SEC Settles Bond Case Centered on Construction of Charter Schools

by Dorsey & Whitney LLP
Contact

The Commission continues to focus on the municipal bond market, filing a settled action against two state grant recipients who were supposed to construct charter schools. The action, alleging fraud in connection with the sale of municipal bonds, centers on undisclosed conflicts with could jeopardize the ability to repay the bonds. SEC v. United Neighborhood Organization of Chicago, Civil Action No. 1:14-cv-04044 (N.D. Ill. Filed June 2, 2014).

Defendant United Neighborhood or UNOC is a not-for-profit corporation founded as a Hispanic community organization. It is an affiliate of, and provides management services for, Defendant UNO Charter School Network, Inc. or UCSN, also a not-for-profit. UCSN is the largest operator of charter schools in the State of Illinois.

The Defendants became involved with charter schools in the late 1990s. Subsequently, they lobbied the State of Illinois for grants to construct charter schools. In 2010 the Defendants entered into a grant agreement with the Illinois Department of Commerce and Economic Opportunity or IDCEO. The next year a second grant agreement was executed. The grants were for the construction of three schools and totaled $88 million.

Each grant agreement contained a provision regarding conflicts involving the officers and directors of the firms and their family members. In part the provisions prohibited conflicts which might give the appearance of “being motivated by a desire for private gain . . . for themselves or others, particularly those with whom they have family business . . .” Each agreement also stipulated that there were no existing conflicts and that IDCEO would be notified by the Defendants if one arose. Each concluded by prviding that if there was a violation of the conflict provisions, the Agreements were suspended and the grant funds could be recovered in which case there would be no other source of funds for the construction. The Defendants executed the agreements.

At the time the agreements were executed, however, the Defendants had engaged one company, and approved the engagement of another, for services. Each company was owned by a brother of the then Senior Vice President /Chief Operating Officer of UNOC. Additional agreements were subsequently reached with the two firm. In sum, the Defendants contracted to pay one company about $11 million for windows and the other about $1.9 million to serve as an owner’s representative during the construction.

In October 2011 Charter School Refunding and Improvement Revenue Bonds were issued in the principal amount of approximately $37.5 million. The Defendants issued an Official Statement that informed investors about their “Conflicts Policy.” That policy, investors were told, was more robust than required. The conflict regarding the owner’s representative agreement was disclosed. The agreement regarding the windows was not. Investors also were not told that IDCEO had not been advised about the agreements. Nor were they told that IDCEO could recoup the grant money,, effectively ending the construction and any ability to repay the bonds.

In February 2013 the Chicago Sun-Times published an article concerning the use of state grant funds by the Defendants. That article alleged violations of the conflict provisions of the grant agreements. When subsequently asked about the allegation by IDCEO, the Defendants denied the conflicts but noted that the COO would be terminated, that the contract with the owner’s representative would be suspended and that an independent audit and review would be conducted.

Two months later IDCEO send the Defendants a letter stating that the grant agreements would be temporarily suspended and that additional payments would be withheld until further notice. The action was taken in view of the failure of the Defendants to identify and report the appearance of a conflict of interest based on the agreements with family members. At the time just less than half of the grant money had been paid out. The Defendants were subsequently unable to make timely payments to construction contractors. Liens were placed on one of the schools. The Commission’s complaint alleges violations of Securities Act Section 17(a)(2).

Defendants resolved the proceeding with each Defendant agreeing to undertakings to improve their internal procedures and training. An independent monitor will also be appointed.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dorsey & Whitney LLP | Attorney Advertising

Written by:

Dorsey & Whitney LLP
Contact
more
less

Dorsey & Whitney LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.