Late last month, San Diego officials indicted 11 people in what they described as a charter scam that defrauded the state of California of more than $50 million in education funds.
The indictment details a scheme in which an Australian man and his business partner in Southern California opened 19 charter schools throughout the state and then took the public funding the schools received to operate and used it instead for real estate and other ventures.
This post explains the scam that the 235-page indictment spells out in detail. This is long but worth the time to read to get an understanding of how easy it is, because of lax charter sector laws in some states, to defraud the public.
California, which has more charter schools and more charter school students than any other state, now has one of the most lax charter laws in the country, allowing these schools to operate with little if any accountability or transparency to the public.
A task force headed by California State Superintendent of Public Instruction Tony Thurmond just completed a report that was sent to Gov. Gavin Newsom (D) with recommendations on how to tighten California’s charter school laws. The report includes measures that would give local school districts more say over where and whether charter schools can open.
This story was first published by Voice of San Diego, which is a member-based nonprofit investigative news organization. It gave me permission to republish this piece, written by Will Huntsberry, a reporter at Voice of San Diego who writes about education, schools and children.
You can read the full indictment here.
By Will Huntsberry
Sean McManus and Jason Schrock created an online charter school empire that covered more than half the state of California, according to prosecutors and investigators for an outside charter school organization.
From the port of entry at San Ysidro up to Los Angeles, past the cliffs of Big Sur all the way to Santa Cruz; east through Raisin City, past the giant sequoias of Sierra National Forest, and down into the flat and quiet of Death Valley; south again to the Mexican border; and back to the coast — a person could travel unbroken through 20 counties that made up the lower half of their empire. An outpost of 14 counties encompassing Sonoma and Sacramento sits further north.
From this vast swath of territory, McManus and Schrock absorbed mind-blowing profits. Take just some of their 2016 tax returns (1): Their nonprofit charter management company A3 brought in $14.2 million in revenue. It spent only $3.6 million. Of the money it spent, $855,796 went to McManus and Schrock’s salaries. They appeared to be the only two employees, according to the tax return.
The profits climbed even higher in the months that followed, according to an indictment (2) filed by prosecutors. A3 Education and other companies controlled by McManus and Schrock ultimately brought in more than $80 million, prosecutors say.
Nothing in the law stops a nonprofit charter management company from operating on wide profit margins or paying its officers hundreds of thousands of dollars a year. But the company’s “profits” aren’t ever supposed to make it into personal bank accounts. To get them there requires shady accounting. Prosecutors say McManus and Schrock extracted roughly $8 million into bank accounts and personal charities and bought a $1.6 million house for joint use in San Juan Capistrano.
The network of 19 online charter schools enrolled tens of thousands of students. Some followed an online curriculum and corresponded with real teachers. Others, many of whom were associated with summer athletic programs, never did any class work or talked to a single teacher, prosecutors say. Regardless, one thing remained true: For every student, taxpayer money directly from the state of California rolled in like a magical floodgate had opened.
The San Diego district attorney’s indictment lays out a complex organizational structure with McManus and Schrock as its head. Their accountant, Robert Williams, was closely involved with many decisions, prosecutors say. Several lieutenants led the charge to enroll thousands of summer school students, who did not take classes. A handful of overlapping trustees sat on the 19 different charter school boards. Positions changed regularly, obscuring the true decision-making power. Several superintendents of small school districts, knowingly or not, helped fuel the network’s growth. And untold coaches, students and parents — some highly suspicious — were roped in to help boost enrollment.
Eleven people have been charged in the alleged conspiracy. Schrock, a 44-year-old from Long Beach, faces more than 40 years in prison. McManus also faces more than 40 years and may be on the run in Australia, his home country, prosecutors say.
All except McManus have pleaded not guilty.
$25 a head for football players
Sometime around December 2017, Luiz Rigney, a certificated teacher, headed to a bland office park in suburban Riverside County to drop off a set of suitcases. The suitcases didn’t carry cash, but they did contain more than $5 million worth of student paperwork, according to the indictment.
The events described in the indictment are based on the accounts of 72 witnesses, including Rigney, who testified before a grand jury. Rigney, like many others, did not respond to a request for comment. I reached out to everyone implicated in the indictment or their lawyers, but few responded.
Over the course of the previous summer, Rigney had set about gathering as many students as possible to enroll in a summer program with one of the A3-connected online charter schools.
Here’s how witnesses say it worked: Rigney reached out to dozens of high school football programs and other youth athletic organizations. In presentations to coaches, he would offer to donate a certain sum of money to the athletic program for each student who filled out the paperwork to sign up for the summer program. The donations started at $25 per student, according to the indictment.
Nothing would be required of the students, other than participation in the previously scheduled athletic program. For each student Rigney signed up, he also got $25, according to the indictment.
But the total worth of each student was actually around $1,600. Everything that didn’t end up getting donated to the athletic program or in Rigney’s pocket went to one of the companies controlled by McManus and Schrock, prosecutors say. That meant they were skimming as much as $1,550 per child.
“Summer School team, I know its (sic) crazy busy for you all, but I need updates please about each of your data collections to date, process, and projected student enrollments for Summer (sic),” Schrock wrote to Rigney on or about July 2, 2017, according to the indictment.
A couple days later, he wrote again: “Any guess on your numbers Lou? Need it for planning if possible.”
“I’m guessing 7000 on the low end and 10000 on the high end,” Rigney responded.
A few days later Rigney heard from McManus: “Guys can I get an update in what we are doing in these regions please? Need to supercharge enrollment for the summer in these areas please advise thanks sean,” he wrote.
For each student Rigney delivered to McManus and Schrock, he also had to deliver paperwork signed by a parent. On some forms, critical information had been left blank.
“I’ve got a team here that didn’t enter what grade their child is in, on any master agreements. Should I send them back and have them enter them in,” Rigney asked McManus, according to the indictment.
“Estimate,” McManus responded.
During the course of a normal school year, every student in California comes with roughly $7,000 to $9,000 in state money, depending on grade level. But since the A3 network was only enrolling students for roughly 40 days during the summer, it received a fraction of the full allotment, prosecutors say.
Students in the athletic programs would be unenrolled from their regular high school, enrolled into an A3 program (that is where the paperwork came in) and then re-enrolled into their regular high school by the end of summer. The students often didn’t even know this was happening and did not do any schoolwork or have any contact with the A3 network’s employees, prosecutors say.
Incidentally, the alleged scheme exposed a loophole in how the state awards money for a student’s average daily attendance. The school year is 180 days long, and a student with perfect attendance is supposed to be worth one full unit of funding. Schools lose a share of that funding based on the percentage of days the student misses.
But Schrock and McManus found that a student could deliver more than his or her full share of state funding. A student might receive one full unit of funding for having perfect attendance at their traditional school. But by being enrolled for the summer, a student could receive an extra 20 percent funding that went to A3.
California Department of Education officials declined to comment for this story.
Backdating to receive maximum funding
Rigney collected the paperwork for 4,213 students during the summer of 2017, according to the indictment. At $25 a student, that would have represented $105,325.
In overall state funding to A3, it would represent more than $6.5 million.
But some of the paperwork was not complete and much of it was not dated July 1, 2017, as it would need to be for the A3 network to collect maximum funding, prosecutors say. Rigney had allowed parents to date their paperwork the same day they signed it, not realizing how that would impact funding.
“Some of your kids have incorrect dates on master agreements I can’t claim any attendance for these kids if we don’t get a revised master agreement,” McManus texted Rigney.
“Can you confirm what the date needs to be on summer school [master agreements]? The first day of summer school, before it started, or any day within the range of dates that they participated,” Rigney asked McManus.
“7-1,” McManus replied.
“Their signature date needs to be 7-1?”
“No it needs to be dated 7-1.”
This was all unfolding in December 2017, as the A3 network prepared to submit its average daily attendance counts to the state.
“I need to speak with you urgently [t]here is a huge problem with many of your master agreements. Please call me,” McManus texted Rigney.
With Rigney’s paperwork severely out of order and the loss of millions of dollars looming, McManus “directed Luiz Rigney to backdate around 4,000 master agreements” to July 1, 2017, according to the indictment. Those students “had no contact with charter school employees,” the indictment reads.
After backdating the master agreements during the final push to get the attendance data in order, Rigney delivered the paperwork in suitcases to A3’s records collection office in Ontario, prosecutors say. Several months later, he received a check for $93,725.
Rigney was one of at least five people doing similar enrollment work for McManus and Schrock, according to witnesses interviewed before the grand jury.
A3 even had a winter break scheme that functioned much like the summer school program.
During winter break 2017, students in Raisin City, a small town near Fresno, were unenrolled from their regular school, enrolled into an A3 school for 17 days and then re-enrolled into their regular school.
A3 signed up 301 students.
In considering the windfall this would represent, Schrock quickly sketched out the math to McManus in an email: “Total cost of camp: Christmas gifts: $15/student x 301 [=] $4,500[,] Labor: 16 people at $300 each [=] $4,800[,] Pizza party in January to collect work sample: [=] $500[,] Total cost: [=] Less than $10,00[.] Income from camp: [=] 17 days of ADA $65 x 301 = $332,605[.] Total Profit for School $322,605.”
‘I am a very real guidance counselor’
An attorney for A3, Gary Brucker, sent me 10 letters from teachers, parents and students who are involved with the A3 network. Their letters paint a picture of an online program that serves many at-risk students who have fallen out of the traditional public school system.
Becky Thompson, a guidance counselor, said she works with students at A3 schools in California, Oregon, Oklahoma and Michigan.
“I am a very real Guidance Counselor and … I have very real students with families that I serve,” she wrote. (3) “Over 500 students to be exact.”
Thompson said she could write of A3 success stories that would fill many pages. She mentioned one student who had to leave traditional school because of an illness and another who finished her junior and senior courseloads in a single year.
“Some of the greatest successes I have are with homeless students and academically low students,” she wrote.
One mother wrote a letter (4) about how it was a “blessing” she could find an alternative schooling option that would help her daughter’s ADHD, anxiety and depression.
Several teachers worried that the actions of a few might destroy the hard work of many others.
Michael Bonkoski, a teacher based in Michigan with a teaching credential in California, wrote (5) that he was “appalled and deeply saddened.” He added: “I do, however, want to reiterate that there are many students that we teach that are legitimate students seeking a legitimate education.”
Getting started in East County
In 2015, Schrock and McManus started A3 as a nonprofit charter school management company. Management companies often help charter schools handle their finances, but A3 also went on to own and operate some of its own schools.
In 2016, McManus and Schrock appeared to be the only two employees, according to tax filings. Since the indictments were announced, A3 put out a news release listing several other company officers and announced it hired an interim CEO. That release has since been removed from A3’s website.
Linking A3 to the 19 different online charter schools investigators say it operated proved to be difficult.
Willow Harrington, who heads nonacademic accountability efforts at the California Charter Schools Association, was connecting the dots of the A3 network and looking into its practices during the same time the DA’s investigation was going on. (CCSA first raised an alarm to the state Department of Education in a letter (6) dated February 2018.)
“There was this clear pattern where one head of schools would be covering multiple schools,” said Harrington. “You also see the boards that have overlapping members, as well as the addresses of corporations; they are all similar addresses. When you piece together the information, it’s hard to explain how they are not all affiliated.”
Keeping distance between a charter school and its management company would be important for anyone trying to subvert the law. Awarding a contract to a company you own and paying it with public funds violates state conflict-of-interest laws.
An early step in establishing the A3 empire came when Steve Van Zant, a former superintendent of Dehesa Elementary School District, “brokered” the sale of an online nonprofit charter school to A3 for $1.5 million, prosecutors say. Mosaica Online Academy of Southern California had already been authorized by Dehesa, an extremely small district that operates one school for about 150 students in East County.
Working as a consultant to A3, Van Zant earned 3 percent of the sale price and 3 percent of all future revenue the school would bring in from the state, according to the indictment. He could face six years in prison for his role in the scheme.
Putting a charter school in a district with 150 students may not sound lucrative. But for an online charter school it can be. Online-only charters are allowed to draw students from the entire county in which they are authorized, not just the school district — plus each adjoining county as well. That means getting authorization from the small Dehesa Elementary School District gives an operator access to more than 1 million potential students, each with thousands of dollars attached to their head, in San Diego, Orange, Riverside and Imperial counties.
And small districts like Dehesa actually have an incentive to authorize these schools. Districts earn between 1 percent and 3 percent of the charter school’s revenue. And that money can make a big difference for a tiny, cash-strapped district. Dehesa ultimately collected $2 million last year from three A3 charter schools it authorized. That’s more than the district’s entire payroll, prosecutors say.
In return for the fees, the authorizing district is supposed to play an oversight role. In theory, it monitors a charter school’s academic and financial performance.
A3 specifically targeted small school districts like Dehesa that did not have the resources or know-how to adequately oversee its operations, Harrington said.
State education code requires authorizing school districts to charge based on the “actual costs” (7) of oversight.
Prosecutors charged Nancy Hauer, superintendent of Dehesa, with misappropriating public funds for allegedly charging A3 more than the actual cost of oversight. She could face four years in prison.
Hauer did not respond to requests for comment.
Van Zant, who authorized several charters while serving as Dehesa superintendent, has been swept up in previous charter school frauds. He pleaded guilty in 2016 to violating the state’s conflict-of-interest laws (8) while serving as superintendent of Mountain Empire Unified School District in East County, according to the Union-Tribune.
Van Zant earned commission on each charter school that Mountain Empire authorized under his leadership. He also ran a consulting firm, much like A3, that provided management services to some of the 13 charter schools he helped authorize.
‘I love bonuses’
In early July 2017, just as Rigney was working to sign up athletes, McManus sent a text to Nyla Crider, who was working in a different position to expand enrollment, according to the indictment.
Crider had just reported some good numbers.
“The ladies are just killing it,” he wrote. “Let’s keep rocking.”
By “the ladies,” McManus seemed to be referring to Crider and Kalehua Kukahiko, who, along with her husband, were working to enroll summer athletes throughout Southern California into A3 charter schools, prosecutors say.
Kukahiko worked as a registrar, reporting to Crider. Her husband, Troy Kukahiko, worked on the ground, reaching out to various athletic programs. He also registered a charity foundation that would bring in money through the A3 network and send some of it back out to schools and booster clubs as donations, according to the indictment.
Neither Crider nor Troy and Kalehua Kukahiko responded to requests for comment.
Crider made bonuses for her work. Troy Kukahiko got paid per athlete, as Rigney had, according to the indictment. But Troy Kukahiko’s deal turned out to be more lucrative. He received $700 per athlete to his foundation, $200 of which went to the athletic program and $500 stayed with the foundation, prosecutors say.
Kukahiko worked with several football coaches. In one instance, he paid a cashier’s check of $4,340 directly to a company owned by the football coach of John Glenn High School in Los Angeles County, instead of paying the money to a booster club, according to the indictment.
In another, the football coach of San Juan Hills High School in San Juan Capistrano heard from several parents who were “concerned” about the A3 program, according to the indictment.
Troy Kukahiko emailed the coach and told him the program “didn’t require students to spend any time outside of football practice,” the indictment reads.
Kukahiko texted Crider that the coach was “suffering from A3 doubt and thought the $200 he was promised per participant was too good to be true,” according to the indictment.
McManus texted Crider that “he would write the check to [the coach] in blood if he had to.”
Soon after, the Stallion Booster Club of San Juan Hills received a check for $16,600, prosecutors say.
Along the way, Crider received an immediate raise of $25,000 and several bonuses between $2,500 and $5,000 each.
Crider faces 11 years in prison. Troy and Kalehua Kukahiko face four years.
Several other employees who received bonuses for their work also reported to Crider. As they were closing the books on summer enrollment, one texted her.
“I had the weirdest dream last night! One was about us growing all Sean’s schools. I was running all the Facebook campaigns and you were running around my office drinking champagne throwing money everywhere yelling I love bonuses.”
Crider forwarded the text to McManus.
“Wow sounds like a party I want to go to,” McManus responded.
Two other loopholes
Prosecutors charge that the A3 network used two other methods, besides summer enrollment, for maximizing the taxpayer money it brought in.
The first involved switching students between different online charter schools without the student’s knowledge. This allowed the company to collect more than a full allotment of average daily attendance funding for each student, prosecutors say.
For instance, one school might have a 180-day calendar that begins July 1, another that begins Aug. 1 and another that begins Sept. 1. Any company that wanted to juice its average daily attendance allotment could switch students between the different calendars, so that the child never had any breaks. This method could potentially bring a school as much as 40 percent more funding than a student is supposed to represent, based on the 261 weekdays in a calendar.
A3 would have been able to switch these students, because it opened multiple online charter schools in most of the districts where it was authorized to operate.
The second method involved enrolling private school students and paying out the majority of their funding allotment to the schools and parents, but skimming $1,000 or more off the top, prosecutors say.
In one example in May 2017, Schrock entered an agreement to pay $5,000 to West Coast Community Services, an organization that worked with some private school families, for every student the organization enrolled with an A3 school.
Some private school parents received $300 per month as part of the deal. For each student, Schrock and McManus received between $7,000 and $9,000 per year, prosecutors say. No parents were indicted.
An auditor gets suspicious
As early as winter 2017, a private auditor started getting suspicious of “potential fraud” involving A3 Education and one of its charter schools, prosecutors say.
Chris Thibodeau was performing an annual audit of Cal Prep Sutter in Sutter County for Squar Milner, a private company that is licensed to provide mandated audits for schools and school districts. He noticed that McManus was listed as the CEO of Cal Prep Sutter, but that the school was also doing business with McManus’s company A3 Education.
Thibodeau flagged this as “related party transactions,” according to the indictment. Related party transactions can often violate the state’s conflict-of-interest laws.
Prosecutors charge that McManus, Schrock and Williams, their accountant, then conspired to backdate paperwork, which showed McManus had actually resigned months earlier as CEO of Cal Prep Sutter.
Thibodeau had obtained some sets of the charter school’s meeting minutes, which appeared to show the contract with A3 had never been approved by its board of directors.
Schrock and Williams discussed fabricating new board minutes, which might help their case, prosecutors say. But Williams cautioned against it: “Problem is will they contradict anything they already have access to. Can’t have two sets of minutes for a meeting.”
Around December 2017, Schrock sent around a set of minutes dated July 6, 2016, which showed McManus resigned as CEO and another man, Eli Johnson, was promoted to his position. Prosecutors say Johnson worked at the direction of McManus.
Johnson’s attorney Abram Genser told me in an email, “I would ask you to remind your readers that an indictment is not evidence of guilt — in fact, it is not evidence at all. Additionally, people are innocent until proven guilty.”
After sending out the new minutes, Schrock sent instructions. “Please sign and send to the auditor,” Schrock wrote to McManus, Williams and Robert Sikma, the board president for Cal Prep Sutter. Sikma served several roles throughout the network, functioning as a board member to several schools and a CEO to one, according to the indictment.
Sikma testified during the grand jury hearing and has not been charged with a crime. He did not respond to a request for comment, but provided a statement to the Union-Tribune on behalf of Valiant Prep charter schools, which operate in Dehesa and Los Angeles County: “Valiant takes these charges very seriously and is committed to reviewing and revising its policies and procedures as needed to address the types of concerns raised by the charges to ensure that it continues to operate within the confines of the law.”
Prosecutors say Sikma shared information with the auditor that “was meant to shield payments made to A3 education” and to conceal McManus’s relationship to the school. To help clear up any confusion about who ran the Sutter school, Sikma emailed Thibodeau: “Mr. Eli Johnson is the CEO of California Prep Sutter,” he wrote.
‘We run a tight ship’
Just as the DA’s investigation was beginning last year, police served a search warrant related to the case on Troy Kukahiko’s house in March 2018.
Around the same time, the charter school association was also intensifying its investigation. The group recently created a nonacademic accountability process specifically for looking into problems like those at A3.
“Obviously we care about holding rogue bad actors accountable, but the real reason we created this is because we want to make sure that the people who are choosing to do this work are doing it for the right reasons,” said Harrington, who worked on the charter school organization’s investigation. “We want to make sure their primary objective is learning and growing for kids.”
Days after the indictment became public, A3 Education posted a statement to its website, naming James Konantz the group’s interim CEO.
“We must keep in mind that the alleged wrong doings are attributed to a few, internally and externally, not the organizations themselves or as a whole,” said the statement, attributed to Konantz.
The statement announced specific steps that would be taken within the next 15 days and the next 60 days to restore confidence in the A3 schools. The statement announced that two schools, one in Dehesa and one in Los Angeles County, would be closing, but that the rest would remain open.
That statement has since been removed from the organization’s website. An earlier statement that still remains on the website says, “A3 Education continues to adapt to the changing legal and regulatory environment and is committed to operating within the confines of the law.”
In one discussion between Crider and McManus about the nature of A3 as a company, Crider said she tended to describe the organization as a “vendor,” according to the indictment. McManus responded that A3 served as a “management company.”
He never understood why people got so “wound up” about the charter management side of the business, he wrote, according to the indictment.
“Thankfully we run a tight ship,” Crider responded.
Article printed from Voice of San Diego: https://www.voiceofsandiego.org
-  2016 tax returns: https://pdf.guidestar.org/PDF_Images/2017/475/353/2017-475353078-0fa8d23c-9.pdf
-  an indictment: https://www.voiceofsandiego.org/wp-content/uploads/2019/06/A3-Education-Charter-Indictment.pdf
-  she wrote: https://www.voiceofsandiego.org/wp-content/uploads/2019/06/Letters-Examples-10.pdf
-  a letter: https://www.voiceofsandiego.org/wp-content/uploads/2019/06/Letters-Examples-9.pdf
-  wrote: https://www.voiceofsandiego.org/wp-content/uploads/2019/06/Letters-Examples-7.pdf
-  a letter: https://cdn2.hubspot.net/hubfs/3049635/2018-02-09-LETTER-SPI%20re%20Valiant%20Prep%20and%20A3.pdf
-  “actual costs”: http://leginfo.legislature.ca.gov/faces/codes_displayText.xhtml?lawCode=EDC & division=4. & title=2. & part=26.8. & chapter=3. & article=
-  violating the state’s conflict-of-interest laws: https://www.sandiegouniontribune.com/news/education/sdut-van-zant-charter-schools-pleads-guilty-2016feb25-story.html