STATE OF NEW JERSEY DEPARTMENT OF EDUCATION OFFICE OF FISCAL ACCOUNTABILITY AND COMPLIANCE INVESTIGATIONS UNIT ADELAIDE L. SANFORD CHARTER SCHOOL FINANCIAL PRACTICES OF AC CASE REPORT OF EXAMINATION MARCH 2012 STATE OF NEW JERSEY DEPARTMENT OF EDUCATION OFFICE OF FISCAL ACCOUNTABILITY AND COMPLIANCE INVESTIGATIONS UNIT REPORT OF E-XANLINATION MARCH 2012 ADELAIDE L. SANFORD CHARTER SCHOOL FINANCIAL PRACTICES EXECUTIVE SUMMARY On February 2, 2012, the Office of Fiscal Accountability and Compliance (OFAC) received 21 request from Deputy Commissioner Andrew Srnarick to review concerns raised by the Office of. Charter Schools in regards to the Adelaide L. Sanford Charter School. The deputy commissioner stated that the Office of Charter Schools is concerned that the ALSCS used public funds inappropriately to fund their facility. The Office of Charter Schools is also concerned about the ongoing relationship between the ALSCS and the Women in Support of the Million Man March Alliance, Incorporated (ACE). The following day, February 3, 2012, Acting Commissioner Christopher D. Cerf notified ALSCS officials that he was placing the school on "probationary status for a period of 90 days to allow the school time to develop and implement a remedial plan after which, if the plan is unsuccessful, the charter may be summarily revoked." Deputy Commissioner Srnarick requested that the OFAC also review the remedial plan submitted by the ALSCS. The OFAC investigators reviewed board minutes, leases, contracts, purchase orders, payments, and loan documents to determine whether the school used public funds inappropriately to fund their facility and the school lease was appropriate, along with the school's relationship with The OFAC investigators also reviewed the remedial plan and interviewed school employees and the attorney who prepared the lease in question. The investigation disclosed that: 0 The ALSCS lease guarantees rent payments for the entire term of a bond agreement with the landlord, ACE. The loan was initiated by the CEO of the ALSCS in her role as executive director of WI The Amended Certification of Incorporation documents of received from the NJEDA showed that ACE is only a change of name for Therefore, ACE and are the same entity. 0 The ALSCS appears to be paying rent for a property that is not occupied by the school. I The ALSCS has a lease committing them to occupy buildings mortgaged in the ACE bond issue; however, the board and CEO of ALSCS and are attempting to move the school to another location. 5 Fredrica Bey's relationship with ALSCS, and ACE constitutes a conflict of interest. Report of Examination March 2012 Adelaide L. Sanford Charter School -- Financial Practices Page 2 FINDINGS 1. The Adelaide L. Sanford Charter School (ALSCS) lease guarantees rent payments for the entire term of a bond agreement with the landlord, Ace Alliance. Inc. (ACE). The loan was initiated by the CEO of the ALSCS in her role as executive director of The ALSCS opened at 51-53 Lincoln Park in Newark on September 6, 2007. ALSCS entered into a lease agreement with the Women in Support of the Million Man March to rent a 8,064 square feet facility. Rent for the building was set at $222,000 per year. On July I, 2008, the lease period was extended to July 1, 2013 and the rent was increased to $300,000, a 35% increase. On July 1, 2009, the school amended the lease to include a second property at 67- 69 Lincoln Park in Newark, which was also owned by The lease was extended to July 1, 2014. The additional property added 6,822 square feet to the school and the rent was increased to $420,000. On February 9, 2011, a new lease with adding a site located at 15 James Street in Newark, was issued for $624,000, an increase of 48.6%. The lease was board approved on February 9, 2011 and extended to January 1, 2016. There is no dedicated space for the ALSCS at the 15 James Street address. The building known as 15 James Street in the lease is also known as l3--l 7 James Street and 2325 Washington Street. The building is 65,180 square feet. On February 28, 2011, Acting Commissioner Christopher Cerf notified the ALSCS that its charter was renewed for another five-year term (through the 20l 5-2016 school year). On March 31, 2011, Fredrica Bey, Chief Executive Officer (CEO) of the ALSCS and Executive Officer of acknowledged New Jersey Economic Development Authority (NJ EDA) approval of their request for financing. On June 14, 2011, filed for an Amended and Restated Certificate of Incorporation that changed its name to ACE Alliance, Incorporated. Fredrica Bey was listed as registered agent on the document. Amine Bey was not listed on the board of directors for ACE. On June 28, 2011, Fredrica Bey emailed the attorney for the ALSCS and the attorney for ACE regarding required signatures by ALSCS for the closing of the Quality School'Construction Bond Funds (QSCB). On August. 1, 2011, ACE received $8,270,000 in bond funds through the NJEDA, of which $2,255,000 were designated QSCB. The bondholder is the Wells Fargo bank. The balance of bond funds were used to pay off loans for purchases of properties and costs of bond issuance. . Also, on August 1, 201 l, an amended lease was issued for the ALSCS with ACE. This lease is for properties at 53 Lincoln Park, 67-69 Lincoln Park and 1 James Street. The lease period is from August 1, 2011 through July 18, 2016. The lease was signed by the board president at the. time, Atiya Jaha-Rashidi, but was never board approved. The lease stated that the landlord is Report of Examination March 2012 Adelaide L. Sanford Charter School -- Financial Practices Page 3 obtaining financing of the property based on the tenant's agreement to enter into the lease and pay the rent. The lease also states that it must be renewed with the landlord at the time of each charter renewal. The lease includes an option to purchase the property, but the purchase is contingent on there being no outstanding bonds at time of purchase. Maturity dates for the bonds range from 2018 through 2041. The lease cannot be terminated without consent of the Trustee and Bondholder's representative. The school cannot change the charter or control of the school or incur debt. without consent of the bondholder's representative. The lease states that the landlord. and tenant agree that the lease is being entered into in connection with the bonds. Various bond documents refer to the ALSCS. The loan agreement between the NJEDA and ACE states that the ALSCS lease will be amended to be acceptable to bondholders. The loan agreement also says that it must be stated in the ALSCS lease that the parties will not terminate the charter school lease to allow the charter school to operate a school facility at another location. The ALSCS board president certified that the charter school was a tenant at the 15 James Street property. A disclosure agreement, also signed by the ALSCS board president stated that "in the event of default, for the protection of the bondholders, any action may be taken against the school, including officers and employees to enforce the agreement, but no monetary damages may be collected." The ALSCS board president also signed the disclosure agreement. The bond offering documents state that the ALSCS leases the majority of the mortgaged property from the borrower for use as a charter school. - The AL-SCS board of trustees tabled the discussion of the amended lease on July 21, 2011. The board never approved the lease. In December 20] 1, the board hired Thomas Johnston of Porzio, Bromberg and Newman as an attorney to review the amended lease. Mr. Johnston wrote an opinion to the board on January 6, 2012 giving his opinion that the amended lease was an unlawful tease due in part to a conflict of interest of Frederica Bey. On January 6, 2012, attorney, Josh M. Mann threatened the ALSCS board with litigation by and the bondholders if the board tried to break the lease and move to a different location. According to N.J.A.C. debt incurred by a charter school must be fully secured by the value of the real property. The total bond issue equals $8,270,000. The total appraisal value for the properties is $12,010,000. However, the appraisal value for the property the ALSCS is actually using is $2,260,000. According to N.J.A.C. a charter school may acquire real property by a lease or a lease with an option to purchase. However, the ALSCS lease states that the property may only be purchased at the end of the bond term, which is in 2041. This lease does not give the option to purchase for the charter period. Conclusion The NJEDA loan was initiated by the CEO of the ALSCS prior to the ALSCS board being informed about the amended lease. While the actual liability to the charter school is open to question, the charter scl1ool's lease was used to secure the bonds. Report of Examination March 2012 Adelaide L. Sanford Charter School -- Financial Practices Page 4 I The OFAC recommends that this report and all backup documentation be referred to the Office of the Attorney General to determine legality of the lease and to the Office of Criminal Justice to determine whether there was any criminal involvement regarding issuance of the lease and bonds 2. The ALSCS appears to be paying rent for a property that is not occupied by the school. As previously mentioned, the ALSCS currently has a lease for properties at 51-53 Lincoln Park, 67-69 Lincoln Park and 11-17 James Street. The building located at 11-17 James Street has also been referred to as 13-17 James Street and 23-25 Washington Street. The ALSCS does not have dedicated space" at the 13-17 James Street/23-25 Washington Street property. There are two other tenants in the building, an Abbott preschool and a church. also leases out many parts of the property for community events. The ALSCS received a 48.6% rent increase when the lease documents added the above mentioned property, yet the ALSCS is not actually a tenant. also charged the ALSCS $250 for use of a on January 9, 2012. Loan documents stated that in the future some grades of the ALSCS will use the third, fourth and fifth floors at 17 James Street, which amount to 15,809 square feet according to appraisal documents. However, ALSCS is not currently using that facility. The buildings where the school is currently housed, 51-53 Lincoln Park and 67-69 Lincoln Park are 1.76 miles from the James Street location, which is located in downtown Newark. Travel between the two sites is difficult. and time--consuming. Students share a and health teacher, art teacher and music teacher. Logistically, it would be very difficult to house classes almost two miles away, while sharing teachers. Conclusion The ALSCS is paying rent for a property not currently occupied by the school. 3. The ALSCS has a lease committint'. them to occupy buildings mortgaged in the ACE bond issue; however. the board and CEO of ALSCS and WISOMNIM are attempting to move the school to another location. The OFAC investigators review of bond documents indicated that the ALSCS is not allowed to break the lease to rent 51-53 Lincoln Park, 67-69 "Lincoln Park and 13-17 James Street/23-25 Washington Street without bondholder approval. However, on October 17, 201 l, Fredrica Bey gave a report to the board regarding the "20l2/2013 new site." Two specific properties were named as locations. The report also mentioned that Ms. Bey was speaking to other people about available schools. On December 5, 2011, Fredrica Bey of received a letter of intent from the board president of the Lillie Mae Jenkins Charter School The letter said that the intends to lease the building currently housing the ALSCS at 51-53 Lincoln Park beginning July 2, 2012. The letter mentioned that the board members had a of the Report of Examination - March 2012 Adelaide L. Sanford Charter School -- Financial Practices Page 5 property. The board president of the requested the right of first refusal for the 67-69 Lincoln Park property, also being used by the ALSCS. On March 1, 2012, Arnina Bey, current board president of ALSCS and daughter of Frederica Bey, sent a packet to ALSCS parent/guardians. Included in the packet was a petition to the Newark Superintendent of Schools to allow to acquire a Newark owned school to house the Adelaide L. Sanford Charter School. Conclusion The ALSCS has a lease stating that they are not allowed to move out of the facilities named in the amended lease. Also, there are loan documents stating that the ALSCS may not move without permission of the bondholders. Not long after bond documents were signed promising that the ALSCS would be a tenant of the properties to 2041, the CEO and board of the ALSCS were making arrangements to move the ALSCS to another location. 4. Fredrica Bey's relationship with ALSCS, and ACE, which appear to be the same company, constitutes a conflict of interest. On February 3, 2012, Acting Commissioner Christopher D. Cerf notified ALSCS officials that he was placing the school on probationary status for a period of 90 days to allow the school time to develop and implement a remedial plan after which, if the plan is unsuccessful, the charter may be summarily revoked." The acting commissioner also stated that the NJDOE "was informed by both the U.S. Attorney's Office and the special counsel to the Adelaide L. Sanford Board of Trustees, that there are concerns of potential misuse of federal funds and your role as the charter school's CEO as it relates to fiscal exchanges with the anon-profit WISOMM, also referred to as ACE Alliance, inc." The probation letter directed Ms. Boy to: 1. Provide evidence of a fully constituted board in accordance with the charter, provide evidence that board members have been scheduled for training and provide confirmation that board members have attended training. - 2. Define the relationship between the ALSCS and The CEO and current board president were both employees of The CEO was also the executive director of ACE. The action required was: Report of Examination -- March 2012 Adelaide L. Sanford Charter School -- Financial Practices Page 6 a. Provide a current lease between the ALSCS and ACE, include information regarding the timeline of the lease and its approval by the board of trustees, and explain the relationship between ACE and the charter school. b. Provide resumes for all current board members, including affiliations with ACE. c. Provide a plan that details the ongoing role and responsibilities of the CEO. Provide evidence that these plans enable her to continue to act legally and in compliance with school ethics laws. d. Provide a plan detailing how the board and school stal;eho.lders will continue to be informed of issues regarding school facilities. Include who will act on behalf of the school's interest in regards to facilities, the process for hearing and determining facility. issues during board meetings and a plan for recusal if other board members continue their affiliation with ACE. On February 17, 2012, the ALSCS submitted a remedial plan/CAP to the NJDOE signed by Fredrica Bey, CEO and Amina Bey, Board President. The OFAC investigators reviewed the CAP and determined the following: 1 . ALSCS provided documentation regarding board members. There is a fully constituted board and board members were scheduled for training. ALSCS's responded to all of the actions to be taken for the second issue. The responses and planned actions appear to address all the issues included in the probation letter; however, each lists the actions as "in process." The response stated that there is no affiliation between ALSCS and ACE other than landlord and tenant. redrica. Bey stated in the response to the probation letter that am currently employed as CEO of the Charter School and I am the Executive Director of I am not an officer of ACE but simply a member of She also produced a letter saying that she resigned from ACE as executive director February 14, 2012, but is still a member of ACE. She believes that there is no conflict of interest. The CEO's contract has duties pertaining to building acquisition and usage. Ms. Bey produced a new job description which eliminated facilities responsibilities. In the response she stated that she will no longer has direct or indirect involvement with. the lease/facility arrangements and related issues of ACE and ALSCS. The ALSCS board's Facilities Committee is now handling facilities responsibilities. Ms. Bey said that Amine Bey, the board president and her daughter, has no affiliation with ACE or Amina Bey attested on February 12, 2012, on her Conflict of Interest Certification that she is not an employee, member, trustee or officer of or ACE and her resume did not include Also, she said during the February 13, 2012 board meeting that she resigned from However, in a ll r/ Report of Examination - March 2012 Adelaide L. Sanford Charter School - Financial Practices Page 7 prior year (2011) ethics form filing, Arnina Bey listed as an employer from whom she received wages and the investigators found no other evidence of her resignation from Also, as of March 6, 2012, Amine Bey's name still appears on website as Chairperson and Director, Event Services. Fredrica Bey stated that. ACE was formed on August 1, 2011 at the suggestion of their bond counsel. According to the CEO, ACE is a holding company that owns property acquired by The Amended of Incorporation documents of received from the NJEDA show that ACE is only a change of name for Therefore, ACE and are the same entity. Fredrica Bey is still listed as the executive director of As further evidence of a relationship between ALSCS and on March 1, 2012, Amina Bey sent a packet to ALSCS parent! guardians with a petition to the Newark Superintendent of Schools to allow to acquire a Newark owned school to house the ALSCS. Conclusion The responses to the CAP indicate that the ALSCS has plans to comply with the probation letter; however, minimal action appears to have been taken by the school, so far. The OFAC investigators have determined that Fredrica Bey's relationship with ALSCS, and ACE, which appear to be the same company, constitutes a conflict of interest. Fredrica Bey is the CEO of ALSCS and the executive director for the school's landlord. The information that Ms. Bey gave to state officials and actual documents reviewed by the investigators contradict each other. In addition, Amine Bey's relationship with all three of these organizations gives the appearance of a conflict of interest. The OFAC recommends that this report and all backup docurnentation be referred to the Office of School Ethics. . Approved by: 'n db 'imf Charles Peffall, ls/I-driiager lnte rnal Audit Unit Director Office of Fiscal Accountability and Compliance Janet McNerney William Ralph