfortunately, we received your statement this morning at 10 :15, when and other Members of the Senate were in an executive session on very important matters, despite the fact that the subcommittee rules asked for the statements 24 hours in advance. Like Senator Percy, therefore, have not had a chance to completely review the statement as would
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Staff has reviewed the statement. Again, time restrictions have not permitted us the chance to review it in detail. But it is the consensus of the staff, Mr. Commissioner, that while the statement is informa tive and useful, it does not address itself to the questions that were developed during the hearings this week, namely, that the HEW student assistance program is being run inefficiently, with little or no
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controls on the wastes and with many questionable practices and corruption. My own brief review indicates that many of the questions had posed note the com before receipt of the statement remain unanswered. plete absence of comment on the West Coast Schools situation in your statement, according to the staff. would direct that your long statement be printed in the record and that you, Commissioner Bell, be afforded the opportunity to deliver the short statement. However, because of the circumstances, believe we should withhold questions until we have a more comprehensive and detailed presentation. am directing the staff of the subcommittee to work Accordingly, with you, Commissioner Bell, and HEW officials in the hope that a more complete and responsive presentation can be presented to the
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subcommittee. want a response by HEW which will answer in detail and with specificity the allegations, charges, conclusions and observations made in testimony delivered by the General Accounting Office staff and other witnesses. We will be setting a date after the recess for an appearance by Com missioner Bell and his staff to respond. might also add that because of what consider the national impact of the allegations that we have intend to ask HEW Secretary Mathews to appear also. heard, think it ought to be called to his personal attention and think his appearance here at some mutually convenient time will be neces sary. Commissioner Bell, you have other people with you today. Before ask you to take the oath which we require of all witnesses under the rules of this subcommittee, would you introduce each one of the people
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who might be testifying? Mr. BELL. Thank you, Mr. Chairman. As introduce these people, should explain to you not that want to be expressing any alibis, but just a statement of fact, that those here at this table are relatively new to their positions. have been in office since June of last year and all of the individuals here are in their positions in a relatively new time. So if we lack historical perspective on this program this may explain some of it. But we will do the best we can in that regard. Charles M. Cooke, Special Assistant to the Secretary for Student As sistance in HEW ; Edward T. York, who is the Deputy Commissioner in the Office of Management in the Office of Education ; John D. Phil lips, who is the Deputy Commissioner, Bureau of Postsecondary Edu cation in the Office of Education ; Richard Hastings, Deputy Assistant for Legislation in the Office of HEW; Peter Bouxsein, who is Act ing Assistant General Counsel for Civil Rights in HEW and inciden tally, Mr. Chairman, Peter previously worked in OE and had a great deal to do with the development of regulations. We will be talking about that. At the table back of me is James G. Allen, who is Chief of the Pro gram Support Branch, Division of Student Support and Special Pro grams in the Bureau of Postsecondary Education. Mr. Allen isn't here apparently ; Kenneth Kohl, Associate Commis sioner, Office of Guaranteed Student Loans in the U.S. Office of Edu
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might explain by way of introduction that Kenneth Kohl came to us from Princeton and is relatively new in this position as we have tried to structure new management for this program. Edward Stepnick, who is Director of HEW Auditing ; John R. Proffitt, who is the Director of Accreditation and Institutional Eligibility in the Bureau of Postsecondary Education in OE and Nathan Dick, who is Director, Office of Investigations and Security of HEW. Senator NTJNN. Is anybody going to testify today besides you, Com missioner Bell ? will be the only one. Mr. BELL. there won't be any questions, there are any questions of the others, they can Senator NUNN. stand and be sworn. Do you swear the testimony you are about to give this subcommittee •will be the truth, the whole truth, and nothing but the truth, so help you God? Mr. BELL. do.
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TESTIMONY OF HON. T. H. BELL, U.S. COMMISSIONER OF EDUCATION, DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE Senator NUNN.
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understand you have
a
longer statement which
will be admitted for the record. Mr. BELL. Mr. Chairman and members of the subcommittee, it is a pleasure to appear before you today to discuss the operation of several of the student assistance programs which are administered by the Office of Education. I would like to describe (1) the function and operation of our campus-based programs: The college work-study
(CWS) program ; the national direct student loan (NDSL) program; and the supplemental educational opportunity grant (SEOG) pro gram; (2) the function and operation of the guaranteed student loan program (GSLP) ; (3) the role accreditation and institutional eligi bility play in the operation of these programs; and (4) steps we have taken in each of the above areas to overcome existing abuses and pre vent future problems. CAMPUS BASED PROGRAMS
Let me begin with an overview of the operation of the campus-based programs, with particular emphasis on those aspects of program oper
ation upon which your investigation focuses. The supplemental educational opportunity grant, college workstudy, and national direct student loan programs are known collec tively as the campus-based student financial aid programs because they are administered through participating institutions of postsecondary education. Although they originated at different times — the national defense (now direct) student loan program was implemented during fiscal year 1959, the college work-study program during fiscal year 1965, the supplemental educational opportunity grant program — successor to the former educational opportunity grant program — in fiscal year 1974—-they are similar in many respects. The Office of Education has unified their administration, insofar as possible, at both the Federal and institutional levels.
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The purpose of these programs is to enable financially needy students to attend institutions of postsecondary education through the provision of grant, work, and loan assistance. A student must have a demon strated financial need for the assistance he receives. In addition, the common statutory and regulatory conditions of student eligibility re quire that a student — (1) Be a citizen or national of the United States or be in the United States for other than a temporary purpose and intend to become a permanent resident thereof ; (2) Be enrolled or accepted for enrollment on at least a halftime basis at an eligible institution ; and (3) Be capable, in the opinion of the institution, of maintain ing good standing in his course of study. There are currently 3,406 institutions participating in the SEOG program, 3.215 in the CWS program, and 3,167 in the NDSL pro gram. The total unduplicated number of institutions is 3,887. The supplemental educational opportunity grant program is limited to undergraduate students of exceptional financial need enrolled on at least a half-time basis for up to 4 years of undergraduate study, with a fifth year of eligibility extended to students whose course of study requires 5 years. The grants may range from $200 to $1,500 per aca demic year, with an aggregate award limit of $4,000 per student, or $5,000 for those with 5 years of eligibility. The grants may not exceed one-half the total student financial aid provided to each student, and the institutions must provide matching assistance of an equal or greater amount from among the specified eligible matching sources of funds. The supplemental educational opportunity grant award, however, is 100 percent Federal funds. The college work-study program provides part-time employment to eligible undergraduate, professional, and graduate students of great financial need. The student may be assigned to work either for the institution itself — except in the case of proprietary institutions — or for an offcampus public or private nonprofit agency. The Federal award pays 80 percent of each student's compensation, with the in stitution or offcampus agency providing the remaining 20 percent. The national direct student loan program provides long-term loans at 3 percent simple interest to eligible undergraduate, graduate, and professional students. A student may borrow aggregate amounts up to $2,500 for the first 2 years of postsecondary study, $5,000 for 4 years, and $10,000 for graduate and professional study. No interest accrues so long as the student remains enrolled on at least a half-time basis at an eligible institution and during a 9-month grace period. Kepayment begins 9 months after he ceases to be so enrolled, and ex tends for as long as 10 years, depending on the amount of a student's loan(s). No repayment is required during periods of up to 3 years of service in the Armed Forces, the Peace Corps, or VISTA. The loans may be fully or partially cancelled for specified types of teaching or military service.
The Federal capital contribution for each fiscal year is matched by an institutional capital contribution on a 9:1 Federal institutional ratio, and deposited into a national direct student loan fund at each participating institution. The fund thus created is used to make loans to eligible students. The fund is replenished by collections on prior
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loans and augmented by new Federal and institutional capital con tributions ; disbursements are made for loans to eligible students, and for other authorized administrative and collection costs. In order to participate in these programs (and in other Office of Education programs) , an institution applies to the accreditation and institutional eligibility staff of the Bureau of Postsecondary Educa tion for a determination of institutional eligibility. That office deter mines whether an institution satisfies the statutory definition of an eligible institution for purposes of participation in these programs. An institution's eligibility must be properly certified by the accredi tation and institutional eligibility staff before it can receive an award of funds in these programs. The programs are administered under a terms of agreement signed by representatives of each institution and by a representative of the Commissioner of Education. The agreement specifies the institution's obligations for participation in the program. In order to receive funds, institutions submit each fall an applica tion for participation in one, two, or all three programs, in which they project the amount of funds needed for the eligible students to be enrolled during the succeeding fiscal year. These applications are submitted to the 10 regional offices of the Office of Education, where they are reviewed by panels of experts in student financial aid. The panels recommend to the appropriate regional assistant commissioner for postsecondary education levels of funding for each institution, which, in the judgment of the panel, most accurately reflect the total need of the students at the institution, considering the other sources of funds likely to be available for such students and the expected con tributions from the students' families. Upon approval by the regional assistant commissioner, a notice of recommended funding levels for each program is sent to the institution, with an explanation of any reductions made in the institution's request. The institution may ap peal any such reductions to the regional office, and if still unsatisfied, to a national appeal panel. After the final recommended funding levels are established for all institutions, the central office (specifically the program support branch of the Division of Student Support and Special Programs) totals these recommended funding levels by pro gram by State. The appropriation for each program is then distribu ted among and within the State according to statutory and regulatory criteria, to determine the actual amount to be awarded to each institu tion. After a further check to insure that all institutions for which an award has been calculated have secured the eligibility certificate pre viously referred to, the program support branch mails three copies of the award letter to each institution —one to the President, director of student financial aid, and chief fiscal officer. The payment of these awards to institutions is handled through the Departmental Federal Assistance Financing System (successor to the former National Institutes of Health Grants Payment System). The program support branch sends a copy of the award letters and other necessary obligation documents to the Office of Education's Finance Division, which then processes the obligation through the departmen tal Federal Assistance Financing System. Each institution selects and makes awards to the students who re ceive assistance under the programs, according to the established cri
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teria of student eligibility. Disbursements against these awards are then made to the students during each academic period. ; After the close of each fiscal year, participating institutions submit a fiscal operations report to the Office of Education Program Support Branch. This report collects a variety of data about the program, in cluding the amount of Federal expenditures made against the author ized award in each program. After the reports are edited and any necessary corrections have been made, the verified Federal expendi ture in each program is subtracted from the authorized award, to determine the unexpended authorization, if any, of each institution's award. The program support branch then submits these "deobligations" to the Office of Education Finance Division, which processes them through the Departmental Federal Assistance Financing Sys tem, resulting in an adjustment of the institution's authorization level in that system. Deobligations may also be processed at any other time during the fiscal year if special situations exist, such as the closing of an institution. Institutions are required by both statute and regulation to exercise due diligence in the collection of national direct student loans. At their option, however, they may contact with an outside agency to handle the billing of loans in repayment status. Those costs are not Specifically reimbursed by the Office of Education, but the institution, by statute, is allowed to withdraw from its loan fund during each fiscal year a payment in lieu of reimbursement for administrative expenses, in an amount not to exceed 3 percent of the loan volume for that year. (Similar payments are authorized in the other two programs, with a $125,000 maximum annual amount for an institution for all three programs in any fiscal year.) An institution may also choose to use an outside collection agency to pursue resistant borrowers when its own collection efforts have not succeeded ; in such cases, the outside agency may retain a reasonable portion of the amounts collected as its fee, and the remaining portion is returned to the institution for redeposit into the NDSL fund. PROGRAM
REVIEW AND MONITORING
The Office of Education attempts to insure adequate institutional ad ministration of the programs through a variety of methods. The Office of Education's regional offices hold periodic training sessions on various specific topics, such as tripartite application workshops, work shops on the annual fiscal-operations reports for the programs, spe cialized instruction in loan billing and collection techniques, and par ticipation in training meetings for. inexperienced financial aid admin istrators. Additionally, the regional program officers conduct periodic program reviews to assist institutions in improving their administra tion of the programs and to recommend an initiate corrective proce dures where required. the deficiencies in program administration are severe, the regional office may request that an audit be performed by the regional office of the Department of Health, Education, and Wel fare Audit Agency. At the present time there is no statutory or regulatory requirement for a participating institution to have audits of the three college-based programs performed on a regular basis; however, institutions were
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required to retain records until audited. In the early days of the pro grams, some audits were accomplished by the Office of Education and the HEW Audit Agency. In fiscal year 1967, the HEW Audit Agency
began accepting audits performed by private accounting firms using audit guides prepared by OE. Since that time most of the audits of the programs have been accomplished by certified public accountants, and fewer than 5 percent of the audits received are done by the HEW Audit Agency. OE has encouraged and urged institutions to have regular audits -done. All of these reports are processed by the HEW Audit Agency before they are sent to OE for necessary action. The number of pro gram audits received for the campus-based programs during the past 3 fiscal years is : Fiscal year 1973, 1,822 ; fiscal year 1974, 2,379 ; and fiscal year 1975, 2,345. The proposed regulations for the national direct student loan and college work-study programs, which were published in the Federal Register on October 14, 1975, require that institutions schedule pro this require gram audits not less frequently than once every 2 years. ment is contained in the final regulations, a similar requirement will educational opportunity grants be inserted iri the supplemental regulations. Audit reports are reviewed individually by the Program Manage ment Section of the Program Support Branch, and any findings or recommendations made by the auditor are noted. Audited expenditures are compared to expenditures reported previously by the institution to OE. Any significant deficiencies are clarified through further corre spondence with the institution. This correspondence also will ask for any additional information which may be needed to assure us that proper action has been taken by the institution to resolve program de ficiencies. During the audit review process, reference is made to the report of any program review at the institution which may have been made by staff in the Office of Education's regional offices. OE regional staff may also be involved in the settlement of the more difficult and complex audit situations, and in cases which may involve the restora tion of Federal funds. However, action to close the audits officially is taken by the Program Support Branch.
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GUARANTEED
STUDENT LOAN PROGRAM
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would like to proceed, now, with a description of the guaranteed student loan program — how it began, how it operates, how the most flagrant abuses developed, how we have begun to take steps to resolve existing abuses and to prevent future abuses, and how this subcommit tee can be of assistance in supporting necessary legislative revisions. In making my comments today, am sensitive to the fact that abuses have plagued the guaranteed student loan program — intentional abuses designed to product a profit for unscrupulous school owners or lending institutions and unintentional abuses perpetrated by all seg ments of the program's constituency because of a lack of understanding of the complexities of the program's operation. believe significant progress has been made both in eliminating abuses to the program and to the student population it serves as well as in reducing the adminis trative complexities which have discouraged greater and more correct participation by lenders.
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The guaranteed student loan program was conceived by Congress to provide, nationwide, access to private capital for postsecondary stu dents. The model for this legislation was the effort of 17 States, be tween 1954 and 1965, in enacting legislation to create State guaranteed student loan programs. Under these programs, a guaranteed loan re serve fund was established into which State appropriations and/or private contributions were deposited to be used as a guarantee for loans from commercial lenders made to students primarily attending institutions of higher education. Typically, the interest rate was very low, a needs test was required, and repayment of the loan was deferred until the student has completed school. All 17 of these pioneer pro grams are still in operation today. The total number of guaranteed agency programs now stands at 27, with 25 having reinsurance agree ments with the Office of Education. The Higher Education and National Vocational Student Loan In surance Acts of 1965 established the concept of loans from private cap ital for postsecondary studies on a nationwide basis. The statutory ob jectives of the guaranteed student loan program as set by the initial Federal legislation, and modified through amendments, are : 1. To encourage States and nonprofit private guaranteed agen cies to establish adequate loan insurance programs for students, attending eligible educational institutions. 2. To provide a program of Federal loan insurance for students or lenders who do not have reasonable access to a State or private nonprofit guaranteed agency program. 3. To pay a portion of the interest on loans to qualified students. 4. To reinsure a portion of loans guaranteed by State and pri vate agencies.
The vocational program was developed from the blueprint of thehigher education program, with appropriate changes in terminology. Both programs were merged in 1968. To encourage the continuation or formation of State or private loan guarantee agencies, Federal advances of so-called seed money were ap propriated to create or expand loan guarantee funds within all States. By the summer of 1967, the guarantee capacity in some States had been exhausted due to the total encumbrance of seed money. Since appro priations from these States were not forthcoming, it became necessary to initiate a Federal program in several States. During the remaining months of 1967 and into 1968, additional States exhausted their guar antee capacity and invited the establishment of the Federal insured loan program. The mixed administrative pattern of "Federal pro gram States" and State and private guaranteed agency programs con tinues to this date. Congress further encouraged State programs with several amend ments to the program's basic statute. In August of 1969, Congress au thorized an increase of the interest rate on the loans to 7 percent. Simi larly, in view of the rapid changes in interest rates during 1969, the Congress adopted a special allowance concept which was designed to provide lenders with an equitable yield after taking into consideration current money market conditions. This additional subsidy was set quarterly on a retrospective basis, providing between 0 and 3 percent age points in addition to the 7 percent, on all loans made and still out standing after August 1, 1969. The special allowance has now been
265 25 quarters and has ranged between a low of three-fourths of percent and a high of 3 percent in 1974. These legislative amend ments contributed immensely to the program's growth during the years 1970 to 1973.
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PROGRAM
OPERATION
Under GSLP a maximum of $2,500 per academic year may be ap plied for in most States, if the educational costs require borrowing tothis extent. Total loans outstanding may not exceed $7,500 for under graduate or vocational students, and this aggregate maximum may be extended to $10,000 for students who borrow for graduate study. The repayment period begins from 9 to 12 months after the student graduates or withdraws from school, and extends over a period of 5 to 10 years. The student is required to pay a minimum of $360 per year on all the guaranteed loans he has received during his school years and loans may be prepaid at any time without penalty. Amendments to the legislation which became effective June 2, 1974, provide that any student whose adjusted family income is less than $15,000 will automatically qualify for Federal interest benefits on. loans totaling up to $2,000, or students, having adjusted family in comes of $15,000 or greater and applying for a subsidized loan of any amount, must submit to the lender the school's recommendation for a subsidized loan based upon the school's assessment of the family's ability to pay for the cost of education. For students eligible for inter est benefits, the Federal Government will pay to the lender the total interest due prior to the beginning of the repayment period. Students not eligible for Federal interest benefits may still apply for a loan but will have to pay their own interest prior to the beginning of and during the repayment period. During the repayment period, all students are responsible for paying the 7 percent interest. An insurance premium of 1 percent each year of the total loan amount outstanding may be collected in advance under State or pri vate guarantee agency programs. By law the premium on federally insured loans is limited to one-quarter of 1 percent. The lender may col lect the premium from the borrower or deduct it from the proceeds
of the loan.
Repayment may be deferred for up to 3 years while the borrower is on active duty in the Armed Forces, is a Peace Corps volunteer or fulltime volunteer in VISTA or certain other ACTION agency programs, or for any period during which he returns to a full-time course of study at an eligible school. There are currently 19,177 lenders eligible to participate in the guaranteed student loan program. Banks, savings and loan associa tions, credit unions, pension funds, insurance companies, and similar institutions subject to examination and supervision by the State or Federal Government are eligible to become lenders. Eligible schools and State agencies may also qualify as lenders. Some 8,453 postsecondary educational institutions are currently eligible for students to attend with loans made under the guaranteed student loan program. Nearly 600 institutions located in 78 foreign countries are also eligible. Applications for guaranteed student loans may be obtained from lenders, schools, State or private nonprofit guarantee agencies or re63-570—76
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gional offices of the Office of Education. The school must complete a portion of this application certifying the student's enrollment, his costs of education, other financial aid awarded, and academic stand ing. In addition, other financial information may be required by the school for those students who do not automatically qualify for Federal interest benefits. The student completes the application form and pre sents it to a participating eligible lender. the lender agrees to make the loan, he first secures the approval of the guarantee agency. A State or private nonprofit agency "guar antees" the loans to the lender in 27 States. In other States, and for the "interstate" lenders, the Federal Government insures the loans. student defaults in repaying to the lender, either the guarantee agency or the Federal Government will pursue the borrower for recovery of the loan. the borrower dies or becomes permanently and totally dis abled, the total obligation will be discharged by the Federal Govern
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If
If
ment.
In all
cases, the
borrower must execute an affidavit that the proceeds
of the loan will be used solely for payment of his educational expenses. This affidavit must be signed by a notary public or other person legally
authorized to administer an oath or affirmation. The Office of Education honors claims for reimbursement for losses incurred by lenders on loans insured under the provisions of the Fed eral insured student loan program due to one of the following condi tions : 1. The loan is determined to be in default because of the borrower's failure to make an installment payment when due or to comply with other terms of his note under circumstances where it is reasonable to conclude that the borrower no longer intends to honor his obligation to repay, and when this condition persists (in the case of a loan repayable in monthly installments) for 120 days or (in the case of a loan repay able in less frequent installments) for 180 days. The lender must have exercised reasonable care and diligence both in the making and collec tion of loans in order to qualify for payment. 2. The borrower has been adjudicated a bankrupt. 3. The borrower has died. 4. The borrower has become totally and permanently disabled, and appropriate medical evidence has been submitted by the lender on his behalf. Also, the Commissioner reimburses to participating guarantee agen cies 80 percent of the principal amount of the loss paid by agencies to their lenders on defaulted guaranteed student loans and 100 percent of the loss incurred on all guaranteed loans due to the death or total and permanent disability of the borrower. These reimbursements are a means of assisting the agencies in maintaining their reserves for the guaranteeing of student loans made by their participating lenders. Under the reinsurance program, there is no subrogation of the loans to the Federal Government and the agency is required to effect recovery of the loss. State guarantee agencies are required to remit to the Office of Education 80 percent of all money collected from defaulted stu dents on reinsured loans. These collections are deposited in the student loan insurance fund. Collections under the Federal insured student loan program are made by 10 regional offices. As soon as an insurance claim is paid on account
267
of default,
a demand letter is sent through the computer system to the last known address of the defaulted borrower. Skip tracing procedures include the use of services provided by commercial and Government
agencies.
The collections activity consists of sending a series of letters to the defaulted borrower and, if no response is forthcoming, telephone calls are made. there is not a positive response, personal visits may be made by the collectors. When it is determined that a defaulter has the ability to repay, but refuses, the file is prepared for submission to the General Accounting Office for appropriate action which may include submittal to the Department of Justice for collection or litigation. All collection efforts are fully documented in the defaulted borrower's file. All payments of money are received and recorded as rapidly as pos sible and deposited in the student loan insurance fund.
If
PROGRAM
STATUS
To date, an estimated 8 million loans have been guaranteed or issued about 4i/g million individual students. This represents an invest ment of $8 billion in private capital. In fiscal year 1976 we anticipate the origination of 1.1 million new loans for a dollar volume of $1.6 billion making the average size of the loans $1,500.
for
The serious default situation which faces the program has high lighted several significant problem areas. Not only are we, as program administrators, concerned by the increasing dollar cost of defaults to the Federal Treasury, but also we are concerned by the reasons for these defaults — i.e., institutional misfeasance and any concomitant ad verse impact on the student borrower. The estimated gross default forecast for the Federal program in fiscal year 1976 is 19 percent. There are significant variations in com putation of this percentage — variations would briefly address at this point. When a default claim is submitted to the Federal Government, an investigation of the claim is performed to determine whether certain legal conditions have been met. When a claim is paid, the Government has purchased the loan — the loan is not simply written off. It moves from the collection process of the original lender to that of the Federal Government. Action by the Federal Government can, and does, cause loans for which claims were paid to revert to repayment status. Thus, the ultimate dollar liability of the Federal Government is reflected by the cost of the paid claim, less the Government's ability to reactivate loans. Therefore, true program losses are represented not by the rate at which lenders are currently submitting claims, but rather at the rate of true loss — loss rate after the Government has made its effort to collect the debt and failed. The word "after" is emphasized since this rate is reduced by our collection activity. The numbers associated with defaults, while representing a signifi cant financial problem for the guaranteed student loan program, point toward several more serious problem areas. would like to illustrate two representative problems — in addition to the financial concerns — and then outline the management and administrative steps we have taken to correct them.
I
I
268
I
will discuss the financial situation. The number of claims First, paid under the Federal portion of the program has increased rapidly in recent years. In fiscal year 1973, there were 82,665 claims paid ; in fiscal year 1975, there were 67,799. At the same time, guarantee agency reinsurance claims paid increased from 17,962 in fiscal 1973 to 31,150 in fiscal year 1975. The guarantee agency claims represent only a portion of their total number of defaults because the claims have been "worked" by State collectors as well as the lender prior to being sub mitted to the Federal Government. The number of claims submitted to the Federal Government by guarantee agencies approximates their actual losses. For fiscal year 1976 we have estimated obligations of $146,437,000 to pay an anticipated 146,437 federally insured default claims. We have also estimated an obligation of $55 million for 50,000 reinsurance claims in fiscal year 1976. A serious, and growing, problem evidenced by the high default fig ure centers on the student who refuses to repay his loan obligation be cause he feels the educational institution did not provide the services promised. Another problem area involves students who could repay their obligations, but refuse to honor their legitimate debt. Our initial efforts to resolve these problems have been to issue more
comprehensive and complete regulations to remove from participation in the program those educational and financial institutions which were designed solely as schemes for personal enrichment. The several pro posed and final regulations, discussed below, published by the guaran teed student loan program should do much to eliminate abuse to the student borrower. By significantly increasing the program's collection staff, we have begun to contact many of the borrowers who have defaulted. A sig nificant percentage, when advised of their legal obligation, begin re payment. The increased staff has allowed us to contact a greater number of defaulted borrowers and to advise lenders on methods for collection which will, hopefully, prevent the initial default. The guaranteed student loan program, by virtue of the immense market it serves and the burgeoning demand for its funds, has become the focal point of the concatenation of social, economic and moral changes in our postsecondary education community. With our increased staff resources, we believe we are now in a unique position to imple ment the mechanisms we have designed to protect the mandated integ rity of the program and the rights of the educational consumer. ADMINISTRATIVE
ACTIONS
ACCOMPLISHED
First, and prime, among the actions taken was the publication of final regulations on February 20 implementing statutory authority provided by the education amendments of 1972. These regulations, which are now in effect, give the Commissioner of Education the au thority to limit, suspend or terminate the eligibility of educational institutions and federally insured lenders to participate in the guaran teed student loan program. This new authority has already been exer cised in instances where program abuse was clearly identified. This regulations package further requires all participating educa tional institutions to have refund policies and make prompt payments
269
of refunds. It is not required that the
refunds
be
applied to reduce the
unpaid balance of student loans unless authorized by the student. Additional provisions of those regulations would require schools which are lenders to make multiple disbursements of the loan proceeds, so that the student would only receive funds as they are needed — a
practice which should eliminate an overwhelming debt burden if the .student withdraws or discontinues his studies. On March 25 proposed regulations were published to clarify the amount of loss the Commissioner of Education would pay on fed erally insured default claims when a refund is due the student but has the school lender files the claim, the not been paid by the school. amount of the claim will be reduced by the amount of the unpaid refund. Where a commercial lender purchases loans from a school lender, the amount of the claim will also be reduced if the refund was due prior to the transfer. Where the refund becomes due after the transfer, the claim will not be reduced if the new holder has made a diligent effort to obtain an assignment from the borrower for the right to receive the refund and if obtained, has made a diligent effort to ob tain the refund from the school. In effect, the Commissioner would reduce the amount of the claim by the amount of the refund owed to the student, and as owner of the note, would pursue the defaulted borrower for only that portion of the obligation which he legally incurred. Another of our actions to curb program abuses was to identify those schools and lenders with high delinquency rates and high default rates. As they were identified, our regional offices began to conduct more in tensive program reviews and, where appropriate, called for and ob tained the assistance of the Department auditors to conduct full-scale audits of the school lenders, schools, and commercial lenders. As these audits proceeded, if there were indications of misfeasance by officials of the institution, Department assistance was again requested and ob tained, this time from the Office of Investigations and Security. In ad dition, as reports of program abuse are received, regardless of source, they are reviewed and investigated either by our regional examiners or central office compliance staff. Where appropriate, further investi gation is carried out by the HEW Audit Agency, the Department's Office of Investigations and Security, and ultimately the Justice Department. We have also prepared detailed performance records of all par ticipating schools. These records, which are reviewed regularly by the program staff, will give an early warning of institutional weaknesses which should be investigated and/or corrected. In the past we have learned of the problems only after the institution was unable to cor rect the weaknesses — a weakness frequently resulting in closure or bankruptcy. A compliance staff in the Office of Guaranteed Student Loans has been set in place and charged with insuring compliance with the pro gram's laws and regulations by all of the program's participants. As a further action, during the past year, a new system concept has been approved and is currently being developed. This system will es tablish what we call front-end control — that is. control of actual dis bursements to schools — and rear-end control which deals with preclaims, claims and collections. A pilot of the rear-end system is in operation today in the San Francisco region. Incidentally, the regional
If
270
GAO personnel have been consulted by our data division staff duringthis implementation. This system will have an immediate impact in establishing the crucial controls over inventory, receivables, and so forth, which GAO highlights as deficient. Inventory of all claims in every region is scheduled for completion by the spring of 1976. The front-end portion of the system is being negotiated at this time and we are planning to implement a pilot operation in the San Francisco region during 1976. It is important that the committee understand what this management system will do to prevent abuses. A primary abuse is perpetrated by lenders who never have funds to lend. They merely secure student sig natures on loan documents, sell them to banks, savings and loans, and credit unions for full face value, in order to quickly take in this tre mendous surge of capital. They fail to provide educational service and then either close the school after withdrawing/expending loan funds and/or file for bankruptcy. The student and the taxpayer are the losers. We expect that the front-end —control over disbursements — portion of the system would eliminate this practice. Under the system we are thinking about all lenders would be advancing funds, not to students in a lump sum at the outset, but to a trust account. Periodic disburse ments would be made as needed to meet educational costs in two name paper — in the name of both student and school. This means lenders must have funds to lend and that students must be in school to sign the periodic disbursements. There would be no capital surges. Lenders would only get back funds they have actually disbursed themselves. Pyramiding and Ponzi type paper schemes will no longer occur. There is another benefit to front-end control. a student has left school, no valid student signature can be obtained on the two name paper. This would place OE in control of dropout problems. OE lia bility for default would be materially reduced because advances would be restricted to students in attendance. Another benefit of this system is that we will be able to secure viable accounting data for transmis sion to the centralized accounting system maintained outside OGSL. Further, validation of interest and special allowance payments to len ders would be built in when we know a disbursement is made. We will compute payments due lenders from our own file. The awkward present billing system which does not lend itself to validation would be ended.
If
ADDITIONAL STEPS TO CURB ABUSES
The Office of Guaranteed Student Loans has prepared an additional of regulations to govern lenders and their practices. These regula tions, which are presently under review at the Department level, con stitute the first major revision of existing regulations since 1970. They will clarify the obligations of lenders and assure that all important documents in the loan process are signed under penalty of law. This will permit stronger enforcement relative to false statements and/or set
misrepresentations. Another area which
will directly be addressed is the Commissioner's statutory prerogative to approve forbearance in the enforcement of a loan obligation after a lender has been reimbursed on a defaulted loan. The statute similarly provides authority for the Commissioner to com promise any such claim. We plan to draft standards and procedures
271
for
If
possible, and compromise of defaulted loans. included in our revised regulations to be published later
such forbearance
they will
this fall.
be
These then are the administrative actions which have been taken to improve and more closely manage the operation of the guaranteed student loan program. The progress, we believe, is significant and meaningful. But there are certain legislative actions which are re quired to further enhance our progress. These recommendations, contained in S. 1229 introduced on March 18 of this year by Senators Beall, Schweiker, and Stafford, would amend the Higher Education Act and the Bankruptcy Act in a number of re spects so as to decrease the number of defaults. We testified before the Senate Subcommittee on Education on this measure earlier in the year, but no further action has been taken thus far. Mr. Chairman, these are the action steps we have undertaken to im prove the administration of the guaranteed student loan program and to more closely insure that our legislated mandate is met. We would solicit your comments, suggestions, and support of our efforts. DETERMINATION
OF INSTITUTIONAL
ELIGIBILITY
Let me now turn to a discussion of how the Office of Education determines whether or not an educational institution is eligible for participation in student aid programs. Passage of the Higher Education Act and related statutes in 1965 that year launched the need for the Office of Education to determine,
compile, and prepare lists of institutions eligible to participate in various Federal education programs established under the act. Culmination of the efforts may be seen in the list of 8,677 institutions cited as eligible to participate in the largest and most broadly based Office of Education program of aid to students: the guaranteed stu dent loan program. To assist with identifying and creating this list of 8,677 eligible institutions, the Accreditation and Institutional Eligibility Staff was formed in May of 1968 to produce eligibility determinations for some 20 Office of Education programs. That staff also provides assistance to other agencies within the Department of Health, Education, and Welfare, such as the Public Health Service in relation to health train ing programs, plus affording eligibility determinations to the Depart ment of Justice, Federal Aviation Agency, Veterans' Administration, Department of Housing and Urban Development, and other Federal and State agencies. Furthermore, it engages in an extensive informa tion dissemination program to institutions, students, and the general public regarding eligibility and accreditation matters. The universe of eligible institutions in the guaranteed student loan program, which is our largest single listing of eligible institutions, can be divided into seven main categories: Foreign schools — 844; Pro prietary — 1,801; 4 year and higher — 1,887; Junior colleges and insti tutes — 1,306; Hospital schools of nursing — 456; Medical technology and related — 1,368 ; Public area vocational schools — 1,015 ; and insti tutional eligibility based upon the 1965 Higher Education Act. And the series of amendments and statutes related thereto, is linked to two broad types of Federal program assistance : student financial
272
aid and direct institutional aid or support. Student financial assistance programs include the basic and supplemental educational opportunity .grants program, the college work-study program, the national direct student loan program, and the aforementioned guaranteed student loan program. Institutional support programs include ones such as that for strengthening developing institutions, the college library support pro gram, and loans and grants for academic facilities. The term "institutions of higher education," as defined in the statu tory requirements, include public and nonprofit institutions which offer the traditional collegiate programs of study leading to a degree. The term also includes other public and nonprofit schools which offer 1-year programs of study that lead to gainful employment in recog.nized occupations such as hospital schools of nursing and other allied health and technical schools. Public and nonprofit institutions which meet all of the other specific requirements stated in the legislation, which will discuss later, are eligible to participate in institutional support programs and programs that provide financial assistance to .students attending these institutions. According to our latest figures, over 3,649 schools meet the statutory definition of "institution of higher education" and have been awarded eligibility status to par ticipate in both institutional support and student financial aid programs. Eligible proprietary schools may apply for participation in the supplemental educational opportunity grant program, the national direct student loan program, and the college work-study program. Presently, 1,759 accredited proprietary institutions are eligible to par ticipate in the basic and supplemental educational opportunity grants program, the national direct student loan program, and the college work-study program. The guaranteed student loan program provides for the definition of a special category of schools, called vocational schools, which in clude public, private nonprofit and proprietary schools which offer postsecondary occupationally oriented programs to high school grad uates and non-high school graduates. Over 3,000 of these vocational schools have been advised of their eligibility for this program. This figure includes 42 unaccredited proprietary vocational schools, which were made eligible initially prior to 1968 under the provision of the law which provides for eligibility access for unaccredited schools which do not have a recognized accrediting agency available to them. Before any school or institution may become eligible to participate in education programs administered by the Office of Education, it must meet certain minimum statutory requirements. These statutory eli gibility elements falls into three categories. The first of these cate gories relates to factual information such as type of school, length of programs, and legal authorization. The second category involves spe-cial requirements established by program administrators under broader provisions of law, through regulation specifying provisions which participating schools must meet (such as "maintenance of efforts re quirements" for library aid programs). The third category deals with the qualitative aspects of schools —or educational programs — in other words, accreditation, or one of the alternatives to accredited status. It is in administering the Office of Education's responsibilities in re'lation to the qualitative factor of eligibility — that is, that dealing
I
273
,with accreditation or its alternatives — that the greatest and most com plex problems arise. Before mentioning some of these specific prob lems, however, vested
iting
let me first discuss accreditation and the authority
in the Commissioner of Education for recognition of accred
agencies.
Accreditation is a major factor in establishing the eligibility status of educational institutions and programs to participate in the various Federal funding programs of assistance to education. It also is a unique area in the eligibility determination process, because it is a process which takes place outside the jurisdiction of the Federal Gov ernment, and it varies considerably in form and purpose, depending upon the organization conducting the process. ACCREDITATION, A BRIEF VIEW OF ITS HISTORY AND FUNCTIONS
The practice of accreditation arose around the turn of the century response to the need to upgrade educational quality and to establish definitions and standards of general collegiate and professional edu cation. It sought to execute a need that is fulfilled in many other coun tries of the world by ministries of education or other centralized au thorities, which exercise quality control functions over education. The philosophy of institutional autonomy in education, and the varying degree of control over institutions of higher education exercised by the States, also contributed to the need for this form of quality identifica tion in education which is unique to the United States. Private educational associations of regional and national scope have developed standards and procedures used in conducting peer evalua tion aimed at determining whether or not educational institutions or programs are operating at basic levels of quality. The procedures of these accrediting commissions and associations usually involve five basic steps : 1. Establishment of educational standards in collaboration with edu cational institutions and other appropriate constituencies. 2. Conduct of institutional or program self-study by applicants for accreditation under the guidance of the accrediting body ; 3. Onsite evaluation by a team of peers, selected by the accrediting body, in order to determine firsthand if the institution's objectives and the accrediting body's standards are being met ; 4. Publication of the accredited status of those institutions or pro grams which are determined by the accrediting body to have met its standards: and 5. Periodic reevaluation of accredited institutions or programs to determine whether or not they continue to meet the established stand
in
ards.
The nongovernmental accrediting agencies fall into two major cat egories — institutional and specialized. Institutional accreditation is conducted by agencies such as the commissions of the six regional ac crediting associations. For example, the Southern Association of Col leges and Schools maintains four accrediting commissions — one foielementary schools, one for secondary schools, one for vocational schools, and one for degree-granting collegiate institutions. Each regional association maintains at least one commission on higher education and one on secondary education. Two associations;
274 have established
a commission
on elementary
schools.
Institutional
accreditation applies to the total institution and signifies that the in stitution as a whole is achieving its objectives satisfactorily. Specialized accreditation is conferred by a number of organizations which are national in scope, rather than regional, and each of which represent a specialized area, such as architecture, business, law, medi cine, or teacher education. A primary purpose of specialized accredita tion is to protect the public against professional or occupational in competence. A majority of the programs evaluated by such agencies are located in regionally accredited institutions. However, most of the national specialized accrediting groups, in addition to accrediting pro grams within institutions, also accredit some specialized institutions which are not accredited by regional association commissions. Rela tively recent newcomers to the accreditation scene are the specialized agencies dealing with the private (mostly for-profit) vocational sector of education, including business, cosmetology, home study education, and trade and technical education. These agencies deal with education located outside of the college and university sector, and therefore, with varying emphases, evaluate both institutional and programmatic as pects of their educational universe. HISTORY OF CRITERIA FOR LISTING NATIONALLY RECOGNIZED ACCREDITING
AGENCIES
AND ASSOCIATIONS
Although the Office of Education has dealt with accrediting agen cies throughout much of its history, it was not until the enactment of the Veterans' Readjustment Assistance Act of 1952 (Public Law 82550) that the U.S. Commissioner of Education was required, for the first time, to publish a list of nationally recognized accrediting agencies and associations which he determined to be reliable authority as to the quality of training offered by an educational institution. This statutory provision was subsequently restated in at least 14 major Federal aid-toeducation legislative acts. In October 1952, subsequent to the passage of the Veterans' Readjustment Assistance Act, Criteria for the Recog nition of National Accrediting Agencies, and an initial list of 28 agencies so recognized were published. By 1967, there were 36 agencies listed by the Commissioner. The 1952 criteria remained in effect until January 16, 1969, when the current criteria for determining nationally recognized accrediting agencies and associations were published in the Federal Register. By 1972, the Commissioner's list of recognized accrediting agencies had grown to 47, and at the present, 63 agencies are listed. Some 10 addi tional accrediting agencies are in varying stages of petitioning the Commissioner for recognition and listing. Revised criteria for Nationally Recognized Accrediting Agencies and Associations have been published on August 20, 1974, which seek to insure the functionality, responsibility, reliability, and autonomy of nationally recognized accrediting agencies. A further revision of the criteria is under development. More specifically, these elements include the following: a. Functionality. — An accrediting agency should be regional or national in its scope of operations and maintain a clear definition of its activities, both as to geographic area and nature and type of insti
275
"tutions or programs covered. It should have adequate administrative and financial support to carry out its accrediting programs, and should liave access to a sufficient number of competent and knowledgeable personnel to participate on visiting teams, on its decisionmaking com mittee, and as consultants. The agency shall also have developed ,clearly written procedures for each level of accreditation status, in cluding institutional or program self-analysis and on-site reviews by a
visiting team.
b. Responsibility. — Considerations here include : A clearly identified need for accreditation by the agency in the field in which it operates; responsiveness to the public interest; adequate provisions for due process in accrediting procedures; demonstrated capability and will ingness to foster ethical practices among the institutions or programs which it accredits ; a program of evaluation of educational standards. c. Reliability. — The agency demonstrates wide acceptance of its policies, procedures, and decisions: Regular review of its standards and procedures ; experience as an accrediting agency ; and representa tion in its policy and decisionmaking bodies of the community of interests directly affected by the scope of its accreditation. d. Autonomy. — The agency must demonstrate the autonomy and independence of its decisions from outside influences. It is noteworthy that these revised criteria place increased emphasis upon accrediting agencies' responsibility to the public interest and their reliability of operations. Whereas the various versions of the Criteria for Nationally Recog nized Accrediting Agencies and Associations have been the Office of Education's instrument for directly supporting constructive change in the area of accreditation as it relates to the eligibility process, the Office of Education has funded or supported a number of projects over the past 6 years designed to improve indirectly the effectiveness of the eligibility determination process : 1. Study of Accreditation of Vocational-Technical Curricula in Postsecondary Institutions, conducted by the Center for Research and Development in Higher Education of the University of California under contract with the Office of Education ; 2. National Study for Accreditation of Vocational/Technical Edu cation, conducted by the American Vocational Association under con tract with the Office of Education ; 3. Study of Licensure and Related Health Personnel Credentialing, conducted by the Department of Health, Education, and Welfare ; 4. Study of Accreditation of Selected Health Educational Programs, sponsored by the American Medical Association, the Association of Schools of Allied Health Professions, and the National Commission on Accrediting; 5. Model State Legislation for Approval of Postsecondary Educa tional Institutions and Authorization to Grant Degrees, developed by the Education Commission of the States through funds supplied by the Office of Education, the Veterans' Administration, and the De partment of Defense ; and 6. Study of Private Accrediting and Public Funding, prepared by the Office of Education under contract with the Brookings Institution and the National Academy of Public Administration Foundation.
276 REVIEW PROCEDURES FOR LISTING NATIONALLY
RECOGNIZED
ACCREDITING
AGENCIES
Those accrediting agencies requesting recognition by the Commis sioner of Education undergo intensive review by the Accreditation and Institutional Eligibility Staff in the Office of Education and by the Commissioner's Advisory Committee on Accreditation and Insti tutional Eligibility, in order to determine whether or not they com ply with the Criteria for Nationally Recognized Accrediting Agencies and Associations. Accrediting agencies seeking recognition by the Commissioner, or those undergoing regular periodic review, file petitions with the Di rector of the Accreditation and Institutional Eligibility Staff. The Staff reviews the petition and may take various investigative steps in order to prepare a summary report to the Commissioner's Advisory Committee concerning the applicant's status with the Criteria for Na tionally Recognized Accrediting Agencies and Associations. At the time of the Advisory Committee review, agency representatives, and interested third parties are offered time for brief oral presentation before the Committee. The Advisory Committee recommendations regarding petitioning accrediting agencies are forwarded to the Com missioner of Education for his review, after which the applicants are informed of his decision. Agencies listed, or recognized, by the Commissioner are normally reviewed every 4 years. Developing agencies may be given a shorter period of recognition, indicating the Commissioner's determination that such agencies have potential to eventually fulfill the criteria. The Commissioner exercises the right to review at any time any recognized agency which has developed problems relevant to its compliance with the criteria. Appeals of the Commissioner's decisions are heard by specially con stituted panels of knowledgeable nongovernmental persons who are not members of the Advisory Committee. These hearing panels report directly to the Commissioner, who acts upon their advice. The Advisory Committee performs a key role in the process of recognizing accrediting agencies and associations for the purpose of determining institutional or program eligibility for Federal funding programs. The Committee was established by the Secretary of Health, Education, and Welfare in 1968 and was subsequently chartered under the Federal Advisory Committee Act (Public Law 92-463). It is composed of 15 members from various segments of the secondary and postsecondary education community, student/youth population, 'State departments of education, professional associations, and the general public. The Committee is advisory to the Secretary of Health, Edu cation, and Welfare and the Commissioner of Education. Its functions include the authority to : 1. Review all current and future policies relating to the responsi bility of the Commissioner for the recognition and designation of accrediting agencies and associations wishing to be designated as na tionally recognized accrediting agencies and associations, and recom mend desirable changes in criteria and procedures; 2. Perform similar functions relevant to the Commissioner's author ity to recognize State agencies for approval of public postsecondary education and nurse education
;
277
Advise the Commissioner of Education in the formulation of all current and future policy relating to institutional eligibility; 4. Review legislation affecting the Office of Education's responsibil ity in the area of accreditation and institutional eligibility and recom 3.
mend needed changes ; 5. Recommend to the Commissioner of Education any action regard ing applicant national accrediting agencies and State vocational and nurse education approval agencies ; 6. Develop standards and criteria for specific categories of voca tional training institutions and institutions of higher education which have no alternative route by which to establish eligibility for Federal
funding programs
;
Advise the Commissioner regarding the award of degreemaking status to Federal agencies and institutions. 7.
STRENGTHS, WEAKNESSES, AND PROBLEM AREAS IN THE PRESENT SYSTEM
I
turn now to several key observations about the dynamics of the present system, gleaned from the Office's 8 years' experience in moni have described above. These ob toring the eligibility mechanism in the of spirit enlisting your continued support servations are offered for the improvement of the system.
I
1.
THE RELATIVE AUTONOMY OF THE ACCREDITING
AGENCIES
Accreditation has been written into Federal legislation as a quality control device in order to help insure the Government's investment in postsecondary education, and, even more importantly, as a means of aiding students and others in identifying institutions and programs deemed to be educationally worthy. We must constantly bear in mind, however, that the accrediting agencies are private, independent, voluntary agencies having discrete, albeit laudable, purposes which do not always coincide neatly with the objectives inherent in Federal aid to education. Accrediting agencies are committed philosophically to stimulation of institutional or programmatic uplift through a tradi tional pattern of expert peer review. They have no legal authority to require compliance; they work instead by persuasion to maintain understanding and acceptance of their role and function by their con stituents and the general public. All accrediting agencies are limited in funds and staffing, and rely heavily on volunteer labor from member organizations. All are now deeply aware of, and some have already experienced, a marked vulnerability to litigation, which they are ill prepared to engage in successfully. One aspect of the Office's relationship to accrediting agencies in volves the processing of complaints against accredited schools and schools which are eligible for participation in federally funded pro grams of assistance to postsecondary education. Complaints about schools — whether accredited or nonaccredited — are directed to the Ac creditation and Institutional Eligibility Staff from many sources. These include parents, consumer organizations, students, USOE regional offices, other divisions within OE, other Federal and State agencies, the Congress, and the White House. These complaints in clude such matters as misrepresentation by salesmen, inadequate or
278 late refunds of tuition, poor quality of instruction or equipment, and enrollment of persons incapable of benefiting from the instruction. Although the Office is not empowered to exercise direct control over educational institutions, it does seek to determine, in the case of ac credited schools, whether or not a possible violation of the accrediting agency's standards has occurred in such complaint cases. The staff reviews each complaint and, if an accredited school is involved, directs a copy of the complaint to the appropriate accredit ing agency with a request that the agency review the matter and report its findings to the staff. The staff, in turn, reviews the report of the accrediting agency and informs the complainant of the agency's find ings. In the event that the staff is not satisfied that the accrediting agency has investigated the matter thoroughly or if the complainant provides additional substantive information relating to the complaint r the staff may ask the accrediting agency to review the matter further. Although the staff usually directs complaints against accredited schools to the appropriate agency for investigation, the staff may, aft times, correspond directly with schools regarding alleged educational malpractice. The relevant statutes speak only to the Federal reliance on the out puts of the accrediting agencies for eligibility purposes, and those out puts are the lists of accredited institutions or programs maintained by every accediting body. Because of the vast sums of Federal money which ultimately flow through reliance upon the accrediting mech anism, however, the Office has deemed it only prudent to establish, and gradually intensify, Federal oversight of the operations of those ac crediting agencies recognized by the Commissioner. One of the press ing questions right now is just how far this oversight can and should go in order to achieve realistic assurance that both the student's educa tional rights and the taxpayer's dollars are protected, while avoiding unwarranted Federal intrusion into the educational process. 2. PROBLEMS
OF CONSISTENCY
WITH A
HETEROGENEOUS
UNIVERSE
Because of the need for consistency in administration, there is a education" as a homogeneous tendency to think of "postsecondary entity. This frame of reference has been reinforced by an active Fed eral posture against discrimination of any sort against any of the various categories of schools. In reality, however, the postsecondary educational universe is a set of heterogeneous subsystems. With the establishment of each new funding program, OE has found the problems becoming more complex in sorting out the real from the imagined differences among institutional types, particularly as cate gorized by type of control : public, private nonprofit, and proprietary, or profitmaking. Though the educational funding statutes make some provision for stricter treatment and limited benefits for profitmaking schools, they are silent on the extent to which the public should be protected from unethical school operators who are more interested in profits than in education. The Office of Education has been examining the problem of need and justification for valid, differentiated stand ards in this regard for some time now. From a practical standpoint, OE has determined that one feasible attack upon this problem can be made by shoring up educational consumer protection in general.
279 3.
EDUCATIONAL CONSUMER PROTECTION
One of the most important issues facing higher education today — and also, of course, facing the Federal Government in its supportive efforts on behalf of higher education — is the matter of insuring that students receive the educational offerings for which they contract. In other words, we all need to assure that the public, students, and Fed eral and State funding programs are not unscrupulously victimized "by unethical operators in the field of higher education. Too much of this has happened already for us to be complacent about this issue. Therefore, we in DHEW believe that a stronger and more concerted effort is required by accrediting agencies, State agencies and by Fed eral agencies in ascertaining the probity of institutional operations and in safeguarding legitimate student interests. In DHEW, we are working to address identified problems in this area through a variety of techniques. One of the most important of these efforts lies through the technique of utilizing institutional eligi bility for funding provisions in such a form that equity for students is heightened, and public funds are provided. Within this frame of refer ence, then, DHEW has been studying the desirability of new eligi bility for funding requirements for higher education institutions which — among other things — would mean that institutions, in order to receive Federal funds, would be obligated to provide students with meaningful data about student attrition and graduate success, to provide students with equitable tuition refunds, and to engage in ac ceptable business and ethical practices in the handling of funds and
of students.
ACCREDITATION AND ELIGIBILITY
The Accreditation and Institutional Eligibility Staff is being re organized in order to upgrade its visibility and to better enable it to perform its functions. For some years now, the Office of Education and the Department of HEW have been concerned about what is commonly referred to as the "degree mill problem" in the United States. Indeed, the Office has attempted to spearhead attacks upon the degree mill problem — as evidenced by publication of the brochure entitled "Pollution in Higher Education, and Financial and Other Support for Development of the Model State Legislation for Approval of Postsecondary Education and Authorization to Grant Degrees," which was published by the Education Commission of the States in June 1973. The Office has also encouraged and developed informational articles on this subject for public consumption which have been published in newspapers and magazines. Furthermore, officials of the Office have consulted with State officials regarding statutory and regulatory strategies for ad dressing problems in this area, and they have served as witnesses in Federal Trade Commission proceedings against degree mill operations. As we have become more sophisticated in recent years regarding the problems which contemporary America society faces regarding over sight needs relative to private degree-granting postsecondary educa tion, we — in the Office of Education — have begun to conceive of, a tripartite design for addressing the needs in this area. By tripartite design, we mean that complementary elements: (1) State chartering, licensure or approval; (2) accreditation by a na tionally recognized accrediting agency; and (3) selective Federal
280
oversight through eligibility requirements for funding program par ticipation, and the work of such agencies as the FTC and Postal Service. Our experience has shown that whenever one or more of these three elements is defective, the probability of educational consumer abuse increases.
Too often, Federal statutes and regulations governing the participa tion of postsecondary schools in Federal aid-to-education programs are interpreted as equating "accreditation" with "eligibility," thus over looking the important coequal statutory responsibility of the individ ual States to effectively charter, license, and regulate schools. More precisely, accreditation by itself is only one of a series of requirements which must be met to establish "eligibility" for USOE administered programs. In fact, statutory definitions of eligibility for postsecondary schools ordinarily require two concurrent but independent judgments; one from the States and one from the accrediting agencies. Because chartering, licensure, and approval practices vary widely have noted earlier) and several other among the States, USOE (as Federal agencies in 1972, provided consultative and financial support for the development by the Education Commission of the States of "Model State Legislation by approval of Postsecondary Education and Authorization to Grant Degrees." The purpose of the "Model Leg islation," published by ECS in June 1973, is to enhance, embellish, and reinforce the States capacity to regulate and license postsecondary educational institutions both proprietary and tax exempt. Since its publication and distribution to the States, the "Model Legislation" has been adopted in several States and is under review for possible adoption in other States. The problem is one in which Federal statutes and regulations, while requiring State authorization of postsecondary schools and institutions, do not address the fact that quality of oversight varies from State to State. The problem, we believe is addressed by the "Model Legislation" which focuses upon standards whereby the States can insure that institutions adhere to approved practices. A second, but related issue pertains to the apparent communication gap which exists among the parties involved in the tripartite system of oversight. On April 30, this year, the Office convened a National Conference on Institutional Eligibility which strongly recommended that the Office consider the need for, and ways to implement an effec tive communications network among Federal, State, and accrediting officials responsible for certifying that accredited and/or approved institutions are acting in the public interest. The Office of Education has contracted for an important study which is designed to strengthen the abilities of State agencies, Federal agen cies, and private accrediting bodies in their efforts to safeguard the legitimate interests of educational consumers. A major thrust of this study will be that of developing means of rapid and continuing shar ing of information on the ethical practices of educational institutions enrolling students supported by federally funded educational pro grams. Another expected outcome of the study is a procedure for informing prospective students (the educational consumers) about institutions which victimize their students. And, finally, we are preparing to launch a 2-year study this spring which will assess the legal and administrative structures of the various States relative to their oversight functions in the overall area of post
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secondary education. To the extent that the study identifies broad areas for improved Federal-State cooperation in this area, we hope to work •with the States in addressing these areas. Senator NUNN. You may proceed with your oral testimony. Mr. BELL. Thank you. Over the past 10 years numerous changes, additions, and refine ments have been made in Federal student aid programs — including the Education Amendments of 1972 which created the basic educational opportunity grant (BEOG) program and the State student incentive grant (SSIG) program, and converted the educational opportunity grant (EOG) program into a new program designed to supplement
BEOG.
Specifically, since 1965, nine separate laws have been enacted which have involved significant changes in the guaranteed student loan (GSL) program. The six most significant statutes are reflected on the attached chart with the major provisions of each shown in somewhat abbreviated fashion [see exhibit 91]. These numerous and continuous changes to the program contribute to confusion, complexity, and misunderstanding by students, schools, and lenders, and affect the administration of the program itself. Proper management of the program could be more readily achieved if stability and continuity in the legislation were introduced. We know that all the legislation authorizing these programs expires this i year. It is my hope that Congress will work to simplify these programs rather than expand this enormous tangle of legislation. Since these hearings have not touched at length on the administrative problems created by the legislation we must administer, would like to discuss this factor in my presentation today. suggest that at least some measure of the problems you are con cerned about is caused by legislative changes which permit and even encourage extensive participation by many institutions which should not be in the programs. Senator NUNN. certainly agree that we need a legislative review,
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This week I have stated several times that whatever is wrong, as far as laws are concerned, is our job to change and we should make
every effort to correct them. In subsequent testimony are you prepared to specify what those leg islative changes should be? Mr. BELL. Yes ; we are. Senator NUNN. Is that part of your statement today ?
Mr. BELL. Yes. Some of this will
statement, however.
be
in the longer statement, not in the abbreviated
Senator NUNN. Thank you. GROWTH
OP THE PROGRAMS
Mr. BELT,. All of the various Federal student aid programs have expanded dramatically over the past 10 years. For example, the GSL program is now of tremendous size — it is the largest single contributor to student financial aid provided by the Office of Education. 63-570—76
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Over 5 million students attending some 8,700 educational institu tions have secured more than $8 billion in loans from approximately 19,000 private lenders. Only one-half of the program is federally insured. The remainder of funds are guaranteed by 27 State and private agencies, all but 2 of which are 80 percent reinsured against loss by the Federal Government. It is important to emphasize at this point that we are talking about private capital under a Federal guarantee of repayment. Any program of this size and nature involving millions of students, thousands of lending and educational institutions, and several differ ent agencies has numerous day-to-day operational and administrative requirements which must be met. Failure to meet these needs has led to the problems we are currently experiencing in the program. LIMITED STAFF
RESOURCES RELATIVE TO ADMINISTRATIVE
RESPONSIBILITIES
The program grew at an explosive rate. The attached charts show the dollar value and number of commitments made since the program's inception in fiscal year 1966 [see exhibits 92 and 93]. Cumulative volume reached $2.2 billion by the end of fiscal year 1970 and more than doubled 2 years later to $4.6 billion, and as of this date is over $8.8
billion. While the program grew, staffing to manage the program lagged significantly behind management requirements. An appreciation of these staffing deficiencies can be gained by comparing the attached charts on authorized staffing levels [see exhibit 94] with the charts depicting program growth. As we appraise the past record of the Office of Education to man age this program, it must be kept in mind that when the floodgates were opened in 1968 to allow virtually every kind of institution op erating on an interstate basis to lend under the program — public, private, profit, nonprofit, noncollegiate. and correspondence schools — we had only 50 persons on the staff. Keep in mind that with this action, Congress put us in the loan business in every city and town in the United States. Compare this staff with what any nationwide billion-dollar business would have out in the private sector. This impossible demand on a small staff must be kept in mind as our performance is appraised and charges of mismanagement and bungling are leveled against us. Senator NUNN. What did your budget request in terms of addi tional staff for the last 2 or 3 fiscal years ? Mr. BELL. haven't been here except for 11/2 years. So have only been able to implement this year's budget. Last year's budget was put in before T arrived. But this year's budget has asked for 780-some
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Senator NUNN. That is compared to how many now ? Mr. BELL. Wo have a total of about 3,000 in the Office of Edu cation. That is the total Office of Education including our 10 regional offices. Over 400 of them are in the guaranteed student loan program. That is 477. It is a nationwide program with the dollars and volumes I am talking about.
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Senator NUNN. You have
400
in the program now. How many
additional positions did you request? Mr. BELL. We asked for 780-some positions for this in our current
budget submission. Senator
particular
NTTNN.
FOP the
entire Office of Education
or for this
Mr. BELL. No. That is for the overall Office of Education. Senator NUNN. How many of those 700-odd positions do you envision would go into this program ? Mr. BELL. I would have to ask Mr. York to respond to that. He liasn't been sworn. Senator NUNN. Go ahead, Mr. York. Why don't you all stand? We will have questions as we go along. Do you and each of you swear the testimony you are about to give before this subcommittee will be the truth, the whole truth, and nothing but the truth, so help you God ? [Witnesses sworn
en masse.]
TESTIMONY OF CHAELES M. COOKE, JR., SPECIAL ASSISTANT TO THE SECRETARY FOR STUDENT ASSISTANCE, DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE; EDWARD T. YORK, JR., DEPUTY COMMISSIONER, OFFICE OF MANAGEMENT, OFFICE OF EDUCATION; JOHN D. PHILLIPS, DEPUTY COMMISSIONER, BUREAU OF POSTSECONDARY EDUCATION, OFFICE OF EDUCA TION; RICHARD A. HASTINGS, DEPUTY ASSISTANT SECRETARY FOR LEGISLATION (EDUCATION), DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE; PETER BOUXSEIN, ACTING ASSIST ANT GENERAL COUNSEL FOR CIVIL RIGHTS; KENNETH KOHL, ASSOCIATE COMMISSIONER, OFFICE OF GUARANTEED STUDENT LOANS, U.S. OFFICE OF EDUCATION; TOGETHER WITH HON. T. H. BELL, U.S. COMMISSIONER OF EDUCATION Senator NUNN. Go ahead, Mr. York. Mr. YORK. Of the number Commissioner Bell refers to, approxi mately 167 in our budget submission for fiscal year 1977 are additions to the guaranteed student loan program.
Senator NUNN. About 167. Mr. YORK. Approximately 167 ; yes, sir. Senator NTTNN. You would be increasing it by approximately
percent
?
35
Mr. YORK. By approximately 35 percent. We now have approxi mately 477 people in the program. This would add an additional 167 to the program. Yes, sir. Mr. BELL. Staffing of significance did not begin to become avail able until 200 positions were authorized with the 1974 Supplemental Appropriations in June of 1974. might digress from my statement, Mr. Chairman, it takes ap proximately 6 months after you get staffing authorization to go through the civil service procedures to bring staff on board. At least that is our experience in the Office of Education. Senator NUNN. Can anybody with you say what your predecessor requested in the budget ?
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I think can address that partially. have with the Office slightly longer than the Commissioner, only a few
Mr. YORK. Senator, been
months longer. In 1974, the first portion that can speak to personally, was the supplemental request for a supplemental appropriation in 1974 in which we requested 250 positions for the guaranteed student loan
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program. At that point in time the staffing of the program was less than 157. We were authorized by the Congress 200 positions rather than the 250 we requested. In fiscal year 1975, the Office of Education had an overall for approximately 350 additional positions for the Office of tion overall, 72 of those would have gone to the guaranteed
request
Educa
student
loan program. We were advised by the Appropriations Committees that because of the consolidation that was taking place, that we should take those positions out of those we were saying from consolidation rather than granting us any additional positions. In fact, the consolidation was only partially affected in that year. We found it difficult to reallocate positions that were not being saved through consolidation. In 1975, 56 positions were assigned to the guaranteed student loan program. In fiscal year 1976, we had a request for 167 positions for the Office of Education, 117 of those were for the guaranteed student loan program. In our 1976 appropriation we had been given 100 positions in total and advised that the majority or most of these positions should go to the guaranteed student loan program. We have in fact assigned 53 of that 100 to the guaranteed student loan program. Senator NUNN. Thank you, sir. Mr. BELL. could just say this, Mr. Chairman : My line of ex planation here, don't want to be construed to indicate that am alibiing about the management in this program. There are manage ment problems that won't be solved by staff. They have got to be solved by better management. might just explain that one of the problems in the Office of Edu cation is turnover of top leadership. For example, am the fourth Commissioner in 6% years. On my left, the Deputy Commissioner for Postsecondary Education, that manages the other student aid took programs, is the third one we have had in that position since office in June of last year. want to We have had enormous turnover in the agency. Again, give that as a statement of fact about the problems and getting continuity, and digging into a complex program like this. don't want to alibi at all about the fact that many of the man agement problems that have been brought out in this hearing are indeed serious management problems. don't want to allege that haven't during my stewardship, which is just over a year, that made errors because want to say to you and .to others here that we have made some mistakes in this program. We are trying conscientiously to do the best job we can to manage what is an enormously large and complex program that is constantly amended and changed.
If I I
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want you to know Senator NUNN. appreciate that attitude. Certainly Congress has responsibility, too. We are here to find out what is wrong and how we can have you correct the administrative problems and have you point out the legislative problems. We are not here to punish or embarrass anyone, but think the facts need to be laid out so we do know what is wrong and to insure some
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creative remedies. think that is the attitude it will So appreciate that attitude. take in order to solve these problems. Mr. BELL. The reason have gone into this at length, Mr. Chairman, is as know the practice that is not uncommon is to alibi and blame will proceed with my other factors. don't want to alibi a bit. statement. Senator NUNN. That is not unique to the Department of Education. It permeates up here, too. Mr. BELL. It is clear that neither we nor the Congress recognized the size and complexity of this program and the potential problems that would occur by not providing adequate staffing and resources. Until enactment of the Education Amendments of 1972, any educa tional institution which met the statutory definition of "eligible insti tution" was automatically eligible for participation in the guaranteed student loan program. There was no statutory basis for regulating the practices of educa tional institutions nor for terminating a school or college's eligibility unless they no longer met the statutory eligibility requirements. Many of the defaults now being experienced in the GSI program are attributable to loans made during that period. However, the Education Amendments of 1972 authorized the Com missioner to issue regulations setting forth standards and requirements that educational institutions had to meet in order to participate as eligible educational institutions (that for their students to receive loans) Educational institutions that do not comply with these regulations are subject to having their eligibility limited, suspended or terminated. might depart from my prepared statement to indicate that these amendments were made in 1972 that gave us authority to promulgate those regulations. We just got those regulations in place earlier this year. So there was lapse of that length of time up until early 1975 before the regulations were in place. Senator NUNN. Are those what we call quality controls? Are those regulations to give some control over the quality of education at the so-called eligible institutions? Mr. BELL. The GSLP regulations do not address themselves to the quality of education but to the administrative practices of educational institutions in such things as records kept, reports required, refund policies, disclosure of information to prospective students, and ad missions policies. The subject of quality and scope of educational offerings and adequacy of facilities and faculty left primarily to the accrediting commissions. For the Office of Education to review and regulate these latter aspects would require substantial staff that would be sophisticated in a vast number of subject areas.
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I would indicate that met earlier this week with a private proprie tary school and their counsel in my office because they had been sus pended from the program because they had lost their eligibility under the accreditation procedures that we have developed. But would indicate that those procedures are relatively recent vintage in this regard. But I mention this as the place where we are trying to bring some of the quality factors into place. Senator NUNN. Do you now have the legislative authority to im plement a quality control on the institutions that are deemed eligible by your Department ? Mr. BELL. Not except through the accreditation process. The quality control only comes there. The accreditation procedure works like this: Congress has authorized the Commissioner, has directed the Commissioner to approve accrediting associations, and the accrediting
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associations approve the school. We approve the standards which the accrediting association has to require of their member schools. So it is through that indirect method or third appointment that we get into these quality factors, and the tradition in accrediting schools is to get into such things as teacher-pupil ratio, adequate science laboratory equipment, adequate library references, and this sort of thing. Senator NTTNN. But you have another type of eligibility in addi tion to the accreditation, don't you ? Don't you have direct eligibility by your department beyond the accreditation process? Mr. BELL. Yes. Mr. Chairman, we will be touching on that a little bit later in my statement. But you may still feel that isn't an adequate answer, and you may want to come back. for lim We would support the extension of this provision — that iting, suspending, and terminating — to the other student financial aid
a
programs. We would not favor limiting the applicability of this provision only to certain categories of educational institutions, but we would advocate authority to make rules that apply only to institutions which are obviously high risks from the standpoint of accountability for Federal funds. The authoT-izing legislation for the guaranteed student loan program generally places lenders in two broad categories: regulated and nonregulated. By law, those lenders which are subject to both the ex amination and supervision of State or Federal agency may partici
it
pate as lenders. This category includes commercial banks, savings and loan associa tions, credit unions, and mutual savings banks, all of which are subject to periodic examination and supervision as lending institutions. The statute also permits State agencies, educational institutions, pension funds, and insurance companies to qualify as lenders. How ever, none of these lenders are subject to examination and supervision as lenders by any State or Federal agency which has responsibility for lending institutions; therefore, has been necessary for the Office of Guaranteed Student Loans to assume that function in cooperation with the HEW Audit Agency. Proposed regulations, which are currently being developed for pub lication soon in the Federal Register, will strengthen criteria which
287
will have to meet to qualify for both initial and continued program eligibility. Senator NUNN. We have had a suggestion this week that there be no lenders other than those that are regulated by State or Federal agencies which would really be financial institutions. In other words, the statement has been made with some degree oi' logic that a school itself should not be a lender. What is your opinion on that? Mr. BELL. agree with that, Mr. Chairman. We have proposed that in legislation that is now before the Senate. Senator NUNN. Is that in the form of a legislative proposal before the Senate now ? am indicating here that that applies to proprietary Mr. BELL. schools only, that proprietary schools cannot always be lenders. There is the inherent potential for conflict of interest in this case. It may be subject to some discussion as to whether or not other schools ought to. Some institutions with large endowments have been able to use their funds for students loans. Some regular, long-established institutions like Harvard, Stanford, University of Chicago, and others of that quality and level. We hadn't proposed at this point to have legislation that would prohibit them from using their funds as lenders. These regulations will be more stringent than those for lenders who are already subject to scrutiny as lenders by Federal and State bank examiners. Once they are effective, these provisions should do much to improve the quality of all lenders participating in the program. such nonregulated lenders
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CURRENT STATUS
The problems we now face in this area are being addressed by the Office of Education as best we can with our limited resources. But keep in mind the volume ; it is a multibillion-dollar program assisting over 5 million students through 19,000 lending institutions. The new staffing authorized for the GSL program, together with the reorganization and new management brought into this program in the last year, have enabled us to begin to identify these and other problems and begin to take necessary actions. The remainder of my testimony outlines the many steps taken by management during the past year to improve the administration of all of our student assistance programs. GUARANTEED
In order to
STUDENT
LOAN
PROGRAM
manage the GSL program, we have Associate Commissioner who has been on the job for a little more than a year. We have transferred the program to the Deputy Commissioner for Management. It used to be under the Deputy Commissioner for Higher Education. New management, established in the past year, has been working to ond most of these abuses. Following are five significant steps which
employed
more effectively
a new
we have taken
Design of
:
a new data management system : During the past year, a new system concept has been approved and is currently being devel 1.
oped.
This system establishes what we call front-end control
;
that
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:
is
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control of actual disbursements to schools; and rear-end control, which deals with proclaims, claims, and collections. A pilot of the in operation today in the San Francisco region. "rear-end" system Incidentally, the regional GAO personnel have been consulted by our data division staff during this implementation. This system will have an immediate impact in establishing the crucial controls over inven tory, receivables, and so forth, which GAO highlights as deficient. scheduled for completion Inventory of all claims in every region will Require periodic the addition, the of 1976. In system spring by disbursement, thereby preventing both students and lenders from skipping with the total amount of the loan at the outset and allow validation of interest and special allowance payments due lenders, major problem which we have with the present thereby eliminating
billing system.
a
a
6,
is
is
:
2.
Refinement of the lender population A sizable problem faced that there are many lenders already in the by new management program with poor performance records who do not wish to leave it. The problem began years ago with the absence of proper guidance and control of lenders. We have faced this issue squarely and have begun -to identify those lenders with poor performance trends. A completely new performance report was instituted, effective June 30, 1975. This report provides complete data on past due accounts in numerous categories. Although there has been some resistance by certain groups of lend basic tool for necessary collection of ers, we feel that this form performance data. this second item that states "allow Senator NUNN. On page validation of interest and special allowance payments due lenders, major problem which we have at the present thereby eliminating
I
notice this
is
billing system."
now?
in the future
tense.
You don't have that implemented
is
?
Mr. BELL. Would you respond to that, Mr. York Mr. YORK. No, sir. That in the conceptual design of the system.
At
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is
it
is
the present time the interest payments are made to lenders and special allowance payments are made to lenders based on the billing that they made to the Office of Education, that we have very little basis for ability to verify whether correct or not correct. Senator NUNN. Of course, the horror story we have heard this week half or so after West Coast Schools closed they sent year and you billing for interest. Am to understand that right now if you were to get another one of those billings for interest from West Coast Schools tomorrow
morning that Mr. YORK.
it
is
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if
?
it
would be paid would hasten to say that was from West Coast believe at this point would not be paid. But Schools, possible for lender to in fact bill us improperly. This has l>een borne out by reviews by the HEW Audit Agency and GAO has commented on this also.
19,000 lenders.
a
a
it
as We recognize problem. At this point, we are in position of finding ourselves in order to correct that problem to have to audit
289
We clearly do not have the ability to do that. The system design, the concept that we are attempting to put in place will in fact give us the control of all disbursements and at that point the verification of what the billing will be will come from our records rather than the lenders' records. It will be a situation of 19,000 lenders auditing us rather than us trying to audit 19,000 lenders. Senator NUNTST. What would happen if you got this West Coast Schools invoice tomorrow morning for interest* Who is responsible for blocking that? What steps have you taken even this week to do that? Mr. YORK. The interest billing would come into the Office of Guar anteed Student Loans headquarters portion of the Office of Guaranteed Student Loans. Specifically, a provision that has been put in place to assure that a payment has not been made to West Coast Schools, would have to ask Mr. Kohl, who runs that office on a day-to-day basis for me, if he could respond to that question. believe he can handle the detail -to explain how this Mr. BELL. think it is a very pertinent question and one works, Mr. Chairman. we have got to explain better than we do at this point. Senator NUNN. Fred Peters is in the hospital. He may be getting imaginative there. He may send in some more billings after reading this testimony. Mr. KOHL. Would you please repeat your question ? Senator NUNN. Let us suppose Mr. Peters in his former capacity with West Coast Schools were to send another billing that you re ceived in the mail tomorrow morning. Let's say it was for $5,000 for am sure he still has interest owed and it was on the proper form. some. What would you do about it? How would that payment be blocked ? Mr. KOHL. The red flag has been run up for some time on West Coast Schools. The branch transaction and billing which handles that would pull the request and throw it on my desk before anything on West Coast Schools for some time has been going through me. wouldn't pay it. sir. The interest billings processing staff has a list of lenders which are checked — including West Coast Schools— in the initial manual review and in the review of the computer edit. The West Coast Schools' bill ings would be caught at the time the bills were scanned in the initial processing, if missed, or during the staff review of the listings from the first computer edit. In certain cases — including West Coast Schools — we have deleted the lender names from the computer file. Any transaction on these lenders will be rejected. Mr. BELL. think, if may get in here, Mr. Chairman, that the chairman's question is using West Coast Schools, but they are a think he would like an explanation about celebrity institution now. other institutions that don't have this notoriety, low profile, that come through the system. He is asking will we go on and blithely pay the claims for an institution. Senator NUNN. That is right.
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First of all, how long has that red flag been on West Coast Schools ? sir, and can^t tell you the Mr. KOHL. Since I found out about
exact date.
it
Mr. KOHL. There are some, sir. We can give you
record.
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Senator NUNN. Senator
list for the
wish you would submit those for the record. Are
is
?
10, 15, or 200 or 300 not 200 or 300, sir. would be less than 100 NTTNN.
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?
talking about Mr. KOHL. It
we
a
red flags
?
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been am not looking for the exact date. Has Senator NUNN. this year Mr. KOHL. Yes. That red flag has been up since about months after got here year ago September. Mr. BELL. might indicate, Mr. Chairman, that they lost their eligibility to participate in the program in June of 1973. Is that correct? Mr. KOHL. May. Senator NUNN. But there have been some interest billings sub mitted since they lost am talking about their eligibility to Mr. BELL. Mr. Chairman, and participate. participate in the program, new students to get into Senator NUNN. Right. But the thing that was so disturbing was year there was even after they lost that eligibility and closed for believe was in 1974. submission in. don't remember the date. Does counsel have that date Mr. FELDMAN. January or February. Senator NUNN. January, February of 1974. Our investigators and the General Accounting Office weren't even able to get from HEW whether that claim had been paid or not. Mr. KOHL. can't react to that because, again, was before my can say that since that time subsequent to when coming here. But and we have the red flag arrived, months, we have known about to hold West Coast Schools. Senator NUNN. How many other schools are under those so-called
Mr. KOHL. Why don't you let me prepare
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list? will feel more comfortable about it. Mr. FELDMAN. Can ask one thing while you are standing? There are lot of things that transpired before came here as chief counsel of the subcommittee in March of 1973. lot of queries about get what happened before that time. have to go to people who worked here prior to my coming or to the records or files. would ask you if you have checked the files and records as to the transaction that the chairman mentioned —-whether or not there was payment based on this submission of January 1974 — and, if so, what were the results of your investigation Mr. KOHL. will check the files. [Material supplied in response to the preceding question follows The file containing requests for payments submitted by West Coast Schools be located. However computer records have been searched and we have located the supporting certification document from our Finance Division for the payment to West Coast Schools in .January 1974. These are attached.
still cannot
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293
Mr. FELDMAN. You mean you have not checked the files? Mr. KOHL. The question has not been put to me. Mr. FELDMAN. Did you have a representative in the hearing room throughout this week and from last Friday on ? Mr. KOHL. I have been here. Mr. FELDMAN. Hasn't anyone checked ? This is a very critical point,
I
think. No one has checked the files to see whether or not this was paid? don't understand why you say it is a critical point Mr. KOHL. you are interested because there is nothing to be saved as a result. will be happy to do it. in me checking the file, however, would agree with counsel, that we have had testi Senator NTJNN. mony this week that not only does HEW not know whether this has been paid, but it is beyond the capacity of the HEW system to tell whether a particular invoice has been paid to a particular school. Mr. KOHL. will have to check. Senator NUNN. Do you know whether the system is capable of providing that information ? Mr. KOHL. think it should be. think every check that goes out of HEW is a Treasury check. We certainly should be able to retrieve what has been passed through the Treasury. Senator NUNN. Would you check into that and submit for the record whether that invoice has been paid ? Mr. KOHL. will be pleased to do so. Mr. FELDMAN. This is why think it is absolutely crucial that HEW consider the record as almost a bill of particulars. They should scrutinize GAO, staff testimony and other sworn testimony, and be able to respond after the recess in detail. We are interested in finding the answers to those questions. That is why it is felt, and think minority counsel endorses this, that the statements here are not reponsive to all of the issues covered. talked to Commissioner Bell before he came up here also. think it is vitally important. Mr. BELL. might indicate by way of more explanation, that the volume of this program just demands computer capability. The pro gram was run on the centralized HEW computer up until just a short time ago. We have been trying to get it on its own computer system capabil ity. It took a while to gain that permission in the Department. We are now in the process of getting onto the computer capability that will provide a better and more responsive information than we have had up to this point. Senator Nuxx. We can get into it later. am mystified how you could ever have a computer operation set up in the style that has been
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described.
I just don't know how a decision
could have ever been reached with
of logic to set up such a monstrosity. Mr. BELL. Than the system we have had at this point.
any degree
Senator NUNN. Right. could interrupt. Mr. Chairman, don't believe Commissioner Bell's question to Mr. Kohl was really answered when he restated what he understood to be your question; namely, with
Mr. STATLER.
If I
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294 respect to this red flagging, how it actually works when you are talk ing about somewhere between 10 and 100 institutions. can see where it would work with one ; namely, West Coast Schools. But do you have people literally taking information out of the com puters whenever another school which has been red flagged is men tioned, or how does that work ? think he is directing that to you. Senator NUNN. Mr. Kohl, Mr. BELL. Do you want to respond further, Mr. Kohl ? Mr. KOHL. think would like to submit that for the record, if may. That would give you a complete rundown. [The material submitted follows :]
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Attached is an excerpt from internal procedures manuals which were de veloped for the Division of Insured Loans by an independent accounting firm (Coopers and Lybrand) in 1971. These procedures provide step-by-step process ing detail and cover pre-edit of the billing document (OE-1166) through the Computer Payments logbook. GUARANTEED
STUDENT
LOAN PROGRAM PROCEDURE
PRE-EDIT OF OB 1166'S REFORE FORWARDING TO DATA PREPARATION
Forms and/or records utilized:
CONTRACTOR
(1) OE 1166 and (2) form letter to lenders.
Steps 1. Receive forms (Exhibit 20) from mail room. 2. Date stamp the forms. 3. Hold in unit chief's office. 4. Take approximately 50 forms. 5. Initial scan should assure the following : 5.1 Lender identification number is present. 5.2 Lender name and address is present. 5.3 One and only one billing period is checked. 5.4 One and only one billing period ending is checked. 5.5 If period is annual, period ending must be June 30. 5.6 If period is semi-annual, period ending must be December 31 or June 30. 5.7 Year is entered. 5.8 Signature is present. 5.9 Name and title are present. 6. If the 1166 fails steps 5.3, 5.4, 5.5, 5.6, 5.8, 5.9, it goes to the buckslip pile (see Exhibit 19). 7. If it fails 5.1 or 5.2, see procedure number Bill-8. 8. If it fails 5.7, insert current year. 9. Manual edit of interest due (see Appendix 1) . 10. Verification of interest due (see Appendix 2) . XI blank, add A1-C1 and insert XI. 11. 12. If Zl does not appear to approximate the total of A1-C1 plus or minus Yl, run a tape of Al thru C1±Y1. 13. If different, place in buckslip pile. 14. Special allowance: Check each line filled in (H1-K1) for year ending, method and average principal balance. 15. Put in buckslip pile if not present. 16. Check that average principal balance is not greater than Al average principal balance. 17. To buckslip pile if greater. 18. If several lines H1-K1 filled in, check that the average principal balances are not going up and down. 19. To buckslip pile if going up and down. 20. Check that quarter ending is filled in and that "increased" or "decreased" is checked on line LI if it is. 21. Buckslip if problem. 22. Explanation must be clear and show change in balance. 23. Write change in balance in shaded area and circle. 24. Buckslip if problem. 25. Deliver buckslip pile to Unit Chief. 26. Total good pile ( see procedure number Bill-5).
If
295 APPENDIX
NO.
1
1. Each line (Al thru Cl) can have only one interest rate. Also each line can have only one item in each column. However, if each column filled in on a line has two items, and the interest rate is the same, these may be combined if the total of all entries in column 6 equals the total due (line Zl, col. 6) . 2. Each line (Al thru Bl) filled in must have columns 2, 3, 4 and 6 filled in if the billing period is quarterly. 3. Line Cl, if filled in, must have columns 2, 3 and 6 filled in. 4. If column 3 of lines Al thru Bl contains only one blank and column 5 of the corresponding line contains an average, the average in column 5 may be put in column 3, but only after the review and approval of the billing chief. 5.
If "method" (col. If line Cl is used as
billing chief.
contains
4)
the word
"actual",
give the 1166 to the
a sub-total line, rule out line Cl. line Yl is filled in, plus or minus must be checked, otherwise give to the billing chief. (Adjustment must be fully explained.) 6. 7.
If
APPENDIX
NO.
2
compute each 1. If billing period is quarterly and the method is quarterly, filled-in column 6 (lines Al thru Bl) as equal to column 5 times the factor. (Ref : Factor Table.) Column 6 may vary from your computation by ±1% or
±$5.00, whichever is greater. 2. the method is daily, compute each filled-in column 6 (lines Al thru Bl) as equal to column 5 times the daily factor times the number of days. (The number of days and the daily factor are in tabular form.) Note: The number of days is determined from both the billing period+period ending date. Allowable tolerance is same as above. 3. If any difference is out of tolerance, place in buckslip pile.
If
MANUAL
PAYMENTS
OE 1166
Forms and/or records utilized
:
INDIVIDUAL LENDERS
(1) OE 1166 and (2) SF 1166.
Steps 1. Receive corrected OE 1166 (Exhibit 20). 2. Divide into groups of 25. 3. Block out bottom portion of the form dealing with special allowance and xerox top portion of the form dealing with interest payment. (This prevents errors in transposition.) 4. Group sort into state code sequence. 5. Tape interest due for each fiscal year. 6. Tape total of each fiscal year's total. 7. Tape all OE 1166s. 8. Compare steps No. 6 and No. 7. If different, repeat steps No. 5 thru No. 8. 9. Staple the batch and tapes together. 10. Give batch with tape to secretary for typing. 11. Receive typed SF 1166, batch and tapes from Secretary (see Exhibit 21). 12. Check SF 1166 to OE 1166s. different, tick mark error. 13. Tape voucher dollars. different, tick mark error and repeat steps No. 1014. Compare 13 to 7. No. 12. 15. Log in fiscal pay book. ( See Appendix 1. ) 16. Post block number on voucher. 18. Staple voucher tape to vouchers. 19. Forward to OE Fiscal Branch. 20. Hold voucher copy. 21. Forward appropriate copy to data preparation contractor marked "manual payments" as in live OE 1166. 22. File one copy.
If
If
APPENDIX NO. 1. 2. 3. 4.
Write Write Write Write
1
LOGGING SF 1166 IN FISCAL PAY ROOK
current day's date. block number. Block number is the last block number used +1. week ending date. (Friday's date). number of payees in voucher.
296 5. 6. 7.
Write dollars for each Fiscal Year (from tape) under appropriate column. Write total dollars under total column. Post "SA" if voucher represents special allowance. MANUAL
OE
1166 PAYMENT
Forms and/or records utilized
:
STATE GUARANTEE
AGENCIES
(1) OE1166and (2) SF 1166.
Steps 1. Receive state guarantee agency bill for all lenders in state (with supporting
detail).
Assign payee code number. See Appendix 1. To typist to type two SF 1166's. (See procedure number Bill-9) Allowance and Regular Interest ( Do not intermix funds ) . 4. Receive invoice and SF 1166's from typist. 5. Proof read vouchers. If error found, repeat steps No. 3 thru No. 5. 6. Start procedure number Bill-2 at step No. 15. 2.
3.
APPENDIX
NO.
:
Special
l
Various state agencies request interest payments on behalf of lenders in their state. The vendor number assigned to these states to be used on the SF 1166 are listed below and never change. Alabama
999701 999704 999706 999707 999708 999709 999710 999712 999713 999714 999716 999717 999718 999719 999720 999721 999723 999728 999729 999730 999732 999734 999735 999736 999737 999738 999740 999741 999742 999743 999744 999745 999748 999751
California
Connecticut Delaware District of Columbia
Florida
Georgia
Illinois Indiana Idaho
Kentucky
Louisiana Maine Maryland Massachusetts
Michigan Mississippi
New Hampshire New Jersey New Mexico
North Carolina
Ohio Oklahoma New York Pennsylvania Rhode Island South Dakota— Tennessee Texas
Utah
Vermont
Virginia Wisconsin Hawaii RATCH
CONTROL OF OE 1166S TO DATA PREPARATION
Forms and/or records utilized Steps 1. 2. 3.
Take totalled batches.
Count documents. Post batch control sheet
:
:
CONTRACTOR
(1) OE 1166 and (2) computer payments log book.
297 3.1 Dollars amount from tape. 3.2 Number of documents (usually 50). 4. Total and post. (Run two sets of tapes.) 4.1 Regular Interest documents. 4.2 Regular interest dollars. 4.3 Special allowance documents. 4.4 Special allowance dollars.
To control desk. Hold until Tuesday or Thursday. 7. Enter batch totals in computer payments log book (see Appendix 1). 8. Post the date and run number on top of control sheet. 9. Make two xerox copies of control sheet. 10. Attach one set of tapes from step No. 4 to one copy of control sheet. 11. File one set of tapes. 12. Attach other set of tapes from step No. 4 to first billing in each batch. 13. Give batched OE 1166's with tape to data preparation contractor messenger.
5.
(5.
APPENDIX
NO.
1 — ENTRIES
INTO
COMPUTER
PAYMENTS
LOG
ROOK
Run number is in format "AX" where "A" is a sequentially assigned number and "X" is a contractor assigned letter. For each submission, "A" is one higher than the previous "A". 2. Number of documents, in total. 3. Total dollars sent. 4. Current day's date. 1.
Run number
:
TOTALING
Forms and/or records utilized : OE
OE
1166
RATCHES
1166.
Steps 1. Obtain batch of 50 edited OE 1166's. 2. Run tape of column 6, line Zl. 3. Repeat step No. 2. 4. Compare tapes. different, check one tape to OE 1166's and isolate error. Repeat steps 5. No. 2 thru No. 6 until both tapes agree. 6. Tape original total ± adjustment and compare to correct tape. 7. If different, repeat from step No. 5. principal balances and ± circled tape of special allowances, 8. Run adjustments. 9. Repeat step No. 8. 10. Compare tapes. 11. Resolve differences. 12. Attach tapes to batch. 13. Mark tape as to special allowance or regular interest. 14. Forward batch with tape to computer control.
If
VERIFYING
OE
1166 ADP ERROR
Forms and/or records utilized:
tape;
and
(4)
data preparation
LISTING AND TREASURY
TAPE
(1) OE 1166; (2) SF 1166; contractor batch balance.
(3)
Treasury
Steps contractor. 1. Receive batch balance and edit report from data preparation 2. Receive from Data Management Center (DMC) the magnetic tape, proof listing and duplicate error listing. 3. Pull duplicate error OE 1166's. Research to determine if it is a valid pay ment. If valid, send to manual payment. If invalid, give to supervisor to clarify with lender. 4. Run adding tape of OE 1166's from step No. 3. 5. Compare DMC total dollars+dollars from step No. 4 to data preparation contractor's total. 6. If different, compare each OE 1166 to proof listing and resolve errors. 7. To secretary. 8. Type SF 1166. 9. Return to processing unit. 10. Forward to OE Fiscal Branch the magnetic tape, SF 1166, two copies of check-proof listing and two disbursement certifications.
298 11. Update log book with: Total dollars to Treasury (special allowance and regular), date sent and ADP dollar dropouts (rejects, duplicates). 12. If name/address kickout is of type OE representative should have passed, send OE 1166 to manual payments. 13. If name/address kickout not the type covered by step No. 12, send OE 1166 to research (see procedure number Bill-8) . 14. If tolerance error because method shown is quarterly, but actual or daily was used, give to billing supervisor who will contact lender to resolve. 15. For all tolerance and crossfoot errors, see procedure number Bill-7. 16. File OE 1166's without errors. 17. Collate and retain balance and edit tapes, duplicate error listing and checkproof listing. PROCESSING
REJECTED
OE
1166'S
Forms and/or records utilized; (1) OE 1166 and (2) daily interest table. Steps 1. Receive rejects from OE manual edit, data preparation contractor manual edit, or computer edit. 2. Determine error. See Appendix 1 for some examples and action to take. 3. Take action resulting in either : Letter to lender (see Exhibit 19 — buckslip) ; Batch to EDP payment ; or to manual payment. APPENDIX
NO.
i
Problem. Billing period not checked. Action. If one quarter is claimed in special allowance and the interest claimed approximates one quarter, check quarterly. If two quarters are claimed in spe cial allowance and the interest claimed approximates one year's interest, check annual. If none of the above, check item No. 3 on the OE 1166 form letter shown at Exhibit 19 (buckslip) and send it and the OE 1166 to the lender. Problem. Billing period checked is annual but period ending date is not June 30. Action. Check buckslip item No. 2 and forward with OE 1166 to lender after obtaining billing supervisor's approval. Problem. Billing period checked is semi-annual but period ending date is not December 31 or June 30. Action. Check buckslip item No. 11, write "semi-annual claims must be for period ending December 31 or June 30" and forward with OE 1166 to lender after obtaining billing supervisor's approval. Problem. Year not filled in. Action. Try to determine year and fill in. Otherwise check buckslip item No. 3 and forward with OE 1166 to lender. Some ways of determining the year are : 1. Method is quarterly and one quarter is filled in in special allowance section. Use year from special allowance section. billing period ending date. Use year 2. Date on signature line approximates from signature line. 3. Billing period ending date is the same as most other OE 1166's. Use same date as other OE 1166's. Problem. Lender identification number incorrect (computer kickout). not identi Action. Conduct research. If identifiable, return for payment. fied, return to lender with reason stated in item No. 11 of buckslip. Problem. Lender name and address changed by lender on label. Action. Update vendor files and then forward for manual payments. Notify vendor file clerical staff. Problem. Method= Actual. Action. Give to billing supervisor. Problem. Lines A1-C1 show different interest rates on one line. Action. Try to separate onto proper line or put into line A3 1. If not possible, check buckslip item No. 11, write explanation and return with OE 1166 to lender. Problem. Line Yl is filled in, but neither plus nor minus is checked. Action. Give to billing supervisor for resolution. Problem. Total interest due (Zl) is not equal to the sum of Al thru C1±Y1. Action. Check buckslip item No. 11, explain error, and forward with OE 1166 to lender. col. 6=col. 5Xfactor±l percent±$5 whichever Problem. Method=quarterly, is greater.
If
1 Try to phone lender to
verify corrections made.
299 Action. Check to see If col. 6=col. 5 X appropriate factor. If so, check buckslip item No. 11, explain that the lender is using the daily method, attach sample of daily vs. quarterly, and return both with the OE 1166 to the lender. If method does not appear to be daily, check buckslip item No. 1 and return with OE 1166 to lender. Problem. Method=daily, col. 6=col. 5 XfactorX number of days in period±l percent or ±$5.5, whichever is greater. Action. Check buckslip item No. 1 and send with OE 1166 and example of daily and quarterly calculations to lender. Problem. "Year Ending" is blank in special allowance section ; not all lines HI thru Kl are filled in. year can be determined from billing period ending date or from year Action. on signature line, fill in year. If cannot be determined, explain on buckslip item No. 11 and send with OE 1166 to lender. Problem. Lines HI thru has "method" blank. Action. Assume same "method" as used in lines Al thru Bl and check that one. If the OE 1166 is for special allowance only, explain problem on buckslip item No. 11 and send with OE 1166 to lender. Problem. LI filled out, but neither "increased" nor "decreased" checked. Action. can determine from explanation, check one ; otherwise check item No. 9 on buckslip and send with OE 1166 to lender. Problem. LI filled in, but explanation not clear. Action. Check buckslip item No. 9 and send with OE 1166 to lender. Problem. Column 2 is blank. Action. Insert the number derived by dividing column 3 by an assumed $1,000 average loan. Problem. Column 4 is blank. Action. Calculate interest due (col. 6) by both methods to determine which is feasible. If it could be either, use method checked in special allowance sec undeterminable, explain problem in item No. 11 of buckslip and send with tion. OE 1166 to lender. Problem. Column 1 contains an invalid interest rate. (Greater than 7 percent.) Action. Explain problem in item No. 11 of buckslip and send with OE 1166 to lender. Problem. Multiple years on lines Al thru Cl. Action. Check buckslip item No. 2 and circle point No. 4 on the OE 1166. Send both to lender. Problem. Multiple years on lines Hk thru Kl. Action. Allowable.
If
Kl
If
If
RESEARCHING
LENDER REQUESTS
Forms and/or records utilized: (3) SF 1166.
(1) OE 1166;
FOR PAYMENT
(2) DMC payment listing: and
Steps 1. Receive phone inquiry or letter inquiry from lender. phone, be sure and obtain identification number, complete address, 1.1 name of person, and telephone number. letter, look up identification number if not shown. 1.2 of payments — latest to earliest for the quarter. 2. Check EDP print-outs found, call lender and inform him of date he should receive check. 3. 4. If not found, check voucher copies to see if paid manually. found, call lender and inform of expected check arrival date. 5. 6. If not found, check filed OE 1166's. 7. If found, check print-out or SF 1166 from received date to current date. Call lender and inform him that he has been paid. 8. If lender insists he has not been paid and OE records show that he has the lender should be requested to provide written notification of that fact. Upon its receipt, a check trace is requested of the OE Fiscal Branch. The Fiscal Branch will respond according to the following alternative possibilities : (a) Check cashed by lender. A photostat of the check is then forwarded to him. (6) Check was returned to Treasury without having been cashed. Treasury is then requested to re-issure the check to the lender at the correct address.
If If
If If
300 (c) Check is still outstanding. Treasury is then requested to stop payment. Insured Loans Branch authorizes issuance of another check. (d) Payment made to incorrect lender. Insured Loans Branch authorizes pay ment to the correct lender and requests recovery from the lender incorrectly paid. 9. To manual payment. PREPARINQ
VOUCHERS
AND SCHEDULE
OF PAYMENTS
MANUAL
Forms and/or records utilized : (1) OE 1166 and (2) SF 1166. Steps 1. Receive OE 1166's and tape from processing unit. 2. Attach three carbons to SF 1166. 3. Type header information from sample, depending upon whether special allow ance or regular interest. (Note : Special allowance and regular interest must not be intermixed.) 4. Type total dollars from tape. 5. If regular interest batch, type line Zl, column 6. 6. If special allowance, type circled figure in column 6 near line Kl. 7. Voucher number on the SF 1166 is the state code and the lender identifica tion number located in the address portion of the document. The state code is typed in the voucher number column of the SF 1166 opposite the first line of the lender's address. The lender ID number is typed on the second line of the address, left justified. (See Exhibit 21.) 8. OE 1166 batch contains both regular and special allowance, return to manual payment processor. 9. When batch complete, return to manual payment processor with source documents.
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NOTES :
Limit of
XXX Use
4 pages/voucher,
out errors.
SF
1107
for pages
2-i
25 items/voucher.
(see Exhibit 22).
*
The first computer listing of special allowance payments after the rate is changed must be verified as to accuracy to insure that the correct factor has been used.
PILINa
Forms and/or records utilized
OP :
OE
1166
AND SF 1166
(1) OE 1166 and, (2) SF 1166.
Steps 1. Receive processed OE 1166's from contractor, batched by state. 2. Sort state batch into bank name sequence. 3. Go to appropriate file. 4. Locate and extract bank folder. 5. If no folder, set aside the OE 1166. 6. If folder exists fold OE 1166 to folder size. 7. Place in folder. 8. Return folder to file. 9. Take OE 1166's without lender folders and prepare folders. Then go to step No. 6.
*******
Receive SF 1166 from OE Fiscal Branch. batch number assigned by Systems Operation is posted on the copy received from Fiscal. 3. File SF 1166 in desk folder according to batch number. 1.
2. The
PROCESSING RETURNED RATCH
CONTROL SHEETS
FROM DATA PREPARATION
Forms and/or records utilized: (1) OE 1166; (2) sheets; and (3) computer payments log book.
CONTRACTOR
data preparation
control
Steps 1. Receive following from data preparation contractor : One copy of batch con trol sheet (Exhibit 23) . Manual edit OE 1166 rejects with buckslips.
301 2. Verify that the number of documents returned matches the number shown on the control sheet. 3. OE 1166-s to error correction. (Procedure number Bill-7). 4. Retrieve original control sheet. 5. Staple copy to original. 6. Post data preparation totals to computer log book (see Appendix 1). 7. Re-file original and copy. APPENDIX
NO.
i
To be posted in Computer Payments Log Book: (1) total documents key punched; (2) total documents returned; (3) total dollars to key -punch ; and (4) total dollars returned. RESEARCHING
HISSING/INCORRECT LENDER IDENTIFICATION NUMBERS
Forms and/or records utilized: (1) OE
3X5
1166;
card update file.
(2)
AEH
lender
list;
and (3)
Steps Receive OE 1166. AEH alpha sequence print-out (latest one). 3. If not there, check on update file (3x5 card file). 4. If not found, call lender. 4.1 If lender has a number, go to step No. 5. 4.2 If lender has no number, refer him to Federal Insured appropriate guarantee agency. 4.3 Return OE 1166 to lender with form letter (Exhibit 19). number on OE 1166. 5. Put identification 6. Return OE 1166 to processing. 1.
2. Check on
PROCESSING
RETURNED
CHECKS
HEW
Section or
FROM TREASURY
Forms and/or records utilized: (1) Check cancellation
(2) deposit form
Loan
form GAO 1098 and,
81.
Steps 1. Receive xerox copies from Treasury. 2. Prepare cancellation form GAO 1098. 3. Send form to OE Fiscal Branch with xerox copies
Or—
Receive checks direct from lender. Accumulate on a daily basis. 3. Log in : date, lender name and address, amount of check, reason for check, disposition, initials of logger. 4. To secretary to type forms GAO 1098 or HEW 81 (Exhibits 24 and 25). 5. Forward checks and forms to OE Fiscal Branch. 6. Copy of voucher and correspondence filed by secretary. 1.
2.
CHANGING
LENDER
Forms and/or records utilized: (1) OE
3x5
card update file.
NAME/ ADDRESS 1166;
(2)
AEH
lender
list;
and (3)
Steps Receive OE 1166 with change on it or receive correspondence. Fill out OE 104 (Exhibit 4) : Government code=l; Vendor=lender identifi cation number ; Action code=2 ; plus new name and present address. 2.1 If address change : Use geographic code books for city code, county code, congressional district if change is to a new city. 3. To unit chief. 4. To DADP Production Control. 1.
2.
Senator Nuxx. "We don't mind it being submitted We want you to plug the leak. Mr. KOHL. understand that.
I
for the record.
302
Senator NUNN. We don't want to lose another $200 million while we are waiting for the record. Mr. STATLER. think a simple answer could be given at this point. You need not go into any specific school. But how does the plug fit in ? Mr. YORK. Mr. Statler, think part of the answer to the question or to try to address the answer to the question, each of the interest bills that are received from lenders are not reviewed by the computer. They are in fact reviewed by people. there has been an identification of a problem organization, one that we have had problems with, the staff that initially look at those interest billings would be able to flag a number of hundreds of them. They would be able to adequately have on their desk a list of those. That really is what Mr. Kohl — how that would end up getting to Mr. Kohl's desk. Senator NUNN. We understood that the billings went directly to the computer at the health center. Is there a staff that processes those before they go there ? Mr. YORK. Yes, sir. All of those interest billings are reviewed first. Yes, sir. A check tape is then produced and is taken directly to the Department of the Treasury for issuance of checks. Mr. BELL. might also indicate, Mr. Chairman, that we do have a system that inputs data to the computer. That flags every institution that lost their accreditation and their eligibility. But should emphasize that if an institution after they have done that would still have entitlement under the law for certain — up to the point of the chop off of certain interest billing, except, of course, a fraudulent case like West Coast Schools. Senator NUNN. Let me ask one other question. have been notified that in about 10 minutes there will be a vote. want to ask this question before then. would like to let you go ahead without interruption so we can make sure we get through. We may have several votes. Of course, you have had people here this week when we have seen a governmental official in a place of high responsibility take the fifth amendment on grounds that the answer to the questions would tend to incriminate him. Mr. James Hoffe, of course, has been the Regional Director in San Francisco. He also testified, as you probably Know, that he has resigned effective the end of this month. My question to you is: Was Mr. Hoffe relieved of his duties by HEW or did he in fact resign? Mr. BELL. He was relieved of his duties at my instructions. He was advised that he was under investigation by us. He was relieved of his duties and all responsibilities in connection with this program. have indicated here by Mr. Phillips, that this This was done, was done last May. Senator NUNN. Has he been under investigation since May? Mr. BELL. Yes, he has. Senator NUNN. What division of your office has been investigating
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Mr. BELL. We don't have investigative capability. So that is turned over to the investigation staff of HEW. Mr. PHILLIPS. could supplement your response, Mr. Chairman, understand it, Mr. Hoffe was transferred to different responsi as
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bilities last May and it was at that time that we received notification that he was under investigation. He was immediately shifted to other responsibilities and as you have reported he has now resigned from his position in the Government. am not quite sure who is investigating him. You Senator NUNN. don't have an investigating unit in the Department of Education? Mr. BELL. Not in the Office of Education ; the HE Ws investigative unit. Senator NUNN. He is being investigated by HEW ? Mr. BELL. That is right. In addition to that, as understand the FBI has also been in volved with this investigation. Senator NUNN. Commissioner Bell, do you have rules and regula tions that would prohibit an employee of HEW from being con sultant to institutions who may receive Mr. BELL. Oh, yes. Those are Departmentwide regulations. Senator NUNN. Is there a criminal penalty or this just civil regulations Mr. BELL. there a criminal penalty, would be inherent in the law itself and maybe Mr. Bouxsein could respond to that, if he would. Mr. BOUXSEIN. believe the regulations themselves just have civil sanctions. But believe that in certain circumstances the conduct in volved may rise to a criminal violation as well under Federal law, in which case would be referred to Senator NUNN. Under general criminal law Mr. BOUXSEIN. Yes. Senator NUNN. Are you an attorney Mr. BOUXSEIN. Yes. Senator NUNN. Could you submit for the record the rules and regu lations that prohibit this kind of activity that we have heard this week and also any applicable criminal statutes that come to your attention
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[The information furnished follows DEPARTMENT OF HEALTH,
:]
Mr. BOUXSEIN. Sure.
EDUCATION,
OFFICE
AND WELFARE, THE SECRETARY,
OF
:
:
December IS, 1975. to Richard A. Hastings, Deputy Assistant Secretary, for Legisla tion/Education. From Civil Rights Division, Office of General Counsel. Memorandum
Regulations on Conflict of Interest. 20 hearing of the Permanent Subcommittee on Investiga tions, Senate Committee on Government Operations, Senator Nunn asked that report on the Department's regulations governing standards of conduct submit and conflict of interest. He also asked about the available sanctions and whether criminal penalties might be involved. Attached is a copy of the Department regulation "Standard of Conduct" found at 45 CFR, Part 73. Although this regulation is lengthy and covers many subject areas, think it would be useful to the Subcommittee to have the entire document. In view of the questions and concerns expressed by the Subcommittee, also think the following aspects of the regulation should be pointed out Section 73.735-402 prohibits Departmental employees from engaging in certain forms of outside professional and consultative services. The prohibitions in subparagraphs (a) (1) and (a) (2) would appear to be applicable to the alleged activities of Mr. James Hoffe brought out during the Subcommittee's hearing. (General provisions on outside employment, also of interest, are found in section :
Subject
Departmental
1.
:
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During the November
73.735-401.)
304 prohibiting an employee from having financial interests 2. Section 73.735-501, which conflict substantially, or appear to conflict substantially, with his Govern mental responsibilities, would also appear to cover Mr. Hoffe's alleged situation. 3. Subpart I, "Administrative Approval of Certain Activities" and Subpart J, "Statements of Employment and Financial Interest" contain administrative mechanisms in which the Subcommittee might be interested. 4. Sanctions for violations of the regulation are set forth in Subpart K. These include demotion, suspension and separation of the employee and also provide for certain forms of remedial action. 5. The Federal criminal provisions of Chapter II, Title 18 of the United States Code, entitled "Bribery, Graft and Conflicts of Interest," are specifically incor porated into the regulation in section 73.735-401 (b) and in Appendix A. These provisions would, of course, be applicable irrespective of their incorporation into the regulation, but this tends to enhance their visibility. Of particular interest are sections 201, 203, and 208 of the Federal criminal code, which punish certain activ ities as felonies. Although not specifically incorporated in the Departmental regulation, the conspiracy provisions of section 371 might also be involved in any given case of misconduct by a government employee. PETER BOUXSEIN. Acting Assistant General Counsel.
Senator NUNN. Commissioner Bell, the question of criminality is not a matter that this subcommittee is going to try to determine, but we are interested in preventive measures in other regions and other employees. Are there any steps that you can take or that you visualize taking with your other regions and with other employees to determine whether this activity is perhaps widespread ? Mr. BELL. Yes. We have taken steps with our regional commis sioners in this regard. would say at the present time this is also a problem or was a problem in the Dallas regional office and some em ployees down there have been discharged and some are under investi gation. don't know if the staff is aware of this. Senator NUNN. Are you bringing in the appropriate officials in the Justice Department for possible criminal violations?
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Mr. BELL. Mr. Bouxsein ? Mr. BOUXSEIN. I am sorry. Are you talking about Dallas Senator XUNN.
In
I am not speaking of any
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particular one. Mr. BOUXSEIN. Yes. Any time that we would have any information at all suggesting a possible criminal violation, we refer it immediately to the Department of Justice. Senator NUNN. What about in the case of the San Francisco region ? Have you brought the Justice Department in on your investigation general.
there?
Mr. BOUXSEIN. Mr. Hoffe
?
Senator XUNN. Yes. Mr. BOUXSEIN. Yes. The FBI and the local U.S. Attorney were brought in on that
several months ago, quite some time ago. Senator NUNN. The FBI was investigating him 2 years ago. That investigation didn't result in anything, according to our understand ing. We know about the local Los Angeles district attorney. We have had a representative of his staff working with us. am asking you if the Justice Department is apprised of the HEW investigation into the San Francisco case ? Are you coordinating that with them now? Mr. BOUXSEIN. Yes. have had conversations with the assistant U.S. attorney in San Francisco with respect to this.
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Senator NUNN. When was that ? Was that recently ? Mr. BOUXSEIN. can't remember exactly. It was earlier this summer. Mr. Cooke and were both out there. Maybe Mr. Cooke remembers the
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Mr. BELL. I think Mr. Cooke can add to that. Mr. COOKE. I may not have the exact date. But as I remember about May or June of this year when we went out there and talked with the assistant U.S. attorney. The regional office has seen the assistant U.S. attorney prior to that. don't have the exact time. But think was around May, could be April. that My understanding of the sequence of events paper was found on Mr. Hoffe's desk which was discussed, think, in the hear is
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dence
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ings previously, and don't need to go into but the one that had the three columns and had my share on it. That paper was discovered by an employee whose name don't know, was given to the OE Regional Commissioner, Mr. Ed Aguirre. At that time Mr. Aguirre talked to the regional attorney of HEW and then gave the piece of paper, plus whatever evidence he had, to the U.S. Attorney and the FBI in San Francisco. At that time an investigation was initiated by the assistant U.S. attorney in San Francisco and the FBI in the spring of this year to look into what was the substance behind this paper. don't know that at some period after that, My understanding the exact dates, HEW was informed that there was not sufficient evi
for prosecution.
At that
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time, the Department and the regional commissioner then initiated what we call administrative procedures which are within the departmental regulations with regard to employees who may be mis using the system or may be violating the code of conduct. Mr. Hoffe was informed that he was under these procedures and under investigation and that he had certain amount of days to pre pare his case. Thev had such administrative hearings 10 days ago, approximately, in San Francisco. Mr. Hoffe and his attorney appeared and at that time submitted Mr. Hoffe's resignation effective November 30 of this month. don't want to take issue with you, Mr. Cooke. But Mr. FELTOIAN. think there are probably two things we are looking at an investiga tion of Fred Peters. Carman Fisher, and West Coast Schools; and also the question of the investigation of Mr. Hoffe. difficult to believe that the U.S. attorney was investigating find the Hoffe case because Dameron, who testified here, had not even been interviewed. That was over year ago. Second, as far as the West Coast Schools case, my understanding was that the case was dormant until we gave one snbpena to the marshal, who thereupon collected subpena from the U.S. attorney, who then vigorously started to pursue this case after we were able to locate Mr. Peters.
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past What want to know in your investigation past. What of Mr. Hoffe. did that investigation deal with the kinds of allegations
that we have received in this hearing or was that an administrative in vestigation which dealt with performance or some other matter? 63-570
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Mr. COOKE. We are talking about two different issues. We are talk ing about two assistant U.S. attorneys. There is an assistant U.S. at torney in Los Angeles involved in this West Coast issue ; whether or not they moved out to try to find Mr. Peters. The second issue we are talking about is Mr. Hoffe and we are talk ing about the assistant U.S. attorney in San Francisco. My understanding of what occurred in San Francisco, when the De partment officials came into possession of the piece of paper allegedly written in Mr. Hoffe's handwriting with "my share" column on it, that piece of paper was turned over to the U.S. attorney in San Fran cisco to investigate possible program violations by Mr. Hoffe. West Coast Schools at that time was not associated with Mr. Hoffe, at least as far as that piece of paper is concerned, because West Coast Schools or Automation or West Coast Trade Schools — none of those names— appeared on that column on that piece of paper. In terms of the timing here, we are talking about two different think : an investigation of the Department, to answer your things,
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the administrative procedures which final question, as understand the Department instituted when the U.S. attorney came back and in formed us that there was not sufficient evidence to convict, Mr. Hoffe. Yes; we took into consideration the allegations that had been made against Mr. Hoffe by a variety of people, although the principal piece of evidence at that time was still this piece of paper that said "my share" on it. That my understanding of the sequence of events. Senator NTTNN. In the interest of time will ask you, Mr. Commis sioner, after you review this record, you will make sure that your investigative unit in HEW is in communication with the Department of Justice at some appropriate time am sure we will in this committee, but would like for you to go ahead and give us your assurances on that coordination. will surely do that, Mr. Chairman. Mr. BELL. might just add that the regional commissioner on this case asked what he should do about that. told him that he ought to immediately make sure that he had no more access to the program and the funds and the operation if looked like he might have been in. We wanted to make sure that we didn't declare him guilty at that point, but give him due process; his rights to career civil service. instructed him at that time to see that the Justice Department was informed and brought into the matter. Senator NTTNN. That right. We are not here, we are not in the posi tion to declare anybody guilty. We don't. But we do think there has been sufficient evidence this week to warrant investigation if there not current investigation. Why don't you go ahead and proceed vote suspect we will get any minute. Mr. BELL. Yes, sir. The report requires unregulated lenders to give data on GSL paper sold, their repurchase responsibilities and the performance at point of sale on all outstanding loans. Many abuses in this program result from the special arrangements between lenders on school originated
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paper. These data will enable us to ferret out these situations and to take appropriate action. A tracking system for lenders, depicting the year-to-year movement of GSL outstandings, their past due status, lender financial statements, and other factors was required to visualize lender performance. A new lender trend record is the basis for selecting certain lenders for review by our compliance staff and HEW Audit Agency. Appropriate credit lines are being established for each nonregulated lender. 3. Creation of a compliance staff : New management has created an 11-member compliance unit which reports directly to the Associate Commissioner which will audit and investigate lenders with adverse performance, initiate actions to limit, suspend, and terminate where appropriate, and interface with other agencies to obtain proper ac tions. This staff will assist in the training of 46 examiners in our re gional offices. 4. New regulations : In February of this year the Office of Education published a final regulation which governs lender performance in the Federal program and school performance in the entire GSLP. In accord with the authority given to the Commissioner by statute, schools and lenders which fail to meet required standards will have their participation limited, suspended or terminated. Consumer protection requirements of these regulations require revi sions in many school policies, changes in catalogs and enrollment con tracts, and other adjustments. 5. Establishment of a proper collection organization : The addition of 109 loan collection positions authorized in June 1974 has increased our collection staff to 135. The training necessary for these new employ ees has been accomplished through the development of a videotape in structional program and basic modular collection manual. Our data for the most recent fiscal year indicates there there is a 5 :1 ratio be tween amounts collected and collection costs. In addition to these administrative actions, we have also proposed certain legislative changes to the Congress. These recommendations, contained in S. 1229, introduced on March 18 of this year by Senators Javits, Beall, Schweiker, and Stafford, would amend the Higher Edu cation Act and the Bankruptcy Act in a number of respects so as to decrease the number of defaults. We testified before the Senate Sub committee on Education on this measure on March 5, 1975, but no further action has been taken thus far. should add that this is the second time we have proposed parts of this legislation and we are anxiously awaiting congressional action. just add that this was done the previous year. The same proposal
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was made then. Before leave this subject, would like to make what believe to be a critical point. Much has been made of the high default rates we have been experiencing in this program, both in the Congress and in the press. respect these criticisms. think we must remember that we are not dealing in the However, GSL program with blue-chip borrowers. Rather, we are dealing with some of the worst credit risks a lender sees : young, unemployed persons with few, if any, assets. On a cumulative basis, through February 1974, 52 percent of the borrowers in the Federal program came from families with annual ad
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justed incomes below $6,000. Seventy-nine percent had family incomes less than $12,000. the purpose of this program is to accomplish certain social aims. feel we must expect certain default rates. the risks were not per ceived to be greater than lenders are willing to take in their normal op eration, there would be no need for a Government guarantee. On the other hand, if we want to start making loans in this program on a sound business basis, we must recognize that we will substantially al ter the mix of borrowers, thereby depriving many needy students of the opportunity to attend a post-secondary institution at all. It should be pointed out that for every dollar of private capital in the program, the cost to the Federal Government is 23 cents. [See exhibit 95.] In our exhibit E, Mr. Chairman, if can depart here for a minute, over a 10-year period, the total cost of this program to date has been don't imply by that $1.6 billion or an average of $166 million per year. that is all the costs are going to be per year, but in view of all of the dollars we are talking about, actual outlay from the taxpayers has been an average of $166 million a year for the 10-year life of the pro
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Senator Nuxx. We have had tevStimony that anywhere from $1 to billion of these loans are probably going to be in default. Do you have anv comment on that ? Mr. BELL. think that is a projection of the default rate that we now have. would point out that the default does not mean a loss to the Government. A default means that the loan is under default as de scribed by the law and then our loan collectors come into the picture. Senator Nuxx. It means a default if the notes are lost. We also have been informed that 10 to 15 percent of the notes were lost in the sample survey. We have also had testimony from two students this week that their loans would be part of the default. One of them never went to a single class and certainly does not feel as if he should pay. The other one went 2 weeks, dropped out of school, and paid $52 on a pro rata basis of what he felt the education cost. am certain he doesn't intend to pay. So, if these are representative of the loans in default, the question of collection is very dubious, wouldn't you say ? Mr. BELL. think on the notes themselves, should ask Mr. Bouxsein if he would respond to that. Before doing that, would just indicate, Mr. Chairman, that not attendance of class is a hard thing for us to control in the office of Education. While quickly concede that this is a am problem, that students are being ripped off in that regard, but sure the number of students we talk about and the thousands of in stitutions involved, it is going to be extremely hard for us to police that. know it is not an easy problem. We are not look Senator Nuxx. ing for perfection. We are just looking for improvements here. Mr. BELL. want to point out that in my entire testimony, fear it may sound like alibies. The other thing don't want to do is say the new can management is here and everything is going to be all right. All say is we are going to be as diligent as we can, to put this program in $2
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Senator Nuxx. What are you going to do when a student can prove that they signed up for a class, that they signed the note, that they never saw the money, the money went directly to the school under a power of attorney, that they never attended the class when you hold the note you paid to the lender and it becomes your duty to collect it ? What are you going to do in the collection process ? Mr. BELL. Mr. Bouxsein has helped us on that. will ask him to respond to that and also the matter of the lost notes, if he would,
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Senator NUNN. Fine.
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Mr. BOUXSEIN. the student has a legal obligation on the loan, of course, we would pay the default claim and try to collect from the student. Under the facts as you gave them, it is not clear whether the student would or would not have a legal obligation. It would depend, for example on whether the loan is made by the school or by a bank or other financial institution apart from the school. It may well be that he still has a legal obligation. Senator NUNN. Let us say the loan was made by the school and then sold to the financial institution. Collection was attempted and then the collection could not be made, so the loan was then forwarded to you for payment. Do you pay it? Mr. BOUXSEIN. The student never attended school ? Senator NUNN. Right.
Mr. BOUXSEIN. In most instances, that student would not have a
legal obligation to repay that loan. In those cases, we would not pay the default payment. we do, or if we pay the default claim without the knowledge that it was not a legal obligation on the part of the student and subsequently found out, we would not try to collect from the student and we would go back to the lender and try to reclaim the default payment that had been made to the lender. Senator NUNN. Are you saying if the student didn't attend class and it came to your attention before you made a default payment to a lender, you would not feel you had an obligation to make that de fault payment to the lender ? Mr. BOUXSEIN. We believe we only have an obligation to pay the default payments when the student has an obligation to pay the loan. Wo believe the program is insuring default on the part of the student and not other activities on the part of lenders which would invalidate the loan. Senator NUNN. Does this mean that the lender has the obligation before buying loans from a school that makes these loans to determine whether the student is in class? Mr. BOUXSEIN. Under our current regulations, that is not true. We have a proposed regulation that is out for public comment which would clarifv to a considerable extent the obligations of someone who is considering the purchase of loans made by an institution. We are attempting to have such institutions make a good financial institution type of judgment as to the validity of those loans. But they are not specifically to determine whether the student was in class at the time the loan was purchased. Senator NUNN. you put the burden on the bank to ascertain whether the student stayed in school as a condition of having their
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310 loans honored on default basis, you won't have any banks participat ing. That is your observation. Mr. BOUXSEIN. Unless there are other ways of protecting the pur chasers, such as warranties and what have you. It is clearly a com plicated problem. know it is Senator NUNN. What are you going to do about it? complicated. There is no doubt about that. It is a tough problem. What are you going to do about it? What do the regulations that you issue say ? Have you issued them or are they out for proposal ? Mr. BOTJXSEIN. They were out for proposed public comment period, and the period has expired and the comments are being reviewed. may, it is a reasonably lengthy and complex matter. Senator NUNN. Can we have it for the record ? Mr. BOTJXSEIN. Yes. would like that. [The information furnished follows:]
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DEPARTMENT
OF
HEALTH, EDUCATION, AND WELFARE, OFFICE OF THE SECRETARY, Washington, D.C., December IS, 1975.
HOWARD J. FELDMAN , Washington. Chief Counsel, Senate Permanent Subcommittee on Investigations, D.C. DEAR MR. FELDMAN : In accordance with Senator Nunn's request made during the Subcommittee's hearings on Federal higher education student assistance programs, we are submitting, for the hearing record, a copy of the proposed reg ulations regarding the Guaranteed 'Student Loan Program published as proposed on March 25, 1975. While a detailed explanation of the proposed regulations is contained in their preamble, the main points covered by them are as follows: 1. Lenders are encouraged to make a sound professional business judgment, regarding the practices of a school, by a proposed amendment to section 177.44, which provides that lenders purchasing loan notes originated by an educational institution may not automatically rely on certifications made by the educational institution. Where such certifications are false, the lender would be expected to pursue its legal remedies against the educational institution. 2. A new section 177.52 is added which provides that the Commissioner will take cognizance of legal defects affecting the initial validity or insurability of a loan and will deduct from the default claim any amounts included in the claim attributable to such defects. This provision is intended primarily to cover intentional misrepresentations, fraud, forgery, and other knowing or intentional acts undertaken in order to obtain Federal insurance for a loan which would not otherwise be eligible. In addition to such legal defects, there are a number of other requirements imposed by the authorizing legislation which could give rise to defects impairing the insurability of a loan. 3. In order to provide the student and subsequent holder of the note with as much protection as possible, the regulations require notice of such transfer or assignment to the student if the transfer requires him to make payments or direct other matters connected with the loan to another party. Notice to the Office of Education is required if the right to receive interest payments has been assigned. Either the seller or the purchaser must see to the proper notification. The purchaser will bear any risk resulting from the lack of notification if it relies on the seller to carry out the requirement. 4. With respect to the payment of the default claims on loans originated by educational institutions, the Commissioner will determine the amount of the unpaid balance in accordance with the following rules : (a) If the educational Institution which made the loan is the holder of the loan at the time of the default, the reimbursement on the default claim will be reduced by any amount included therein which is attributable to an unpaid refund owed to the student by that institution. (6) If the holder of the loan at the time of default is an eligible lender other than the educational institution which made the loan, the reimbursement on the default claim will be reduced by any amount included therein which is attributa ble to an unpaid refund which had become due prior to the date on which the educational institution transferred the loan and proper notice of such transfer was given to the student.
Mr.
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If the holder of the loan at the time of the default is an eligible lender than the educational institution which made the loan, the reimbursement on the default claim will not be reduced to take account of an unpaid refund which became due after the date on which the institution transferred the loan and the student was given proper notification of the transfer, if the lender has made a diligent effort to collect any such refund. a student is unable to complete the academic session for which he (d) obtained the loan because the educational institution terminated the course of study in which the student was enrolled, and if that educational institution is the holder of the loan at the time of the termination, the reimbursement on the institution's default claim will not be a greater proportion of the total loan than the proportion of the academic session which the student was able to complete. the holder of the loan at the time of termination is an eligible lender other than the educational institution, the reimbursement on the holder's default claim will likewise not be a greater proportion of the total loan than the proportion of the academic session which the student was able to complete. 5. Section 177.52 (c) addresses the question of lenders having a special relation ship with schools. It identifies certain circumstances which would result in the loans made by the lender being treated as if they were made by a school and transferred to the lender. Such relationhips would include cases in which the lender and the institution have common ownership or control and cases in which the lender has delegated its normal loan-making activities to the school. The public comment period has expired and all comments received have been reviewed and considered. The regulations are in the final stages of the clearance process and it is anticipated that the final version will be published shortly. Sincerely, THEODORE SKY, Acting Assistant General Counsel for Education. (o) other
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Senator NUNN. Mr. Bell, we will need to get your cooperation in the next 2 or 3 weeks for the subcommittee so we can submit questions to you and get everything complete, everything you are not only doing, but what you plan to do. Mr. BELL. We will certainly respond, Mr. Chairman.
I have four more pages here, if I hustle
along.
Senator NTJNN. Why don't you go ahead COLLEGE-BASED
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PROGRAMS
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Mr. BELL. understand that in earlier testimony it was indicated that "HEW's compliance policies for these programs — the national direct student loan, college work-study, and supplemental educational opportunity grants programs — are based on faith in the integrity of the schools." with an implication that this showed a laxity or naivete on our part. wish to affirm my support for the fact that our compliance policies are based on faith in the integrity of the participating schools, and point out that to do otherwise would not only be contrary to the basic principle that people are innocent until proven guilty, but would also require a staff in the OE headquarters and regional offices of staggering
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You must realize, however, that it is practically impossible to devise procedures which would prevent abuse by a person in a position of trust who is determined to misuse that trust. However, we have encouraged and urged institutions to have regular audits done. The number of program audits received for the collegebased programs during the past 3 fiscal years is : fiscal year 1973, 1,822 : 1974, 2,379; and 1975, 2,345. In addition, the proposed regulations for the national direct student loan and college work-study programs, published in the Federal Regis
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ter on October 14, 1975, require that institutions schedule program audits not less frequently than once every 2 years. this requirement is contained in the final regulations, a similar requirement will be inserted in the supplemental educational oppor tunity grants program regulations. A more comprehensive discussion of our audit situation for the campus-based programs is contained in my longer statement submitted
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for the record. With regard to the general administration of these programs, it is
quite true that official current regulations have not been available in a timely fashion. However, final current regulations for the administration of the sup plemental educational opportunity grants program were published in the Federal Register on October 21, 1974, and address in detail such subjects as institutional applications, application review and approval of request, the institutional agreement, fiscal procedures and records, and termination and suspension. Similar provisions have been included in the notice of proposed rulemaking for the administration of the college work-study and national direct student loan programs. Final regulations on these programs should be issued within the next several months. We believe that the existence of current official regulations will assist in improving the operation of the campus-based programs. Finally, would like to mention some additional recommendations for legislation relating to institutional eligibility which we are
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LEGISLATIVE POSSIBILITIES
We presently have under consideration —and expect to forward to Congress soon — proposed statutory language which, if enacted, would — among other points — strengthen the Office's ability to review the performance of institutions relative to student aid programs. The proposed language would also provide for establishment of appropriate guidelines for institutional financial responsibility and the maintenance of student records, compliance with ethical standards for advertisement and recruitment of students, provision for fair and equitable tuition refund policies, and public disclosure of institutional performance statistics. A second major feature of the proposals would be that of providing the Commissioner of Education with explicit authority to limit, sus pend, or terminate the eligibility status of postsecondary schools for all student aid programs should they be found to be in noncompliance with pertinent statutes or regulations. A third major feature is that of providing greater flexibility in our available mechanisms for providing eligibility access to schools. In the vocational school sector, we would propose a broadening of our ability to rely upon the actions of competent State approval agen cies in order to provide eligibility status for their schools. Furthermore, we see the need for a more comprehensive mechanism which can provide eligibility status for those schools which have no recognized accrediting or State approval agency available to them.
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The final major feature of the statutory proposals on which we have been working is language which will upgrade and strengthen the role of the National Advisory Committee on Accreditation and Institu tional Eligibility, which has emerged during the past several years as one of our major instruments for bringing increased substance to our efforts in this area. Essentially, Mr. Chairman, the statutory changes we envision would, if adopted by Congress : Provide alternative channels for establishing institutional fund ing eligibility, thereby lessening unwarranted pressures on both accrediting agencies and institutions ; Create safeguards insuring that the appropriate interests of students, institutions, the public and the Federal Government are properly protected ; Provide the Commissioner of Education with reasonable au thority designed to enable him to fulfill his explicit and implied stewardship responsibilities for administering programs of stu dent financial aid ; and Add specificity and flexibility to the range of remedies avail able in dealing with individual institutions and particular cir cumstances in the realm of funding eligibility. Another effort to which we have been addressing ourselves in the eligibility picture is that of development of regulations. Presently we are redrafting, or drafting anew, regulations pertain ing to eligibility determinations or procedures under present laws. In cluded among these are improved regulations dealing with the recog nition of accrediting and State approval agencies. In conclusion want to emphasize the enormous size and complexity of the student aid programs. They involve billions of dollars, millions of students, and thousands of schools and colleges. This presents us with an enormous administrative burden which trust will be better understood as a result of these hearings.
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Thank you, Mr. Chairman. Senator NTJI^N. Thank you, Mr. Commissioner. We will have all of the exhibits that are attached to the Commis sioner's statement in our record. They will be given the proper number, without objection. [The documents referred to were marked "Exhibit Nos. 95"
for reference and follow :]
EXHIBIT SIGNIFICANT
Public Law No. 89-329 89-287 89-698 90-460 90-575 91-95 92-318 93-269
91
through
NO. 91
LEGISLATIVE CHANGES TO THE GSLP
Date of enactment Change Nov. 8,1965) Established the guaranteed student loan program for higher education students and Oct. 22, 1965( vocational students. Nov. 29, 1966 Expanded school eligibility to include foreign schools. Augl 3,1968 Raised interest rates from 6 to 7 percent. Created reinsurance authority; established 1 program to cover higher and vocational loan programs; authorized Federal insurance for interstate lenders. Nov. 22, 1969 Created special allowance of up to 3 percent. June 23, 1972 Increased loan maximums; insured interest on new federally insured loans; instituted needs analysis for Federal interest benefits; authorized regulation for school participa tion; and createdthe Student Loan Marketing Association. Apr. 18,1974 Eliminated needs test for students with adjusted family income below $15,000 on loan amounts up to $2,000 per year.
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317 EXHIBIT
NO. 95
COST OF OPERATING THE PROGRAM FEDERAL EXPENDITURES— FISCAL YEAR 1966 THROUGH FISCAL YEAR 1974 AND THROUGH FISCAL YEAR 1975 Through 1974 Cumulative average loan value.. Cumulative number of loans disbursed Cumulative volume of loans disbursed
Through 1975
$998.00 6,435,000.00 6,425,000,000.00
$1,037.00 7,311,000.00 7,585,000,000.00
933,995,200.00 174,728,759.00 209,146,320.00 25, Oil, 000.00
1,087,255,736.00 259,030,226.00 322,146,000.00 44, Oil, 000.00
Subtotal Minus income from— Collections Insurance premiums
1,342,881,279.00
1,712,442,962.00
13,941,847.00 15,597,616.00
25,406,127.00 18,988,822.00
Net. Average cost per loan "" Cost per dollar of disbursed loan... Dollars disbursed per dollar cost
1,313,341,816.00 204.09 .20 4.89
1,668,048,013.00 228.16 .23 4.55
Costs: Cumulative interest benefits payments Cumulative special allowance payments. Cumulative claims payments Cumulative salary and expense funds.
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have several pages of questions, but think we Senator NUNN. would all be better served to let you review the record that has been developed this week. Let us get as much as we can from you on what you are working on right now, and then let our staff work together in the next couple of weeks. We will be making another request for an appearance of both you and the Secretary at a convenient time. Do any of you here have any other statements you want to make ? Mr. BELL. would like to express my appreciation, Mr. Chairman, for the opportunity to appear here and your courtesy toward us. appreciate it. Mr. FELDMAN. Could just get the procedure down pat, Mr. Chair would like to do is that on Monday, if you could send a man ? What will give him a complete set of the representative up to my office, which official hearing transcripts you then can go through and scruti nize very closely and address yourselves to those issues in the transcripts. would be happy to work with you and the staff and the minority and majority will work with you so you can come back and address
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the issues. For example,
the testimony on when did HEW know about the situation of West Coast Schools and what HEW did when Alexander Grant & Co., the accounting firm brought it to their attention ? think you should be able to trace those things down and give us a response, or if you can't tell why. Go into detail. Mr. STATLER. would just like to add one thing to the pertinent questions that the chairman proposed at the beginning, and that is the question that you and Senator Percy both posed to Mr. Hoffe yesterday ; namely, above and beyond the existing laws, the existing regulations that you promulgated, pursuant to those laws, would like to have the views and the recommendations of OE on specifically what you think should be the responsibilities of each of the various parties involved in these transactions, specifically the financial institutions, the schools involved, the students and also very importantly, accredit ing organizations ? That is all.
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Mr. HASTINGS. Mr. Chairman, it would be helpful to the extent that we can get them, if we could see some of the questions you would like us to respond to specifically as well. Senator NUNN. We will submit those. We have already got a good many prepared. We will have some more prepared and get those to think the record speaks for itself. There are a lot of ques you. But tions that have come up this week. think if you read this record, and those who have attended know, it will be pretty obvious what the questions and the problems are. have a brief closing statement am going to read at this time, we have got copies. We have completed several days of rather intensive hearings on the guaranteed student loan program and related financial assistance programs administered by the Department of Health, Education, and Welfare. This has not been a cursory examination. To the contrary, we have documented abuses ranging from negligence to alleged cor ruption in building a comprehensive record of sworn testimony. Our staff has done an excellent job, believe, and want to commend each of the members of the staff, any minority and majority who have worked so hard on this. This record, in my opinion, dictates the con clusion that this program must be brought under control and it must be reshaped, both legislatively and administratively, so that it can truly serve those it was intended to serve, the Americans who are basically disadvantaged, who would not otherwise benefit from con tinuing education. Instead, at the present time, unfortunately, we see benefits passing to fly-by-night operators, in many cases, and a small group of unscrupulous individuals who are preying on unsuspecting young people and who parry Federal funds into financial empires. want to add, at that point, that am also certain there are many fine operations, there are many outstanding schools and there are many programs that are being administered correctly, but we have heard enough this week to make us wonder how much the program is going to cost taxpayers in the future and whether it is a bill we can afford to pay. When the Government administers a program involving billions of dollars and when the people who administer the program can't tell us how much is outstanding in loan guarantees and they can't tell us how much has been guaranteed for students in a particular school or how much in direct money grants has gone to the school, when we have a situation where the administrators have not bothered to check the validity of millions of dollars of interest claims submitted by lending institutions, can't find the notes, evidencing the debts and certain powers, have a situation further where there is information lost on computer tapes which recorded millions of dollars of student loans and when our subcommittee staff itself has had to help put the file in order which in one office, according to testimony, was strewn all over, stacked on window sills and in other areas, and when we see all of this coupled together and the fact that not much at all, if anything, had been done until this subcommittee staff began an intensive investi would say that summarizing it all, something is gation this year, radically wrong with the program. think Congress has a responsibility to correct any deficiencies in have already said, the law. Mr. Commissioner, as certainly think your Department and HEW have a grave responsibility to straighten
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out the administrative apparatus as soon as possible so that we can have a program which really carries out the noble intent of the
legislation. We will convene at
a later date. We will Commissioner, to you. Thank you for appearing.
[Whereupon, at
3 :35
be
submitting questions, Mr.
p.m., the subcommittee
subject to the call of the Chair.]
recessed, to reconvene
[Member of the subcommittee present at time of recess: Senator Nunn.]
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