Two virtual schools defrauded Indiana of $68 million and funneled more to execs

Early estimates of just how much money two online schools stole from the state of Indiana were wrong, according to a report filed Wednesday by the Indiana State Board of Accounts.

A special investigation into malfeasance by Indiana Virtual School and Indiana Virtual Pathways Academy found that the schools inappropriately received more than $68.7 million collectively.

Last summer, state investigators revealed that the charter schools had inflated their enrollment to defraud the state — by enrolling students who’d simply requested information on the schools’ website, re-enrolling students after they’d left the schools or, in one case, by keeping a deceased student on their books more than a year after their death.

The state funds public schools — which include virtual charter schools — based on the number of students enrolled each year. At the time, investigators estimated overpayments to be around $40 million.

The new report details widespread fraud, misuse of state funds and a severe lack of oversight by school officials and the schools’ charter authorizer, Daleville Community Schools.

Officials with Daleville have said they did not have access to the charter schools data until August 2018, at which point they took concerns over irregularities in the schools’ reporting to SBOA.

Paul Joyce, state examiner with SBOA, said they opened the special investigation after receiving reports of irregularities. What happens next is up to law enforcement officials, he said.

"When public trust is violated, SBOA will work with our law enforcement partners and the Office of the Attorney General to ensure all responsible parties are held accountable," Joyce said in a statement Wednesday.

Daleville closed both schools August last year. The district did not return a request for comment Wednesday.

Now, the state is looking to claw back the cash it paid for students who weren’t actually attending the online schools — plus millions more that investigators say was funneled through the schools and into companies owned by its administrators and their family members.

The $68 million overpaid to the schools came from thousands of students improperly included in enrollment counts. From 2011 until last year, more than 14,000 students were counted as enrolled when they should not have been.

While SBOA found instances of enrollment inflation each year, the number of falsified student records ballooned in the fall of 2017.

In the 2017-18 school year, SBOA found more than 3,200 ineligible students were counted in enrollment figures. In 2018-19, that number was 5,694, according to the report.

Only a fraction of registered students were actually listed as “active” in the student lists provided to teachers, according to the report. SBOA also raised questions about course completion reporting figures, self-reported by the school.

No invoices, no details

From the 2016-17 school year to the 2018-19 school year, the two schools received more than $103 million in state funds and funneled more than $85 million to related parties, including several companies run by the schools' founder, Thomas Stoughton, and his son.

And the state wants that money back.

The state is requesting reimbursement of the $85 million, improperly paid to 14 different vendors that were related to the schools through a common employee or family member.

In many instances, payments were made to companies related to school officials — sometimes by the school official who worked for the company receiving the funds — without an invoice or with an invoice that had no details, which goes against the state's accounting guidelines for charter schools.

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There were no invoices or no details on invoices for more than $32 million paid to American Pathways Academy, whose chief financial officer was Merle Bright. Bright was an authorized signor of bank accounts for the schools and the father of the schools’ CFO, Greg Bright.

Because the fees charged by American Pathways were based on inflated enrollment figures, the state calculated that American Pathways was overpaid by more than $22 million.

Merle Bright also signed more than $3 million worth of checks that the schools paid to American Pathways.

Bright was also connected to Eightbit, a company that received more than $18 million from the virtual schools – all payments made without invoices or with invoices that had no details.

In one instance, an invoice from February 2019 includes a payment of $285,825.83 for “teacher salaries,” even though all teachers at the schools were independent contractors and paid directly by the schools.

State investigators found that Eightbit was overpaid by more than $14 million, due to the inflated enrollment figures.

Cyber Educational Services, which received more than $14 million from the virtual schools, was overpaid by more than $8 million.

Merle Bright is a managing member of CES, according to the state report. CES received more than $13 million from the schools through electronic fund transfers between August 2016 and November 2017, a time period during which Bright’s son was authorized to make electronic check payments for the virtual schools.

During that same time period, another $10 million in electronic fund transfers was made to a company called AlphaCom. AlphaCom was founded by Thomas Stoughton, who also founded the virtual schools, and Merle Bright served as the CEO and treasurer. AlphaCom and the schools also shared a lawyer in Thomas Burroughs.

AlphaCom was paid more than $14 million by the schools, nearly $10 million of which was an overpayment based on the inflated enrollment figures according to state investigators.

And more than $2 million was paid to AlphaCom with checks signed by the company’s founder, Thomas Stoughton.

All told, state investigators found that the two virtual schools used state funds to pay more than $85 million to related parties at 14 different vendors.

Additionally, a financial services company owned by the school’s CFO, Greg Bright, was paid more than $26 million through electronic fund transfers. The amounts matched claims made by other vendors but there were no records those vendor payments were ever made.

Stoughton, Burroughs, Merle Bright and Greg Bright could not be reached for comment.

The recovery of funds

SBOA said it has sent its findings to local and federal prosecutor's offices, the Indiana Inspector General's Office and to the Indiana Attorney General's office.

School officials have already been called before a grand jury. A subpoena was issued by U.S. Attorney Josh Minkler's office last summer.

A spokesperson from Minkler's office said they could not confirm or deny a pending investigation, but a spokesperson for the Marion County Prosecutor's Office said inquires about the investigation into the schools should be sent to Minkler's office.

A spokesperson with Attorney General Curtis Hill's office said they are reviewing the report.

"We take seriously our duty to pursue all available options for recovery of the misappropriated or diverted taxpayer funds," said a statement from the AG's office. "As such, we are thoroughly reviewing the report to diligently pursue the charged parties."

The subpoena directed documents be sent to a Federal Bureau of Investigation agent.

A spokesperson for the FBI said they could not confirm or deny an investigation, per Department of Justice Policy.

A spokesperson with the Indiana Inspector General's office said they do not acknowledge or confirm any open investigations.

The virtual schools had been the subject of scrutiny for more than a year before the Daleville school board voted to close them last February. The closure was slated for the fall, but when the size and scope of the problem became more clear, the board accelerated their timeline and closed the schools in late July.

The abrupt closure of schools left those students that were still enrolled with questions about how to get transcripts and teachers scrambling. Teachers with the schools said they were not paid for their final month of work.

Call IndyStar education reporter Arika Herron at 317-201-5620 or email her at Arika.Herron@indystar.com. Follow her on Twitter: @ArikaHerron.