    [Senate Hearing 106-916]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 106-916

    SOLVING THE PROBLEM OF SCHOLARSHIP SCAMS: THE COLLEGE SCHOLARSHIP FRAUD
                             PREVENTION ACT OF 1999

    =======================================================================

                                    HEARING

                                   before the

                           COMMITTEE ON THE JUDICIARY
                              UNITED STATES SENATE

                           ONE HUNDRED SIXTH CONGRESS

                                 FIRST SESSION

                                       on

                                    S. 1455

        A BILL TO ENHANCE PROTECTIONS AGAINST FRAUD IN THE OFFERING OF
                   FINANCIAL ASSISTANCE FOR COLLEGE EDUCATION

                                   __________

                                OCTOBER 6, 1999

                                   __________

                              Serial No. J-106-52

                                   __________

             Printed for the use of the Committee on the Judiciary

                        U.S. GOVERNMENT PRINTING OFFICE
    70-309 CC                   WASHINGTON : 2001

                           COMMITTEE ON THE JUDICIARY

                         ORRIN G. HATCH, Utah, Chairman

    STROM THURMOND, South Carolina       PATRICK J. LEAHY, Vermont
    CHARLES E. GRASSLEY, Iowa            EDWARD M. KENNEDY, Massachusetts
    ARLEN SPECTER, Pennsylvania          JOSEPH R. BIDEN, Jr., Delaware
    JON KYL, Arizona                     HERBERT KOHL, Wisconsin
    MIKE DeWINE, Ohio                    DIANNE FEINSTEIN, California
    JOHN ASHCROFT, Missouri              RUSSELL D. FEINGOLD, Wisconsin
    SPENCER ABRAHAM, Michigan            ROBERT G. TORRICELLI, New Jersey
    JEFF SESSIONS, Alabama               CHARLES E. SCHUMER, New York
    BOB SMITH, New Hampshire

                 Manus Cooney, Chief Counsel and Staff Director

                     Bruce A. Cohen, Minority Chief Counsel

                                      (ii)

                                C O N T E N T S

                                  ----------

                        STATEMENTS OF COMMITTEE MEMBERS

                                                                       Page

    Abraham, Hon. Spencer, U.S. Senator from the State of Michigan...     1
    Feingold, Hon. Russell D., U.S. Senator from the State of
      Wisconsin......................................................    28
    Hatch, Hon. Orrin G., U.S. Senator from the State of Utah........    33
    Leahy, Hon. Patrick J., U.S. Senator from the State of Vermont...    33

                        CHRONOLOGICAL LIST OF WITNESSES

    Panel consisting of Sheila F. Anthony, commissioner, Federal
      Trade Commission, Washington, DC; Susan O'Flaherty, director of
      financial aid and scholarships, Western Michigan University,
      Kalamazoo, MI; Mark Kantrowitz, publisher, Finaid Page LLC,
      Pittsburgh, PA; and Sanjeev Bery, U.S. Public Interest Research
      Group Higher Education Associate, U.S. Public Interest Research
      Group Higher Education Project, Washington, DC.................     4
    Prepared statement of Sherri Pickett, senior at the University of
      Wisconsin-Madison..............................................    30
    Prepared statement of Dale P. Kelberman, Assistant U.S. Attorney.    38

                   ALPHABETICAL LIST AND MATERIALS SUBMITTED

    Anthony Sheila F.:
        Testimony....................................................     4
        Prepared statement...........................................     6
            Attachments: Summary of FTC Cases, and FTC ``Teaser'' Web
              Sites..................................................    10
    Bery, Sanjeev:
        Testimony....................................................    25
        Prepared statement...........................................    27
    Kantrowitz, Mark:
        Testimony....................................................    20
        Prepared statement...........................................    22
    Kelberman, Dale P.: Prepared statement...........................    38
    O'Flaherty, Susan:
        Testimony....................................................    16
        Prepared statement...........................................    18
    Pickett, Sherri: Prepared statement..............................    30

                                    APPENDIX

                              Proposed Legislation

    S. 1455, a bill to enhance protections against fraud in the
      offering of financial assistance for college education.........    41

                             Questions and Answers

    Responses of Sheila F. Anthony to Questions From Senators:
        Hatch........................................................    47
        Thurmond.....................................................    47
    Responses of Susan O'Flaherty to Questions From Senators:
        Leahy........................................................    49
        Thurmond.....................................................    50
        Hatch........................................................    50
    Responses of Mark Kantrowitz to Questions From Senators
        Hatch........................................................    52
        Thurmond.....................................................    53
        Leahy........................................................    54
            Various Attachments to the Answers of Mark Kantrowitz....    56

    SOLVING THE PROBLEM OF SCHOLARSHIP SCAMS: THE COLLEGE SCHOLARSHIP FRAUD
                             PREVENTION ACT OF 1999

                                  ----------

                           WEDNESDAY, OCTOBER 6, 1999

                                           U.S. Senate,
                                    Committee on the Judiciary,
                                                        Washington, DC.
        The committee met, pursuant to notice, at 2:10 p.m., in
    room SD-226, Dirksen Senate Office Building, Hon. Spencer
    Abraham presiding.
        Also present: Senator Feingold.

     OPENING STATEMENT OF HON. SPENCER ABRAHAM, U.S. SENATOR FROM
                         THE STATE OF MICHIGAN

        Senator Abraham. We will begin the hearing, and I want to
    welcome everybody to this hearing of the Senate Judiciary
    Committee on solving the problem of scholarship scams, S. 1455,
    the College Scholarship Fraud Prevention Act of 1999.
        Just to give everybody a brief glimpse of the format here,
    basically I am going to make a few opening remarks as part of
    an opening statement and then if there are other members here
    at that point, we will turn to them for their opening
    statements. Then we will begin to hear from the panel, assuming
    the panel is here. I don't know the panelists, but if you are
    here, you actually can come up now, if you would like, and take
    seats. And then we would go to questions to the panel at that
    point from whichever members would be present at that occasion.
        Today, as I said, we are here to discuss the College
    Scholarship Fraud Prevention Act of 1999, legislation which
    Senator Feingold and I have introduced to try to help fight
    fraud in the offering of college financial assistance.
        As the panel will soon detail, schemes by which criminals
    defraud unsuspecting students of so-called application or
    administrative fees are widespread, constantly changing, and
    often quite effective. These scams are hampering the process of
    matching financial assistance with those in need, and
    perversely deliver the most harm upon those whose need is the
    greatest. But even worse than the financial loss, the victim's
    feeling that they have been had by one of these scams lasts
    much longer and is a demoralizing experience that causes those
    victims to become disenchanted with the financial assistance
    process altogether.
        The decision to pursue a college education constitutes one
    of the most important investment decisions a person can make.
    Although college is often thought of as a training ground for
    an individual's future career, in reality it is much more, as
    we all know. College is also a place at which a young person
    begins his or her journey into adulthood.
        The college experience forces young people to develop the
    skills and habits they need to become productive leaders in our
    economy and in our communities. Earning a college degree is a
    challenge in its own right. Clearly, no American deserves the
    additional obstacle of being defrauded out of his or her
    opportunity to attend a university.
        Skyrocketing tuition presses students and their families to
    seek creative ways to finance higher education. America's
    greatest economic asset has long been the ability to find
    creative solutions to problems. In fact, many companies and
    organizations are dedicated to legitimately helping students
    and their families. Many of these organizations perform an
    invaluable service by either directly providing educational
    financing themselves or by directing students to other provider
    institutions.
        Unfortunately, however, a growing number of profiteering
    con artists are taking advantage of students' financial
    vulnerabilities. Their tactics vary widely, but most center
    around misrepresentations and fraud. The schemes are
    everywhere, using the U.S. mail, 800 numbers, and the Internet
    to facilitate illegal activities. The standard practice is to
    lead the student along, promising financial assistance only if
    the student sends payment covering application or processing
    fees.
        For example, the National Scholarship Foundation sent
    hundreds of thousands of postcards to potential college
    students. Students were then encouraged to call an 800 number
    for more information, at which time they were told that the NSF
    would guarantee them $1,000 or more in scholarship money. Of
    course, there was a catch, and in this case the students had to
    pay a $189 fee that would be refunded if they did not receive
    the guaranteed scholarship money.
        As it turns out, the students received only general
    information about the college application process and about the
    cost of a college education--information that they already had
    or could have received without these scam artists. The
    guaranteed money never materialized and the company never
    provided refunds.
        The Federal Trade Commission has been aware of this growing
    problem, and in 1996 it initiated Project ScholarshipScam, a
    nationwide crackdown on fraudulent financial assistance
    services. But although the FTC is dedicated in stopping these
    con artists, it can only file civil charges seeking redress to
    defrauded consumers and injunctions prohibiting or restricting
    future activity. Regardless of the clarity of proof and the
    seriousness of the wrongdoing, the FTC simply lacks the
    authority to prosecute scholarship scam artists on criminal
    charges.
        The Department of Justice is responsible for the criminal
    prosecution of these fraudulent activities, but unfortunately
    criminal prosecution is quite rare, even in the face of
    widespread criminal behavior. In one of the few cases which
    occurred right next door, in Maryland, a Federal jury convicted
    Christopher Nwaigwe of defrauding more than 50,000 college
    students of more than $500,000. He launched his scheme by
    mailing letters announcing scholarship offers of $2,500 to
    $7,500. The catch was that students had to send him $10,
    described as a processing fee. The students received nothing in
    return. However, Mr. Nwaigwe was not so fortunate; he received
    36 months in prison for his service.
        Despite its successful disposition, this case demonstrates
    a distressing fact. The current system does not deter
    criminals. In 1993, Mr. Nwaigwe was ordered by the U.S. Postal
    Service to stop sending misleading letters, an order he
    ignored. In 1996, he was the subject of a civil action in U.S.
    District Court in Baltimore, in which he was permanently
    enjoined from using his materials to solicit money from
    students. But it was not until this year that he was finally
    facing criminal prosecution.
        Senator Feingold and I introduced this bill because we
    believe the continued plague of scholarship fraud warrants a
    renewed Federal effort. Our legislation has three major
    components.
        First, this bill will provide an additional 10 years
    imprisonment and/or heavier fines in fraud cases involving the
    offering of education services. We believe this enhancement
    will serve a dual purpose, encouraging the Department of
    Justice to pursue and prosecute more of these cases, while
    chilling the fraudulent industry as a whole.
        Second, the bill will improve the FTC's ability to enforce
    orders for disgorgement and redress to consumers by excluding
    debts associated with college financial aid fraud convictions
    from the list of permissible exemptions from a bankruptcy
    estate. In this context, beneficiaries of scholarship scam
    operations use their fraudulent gains to buy residential
    properties. When caught, they file for bankruptcy, and because
    many States exempt residential properties from bankruptcies,
    many of these con artists who have been found guilty by a court
    are permitted to retain their homes, no matter how great the
    value.
        After the bankruptcy proceedings clear their debt, these
    operators then are free to sell their homes and keep the money
    they defrauded out of students. In using a narrow exception
    patterned after the response to the savings and loan crisis,
    our bill prevents crooks from further abusing the public trust
    while maintaining legitimate protections for those honestly in
    need of bankruptcy protection.
        Finally, our view is that simply deterring the con artists
    is not enough. We must also help students and their families
    obtain financing help from legitimate companies, making it
    easier for students and their families to differentiate the
    legitimate companies from the con artists.
        Currently, the FTC and the Department of Education
    independently warn students about fraudulent scholarship
    services. This legislation will enhance those efforts, calling
    for a coordinated effort in educating our students. For that
    purpose, this bill would require that the Secretary of
    Education consult with the FTC and post financial assistance
    fraud information on the Department of Education's Internet Web
    site. It is our hope that this Department of Education/FTC
    collaboration will further expose the con artists and help to
    raise public awareness of their tactics.
        With that, I am pleased to welcome the members of our first
    panel. We appreciate your all being here, and let me begin by
    introducing them from, I guess, my left to right. We will first
    hear from Ms. Sheila Anthony, whom we welcome today. She is a
    Commissioner of the Federal Trade Commission here in
    Washington.
        We will then hear from Ms. Susan O'Flaherty, who is the
    Director of Financial Aid and Scholarships for Western Michigan
    University, in Kalamazoo, MI. Incidentally, I am pleased to
    note that Western Michigan is also located in the congressional
    district of Congressman Fred Upton, who is the lead sponsor of
    the companion legislation on this issue in the House of
    Representatives.
        Next is Mr. Mark Kantrowitz. Mr. Kantrowitz is the
    publisher of FinAid as well as eduPASS Web sites. FinAid has
    been named the top college financial aid site by numerous
    publications, including Yahoo, Internet Life, and Time
    Magazine.
        Finally, we will hear from Sanjeev Bery, who is a higher
    education associate for the U.S. Public Interest Research
    Group, or PIRG. U.S. PIRG is the national lobby office for
    student-led public interest organizations in 25 States across
    the country, including Michigan.
        So we will begin. What we do normally here is kind of post
    through this clock system about a 5-minute time frame for
    opening statements. The orange light will come on at 4 minutes,
    the red light at 5. We are usually pretty flexible in terms of
    letting people finish the points they are making after the 5
    minutes. If you have longer statements, though, we will include
    the total statement in the record, but would urge people to--
    not that I set a particularly good example here today, but
    would urge you to try to stay at least reasonably within the 5-
    minute limit.
        Commissioner Anthony, we will start with you, and we
    welcome and thank you for being here today.

     PANEL CONSISTING OF SHEILA F. ANTHONY, COMMISSIONER, FEDERAL
    TRADE COMMISSION, WASHINGTON, DC; SUSAN O'FLAHERTY, DIRECTOR OF
     FINANCIAL AID AND SCHOLARSHIPS, WESTERN MICHIGAN UNIVERSITY,
      KALAMAZOO, MI; MARK KANTROWITZ, PUBLISHER, FINAID PAGE LLC,
    PITTSBURGH, PA; AND SANJEEV BERY, U.S. PUBLIC INTEREST RESEARCH
    GROUP HIGHER EDUCATION ASSOCIATE, U.S. PUBLIC INTEREST RESEARCH
             GROUP HIGHER EDUCATION PROJECT, WASHINGTON, DC

                     STATEMENT OF SHEILA F. ANTHONY

        Ms. Anthony. Thank you, Senator. I am pleased to have this
    opportunity to describe the Commission's consumer protection
    activities in the area of scholarship scams. The Commission
    applauds you, Senator Abraham, and also Senator Feingold for
    focusing on this area of serious law enforcement issues raised
    by fraudulent purveyors of scholarship services.
        In the fall of 1996, the Commission launched Project
    ScholarScam, a joint law enforcement and consumer education
    effort aimed at the fraudulent purveyors of so-called
    scholarship services. At that time, the Commission announced
    six law enforcement cases against companies we alleged falsely
    promised scholarships to students and their parents nationwide.
        In November 1997, the Commission followed through with two
    additional cases, known as Scholarscam II. The Commission
    obtained the most recent settlements in the fall of 1998. These
    cases were filed in Federal district courts in Florida,
    Maryland, Georgia, and New York, and a summary of these cases
    can be acquired as an appendix to my written statement.
        The Commission sought and obtained temporary restraining
    orders with asset freezes, and in some cases the appointment of
    a receiver over the corporate defendants. All Commission
    litigation has been concluded, with permanent injunctions
    obtained either through settlements or ordered by the court.
    The orders either ban the defendants from telemarketing or
    providing scholarship services, or they require the defendants
    to post a performance bond in a significant amount. In several
    instances, the Commission obtained partial or complete redress
    for consumers, and in two cases the defendants posted $100,000
    telemarketing bonds pursuant to Florida law.
        We estimate that the companies involved in these scams have
    scammed, in total, approximately 175,000 consumers, to the tune
    of about $22 million. Tough penalties are needed for these scam
    artists. The civil remedies afforded by an FTC action can
    deprive defendants of their ill-gotten gains through
    restitution, but only if the victims' money can be found.
        The penalties resulting from criminal prosecutions by the
    U.S. Department of Justice and State authorities sends the
    strongest possible message, which is particularly needed here
    because there is a never-ending pool of potential victims,
    college-bound students and their families.
        The Commission has undertaken extraordinary efforts to
    educate consumers about scholarship scams. As part of this
    effort, we teamed up with a variety of private and public
    partners, including Sallie Mae, Who's Who Among American High
    School Students, the College Board, and the Educational Testing
    Service, which administers the SAT exams.
        Our consumer education materials include bookmarks,
    posters, and consumer alerts warning students and their parents
    of the red flags to look for when evaluating scholarship
    service sales material and sales pitches. The six signs that
    your scholarship is sunk are the scholarship is guaranteed or
    your money back. You can't get this information anywhere else.
    Number three, may I have your credit card or bank account
    number to hold this scholarship. Number four, we will do all
    the work. Number five, the scholarship will cost some money.
    Number six, you have been selected by a national foundation to
    receive a scholarship, or you are a finalist in a scholarship
    contest.
        We have distributed over 2.5 million pieces of consumer
    education materials, including mass mailings of bookmarks
    listing these six red-flag signs, to 2,000 college bookstores
    across the country, and have materials posted on our Web site.
    In addition, we have posted a Web page of a fictitious
    scholarship service company that had typical claims that we saw
    in our cases. And when consumers clicked to sign up for the
    services, they were warned that they too could be scammed. We
    call these teaser Web site pages, and we have used these to
    help disseminate our message on the Internet.
        The Commission continues to monitor the industry and to
    provide both consumer and business education. In May this year,
    we issued a new consumer alert to inform consumers about a
    recent trend, the seminar for financial aid or scholarships.
    Instead of telemarketing, the scam artists now invite students
    and their families to a free seminar in some local hotel and
    then give them a hard sales pitch to get them to sign up for
    the scholarship service at a fee of approximately $800 to
    $1,200, which is quite a lot of money for some families.
        The story of Project Scholarscam has garnered tremendous
    coverage in the media, and through this coverage and by
    enlisting those who are on the front lines, financial aid
    advisers and guidance counselors, we have spread the word about
    these pernicious scams. We hope the Commission's strong record
    of enforcement and education has served as an effective
    deterrent in this industry. But as education costs continue to
    rise, and given the unlimited supply of potential victims,
    fraudulent operators will always have an interested audience
    and an enticing sales pitch. Thus, we will continue our
    efforts, and we will also continue to provide cooperation to
    any criminal investigation or prosecution of a Scholarscam
    defendant.
        Thank you.
        Senator Abraham. Thank you very much. Actually, during the
    last year I have visited a number of campuses in our State with
    those do's and don't's lists to try, on a campus-by-campus
    basis, to make sure we got more information out. I have visited
    several throughout the State and hope to do more of them, and
    tried to point out why each of those statements you read
    clearly couldn't possibly be true--the idea that you don't have
    to do any work yourself and that somehow a scholarship is going
    to be made available, things like that.
        [The prepared statement of Ms. Anthony follows:]

                    Prepared Statement of Sheila F. Anthony

                                I. INTRODUCTION
        Mr. Chairman and members of the Subcommittee, I am Sheila F.
    Anthony, a Commissioner of the Federal Trade Commission (``FTC'' or
    ``Commission''). I am pleased to have this opportunity to describe the
    Commission's consumer protection activities in the area of scholarship
    services.\1\ The Commission applauds Senator Abraham and Senator
    Feingold for focusing on the serious law enforcement issues raised by
    fraudulent purveyors of scholarship services.
    ---------------------------------------------------------------------------
        \1\ This written statement presents the views of the Federal Trade
    Commission. Responses to questions reflect my views and do not
    necessarily reflect the views of the Commission or the other
    Commissioner.
    ---------------------------------------------------------------------------

                II. THE COMMISSION'S CONSUMER PROTECTION MISSION
        The FTC is a law enforcement agency whose mission is to promote the
    efficient functioning of the marketplace by protecting consumers from
    unfair or deceptive acts or practices and increasing consumer choice by
    promoting vigorous competition. The Commission's primary legislative
    mandate is to enforce the Federal Trade Commission Act (``FTCA''),
    which prohibits unfair methods of competition and unfair or deceptive
    acts or practices in or affecting commerce.\2\ The FTCA generally
    provides the Commission with broad law enforcement authority over
    entities engaged in, or whose business affects, commerce and with the
    authority to gather information about such entities.\3\ The Commission
    also has responsibility under approximately forty additional statutes
    governing specific industries and practices.\4\
    ---------------------------------------------------------------------------
        \2\ 15 U.S.C. Sec. 45(a).
        \3\ 15 U.S.C. Sec. Sec. 45(a), 46(a).
        \4\ These include,, for example, the Truth in Lending Act, 15
    U.S.C. Sec. Sec. 1601 et seq., which mandates disclosures of credit
    terms, and the Fair Credit Billing Act, 15 U.S.C. Sec. Sec. 1666 et.
    seq., which provides for the correction of billing errors on credit
    accounts. The Commission also enforces over 30 rules industries and
    practices.
    ---------------------------------------------------------------------------

                            III. PROJECT SCHOLARSCAM
        In the fall of 1996, the Commission launched ``Project
    Scholarscam,'' a joint law enforcement and consumer education effort
    aimed at fraudulent purveyors of so-called ``scholarship services.'' At
    that time, the Commission announced six law enforcement cases against
    companies we alleged falsely promised scholarships to students and
    their parents nationwide. In November 1997, the Commission followed up
    with two additional cases known as ScholarScam II. The Commission
    obtained the most recent settlements in the fall of 1998.
        These companies employed similar tactics: the sales pitch usually
    started with a postcard proclaiming ``FREE MONEY FOR COLLEGE'' and
    providing a toll free number for students or their parents to call. A
    telemarketing sales pitch ensued whereby the company told students and
    parents that, for an up-front fee $100 to $400, the defendant would
    guarantee that the student would get a scholarship or the company would
    refund the up-front fee. To further entice the students, telemarketers
    claimed the student had prequalified for scholarships and that the
    company would ``do all the work'' necessary to obtain the scholarship.
    Getting the scholarships was easy, the telemarketers explained, because
    the company would match the student's qualifications with a database of
    scholarships and would send the student a list of sources tailored to
    that student. The telemarketers proclaimed that the company had
    ``information you can't get anywhere else.''
        Naturally, the telemarketer would impress upon the student the need
    to act quickly and typically would press the student or parent to
    provide over the telephone a credit card number or checking account
    number. Once students and their parents paid the up-front fee, they
    would complete a questionnaire detailing their interests, school
    activities and other personal information. Subsequently, they would
    receive a list of available scholarships and sources of money--but the
    list was hardly ``tailored'' to the student's qualifications. In fact,
    as the Commission alleged, it was a useless list--containing outdated
    information, scholarships whose deadlines had passed, entries that were
    not even scholarships but were student loan programs, and scholarships
    that the student clearly could not qualify for (for example, a
    scholarship for children of veterans or residents of a particular state
    when the student was neither).
        When consumers sought refunds for these useless lists, the
    defendants foiled their attempts by putting hurdles up at every turn
    instead of honoring their much-heralded and unconditional ``money-back
    guarantee.'' Students were required, the defendants said, to apply to
    each and every source on the list and to obtain and send to the company
    all rejection letters received. In reality, this was an impossible
    condition to fulfill because scholarship organizations typically notify
    only those who are selected as recipients. In addition, because the
    list contained scholarships for which the students could not qualify,
    students had no reason to apply to those sources. In one FTC case, the
    defendant stopped providing any lists at all--leaving consumers to
    write futile complaint letters to a nonexistent ``scholarship
    foundation.''
        These cases were filed in federal district courts in Florida,
    Georgia, Maryland, and New York. A summary of these cases is provided
    to the Committee as an Appendix to my written statement. The Commission
    sought and obtained temporary restraining orders with asset freezes
    and, in some cases, the appointment of a receiver over the corporate
    defendants. All Commission litigation has been concluded with permanent
    injunctions obtained either through settlements or ordered by the
    court. The orders obtained either ban defendants from engaging in
    telemarketing or providing scholarship services or require defendants
    to post performance bonds in significant amounts to protect consumers
    from future fraudulent practices should defendants resume telemarketing
    of scholarship services.
        In several instances, the Commission obtained partial or complete
    redress for consumers. In two cases, the defendants posted $100,000
    telemarketing bonds pursuant to Florida law, which requires all
    telemarketers to make such commitments. We worked with the Florida
    Department of Agriculture and Consumer Services to revoke the bonds
    and, for the first time, Florida consumers received refunds derived
    from a Florida telemarketing bond. In another case, as part of the
    settlement, the defendant relinquished mail containing checks from
    almost 500 consumers which enabled the Commissioner to provide full
    refunds to those consumers. In many FTC cases, however, the defendants
    have depleted the monies received, leaving little, if any, for consumer
    redress. In addition, FTC defendants frequently attempt to use
    bankruptcy laws to avoid paying consumer redress required by our
    orders.
        We estimate that the companies involved in these cases scammed, in
    total, approximately 175,000 consumers to the tune of $22 million. In
    addition, one of the Scholarscam defendants, Christopher Nwaigwe, was
    criminally prosecuted by the U.S. Attorney's Office in Baltimore,
    Maryland. Commission staff provided substantial assistance to the U.S.
    Attorney's Office, including having a staff attorney testify at trial.
    Nwaigwe was convicted of seven counts of mail fraud in March of this
    year and in June was sentenced to 36 months in prison. Tough penalties
    are needed for these scam artists. The civil remedies afforded by an
    FTC action can deprive defendants of their ill-gotten gains through
    restitution, but only if the victim's money can be found. The penalties
    resulting from criminal prosecutions by the U.S. Department of Justice
    and state authorities send the strongest possible message, which is
    particularly needed because there is a never-ending pool of potential
    victims: college-bound students and their parents.
        The Commission has undertaken extraordinary efforts to educate
    consumers about scholarship scams. As part of this effort, we teamed up
    with a variety of private and public partners, including:

       Sallie Mae
       College Parents of America
       Who's Who Among American High School Students
       The College Board
       Educational Testing Service
       National Association of Student Financial Aid Administrators
       National Association of Secondary School Principals
       National Association of College Stores

    Our consumer education materials include bookmarks, posters, and
    consumer alerts warning students and their parents of the red flags to
    look for when evaluating scholarship service sales materials and sales
    pitches. We have distributed over 2\1/2\ million pieces of our consumer
    education materials, including a mass mailing of bookmarks to 2,000
    college bookstores across the country and have the materials posted on
    our Web site. In addition, we posted a Web page of a fictitious
    scholarship service company that had the typical claims we saw in our
    cases and, when consumers clicked to sign up for the service, they were
    warned that they could have been scammed. We call this a ``teaser Web
    site'' and have used it to help disseminate our message on the
    Internet.
        The Commission continues to monitor the industry and to provide
    both consumer and business education. In May, we issued a new Consumer
    Alert to inform consumers about a recent trend: the seminar for
    financial aid or scholarships. We warn consumers to take their time
    when attending these seminars and to avoid high-pressure sales pitches
    that require them to buy now or risk losing out on the opportunity.
    Consumers should investigate the organization by talking with a high
    school or college guidance counselor or financial aid advisor before
    spending money--many colleges and universities are offering Web-based
    scholarship searches for free to potential students. Consumers
    shouldn't rely solely on ``success stories'' or testimonials of
    extraordinary success offered by the seminar company. Instead, they
    should ask for a list of three local families who have used the service
    in the last year and then contact them to find out if they were
    satisfied with the products and services received. As always, consumers
    should keep in mind that they may never recoup the money they give to
    an unscrupulous operator, despite stated refund policies.

                            IV. PROPOSED LEGISLATION
        S. 1455, the ``College Scholarship Fraud Prevention Act of 1999,''
    provides some useful tools to help combat scholarship fraud. It would
    enhance criminal penalties for fraud in connection with the obtaining
    or providing of scholarships. Also, it would prevent purveyors of
    college scholarship fraud from using the bankruptcy laws to shield
    their ill-gotten gains while their victims go without recompense. The
    Bankruptcy Code allows debtors to retain certain property even when
    their creditors receive little or no recompense. In particular, debtors
    can use state-law exemptions, including homestead exemptions that in
    some states can have no dollar limit, to shield their assets. S. 1455
    would deny these exemptions to the extent that debts resulted from
    college scholarship fraud.

                                 V. CONCLUSION
        The story of Project ScholarScam has garnered tremendous coverage
    in the media. Through this coverage and by enlisting those who are on
    the front lines--financial aid advisors and guidance counselors--we
    have spread the word about these pernicious scams. The Commission's
    strong record of enforcement and education has served as an effective
    deterrent in this industry. But, as education costs continue to rise
    and, given the unlimited supply of potential victims, fraudulent
    operators will always have an interested audience and an enticing sales
    pitch. Thus, we will continue our efforts and will also continue to
    provide cooperation to any criminal investigation or prosecution of
    ``ScholarScam'' defendants.
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        Senator Abraham. So we will turn now to Ms. O'Flaherty
    here, and she will undoubtedly reinforce the notion that
    students will be getting scholarships without having done a
    lick of work themselves because that probably doesn't happen at
    Western Michigan.

                     STATEMENT OF SUSAN O'FLAHERTY

        Ms. O'Flaherty. It doesn't happen.
        Senator Abraham. Thank you for being here.
        Ms. O'Flaherty. Thank you. I appreciate this opportunity. I
    must tell you how personally and professionally pleased I am to
    see a bill that is focused on creating greater protection for
    consumers against scholarship fraud. I applaud your efforts and
    Senator Feingold's efforts, and I offer you my support and
    assistance as this legislation makes its way through the
    Senate.
        I am Director of Financial Aid and Scholarships at Western
    Michigan University, in Kalamazoo, MI. Western Michigan enrolls
    over 27,000 students, 72 percent of whom receive some form of
    financial aid. Student loan volume at Western approaches $70
    million. So as you might imagine, helping students locate and
    ultimately obtain non-loan dollars such as scholarships is of
    primary interest to our university.
        Just so that you are aware, I have been in financial aid
    most of my life and in various parts of the country, and I
    could not count the number of financial aid and scholarship
    nights that I have done for parents and high school counselors.
    And I don't recall any such event in which this issue has not
    been raised during all of those years.
        The need for action on this issue cannot be overstated.
    Scholarship fraud is out there; it is rapidly evolving with
    new, innovative scams and is scaring off students and
    legitimate services who must suffer because of the acts of an
    unscrupulous population. I believe the problem is best exposed
    through examples, and I will share a few of those with you. You
    may be aware of some of these cases, as they are becoming more
    public. I would like to make you aware that these are not cases
    from press accounts, but cases and descriptions of situations
    that have occurred in my office.
        My staff and I have spoken with families who have received
    a mailing that boasts that in exchange for $12.95, they would
    be guaranteed money for college. What they receive is a list of
    scholarships available in the area, and mostly general
    information about applying for financial aid through the
    regular process.
        It surprised me to hear about this particular opportunity
    because we normally see this type of guarantee associated with
    a charge of anywhere from $49.99 to $500. Our discussion in the
    office was that by lowering the charge to $12.95, the scam
    artist could get a significant number of bites and their
    revenues would increase dramatically on the high-volume
    business. This is an interesting point to me and I feel real
    strong about the advertisement of this type of thing to
    families because very often high-cost charges are associated
    with scams, versus the low-cost charges.
        We have seen high school seniors receive letters on red,
    white and blue letterhead with an official-looking seal,
    inviting them to send money and complete a profile. They
    guarantee funds for college. What the students receive is a
    list of names that they have to contact requesting an
    application. Any scholarship search, good or bad, must rely on
    the student or family to do all the work.
        The actual match is the easy part. Once a student receives
    a list of matches, they must contact each donor and obtain the
    application, criteria and deadline information. After
    completing the application, they need to mail the form. There
    are no requirements that donors respond to each applicant, so
    there is no guarantee that the student will ever hear from a
    particular donor.
        More typically, the scholarship organization will only
    notify the winners. For scholarship search organizations who
    advertise a money-back guarantee, the fine print will normally
    say something like students must apply for all scholarship
    matches and receive a negative response back from each source
    before a refund will even be considered.
        Another one that is very popular these days is an approach
    for a college night offered by College Forum, a national
    college program. I personally have been approached by this for
    one of my own children. We are asked to call an 800 number and
    reserve a place on an already preassigned date and location,
    and they do offer help with assistance for the admissions and
    the financial aid for a mere $650.
        I can go on with more of those, but in my experience I have
    spoken with many families from a variety of incomes who have
    fallen prey to these scholarship scams. I have spoken with
    families who are bright and educated themselves, who are just
    inquiring about what scholarship search organizations can be
    trusted enough to recommend, without getting into a dialogue
    about the mysteries and myths of financial aid.
        We speak to many low- and middle-income families who, for
    one reason or another, do not have the savings necessary for
    their children's education and are just seeking any possible
    way to find help. They understand the value of higher education
    today and want that for their children. Families waste good
    money on scholarship search scams that could have been used for
    college expenses. It seems to me that these companies prey on
    exactly the kind of family that Congress took such great care
    to ensure access to funds for higher education by eliminating
    the fee that used to be associated with filing the financial
    aid application.
        In terms of Senate bill 1455, I support the greater
    penalties for those convicted of these crimes, which I believe
    will have a cooling effect on the fraudulent element of the
    financial assistance industry. We recognize that there are
    organizations that provide good services for students, but urge
    that consumers continue to be educated on how to detect
    potential fraud companies.
        Above all else, scholarship searches are nothing more than
    a database match. The only thing that a company, good or bad,
    can supply a student with is a list of possible opportunities.
    It is the consumer that has to do the work and the follow-up
    with every possible donor.
        I also support the bill's provisions which seek to raise
    public awareness of scam artists. In my opinion, families, aid
    administrators and high school counselors would welcome a
    centralized Internet source that identifies businesses that go
    through some kind of screening process. Collections of
    information similar to Mr. Kantrowitz' Web site are a valuable
    resource, and the information contained within these resources
    should be made available through multiple media. The Department
    of Education already has a mechanism in which it communicates
    to all financial aid applicants who submit a FAFSA. Although
    the timing may not work out, this may be a means of providing
    some information to a public seeking assistance.
        I would like to offer one suggestion to further enhance
    student protection. Just as colleges and universities that
    receive Federal funds must meet certain requirements in order
    to participate in Federal programs, it seems to me that a
    company providing match results that include Federal programs
    should also be required to disclose certain information to
    applicants in clear and understandable terms. They should be
    required to state up front how families can obtain free
    information about the Federal programs without paying for the
    match. The price, so to speak, for these companies to use
    Federal information in their scams should be the requirement
    that they direct students to a variety of free sources of
    information in their marketing literature.
        Again, I thank you for this opportunity to speak to you
    about this topic today and I would be happy to answer any
    questions you may have.
        Senator Abraham. Thank you very much.
        [The prepared statement of Ms. O'Flaherty follows:]

                     Prepared Statement of Susan O'Flaherty

        Mr. Chairman, members of the Senate Judiciary Committee, thank you
    for the invitation to speak to you today regarding Senate bill 1455,
    the Scholarship Fraud Prevention Act of 1999. I appreciate this
    opportunity and must also tell you how personally and professionally
    pleased I am to see a bill that is focused on creating greater
    protection for consumers against scholarship fraud. I applaud the
    efforts of Senators Abraham and Feingold, and I offer them my support
    and assistance as this legislation makes its way through the Senate.
        I am Director of Financial Aid and Scholarships at Western Michigan
    University in Kalamazoo, Michigan. Western Michigan University enrolls
    over 27,000 students, 72 percent of whom receive some form of financial
    aid. Student loan volume at Western Michigan alone approaches $70
    million dollars; as you might imagine, helping students locate and
    ultimately obtain ``non loan'' funds, such as scholarships, is of
    primary interest to my university, and to me personally.
        Before I begin my actual testimony, I want to let you know that I
    have worked in financial aid since 1973 and have had the opportunity of
    not only working for Western Michigan University but also for the
    University of Colorado, California Polytechnic State University and
    several private colleges in the East where I grew up.
        I could not count the number of financial aid and scholarship
    workshops I have facilitated to families and also to high school
    guidance counselors over those years. I can tell you that I honestly
    cannot recall one workshop in which a parent or a high school guidance
    counselor did not raise a question about scholarship search
    opportunities and which ones were ``good ones''. In my experience it is
    clearly an issue for many, many families.
        The need for action on this issue cannot be understated;
    scholarship fraud is out there, it is rapidly evolving with new,
    innovative scams, and it is scaring off students and legitimate
    services who must suffer because of the acts of an unscrupulous
    population. I believe the problem is best exposed through examples, and
    at this point I would like to share some of my personal experiences
    with various, questionable scholarship search approaches. You may be
    familiar with several of these cases, as they have affected literally
    thousands of students across the country, and most have received some
    degree of press attention. However, I'd like to make it clear that I am
    not relaying press accounts; each of these descriptions represent
    personal situations that families have shared with my office.

       My staff and I have spoken with many families who have
            received a mailing boasting that in exchange for $12.95, they
            would be guaranteed money for college. What they in fact
            received was a list of scholarships available in their area,
            and general information about applying for financial aid
            through the FAFSA, the Free Application for Federal Student
            Aid. It surprised me to hear about this particular
            ``opportunity'' because we normally see this type of guarantee
            costing families anywhere from $49.99 to $500. However, after
            discussion with my staff, we came to the obvious business
            conclusion that was reached much earlier by the crooks--that by
            lowering the charge to $12.95, these scam-artists would get a
            significant number of ``bites''--and their revenues would
            increase dramatically on high-volume ``business''. I think this
            is interesting and important in part because it illustrates
            that not all scholarship scams can be identified as being
            ``high-cost''. Furthermore, in this example, the student is
            guaranteed ``money'', not ``scholarships''--but truth of the
            matter is that all students are eligible for either a
            subsidized or unsubsidized federal student loan. The guarantee
            has been met, but by the Federal Government, not the scam
            artist. The student paid for information that is already
            available to them free of any charge.
       ``Come to a night about paying for college'' is a standard
            advertising hook-phrase in this industry, and quite often,
            these programs are held in a rented facility on a college
            campus. The college financial aid office typically does not
            authorize these programs, but parents and students commonly
            hold the perception that if the workshop is held on a college
            campus, then it must be legitimate. I am hopeful that many
            colleges will catch on to this scam, as these organizations
            prey on the fact that it is not unusual for legitimate
            financial aid seminars to be held on campus. And the goal of
            these programs? To convince people that for a fee, funds can be
            secured.
       We have seen high school seniors receive letters on red,
            white and blue letterhead with an official-looking seal
            inviting them to send money and complete a profile form for
            scholarship dollars. They guarantee funds for college. What the
            student receives is a list of names that they then have to
            contact requesting an application. Any scholarship search, good
            or bad, must rely on the student or family to do a lot of the
            work. The actual match is the easy part. Once the students
            receive the list of matches, they must contact each donor and
            obtain the application, criteria, and deadline information.
            After completing the application for each donor, they then need
            to mail the form. There are no requirements that donors respond
            to each applicant so there is no guarantee that the student
            will ever hear from a particular donor. More typically the
            scholarship organization will only notify the winners. For
            scholarship search organizations who advertise a money back
            guarantee, the fine print will normally say something like:
            ``student must apply for ALL scholarship matches (including
            doing all the work as indicated above) and receive a negative
            response from each source before a refund application can be
            processed''.
       Another current and popular approach these days is the
            scholarship search that is attached to a ``college night''
            program offered by some ``National College Program''. In this
            case, the families are asked to call an ``800'' number and
            reserve a place on an already pre-assigned date and location.
            These are often at hotels within an hour or so of the family
            residence. In this case, they are offered assistance with the
            admissions application AND for finding funds for going to
            college. I have heard of costs as high as $650 in this case.
            You may have seen the segment on a recent news program
            highlighting problems that families have encountered.
       One especially innovative scam is accomplished through tying
            the scholarship dollars to a life insurance policy. In this
            example, families are urged to sign up for a life insurance
            policy and in exchange their student-children are guaranteed
            funds for college. Once again, those ``funds'' are those
            federal funds that the student would normally receive by
            applying through the FAFSA.

        In my experience, I have spoken with many families from a variety
    of incomes who have fallen prey to these scholarship scams. I have
    spoken with families who are bright and educated themselves, who are
    just inquiring about what scholarship search organizations can be
    trusted enough to recommend. Without getting into a dialogue about the
    ``mysteries and myths of financial aid'', we speak to many low and
    middle income families who for one reason or another do not have the
    savings necessary for their children's education and are just seeking
    any possible way to find help. They understand the value of a higher
    education today and want that for their children. Families waste good
    money on scholarship search scams that could have been used for college
    expenses. It seems to me that these companies prey on exactly the kind
    of family that Congress took such great care to ensure access to funds
    for higher education by eliminating the fee that used to be associated
    with filing a financial aid application.
        In terms of the Senate bill 1455, I support a greater penalty for
    those convicted of these crimes, which I believe will have a ``cooling
    effect'' on the fraudulent element of the financial assistance
    industry. We recognize that there are organizations that provide good
    services for students but urge that consumers continue to be educated
    on how to detect a potential fraud company. Above all else, scholarship
    searches are nothing more than a data base match. The only thing that
    any company, good or bad, can supply a student with is a list of
    possible opportunities. It is the consumer that has to do the work and
    follow up with every possible donor. How can a company guarantee funds
    based on the consumer needing to do extensive follow up? In my opinion,
    there can never be a guarantee of any type associated with any
    scholarship search. As criteria and as a warning for consumers, it
    should be an automatic sign of possible fraud.
        I also support the bill's provisions which seek to raise public
    awareness of scam artists. In my opinion, families, aid administrators,
    and high school counselors would welcome a centralized Internet source
    that identifies businesses that go through some kind of screening
    process. Collections of information similar to Mr. Kantrowitz's website
    are a valuable resource, and the information contained within these
    resources should be made available through multiple media. The
    Department of Education already has a mechanism in which it
    communicates to all financial aid applicants who submit a FAFSA.
    Although the timing may not work out in all cases, the FAFSA
    application process it may be a way to provide general information to a
    public that is already seeking assistance.
        I would like to offer one suggestion to further enhance student
    protections. Just as colleges and universities that receive federal
    funds must meet certain requirements in order to participate in the
    federal programs, it seems to me a company providing match results that
    include federal programs should also be required to disclose certain
    information to applicants in clear and understandable terms. They
    should be required to state up-front how families can obtain free
    information about the federal programs without paying for the match.
    The ``price'', so to speak, for these companies to use free federal
    information in their scam should be the requirement that they direct
    students to a variety of free sources of information in their marketing
    literature. Mr. Chairman, I again thank you and the cosponsors of this
    legislation for providing a forum in which we may discuss this
    important issue, and I would be happy to answer any questions you or
    any other Senator may have.

        Senator Abraham. As you all have heard some bells going off
    behind you the last couple of minutes, there is a vote taking
    place on the Senate floor right now which I have to go cast. So
    what I am going to do is just temporarily recess the hearing
    before we hear from our last two panelists here while I run
    over, vote and come back. I hope that won't take very long, but
    please bear with us and we will resume the hearing very
    shortly.
        [The committee stood in recess from 2:35 p.m. to 2:50 p.m.]
        Senator Abraham. We will resume the hearing at this time.
    As everybody can see, we have been joined by Senator Feingold,
    who is the other original cosponsor of this legislation, and I
    appreciate his support. As always, when we work together on
    things, I appreciate that as well.
        What we are going to do is let our final two witnesses
    testify or make your statements and then we will turn to
    Senator Feingold for his statement and then we will pursue
    questioning after that.
        So it is your turn, Mr. Kantrowitz. We appreciate your
    being here today, and welcome you and turn to you for your
    statement at this time.

                      STATEMENT OF MARK KANTROWITZ

        Mr. Kantrowitz. Mr. Chairman, I thank you for convening
    this hearing on the College Scholarship Fraud Prevention Act of
    1999 and for inviting me to testify before the Senate Judiciary
    Committee this afternoon.
        My name is Mark Kantrowitz and I am the publisher of the
    FinAid and eduPASS Web sites, free resources that exist to aid
    students in navigating the sea of financial aid and to combat
    the type of fraud the Abraham-Feingold legislation addresses.
    The FinAid site had more than 2 million visitors last year. I
    am pleased to have the opportunity to share my experiences with
    the committee today.
        Every year, several hundred thousand students and parents
    are defrauded by scholarship scams. The victims of these scams
    lose more than $100 million annually. These are conservative
    estimates. The most common types of scholarship scams include
    scholarships for profit and guaranteed scholarship search
    services.
        The first type charges an application fee for scholarships
    that never materialize or are less than advertised or disburses
    less money in scholarships than is received in application
    fees. They make a profit off of the scholarships. The second
    type charges a fee to match student information against a
    database of scholarships and guarantees that the student will
    actually receive money. There are other types such as Susan
    mentioned where they have seminar scams. My cat receives
    invitations for these all the time.
        Scholarship scams succeed by giving families an
    unreasonable expectation of success in using their services to
    obtain financial aid. Several of the most common
    misrepresentations include, first, the unclaimed aid myth which
    falsely states that millions or billions in aid went unclaimed
    last year and promises to get the student their fair share.
    This is an extremely pernicious myth because it not only
    defrauds consumers, but it also suggests to private sector
    benefactors that there is no need for them to create new
    scholarships. After all, if money is unclaimed, they don't need
    to create new ones.
        Second, bogus guarantees which often include restrictions
    that render them meaningless, such as requiring the student to
    submit rejection letters--sponsors do not provide students with
    rejection letters; they only notify the winners--or which
    include Federal aid as part of the total.
        And, third, false claims of government or Better Business
    Bureau approval. One scam even created its own bogus BBB.
    Others misrepresent the nature of their business by using an
    eagle and a formal seal as a logo or words like ``national,''
    ``administration,'' ``foundation'' and ``federal'' in their
    names.
        I support the College Scholarship Fraud Prevention Act
    because it addresses the problem through a combination of law
    enforcement and consumer education. I would like to suggest a
    few ways in which the legislation could be enhanced.
        First, in section 5, restrict the listings to organizations
    that provide information and services for free, at no charge to
    the student. The Higher Education Act already includes such a
    requirement. There are numerous high-quality sources of free
    information about financial aid, including the FinAid, Fast-
    Web, College Board, and Peterson's Web sites.
        Second, in section 5, require the organizations to publish
    a privacy policy on their Web sites, and require the
    organizations to provide the consumer with the ability to opt
    out of any mailing lists as part of the registration process.
        Third, in section 5, allow the U.S. Department of Education
    to exclude businesses which are being prosecuted by State
    attorneys general, not just the FTC.
        Fourth, in section 5, give the U.S. Department of Education
    broader discretionary power in determining which organizations
    should not be listed, since a listing on the ed.gov Web site
    will be viewed by consumers as an implicit endorsement.
        Fifth, in section 5, add language directing the U.S.
    Department of Education's consumer hotline, the Federal Student
    Aid Information Center, 1-800-4-FED-AID, to provide similar
    information to consumers who call with questions about the
    legitimacy of a particular financial aid business.
        Sixth, expand the language of the legislation to include
    organizations that provide information about student financial
    aid, in addition to organizations that claim to offer financial
    assistance.
        An additional idea for improving the legislation concerns
    scholarships for profit or organizations that offer
    scholarships with an application fee. Students apply for these
    awards thinking that the organization is involved in
    philanthropy when, in reality, the organization is enriching
    itself through the application fees. Philanthropy should be
    about giving money, not getting money. I recommend making it
    illegal to misrepresent what amounts to little more than a
    raffle or a lottery as a scholarship by making it illegal to
    charge student fees to apply for scholarships. If they want to
    call it a scholarship or fellowship, they must not be allowed
    to charge students any fees.
        Alternatively, I would recommend requiring any organization
    that charges students an application fee for scholarships to
    disclose certain information on the application form and to the
    general public, including the number of applicants, the total
    application fee revenue, and the total amount disbursed in
    scholarships. The consumer can then use this to see that the
    organization is making a profit off of the scholarship.
        Mr. Chairman, I once again thank you and the committee for
    taking an interest in the issue of student financial assistance
    fraud and for inviting me to share my thoughts on the matter. I
    would be happy to answer any questions you may have.
        Senator Abraham. Thank you very much, and we will look
    closely at your recommendations as we move forward
    legislatively.
        [The prepared statement of Mr. Kantrowitz follows:]

                     Prepared Statement of Mark Kantrowitz

        Mr. Chairman, I thank you for convening this hearing on S. 1455,
    the College Scholarship Fraud Prevention Act of 1999, and for inviting
    me to testify before the Senate Judiciary Committee this afternoon. My
    name is Mark Kantrowitz, and I am the publisher of the FinAid and
    eduPASS web sites, resources that exist to aid students in navigating
    the sea of financial aid and combat the type of fraud the Abraham-
    Feingold legislation addresses. I am pleased to have the opportunity to
    share my experiences with the Committee today.
        Every year, several hundred thousand students and parents are
    defrauded by scholarship scams. The victims of these scams lose more
    than 100 million dollars annually.
        Most families are afraid of the high cost of a college education
    and find the student financial aid process to be overwhelming.
    Financial aid even has its own language, an alphabet soup of acronyms
    like EFC and FAFSA and terms like need analysis and professional
    judgment. In such an environment, scams can thrive. When families are
    approached by outfits that promise to get the student all the money he
    or she needs to pay for college, they are so desperate that they lose
    their sense of caution. After all, many scholarship scams guarantee
    success and tell consumers that their services are completely without
    risk.
        The most common types of scholarship scams include the following:

       Scholarships for Profit. These are scholarships with an
            application fee or other fees, but no money is ever awarded,
            the amounts disbursed are less than advertised, or the
            scholarship sponsor receives more money in fees than is
            returned to the students in the form of scholarships.
       Guaranteed Scholarship Search Services. These are
            information brokers who charge a fee to match student
            information against a database of scholarships and guarantee
            that the student will receive at least $1,000 or $2,000 in
            scholarships.

        Other types of scholarship scams include:

       Guaranteed Financial Aid Consultants. These outfits promise
            to maximize eligibility for need-based student aid by
            decreasing the Expected Family Contribution (EFC) and guarantee
            success, suggesting that they can send the student to college
            for free. Although there are legitimate strategies for
            decreasing the EFC, such as paying off consumer debt (e.g.,
            credit cards and auto loans) and shifting assets from the
            student's name to the parent's name, the typical decrease in
            the EFC is only $1,000 and is often realized in the form of
            loans. Some outfits may advocate that the families provide
            false information on the FAFSA and may fail to sign in the paid
            preparer section of the form.
       Student Loans with an Up-Front Fee. These scams charge an
            ``application'', ``processing'', it origination'', or
            ``guarantee'' fee up-front, but the promised loans never
            materialize. Federal education loans do not have application
            fees and always deduct the origination and guarantee fees from
            the disbursement check.
       Seminar Scams. These outfits advertise a free financial aid
            seminar, often in letters mailed directly to parents. The
            seminar turns out to be a high pressure sales pitch for
            expensive financial aid products and services. What little
            financial aid information is presented is often inaccurate or
            obsolete. They do not provide the families with practical
            advice.
       Linked Product Scams. These scams state or suggest that the
            family must purchase a particular product, typically student
            life insurance or an annuity, in order to get access to federal
            student aid.

        Scholarship scams succeed by giving families an unreasonable
    expectation of success in using their services to obtain financial aid.
    Several of the most common misrepresentations include:

       The unclaimed aid myth. This myth states that ``$6.6 billion
            in aid went unclaimed'' and promises to get the student their
            fair share. Other common variations include $2.7 billion and
            $135 million. This is an extremely pernicious myth, because it
            not only defrauds consumers, but suggests to private sector
            benefactors that there is no need for them to create new
            scholarships. The $6.6 billion version of the myth is based on
            a 1976-77 academic year study in which the National Institute
            of Work and Learning estimated that $7 billion was potentially
            available from employers in the form of employee tuition
            assistance, but that only an estimated $400 million was used.
            Nobody has ever substantiated that any scholarship money
            available to the general public has ever gone ``unclaimed''. If
            there were such an unclaimed award, it would only need to be
            listed in one of the free national scholarship databases to
            obtain thousands of qualified applicants.
       High success rates. A guaranteed scholarship matching
            service might advertise a 96 percent success rate. The National
            Post-secondary Student Aid Study (NPSAS) conducted by the
            National Center for Education Statistics at the U.S. Department
            of Education found that only one in twenty-five students (4
            percent) receives a private sector scholarship, and the average
            amount is only about $1,600.
       Bogus Guarantees. A scholarship matching service might offer
            a guarantee that the student will receive a minimum amount of
            aid, typically $1,000 or $2,000. Such guarantees often come
            with restrictions that render them meaningless, such as
            requiring the student to submit rejection letters (most
            sponsors only notify winners), or include federal aid as part
            of the total.
       False claims of government, Chamber of Commerce, or BBB
            approval. One scam even created their own bogus BBB. Another
            stated that they are listed in the U.S. Library of Congress.
            Others misrepresent the nature of their business by using an
            eagle in a formal seal as their logo, and words like
            ``National'', ``Administration'', ``Foundation'' and
            ``Federal'' in their names.
       False claims of special influence with or special access to
            scholarship sponsors.

        The Federal Trade Commission initiated law enforcement activity
    against scholarship scams in the Fall of 1996. To date the FTC has
    brought actions against eight companies that collectively have
    defrauded 175,000 consumers out of an estimated 22 million dollars. The
    FTC initiative spurred the Attorneys General in several states to take
    action against scholarship scams operating in their states. The FTC
    also launched a consumer education campaign with their ``Six Signs Your
    ScholarShip is Sunk'' brochure.
        But this is just the tip of the iceberg. I estimate that there are
    900 to 1,000 scholarship scams of all types still in operation, with
    new scams being created every year. The typical scam charges fees
    ranging from $2 to $800, and has 5,000 to 10,000 victims. Some scams
    have charged fees as high as $5,000, and some have had as many as
    100,000 victims.
        I support the College Scholarship Fraud Prevention Act because it
    addresses the problem through a combination of law enforcement and
    consumer education.
        With regard to S. 1455, I would like to suggest a few ways in which
    the legislation could be enhanced:

       In section 5, require that only organizations which provide
            information and services for free be listed. In the Higher
            Education Amendments of 1998, Section 485(d) of the Higher
            Education Act of 1965 was amended to direct the U.S. Department
            of Education's web site to include direct links to databases
            that contain information on public and private financial
            assistance programs, and further stated ``The Secretary shall
            only provide links to databases that can be accessed without
            charge and shall make reasonable efforts to verify that the
            databases included in a direct link are not providing
            fraudulent information.'' There are numerous high quality
            sources of free information about financial aid, including the
            FinAid, FastWeb, College Board, and Peterson's web sites.
       In section 5, require the organizations to publish a privacy
            policy on their web site and require the organizations to
            provide the consumer with the ability to opt out of any mailing
            lists as part of the registration process.
       In section 5, allow the U.S. Department of Education to
            exclude businesses which are under investigation or being
            prosecuted by State Attorneys General.
       In section 5, give the U.S. Department of Education broader
            discretionary power in determining which organizations should
            not be listed, since a listing on the www.ed.gov site will be
            viewed by consumers as an implicit endorsement. One possibility
            would be to have the Department assemble an advisory committee
            of respected college financial aid personnel and other
            financial aid experts to set standards for inclusion on the
            Department's web site.

        In section 5, add language directing the U.S. Department of
    Education's consumer hotline, the Federal Student Aid Information
    Center (1-800-4-FED-AID), to provide similar information to consumers
    who call with questions about a financial aid business's legitimacy.

       Expand the language of the legislation to include
            organizations that provide information about student financial
            aid in addition to organizations that offer financial
            assistance.

        One additional suggestion concerns what I call ``scholarships for
    profit'' or organizations that offer scholarships with an application
    fee. (Note that I'm not talking about organizations that provide
    information about scholarships, such as scholarship databases and
    books, but rather organizations that claim to give money to students
    but charge an application fee or other fees.) Students apply for these
    awards, thinking that the organization is involved in philanthropy,
    when in reality the organization is a for-profit business making a
    substantial amount of money off of application fees. If the application
    fee revenue exceeds the amount disbursed in scholarships, the outfit is
    making a profit by offering the scholarships. Even if the application
    fee revenue is less, the organization is effectively recirculating
    student money in the form of scholarships, or getting the students to
    cover administrative expenses such as salaries. In many cases the
    students would be better off playing the lottery, where at least
    there's a 50 percent payout.
        To give a concrete example, suppose a scholarship program gives
    away fifty $1,000 scholarships a year, but charges a $10 application
    fee and gets 10,000 applications. They receive a total of $100,000 in
    application fees, and give out $50,000 in scholarships, for a net
    profit of $50,000. Or let's suppose the application fee is only $5, in
    which case the $50,000 in application fees is given out entirely in
    scholarships. Even in that case it should feel a little odd to you. In
    both cases, fifty of the 10,000 students are well served by the
    scholarships, in that they paid $5 or $10 and got $1,000. But the
    remaining 9,950 students have no benefit for their application fee.
        In some cases the application fees are charged by organizations
    that appear to be merely misguided. For example, in one case a tax
    exempt foundation charged students a $3 application fee, received more
    than 100,000 applications, but only gave away 180 $1,000 scholarships.
    The foundation was able to cover its expenses and also build up a
    rather large nest egg. In this case I was able to convince them to
    eliminate the application fee. But in most cases it is an organization
    or an individual who is deviously defrauding students by making them
    think that the purpose of the organization is to give them money, when
    it really is to enrich the people operating the scam.
        The bottom line is that philanthropy should be about giving money,
    not getting money. The key to these scams is they are able to charge an
    application fee or other fees to apply for their scholarship programs,
    while still being able to call it a scholarship or fellowship. If S.
    1455 were to make it illegal to misrepresent what probably amounts to
    little more than a raffle or lottery as a scholarship, making it
    illegal for an organization that offers a scholarship to charge an
    application fee or other fee (e.g., ``administrative fee'',
    ``redemption fee'', or whatever they want to call it) to apply. If they
    use the word ``scholarship'' or ``fellowship'', they should not be able
    to charge the student (or the parent/teacher) money as a requirement
    for the student to submit an application.
        It is important that the language of such a provision carefully
    distinguish such scams from legitimate operations, such as:

       Publishers of scholarship books (e.g., Peterson's, Prentice
            Hall, McGraw Hill), who charge a fee for a book of information
            about scholarships. The distinction here is that such
            publishers are charging for information about a variety of
            scholarships, not a fee to apply for a scholarship.
       Scholarship management services (e.g., USA Group, Citizen's
            Scholarship Foundation of America, etc.) who charge the
            scholarship sponsor a fee to manage their scholarship programs.
            The distinction here is that the sponsor is getting charged an
            administrative fee, not the individual students.

        Mr. Chairman, I once again thank you and the Committee for taking
    an interest in the issue of financial assistance fraud, and for
    inviting me to share my thoughts on the matter. I would be happy to
    answer any questions you may have.

        Senator Abraham. Mr. Bery, we welcome you. Thank you for
    being here today. We will turn to you for your testimony.

                       STATEMENT OF SANJEEV BERY

        Mr. Bery. Thank you, Senator Abraham and Senator Feingold,
    for offering me this opportunity to testify, as well as thank
    you for introducing this legislation. My name is Sanjeev Bery
    and I am the higher education associate for U.S. PIRG, U.S.
    Public Interest Research Group.
        The U.S. PIRG Higher Education Project works to expand
    access to higher education. We do so by advocating for
    increased funding for need-based student aid, lower-cost
    student loans, and better service for students who are served
    by Title IV of the Higher Education Act. U.S. PIRG endorses
    Senate bill 1455, the College Scholarship Fraud Prevention Act
    of 1999. I am the U.S. PRIG representative tasked with
    advocating support of this bill, and thank you again for
    introducing this legislation.
        It is my pleasure to talk to you today regarding the
    subject of fraudulent college financial assistance services. My
    experience with college scholarship fraud began with personal
    experience. In 1994, I was a senior at Fred C. Buyer High
    School in Modesto, CA. At the time, I was applying to college
    and looking for sources of financial aid.
        During that period of time, my parents received a postcard
    in the mail advertising a scholarship service. The company was
    named CAP, College Academic Planning, Incorporated. CAP's
    services seemed straightforward. In return for a $200 fee, I
    would receive a detailed list of scholarships tailored to my
    future background and future plans.
        Despite the heavy price tag, my parents and I decided to go
    ahead with the service. Though $200 is indeed a lot of money,
    we thought that if we were missing out on opportunities to
    apply for scholarships that I didn't already know about, that
    would be a problem and something not to miss out on. So my
    parents went ahead and paid the $200 fee.
        I then spoke on the phone with a CAP representative who
    asked me about my background and academic plans. Sometime
    later, I received a booklet in the mail with the results of
    CAP's so-called personalized scholarship search. The product we
    received in return for our $200 was of the poorest quality. The
    scholarships listed had absolutely nothing to do with either my
    personal background or my college pursuits.
        While I intended to study political science, I received a
    list of scholarships dealing with how to apply for scholarships
    dealing with med school. While I am of Indian descent, my
    parents having been born in India, I also received a list of
    scholarships on how to apply for Native American scholarships.
        So when we looked into the refund policy, it became clear
    that we had been ripped off. According to CAP, we would receive
    a refund if we provided proof that I had unsuccessfully applied
    to each of the scholarships they had given information on. But
    obviously with none of the scholarships really relevant to me
    or my personal needs at all, it would have been a complete
    waste of time to do so, even if the scholarship companies had
    actually responded and said that I was rejected.
        In some cases, I didn't even meet the qualifications to
    actually apply for the scholarships, as in the case of the
    Native American scholarships. This made it a complete waste of
    time to apply to each and every scholarship that they provided.
    Not knowing of any other alternative, we decided to accept our
    $200 loss.
        At the time, I had no idea that thousands of other high
    school students across the country and their parents were
    becoming victims of the same company's fraudulent practices.
    When the Federal Trade Commission shut down CAP through legal
    action in 1997, it became known that over 30,000 students and
    families across the country were similarly ripped off. CAP
    earned over $6 million in net sales through its fraudulent
    practices, charging families for a product that had lots of
    promise but little actual value.
        I went on to study at the University of California at
    Berkeley. Though I would never hear from CAP again, I know that
    during my 4 years as an undergraduate, many of my fellow
    classmates must have fallen prey to the same fraudulent
    schemes.
        At UC-Berkeley, like many other college campuses across the
    country, scholarship services place their offers on bulletin
    boards and mail them to students. As mentioned in other
    testimony today, the ads often wrongly state that millions of
    dollars in scholarship aid go unclaimed each year. Some even
    falsely guarantee that students or parents who pay the
    application fee and participate will automatically qualify for
    a scholarship.
        Many students are extremely vulnerable to these kinds of
    tactics. Over the past 20 years, the need for student aid has
    skyrocketed as enrollments and college costs have risen.
    Unfortunately, Federal student aid programs like the Pell
    Grants have not kept pace. This forces many low-income students
    to work long hours and take out large loans to pay for college.
    In this kind of environment, any promise of scholarship aid is
    difficult to resist.
        I strongly support your efforts to protect students and
    fight this fraud. Senate bill 1455, the College Scholarship
    Fraud Prevention Act of 1999, will go a long way toward
    stopping this type of criminal behavior.
        Thank you, Senator Abraham and Senator Feingold, for
    introducing this legislation and for giving me the opportunity
    to testify.
        Senator Abraham. Thank you, Mr. Bery.
        [The prepared statement of Mr. Bery follows:]

                       Prepared Statement of Senjeev Bery

        Thank you, Chairman and Senators, for the opportunity to testify
    before this committee. My name is Sanjeev Bery, and I am the Higher
    Education Associate for U.S. PIRG, the U.S. Public Interest Research
    Group. U.S. PIRG is the national lobby office for the state PIRG's. The
    State PIRG's are student-led public interest organizations in 25 states
    across the country.
        The U.S. PIRG Higher Education Project works to expand access to
    higher education. We do this by advocating for increased funding for
    need-based student aid, lower-cost student loans, and better service
    for students who are served by Title IV of the Higher Education Act.
    U.S. PIRG endorses Senate Bill 1455, The College Scholarship Fraud
    Prevention Act of 1999. I am the lead person at U.S. PIRG responsible
    for advocating in support of this bill.
        It is my pleasure to talk to you today regarding the subject of
    fraudulent college financial assistance services. My experience with
    scholarship fraud begins with personal experience. In 1994, 1 was a
    senior at Fred C. Beyer High School in Modesto, California. At the
    time, I was applying to college and anxiously awaiting a response from
    several universities. While finishing the application process, I was
    also focused on finding sources of financial aid. Because of this, I
    made it a priority to research scholarships, and apply to those that I
    might qualify for.
        During that period, my parents received a postcard in the mail
    advertising a scholarship service. The company was named CAP, College
    Academic Planning, Inc. CAP's services seemed straightforward--in
    return for a $200 fee, I would receive a detailed list of scholarships
    tailored to my personal background and future plans. Despite the heavy
    price tag, my parents and I decided to go ahead with the service. At
    the time, we viewed it as an investment. Though $200 is a significant
    amount of money, I could not pass up the opportunity to receive much
    needed financial aid.
        So my parents went ahead and paid the $200 fee. I then spoke on the
    phone with a CAP employee, who asked me about my background and
    academic plans. Sometime later, I received a booklet in the mail with
    the results of CAP's personalized scholarship search.
        The product we received in return for our $200 was of terrible
    quality. The scholarships listed had absolutely nothing to do with my
    background or planned future pursuits. While I intended to study
    political science, the booklet provided by CAP contained scholarships
    for students pursuing medicine. While I am of Indian descent, my
    parents having been born in India, the scholarship company provided
    information on scholarships for Native Americans.
        When we looked into the refund policy, it became clear that we had
    been ripped off. According to CAP, we would only receive a refund if we
    provided proof that I had unsuccessfully applied to each of the
    scholarships they had given information on. None of the scholarships
    included in the booklet were of any relevance to my background or
    planned pursuits, academic or otherwise. In some cases, I actually did
    not even meet the basic criteria for applying. To apply to a series of
    scholarships that requested written essays and a variety of other
    materials, knowing full well that there was little chance I would
    qualify for anything, would have been a total waste of time. Not
    knowing of any other alternative, we accepted our $200 loss.
        At the time, I had no idea that thousands of other high school
    students and their parents were becoming victims of the same company's
    fraudulent business practices. When the Federal Trade Commission shut
    CAP down through legal action in 1997, it became clear that at least
    30,000 other families had also been ripped off. CAP earned over $6
    million in net sales through its fraudulent practices, charging
    families for a product that had lots of promise, but no value.
        I went on to study at the University of California at Berkeley.
    Though I would never hear from CAP again, I know that during my four
    years as an undergraduate, many of my fellow classmates must have
    fallen prey to similar fraudulent schemes. At UC Berkeley, like many
    other college campuses, scholarship services placed their offers on
    bulletin boards and mailed. them to students. The ads often claimed
    that millions of dollars in scholarship aid went unclaimed each year.
    Some even guaranteed that students who participated would qualify for a
    scholarship. The ads were often personalized, making use of mail order
    lists that provided students' names, interests, and contact
    information.
        Many students are extremely vulnerable to these kinds of tactics.
    Over the past 20 years, the need for student aid has skyrocketed as
    enrollment and college costs have risen. Unfortunately, federal student
    aid programs like the Pell Grant have not kept pace. This forces many
    low-federal students to work long hours and take out large loans to pay
    for college. In this kind of environment, any new promise of
    scholarship aid is difficult to resist. I would go so far as to say
    that many hardworking students and families feel a strong obligation to
    pursue whatever opportunities are available to make that investment in
    a college education.
        I strongly support your efforts to protect students and fight this
    fraud. S. 1455, the College Scholarship Fraud Prevention Act of 1999,
    sponsored by Senator Abraham and Senator Feingold, will help reduce the
    prevalence of these types of crimes.
        The bill's first plank, which toughens the penalties against the
    perpetrators of such fraudulent services, will send the message that
    such behavior will not be tolerated. The second plank removes the
    protective shield of bankruptcy that many financial assistance services
    hide behind when prosecuted. Finally, putting a list of reputable
    services online will provide parents and students with the best defense
    there is: good information.
        I would like to offer two suggestions as to how S. 1455 can be made
    even stronger:
        Require the Department of Education to submit an annual report to
    Congress on fraudulent financial assistance services.--By doing so,
    Congress will ensure that the issue retains high visibility. Such a
    report should include a list of companies that have been investigated
    or have had complaints filed against them. It should also categorize
    the different kinds of fraudulent services that are prevalent. By
    issuing such a report, the Department of Education would raise the
    issue's profile in the education community. In addition, it is likely
    that such a report would be covered by a broad spectrum of media as
    well. Increased awareness of the problem would ultimately benefit
    students and their parents.
        Promote a coordinated effort between the Department of Education
    and the Federal Trade Commission to educate high school students and
    guidance counselors on scholarship fraud.--As mentioned above, good
    information is often the best defense against fraud. Providing guidance
    counselors and high school seniors with tips for avoiding potentially
    fraudulent financial assistance services would go a long way towards
    reducing the prevalence of these crimes. Whether through printed
    materials or otherwise, this would supplement the information that this
    legislation already seeks to place on the World Wide Web.
        The College Scholarship Fraud Prevention Act of 1999 will help
    protect many students and parents from the predatory practices of
    fraudulent college financial assistance services. Providing an annual
    report on the subject and educating high school students and guidance
    counselors would offer even greater protection to potential victims.
        Thank you for this opportunity to testify.

        Senator Abraham. As I said, we will now turn to Senator
    Feingold for his statement.

    STATEMENT OF HON. RUSSELL D. FEINGOLD, A U.S. SENATOR FROM THE
                           STATE OF WISCONSIN

        Senator Feingold. I would like to thank you, Senator
    Abraham, for your efforts to protect our Nation's students from
    scholarship fraud. This is not the first Abraham-Feingold
    effort and the last one was a very successful one and a good
    one, and I appreciate your asking me to work with you on this.
        Senator Abraham. Thank you.
        Senator Feingold. I would also like to thank the chairman
    for holding the hearing.
        My home State of Wisconsin, like its Midwestern neighbor,
    Michigan, is fortunate to have some of the finest higher
    education institutions in the entire United States, and good
    football teams. Although we did not quite beat Michigan, I
    think we can both agree that Wisconsin's defeat of Ohio State
    last week was a pleasure for both of us.
        Senator Abraham. It served a useful purpose.
        Senator Feingold. But in all seriousness, we are extremely
    proud in both of our States of our schools, our higher
    education institutions. Our States also enjoy diverse higher
    education systems, including public colleges and universities,
    community and technical colleges, and independent colleges and
    universities.
        High school students across the United States spend a good
    portion of their junior and senior years dreaming of attending
    one of these fine institutions. I think I am on the phone with
    my daughter, if not with her in person, every other day talking
    about this. She is a junior in high school right now.
        They recognize that a college education is an invaluable
    asset and higher education a truly wonderful experience.
    Students and parents alike are facing the reality that a
    college education is becoming increasingly expensive. And as I
    have indicated, I have personal experience with that, with one
    daughter already enrolled in the University of Wisconsin system
    and another one getting ready to apply.
        A university education is significantly more expensive than
    the costs I faced when I attended the University of Wisconsin-
    Madison. The University of Wisconsin-Madison is quite
    affordable compared to other Big 10 universities, but the costs
    are increasing, and students in my State are concerned about
    those costs.
        Fortunately, there are some private and Federal scholarship
    opportunities that help to allow students to realize their
    dream of a college education, but these resources are limited
    and there are not nearly enough for all of those in need.
    Regrettably, some unscrupulous companies are trying to take
    advantage of students by imitating legitimate government
    agencies and grant-giving foundations, and I am dismayed by the
    increasing frequency with which I hear stories of corrupt
    companies and individuals preying on the hopes and dreams of
    America's youth.
        Many of these unscrupulous companies guarantee scholarships
    in exchange for an advance fee. Some of these companies attempt
    to sweeten the deal by providing money-back guarantees which
    lures in unsuspecting students. Still others trick students
    into divulging their checking account number and debit the
    student's account, with or without a student's consent.
        In most cases, the result is the same. The students lose
    valuable time and resources that could have been used toward
    furthering their education. Some students do receive their
    money back, but only after countless hours of phone calls and a
    few months of worry and hassle.
        Sherri Pickett, a senior at the University of Wisconsin-
    Madison, paid $45 to a firm called Academic Financial Programs.
    A month later, she received a folder containing 10 grant and
    scholarship opportunities. That is when the problem started.
    First, she noticed that she, as a junior, was ineligible for
    seven out of the 10 scholarships. Then she wondered why she
    filled out the personal profile. Sherri received a few notices
    for freshman scholarships when she was a junior, notices for
    aid available only to those going into the petroleum industry,
    and notices for financial aid for students at private
    institutions.
        Finally, she realized that the acceptance deadline had
    already passed for the three remaining scholarships. Sherri
    spent countless hours trying to reach Academic Financial
    Programs. In the meantime, she contacted each of these
    scholarship opportunities and hoped to get a formal letter of
    rejection so she could simply get her money back. Instead of
    spending her time chasing scholarships she wasn't qualified for
    and leaving countless messages on answering machines, she could
    have devoted her time to studying, working, or enjoying
    college.
        In the end, Sherri did receive her money back, but only
    after many hours of hassle. But Sherri makes an important
    point. She writes, ``They will return your money if you have
    months of time to devote to them, but my money was something I
    already had in the first place.''
        We need to help students like Sherri Pickett who lost
    valuable time and confidence in the system trying to reclaim
    her fee from a corrupt company. Mr. Chairman, I ask that her
    full story be placed in the record.
        Senator Abraham. Without objection.
        [The prepared statement of Ms. Pickett follows:]

       Prepared Statement of Sherri Pickett, Senior at the University of
                               Wisconsin-Madison

        My name is Sherri Pickett and I am from Madison, Wisconsin and am a
    senior at the University of Wisconsin-Madison. In June of 1998, I was
    contacted by a financial assistance service named Academic Financial
    Programs. The letter describing their service stated that if I sent the
    company a fee of $45, they would identify for me sources of financial
    aid for the upcoming school year. If they could not find identify any
    financial aid, I would be reimbursed for the fee. I felt I could not
    lose. I needed the money badly for school and I thought if there were
    any problems with the process, I would get my money back. I sent in the
    money along with a personal profile of myself, which included my major
    in school and my career interests. This was apparently the criterion
    that was used in order to locate the appropriate scholarships and
    grants.
        About a month later, I received a folder of about ten grant and
    scholarship opportunities. I also received information about how to get
    my money back if none of the identified sources could provide financial
    aid for me. I was anxious to contact these sources because I was
    excited at the opportunity to receive any extra aid. I became skeptical
    as I looked closer at all of the sources. I noticed that I was not even
    eligible for about seven of them. I wondered what the personal profile
    was for if I did not match any of the requirements. I received a few
    notices for freshman scholarships when I was a junior, notices for aid
    available if you were going into the petroleum industry, and notices
    for financial aid for students at private institutions. I never wrote
    anything of the sort in my personal profile. I also received notices
    for aid that was no longer available because the deadlines had all
    ready passed. Academic Financial Program also sent me information on
    aid from the state of Wisconsin, which I would have already received in
    my financial aid package from the university if I were eligible.
        At this point, I was determined to get my money back because I
    could see the program was nothing like I expected. It was now my
    responsibility to write to all of these sources and get rejection
    letters. The Academic Financial Program wanted you to write to the
    identified sources asking about financial aid in general. Instead, I
    told each source up front in letters that I knew I was not eligible for
    their financial aid and I wanted a letter from them stating so in
    return. The few scholarships I was eligible for were already past the
    acceptance deadline.
        I was so frustrated with this program that I called their office in
    San Diego several times telling them to expect my demand for a refund
    in the mail. About half of the times that I tried to contact them, no
    one would answer their phone. This was really starting to scare me
    because I really hated to think that I was being scammed. I finally got
    a hold of someone in the office and expressed my concerns about what I
    received from them. The woman I spoke to seemed helpful, but I was not
    sure how genuine she was. I thought they picked up their phone by
    mistake and would not pick it up again after speaking with me.
        I started to panic and contacted my financial aid advisor. She told
    me that plenty of students were paying far more than I was and not
    being reimbursed by these types of companies. She said she wished I had
    talked to her before I decided to follow through with paying Academic
    Financial Programs. I told her how disappointed I was with the service.
    I could not believe that these people actually have access to your name
    and information to contact you. It was definitely not what I expected.
    I spent several weeks gathering all of the rejection letters in hopes
    that I might possibly get my money back. It was very irritating that I
    had to even bother with the sources I was not eligible for.
        In between the time that I sent all of this information back to San
    Diego and the time that I actually heard back from them, I was
    constantly calling them to see if they received the package yet. I
    finally received the reimbursement in the mail of the full $45 after
    the course of a couple months. I was very fortunate to see that money
    back. I thought that I was probably just one out of the many people who
    even bothered going through the hassle of getting their money back with
    this company. Most students probably did not see the trouble they were
    getting themselves into, they just saw the potential money like I did.
    Although I got my money back as promised, it was a very long and drawn
    out process. I have warned many people about the program to hopefully
    save them the time and aggravated feeling I had after dealing with
    Academic Financial Programs. There is no question that they do not
    deliver what they promise--links to financial aid sources. They will
    return your money if you have months of time to devote to them, but my
    money was something I already had in the first place.
        I urge this committee to pass S. 1455, which would prevent future
    students from going through the ordeal that I dealt with.

        Senator Feingold. Hopefully, with this legislation, we can
    empower the Justice Department, the Federal Trade Commission,
    and the Department of Education to prevent companies from
    scamming students like Sherri.
        I commend the FTC for addressing the issue of scholarship
    scams. In 1996, the FTC initiated Project Scholarshipscam, a
    nationwide crackdown on fraudulent scholarship search services.
    I am particularly pleased about the accessibility of
    information on scholarship scams on the FTC's Web site and look
    forward to hearing from the FTC on its efforts to deal with
    this problem.
        Private organizations have also joined in the effort. Web
    sites such as www.finaid.org provide a valuable service, both
    making students aware of legitimate scholarships and warning
    them of potential scams. I am pleased that Mr. Kantrowitz has
    joined us today. Unfortunately, their efforts are not enough to
    deter scholarship scam artists. According to the National
    Association of Student Financial Aid Administrators, more than
    350,000 people are duped by aid scams each year, losing some $5
    million annually.
        I understand that in one such case, in Baltimore, MD, a
    single individual defrauded 60,000 students for a grand total
    of $600,000. This fraud must stop. Students have a right to
    dream of a college education without worrying about fraud and
    abuse. We must increase awareness of such fraud, protect
    students from scam artists, and deter future criminals.
        I am pleased that this legislation will protect students by
    requiring the Department of Education to create a Web site of
    legitimate sources of scholarship information. It would further
    require the Department of Education to coordinate with the FTC
    in compiling this list. This legislation will protect against
    fraudulent organizations being listed on the site. The Web site
    will hit the ground running, since the FTC has already begun
    the awareness campaign on their site. This Web site will
    provide an invaluable service, making students aware of
    legitimate scholarships and helping them to differentiate
    legitimate companies from con artists.
        I am also pleased that this legislation improves the FTC's
    ability to recover the monies owed students. I understand that
    some scholarship scam artists use bankruptcy to retain their
    ill-gotten gains and avoid paying court judgments. Here is how
    they do it. First, the scam artists use the student's money to
    invest in expensive homes. When the scam artists are hit with
    disgorgement and redress orders, they file for bankruptcy. The
    scam artists take advantage of the bankruptcy estate exemption
    for residential property to keep the students' money. Then
    after the bankruptcy proceedings clear their debts, the scam
    artists sell their expensive homes and succeed in keeping the
    money they have defrauded from students. This is an outrageous
    abuse of the bankruptcy laws and can't be allowed to continue.
    While I am cautious about eliminating legitimate exemptions
    from bankruptcy for those who need them, I want to be sure the
    scam artists cannot use bankruptcy as a tool to avoid being
    held responsible for their wrongdoing.
        The scams themselves take many forms--the advance fee loan,
    the scholarship prize, the guaranteed scholarship search
    service, to name just a few. Unfortunately, all the scams have
    one common thread; they deprive students of resources that
    could otherwise be used for books or tuition.
        In one scam that has been cited by Senator Abraham and
    others, a bogus organization, the National Scholarship
    Foundation, charged students a $189 processing fee. For their
    hard-earned dollars, students received only general information
    about the general college application process. For those who
    may be reluctant to act on this legislation, I want to make
    clear that these frauds, though they may seem like small
    amounts of money, represent real money to Wisconsin students.
    For $189, students could have taken a sales management course
    at the Milwaukee area technical college, bought books at the
    campus bookstore in Madison, WI, or purchased 10 to 15 hours of
    child care to allow them to be able to attend classes in the UW
    system.
        We in Congress also believe these amounts to be
    significant. For example, the fiscal year 2000 Labor-HHS bill
    contained a $200 increase in the maximum Pell Grant award. We
    would like to do more, but that is supposedly worthwhile, that
    is real money.
        I hope this committee will take up this legislation soon
    and forward it on to the full Senate. We need to protect our
    Nation's college students from unscrupulous companies. This
    legislation is a common-sense first step in preventing
    scholarship fraud, and I again want to thank Senator Abraham
    for his leadership on the issue.
        Thanks for the time.
        Senator Abraham. Senator Feingold, thank you. I think you
    have once again identified some compelling arguments in support
    of what we are trying to do here, and I appreciate your help on
    this very much.
        Senator Feingold. Mr. Chairman, I forgot to ask unanimous
    consent that Senator Leahy's statement be submitted for the
    record.
        Senator Abraham. Of course, without objection.
        Senator Feingold. Thank you.
        Senator Abraham. If other members of the full committee
    wish to submit statements, we will leave the record open for
    them to have that opportunity.
        [The prepared statements of Senators Hatch and Leahy
    follow:]

       Prepared Statement of Hon. Orrin G. Hatch, U.S. Senator From the
                                 State of Utah

        Good morning, and welcome to today's hearing on solving the problem
    of scholarship scams. I first would like to thank Senators Abraham and
    Feingold for their efforts and leadership on this important issue. As
    many of you know, ``The Scholarship Fraud Prevention Act (S. 1455)''
    was introduced by Senators Abraham and Feingold on July, 28 of this
    year. Also, I would like to thank all of our witnesses today for their
    time and cooperation.
        For those of us who care deeply about education and who promote
    higher education, scholarship scams are particularly offensive because
    they target the very students who are in need of financial help to
    continue their education. I have a long record of supporting the
    integrity of the student loan system, and ensuring that students have
    the broadest possible set of options in financing their educations. I
    am a longstanding supporter of the student loan system, and have worked
    hard to make sure that interest rates on student loans are kept to a
    minimum. I also have undertaken to make sure that scholarships and
    grants remain available to assist those students who need them.
        It is well-known that the cost of a college education today is
    extremely high, and students increasingly must seek financial
    assistance in order to attend. At the same time, fraud in the offering
    of financial assistance to college students has emerged in a wide
    variety of forms, and appears to be a growing problem. I hope that,
    with this hearing, we will better understand the problem of con artists
    who defraud students seeking to finance their college educations, and
    examine appropriate solutions to the problem.
                                   __________

      Prepared Statement of Hon. Patrick J. Leahy, U.S. Senator From the
                                State of Vermont

        One of the singular most important issues facing us today is
    education. Affordable higher education is an opportunity that must be
    made available to all of our young people. To that end, public and
    private scholarships, grants and loans have long assisted our nation's
    students in pursuing college degrees.
        Phony scholarship offerings, scams and frauds do great harm to our
    nation's students. No student seeking to attend a college or university
    should have to worry about whether a scholarship offering is legitimate
    or wonder whether the business to which he or she has mailed an
    application fee actually exists. I am glad we are exploring ways to add
    to the arsenal of our current laws to combat these types of frauds.
        The goals of the proposed bill are laudable: combating scholarship
    scams and promoting the dissemination of information about legitimate
    sources of higher education funding. Nevertheless, I have certain
    questions about whether the proposed bill is the most effective way in
    which to pursue the goals we all share.
        For instance, the bill proposes to raise the long-standing
    statutory maximum punishment of five years for mail and wire fraud to
    ten years in cases of scholarship scams. In light of the fact that
    scholarship scams often involve more than one victim and may result in
    multiple charges, raising, the statutory penalties may not be necessary
    to effectuate punishment goals. A more appropriate and effective
    solution to ensure adequate punishment may be to direct the Sentencing
    Commission to consider whether a guideline enhancement for cases
    involving fraudulent scholarship offerings should be added to the
    Sentencing Guidelines. I would welcome consideration of this issue.
        Similarly, I would be interested to know whether we have
    information to suggest that those criminals who base their schemes on
    scholarship offerings are more likely than those perpetrating other
    types of frauds to shield ill-gotten gains in bankruptcy homestead
    exemptions. I would welcome further information on this issue as well.
        I look forward to reviewing the testimony of our witnesses and
    learning more about these important issues.

        Senator Abraham. I just have a few questions, and really
    they are in part just to follow up on some of the points
    already made. First, I am going to ask Ms. O'Flaherty,
    obviously your office is the center of this activity when it
    comes to identifying and assisting students with respect to
    financial assistance. I assume you also have a relationship
    with high schools in our State that come to you for information
    or that you provide.
        Having now been part of this process, seeing some of these
    fraud schemes, and so on, is it your impression--at least the
    ones who actually charge people to just provide information,
    that essentially the information that they are providing when
    it is simply of that sort is available to students either at a
    financial aid office like yours or often even in their own high
    school?
        I don't want to presume that, but is that typically the
    case? I mean, is there any unique information that these
    services--I guess that is how I should ask the question--that
    these services have that couldn't be obtained at the Western
    Michigan University financial aid office?
        Ms. O'Flaherty. I would say there is very little. On a
    service that is legitimate, there may be some scholarship match
    that we have been unable to do. The State of Michigan has an
    excellent scholarship match on its Web site for free; it is a
    national database.
        Very, very often, the parents that I speak to who are so
    frustrated and have that horrible sense of being taken, they
    come in and it says Federal direct unsubsidized loan and parent
    loan, and we see a lot of that. So, yes, that information is
    available in our office, in most financial aid offices, and on
    numerous Web sites for free.
        Senator Abraham. So the notion that somebody has to pay,
    whether it is $189 or it is $20, to get this so-called inside
    information about scholarships that are out in the world--
    basically, that isn't the case. This kind of information is
    available at the place you would probably typically think of to
    begin with.
        Ms. O'Flaherty. Correct, it is, and if it is not right
    there, we can get them to the right resource on the Web.
        Senator Abraham. You indicate in your testimony that as you
    have traveled around to do maybe seminars or whatever that you
    are hearing more and more of these kinds of problems. Has that
    been the case with the students who come into the financial aid
    office itself?
        Ms. O'Flaherty. Yes. I mean, I have been in financial aid
    since 1973 and this has been an issue my whole term. I have
    always heard about it on and off over the years. I just
    returned from a financial aid conference in Cleveland last
    night, and intentionally talked to as many people from various
    States as I could to find out their sense of what was going on.
    And I would say for the most part, the sense is that it
    continues, it is growing, it is changing its face all the time;
    a little bit different twist associated with purchasing
    something. Insurance policies, any variety of things are
    associated with it, so we feel very strongly that it is out
    there in significant amounts.
        Senator Abraham. So whatever we are trying to do or is
    currently being done that might be discouraging hasn't seemed
    to work, and therefore you would conclude that we need to do
    more in terms of the discouragement of this kind of practice, I
    guess.
        Ms. O'Flaherty. Yes, I would, and I really mean it when I
    say I have talked to parents, not even at college nights but
    just in the office or informally. It is a huge issue and a
    question for many, many families.
        Senator Abraham. My sense--and, again, I don't have any
    empirical evidence to back this up, but maybe Mr. Kantrowitz
    would have some insight. But my sense is that as we develop new
    technologies, we, of course, give creative people who want to
    use new technologies in a bad way new opportunities.
        And my suspicion is that some of the reason that this is
    growing is because with the Internet now there is a lot of new
    sort tools, so to speak, available to people to communicate
    with students, and maybe even in a more effective way to some
    extent because there might be a little more--I don't know--a
    mass mailing may just on its face be easy to look at and
    discard, whereas something that maybe shows up through the
    Internet sometimes might have an even more serious look to it
    or be harder to discern immediately if it was not effective. Do
    you think that is a possibility?
        Mr. Kantrowitz. Definitely a possibility. The Internet is a
    new communication channel and just as it can be used by
    legitimate organizations to communicate at less expense, it can
    also be used by scam operations to reach a greater audience.
        Senator Abraham. I want to change gears slightly and go to
    you, Ms. Anthony. First of all, we appreciate what the FTC has
    done both working with our office as we have put the
    legislation together and even before that when we first started
    reading about these problems and hearing from people in
    Michigan. You have been very helpful to give us the kind of
    background needed to both go out on a little tour of my own to
    talk about these warning signals, but also in terms of helping
    us to do a better job here.
        One of the questions I have is right now the issue, I
    guess, is in my mind is with respect to the pursuit of those
    who are engaging in this fraud. Your power is obviously limited
    to sort of civil actions, not to criminal actions.
        Ms. Anthony. That is correct.
        Senator Abraham. At this point, is it typical for the FTC
    to then make criminal referrals to the Department of Justice?
    Is that what would happen if you thought somebody had reached a
    level of misconduct that required that criminal fraud was
    involved? Is that how the process works?
        Ms. Anthony. Yes. We have two options. We can either bring
    a civil action or make a criminal referral to a U.S. attorney's
    office, which we have done.
        Senator Abraham. Do you do that very often at this point,
    or is that sort of a limited use option?
        Ms. Anthony. It depends, I suspect--I would like to defer
    to the staff on this and I will get back to you with that
    question.
        Senator Abraham. That would be fine.
        Ms. Anthony. But it would depend, I suspect, on maybe the
    size of the consumer injury as to whether the U.S. attorney's
    office, who are dealing with drugs and violent crime and other
    matters, would feel that it was worth the resources that they
    would need to expend.
        Senator Abraham. I would be at least interested in knowing
    how that process has worked, and also to the extent you know,
    what follow-up or what percentage of the referrals have
    actually been acted on. I am sure the calculus from the other
    side--that is, from the U.S. attorney's side or from the
    Department of Justice's side--also is to look at the penalties
    that currently exist which are not very severe in terms of the
    criminal side and maybe when they have to make that cost/
    benefit analysis between pursuit of other criminals or
    prosecutions versus these.
        One of the arguments we have for our legislation is that by
    increasing the potential criminal penalties, it not only maybe
    discourages people, but it also makes the pursuit of cases in
    this area a little more arguable, or sort of buttresses the
    investments that would be made in terms of resources. So if you
    could get us some information along those lines, that would be
    very helpful.
        Ms. Anthony. I will be happy to do that, Senator.
        Senator Abraham. And we do thank you for the FTC, the full
    agency, your Commission, for what efforts you have already
    engaged in.
        Do you feel that it would be possible to work with the
    Department of Education to put together the kind of site that
    we have talked about that might give students at least a more
    accurate list of the services that are legitimate?
        Ms. Anthony. We would feel delighted to cooperate with the
    Department of Education in any way that we could be of
    assistance. We have made great efforts to send a consumer
    education message, and we feel that we have been fairly
    successful with that, to both businesses and individual
    consumers.
        We would be, of course, deferring to the Department of
    Education, who has a great deal of experience in all sorts of
    financial aid, both loans and work/study and other financial
    aid packages. But as far as helping them with lists, we would
    be happy to lend a hand.
        Senator Abraham. And Mr. Kantrowitz has given us some ideas
    as to other ways that we might want to adjust perhaps the
    process, or at least the sort of criteria, and we will look
    into those.
        Mr. Bery, your personal experience is probably the most
    illuminating sort of testimony we have received in a certain
    sense because it demonstrates that this isn't just kind of an
    imagined problem, but one that hits home to people of modest
    means and causes hardship.
        I think one of the problems, as I have sort of talked to
    people in our State, is that the amount of injury suffered in
    terms of dollar damages to any one person is at a level where
    the pursuit of any kind of redress is to them, at least, more
    expensive, presumably, or more difficult than the loss
    involved.
        We have also noticed in Michigan, at least, that the people
    who have--you know, the law enforcement folks in our State and
    the people in the universities and colleges are having a
    greater difficulty because many times the people involved are
    not around Michigan. They are from Maryland or they are from
    other parts of the country, which is another reason why I think
    having some sort of Federal comprehensive approach makes some
    sense.
        But I am just wondering, in your professional role now, are
    you too encountering an indication of an increased level of
    this sort of activity going on? Is that something in your job
    with PIRG that you are encountering?
        Mr. Bery. Well, as you have said, a lot of times because
    students at an individual--you know, it is so daunting to even
    begin to figure out the process of what to do once you have
    lost anything from $25 to $200. A lot of times, the types of
    complaints that could be logged aren't because students are
    just dismayed by that and move on to other efforts.
        But I think this effort, this bill, will go a long way
    toward sending out a message nationwide to perpetrators of
    these types of crimes that there are significant penalties. And
    it is also good because it provides good information through
    the requirement of a Web site. And I think even further
    developing that and further developing the efforts that
    Commissioner Anthony had mentioned with regard to the FTC
    providing those bookmarks at college bookstores--maybe if the
    Department of Education and the FTC aren't already doing this,
    going so far as to provide information to guidance counselors
    at the high school level, so a high school senior who walks
    into a guidance counselor's office and sees a pamphlet next to
    the FAFSA, the Free Application for Federal Student Aid, that
    says don't get scammed, and a few tips, similar to what the
    poster was that the Commissioner had highlighted for the
    hearing. Those would be good steps to avoid that.
        Senator Abraham. I think some of that does go on, right?
        Ms. Anthony. Yes, it does, and the testing services have
    been cooperative with us in disseminating these sorts of
    warnings to high schools and high school guidance counselors.
        Senator Abraham. Senator Feingold.
        Senator Feingold. Thank you, Mr. Chairman, and thank you to
    all the witnesses for being here. I just have two questions for
    Commissioner Anthony. I have been particularly concerned about
    the availability of financial aid to low- and middle-income
    students, many of whom have contacted me about the Pell Grants.
    Ms. O'Flaherty indicated in her testimony that many of the
    victims of the scholarship scams are students in low- and
    middle-income households.
        Do you find any evidence that these scams are, in effect,
    profiling students and specifically targeting certain economic
    groups?
        Ms. Anthony. Senator, I think these scam artists are
    targeting all American families who have college-age students,
    and I don't necessarily think it depends on the income level
    because nearly every family today is seeking financial aid in
    some way or another because college costs have become so
    expensive. If we do discover any matter of profiling, I will be
    certainly happy to share that information with you.
        Senator Feingold. Fair enough. The other question is if you
    could discuss the extent of the problem with scam artists
    hiding their ill-gotten gains under the residential property
    exemption for estates in bankruptcy proceedings. In your
    experience, have you found that scam artists are hiding their
    ill-gotten gains from bankruptcy courts in other ways, in
    addition to the residential property exemption?
        Ms. Anthony. I am not aware of any. I will be happy to
    consult with the staff and get back to you on that.
        Senator Feingold. Thank you, Commissioner. Thank you, Mr.
    Chairman.
        Senator Abraham. Senator Feingold, thank you.
        As we bring this to an end, oftentimes our hearings are--
    because a member has a different view on the issue from our
    committee, they bring in witnesses who are in conflict. Today,
    we don't have much conflict, so our hearing is relatively short
    in length, but not limited in terms of its impact. I think it
    can be very helpful to us as we try to move the bill forward.
        Before we close, I have been actually handed a statement
    which we will include in the record, assuming there is no
    objection, from Assistant U.S. Attorney Dale Kelberman, from
    the District of Maryland, who is the supervisor of the White
    Collar Crime Section and who dealt with one of these cases, the
    one I referenced in my opening statement. He would like to have
    this statement entered into the record as well.
        [The prepared statement of Mr. Kelberman follows:]

        Prepared Statement of Assistant U.S. Attorney Dale P. Kelberman

        Mr. Chairman and Distinguished Members of the Senate Judiciary
    Committee. Thank you for the opportunity to present this statement to
    the Committee regarding the prosecution by our office of the case of
    United States v. Christopher Ebero Nwaigwe aka Christopher Maige
    (Criminal No. WMN-98-0414, D.Md.). I am an Assistant United States
    Attorney for the District of Maryland and the supervisor of the White
    Collar Crime section of the Office. I have been an Assistant since
    October, 1987, and have been a prosecutor for approximately twenty-five
    years at the federal, state and local levels. The Nwaigwe case was
    prosecuted by an Assistant United States Attorney who comes under my
    supervision in the office.
        Our office worked with agents from the United States Postal
    Inspection Service in conducting the investigation which led to the
    charges against Mr. Nwaigwe. The investigation focused upon Mr.
    Nwaigwe's false representations to various members of the public in
    which he represented that he was associated with different college
    scholarship programs including the ``National Health Scholarship
    Program,'' the ``National Nursing Scholarship Program,'' the ``Higher
    Education Scholarship Program,'' and other similarly-named programs.
    Using both his own name and an alias, Christopher Maige, Mr. Nwaigwe
    had opened about a dozen post office boxes in various locations in the
    Baltimore metropolitan area. The post office boxes were represented to
    students and prospective students as ``suites,'' when they were simply
    mail drops. Nwaigwe mailed letters to students from lists he had
    obtained advising them that they had won scholarships, or could win
    scholarships. The solicitation requested that the students fill out
    forms and send them in with a $10.00 processing fee to one of the named
    addresses. In truth, there were no scholarships for any student.
        The $10 fee was deposited to bank accounts Nwaigwe opened at Signet
    Bank, First National Bank of Maryland, and NationsBank. Nwaigwe used
    the funds for his own personal use, although it was difficult to trace
    all the funds because much of it was converted to cash. Nwaigwe
    collected approximately $500,000 from prospective students in this
    fashion.\1\ Mr. Nwaigwe had previously been the subject of a cease and
    desist order from the Postal Service, which order had been issued in
    1993. Nwaigwe also was enjoined from soliciting fees in 1996 in a civil
    action. On October 22, 1998, Mr. Nwaigwe was indicted by a grand jury
    in the District of Maryland on seven counts, each of which charged him
    with the crime of mail fraud, in violation of Title 18, United States
    Code, Section 1341.
    ---------------------------------------------------------------------------
        \1\ One of the delays in prosecuting this case was the time
    involved in obtaining all the necessary bank records relevant to the
    government's case. In order to identify all possible victims, the
    government issued subpoenas to the three banks for all deposited items
    of $10.00 or more. Given the volume of activity into those bank
    accounts, it took the banks some time to research and copy all of the
    thousands of bank items involved.
    ---------------------------------------------------------------------------
        Nwaigwe was represented by the Federal Defender's Office in the
    District of Maryland, and went to trial on March 8, 1999 before a jury
    presided over by the Honorable William M. Nickerson. The defendant was
    convicted of all seven counts by the jury on March 15, 1999.
        The trial court ordered a presentence report, and held sentencing
    on June 4, 1999. Because he was convicted of seven counts of mail
    fraud, Mr. Nwaigwe was subject to a maximum statutory penalty of
    thirty-five (35) years imprisonment, a fine of $1,750,000 (7
    $250,000), supervised release, restitution of the amount of the loss,
    i.e. $500,000, and a special assessment of $350.00 (7
    $50.00).
        However, because the Sentencing Reform Act of 1994, which adopted
    the federal sentencing guidelines, applied, Mr. Nwaigwe's sentence was
    based upon the sentencing guideline factors which applied to his case,
    as adjusted based upon his criminal history. In addition to the ``base
    offense level,'' the sentencing guideline factors found to apply by the
    trial judge included: (1) the amount of the loss ($500,000); (2) a two-
    level enhancement because there was more than one victim; and (3) a
    two-level enhancement because the defendant falsely represented that he
    was acting on behalf of an educational organization and had violated an
    administrative order. As a result of these factors, the sentencing
    court found the guideline range to be 33 to 41 months incarceration.
    The trial judge departed downward one level from that range because
    Nwaigwe's status as an ``alien'' might subject him to more onerous
    conditions of confinement. The judge imposed a sentence of (36) months
    incarceration, followed by three (3) years of supervised release. The
    court determined that Nwaigwe did not have the ability to pay a fine or
    make restitution, so none was ordered. Mr. Nwaigwe was detained in
    Worcester, Massachusetts shortly after his indictment, and he has
    remained in custody since then.
        Mr. Nwaigwe has filed a notice of appeal to the United States Court
    of Appeals for the Fourth Circuit, which is pending. The defendant has
    not yet filed his brief in the 4th Circuit, so the issues on appeal are
    at this point unclear.

        Senator Abraham. So I want to thank the panel, thank the
    organizations represented as well. And certainly to our
    audience, I appreciate those who have spent a little time with
    us today. We will work together certainly with our colleagues
    here on the committee to try to move this legislation. I think
    it is a constructive step. Hopefully, it can begin the process
    of reducing the abuse that has gone on. And we appreciate those
    of you on the front line and the job you are doing to try to
    help with that as well.
        So we will bring the hearing to a conclusion and we thank
    everybody for their participation.
        [Whereupon, at 3:26 p.m., the subcommittee was adjourned.]
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