The First Casualty
The University of Texas at Austin fired its financial aid director Monday after an investigation by the university system concluded that he had violated campus and system policies and rules as a result of his purchase and ownership of stock in a lender with which the university worked. The dismissal of Lawrence W. Burt makes him the first campus financial aid official to lose a job in the ever-expanding, multilateral investigation into possible wrongdoing in the student loan industry.
A 33-page "special investigative report" (with 100 pages of appendices) by the University of Texas System's Office of General Counsel examined a set of charges that were first raised against Burt early last month by New York's attorney general, Andrew M. Cuomo. Cuomo accused Burt and financial aid officers at Columbia University and the University of Southern California of owning stock in a student loan company that appeared on the institutions' lists of "preferred lenders" to which they referred students. Those charges -- along with allegations a few days later of cash payments and consulting fees given to campus officials at Capella, Johns Hopkins and Widener Universities by the same lender, Student Loan Xpress -- shook many college officials and others who previously had pooh-poohed the significance of the student loan inquiries.
Monday's release of the Texas report represents the first formal review of any of Cuomo's charges about lender-college relationships, and it is damning. While the university's report does not try to assess whether state or other laws were broken -- conclusions outside the scope of its review, Texas officials said -- it does not shy away from a harsh assessment of Burt. It cites an ethos in the student financial services office he led that reflected a "widespread ignorance ... about basic ethics and conflicts of interest principles.... Burt failed to communicate a 'tone at the top' of ethics compliance." Burt could not be reached for comment, but he has steadfastly denied wrongdoing in recent weeks, and his lawyer told Reuters that the findings were "unfair."
Specifically, the university system's investigation examined how the UT-Austin student aid office selected its preferred lender lists; the story behind Burt's ownership of Student Loan Xpress stock; and the benefits the student financial services office and its employees received from loan providers, the latter a subject that drew attention not from Cuomo but from the campus student newspaper, The Daily Texan, which revealed that aid officers produced lists of which lenders gave them the best food and other goodies.
Taken in order of seriousness, here are the review's findings:
Stock ownership broke campus standards of conduct and system regulations. The review offers significant new details about Cuomo's initial finding that Burt owned stock in Student Loan Xpress (later taken over by Education Lending Group, and now owned by the CIT Group) at a time when the lender appeared on the university's preferred lender list. Burt did own the stock -- 800 shares that he bought through an IRA in January 2001, another 1,000 that he bought in a "private placement" (possibly at a below-market rate, the review finds) from Fabrizio Balestri, a long-time friend at the company, in December 2001, and another 500 in stock warrants that he exercised in October 2004, for a total of 2,300 shares. He sold all of the stock in February 2005, with the 1,500 shares that he had received from Balestri netting a profit of $18,050.
The investigation finds several problems with Burt's stock ownership. First, it "seems probable" that Burt was offered the benefit of purchasing the stock in a private offering because of his official position at UT, and the university's standards of conduct and the Texas regents' Rules and Regulations forbid accepting a benefit or making an investment that "might reasonably tend to influence the officer or employee in the discharge of official duties" or that "could reasonably be expected to create a substantial conflict between the officer's or employee's private interests or public interests."
And while there is no "direct evidence" that Burt accepted the 1,500 shares of stock in December 2001 in exchange for putting Student Loan Xpress on UT-Austin's preferred lender lists, the fact that the lender -- which had just begun offering private loans after having morphed from a loan consolidation company -- was placed on the lists three months later, in March 2002, "raises the suspicion and, at least, creates the appearance of impropriety." (Student Loan XPress did not just appear on the list, either; in four of five years, it was in the No.1 spot, and the other year it was in another premium slot.)
"Dr. Burt's acceptance of Education Lending Group shares and continued retention of them in his portfolio represents an error in judgment that created an appearance of impropriety and leads one to seriously question whether there was a quid pro quo," the report says. Burt's failure to disclose the holdings at a time he was making decisions regarding the company "compounded the conflict," the report concluded.
Preferred lender lists were put together inappropriately. The system review found that while UT-Austin had significant numbers of lenders on its preferred lender lists -- avoiding one flaw cited frequently elsewhere in which institutions appear to steer students to one or two cherished loan providers -- its process for making up the lists was "flawed in several material respects." Decisions were "inappropriately concentrated" in Burt's hands, the criteria used were "opaque" and the process contained "no accountability," and "the best interests of student borrowers were not the overriding consideration."
Rather, factors such as how much lender representatives were seen in the financial aid office and the quality of the treats they provided to employees were considered. "Whether or not a fact-finder would find a tacit quid pro quo, Dr. Burt's conduct evidenced poor judgment and indifference towards Texas ethics and conflicts of interest law," the report says.
The Texas report also uncovered evidence suggesting that Burt had written letters encouraging financial aid officers at other colleges to use Student Loan Xpress, among other activities laid out in the many pages of appendices.
But the inquiry found no ethical violations in Burt's presence on numerous lender advisory committees (including reimbursement of expenses) or the university's receipt of exit counseling software or donations to scholarship funds from lenders, practices that Cuomo and others have questioned.
But the report does find Burt to have failed in instilling in his office's employees any sense that ethics matter. "No attempt was made to value gifts that were received. No formal process was in place for staff employees to clear interaction with, or seek guidance from, management about student lender representatives. No written guidelines existed ... for employees to rely upon when being entertained by student lenders.... In the final analysis, the absence of sufficient ethics and conflicts of interest awareness and training must be laid at his feet."
(Interestingly, the report suggests that the university's own procedures may have holes. It notes, for instance, that only employees with "contracting authority" are required to complete a financial disclosure and conflict of interest statement. Because Burt did not have authority to enter into such contracts, he was not required to complete such a form.)
Like some of the other accused financial aid officials at other institutions, Burt, who was associate vice president for student affairs as well as director of the Office of Student Financial Services, was a national leader in financial aid circles; he was a member of the federal Advisory Committee on Student Financial Assistance, which advises Congress on student aid issues, until Education Secretary Margaret Spellings asked him to resign last month.
Officials at Johns Hopkins, Widener, Columbia and other institutions where other financial aid officers have been directly accused of wrongdoing similar to Burt's said Monday that they were still conducting their own investigations or waiting for further reviews by Cuomo's office. Spellings said in testimony before a House of Representatives committee last week that the Education Department had begun sending teams to "all of the 44 institutions we've read about in the paper."
Cuomo and Sen. Edward M. Kennedy (D-Mass.), both of whom had asked Texas officials last month for all documents related to Burt's actions, issued statements praising the university system for its thorough report.
Said Cuomo: “The report issued today by the University of Texas highlights the conflicts of interest that pervade the student loan industry. Three months after the University's Financial Aid Director received 1,500 shares of Student Loan Xpress stock, the company vaulted to the very top of the school’s preferred lender lists. That is no coincidence. My office is continuing to investigate the leadership of Student Loan Xpress and all of the individual financial aid directors who received stock and other benefits from them. I applaud the University of Texas for taking swift action and putting together an enlightening report.”