Insurer pays $13.5 million to resolve federal claims over defunct Marinello beauty school

An insurer for the shuttered Marinello Schools of Beauty has agreed to pay $13.5 million to settle allegations that the cosmetology school ripped off the federal student loan program, the U.S. attorney’s office said Wednesday.

The federal government had alleged B&H Education of Beverly Hills, the operator of the schools, gave students bogus high school diplomas so they would be eligible for federal money. Those aid funds would then flow to B&H when students enrolled in the Marinello cosmetology schools, according to the government.

Marinello schools received more than $87 million in federal aid for the 2014-15 school year, the government said.

B&H shut down all its 56 Marinello campuses this year after the Department of Education said it would stop providing aid to 21 campuses in California and two in Nevada.

“The operator of this school manipulated the system in order to fraudulently secure student aid funds without which the school could not function,” U.S. Atty. Eileen M. Decker said in a statement.

B&H, the department alleged, allowed students to repeat the same high school diploma tests until they passed, use their phones to look up answers and took the tests without supervision.

Then when the students enrolled in cosmetology and barbering, Marinello failed to follow through on promised training, the government said this year when it decided to stop providing aid.

Department staffers, for example, spoke with students “who supposedly ‘graduated’ yet were unable to cut hair,” the government said.

The settlement, paid by Philadelphia Indemnity Insurance Co. because B&H shut down, ends the allegations.

Out of the $13.5-million settlement, $8.6 million has been paid to the federal government. The rest goes to six former B&H employees and their attorenys, who brought the case to authorities.

The Obama administration has been scrutinizing for-profit colleges since 2009 amid evidence that many schools were saddling students with massive debts they couldn’t repay. The industry soared during the Great Recession as schools marketed heavily to growing ranks of unemployed workers seeking new skills.

Among the high-profile cases was Santa Ana-based Corinthian Colleges, which shut down and filed for bankruptcy last year after a department investigation into falsified job-placement rates.

[email protected]

Follow me @khouriandrew on Twitter