D.C. Was Cheated, SEC Says
Wednesday, April 5, 2006
Federal securities regulators yesterday accused a Maryland firm of defrauding the District of millions in federal and local funds earmarked for D.C. charter schools, saying the firm used the cash to try to prop up two failing subsidiaries.
In a complaint filed in federal court, the U.S. Securities and Exchange Commission alleges that Geneva Capital Partners LLC and its owner, Eric M. Westbury of Silver Spring, obtained investments of more than $21 million from the District without telling D.C. officials that two of the city's advisers had a financial stake in Westbury's firms.
Westbury then used some of the cash to cover losses at his other companies, which together owe about $33 million to more than 2,000 small investors nationwide, the complaint says.
In addition, Geneva owes the District about $11 million. In a court hearing yesterday, SEC lawyers argued that the family of firms has insufficient assets to repay that and other debts.
"It's our view . . . that there's just not enough money for everyone to get their money back here," said Amy J. Greer, the SEC trial counsel handling the case. "We have a lot of companies all showing substantial losses. And I think it's unlikely that all of the investors, both the District and the [small investors], will be fully compensated."
Westbury did not return a call to his Bethesda office. His attorney, John M. Fedders, denied that Westbury is "a fraudster."
Westbury "has not engaged in fraud," Fedders said. "He is a man of high moral integrity, and high business ethics. I think there's an enormous misunderstanding here about some of the things that have gone on, and we dispute paragraph after paragraph of these SEC allegations."
U.S. District Judge Deborah K. Chasanow gave Fedders until April 26 to file his objections, and she set a hearing date for May 12. In the meantime, Chasanow barred Westbury from making payments to investors and ordered him to alert the court if any of them demands their money.
The order effectively prohibits Westbury from complying with the District's March 15 demand to return its remaining cash. However, the order also bars Westbury from giving the District's money to anyone else, said Daniel M. Hawke, associate district administrator for enforcement in the SEC's Philadelphia office.
District officials declined to discuss the case yesterday. But Deborah A. Gist, director of the D.C. State Education Office, which administers the charter school funds, issued a written statement saying her office "is aware that the SEC has concerns with Geneva Capital." The District "continues to deal with this issue seriously," she wrote, noting that the D.C. inspector general is also investigating.
So far, District officials have been unable to explain why they selected Geneva in 2003 to manage the charter school money, a combination of local and federal funds intended to help charter schools obtain bank loans to purchase, build and maintain facilities. Hawke and D.C. officials said mismanagement of the funds has not affected operations at any school.
The SEC complaint may shed some light on the selection process. Under the heading, "Additional Undisclosed Conflicts of Interest," the complaint accuses Westbury of failing to disclose to District officials that the financial manager of the charter school fund "had received a substantial loan" from one of Geneva's subsidiaries, SBM Certificate Co., "in connection with an unrelated commercial real estate project of his own."