U.S. Department of Labor                    Administrative Review Board
                                                             200 Constitution Avenue, N.W.
                                                                 Washington, D.C. 20210



IN THE MATTER OF

ARIZONA DEPARTMENT OF                          CASE NO. 94-JTP-18
ECONOMIC SECURITY,
                                                                            DATE: June 7, 1996
COMPLAINANT,

     v.

U.S. DEPARTMENT OF LABOR,

RESPONDENT.

BEFORE:    THE ADMINISTRATIVE REVIEW BOARD[1]


                                        FINAL DECISION AND ORDER

     This case arises under the Job Training Partnership Act (JTPA or Act), 29 U.S.C.
§§ 1501-1791 (1988), and the regulations issued thereunder at 20 C.F.R Parts
626-638 (1994).  For the reasons set forth below, the Administrative Law Judge's (ALJ)
November 9, 1995, Decision and Order Reversing Imposition of Sanctions (D. and O.) is
reversed, and a Final Decision on the merits of this case is issued.


                                                     BACKGROUND

     The State of Arizona, a JTPA grantee, through the Arizona Department of Economic
Security (ADES), entered into a subgrantee agreement with the City of Phoenix Service
Delivery Area (SDA).  The SDA in turn, contracted with the Western Economic Development
Corporation (WEDCO), to develop and place JTPA eligible participants into training and
employment positions.  An investigation by an SDA coordinator in July 1991, lead to
criminal indictments against two WEDCO employees who had fraudulently schemed to claim
the placement of 34 ineligible persons into JTPA funded positions.[2] The fraud consequently
resulted in the wrongful payment of $80,664 in costs charged to the JTPA agreement. (This
amount was subsequently adjusted to $77,016, after certain funds due WEDCO were deducted
from the amount determined to have been misexpended).  Administrative File (AF) at 31-39. 
The parties do not dispute the facts concerning the crime or the misexpenditure of the funds. 
D. and 0. at 3.


[PAGE 2]
     In January 1992, the State JTPA Administrator received a proposed payback plan from
the SDA whereby WEDCO would provide in-kind services to the JTPA program, that is,
provide various services in support of the program at no cost to the program, in lieu of
repayment of the misexpended funds.  A.F. at 51.  WEDCO's plan was to run from January
1992 through September 1992.  Id. at 54.

     In June 1992 and October 1992, an SDA accountant reviewed WEDCO's repayment
plan, presumably underway in June and completed by October, and reported that the payback
program was seriously flawed, with no means of verifying the purported expenditures.  In
addition, although the purported payback was to have been completed in September, even the
unverifiable claims of in-kind expenditures in October were approximately half of the amount
of the disallowance.  The reviewer concluded that WEDCO was merely allocating part of its
administrative cost to the payback program, and had not verifiably fulfilled its obligations
under the plan.  Id. at 61-67.

     On January 13, 1993, the ADES Deputy Director sent a letter to the U. S. Department
of Labor (USDOL) Regional Administrator (RA), requesting that WEDCO's repayment plan
be approved.  A.F. at 50.  We note that the tone of the letter is as if the repayment plan was
to be performed in the future: "The . . . []SDA[] has submitted an in-kind services plan that
will repay the debt.  The plan provides for []WEDCO[] to provide $79,458[3]
worth of additional services. . . ..    at no cost to the SDA . . . ."  (Emphasis supplied). 
Id.

     As the record indicates, the plan had been undertaken, albeit, without USDOL
approval and unsatisfactorily, during the previous year.  The Regional Administrator
responded to the January 13th letter within two weeks.  On January 25, 1993, the RA sent a
letter to the ADES Director advising him that pursuant to USDOL policy, repayment of
misexpenditures which arose from an incident of fraud must be remitted in cash from non-
Federal sources.  The letter further advised the Director that the repayment agreement entered
into between the SDA and its subrecipient did not relieve the state, as the grant recipient,
from its obligation to repay the misexpenditures to the Federal government.  A.F. at 69.

     The Grant Officer's Initial Determination was issued on December 7, 1993, and the
Final Determination was issued on February 8, 1994.  A.F. at 15-17 and 9-11.  The state
timely requested an administrative hearing.  In October 1995, the parties agreed to forego a
hearing, and further agreed that the ALJ's decision would be made upon the record, including
affidavits by the investigating police detective and the president of WEDCO.  D. and 0. at 2.

     The ALJ determined that the USDOL had failed to carry its initial burden of
production, in that the record did not contain any evidence that the Complainant or WEDCO
engaged in activities that required the recovery of misexpended funds under JTPA, pursuant
to § 164(e)(1), which was the only JTPA section referenced in the Grant Officer's Final
Determination.  The ALJ opined that a prima facie case might arguably have been
presented had the Grant Officer referenced § 164(d).  The Grant Officer timely
excepted to the ALJ's decision and the Secretary asserted jurisdiction on December 13, 1995.

                                                               DISCUSSION

     The ALJ misapprehends the meaning of the pertinent sections of the Act.  The first 
[PAGE 3]
sentence of § 164(d) establishes the general rule governing recipient liability.  It
provides that amounts not expended in accordance with JTPA are subject to repayment.  It
imposes on a recipient the financial liability to repay any amount not properly expended. 
There is no dispute that program monies were fraudulently misexpended, and therefore,
pursuant to § 164(d), these monies are to be recovered.

     The second sentence of § 164(d) permits the Secretary, at his discretion, to
offset amounts due against other funds to which the recipient is or may become entitled. 
That section does not require or otherwise mandate the Secretary to offset the disallowed
costs, but provides him with the discretion to do so.  The Secretary's discretion is, however,
limited and may not be exercised in those situations where the Secretary finds the aggravating
factors set forth in § 164(e)(1) to be present.  Subsection (e)(1) does not establish an
independent basis for liability, but only sets forth those conditions under which the Secretary
is precluded from exercising the discretion provided for in subsection (d).[4]

     The ALJ misreads the statute in suggesting that a recipient must be separately notified
of its liability under both § 164(d) and § 164(e)(1).  By notifying a recipient that
USDOL is seeking repayment and including a reference to § 164(e)(1), the Grant
Officer is putting the recipient on notice first, of its underlying liability under § 164(d)
and second, that no offset under § 164(e)(1) is available.  A notification that references
§ 164(e)(1) implicitly and necessarily incorporates a finding of liability under §
164(d).

     Nor does unfairness flow from the Grant Officer's failure to specifically notify the
Complainant of its liability under § 164(d).  No factual issues are introduced that would
not need to be litigated to establish liability under § 164(e)(1).  There is no defense that
Complainant could avail itself of under § 164(d) that is not available to it under §
164(e)(1).  The basic error that the ALJ makes is to presume that § 164(d) and §
164(e)(1) rely on different theories of liability.  However, as explained above, liability under
§ 164(e)(1) is premised on a finding under § 164(d) that funds were not
expended in accordance with the JTPA.

     The ALJ did not consider the relevance of § 164(d) because it was not
specifically cited in the Grant officer's Final Determination, although he appears to concede
that had the Grant officer referenced § 164(d), a prima facie case warranting the
repayment of the misexpended funds may have been made.  The ALJ concluded, however,
that the Grant officer's failure to do so barred the Government from recovering the
fraudulently converted public funds.  D. and 0. at 7.

     This interpretation literally turns the meaning of the two subsections read in context on
its head.  Rather than effectuating the recovery of misspent public funds, the ALJ's
interpretation requires the Grant Officer to prove that the grantee had extraordinarily
maladministered the program before the wrongful expenditures could be recouped.  We find
this interpretation to be contrary to the plain meaning of the Act.

     The ALJ's proffered rationale for finding that the Grant officer failed to make a
prima facie case was the reference to § 164(e)(1) rather than § 164(d) in
the Final Determination, but he did not determine that the Grant Officer's sole citation of
§ 164(e)(1) in any way 
[PAGE 4]
misled, surprised or otherwise denied the Complainant due process with regard to the
Government's legal theory.  The ALJ simply found that the mere failure to cite subsection (d),
was fatal to the Government's case.  Id. We do not agree.  Yellow Freight v. Martin,
954 F.2d 353, 358 (6th Cir. 1992)(where the relevant issues of a matter are fully tried,
they should not be obscured by legal technicalities).

     We carefully reviewed the case record.  The Administrative File fully documents the
fraudulent activities of WEDCO's employees, even if it does not implicate either the
Complainant or WEDCO in their wrongdoing.  The Grant Officer properly determined that
the fraudulently misexpended Federal grant funds should be recovered, and the Complainant
is not exempt from the Act's provisions requiring such recovery.

     The facts of this case are uncontroverted.  Fraudulent wrongdoing by WEDCO's
employees occurred, and the adjusted amount of the misexpended funds is $77,016.  The Act
is unambiguous, requiring that: "[e]very recipient shall repay to the United States amounts
found not to have been expended in accordance with this Act." (Emphasis provided). 
Supra, fn. 4. It is clearly within the Secretary's authority to require cash repayments in
those instances where the misexpenditure is the result of fraud.  This policy is set forth in the
JTPA Training and Guidance Letter 2-87, issued August 31, 1988, which was in effect during
the time of WEDCO's agreement with the SDA, and during its employees' fraudulent
activities.

     In addition, even when we consider § 164(e)(1), we determine that the
Complainant is liable for the repayment of the misexpended funds.  It is evident from the
record that WEDCO's administrative personnel failed to conduct rudimentary oversight of the
documents from which they authorized the payment of JTPA funds.  The investigating
detective reported that WEDCO's president stated that "a cursory review of the signatures
within the participant files" allowed him to determine that the signatures looked a lot like his
malfeasant employee's signature, and that the participants' and the employers' signatures were
forged.[5] Although the forgeries were apparently obvious to the president's casual review,
they had not been challenged by WEDCO's supervisory personnel.

     Nor does the record indicate that the Complainant attempted to recover the
misexpended funds from WEDCO, apart from a demand letter, or from the participating
employers who apparently benefitted from the wrongful enrollment of the ineligible
employees.  These employers were partially identified in an incomplete attachment to the
SDA's demand letter to WEDCO to repay the disallowed costs.  A.F. at 37-39.  The
attachment reveals that substantial sums of money went to WEDCO and a variety of
employers.  The record indicates that the indicted employees cashed checks amounting to a
total of $8,395.48, but there is no further reconciliation of the approximately $72,000 balance
of the misexpended monies. on the facts of the record before us, we conclude that the
Complainant did not observe accepted standards of administration, and therefore is liable for
the cash repayment of the misexpended funds.

                                                                 ORDER

     The ALJ's November 9, 1995 decision IS REVERSED.

     We find that the Grant Officer properly disallowed the adjusted amount of $77,016 of 
[PAGE 5]
misexpended JTPA funds.  The State of Arizona Department of Economic Security IS
ORDERED to pay such amount to the U.S. Department of Labor in non-Federal funds.

     SO ORDERED.

                                   DAVID A. O'BRIEN
                                   Chair

                                   KARL J. SANDSTROM
                                   Member

                                   JOYCE D. MILLER
                                   Alternate Member


[1]  On April 17, 1996, a Secretary's Order was signed delegating jurisdiction to issue final
agency decisions under this statute and these regulations to the newly created Administrative
Review Board (ARB). 61 Fed.  Reg. 19978 (May 3, 1996)(copy attached).

     Secretary's Order 2-96 contains a comprehensive list of the statutes, executive order,
and regulations under which the Administrative Review Board now issues final agency
decisions.  A copy of the final procedural revisions to the regulations (61 Fed.  Reg. 19982),
implementing this reorganization is also attached.

[2]  One of the employees subsequently plead guilty to the charges, the other apparently
remains a fugitive.

[3]  The additional funds to be repaid pertain to other matters.

[4]  (d) Every recipient shall repay to the United states amounts found not to have been
     expended in accordance with this Act.  The Secretary may offset such amounts against
     any other amount to which the recipient is or may be entitled under this Act unless he
     determines that such recipient should be held liable pursuant to subsection (e).  No
     such action shall be taken except after notice and opportunity for a hearing have been
     given to the recipient.

     (e)(1) Each recipient shall be liable to repay such amounts, from funds other than
     funds received under this Act, upon a determination that the misexpenditure of funds
     was due to willful disregard of the requirements of this Act, gross negligence, or
     failure to observe accepted standards of administration.  No such finding shall be made
     except after notice and opportunity for a fair hearing.

29 U.S.C. § 1574 (1988).

[5]  Complainant's Supplemental Brief to Cross Motion for Summary Judgment, Exhibit C,
Attachment 4.