This law journal article about the self-dealing and corruption in the charter sector was written by Professors Preston C. Green III, Bruce D. Baker, and Joseph Oluwole.

Since it was written, there have been so many examples of scandals, conflicts of interest, and outright theft of public dollars that this prediction seems remarkably prescient.

Here is the table of contents:

INTRODUCTION

OVERVIEW OF ENRON

A. ENRON AND DEREGULATION

B. THE LJM SPES

C. ENRON’S COLLAPSE

II: ENRON’S GATEKEEPER PROBLEMS

A. ARTHUR ANDERSEN

B. INDEPENDENT ANALYSTS

C. CREDIT RATING AGENCIES

D. ENRON’S BOARD OF DIRECTORS

E. SECURITIES AND EXCHANGE COMMISSION (SEC)

III: CHARTER SCHOOLS AND RELATED-PARTY TRANSACTIONS

A. CHARTER SCHOOL DEREGULATION AND PRIVATE INVESTORS

B. EXAMPLES OF ENRON-LIKE RELATED-PARTY TRANSACTIONS

1. IMAGINE SCHOOLS

2. IVY ACADEMIA CHARTER SCHOOL

3. AMERICAN INDIAN MODEL CHARTER SCHOOLS

4. GRAND TRAVERSE ACADEMY

5. PENNSYLVANIA CYBER CHARTER SCHOOL

C. THE FEDERAL GOVERNMENT, RELATED-PARTY TRANSACTIONS, AND THE NEED FOR STRONG GATEKEEPING

IV: CHARTER SCHOOL GATEKEEPERS

A. AUDITORS

B. CHARTER SCHOOL GOVERNING BOARDS

C. CHARTER SCHOOL AUTHORIZERS

D. STATE EDUCATION AGENCIES (SEAS)

E. U.S. DEPARTMENT OF EDUCATION

CONCLUSION

Here is the Introduction to the article:

INTRODUCTION

In December 2001, Enron rocked the financial world by declaring bankruptcy due to the effects of an accounting scandal. Earlier in the year, Enron had been the sev- enth largest corporation in the country.1 This energy trading and utilities giant had become a dominant player by aggressively benefitting from the federal deregulation of the energy markets.2 Enron’s collapse erased more than $60 billion in shareholdervalue and caused thousands of employees to lose their jobs and pensions.3

Enron proved not to be an anomaly. Soon after the corporation’s collapse, thefinancial markets were further roiled when WorldCom, Adelphia, and Tyco, among others, declared bankruptcy because of accounting fraud.4 Congress responded to this wave of scandals by passing the Sarbanes-Oxley Act of 2002, which imposed greater accountability on publicly traded companies and their auditors.5

Andrew Fastow, Enron’s CFO, was a pivotal figure in Enron’s collapse. He cre- ated two special purpose entities (SPEs)—LJM1 Cayman LP (LJM1) and LJM2 Co- Investment LP (LJM2)—to serve as a hedge against potential downturns in Enron stock.6 Fastow and his associates served as the managers of these SPEs.7 Because ofFastow’s dual management roles, Enron should have disclosed to its shareholdersthat the partnerships were related-party transactions, defined as deals between enti- ties with special, preexisting relationships,8 which Enron failed to do.9 Although re- lated-party transactions are legal, they can create conflicts of interest that have the potential of harming their shareholders.10 Specifically, these transactions “can createthe impression that an insider is using company assets for personal benefit, and that the company is getting the short end of the stick.”11 Indeed, Fastow did take ad- vantage of this conflict of interest by making millions of dollars from the SPEs and using the illegal proceeds to invest in other interests.12

Enron’s collapse was significant because it exposed the deficiencies of gatekeep- ers that had the responsibility of protecting the integrity of the markets.13 These gate-keepers included Enron’s auditor Arthur Andersen, independent analysts, credit rat- ing agencies, corporate boards, and the Securities and Exchange Commission (SEC).14 In the case of the Enron debacle, all of these watchdogs failed to detect thedangers caused by Fastow’s conflict of interest.

Related-party transactions are now posing a threat to the charter school sector. Charter schools are a deregulated departure from traditional public schools because they are exempted from laws governing budgets and financial transparency.15 Similar to Fastow, unscrupulous individuals and corporations are using their control over charter schools and their affiliates to obtain unreasonable management fees for their services and funnel money intended for charter schools into other business ventures.16

In spite of this evidence, the federal government has consistently attempted to increase the number of charter schools without pushing for oversight.17 This policy approach is alarming because it will create more opportunities for illegal related- party transactions.18 Also, this approach runs the risk of harming students in low- income and minority communities—the very children whom charter schools are sup- posed to serve.19 Therefore, charter school gatekeepers must learn from the Enron debacle by becoming more prepared to guard against the dangers posed by related- party transactions.20 These gatekeepers include auditors, governing boards, authoriz- ers, state education agencies (SEAs), and the U.S. Department of Education.

In this Article, we discuss how some charter school officials have engaged in Enron-like related-party transactions to defraud charter schools. We also identify several measures that can be taken to strengthen the ability of charter school gate- keepers to protect against this danger. This Article is divided into four Parts. Part I describes how Fastow used his management of Enron and the SPEs to obtain illegal profits contrary to the interests of the former company. Part II discusses why the gatekeepers in the financial sector failed to stop the related-party transactions be- tween Enron and the LJM entities. Part III provides examples of how individuals in the charter school sector are benefitting from their control over charter schools and their affiliates in a manner similar to Fastow. Part IV analyzes, inter alia, pertinent statutory and regulatory provisions that apply to state and federal gatekeepers. We perform this task to identify the steps that legislators and policymakers can take to increase the gatekeepers’ ability to protect against harmful related-party transactions.

If you want to understand the deep potential for financial corruption at the heart of deregulated private charter schools, you must read this article.

Here is a small excerpt:

Major philanthropic organizations have invested heavily in the charter school sec- tor.112 For example, the Walton Family Foundation, which was established by the founder of the Walmart retail chain, has pledged $1 billion to support charter schools.113 Reed Hastings, the founder of Netflix and a long-time supporter of charter schools, has created a $100 million education foundation.114 Hedge funds and other private investors have also become interested in investing in charter schools.115

The attention of philanthropic groups and private investors has dramatically im- pacted the charter school sector. For example, the education management organiza- tions (EMOs) that these groups operate have become the dominant players in the charter school sector.116 EMOs are for-profit or nonprofit entities that provide edu- cational and management services to charter schools.117 EMOs manage between thirty-five to forty percent of all charter schools, accounting for about forty-five per- cent of charter school enrollments.118

Charter schools attract investors because of the potential for new revenue streams.119 For instance, the New Market Tax Credits (NMTC) program provides investors the opportunity to make profits from charter-school real estate transac- tions.120 Enacted as a component of the Community Relief Tax Credit Act of 2000,121the NMTC was designed to encourage investment in low-income communities.122The NMTC accomplishes this goal by providing investors in a community develop- ment entity (CDE) a thirty-nine percent tax credit over a seven-year period.123 A CDE is a corporation or partnership that provides capital for investment in low-income communities.124 An educational organization such as a charter school foundation can use NMTC funding to build a charter school.125

For-profit entities can double their investment in charter-school real estate pro- jects by taking advantage of the NMTC as well as other federal tax credits.126 For- profit entities can also obtain revenue from charter schools through lease payments for the use of the facilities. For instance, the Robert Bacon Academy (RBA), a for- profit EMO operating in North Carolina, received $1.5 million in rent, as well as almost $549,000 for maintenance during the 2013–14 school year—from one char- ter school alone.127

Investors can also obtain profits through the management fees that EMOs charge for their services.128 Management fees can be very generous. In the 2013–14 school year, RBA received a management fee of sixteen percent of its school’sexpense as well as “additional incentive payments based on student achieve-ment.”129 Two charter schools paid RBA nearly “$2.4 million in fees and incentivesout of just $13 million in total revenue.”130

Please send copies of this law review article to the Center for American Progress, the Brookings Institution, the New York Times editorial board, the Washington Post editorial board, your Senators and members of Congress, and to the campaigns of every Democrat running for President.