EDUCATION : Trade School Scandal Exposes Flaws in Pell Grant Program

Federal education funds being used to lease luxury automobiles and take Club Med vacations? That’s the charge leveled against a chain of Los Angeles-area trade schools by a Senate subcommittee that has conducted a yearlong inquiry into the U.S. Department of Education’s Pell Grant program.

IADE American Schools closed its doors in March after FBI agents raided the school’s administrative offices and seized its financial records.

Red-faced Education Department officials acknowledge that their $6-billion-a-year Pell program, which pays schools to educate financially needy students, is badly in need of tighter controls--even though they claim IADE is an unusual case.

The school received more than $50 million in grants over the last five years, most of it through outright fraud, according to the permanent investigations subcommittee of the Senate Governmental Affairs Committee.

“We have made substantial progress to reduce fraud and abuse in student aid programs,” Assistant Secretary of Education David A. Longanecker insisted to the subcommittee. But Longanecker said that “we believe we can continue to improve our management” in determining who is eligible for financial aid.

Unlike the student loan program, Pell grants are sent directly to institutions, including thousands of vocational schools like IADE that enroll needy students, and the grants are not subject to repayment.

Acting Inspector General John P. Higgins Jr. told Congress that attempts to determine eligibility for these grants, in which state agencies share a role, so far have been “insufficient to keep out unscrupulous schools.” But Sen. Sam Nunn (D-Ga.), who has led the probe, believes that better training is needed for federal auditors. He says that fraud has occurred “right under the noses of reviewers, auditors and investigators who are on site conducting examinations.”

According to Senate investigators, IADE was founded in South Gate in 1983 by Abraham Stofenmacher, an Argentine businessman, and eventually expanded to five more sites in Southern California. It enrolled 5,000 to 10,000 students a year--mostly Latino immigrants who flocked to classes in English, computer and auto repair.

Stofenmacher and his sons, Bernardi, Alejandro and Sergio, shared in management of the school, federal sources said. All are Argentine citizens.

“The school took advantage of a student population that was largely unskilled in English,” one source said. “Most had no idea they were receiving grants from the government. They were told to come to school for free.”

Although some students were charged minimal tuition, the subcommittee found that the Pell grants accounted for about 95% of IADE’s operating budget.

However, according to the panel’s findings, the owners siphoned large sums into foreign bank accounts--sometimes leaving the country with suitcases full of money--and used other federal funds to lease expensive cars, make child-support payments and finance Club Med vacations.

Asked about the allegations, Mary Gibbons, a lawyer representing the school’s management, said: “I do not agree with that statement.” She declined to comment further.

Gibbons would not disclose the whereabouts of Stofenmacher family members, although Senate investigators said most have left the country and have refused to testify to the subcommittee.

The subcommittee found that as part of their scheme to fool Education Department auditors, school managers drew up lists of “ghost students”--persons who had applied for admittance but never showed up. They also inflated tuition costs and made other alterations in computer records and student aid files, the panel alleged.

Investigators said they received evidence that the quality of education was poor. And many students, after receiving certificates, were placed in jobs far below the level of skills for which they were supposed to be trained, investigators said. Others were listed as having been placed with companies that did not exist.

“For five years the subcommittee has exposed the problems of fraud and abuse that seem to plague these programs,” Nunn said. “Unfortunately the Pell Grant system continues to run on little more than an honor system--and there is no honor among thieves.”