D.C. Was Warned in Charter Deal, Firm Says
Thursday, April 27, 2006
Before selecting a newly formed Maryland firm to handle nearly $21 million in public charter school funds, District officials were warned that it had "no operating history" and that it planned to use the money to purchase a financially troubled corporation, according to papers filed yesterday in federal court.
D.C. officials nonetheless entrusted millions in local and federal funds to Geneva Capital Partners LLC beginning in July 2003, when the private company was less than three months old, court papers show. Geneva later made a $250,000 loan to a company partly controlled by the city consultant who negotiated the deal.
The information was contained in Geneva's response to allegations of fraud filed this month against the company and its owner, Eric M. Westbury of Silver Spring. The U.S. Securities and Exchange Commission has accused Geneva of defrauding the District by using the city's money to prop up failing subsidiaries and by neglecting to tell D.C. officials that two of the city's advisers on the charter school fund had a financial stake in Westbury's companies.
Geneva owes the District about $11 million. U.S. District Judge Deborah K. Chasanow has barred Westbury from making payments to any investors while the allegations are pending. A hearing is scheduled for May 12.
Yesterday, Geneva's attorney, John M. Fedders, said that "there has been neither fraud nor violations of the laws alleged by the SEC." The District, Fedders said, was informed in a "private offering memorandum" that its money -- a special fund approved by Congress to help charter schools purchase and renovate facilities -- would be used to purchase 1st Atlantic Guaranty Corp., a company that had been wracked by fraud, according to the SEC.
Moreover, Fedders said, the city adviser who contracted with Geneva to handle the city's funds, Timothy Webb, had no financial interest in Westbury's companies at the time of the deal. The other adviser, Marialice B. Williams, a board member of one of Westbury's companies, was not involved in the transaction, Fedders said.
In addition to disputing the allegations, yesterday's filing shows "that we're solvent and we're capable of" repaying the District's money, Fedders said, a point the SEC disputes.
"The response they filed today is very long on conclusions without any facts to support those conclusions," said Amy J. Greer, the SEC trial counsel handling the case.
City officials declined to comment on yesterday's court filing, saying the matter is under investigation.
The city's relationship with Geneva Capital has been the focus of intense interest since at least March 15, when D.C. Attorney General Robert J. Spagnoletti sent a letter demanding the city's money back. The D.C. inspector general is also investigating the matter, in part to determine how and why the city selected the company to handle the charter school funds.
Yesterday's 43-page filing sheds some light on that process. According to the document, Geneva was organized in May 2003 "to acquire" 1st Atlantic. In spring 2003, "Westbury was approached by a Finance Manager of the Office Public Charter School Financing and Support." He and "five institutions were requested to submit proposals" to handle the charter school money. The city turned over the first installment, $5 million, to Geneva in July 2003.
Fedders declined yesterday to identify the "finance manager." According to city records filed in court by the SEC, Webb was notified on March 31, 2003, that the city was hiring him to serve as "financial manager" of the Office Public Charter School Financing and Support.
That same day -- a month before Geneva was officially organized -- Webb sent a letter to Westbury notifying him that Webb had been "authorized . . . to place $10 million with Geneva Capital Partners."
In September 2003, a month after Webb's city contract expired, "Geneva invested funds into INVY Resort Ventures Ltd.," where Webb was a "member of the management of the general partner," court records show. In March 2004, Geneva lent INVY $250,000.
"Geneva has been told that at the time of these investments and of the loan by Geneva into INVY, Webb was not a contracted consultant to the District," Fedders wrote, adding that Webb was rehired by the city in May 2004.
Webb did not return a call to his office late yesterday.