POTENTIAL CIVIL AND CRIMINAL CONSEQUENCES OF
CONFLICTS OF INTEREST
November 11–13, 2009
Benjamin E. Rosenberg
David T. Jones
Dechert, LLP
Conflicts of interest may arise in almost any setting in universities and colleges. This
outline discusses some of the potentially severe consequences of such conflicts of interest under
both federal and state law.
I.
False Claims Act
A.
Introduction
The False Claims Act (the “FCA”)1 was enacted during the Civil War to combat massive
frauds perpetrated by contractors supplying goods and services for the war effort.2 As a result of
expansive amendments in 1986, however, the FCA has morphed into a broad antifraud statute
that potentially implicates any company or institution that does business with the federal
government or receives federal funding. In fact, the FCA is now widely considered the “single
most important tool used to protect the public fisc.”3 It provides for substantial civil liability,
including treble damages, penalties of up to $11,000 for each violation, and an award of
attorney’s fees and costs against violators.4 The FCA also includes uniquely attractive
“whistleblower” provisions that authorize third party individuals, often disgruntled former
employees, to bring FCA actions on behalf of the federal government and recover a share (up to
thirty percent) of any settlement or judgment.5 In view of the strong financial incentives that the
FCA offers to the government and private whistleblowers alike, it is hardly surprising that FCA
actions have become big business. Over the last twenty years, the government has obtained
approximately $22 billion in settlements and judgments under the FCA, with whistleblower
plaintiffs collecting more than $2.2 billion in awards during that time.6 And there are no signs of
FCA litigation slowing down anytime soon. On the contrary, recent amendments to the FCA by
the Fraud Enforcement and Recovery Act of 2009 (“FERA”) have provided the government and
private whistblowers with even more firepower to investigate and pursue FCA claims, and more
than twenty states have now enacted their own false claims statutes modeled after the FCA.
While defense contractors and pharmaceutical companies have long been targets of FCA
claims, the federal government and whistleblowers have increasingly turned their attention to
universities in recent years. In the past year alone, several schools have entered into multi-
1
31 U.S.C. §§ 3729-3733.
United States v. Hibbs, 568 F.3d 347 (3d Cir. 1977).
3
Zachary A. Kitts, Commentary to FCA.
4
31 U.S.C. § 3729.
5
31 U.S.C. § 3730.
6
DOJ Fraud Statistics 1986-2008, available at http://www.taf.org/FCA-stats-DoJ-2008.pdf.
2
13618137.1.LITIGATION
million dollar FCA settlements with the government and whistleblower plaintiffs.7 Two
practitioners recently posited that universities have become prime targets for FCA claims
because they “tend to be decentralized . . . hav[ing] many different departments, schools, and
related entities that do business with the federal government without any particular oversight or
coordination between and among the different actors”; have a “broad pool of potential whistleblowers, many of whom may be transient or short-term employees with little allegiance to the
university or interest in the university’s long-term success and reputation”; and offer “deep
pockets, with the ability to satisfy multimillion-dollar settlements and judgments, as well as
related attorney fees.”8 In the current litigation climate, any school that does not aggressively
monitor its compliance with federal funding programs risks massive liability exposure under the
FCA.
B.
Overview of the FCA
The FCA generally prohibits any entity or individual from submitting, or causing
someone else to submit, a false or fraudulent claim for payment of government funds.9 The FCA
proscribes seven broad categories of misconduct.10 The most commonly invoked provisions of
the FCA impose liability on any person who “knowingly presents, or causes to be presented, a
false or fraudulent claim for payment or approval” or “knowingly makes, uses, or causes to be
made or used, a false record or statement material to a false or fraudulent claim.”11 The latter
provision is “designed to prevent those who make false records or statements to get claims paid
or approved from escaping liability solely on the ground that they did not themselves present a
claim for payment or approval”12 or were not otherwise involved directly in the claims process.13
Recent amendments to each of these provisions under FERA have expanded liability to include
not only false claims for payment submitted directly to the federal government, but also claims
by subcontractors made to general contractors, grantees, or other recipients of federal funds.
The FCA expressly defines several of the key terms in the statute. A “claim” is defined
in part to include “any request or demand, whether under a contract or otherwise, for money or
7
Recent settlements include: (1) a $2 million settlement by New Jersey University Hospital in June 2009 for
allegedly double billing the government’s Medicaid program, which supplemented a previous settlement payment of
$2.45 million ($801,000 received by the whistleblower); (2) a $7 million settlement by Alta Colleges in April 2009
for allegedly falsely certifying compliance with state licensing requirements necessary to qualify for federal student
aid ($1.19 million received by the whistleblowers); (3) a $2.6 million settlement by Weill Medical College of
Cornell University in March 2009 based on allegations that an employee failed to fully disclose her active research
projects in federal grant applications; (4) a $7.6 million settlement by Yale University in December 2008 for
allegedly mischarging salaries and costs paid from federal grants; (5) a $1 million settlement by St. Louis University
in July 2008 based on allegations of supplemental pay mischarges by faculty members of the University’s School of
Public Health ($190,000 received by the whistleblower, who was the school’s former dean).
Roberto M. Braceras & Karin Bell, “The False Claims Act and Universities: From Fraud to Compliance,” College
and University Law Manual (2009).
9
31 U.S.C. § 3729.
10
Id.
11
Id. § 3729(a)(1)(A), (a)(1)(B). The FCA also imposes liability for “conspir[ing] to commit a violation” of the
FCA. Id. § 3729(a)(1)(C).
12
United States ex. rel. Totten v. Bombardier Corp., 380 F.3d 488, 501 (D.C. Cir. 2004).
13
United States v. President and Fellows of Harvard College, 323 F. Supp. 2d 151, 194 (D. Mass. 2004).
8
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property.”14 Courts have broadly defined the term “claim” to capture “all fraudulent attempts to
cause the Government to pay our sums of money.”15 False claims include not only the classic
example of overcharging the federal government for goods and services, but also encompass
what are commonly known as “false certification” claims, among other types of claims. Under
the “false certification” theory, a defendant may be found liable under the FCA for falsely
certifying compliance with statutory, regulatory, or contractual provisions that serve as a
prerequisite to obtaining government funds. The government and whistleblower plaintiffs have
increasingly relied on the “false certification” theory in litigating FCA claims against universities,
as reflected in the Harvard case discussed below.16
The FCA also expressly defines the term “knowingly” as having “actual knowledge” of
the falsity of the information at issue or acting in “deliberate ignorance” or “reckless disregard”
of the truth or falsity of the information.17 Thus, unlike traditional fraud claims, the government
need only prove that the defendant acted recklessly and “no proof of specific intent is
required.”18
C.
Conflicts of Interest May Lead to FCA Liability
In United States v. President and Fellows of Harvard College,19 the federal government
brought a civil action under the FCA against Harvard and two of its employees who participated
in a government-funded project to assist Russia in developing capital markets and foreign
investments. The government’s contract with Harvard barred employees who were assigned to
the project from conducting certain business and investment activity in Russia that could give
rise to real or apparent conflicts of interest. The government alleged that the individual
defendants improperly invested and conducted business in Russia, and then caused financial
forms to be submitted to the government that falsely certified, in violation of the FCA, that
Harvard was complying with the contract. According to the government, those false
certifications had the practical effect of inducing continued payments by the government to
Harvard for the project. The district court found both individual defendants liable under the FCA
for their respective roles in Harvard’s submission of false certifications. While the court
determined that Harvard was not liable under the FCA because it lacked sufficient information to
alert it to the fact that the individual defendants were making improper investments in Russia, the
court still found Harvard liable for breach of its contract with the government. After litigating
for five years, the parties ultimately reached a settlement in August 2005 that required Harvard
and the individual defendants to pay more than $31 million in total.
As the Harvard case illustrates, the federal government is fully willing and able to invest
years of time and resources into litigating FCA claims in the hopes of a big payoff. In light of
the government’s aggressive pursuit of FCA violations, it is essential that universities take
affirmative steps to minimize their potential exposure to FCA claims, whether arising from
conflicts of interest or otherwise. Because the FCA does not allow to employers to avoid
14
31 U.S.C. § 3729(b)(2).
Harvard, 323 F. Supp. 2d at 179.
16
See also United States ex. rel. Main v. Oakland City Univ., 426 F.3d 914 (7th Cir. 2005).
17
31 U.S.C. § 3729(b)(1).
18
Id.
19
323 F. Supp. 2d 151 (D. Mass. 2004).
15
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liability by “hiding behind a shield of self-imposed ignorance,”20 the best defense against FCA
liability is a comprehensive compliance program, ideally overseen by a central administrative
department or office that is exclusively responsible for supervising government contracts and
grants. Conducting annual FCA training and education sesssions with employees, as well as
implementing and enforcing disciplinary guidelines, will help universities deter FCA violations
and increase the likelihood that potential violations are detected and corrected promptly. To
guard against conflicts of interest like the investment decisions at issue in the Harvard case,
universities would be well-advised to heed the district court’s recommendations in that case to
“distribute[ ] a short memo explaining the conflicts provision, and perhaps even require[ ] project
staff to fill out a disclosure form.”21
II.
Honest Services Fraud
A.
Introduction
The sweeping scope of the federal mail fraud statute22 led one commentator (now judge)
to observe long ago that “[t]o federal prosecutors of white collar crime, the mail fraud statute is
our Stradivarius, our Colt 45, our Louisville Slugger, our Cuisinart – and our true love. We may
flirt with RICO, show off with 10b-5, and call the conspiracy law ‘darling,’ but we will always
come home to the virtues of 18 U.S.C. § 1341, with its simplicity, adaptability, and comfortable
familiarity.”23 Since that time, a particular species of mail fraud, known as honest services fraud,
has arguably become the new “main squeeze” of federal prosecutors. Enacted by Congress in
1988 in response to a Supreme Court ruling that the mail fraud statute only criminalized
“schemes to defraud” involving a deprivation of money or other tangible property, the honest
services fraud statute summarily provides that “the term ‘scheme or artifice to defraud’ [(as used
in the mail, wire, and bank fraud statutes)] includes a scheme or artifice to deprive another of the
intangible right of honest services.”24 By dispensing with the need to prove a tangible financial
harm to the victim, the honest services fraud statute provides federal prosecutors with greater
versatility than ever before. Although it consumes only one line of text, Section 1346 is
unquestionably “the hottest little criminal statute in federal court.”25
Honest services fraud “typically occurs in two scenarios: (1) bribery, where a legislator
was paid for a particular decision or action; or (2) failure to disclose a conflict of interest
resulting in personal gain.”26 While disgraced public officials are most commonly the subjects
of honest services fraud prosecution, the government has increasingly targeted private
individuals, from private lawyers who arranged for secret gratuities to be paid to claims
adjusters,27 to members of the Salt Lake City Bid Committee who allegedly bribed the
International Olympic Committee in a bid to host the 2002 Winter Olympics,28 to college
20
Id. at 192.
Id.
22
18 U.S.C. § 1341.
23
Jed Rakoff, The Federal Mail Fraud Statute (Part 1), 18 Duq. L. Rev. 771, 771 (1980).
24
18 U.S.C. § 1346.
25
Laurie L. Levenson, “Honest Services Fraud,” The National Law Journal (Mar. 9, 2009).
26
United States v. Antico, 275 F.3d 245, 262 (3d Cir. 2001).
27
United States v. Rybicki, 354 F.3d 124 (2d Cir. 2003).
28
United States v. Welch, 327 F.3d 1081 (10th Cir. 2003).
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coaches who helped students cheat to become academically eligible to play for their university.29
Federal prosecutors are even exploring the possibility of bringing honest services fraud charges
against Cardinal Roger Mahony, the head of the Catholic Archdioese in Los Angeles, for
allegedly covering up the sexual abuse of minors by priests.30
Taken to its literal extreme, the honest services fraud statute could be read to criminalize
the most mundane ethical violations and technical breaches of contract. Earlier this year, Justice
Scalia expressed fear over a parade of horribles in which “a salaried employee’s phoning in sick
to go to a ball game” could theoretically implicate honest services fraud.31 While courts have
uniformly recognized the need for limiting principles to cabin the potentially breathtaking scope
of the honest services fraud statute, courts have struggled over the last two decades to reach any
sort of consensus on what those limiting principles should be. After much clamoring by the
lower courts, the Supreme Court has finally granted certiorari in two cases involving the
parameters of honest services fraud.32 As long as the law remains unsettled, however, federal
prosecutors will undoubtedly continue to press the outer boundaries of the honest services fraud
statute. In light of the government’s aggressive pursuit of honest services fraud prosecutions
implicating all sorts of public and private conduct, coupled with the government’s growing
interest in investigating universities for potential FCA violations, it is important for universities
and their employees to have at least a baseline understanding of the crime of honest services
fraud.
B.
Overview of Honest Services Fraud: Conflicting Approaches Among the Courts
Courts have employed a variety of different limiting principles in applying the honest
services fraud statute to public officials. In addition to the basic elements of mail fraud,33 the
Seventh Circuit has held that the government must prove that the defendant was motivated by a
personal or private gain to sustain a honest services fraud conviction.34 Several other circuits
have rejected this standard as merely “substituting one ambigous standard for another.”35 Some
circuits have required the government to prove that the defendant’s dishonest conduct
independently violated a state law,36 which has been subject to the criticism that “public officials'
duty of honesty [should be] uniform rather than variable by state.”37 Still other courts have
rejected both the “private gain” and “state law violation” approaches and focused more generally
on whether the government has sufficiently proven that the defendant intended to defraud the
public, noting that while “[e]vidence of private gain may bolster a showing of deceptive
intent, . . . a showing could also rest heavily on evidence of harm and deceit.”38
29
United States v. Gray, 96 F.3d 769 (5th Cir. 1996).
Dan Slater, “From Coaches to Church Officials, An Honesty Law Gets a Workout,” The Wall Street Journal (Feb.
5, 2009).
31
Sorich v. United States, 129 S.Ct. 1308, 1309 (2009) (Scalia, J., dissenting from denial of certiorari).
32
Black v. United States, 129 S.Ct. 2379 (2009); Weyhrauch v. United States, 129 S.Ct. 2863 (2009).
33
The basic elements of mail and wire fraud are: (1) proof of a scheme to defraud; (2) using the mails or wires to
further the fraudulent scheme; and (3) specific intent to defraud.
34
United States v. Bloom, 149 F.3d 649 (7th Cir. 1998).
35
United States v. Panarella, 277 F.3d 678, 692, 699 (3d Cir. 2002).
36
United States v. Brumley, 116 F.3d 728 (5th Cir. 1997); United States v. Murphy, 323 F.3d 102 (3d Cir. 2003).
37
United States v. Weyhrauch, 548 F.3d 1237, 1245 (9th Cir. 2008).
38
United States v. Inzunza, 2009 WL 2750488, at *10 (9th Cir. Sept. 1, 2009). See also Welch, 327 F.3d at 1106
(“[T]he intent to defraud does not depend on the intent to gain, but rather the intent to deprive.”).
30
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Courts are no less divided over the proper reach of the honest services fraud statute in the
private sector. Because private individuals, unlike public officials, do not ordinarily owe a duty of
“honest services” to their employers or other fiduciaries per se, courts have recognized that
“[a]pplication of the ‘right to honest services’ doctrine to the private sector is problematic”39 and
“poses special risks.”40 Mindful of these concerns, many courts have crafted special requirements
for honest services fraud prosecutions in the private sector. Several circuits have held that the
conviction of a private employee (or other private individual owing fiduciary duties to another
person or entity) for honest services fraud may only be upheld where the employee “foresaw or
reasonably should have foreseen that his employer might suffer an economic harm” as a result of
the employee’s misconduct.41 In Frost, for example, the Sixth Circuit upheld the convictions of
two university professors who helped certain graduate students plagiarize their dissertations and
obtain graduate degrees in exchange for the students (who worked for the government) securing
government contracts for a private research firm owned by the professors.42 The court held that,
by failing to disclose their conflict of interest to the university, the defendant professors “intended,
[or at least] reasonably contemplated, that the University would suffer a concrete business harm by
unwittingly conferring an undeserved advanced degree on each student defendant.”43
Other circuits have held that, while the government must prove that the defendant’s
misconduct caused “some detriment” to his employer, the mere non-disclosure of material
information that the employee had a duty to disclose is in itself “detriment” sufficient to support
a honest services fraud conviction.44 For its part, the Seventh Circuit recently concluded that, as
with public officials, sufficient proof of personal gain by a private individual, regardless of
whether it came at the expense of the defendant’s fiduciary or otherwise caused tangible harm to
the defendant’s fiduciary, may sustain a honest services fraud conviction (assuming all of the
other elements of the mail or wire fraud statutes are satisfied).45
39
United States v. Frost, 125 F.3d 345, 358 (6th Cir. 1997).
United States v. Sun-Diamond Growers, 138 F.3d 961, 973 (D.C. Cir. 1998). See also United States v. deVegter,
198 F.3d 1324, 1328 (11th Cir. 1999) (“The meaning of intangible right of honest services has different implications
when applied to public official malfeasance and private sector misconduct. Public officials inherently owe a
fiduciary duty to the public to make governmental decisions in the public’s best interest. If the official instead
secretly makes his decision based on his own personal interests – as when an official accepts a bribe or personally
benefits from an undisclosed conflict of interest – the official has defrauded the public of his honest services . . . .
On the other hand, such a strict duty of loyalty ordinarily is not a part of private sector relationships. Most private
sector interactions do not involve duties of, or rights to, the “honest services” of either party. Relationships may be
accompanied by obligations of good faith and fair dealing…but these and similar duties are quite unlike the duty of
loyalty and fidelity to purpose required of public officials.”).
41
United States v. Frost, 125 F.3d 346, 368 (6th Cir. 1997). The economic harm requirement rests on notion that
"employee loyalty is not an end in itself, it is a means to obtain and preserve pecuniary benefits for the employer . . . .
[and] [a]n employee's undisclosed conflict of interest does not by itself necessarily pose the threat of economic harm
to the employer." deVegter, 198 F.3d at 1328 (quoting United States v. Lemire, 720 F.2d 1327, 1336 (D.C. Cir.
1983)).
42
The professors were employed by the University of Tennessee, a public institution. While the court observed that
it was “unclear” whether the defendants’ “mere status as employees of a state university would qualify them as
public or quasi-public officials,” the court’s analysis assumed that the defendants were private individuals since the
government had not alleged otherwise in the indictment. Id. at 365 n.5.
43
Frost, 125 F.3d at 369.
44
United States v. Brown, 459 F.3d 509 (5th Cir. 2006).
45
See United States v. Black, 530 F.3d 596 (7th Cir. 2008) (affirming convictions of corporate executives who
structured personal transactions to avoid taxes but failed to disclose the transactions to the corporation’s
40
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C.
The Interplay Between Honest Services Fraud and the FCA in the University
Setting
While a professor who obtains royalties from assigning his own textbooks in the courses
he teaches probably need not be overly worried about a criminal indictment for honest services
fraud, the potential breadth of the honest services fraud statute and lack of clear and uniform
limitations on its scope should at least give pause to universities and their employees in assessing
the implications of conflicts of interest. Universities must also remain mindful that the same
predicate conduct that might support the criminal prosecution of a university employee for
committing honest services fraud could well also support FCA claims against both the employee
and the university. Indeed, the government’s FCA lawsuit against Harvard and its employees,
discussed above, was preceded by a criminal investigation of the employees for honest services
fraud based on the alleged conflict of interest resulting from their Russian investments (the
government’s investigation did not result in any criminal charges against the employees).
Similarly, it is not difficult to imagine a scenario where a college coach falsely certifies that
certain student athletes are academically eligible for government-sponsored scholarship funds. If
the university does not have sufficient controls and procedures in place to detect such fraudulent
behavior, FCA liability could well be imposed against the university under the unimposing
“reckless disregard” standard applicable to FCA claims, while the college employee is
prosecuted separately for honest services fraud. Given the potential interplay between the FCA
and honest services fraud, educating university employees about the risks presented by both
statutes should provide a mutually reinforcing deterrent effect.
III.
State Law Issues: Aggressive State Investigations Lead to New Laws Addressing
Conflicts of Interest in Student Lending
A.
Introduction
In October 2006, news outlets reported the cancellation of an expenses-paid education
meeting to be held at the Four Seasons Resort on the Caribbean island of Nevis amid criticism
that the student loan company holding the meeting had invited college officials and their spouses
on the trip in a thinly veiled attempt to secure a spot on the schools’ prized “preferred” lender
lists.46 One commentator called the trip cancellation “a small victory for the integrity of
financial aid,” but hastened to add that “larger conflicts of interest remain.”47 Those remarks
served as a haunting omen of events that would turn the financial aid community upside down in
the ensuing months.
In November 2006, the New York Attorney General’s Office commenced a preliminary
inquiry into potential financial arrangements between universities and loan providers. While
shareholders in accordance with state fiduciary laws, even though defendants arguably received no gain at the
expense of the corporation’s shareholders).
Jonathan D. Glater, “Loan Company Cancels a Trip for Educators,” New York Times (October 27, 2006),
available at http://query.nytimes.com/gst/fullpage.html?res=9D0DE7D6143FF934A15753C1A9609C8B63. The
student loan company released a statement stating that it cancelled the event “in light of recent inaccurate reports in
the media regarding the financial aid community and the unfortunate perception these reports have created.” Id.
47
Id. (quoting Michael Dannenberg, director of education policy at New America Foundation).
46
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loan companies were the initial targets of the Office’s inquiry, the investigation quickly
expanded to include universities and colleges throughout the United States. In February 2007,
New York Attorney General Andrew Cuomo sent formal requests for information to scores of
universities, seeking to probe the standards used by schools to determine which lending
companies were included on “preferred” lender lists that students often rely upon in selecting a
lender.48 The following month, Cuomo proclaimed that his investigation had uncovered “an
unholy alliance between banks and institutions of higher education that may often not be in the
students’ best interest.”49
Accusations that struck many in the education community as being overly sensational
soon gained some measure of credence with announcements that the New York Attorney
General had entered into agreements with dozens of schools and lenders to settle claims of
allegedly deceptive student loan practices.50 As part of the settlements, schools and loan
companies were required to return millions of dollars to student borrowers, help finance a
national education fund, and adopt a Student Loan Code of Conduct developed by the New York
Attorney General.51 Attorneys General of several other states, including Illinois, Missouri,
Minnesota, California, Connecticut and Ohio, among others, soon launched their own
investigations and brokered settlements, often in coordination with the New York Attorney
General, with both universities and lenders.52 Building on the momentum of the various state
investigations, U.S. Congressional investigations of alleged financial aid abuses kicked into high
gear and generated several reports chronicling “systemic” problems in the industry.53
Student loan scandals became almost daily fodder for the press during the spring and
summer months of 2007. News releases detailed reports of lenders making direct payments to
schools, offering inducements to financial aid officers (including expense-paid trips to resorts,
free meals, and tickets to professional sporting events), and even agreeing to revenue sharing
arrangements with schools, all in exchange for being included on the schools’ “preferred” lender
lists. Other reports revealed instances in which school financial aid hotlines, which were
marketed as providing students and parents with an outlet for the school’s advice concerning
educational borrowing options, were in fact staffed and operated by preferred lenders. Financial
NYAG Press Release, “ATTORNEY GENERAL ANDREW CUOMO LAUNCHES BROAD EXPANSION OF
INVESTIGATION INTO POTENTIAL CONFLICTS OF INTEREST IN THE STUDENT LOAN INDUSTRY”
(Feb. 1, 2007), available at http://www.oag.state.ny.us/media_center/2007/feb/feb01a_07.html.
49
NYAG Press Release, “ATTORNEY GENERAL ANDREW CUOMO REVEALS DECEPTIVE PRACTICES IN
THE COLLEGE LOAN INDUSTRY; SENDS LETTERS TO MORE THAN 400 COLLEGES AND
UNIVERSITIES CAUTIONING THEM OF POTENTIAL CONFLICTS OF INTEREST; ADVISES COLLEGEBOUND STUDENTS TO PROTECT THEMSELVES” (Mar. 15, 2007), available at
http://www.oag.state.ny.us/media_center/2007/mar/mar15a_07.html.
50
See, e.g., NYAG Press Release, “ATTORNEY GENERAL ANNOUNCES LANDMARK STUDENT LOAN
AGREEMENTS - SCHOOLS TO ADOPT NEW COLLEGE CODE OF CONDUCT AND REPAY STUDENTS”
(April 2, 2007), available at http://www.oag.state.ny.us/media_center/2007/apr/apr02a_07.html
51
Id. The Student Loan Code of Conduct is available at:
www.oag.state.ny.us/media_center/2007/apr/Collegea%20Code%20of%20Conduct%20final%201.pdf
52
See, e.g., Sam Dillon, “In U.S. Absence, States Take Lead in Student Loan Cases,” New York Times (Apr. 24,
2007), available at http://www.nytimes.com/2007/04/24/education/24loans.html.
53
See, e.g., U.S. Senate Health, Education, Labor and Pensions Committee, “Report on Marketing Practices in the
Federal Family Education Loan Program” (June 14, 2007), U.S. Senate Health, Education, Labor and Pensions
Committee, “Second Report on Marketing Practices in the Federal Family Education Loan Program” (September 4,
2007).
48
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aid directors at several of the most prestigous universities in the country were forced out amid
revelations of improper financial arrangements with student lenders. One of the erstwhile
directors oversaw a financial aid office that allegedly kept meticulous track of “lender treats,”
like ice cream, happy hours and birthday cakes that were allegedly considered in deciding
whether to put loan companies on preferred lender lists,54 while another of the directors allegedly
received cash payments of $65,000 from a preferred student lender.55
By the time all the dust had finally settled, the legal landscape governing the relationships
between colleges and student lenders had changed dramatically. In May 2007, New York
enacted the Student Lending Accountability, Transparency and Enforcement (“SLATE”) Act,56
effectively codifying the Code of Conduct developed by the New York Attorney General, and
comparable laws were passed by Congress in 2008 as part of the Higher Education Opportunity
Act (“HEOA”). Those laws are summarized below.57
B.
New York’s SLATE Act: Setting the Standard for Regulation of Student Loan
Practices
Enacted “to protect[ ] students and parents from being steered by lenders and institutions
of higher learning into student loans laden with conflicts of interest,”58 the SLATE Act
proscribes several of the financial dealings between schools and lenders that were the subject of
the state and federal investigations described above. The key provisions of the SLATE Act are
summarized below:


Prohibits lenders from making gifts,59 including the practice of revenue sharing, to
schools or their employees in exchange for any advantage related to loan activities60
Prohibits schools and their employees from directly or indirectly soliciting, accepting or
receiving any gifts from lenders in exchange for any advantage related to loan
activities61
Jonathan D. Glater, “U. of Texas Fires Officer Over Tie to Loan Company,” New York Times (May 15, 2007),
available at http://www.nytimes.com/2007/05/15/us/15loans.html.
55
Amit R. Paley & Jeffrey H. Birnbaum, “Johns Hopkins Aid Official Resigns,” Washington Post (May 22, 2007),
available at http://www.washingtonpost.com/wp-dyn/content/article/2007/05/21/AR2007052101622.html.
56
N.Y. EDUC. LAW §§ 620-632. The SLATE Act applies to more than 700 colleges and vocational schools in
New York State. See June 19, 2007 Memo from J. Duncan-Poitier to N.Y. Higher Education and Professional
Practice Committee, available at http://www.regents.nysed.gov/meetings/2007Meetings/June2007/0607heppd3.htm
54
57
In addition, several states have adopted Student Loan Codes of Conduct modeled after the Code developed by the
New York Attorney General. See, e.g., NJ Attorney General Press Release, “Attorney General Issues Loan Code of
Conduct for State Colleges and Universities” (September 4, 2007), available at
http://www.nj.gov/oag/newsreleases07/pr20070904a.html.
58
2007 Sess. Law News of N.Y. Ch. 41 (A. 7950).
59
The SLATE Act broadly defines the term “gift” to include any item “having more than nominal value,” including
even lodging costs, meals, and travel expenses. N.Y. EDUC. § 620. The Act exempts brochures or promotional
literature, food, refreshments, and training or informational materials furnished by a lender “as an integral part of a
training session, if such training contributes to the professional development of the [school] employee.” Id. The Act
does not prohibit “private philathropic activities of banks or other lending institutions that are unrelated to
educational loans” Id.
60
Id. § 621.
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Bars school employees from receiving any remuneration or reimbursement of expenses
for serving as a member of a lender’s advisory board62
Prohibits lender employees and agents from posing as school employees or from
otherwise staffing a school’s financial aid office63
Requires schools to inform students seeking loans of all financing options available
under federal law, including information on any terms and conditions of federal loans
that are more favorable to the student, before a lender may provide a private educational
loan to the student64
Prohibits lenders and schools from agreeing to certain quid pro quo high-risk loans that
may prejudice borrowers65
Requires schools to determine the lenders to be included on a “preferred” lender list
“solely by consideration of the best interests of the borrowers . . . without regard to the
pecuniary interests” of the school and to review and update the list annually66
Requires any preferred lender lists distributed by schools to disclose, among other
things:67
o The process by which the school selected the lender for the list, “including, but
not limited to, the method and criteria used to choose the lending institutions and
the relative importance of those criteria,” and
o The students’ right to select a lender of their choice, regardless of whether that
lender is included on the preferred lender list, without any penalty
Requires a private loan provider to disclose, upon request by a school, the historic
default rates of borrowers from that school, the rates of interest charged to borrowers
from the school for the preceding year, and the number of borrowers obtaining each rate
of interest68
The SLATE Act calls for the assessment of civil penalties for any violations, including
penalties of up to $50,000 for violations by schools or lenders and penalties of up to $7,500 for
violations by school employees.69 It also provides that any lender found in violation of the Act
“shall not be placed or remain on any [school’s] preferred lender list unless notice of such
violation is provided to all potential borrowers of [the school].”70
While the New York State Education Department has not yet finalized rules and
regulations implementing the SLATE Act, many schools and lenders are already adhering to “13
Points”71 set forth in the Department’s preliminary draft regulations.72 In addition, many schools
have required their prefered lenders to submit SLATE Act compliance certifications.73
61
Id. §§ 622-623.
Id. § 624.
63
Id. § 625.
64
Id. § 626.
65
Id.
66
Id. § 627.
67
Id.
68
Id. § 629.
69
Id. § 630.
70
Id.
71
The “13 Points” enumerate various disclosure requirements related to interest rates, fees, repayment terms,
penalties, and other terms and conditions of a loan, as well disclosure of examples of a borrower’s estimated
62
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C.
HEOA: Federalizing the Student Loan Codes of Conduct
Enacted in August 2008 to reauthorize the Higher Education Act of 1965, HEOA requires
schools that participate in federal student loan programs to adopt a code of conduct that, at
minimum, satisfies several detailed requirements set forth in the Act.74 Many of these
requirements, including a ban on revenue-sharing arrangements and most gifts from lenders to
financial aid employees, are virtually identical to the proscriptions set forth in the SLATE Act.75
Other provisions of HEOA are less stringent than parallel provisions of the SLATE Act. For
example, while the SLATE Act flatly bans a lender from providing call center or financial aid
office staffing assistance, HEOA includes an exception for “staffing services on a short-term,
nonrecurring basis to assist the institution with financial-aid related functions during
emergencies, including State-declared or federally declared natural disasters….”76 HEOA also
permits a school employee to obtain reimbursement for reasonable expenses incurred while
serving on an advisory board for the lender,77 whereas the SLATE Act imposes a blanket ban on
reimbursement in these cirumstances.
HEOA sets forth preferred lender list requirements similar to those set forth in the
SLATE Act, including annual updates, prominent disclosure of the method and criteria used in
the selection of a preferred lender, and an obligation to prepare the lists for the sole benefit of the
student borrowers.78 HEOA also includes certain additional requirements for preferred lender
lists beyond those specified in the SLATE Act. For example, HEOA requires schools to ensure
that there are not less than three unaffiliated lenders on the list for federal loans and not less than
two unaffiliated lenders for private loans.79 HEOA also specifically enumerates certain criteria
that schools must consider to ensure that preferred lenders are selected on the basis of the best
interest of the borrowers, including payment of origination or other fees on behalf of the
borrower; highly competitive interest rates; high-quality loan servicing; and any “additional
benefits beyond the standard terms and conditions or provisions for such loans.”80
monthly payments and the total payment using the interest rate being offered. See Memo from J. Duncan-Poitier to
N.Y. Higher Education Committee (Feb. 27, 2008), available at
http://www.regents.nysed.gov/meetings/2008Meetings/March2008/0308hed1.htm
See, e.g., JP Morgan Chase – Education Loan Information Related to the New York SLATE Act, (addressing the
“13 Points” for loans available to SUNY Fredonia students), available at
http://www.fredonia.edu/finaid/forms/chaseslate.pdf
73
See, e.g., http://www.fredonia.edu/finaid/slate.asp (stating that “SUNY Fredonia has requested from our
recommended lenders that they provide our institution with a SLATE Compliant Document that illustrates their
compliance and committment [sic] to honest student lending” and attaching copies of compliance documents
completed by lenders).
74
20 U.S.C. § 1094(a)(25).
75
Id. § 1094(e).
76
Id. § 1094(e)(6)(B).
77
Id. § 1094(e)(7).
78
Id. § 1094(h).
79
Id. § 1094(h)(1)(B).
80
Id. § 1094(h)(1)(C).
72
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Through its amendments to the Truth In Lending Act, HEOA represents the first time that
the federal government has regulated private educational loans.81 HEOA prohibits private
educational lenders from, among other things: providing gifts to schools in exchange for any
advantage related to its lending activities or engaging in revenue sharing; co-branding, i.e., using
a school’s name, emblem, logo, mascot, or other words or symbols readily identified with the
school, in marketing educational loans; and compensating financial aid office employees for
service on a private lender’s advisory board, although reasonable expenses may be reimbursed.
Schools are also required to file an annual report with the Secretary of Education disclosing any
reimbursements for service on advisory boards received by its employees.
As the statute itself makes clear, HEOA sets forth only “minimum” standards for codes
of conduct addressing potential conflicts of interest between schools and loan companies. In
addition to New York, some states and universities have implemented codes of conduct that are
more restrictive than HEOA in some respects. The State of Arizona, for example, has created a
Code of Conduct that “exceeds the requirements of the federal act in some key ways,” such as
requiring colleges and universities in that state to list three private lenders on its preferred lender
list (as opposed to two lenders under HEOA) and prohibiting school employees from seeking
reimbursement of travel or other expenses for serving on advisory boards of private lenders.82
D.
Applying Student Loan Codes of Conduct to Relationships With Other Corporate
Vendors
In the midst of his office’s investigation of financial arrangements between schools and
lenders, Attorney General Cuomo warned school leaders that “[i]f we find another manifestation
of the illness, then we will prosecute that, too . . . be it credit cards, or health care services, or
food services.”83 Cuomo further admonished that, if “[schools are] not reevaluating all of their
arrangements and relationships in light of this [investigation], I would be surprised, and it would
be irresponsible of them.”84 Schools deal regularly with numerous corporate vendors offering
incentives, sponsorships, and various other financial benefits to earn the school’s lucrative
business. These arrangements often implicate the very conflict of interest concerns that
prompted Attorney General Cuomo’s investigation of financial arrangements between schools
and student lenders. Accordingly, schools would be well-advised to carefully scrutinize their
relationships with third party vendors of all types and adopt comprehensive “codes of conduct,”
modeled after New York’s SLATE Act, HEOA, and similar student loan codes of conduct
developed by other states, that address revenue sharing and other potentially questionable
arrangements that could prompt an unwanted inquiry from the state attorney general’s office. As
history has shown, what may start as a single state issue can quickly snowball into a highlypublicized nationwide investigation given the high standards of public trust to which colleges
and universities are held.
81
See generally 15 U.S.C. § 1650.
Press Release from the Office of Attorney General Terry Goddard, “Terry Goddard Announces New Student
Lending Standards” (September 24, 2008), available at
http://www.azag.gov/press_releases/sept/2008/Student%20Loan%20Code%20Release.pdf.
83
Doug Lederman, “Inside the Cuomo Probe,” Inside Higher Ed (July 30, 2007), available at
http://www.insidehighered.com/news/2007/07/30/cuomo.
84
Id.
82
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