Defunct Cosmetology School’s Insurer Pays $8.6 Million to Resolve Claims that School Improperly Obtained Federal Student Loan Funds
LOS ANGELES – The insurance carrier for a defunct, for-profit cosmetology school has paid the United States $8,631,000 to resolve civil allegations that the school obtained federal student loan funds for ineligible students who received bogus high school diplomas.
B&H Education, Inc. (B&H), which operated the Marinello Schools of Beauty in locations across Southern California, was accused in a “whistleblower” lawsuit of improperly assisting adult students who did not have high school diplomas to obtain bogus high school diplomas. B&H allegedly allowed students seeking high school diplomas to take their tests without proctors, to use their phones and workbooks to look up answers during tests, and to repeat the same tests until they passed.
Many of the students who received their high school diplomas through this program then enrolled at B&H, and, with B&H’s assistance, applied for and received federal student loans for which they were not eligible. Under U.S. Department of Education (ED) regulations, a student must have a valid high school diploma or its equivalent in order to receive federal student loans.
“The operator of this school manipulated the system in order to fraudulently secure student aid funds without which the school could not function,” said United States Attorney Eileen M. Decker. “Today’s settlement demonstrates my office’s commitment to ensuring the integrity of federal programs, and the public monies used to support them.”
“Our students depend on higher education institutions to prepare them for careers through a quality education. Unfortunately, some schools violate their trust through deceptive marketing practices and defraud taxpayers by giving out student aid inappropriately. These unscrupulous institutions use questionable business practices or outright lie to both students and the federal government,” said ED Under Secretary Ted Mitchell. “In these cases we are taking aggressive action to protect students and taxpayers from further harm by these institutions.”
The allegations against B&H first surfaced in a qui tam, or whistleblower, lawsuit filed by six former B&H employees in 2013 under the False Claims Act. Pursuant to the provisions of the False Claims Act, as a result of the settlement announced today, the six whistleblowers collectively will receive $2.5 million for filing the lawsuit on behalf of the United States.
The settlement is with the insurance carrier because B&H went out of business earlier this year after the ED denied B&H’s recertification application to continue participating in federal student financial assistance programs. B&H’s only remaining non-secured asset was its insurance policy issued by Philadelphia Indemnity Insurance Company. In April, United States District Judge R. Gary Klausner allowed the insurer to intervene in the civil lawsuit.
In February, the ED cut off Marinello's participation in the federal student aid program after determining that the institution was knowingly requesting federal aid for students based on invalid high school diplomas, underawarding federal student aid to students, charging students for excessive overtime and engaging in other acts of misrepresentation. This action included 23 Marinello campuses in Las Vegas, Nevada; Los Angeles; Burbank, California; Moreno Valley, California; and Sacramento, California. The entire Marinello school chain – with 56 campuses across the nation – received more than $87 million in Pell Grants and federal student loans for the 2014-15 school year. The entire chain closed shortly after the action was initiated.
In addition to the $8.6 million payment to the United States, pursuant to the False Claims Act, the insurer will also pay $2,369,000 to the six whistleblowers’ attorneys, who have litigated the case since January 2015 and partnered with the U.S. Department of Justice to negotiate the settlement.
Philadelphia Indemnity agreed to the civil settlement without admitting any wrongdoing by its insured, B&H, and paid the settlement on August 15. On August 22, Judge Klausner dismissed the case against B&H, United States ex rel. Caron, et al. v. B&H Education, Inc., et al., CV13-5256-RGK.
The government’s investigation was conducted by the U.S. Department of Education’s Multi-Regional School Participation Division, the Administrative Actions and Appeals Service Group, the Office of the General Counsel, and the Office of Inspector General.
The settlement was handled by Assistant United States Attorney Abraham Meltzer of the Civil Division’s Civil Fraud Section.