The document, an amended complaint that D.C. government lawyers filed as part of a lawsuit that began in October, expands on allegations that Options leaders diverted more than $3 million from the Northeast Washington school for at-risk teens to companies they founded. In the court papers, D.C. authorities describe a contracting scheme more elaborate than previously believed, including the alleged payments to Williams, extensive markups of services to generate personal profit, and bringing additional taxpayer dollars to Options to enrich themselves, money meant to help the city’s neediest students.
The court papers also levy new allegations against WUSA (Channel 9) news personality J.C. Hayward, who authorities allege had an ownership stake in one of the companies and was paid $8,500 to attend company board meetings.
Williams and his attorney declined to comment, as did attorneys for two of the Options managers, former chief executive Donna Montgomery and Paul Dalton, the former provost. Hayward’s attorney said she knew nothing of any alleged scheme.
An attorney for the third manager, former clinical director David Cranford, said that nothing about the business arrangements between Options and the two companies was illegal or inappropriate — or even all that unusual.
“These related-party transactions between for-profit management companies and the nonprofit public charter schools are not only appropriate and lawful, but the same arrangements exist with several other public charter schools,” A. Scott Bolden said. “It seems to me that the government has quite a burden on its hands in proving these claims against my client.”
Bolden declined to name other D.C. charter schools with comparable arrangements. Nonprofit charter schools may enter into contracts with for-profit management companies, but any related-party transactions must be accurately disclosed to the charter board. The D.C Public Charter School Board is currently seeking to strengthen rules about the disclosure of conflicts of interest in business transactions.
A spokeswoman for the charter board said it has sought to clarify its internal staff rules.
“Since we learned about the issues at Options, PCSB staff policies have changed to be more clear about the prohibition on outside employment — but the policies have always had a clear conflict-of-interest provision,” Theola Labbé-DeBose said. She declined to comment on Bolden’s claims that several charter schools have arrangements with private companies similar to Options’.
District lawyers initially named Hayward as a defendant because she signed key contracts in her role as the board chairwoman of Options, contracts that sent hundreds of thousands of dollars to Exceptional Education Services, one of two for-profit companies controlled by the managers of Options.
The new document alleges that Hayward received at least $8,500 to attend company board meetings and was recognized as a part owner of EES, receiving 10 percent of the company’s shares during a meeting at her home.
Hayward’s attorney said the new allegations do not change the fact that his client was unaware of and did not profit from any alleged scheme. The amended complaint contains inaccuracies, he said, including the length of Hayward’s ownership stake in EES.
“There’s no reason to believe that she’s still an owner or that she profited by any ownership,” Jeffrey Jacobovitz said. “Nobody is saying that she received an extraordinary amount of money.”
Lawyers for the D.C. Office of the Attorney General filed the new allegations after the defendants sought to be dismissed from the case. The defendants argued that the original complaint failed to specify wrongdoing and state legitimate claims.
D.C. Superior Court Judge Craig Iscoe could decide to rule on those requests for dismissal, or he could accept the amended complaint and its new allegations. In a hearing Friday, attorneys for the defendants said they will continue to seek dismissal in any event but oppose the new complaint.
“At the 11th hour, these new allegations are brought to light — it’s just too prejudicial,” said Troy Poole, an attorney for Williams.
According to the amended complaint, EES was a shell company that the Options managers used to funnel money from the school into their own pockets.
Hayward originally incorporated EES in 2009 as a for-profit subsidiary of Options, which meant that Options owned all 100 shares of EES stock and profits were supposed to go to the school.
But in 2012, the court document alleges, Hayward and the three Options managers transferred ownership to themselves. The idea was discussed on May 22, 2012, at the Thunder Grill at Union Station, according to EES board meeting minutes cited in the court documents. Hayward did not attend that meeting — she was undergoing breast cancer treatment at the time, according to her attorney — but several months later, she hosted a meeting at her home, according to the complaint.
At that Aug. 9, 2012 meeting, Montgomery — who was both the chief executive of Options and chairman of EES — allegedly gave herself 53 percent of the company. The complaint says she split 18 percent of the shares between two Options managers, Cranford and Dalton, and gave 10 percent to Hayward. Two other people who had leadership roles at Options but are not named defendants also received shares.
After the Options managers gained ownership of EES, the company began providing the school’s bus transportation for the 2012-13 school year. But instead of running buses itself, EES hired a subcontractor — Deadwyler Transportation, the same company that had bused Options students the year before.
Deadwyler charged about $31,000 per month. But EES charged Options a 77 percent markup, court papers allege — $45,000 per month plus a $100,000 “ridership bonus” in the middle of the year.
Options and EES also signed a supplemental agreement that raised the payments to EES because of the school’s arrangement for increased Medicaid reimbursements for bus transportation. Those reimbursements are now the subject of a federal investigation, according to people familiar with the investigation.
In all, EES received $974,850 from Options for bus transportation, according to court documents. The company paid Deadwyler $309,200 to run the buses, and it paid Montgomery, Dalton and Cranford hundreds of thousands of dollars on top of the full-time salaries and bonuses they were already receiving for working at the charter school.
Montgomery allegedly received $235,000 from EES in addition to the $425,000 from Options during the 2012-13 school year; Cranford allegedly received $82,893 from EES; and Dalton allegedly received $162,522.
The three allegedly funneled additional tax dollars to themselves through Exceptional Education Management Corp., the other company they controlled, according to court documents.
In the middle of the 2012-13 school year, Options projected that its revenue would increase by $2.8 million because of an increase in the number of special education students with the most intensive needs, who also bring with them far more city money.
Soon after that projection, the school signed a management contract with EEMC estimated at the time to be worth $2.8 million. The “true purpose” of the contract was to funnel Options money to the managers through EEMC, the amended complaint alleges.
Options made a $500,000 prepayment under that contract in February 2013 and a second prepayment in August worth $954,000. It’s not clear what Options received in exchange for the money; the payments were allegedly made before the school received any documentation of services provided.
The large payments allegedly allowed EEMC to pay Montgomery $212,000 (on top of the $660,000 she received from EES and Options), while Cranford received an additional $131,706 and Dalton $94,884.
Some of the EES and EEMC money allegedly went to Williams, a longtime charter board official. Williams allegedly joined the finance committee of the Options board in February 2013 and in March began serving as a business adviser to EEMC.
He “regularly forwarded confidential, internal” e-mails to the three managers, including e-mails alerting them to an inspection of Options that was meant to be a surprise, according to court documents. He also allegedly ensured that EEMC’s largest contract with Options would not be reviewed by the board’s staff.
Williams left the charter board in August and became EEMC’s chief financial officer, according to court documents. The new allegations say that he and a Virginia corporation he owns, Gemini Financial Strategists, received $148,243 from EES and EEMC over seven months in 2013.