Free Findings of Fact - District Court of Arizona - Arizona

1 2 3 4 5 6 7 8 9 10 11 12 v. United States of America, Plaintiff, ) ) ) ) ) ) ) ) ) ) ) ) CR 04-0276-PHX-SMM IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

13 Robert C. Hazlett, 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Defendant.

FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER

A criminal charge of conspiracy to commit bank fraud and student loan fraud against defendant Robert C. Hazlett ("Defendant") came before the Court for a bench trial. Having heard the evidence and determined the credibility of the witnesses, the Court now enters its findings of fact found specially from the record beyond a reasonable doubt, the applicable conclusions of law, and the Court's verdict pursuant to Rule 23(c) of the Federal Rules of Criminal Procedure. PROCEDURAL BACKGROUND An amended Superseding Indictment returned against Defendant included 33 counts, consisting of bank fraud (Counts 1 through 16), in violation of 18 U.S.C. § 1344, student loan fraud (Counts 17 through 32), in violation of 20 U.S.C. § 1097(a), and conspiracy to commit bank fraud and student loan fraud (Count 33), in violation of 18 U.S.C § 371 (the "Superseding Indictment"). (Dkts. 92; 132; 208 at 10-11.) Count 33

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1 alleged that, between April 1999 and June 2000, Defendant, the president and owner of 2 debt collection agency Valley Acceptance Corporation ("VAC"), conspired with four debt 3 collectors employed by VAC who specialized in the collection of defaulted student loans, 4 Gregory Evans, James Stevens, Suzanne Prather, and David Honderd ("Co-Defendants," 5 collectively with Defendant, "Defendants"), to commit bank fraud against SunTrust Bank 6 and student loan fraud against the United States Department of Education (the 7 "Department of Education"). The Indictment alleged that the Defendants knowingly and 8 with the intent to defraud developed and executed a scheme that involved submitting 9 material false loan documents in order to (i) obtain money from federally-insured 10 SunTrust Bank and (ii) obtain funds insured by the Department of Education under the 11 provisions of the Higher Education Resources and Student Assistance Law. (Dkt. 92 at 112 6.) The Government alleged that, as a result of the Defendants' scheme, a total of 537 13 fraudulent loan applications were submitted to and approved by SunTrust Bank, resulting 14 in the issuance of $3,696,163 in consolidated student loans, and $1,049,433 in collection 15 fees to VAC. As the ultimate guarantor of the consolidated loans, the Department of 16 Education subsequently paid $1.4 million to the guarantor of SunTrust Bank. (Dkt. 92 at 17 6-8.) The Government alleged that the purpose of the scheme was to falsely represent that 18 certain borrowers qualified for consolidated student loans so that VAC would receive 19 larger commissions as part of the loan consolidation process. 20 A criminal case against Defendant involving all 33 counts was tried to a jury

21 between May 10 and May 19, 2005. (Dkts. 132-153.) After three days of deliberations, 22 the jury announced that it was deadlocked, and the Court declared a mistrial. (Dkt. 158.) 23 Following the mistrial, both parties stipulated to waive their rights to a jury trial and

24 to submit the conspiracy count alone to the Court on the evidence admitted in the first trial. 25 (Dkts. 185-186.) On December 14, 2005, Defendant appeared in Court and waived his 26 right to jury trial both orally and in writing in accordance with Fed.R.Crim.P. 23(a). 27 28
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1 (Dkts. 231-32.) The Government consented to Defendant's waiver, and the Court 2 approved it. See Fed.R.Crim.P. 23(a)(2)-(3) (Id.) 3 FINDINGS OF FACT

4 The Consolidation Loan Program 5 1. 6 7 8 2. 9 10 11 12 13 3. 14 15 16 17 4. 18 19 20 21 22 23 24 25 26 27 28
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VAC is a debt collection agency that was owned and operated by Defendant between April 1999 and June 2000. Defendant was also the president of VAC during this time period. Among other debts, VAC collected defaulted student loans for many colleges and universities participating in the Department of Education's Perkins Loan Program. A Perkins Loan is a federally subsidized loan provided to a student by a college or university. No collection fees were awarded to VAC if it was ultimately unable to collect any money on a defaulted Perkins Loan. On April 1, 1999, VAC entered into a contract with loan broker College Funding Services ("CFS") to replace defaulted Perkins Loans with consolidated loans under the Federal Family Education Loan Program's Consolidation Loan Program (the "CLP") if the borrowers met certain requirements.1 (Exhs. 78, 80.) Pursuant to the CLP, a borrower who had defaulted on an original Perkins Loan could obtain a "consolidated loan" from SunTrust Bank2 provided that the original Perkins Loan was in "repayment status" at the time the borrower applied for the consolidated loan. In order to be in "repayment status," and thus eligible for a consolidated loan under the CLP, a borrower was required to make six consecutive

Under the Federal Family Education Loan Program, borrowers received education loans from private banks that were insured by various public or nonprofit guaranty agencies. The Department of Education served as the ultimate guarantor by providing reinsurance to the guaranty agencies. Between April 1999 and June 2000, SunTrust Bank was an insured institution under the provisions of the Federal Deposit Insurance Corporation. See Exh. 95. -3Filed 02/13/2006 Page 3 of 25

2

1 2 3 4 5 6 5. 7 8 9 10 11 12 13 14 6. 15 16 17 18 19 7. 20 21 22 23 24 25 26 27 28
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monthly payments equal to the greater of one percent of the outstanding balance of the defaulted Perkins Loan or $50 (the "Repayment Requirement").3 (Exh. 80 at ¶ 3.) . The purpose of the Repayment Requirement was to ensure that borrowers were sufficiently credit-worthy to provide a reasonable likelihood of continued monthly payments on the consolidated loan. Under the CLP, SunTech Incorporated, the servicing agent for SunTrust Bank, disbursed the proceeds of consolidated loans to VAC. After VAC paid off the Perkins Loan, by remitting the original loan amount and accumulated interest to the college or university, and paid CFS's brokerage fee, the balance of the consolidated loan funds were retained by VAC as its collection fee. Depending on its contract with the college or university holding the Perkins Loan, VAC received a fee of between 25 and 50 percent of the original loan balance when the Perkins Loan was paid off. See Exh. 90. Loans funded by SunTrust Bank under the CLP were insured by Educational Credit Management Corporation ("ECMC") and guaranteed by the Department of Education. As a result, if a borrower defaulted on a consolidated loan under the CLP, SunTrust Bank would submit a claim for reimbursement to ECMC; ECMC would then file a claim for reimbursement with the Department of Education. To demonstrate that the Repayment Requirement had been satisfied, a Payment History Statement was required to be submitted with every consolidated loan application. (Exh. 86.) The Payment History Statement was required to list each of the six consecutive payments made on the defaulted Perkins loan, together with the dates and amounts paid. The collector who submitted the loan application was required to sign the Payment History Statement on behalf of VAC, verifying that

Only three consecutive payments were required if the borrower's credit bureau score was greater than 525. All of the fraudulently consolidated loan applications submitted by VAC used the six payment method. -4Document 238 Filed 02/13/2006 Page 4 of 25

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the required payments had been made by the borrower. Borrowers were not required to sign Payment History Statements. (Exh. 86.) In addition to the Payment History Statement, either Defendant or Tom Friedlander, VAC's Collections Manager, was required to sign a Loan Verification Certification (the "LVC"), certifying that all information on the loan documents ­ including the Payment History Statement ­ was true and correct. (Exh. 87.) Column number 10 on the LVC indicated whether the borrower had satisfied the Repayment Requirement, and thus was in "repayment status." Both the Payment History Statement and column number 10 on the LVC were material to SunTrust Bank's decision to fund consolidated loans because ECMC would not guarantee a consolidated loan unless the borrower had satisfied the Repayment Requirement. As a result, both the Payment History Statement and column number 10 on the LVC were material to ECMC's decision to guarantee consolidated loans funded by SunTrust Bank. Consolidated loan applications were forwarded by VAC to CFS, which sent the applications to SunTech for processing. CFS never sought to verify the Payment History Statements, but instead relied on VAC to provide truthful and accurate representations of each borrower.4 (Exhs. 78, 80.)

19 VAC Received Record Amounts of Fees From The Consolidation Loan Program 20 11. 21 22 23 24 25 26 27 28
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In April 1999, close to the time VAC entered into the CLP agreement with CFS, Defendant, together with Mr. Friedlander and Dave Barton, VAC's Vice President of Sales, held a general meeting with VAC's student loan collectors and explained the CLP to them. Mr. Friedlander discussed the details of the CLP, and everyone

CFS verified certain information with borrowers only if the loan amount exceeded $20,000. Most of the loans received from VAC were for less than $20,000. -5Filed 02/13/2006 Page 5 of 25

1 2 3 12. 4 5 6 7 8 9 13. 10 11 12 13

understood at the conclusion of the meeting the requirements necessary in order to consolidate a defaulted Perkins loan. The CLP presented a significant opportunity for VAC to increase its profits because the purpose of the program was to pay off defaulted Perkins Loans in their entirety, as opposed to collecting relatively small monthly payments, and VAC's collection fees were based on the amount of money it collected. Because collectors' commissions were based on the amount of money they collected on behalf of VAC, the collectors were also motivated to qualify borrowers under the CLP. When VAC began implementing the CLP, student loan collectors searched their files for qualifying loan accounts ­ those in which the borrower had defaulted on a Perkins Loan and had satisfied the Repayment Requirement by making six consecutive monthly payments ­ and rapidly processed those consolidation applications. During this time period, VAC received record amounts of fees.

14 When the Inventory of Qualifying Loan Accounts Was No Longer Capable of 15 Generating Constant Collection Fees, the Collectors Devised a Scheme to 16 Misrepresent Ineligible Borrowers as Eligible for the CLP 17 14. 18 19 20 21 22 23 24 25 26 15. 27 28
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When the Co-Defendant collectors realized that the inventory of qualified loan accounts had been depleted and was no longer capable of generating a constant stream of collection fees, the Co-Defendants developed a scheme to defraud SunTrust Bank by preparing and submitting false Payment History Statements and false LVCs in order to qualify ineligible borrowers ­ those who had not satisfied the Repayment Requirement ­ for consolidated loans. This scheme to defraud SunTrust Bank, which began as early as April 1999, resulted in a constant stream of collection fees to both the Co-Defendants and VAC even though the inventory of qualified loan accounts was depleted. See Exh. 202. Bulk Payment Method of Scheme to Defraud SunTrust Bank: The Bulk Payment Method of the scheme to defraud SunTrust Bank was initiated by Co-Defendant -6Filed 02/13/2006 Page 6 of 25

1 2 3 4 5 6 7 8 9 10 16. 11 12 13 14 15 16 17 18 19 20 17. 21 22 23 24 25 26 27 28

Evans. The Bulk Payment Method involved the collection of one large payment equal to roughly six percent of the total balance due on the defaulted Perkins Loan, rather than the collection of six consecutive monthly payments. Pursuant to the Bulk Payment Method, the Co-Defendants prepared and submitted false Payment History Statements representing that a single payment had been received over six consecutive months. The Co-Defendants also prepared and submitted false LVCs representing that the defaulted borrower was in "repayment status." See Exhs. 1014. False LVCs prepared in accordance with the Bulk Payment Method were then signed by Defendant and Mr. Friedlander. See Exh. 13. Reduced Payment Method of Scheme to Defraud SunTrust Bank: Under the Reduced Payment Method of the scheme to defraud SunTrust Bank, the CoDefendants prepared and submitted false Payment History Statements representing that six consecutive monthly payments equal to one percent of the balance due had been received by VAC from the defaulted borrower, even though no payments, or fewer than six consecutive payments, had been received. See Exhs. 1-4, 5-9, 15-19, 20-23, 24-28, 29-32, 33-37, 38-41, 42-46, 47-51, 52-55, 56-59, 60-63, 64-68, 6972. False LVCs representing that the borrower was in "repayment status" were then signed by Defendant and Mr. Friedlander. See Exhs. 3, 8, 18, 22, 27, 31, 36, 40, 45, 50, 54, 58, 62, 67, 71. The Court finds that both the Bulk Payment Method and the Reduced Payment Method of the scheme to defraud SunTrust Bank were brought to Defendant's attention, and that Defendant knowingly and intentionally joined the scheme to defraud SunTrust Bank by executing and submitting false loan documents with the intent to defraud SunTrust Bank. The Court further finds that Defendant was a knowing Co-Conspirator who agreed to join the scheme to defraud SunTrust Bank and actively participated in it.

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1 Defendant's Participation in the Unlawful Conspiracy 2 18. 3 4 5 6 7 8 9 10 19. 11 12 13 14 15 20. 16 17 18 19 21. 20 21 22 23 24 25 26 27 28
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In June 1999, during a discussion about the Bulk Payment Method, Defendant instructed Co-Defendants Stevens and Evans not to worry about preparing and submitting false Payment History Statements because he would "smooth it over with [VAC's contact at CFS]," Steven Slatas. (Dkt. 211 at 720.) The Court finds that Defendant had no intention of trying to talk CFS into waiving the Repayment Requirement,5 and that his statement was intended to motivate and induce CoDefendants Evans and Stevens to continue preparing and submitting false Payment History Statements and false LVCs in order to defraud SunTrust Bank. Defendant later told Co-Defendant Evans that it was okay for student loan collectors to submit false Payment History Statements and false LVCs to CFS because CFS was not monitoring or verifying the Payment History Statements. Instead, CFS was relying on the LVCs from VAC, which certified that all of the information in the loan documents was true and correct. The Court finds credible Co-Defendant Evans's testimony that, on several occasions, Defendant specifically instructed him to prepare false Payment History Statements in order to carry out the scheme to defraud SunTrust Bank by qualifying ineligible borrowers for consolidated loans. Shortly after the CLP began, in order to better monitor the scheme to defraud SunTrust Bank, Defendant created a Consolidation Department consisting of CoDefendants Stevens and Evans alone. The Consolidation Department's sole responsibility was to collect on defaulted Perkins Loans. Shortly thereafter, CoDefendant Evans told Defendant that some student loan collectors were falsifying Payment History Statements in order to submit ineligible loan applications to CFS.

Indeed, Defendant had negotiated the CLP agreement with CFS, and thus undoubtedly knew that CFS was not capable of waiving the Repayment Requirement, which was mandated by ECMC and SunTrust Bank. -8Filed 02/13/2006 Page 8 of 25

1 2 3 4 5 6 22. 7 8 9 10 11 12 13 14 15 23. 16 17 18 19 20 21 22 23 24. 24 25 26 27 28

Defendant responded that only Co-Defendants Stevens and Evans were to "handle . . . paperwork" involved in the CLP. Based on other discussions with Defendant, Co-Defendant Evans understood Defendant's response to mean that he and CoDefendant Stevens were the only collectors Defendant wanted to prepare and submit false Payment History Statements and false LVCs. (Dkt. 211 at 800-01.) In July 1999, Mr. Friedlander told Defendant that Co-Defendant Evans sought to submit a false Payment History Statement pursuant to the Bulk Payment Method in order to qualify an ineligible borrower for a consolidated loan. The Court finds credible Mr. Friedlander's statement that Defendant instructed him to submit the false document and ineligible account. The Court finds that Defendant instructed Mr. Friedlander to submit the false Payment History Statement in order to carry out the scheme to defraud SunTrust Bank. The Court further finds that Defendant's instruction resulted in Mr. Friedlander 's decision to submit other false Payment History Statements and to sign false LVCs. Co-Defendant Stevens told Defendant that the CLP did not really benefit VAC because, once all of the qualifying accounts were out of the system, it took six months for other accounts to become eligible for consolidated loans. Defendant instructed Co-Defendant Stevens to get the accounts qualified. Based on previous discussions with Defendant, Co-Defendant Stevens interpreted this response to mean that he should continue to prepare and submit false Payment History Statements and false LVCs, rather than waiting six months for borrowers to become eligible for the CLP. The Court finds credible Mr. Friedlander's testimony that, in October 1999, he told Defendant more than half of the accounts being sent to CFS pursuant to the CLP were accompanied by false Payment History Statements and false LVCs. Mr. Friedlander also told Defendant that he had developed a plan to stop the fraudulent scheme by December 1999. The Court credits Mr. Friedlander's testimony that, -9Document 238 Filed 02/13/2006 Page 9 of 25

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because close to seventy-five percent of VAC's fees were being generated from the CLP, Defendant instructed him not to immediately stop the preparation and submission of false Payment History Statements and false LVCs. Defendant recognized that not satisfying the Repayment Requirement was a problem, but told Mr. Friedlander to "do what [he had] to do" to make sure that collection fees kept coming in from the CLP. Based on his previous discussions with Defendant, Mr. Friedlander interpreted Defendant's response as prohibiting him from interfering with the Co-Defendants' preparation and submission of false Payment History Statements and false LVCs. The Court finds that Defendant intentionally prohibited Mr. Friedlander from interfering with the scheme to defraud SunTrust Bank in order to carry out the object of the conspiracy. Defendant told Mr. Friedlander that, if the fraudulent scheme was ever publically disclosed, he would "swear" he never said anything about allowing collectors to ignore the Repayment Requirement by preparing and submitting false Payment History Statements and false LVCs. After Co-Defendant Stevens left VAC, Defendant Prather applied for his position in the Consolidation Department. Defendant instructed Co-Defendant Prather that one lump sum payment equal to six percent could be split up and falsely represented on the Payment History Statement as having been received in six consecutive monthly payments of one-percent. The Court credits Co-Defendant Prather's testimony that she sought approval from Defendant and Mr. Friedlander before preparing and submitting false Payment History Statements and false LVCs, and that Defendant specifically approved of both practices. The Court finds that Defendant approved the fraudulent practices in order to carry out the scheme to defraud SunTrust Bank.

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The Court finds credible Co-Defendant Prather's testimony that Defendant knew she was preparing and submitting false Payment History Statements and false LVCs. In October 1999, Mr. Barton received a telephone call from Thomas Kohlmann at Michigan State University ("MSU") questioning the rapid repayment of a defaulted Perkins Loan pursuant to the CLP. Mr. Kohlmann asked Mr. Barton how VAC had obtained a consolidated loan in only sixty days for a borrower who was in default, and thus required six monthly payments in order to be eligible for the CLP. Mr. Barton first asked Kathy Grady, VAC's office administrator, about the telephone call from Mr. Kohlmann. Ms. Grady told Mr. Barton that some collectors had been submitting defaulted Perkins Loans for consolidation under the CLP without complying with the Repayment Requirement. When Mr. Barton confronted Defendant with the information he had received from Ms. Grady, Defendant responded, "They're doing that again?" When Mr. Barton asked what Defendant was referring to, Defendant replied, "Well, I'll stop it right now." Mr. Barton interpreted Defendant's first response as meaning that the MSU loan was not the first time the Repayment Requirement had been purposefully disregarded. Mr. Barton's testimony constitutes additional evidence of Defendant's knowledge of the scheme to defraud SunTrust Bank. The Court finds credible Co-Defendant Evans's testimony that, when Mr. Barton confronted him with the situation involving MSU, he accused Evans of breaking the law. Co-Defendant Evans told Mr. Barton to talk to Defendant because he had instructed the collectors to prepare and submit false Payment History Statements. After Co-Defendant Evans relayed this information to Mr. Barton, Defendant instructed Co-Defendant Evans not to discuss with Mr. Barton the preparation and submission of false loan documents.

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1 34. 2 3 4 5 6 7 8

After the MSU incident, Co-Defendant Stevens returned to VAC and subsequently told Mr. Barton his concerns that VAC was not properly qualifying loans under the CLP because it was processing the loans based on one six percent payment, rather than six consecutive monthly payments. The Court credits Mr. Barton's testimony that he immediately reported this information to Defendant, who responded that getting six percent of the defaulted loan amount in one lump sum, rather than in six monthly payments, was proper. Because Defendant had signed the contract with CFS, Mr. Barton assumed Defendant was correct.

9 The 7/13/99 Memoranda 10 35. 11 12 13 14 15 16 17 18 19 36. 20 21 22 23 24 25 26 37. 27 28
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The Court credits Mr. Friedlander's testimony that, prior to the Government's investigation of VAC in August 2000, he never received a memorandum dated July 13, 1999 from Defendant expressing concern over the collectors' practice of preparing and submitting false Payment History Statements and false LVCs (the "July 13 Friedlander Memo"). See Exh. 77. Defendant never instructed Mr. Friedlander to stop collectors from preparing and submitting false Payment History Statements and false LVCs, nor did he instruct Mr. Friedlander to make certain that collectors were complying with the Repayment Requirement and not preparing false loan documents. The Court finds credible Mr. Friedlander's testimony that Defendant never discussed a July 13, 1999 memorandum addressed from Defendant to CoDefendants Stevens and Evans, which expressed concern over their practice of preparing and submitting false Payment History Statements and false LVCs in order to qualify ineligible borrowers for consolidation loans (the "July 13 Stevens/Evans Memo"). Exh. 75. As Mr. Friedlander was the Manager of Collections, Defendant would normally have discussed the July 13 Stevens/Evans Memo with him. The Court credits Co-Defendants Stevens' and Evans' testimony that Defendant never provided either of them with the July 13 Stevens/Evans Memo. To the - 12 Filed 02/13/2006 Page 12 of 25

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contrary, Defendant never disciplined, chastised or berated Co-Defendants Stevens, Evans, Honderd, or Prather for preparing and submitting false Payment History Statements and false LVCs, even though Defendant knew that each of the four CoDefendants were preparing and submitting such false loan documents in order to qualify ineligible borrowers for consolidation loans under the CLP. Because the fraudulent scheme was illegal and could have subjected VAC to significant liability, the Court specifically finds that Defendant would have personally delivered and discussed the July 13 Stevens/Evans Memo with both CoDefendants, rather than leaving the Memo on their computer keyboards, as Defendant testified.

11 VAC's Payment Structure 12 38. 13 14 39. 15 16 17 40. 18 19 20 21 22 23 24 25 26 27 28
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During the time he worked at VAC, Mr. Friedlander was paid a salary. Mr. Friedlander was not paid on a commissions basis. The Co-Defendant student loan collectors were originally paid a base salary and, after they collected four times the amount of their monthly base salary, they received twenty percent of any collections exceeding that amount. When the Consolidation Department was formed, Defendant changed the pay structure for collectors in the Consolidation Department. Although the collectors who worked in the Consolidation Department had the opportunity to earn more money by replacing defaulted Perkins Loans with new consolidated loans, they could have made more money in commissions under the prior pay structure. Under the new payment structure, in an effort to limit the amount of commissions VAC paid to the collectors, Defendant increased monthly base salaries as well as the monthly fee goal that collectors had to reach before commissions were awarded. In addition, the percentage of commissions that collectors earned if they reached the monthly required fee goal decreased from 20 percent to 4.5 percent, if they

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collected in excess of $50,000, 5 percent if they collected in excess of $75,000, and up to 6.5 percent if they collected in excess of $150,000. See Exh. 200. The Consolidation Department's new payment structure benefitted both VAC and Defendant because it resulted in more collection fees being retained by VAC. Defendant was paid a salary from VAC, as well as a bonus based on VAC's yearly profits. The Court finds that Defendant changed the payment structure for collectors in the Consolidation Department because he wanted VAC to retain the extra collection fees resulting from the scheme to defraud SunTrust Bank.

9 VAC's Internal Accounting Records 10 42. 11 12 43. 13 14 15 44. 16 17 18 19 45. 20 21 22 23 24 46. 25 26 27 28
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A facsimile copy of every account that was sent to CFS for processing under the CLP was provided to Defendant. Before July 1999, VAC used the Debt Master System, which recorded the most recent eight payments, including consolidated loan amounts, or adjustments to borrowers' accounts. (Exhs. 1; 65.) In or about July 1999, VAC began using the Flexible Automated Collection System ("FACS"), an income recognition system that, among other things, reflected payments made by borrowers in connection with CLP's Repayment Requirement. See Exh. 60. VAC also maintained computerized Debtor History Reports (the "Reports") for each borrower serviced by VAC. The Reports contained information originating from the college or university from which the borrower had obtained a Perkins loan, including principal loan balance, accumulated interest, collection fees, and balance owed. See Exhs. 5, 10, 15, 24, 29, 33, 38, 42, 47, 64. The Debtor Activity History section of the Reports contained collectors' notes with regards to attempting to collect, including a complete history of communications. The Activity Column of the Debtor Activity History section recorded VAC's receipt of payments from borrowers towards satisfying defaulted Perkins loans. - 14 Filed 02/13/2006 Page 14 of 25

1 2 3 47. 4 5 6 7 8 48. 9 10 11 12 13 14 15 49. 16 17 18 19 20 21 50. 22 23 24 25 26 27 28

This column also reflected payments received by VAC that did not clear the borrower's bank due to non-sufficient funds. The Debtor Payment History section of the Report contained a complete summary of all payments received by VAC from borrowers on defaulted Perkins loans, as well as any payments received by the college or university on the same defaulted Perkins loans. If a borrower received a consolidated loan from SunTrust Bank, the Debtor Payment History section reflected the amount of money disbursed to VAC. A comparison of the Debtor Payment History section of the Reports with the false Payment History Statements submitted to SunTrust Bank revealed which borrowers had received consolidated loans based on the preparation and submission of false loan documents by the Defendants. The Payment History Statements of borrowers who failed to meet the Repayment Requirement did not match the Debtor Payment History section of their Reports. See Exhs. 5, 7, 10-12, 15, 17, 24-26, 29-30, 33, 35, 38-39, 42, 44, 47, 49, 64, 66. A comparison of Debt Master statements with the false Payment History Statements submitted to SunTrust Bank revealed which borrowers had received consolidated loans based on the preparation and submission of false loan documents by the Defendants. The Payment History Statements of borrowers who failed to meet the Repayment Requirement, did not match their Debt Master records. See Exhs. 12,16-17, 20-21, 34-35, 48-49, 52-53, 56-57, 65-66, 69-70. The Court credits Mr. Friedlander's testimony that, while reviewing Debt Master, he was able to and did discover that Co-Defendant Evans was attempting to qualify defaulted student loans for CLP by (i) falsifying student payment histories; and (ii) changing codes in VAC's computer program so that non-Perkins loans were fraudulently represented as Perkins Loans.

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1 Total Losses Resulting From VAC's Scheme 2 51. 3 4 5 6 7 8 9 10 52. 11 12 13 53. 14 15 16 17 54. 18 Dale Fagan, investigator for the Department of Education, subpoenaed documents from CFS, SunTrust Bank and VAC. Mr. Fagan compared the false Payment History Statements and false LVCs prepared and submitted by Defendants with copies of VAC's Debt Master, FACS, and Reports. See Exh. 89. Of the 640 consolidated loans that had been obtained through VAC, 537 loans were accompanied by false Payment History Statements and false LVCs that represented the borrowers as having satisfied the Repayment Requirement even though they had actually submitted none, one, or two of the six required payments. Exh. 89. The 537 consolidated loans issued by SunTrust Bank in reliance on the false Payment History Statements and false LVCs submitted by VAC resulted in collection fees to VAC of more than $1 million. ECMC has paid $1.4 million to SunTrust Bank for claims arising out of 212 defaulted consolidated loans. Each of those 212 loans were issued by SunTrust Bank in reliance on false Payment History Statements and false LVCs prepared and submitted by Defendants through VAC. As a result of ECMC's payments to SunTrust Bank, the Department of Education has reimbursed ECMC $1.4 million.

19 Defendant's Testimony 20 55. 21 22 23 24 25 26 27 28
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The Court does not find credible Defendant's testimony that, in July 1999, when he discovered many of the consolidated loans sent to CFS had not been processed with the requisite number of qualifying payments, he demanded corrective action be taken immediately and told Co-Defendants Stevens and Evans and Mr. Friedlander that he would not tolerate loans being done incorrectly. (Exhs. 73, 75.) This testimony conflicts with Exhibit Nos. 5-14 and 24-28, which demonstrate that false loan Payment History Statements and false LVCs prepared and submitted by Co-

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1 2 3 56. 4 5 6 7 8 9 10 11 12 13 14 15 57. 16 17 18 19 20 21 22 23 24 25 58. 26 27 28

Defendants Stevens and Evans before and through July 1999 were never corrected or attempted to be withdrawn from CFS and/or SunTrust Bank. The Court does not find credible Defendant's testimony that, on July 13, 1999, after signing between ten and twenty LVCs and checking VAC's internal computer records to verify payment amounts, he noticed that Payment History Statements for the loans he verified did not correspond to the payment amounts in VAC's computer. This testimony conflicts with Defendant's testimony that, after July 13, 1999, he never conducted a similar review of the computer records and Payment History Statements, nor did he require Mr. Friedlander to do so, even though he admitted continuing to sign LVCs thereafter and knew Mr. Friedlander was doing the same. It is also contradicted by the false LVCs Defendant signed and submitted on or about July 13, 1999, together with their false Payment History Statements. See Exhs. 7-8, 12-13. The consolidated loans resulting from these false applications were funded on July 16, 1999. See Exhs. 5-6, 10-11. The Court rejects Defendant's testimony that, after July 1999, he had no knowledge that the Co-Defendants were continuing to submit false Payment History Statements and false LVCs in order to defraud SunTrust Bank by obtaining consolidated loans for ineligible accounts. Rather, based on the Court's findings detailed above, it is clear beyond a reasonable doubt that Defendant knew of the scheme to defraud SunTrust Bank, knowingly and intentionally joined the conspiracy with the intent to defraud SunTrust Bank, and participated in carrying out the object of the conspiracy by instructing the Co-Defendants and Mr. Friedlander to continue preparing and submitting false Payment History Statements and false LVCs. The Court also rejects Defendant's testimony that the reason he changed the compensation structure for the Consolidation Department's collectors is because he realized that they would not be able to qualify as many Perkins Loan accounts - 17 Document 238 Filed 02/13/2006 Page 17 of 25

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under the CLP for at least six months. As noted above, the changed compensation structure resulted in more collections being paid to VAC. In addition to owning VAC, Defendant's yearly bonus was based on VAC's profits. CONCLUSIONS OF LAW The Government has moved to dismiss 16 counts of bank fraud and 16 counts of

6 student loan fraud from the Superseding Indictment returned against Defendant. Dkts. 92, 7 132. The Government's decision to dismiss these counts does not change the fact that 8 bank fraud and student loan fraud were committed at VAC between April 1999 and June 9 2000. The commission of such criminal conduct is pertinent to the Court's determination 10 of whether the Government has satisfied its burden of proving beyond a reasonable doubt 11 that Defendant engaged in a conspiracy to commit bank fraud and student loan fraud. 12 1. 13 14 15 16 17 18 19 20 21 22 d. e. b. c. In order for each of the Co-Defendants to be found guilty of bank fraud, in violation of Section 1344(2) of Title 18 of the United States Code, the Government was required to prove the following five elements beyond a reasonable doubt: a. First, the Co-Defendant knowingly carried out a scheme or plan to obtain money or property from SunTrust Bank by making false statements or promises; Second, the Co-Defendant knew that the statements or promises were false; Third, the statements or promises were material, such that they would reasonably influence SunTrust Bank to part with its money or property; Fourth, the Co-Defendant acted with the intent to defraud; and Fifth, SunTrust Bank was federally insured.

23 See United States v. Anderson,391 F.3d 970, 976-77 (9th Cir. 2004); United States v. 24 McNeil, 320 F.3d 1034, 1037 (9th Cir. 2003); 18 U.S.C. § 1344(2). 25 2. 26 27 28
Case 2:04-cr-00276-SMM Document 238

In order for each of the Co-Defendants to be found guilty of student loan fraud in violation of Section 1097(a) of Title 20 of the United States Code, the Government was required to prove each of the following elements beyond a reasonable doubt: - 18 Filed 02/13/2006 Page 18 of 25

1 2 3 4 5

a.

First, the Co-Defendant knowingly and willfully obtained funds by fraud or false statements; and

b.

Second, the funds were provided or insured by the United States Department of Education under the provisions of the Higher Education Resources and Student Assistance Law.

6 See 20 U.S.C. § 1097(a). 7 3. 8 9 10 11 12 13 14 15 16 17 18 19 20 4. 21 22 23 24 25 26 27 28
Case 2:04-cr-00276-SMM Document 238

The record establishes beyond a reasonable doubt that, in or about April 1999 and continuing through June 2000, Co-Defendants Dave Roy Honderd, Gregory Allen Evans, Suzanne Prather, and James Joseph Stevens knowingly and intentionally agreed to develop and execute a scheme to defraud and obtain money from SunTrust Bank, a federally insured financial institution, by knowingly preparing and submitting false Payment History Statements and false LVCs with the intent to deceive and induce SunTrust Bank into funding consolidated loans so that they would receive large collection fees (through VAC). The Co-Defendants knew that the false Payment History Statements and false LVCs were material to SunTrust Bank's decision to fund consolidated loans. The Co-Defendants' conduct in developing and participating in this fraudulent scheme constituted bank fraud, in violation of 18 U.S.C. § 1344(2), as well as conspiracy to commit bank fraud, in violation of 18 U.S.C. § 371. Because the fraudulently obtained collection fees received from the CLP loans were guaranteed by ECMC, and insured by the Department of Education, the CoDefendants' conduct constituted student loan fraud, in violation of 20 U.S.C. § 1097(a), and conspiracy to commit student loan fraud, in violation of 18 U.S.C. § 371. The Co-Defendants' preparation and submission of false Payment History Statements and false LVCs constituted overt acts in furtherance of the conspiracy to commit bank fraud and student loan fraud, see Exhs. 1-72, 82 at 10-12, 83 at 10-12, 84 at 9-11, 85 at 8-9. See United States v. Bishop, 1 F.3d 910, 911 (9th Cir. 1993) - 19 Filed 02/13/2006 Page 19 of 25

1 2 3 4 5. 5 6 7 8 9 10 11 12 13 14 15 16

(the government need not prove the existence of a formal agreement; rather, it can demonstrate that a conspiracy existed through circumstantial evidence that the defendants acted together in pursuit of a common illegal objective). The conspiracy charged against Defendant in Count 33 of the Superseding Indictment has two objects, bank fraud and student loan fraud. Specifically, these charged objects are as follows: a. To knowingly and with the intend to defraud carry out a scheme or plan to obtain money or property from a federally-insured financial institution by making false statements or representations, which (i) the defendant knew were false and (ii) were material to the financial institution, in that they would reasonably influence a bank to part with money or property, in violation of 18 U.S.C. § 1344(2). b. To knowingly and willfully obtain by fraud or false statements any funds provided or insured under Title 20, United States Code, Sub-Chapter IV, Higher Education Resources and Student Assistance Law, in violation of 20 U.S.C. § 1097(a).

17 See Dkts. 92, 132 at page 13, ¶ 1(a)-(b). 18 6. 19 20 21 22 23 24 25 26 27 28
Case 2:04-cr-00276-SMM Document 238

In order for Defendant to be found guilty of conspiracy to commit bank fraud and student loan fraud in violation of Section 371 of Title 18 of the United States Code, as charged in Count 33 of the Superseding Indictment, the Government must prove each of the following elements beyond a reasonable doubt: a. First, beginning on or about April 1999, and ending on or about June 2000, there was an agreement between two or more persons to commit bank fraud or student loan fraud, which were the objects of the conspiracy; b. Second, Defendant became a member of the conspiracy knowing of at least one of its objects and intending to help accomplish it; and

- 20 Filed 02/13/2006 Page 20 of 25

1 2

c.

Third, one of the members of the conspiracy performed at least one overt act for the purpose of carrying out the conspiracy.

3 See United States v. Chong, 419 F.3d 1076, 1079 (9th Cir. 2005); United States v. Bailon4 Santana, 429 F.3d 1258, 1262 (9th Cir. 2005); United States v. Knapp, 120 F.3d 928, 9305 31 (9th 1997); 18 U.S.C. § 371. 6 Conspiracy to Commit Bank Fraud Against SunTrust Bank 7 7. 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
Case 2:04-cr-00276-SMM Document 238

As shown by the Court's findings, the Government has proven beyond a reasonable doubt that the Defendant is guilty of the conspiracy charged in Count 33 of the Superseding Indictment, including each of its two objects (the "Conspiracy"). Indeed, the record clearly demonstrates that, beginning in or about April 1999 and ending in or about June 2000, Defendant knowingly and intentionally joined the Co-Defendants' scheme to defraud SunTrust Bank, a federally-insured financial institution. In joining this scheme, Defendant knowingly, willfully, and with the intent to defraud, sought to obtain (and did obtain) money under the control of SunTrust Bank by participating in the preparation and submission of false Payment History Statements and false LVCs. Defendant knew that the false Payment History Statements and false LVCs submitted on behalf of defaulted Perkins Loan borrowers contained material false representations that were reasonably likely to induce SunTrust Bank to fund consolidated loans so that Defendant and VAC would receive large collection fees. See Bishop, 1 F.3d at 911(existence of conspiracy may be shown through circumstantial evidence that the defendants acted together in pursuit of a common illegal objective); United States v. Skillman, 922 F.2d 1370, 1373 (9th Cir. 1991) (only slight connection to conspiracy must be shown and slight connection may be proved by defendant's willful participation in the illegal object of a conspiracy with intent to further some purpose of it).

- 21 Filed 02/13/2006 Page 21 of 25

1 Conspiracy to Commit Student Loan Fraud Against the Department of Education 2 8. 3 4 5 6 7 8 9 10 9. 11 12 13 14 15 16 17 18 10. 19 20 21 22 23 24 25 26 27 28
Case 2:04-cr-00276-SMM Document 238

The record further establishes that, by engaging in the scheme to defraud SunTrust Bank of funds that were insured by the United States Department of Education under the provisions of the Higher Education Resources and Student Assistance Law, Defendant knowingly, intentionally, and willfully obtained funds under the control of SunTrust Bank through the use of fraud and false statements, at least $1,400,000 of which was later repaid to SunTrust Bank by funds insured by the Department of Education under the provisions of the Higher Education Resources and Student Assistance Law. Defendant joined the Conspiracy by knowingly committing and directing numerous acts in furtherance of the fraudulent scheme, which were aimed directly at defrauding SunTrust Bank and the Department of Education. For example, each of the false LVCs Defendant signed constitutes a separate overt act taken in furtherance of the unlawful conspiracy and demonstrates Defendant's knowledge of, and intent to accomplish, the objects of the conspiracy. See Exhs. 5-9 (Ingrid Keil), 10-14 (Howard Kalter), 42-46 (Ramona Fattig), 52-55 (Sidney Moore), 6972 (Erica Cooper). Defendant committed an overt act in furtherance of the unlawful Conspiracy to defraud SunTrust Bank and the Department of Education by knowingly and intentionally encouraging and instructing Co-Defendants Evans, Stevens, Honderd, and Prather to submit false Payment History Statements and false LVCs. Defendant knew that Payment History Statements and LVCs were material to SunTrust Bank's decision to issue consolidated loans, and that, if false Payment History Statements and LVCs were submitted to SunTrust Bank, consolidated loans would be issued to ineligible borrowers and VAC would receive large collection fees. Thus, Defendant willfully participated in the unlawful scheme with the intent to further and accomplish the objects of the Conspiracy, bank fraud against - 22 Filed 02/13/2006 Page 22 of 25

1 2 3 4 5 11. 6 7 8 9 10 11 12 13 14 12. 15 16 17 18 13. 19 20 21 22 14. 23 24 25 26 27 28

SunTrust Bank and student loan fraud against the Department of Education. See United States v. Sarault, 840 F.2d 1479, 1487 (9th Cir.1988) ("the overt act need only be a concrete step toward carrying out the agreement, not one that actually accomplishes the goal of the conspiracy"). Defendant committed an overt act in furtherance of the unlawful Conspiracy to defraud SunTrust Bank and the Department of Education by telling Co-Defendants Evans and Stevens that he would talk to Steve Slatas and obtain a modification of the Repayment Requirement so that a lump sum payment of one six percent payment would satisfy the Repayment Requirement. In doing so, Defendant knowingly induced and encouraged Co-Defendants Evans, Stevens, and Prather to continue the fraudulent Conspiracy against SunTrust Bank and the Department of Education by continuing to prepare and submit false Payment History Statements and false LVCs. Defendant committed another overt act in furtherance of the unlawful Conspiracy to defraud SunTrust Bank and the Department of Education by instructing Mr. Friedlander to submit false Payment History Statements and false LVCs prepared by Co-Defendant Evans pursuant to the Bulk Payment Method. Defendant committed another overt act in furtherance of the unlawful Conspiracy to defraud SunTrust Bank and the Department of Education by instructing Mr. Friedlander that he should not immediately stop the submission of false Payment History Statements and false LVCs by Co-Defendants Evans and Prather. As a result of the Conspiracy to defraud SunTrust Bank and the Department of Education, 537 fraudulent loan applications were submitted by VAC, resulting in the issuance of $3,696,163 in new consolidated student loans and $1,049,433 in collection fees to VAC for loans issued by SunTrust Bank in reliance on the false Payment History Statements and false LVCs.

- 23 Document 238 Filed 02/13/2006 Page 23 of 25

Case 2:04-cr-00276-SMM

1 15. 2 3 4 5 6

Of the 537 defaulted consolidated loan accounts insured by ECMC, ECMC has paid $1.4 million to SunTrust Bank for claims arising out of 212 consolidated loans. Each of those 212 loans was issued by SunTrust Bank in reliance on the false Payment History Statements and false LVCs submitted by Defendants. As a result of ECMC's payments to SunTrust Bank, the Department of Education has reimbursed ECMC $1.4 million.

7 Conclusion 8 16. 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 At trial, Defendant's counsel skillfully demonstrated the potential bias of each of the four Co-Defendants by cross-examining them on their plea agreements with the Government. Despite the evidence revealed on cross-examination, the Conspiracy to defraud SunTrust Bank and the Department of Education, as well as Defendant's intentional and knowing participation in the unlawful Conspiracy, is supported by the Co-Defendants' testimony and the Exhibits in the case. The testimony and exhibits admitted at trial do not support Defendant's version of the facts. Rather, the testimony and exhibits conclusively demonstrate that Defendant knowingly joined the scheme to defraud SunTrust Bank and the Department of Education with the specific intent of defrauding both the Bank and the Department, and that he committed overt acts in furtherance of that scheme. As such, the Government proved beyond a reasonable doubt that each and every element of the crime charged in Count 33 of the Superseding Indictment, Conspiracy to commit bank fraud and student loan fraud, was met. Accordingly, IT IS HEREBY ORDERED AND ADJUDGED that Defendant Robert C. Hazlett

24 is GUILTY of Conspiracy to engage in bank fraud and student loan fraud, in violation of 25 18 U.S.C. § 371, as alleged in Count 33 of the Superseding Indictment. (Dkts. 92, 132 at 26 13-15.) 27 28
Case 2:04-cr-00276-SMM Document 238

- 24 Filed 02/13/2006 Page 24 of 25

1

IT IS FURTHER ORDERED that Counts 1 through 16 of the Superseding

2 Indictment, charging bank fraud against Defendant Robert C. Hazlett, shall be dismissed 3 with prejudice. (Dkts. 92, 132 at 6-10.) 4 IT IS FURTHER ORDERED that Counts 17 through 32 of the Superseding

5 Indictment, charging student loan fraud against Defendant Robert C. Hazlett, shall be 6 dismissed with prejudice. (Dkts. 92, 132 at 10-12.) 7 IT IS FURTHER ORDERED that the United States Probation Office shall

8 prepare a presentence report, including a sentencing recommendation, regarding 9 Defendant Robert C. Hazlett. 10 IT IS FURTHER ORDERED that Defendant Robert C. Hazlett shall cooperate

11 fully with the United States Probation Office, and that Defendant shall report to the United 12 States Probation Office no later than February 27, 2006. 13 IT IS FURTHER ORDERED that Defendant Robert C. Hazlett shall appear

14 before the Court on May 1, 2006 at 11:00 a.m. for sentencing on the Conspiracy Count. 15 IT IS FURTHER ORDERED that, at sentencing, the Court will decide the total

16 amount of loss suffered as a result of Defendant's participation in the conspiracy. Counsel 17 for both parties shall submit briefs addressing this issue no later than ten (10) calendar 18 days before sentencing. 19 IT IS FURTHER ORDERED that a copy of this Order shall be provided to Linda

20 Coyle, United States Probation Office, for presentence assignment. 21 22 23 24 25 26 27 28
Case 2:04-cr-00276-SMM Document 238

DATED this 9th day of February, 2006.

- 25 Filed 02/13/2006 Page 25 of 25