State seeking $154M from former charter schools accused of enrollment fraud

Editor’s note: This story has been updated.

The state of Indiana is suing to recover more than $154 million from two now-defunct charter schools accused of padding their enrollment numbers to receive extra state funds, then misappropriating those funds to benefit school associates and their private businesses.

Indiana Attorney General Todd Rokita filed the lawsuit July 8 against the Indiana Virtual School and Indiana Virtual Pathways Academy. The complaint, filed in Hamilton Superior Court 6, also names as defendants numerous individuals and companies with ties to the schools’ founder and/or his associates.

Indiana Virtual School and Indiana Virtual Pathways Academy, which had a shared administration, were shut down in August 2019 and were later administratively dissolved. Then in February 2020, the State Board of Accounts issued a report finding the schools had wrongly received $68.7 million in state payments by improperly claiming about 14,000 students as being enrolled between 2011 and 2019.

“This lawsuit is historic because it represents the largest amount of monetary damages ever sought by our office following a State Board of Accounts investigation,” Rokita, a Republican, said in a Monday news release. “This massive attempt to defraud Hoosier taxpayers through complex schemes truly boggles the mind. This case demonstrates once again that public servants must remain ever vigilant in our work to safeguard the public treasury from opportunists.”

According to the lawsuit, the schools intentionally inflated their “average daily membership.” These school enrollment counts were reported each September and February and used by the Indiana Department of Education to determine the amount of state support schools will receive.

IVS and IVPA misreported their ADMs by including “membership for ineligible student’s counts, for students who, for example, had little to no online activity and did not complete courses within reporting periods,” according to the state. Inflated ADMs were reported between September 2011 and June 2019, the state alleges.

As a result, the charter schools received more than $54 million in wrongfully paid tuition, more than $10 million in wrongfully paid complexity grants, which provide additional tuition funding, and more than $2 million in wrongfully paid special education grants, according to the state. Additionally, the schools were wrongfully paid nearly $700,000 in curricular material costs reimbursement funds, the complaint alleges.

Beyond the overpaid funds, the state is seeking to recovery more than $85 million in funds “wrongfully disbursed to entities by IVS and/or IVPA.”

A total of 13 companies based in either Indiana or Naples, Florida, received misappropriated funds for “services” to the schools, the state alleges. Some of those services were duplicated across multiple companies without an apparent need, according to the complaint.

Also, 14 individuals with ties to the school and/or the companies were named as defendants. Among those individuals was Thomas H. Stoughton, the longtime head of the schools’ boards of directors.

Houghton and his associates, including his wife and son, are alleged to have used their ties to the charter schools to net lucrative contracts for the defendant businesses, which many of the individual defendants owned and/or operated. Other individual defendants are former IVS and IVPA officials with responsibilities for contract oversight and financial management.

“The State’s claims arise from systematic violations of a position of trust by a public official, misappropriation and diversion of public funds, malfeasance, misfeasance, nonfeasance, dishonest acts, breached fidelity of duties by a public official, overt acts, fraud, and other conduct in breach of the duties owed to the State and the public by a public official and other proper persons and/or entities,” the complaint says.

“The (SBOA) Audit Report further disclosed that public money had been unlawfully expended, obtained by fraud or any unlawful manner, or wrongfully withheld from the public treasury … ,” it continues.

In total, the state is alleging pecuniary losses for:

• $11,746,567.56 in tuition overpayments for the 2011-2021 through 2016-2017 school years.
• $42,950,043.90 in tuition overpayments for the 2017-2018 and 2018-2019 school years.
• $10,875,566.28 in complexity grant overpayments for the 2014-2015 through 2018-2019 school years.
• $2,499,484.50 in special education grant overpayments from 2012-2019.
• $692,013.89 in curricular material grant overpayments for the 2015-2016 and 2018-2019 school years.
• $85,687,398.60 in non-compliant disbursements.

Rokita’s office is seeking judgment against all defendants, an order for disgorgement of ill-gotten gains unjustly and wrongfully received and diverted, treble damages and attorney fees, plus $218,174.62 for the costs of the SBOA audit. It has also referred the matter to federal and state criminal investigative agencies.

Online court records did not list an attorney for defendant Indiana Virtual Education Foundation Inc., which operated the schools. An attorney for Stoughton declined to comment, according to The Associated Press.

Indiana Virtual School was formed in 2011 soon after a Republican-driven state education overhaul that expanded the availability of charter schools, which are privately operated but receive taxpayer funding, and launched the state’s private school voucher program.

Republicans who dominate the state Legislature rejected complaints from Democrats after the fraud allegations emerged that responsibility rested with lax state regulations. GOP leaders argued it was difficult to legislate against “criminal intent.”

Democratic Rep. Ed DeLaney of Indianapolis said he was only surprised by the scale of the apparent fraud and that he had little hope of the state recovering much money. He said the state had provided “flimsy” supervision.

“We need to learn from this,” DeLaney said. “You know if you give vast sums of money to people who are allowed to act outside of public view, they might take advantage of it.”

Indiana House Minority Leader Phil GiaQuinta, D-Fort Wayne, shared a similar sentiment Tuesday.

“Though I’m relieved to see that punitive action is finally being taken against these corrupt schools, I’m disturbed that we are still cleaning up the mess that Statehouse Republicans made of our education system years ago,” GiaQuinta said. “Because Republicans refused to set up the proper accountability measures to keep these virtual charter schools in check, millions of dollars were stolen from Indiana taxpayers.

“The Attorney General has done the right thing by filing a lawsuit that he said represents the largest amount of monetary damages ever sought by his office,” GiaQuinta continued, “but we shouldn’t forget that it was members of his own party who allowed these events to unfold.

“… (W)e will remain vigilant in our pursuit to provide safeguards against this gross misuse of funding so these abuses can be prevented in the future,” the minority leader said.

Officials in Indiana have disagreed about oversight responsibilities between the State Board of Education, the state Department of Education and the Daleville Community Schools, a district of about 1,000 students near Muncie, which was the charter authorizer for the two online schools.

The SBOA released a report in August 2020 determining that Daleville Community Schools should repay $2.2 million for failing to properly supervise IVS and IVPA. District officials, however, maintained the district played no role in the erroneous enrollment reports and didn’t have access to data about the online schools’ students until 2018 because of concerns about federal student privacy laws.

“The State Board of Accounts is committed to creating a culture of accountability where public officials and institutions are held to the highest standards,” state examiner Paul Joyce said in a Monday statement.

The case is Indiana, et al. v. Indiana Virtual Education Foundation, Inc., et al., 29D05-2107-PL-004821.

The Associated Press contributed to this report.