Reversing the jury he supervised through three weeks of trial almost a year ago, a U.S. district judge has thrown out 34 of 62 guilty verdicts against Wilfred beauty schools and cleared the chain's former president of all 63 counts against him.
Judge Lee Gagliardi said the Fort Myers jury saw sufficient evidence only to find Wilfred guilty of 28 counts of falsifying student loan applications. He will sentence the bankrupt corporation Friday on those convictions, which could result in fines as high as $1.2-million.
Lawyers for Wilfred's trustee intend to appeal, and prosecutors meanwhile hope a higher court will reinstate the other 97 convictions, including racketeering counts against both the company and Philip E. Jakeway Jr., its former president.
If that happens the outcome will be doubly unusual. Trial judges face what Gagliardi called "a heavy burden" in dismissing a jury's verdict in the first place.
"It's been a nightmare to go through and the company, because of it, was forced into bankruptcy," said Jakeway, who resigned as president of Wilfred American Educational Corp. the day after the jury's verdicts were announced last February.
"It was an unfair situation from the beginning, but the start of the situation was with the St. Petersburg Times."
In 1985 the Times published a series of articles that examined Wilfred's reliance on federal student loans and grants and the sometimes dubious methods by which they were kept flowing into its Central Florida branches, known as Wilfred Academies of Hair and Beauty Culture. The newspaper quoted former recruiters as saying they faced quotas for enrolling new students, and some employees told of helping students to falsify their applications for loans and grants to cover tuition that ran as high as $5,000 a year.
The money went directly to Wilfred, but the Times found it did not necessarily buy a quality education. In one two-year period, the newspaper estimated, three-fourths of Wilfred students dropped out. Barely half of those who eventually took the state licensing examination passed it.
The U.S. Education Department and state of Florida subsequently investigated the chain. And in 1988, after an almost three-year inquiry by the U.S. attorney, a Tampa grand jury handed up criminal indictments naming the corporation, Jakeway and 18 employees.
Wilfred's trial attorney said the indictments were weak to begin with and came out only because investigators had invested so much in the case.
"That's one of the great misapprehensions I have about federal investigating agencies," said Ted Klein of Miami. "Once they sink their teeth into your leg they don't let go until they've bitten a chunk out."
U.S. Attorney Robert Genzman declined to comment.
What Judge Gagliardi said, again and again in his Jan. 14 order, was "insufficient evidence."
Former Wilfred executives with authority over the schools testified for the government after pleading guilty, but prosecutors never showed that Jakeway, from the company's New York headquarters, either instructed or had guilty knowledge of what his recruiters were doing in Florida, the judge said.
"Indeed, these employees admitted that they concealed their activities and that it was not Wilfred's policy to encourage false applications," Gagliardi wrote in dismissing 28 counts of loan falsification against Jakeway.
The judge ruled the same counts will remain against the company because a corporation is guilty if it benefits by wrongdoing done even partly on its behalf. But the standard of guilt is higher for an individual. Gagliardi said testimony from a Wilfred registrar indicated Jakeway may well have encouraged employees to exploit loopholes in federal loan rules.
But "Wilfred's obvious ethical shortcomings" did not prove Jakeway guilty of a criminal offense, he said.
In fact, the judge added, in Jakeway's case prosecutors so confused violations of federal loan rules with the charges in the indictment that the jury could not be expected to sort the merely illegal from the criminal. For that reason he would have ordered a new trial for Jakeway were he not acquitting him altogether, the judge said.
The judge dismissed 26 counts of misapplying federal funds against both Wilfred and Jakeway, saying criminal intent was not proved. Seven mutual counts of wire fraud were thrown out because the money transfers cited were not "essential" to the scheme alleged.
And with all that gone, the counts of conspiracy and racketeering cannot stand either, the ruling said.
Wilfred attorneys were especially relieved to see the final charge thrown out; a racketeering conviction permits the government to seize remaining assets. Although, at this point, what Wilfred mostly has is liabilities. Since April the company has been in the hands of a Washington, D.C., trustee after filing for protection under Chapter 11.
Its last Florida school, in Tampa, closed voluntarily at about the same time, state regulators said. From a nationwide chain of more than 60 schools, the company now operates 12 or 13 branches in the Northeast. Those remain eligible for federal money, said attorney William Stein.
Jakeway, meanwhile, said the affair has cost him the considerable value of his stock, $3-million in loans to a company now bankrupt, and a reputation that dates from 1954, when he joined what had been his father-in-law's business.
"I really felt all along that we operated good schools," he said. "The regulations are very vague at times, and you can do things you think are correct business-wise and somebody says go against the rules."