U.S. v. Craig, 98-2252

• Decision Date: 20 May 1999
• Docket Number: No. 98-2252,98-2252
• Citation: 178 F.3d 891
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Bertha CRAIG, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

178 F.3d 891

UNITED STATES of America, Plaintiff-Appellee, v. Bertha CRAIG, Defendant-Appellant.

No. 98-2252.

United States Court of Appeals, Seventh Circuit.

Argued Jan. 22, 1999.

Decided May 20, 1999.

Stephen Heinze (argued), Office of the United States Attorney, Criminal Division, Chicago, IL, for Plaintiff-Appellee.

J. Reed Millsaps (argued), Northbrook, IL, for Defendant-Appellant.

Before EASTERBROOK, KANNE, and DIANE P. WOOD, Circuit Judges.

KANNE, Circuit Judge.

After the Department of Education's investigation of several beauty academies owned by Paul and Diane Scardino turned up evidence that the schools had defrauded the federal government of thousands of dollars through a scam involving the distribution of Pell Grant funds, the government charged Bertha Craig and fourteen others in a fifty-four count indictment. While the others pleaded guilty, Bertha Craig maintained her innocence. Following a trial, she was found guilty of two counts of wire fraud and one count of misappropriation of Pell Grant funds. The district court sentenced her to eighteen months imprisonment and three years of supervised release. Craig challenges the district court's decision to provide an "ostrich" instruction to the jury, as well as the calculation of her sentence under the United States Sentencing Guidelines ("U.S.S.G." or "Sentencing Guidelines").

I. History

Craig worked at the Riviera Beauty Academy ("Riviera") in Chicago, Illinois, until she was laid off in the summer of 1992. The Scardinos owned Riviera, as well as a number of other beauty academies, and worked at Riviera an average of three to four days each week. During her tenure at Riviera, Craig donned many hats. She was one of three instructors, teaching "juniors" and "seniors" a course in theory as well as overseeing the school's clinical course. She also helped to recruit students. While she did not have the title of "manager," many of her duties related to the administrative responsibilities associated with such a position. She certified transcripts, attended managers' meetings, and was in charge when the Scardinos were not available. She also attended each orientation session during which she handed out a beauty kit containing supplies to the new students and talked about the courses.

During this time, Riviera participated in the federal Pell Grant program. This program provides money to low-income students for short-term educational training. The schools that participate in the program receive the funds based on the number of eligible students. The schools administer the program and determine which students are eligible to receive funds. They act as fiduciaries and hold the money for the student beneficiaries. The federal government has established a set of baseline requirements that schools must follow in determining student eligibility. Under these requirements, students are eligible for Pell Grant funds only if they are (1) enrolled at least half-time for the purpose of receiving a degree and (2) have a high school diploma or a G.E.D. or pass an "ability to benefit" test. Once the school concludes that a student is eligible, it must maintain documentation of that student's eligibility for at least five years. After the determination has been made, the Pell Grant program will distribute funds to the participant school up to three weeks before the student begins the program to cover start-up costs. If the student does not in the end attend the school, the Pell Grant money must be returned. Attendance at orientation alone is not enough to allow the school to retain all of the funds.

Like many educational institutions, Riviera had the Pell Grant funds electronically transferred to the school through the Electronic Student Aid Report ("ESAR"). Under this system, Riviera electronically transferred the required financial information of eligible students to National Computer Systems ("NCS"). NCS used the information to confirm that the student was indeed eligible for a Pell Grant. NCS then returned a copy of the ESAR to Riviera, which, in turn, had the student sign it. Once the student signed the form, Riviera could collect the funds.

In 1992, Riviera came under increased scrutiny from two angles. First, the company Riviera had hired to administer the Pell Grant funds discovered when it reviewed Riviera's ESARs that several of the signatures on the forms were similar. The company contacted Riviera and told the school it would not process the forms until the problem had been "straightened out." Around the same time, the U.S. Department of Education ("Department") began investigating all of the beauty academies owned by the Scardinos because many of these schools had a default rate of sixty percent or greater with regard to their loans. During this investigation, the Department reviewed student files. As a result of its investigation, the Department declared Riviera ineligible to participate in the Pell Grant program.

The Department's investigators concluded that Riviera had defrauded the federal government by improperly obtaining Pell Grant funds purportedly for the use of low-income students. These investigators described the scam at Riviera as including the falsification of documents, the recruitment of unqualified students who were used to establish fake files, and, ultimately, the operation of a school that hardly graduated anyone. When it reviewed Riviera's records, the Department determined that in the 1990-91 academic year, of the 841 students for whom Riviera received Pell Grant funds, no files existed for 642 of them. During that year, Riviera derived ninety-three percent of its total revenues from Pell Grant funds. In the 1991-92 academic year, 1284 students received Pell Grant funds. Of these, there were no records for 171. A vast majority, 992, attended Riviera for eight hours or less. Craig certified transcripts for 1085 of these students. Riviera, in that year, derived ninety-one percent of its total revenues from Pell Grant funds. During this time, only one percent of the students who received Pell Grants finished Riviera's cosmetology program. Of those, only four passed the state examination and became licensed to practice in the State of Illinois.

The scam involved several employees of Riviera. It began with the school's "recruiters," who worked on commission. By the time the investigation had concluded, these individuals received $200 for each student they brought to the school. Several recruiters testified during Craig's trial, relaying similar stories. According to these individuals, Paul Scardino instigated a push to find as many students as possible to fill the classrooms. Initially in 1991, Riviera began a new session each month; Scardino changed this schedule to a bi-weekly rotation. The recruiters testified that he openly told them to recruit individuals on Medicaid or Public Aid and to avoid students who worked, because the latter group would not qualify for Pell Grant funds. He held up as role models recruiters who brought in more than twenty students each month, even though not one remained at the school. Basically, the recruiters were finding anyone they could round up to fill the chairs at orientation and provide an identification number so paperwork could be submitted to the Pell Grant program. If the person did not have at least a social security number, Paul Scardino gave recruiters money to purchase identification cards for them. Many of those who had been recruited to attend the orientation sessions appeared uninterested in the school's programs and were loud and abusive. Often these individuals remained only long enough to receive the beauty kits from which the more expensive items had been removed. In addition, some were funneled through the orientation session several times. No instructions were provided to these "students" during the orientation sessions. While each session lasted only two to three hours, Riviera recorded them as lasting eight hours, so that the school could obtain Pell Grant funds for them.

Craig admitted to recruiting students. Her tax forms confirm she received payment for the students she recruited. At least twenty-seven of the students she brought to Riviera attended the school for eight hours or less. Only nine had G.E.D.s.

Once Riviera had names and identification numbers, it began the process of falsifying documents for the files required by the Pell Grant program. Recruiters admitted to preparing fake G.E.D. certificates, high school diplomas, and transcripts. At least three Riviera employees who worked with financial aid brought fake documents to Craig's attention. She, in turn, took these employees to Paul Scardino with the falsified documents. It is unclear whether Scardino told Craig to continue the practice, but it is clear that he told the other employees to accept the documents and that the practice continued.

Several of these employees testified that they had seen Craig actively participate in this scam by falsifying an ESAR, filling out enrollment contracts and other paperwork, and participating in a "recycling" of student files. Others testified that she had instructed them to falsify documents as well. Two recruiters stated that they split their commission fees for recruiting students with her after she had told them to find students so that they could reuse already existing files.

Craig disputed this testimony at trial. She did admit to signing student transcripts attesting that the students had attended Riviera for the recorded number of hours without personal knowledge of their actual attendance. She claimed she did not think of looking at the students' files when engaging in this process. She said she signed the transcripts of students she knew did not attend full-day orientation sessions only because Diane Scardino told her to do so. In addition, she admitted to attending an orientation session at which there were fifty to sixty students, most of whom did not...