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DC Files Suit Accusing Former Public Charter School Managers of Maximizing Their Earnings at the Expense of Benefits for At-Risk Youth; Seeks Receiver for the School

Tuesday, October 1, 2013

DC Files Suit Accusing Former Public Charter School Managers of Maximizing Their Earnings at the Expense of Benefits for At-Risk Youth; Seeks Receiver for the School

CONTACT:  
Ted Gest, Public Information Officer
202-727-6283
ted.gest@dc.gov

WASHINGTON, D.C. – The District today asked the D.C. Superior Court to appoint a receiver to oversee Options Public Charter School, a non-profit corporation that operates a school in Northeast D.C. for 400 at-risk middle and high school students, Attorney General Irvin B. Nathan announced.  The lawsuit alleges that Options has been operated by three of its former managers “not for the purpose of maximizing benefits for at-risk youth,” but to maximize income, revenue, and profits for themselves and for two for-profit corporations that they began running while they still were employed by Options.    
 
The District said the receiver should “rededicate Options PSC to its nonprofit purpose of serving at-risk youth, and … recover funds diverted to its former managers and the corporations they control.”
 
The District of Columbia Public Charter School Board, which oversees public charter schools, acted quickly to refer issues involving the school to the Office of the Attorney General and engaged an accounting firm to do a forensic audit of the school’s financial records.
 
The District alleges that, while employed by Options as its management team, three defendants  -- Dr. Donna D. Montgomery, Dr. David Cranford, and Paul S. Dalton -- engaged in a “pattern of self-dealing,” including a series of transactions with two for-profit corporations they controlled (also named as defendants):  Exceptional Education Management Corporation (“EEMC”) and Exceptional Education Service, Inc. at Options Public Charter School (“EES”).  These transactions, all made with District funds, accounted for more than $3 million in improper payments during 2012 and 2013. They  included:

  • payments to EEMC totaling $1.45 million for services that had not yet been documented.
  • payments to EES totaling $981,250 for student transportation services during the 2012-2013 school year, more than ten times what the school had paid directly to EES’s subcontractor for transportation services the year before;
  • payments to EES totaling $449,000 for billing services that were provided by the school’s own employees;
  • payments to EEMC totaling $242,816 to help cover start-up costs;
  • a $159,000 loan to EES;

 Options’ total revenue for the 2012-2013 school year, mostly from District funds, was projected to be $13.5 million.  

The District charged that Options paid large unscheduled bonuses to Montgomery, Cranford, and Dalton in 2012-2013, shortly before they left Options to run EEMC.  Montgomery’s bonuses totaled $185,000, on top of her annual base salary of about $240,000, while Cranford’s totaled $133,000 and Dalton’s  totaled $50,000.  The complaint alleges Montgomery alone was paid more than $425,000 in a year in public funds, more than the salary of the President of the United States and the D.C. Mayor.

The District’s complaint notes that in December 2012, Options projected that its 2012-2013 funding from the District would increase by $2.8 million from the preceding year, due primarily to a large increase in the number of Options students who would be assigned to disability levels that generate much higher-than-average per-pupil revenue.  About two months later, Options contracted to pay $2.8 million for management services to be provided by EEMC.  At that time, EEMC was being run by Montgomery, then Options’ president; Cranford, then Options’ clinical director; and Dalton, then Options’ general counsel.  
 
The lawsuit alleges that while holding executive positions at Options, individual defendants Montgomery, Cranford, and Dalton formed and ran the two for profit corporations, EES and EEMC. Defendant Montgomery, while Executive Director/CEO of Options, executed agreements that resulted in large payments of District funds by Options to the two companies.   Defendants Montgomery, Cranford, and Dalton left Options in July 2013 and, since then, have been serving as managers of EEMC, the District alleges.

The District’s complaint also names as defendants Dr. J.C. Hayward, the former chair of Options’ board of trustees and the incorporator of EES who signed contracts with EES and EEMC in her capacity as Board Chair of Options,  and Jeremy L. Williams, former chief financial officer of the District of Columbia Public Charter School Board, who served on the Options Board of Trustees Finance Committee and acted as a business advisor to EEMC while still employed by the PCSB.  The complaint alleges that defendant Williams forwarded confidential, internal PCSB emails to the other named defendants and assisted EEMC in evading PCSB review of its Management Agreement by engaging in actions to give the false impression that such contract previously had been reviewed by the PCSB staff.  Williams now is EEMC’s chief financial officer.   
 
“We must take swift action to protect the District and its funds when the managers of a non-profit school, whose mission is to serve vulnerable D.C. youth, use the school as a cash-generating machine to enrich themselves and the for-profit companies they control,” Attorney General Nathan said.  “I commend the Public Charter School Board, especially its Chair, John H. “Skip” McKoy, and its Executive Director, Scott Pearson, for responding quickly as the facts emerged and for promptly referring this matter to the Office of the Attorney General.”

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Complaint 10-1-13.pdf809.12 KB