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Is Russ Whitney violating the Texas Proprietary School Act? by John T. Reed 2 Here' another item from that same article on the use of ridicule by Whitney' representatives to get people to sign up. If you refuse to sign up for a paid seminar at the "free training," you may be ridiculed as a loser. Persons who do not sign up are depicted as losers as a group by the speaker, and you may receive that or a similar accusation personally from one of the Whitney employees as well. All free with your "free training." The Cherry Hill guy said, ""¦they did indeed try to make you feel like you"re a loser if you didn"t register for the seminar. They used wise-cracks and put-downs so that you rushed to the back of the room to sign-up at the end of the meeting, obviously thinking that you are now NOT a loser. I had no respect for that tactic." A Canadian attendee said those who left early were ridiculed afterward for having blown the best opportunity of their lives. "They couldn"t handle it. They left to go to a beer store and buy some cigarettes. No wonder they"re broke." A Texas attendee said that when a few people left, the speaker started bashing the area of Texas where the seminar was saying the people there have "low mentalities and don"t understand the meaning of being rich" according to a posting on CREonline. Apparently, people leaving the "free training" during the break really outrages many of Whitney' "free training" speakers. Others have reported that the speaker berates persons who get up to leave during the seminar"”that is, berates them publicly in front of the whole audience as they walk from their seats to the exits. Rule 807.53 (c)(8) says representatives shall not, "represent that a school"¦has"¦characteristics, use, benefits, or qualities that it does not have." See my article on Whitney' TV infomercial for a bunch of pertinent examples. "The school is financially sound" Section 132.055 (i) of the Act says the school has to be financially sound. How do they define that? Section 897.32 (a) of the Rules says Whitney must provide a balance sheet and that balance sheet must reflect "(1) positive equity or net worth balance." Whitney cannot do that. Whitney Information Network, Inc., the parent company of Whitney Education Group, Inc. has a negative net worth and has had for years. Here are the net worth figures for the last three years taken from Whitney' 2002 annual report (available at the SEC' EDGAR Web site): Year Whitney Information Network, Inc. net worth 2000 -$12,936,972 2001 -$10,382,725 2002 -$3,102,555 2003 -$4,157,000 2004 -$33,609,000 Section 807.32(a)(4) also says the company net worth must be positive after subtracting goodwill from the assets. Whitney cannot pass that test either because his company net worth is not positive even before subtracting goodwill, so it cannot possibly be afterward. Section 807.32 (d) says Whitney can also meet the financially sound requirements if they maintain "a financial responsibility composite score that meets the general standards established in federal regulations by the U.S. Department of Education for postsecondary institutions participating in student financial-assistance programs authorized under Title IV of the Higher Education Act of 1965, as amended." I do not know what those standards are, but I doubt they are significantly more lenient than the Texas standards. More likely, they are tougher and the State of Teas is just saying that if you are approved by the feds, you do not need to prove financial soundness to us. I suspect Whitney would be bragging about it if he met those federal standards. "Current ratio of at least one-to-one" Section 807.32(a)(3) says Whitney must have "a current ratio of at least one-to-one" in order to be a Texas Proprietary School. Does he? No. According to the classic text book Accounting Principles by Nisswonger and Fess, a current ratio is total current assets divided by total current liabilities. That calculation for Whitney Information Network, Inc. for the year 2002"”the most recent available"”is $16,559,971 ÷ $27,663,432 = .60. That' less than one-to-one"”which would be 1.00 mathematically. It' less by 40%"”not even close to one-to-one. These financial standards must be met annually, not just the first year you apply. The schools have to submit annual financial statements to the Commission. These statements must be accompanied by "the

owner' sworn statement." [Rule 807.32(b)] That raises the stakes. Sworn statements that are not accurate can trigger state and federal criminal laws. "Good reputation and character" Act '§ 132.055(j) says the school' "administrators, directors, owners, and instructors" must be "of good reputation and character." How is that defined? Rule Section 807.2 (15) says, "(A) never been convicted of a felony related to the operation of a school, and the person has been rehabilitated, including completion of parole or probation, from any other convictions that would constitute risk of harm to the school or students as determined by the Commission." Whitney was convicted of second degree robbery. He was paroled. I suspect he completed parole, but I do not know for sure. "(B) has never been successfully sued for fraud or deceptive trade practices within the last ten years;" He was sued successfully twice in Hennepin County, MN (Minneapolis area). I do not know if that was for fraud or deceptive trade practices. He was also sued by the states of Florida, Michigan and Tennessee and by the Commonwealth of Pennsylvania for fraud and deceptive trade practices sorts of claims. All three resulted in voluntary agreements by Whitney' company to behave. I do not know if that constitutes successful suit. Pretty close. There are a bunch of suits against him on the Lee County, Florida court clerk' Web site. I cannot tell from the court' Web site if they are successful and for fraud or deceptive trade practices. "(C) "¦has never owned a school with repeated violations, and has never owned a school that closed with violations, including but not limited to, unpaid refunds;" Might the above MI, PA, and TN complaints constitute such things? As I understand it, he ran "Bird Dog Program" seminars that they complained about"”and he stopped doing them. Would the man who says "no refunds" have any unpaid refunds? "(D) has not knowingly falsified or withheld information from the Commission." I will attempt to get a copy of the various documents Whitney has provided to the Commission and go over them with a magnifying glass to see if they contain any false information or material omissions. Given the discussion above, it seems like it would be hard for them not to. Instructor qualifications Texas has some pretty tough qualification requirements for instructors at proprietary schools. Whitney claims to be a high school dropout. If so, he cannot teach Texans. However, he sometimes admits to having a high school education. Like when he turned himself into police in connection with his hit-and-run. He apparently got a G.E.D. in prison as a condition of parole. Generally Texas wants you to have a masters degree including at least six semester credit hours in the subject being taught and at least one year of practical experience in the subject in question within the last ten years. If you have less education, the amount of practical experience required goes up. If you are just a high school graduate, you must have at least five years of experience in the subject being taught. I have heard that few of Whitney' real estate investment instructors actually invest in real estate. Sounds like I need to get hold of the applications those instructors submitted to the State of Texas. Continuing education of instructors Rule 807.84(c) says Whitney must have an annually updated written plan for instructor development including continuing education and attendance at trade and professional conferences. Except for one guy who is a CCIM, I would be surprised if Whitney instructors are worrying about continuing ed or attending real estate meetings. I used to attend a lot of such meetings and I never saw representatives of any gurus there. I expect they would laugh in your face if you suggested such a thing in a private setting. If they do any continuing ed or attend any conferences, I would expect it would only be those on how to sell more seminars, not on how to invest in real estate or do any of the other things they teach. Evaluation of instructors Rule 807.84 (e) says the school director shall allow the students the opportunity to formally evaluate each instructor. Oh, really!? Sounds like something to ask for in depositions. If they have few or no such evaluations, they are probably not in compliance. Or if the evaluations they give me are all glowing, one would have to wonder why the evaluations at the Better Business Bureau are not. Cost comparison Section 132.021 (a) of the Texas Proprietary School act says the Commission will prepare a comparison of the cost to a student of a course at one of the schools they regulate with schools they do not regulate"”like colleges and adult education. Expert consultation Section 132.021(b) says the commission may consult a recognized expert for assistance in determining minimum standards for that field. Good idea. Texas A & M has a very active real estate department. Seems like they could help. Success rates of students Section 132.055(o) says the school must furnish the commission with the current rates of students who get jobs in the field. I do not know if that applies to Whitney because most of his courses are about self-employment activities. But there are other success stats like property purchases that could be provided for real estate investment courses. Rule 807.92(b) says, "No subject or program shall be approved unless the school demonstrates that the program' quality, content, and length reasonably and adequately impart the job skills and knowledge necessary for the student to obtain employment in the stated industry." Rule 807.94(a) says, "The school shall ensure that each program prepares the student for the stated occupation." I"d like to see an expert' opinion on whether any of Whitney' programs do that. Rule 807.101 (b)(2) says the school shall demonstrate, "a minimum employment rate for program graduates in jobs related to the stated occupations." From what I"ve heard, get-rich-quick seminar material generally ends up unopened and unused in the attic. A lot of the real estate guru courses advertised on eBay are described as "unopened." If you translate that to the various self-employment schemes Whitney teaches, I doubt his programs would pass muster. They all seem to be get-rich-quick schemes that promise to teach impossible subjects like how to get rich in real estate in months (witness the testimonials of people who claim to have put large sums in their pockets within weeks or months of taking the course) with no cash, no credit ("any level of cash or credit" is in the infomercial), no experience, and without taking any risk (They use the word "safely" in the infomercial) or expending any effort. (I exaggerate, but only slightly.) Rule 807.124 (b) says, "Advertisements shall not contain dollar amounts as representative or indicative of the earning potential of graduates unless those dollar amounts have been published by the United States Department of Labor." It seems pretty clear that Whitney' infomercial violates that. It has graduates bragging about making tens of thousands of dollars on this deal or that. I cannot imagine that the Department of Labor puts out statistics on how much real estate investors make after attending a seminar. Renewal fee According to Rule 807.112 (b)(1), the annual renewal fee is .31% of the gross tuition collected not counting refunds. Whitney does not pay refunds so in his case it would just be .31% of the gross which was $62,145,237 = .31% x $62,145,237 = $192,650. Did Whitney pay that much to the Texas Workforce Commission for 2002? I don"t know. If he did, seems like they ought to have a staff of about three people devoted to nothing but watching him full time. Conversely, if they shut him down for non-compliance, they might have to lay off some people. Registered representatives All representatives of Whitney Education Group, Inc. must be registered annually with the commission. [Rule 807.51] That would be the people who were selling you the seminar in a meeting room or by phone. '§132.059 (a) I will try to get and publish a list of them and the dates they were registered so you can see if the one who sold you was legal. Representatives must be of good reputation. The school is responsible for any representations or misrepresentations, expressed or implied, by a representative. [Rule 807.51(b)] No gifts Representatives may not offer as an inducement any material consideration to a prospective student prior to enrollment, such as cash, food, or gifts. [Rule 807.53(c)(2)] If I understand correctly, Whitney does offer and has offered various gifts and prizes for attending his come-on seminars. See my article on his "free training." He claims that these gifts or prizes have values in the hundreds of dollars. Federal Trade Commission Act Regulation 16 CFR 251 also governs the use of the word "free" or the offering of any gifts or prizes. Bonding requirement Texas Proprietary Schools must post a bond or equivalent security with the Texas Workforce Commission. I would like to see the application form filled out by Whitney or his company for that bond. Texas may allow convicted felons to own proprietary schools, but I would be surprised if bonding companies are interested in providing bonds to convicted thieves. Texas proprietary schools may not accept an enrollment contract from a representative who is not bonded. '§132.151(3). To complain to the Texas Proprietary Schools Commission. Do not rant and rave or complain about why they have not stopped Whitney already. Just give them the facts and evidence they need to decide whether to pursue Whitney. Their budget has been cut. The more work you can do for them, the more likely they will work on your case because you are helping them stretch their thin resources. Rule 807.221 says the school shall provide a written grievance procedure to all students and maintain records of all grievances filed and how they were resolved. Texas Attorney General I asked the Texas proprietary School representative if they ever worked with other state agencies like the attorney general. He said they did work with the Attorney General when the DTPA was involved. DTPA? Deceptive Trade Practices Act I know the Texas Deceptive Trade Practices Act. I used to be a landlord in Texas, owning three apartment complexes there. I have written a number of articles and book sections that cite it. I"ll put the analysis of whether Whitney is violating the Texas Deceptive Trade Practices Act (Texas Business and Commerce Code '§17.45 et seq.) in a separate article. Texas' anti-litter campaign has a slogan Russ Whitney ought to remember: "Don"t mess with Texas." John T. Reed Copyright 2003, 2004 by John T. Reed Last update 4/18/04 John T. Reed, a.k.a. John Reed, Jack Reed, 342 Bryan Drive, Alamo, CA 94507, Voice: 925-820-7262, Fax: 925-820-1259, www.johntreed.com

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