Saturday, September 5, 2015

BACK TO SCHOOL 101: The Grand Traverse Academy's Steven Ingersoll Fraud Scandal — Part 1

Since I embarked on my groundbreaking 18-month examination Steven Ingersoll’s financial activity at the Grand Traverse Academy, some of the players involved have worked behind-the-scenes to discredit my work, including the threat of a defamation suit from a sniveling former Board member, revealing my identity and home address online, and hand-delivering a handwritten threat letter to my former Northville home.

None of it stopped me.

In fact, it convinced me I was on the right path.

Here is the first installment of a three-part series — a comprehensive timeline detailing the activity that fueled what appears to be a massive misappropriation of millions of dollars from a taxpayer-funded Michigan charter school, the Grand Traverse Academy.

When you read the series, keep these facts in mind: the Academy's Board knew Steve Ingersoll was under federal investigation (and likely to be indicted) for nearly a year before he was formally charged — and still left him in control of its money. In addition, although the Board's attorney demanded repayment of Ingersoll's estimated $3.5 million dollar debt, the Smart Schools Management, Inc. contract was never amended to include the repayment plan's terms. And finally, Academy spokespersons (including Mark Noss and Brad Habermehl) publicly made statements about the misappropriation they likely knew were false.
2007-2012 At the beginning of each fiscal year, Steven Ingersoll advances (generally in a lump sum), his annual Smart Schools Management/Grand Traverse Academy management fee.  Although based on a Board-approved preliminary budget figure, Ingersoll’s management fees are later adjusted downward after actual budgets are calculated. However, Ingersoll withholds the difference each year during this six-year period and does not return the money to the Academy.

Instead, Ingersoll books amounts the owed to the Grand Traverse Academy as “accounts receivable” from Smart Schools Management, and Ingersoll’s balance grows from $538,864 on June 30, 2007 to $3,551,328 by June 30, 2012.  (The Academy makes no attempt to demand repayment from Ingersoll until 2013, although official court records confirm Ingersoll does make a $704,000 payment to the Academy on June 30, 2011 using money diverted from a $1.8 million dollar Chemical Bank loan he obtained for renovation of his Bay City Academy.)

May 20, 2013 At Ingersoll’s request, Grand Traverse Academy Board president Mark Noss calls a meeting with the entire Board, Ingersoll and Academy attorney Margaret Hackett. Ingersoll, acknowledging to the Board that he’s under federal investigation for fraud and tax evasion, pleads with the members to characterize his $3.5 million dollar Smart Schools Management, Inc. debt to the school a “loan”.

May 30, 2013 Margaret Hackett issues a legal opinion (referred to during Ingersoll’s federal trial as the “Thrun letter”) to the Academy Board. The contents of the letter have never been publicly revealed. However, according to Hackett’s testimony during Ingersoll’s trial, Steven Ingersoll told those attending the May 20, 2013 meeting that he “could not afford to pay that (his Academy debt) and his taxes all at the same time”, and needed to have the debt characterized as a loan. When asked by the government during Ingersoll’s trial if the Grand Traverse Academy, as a public school academy, was even allowed to make a loan, Hackett said no.

Saying that the Grand Traverse Academy had “no legal authority” to loan money to Steven Ingersoll, Hackett explained that Michigan law prohibits a public body, like the appointed board of a charter school, from making any loans.

June 7, 2013 At the suggestion of its auditor, Traverse City accounting firm Dennis, Gartland & Neirgarth, the Academy Board adopts a resolution requiring Smart Schools Management to apply all future management fee earnings against the $3,551,328 “related party receivable” until a zero balance is achieved. The resolution reinforces that no cash payments will be made to Steven Ingersoll for management services until his entire debt is repaid.

(In a November 25, 2013 letter to auditor John Brooks at the Michigan Department of Education’s Office of Financial Management, Board attorney Doug Bishop reveals one whopping exception: a $332,000 cash payment authorized by the Board to Steven Ingersoll to cover his “pre-obligated annual debt service of Smart Schools Management”. The existence of that payment is never publicly disclosed by the Academy.)

In addition, the management agreement between the Grand Traverse Academy and Steven Ingersoll’s Smart Schools Management, Inc. is never amended to include the repayment terms outlined in the June 7, 2013 resolution.

June 13, 2013 Grand Traverse Academy attorney Doug Bishop sends Ingersoll a "demand letter", seeking the immediate repayment of $3,548,319. Bishop’s letter states his firm had been “directed by the Board to make a demand for immediate payment of all amounts due from Smart Schools Management, Inc. and/or Steve Ingersol (sic). These amounts include, but are not necessarily limited to, any amount formally designated as a receivable on Grand Traverse Academy’s financial statements.”

June 16, 2013 Ingersoll responds to Bishop’s letter, sternly

reminding the Grand Traverse Academy of its “symbiotic” relationship with Ingersoll’s Smart Schools Management: “The financial relationship between the Grand Traverse Academy (GTA) and Smart Schools Management (SSM) has been symbiotic from the inception of the Academy. The board previously recognized in a formal resolution (a May 4, 2012 “reimbursement resolution”) the various and financial contributions of SSM and made clear its intent to honor those contributions monetarily as resources allow.“

Symbiosis is a biological concept — roughly defined as a partnership between organisms — that has helped living creatures innovate and expand into new niches for billions of years. There are small fish that swim right into the mouths of large predatory fish to clean their parasites — the little fish gets some food and the big fish forgoes eating the little fish in exchange for getting its parasites removed.

But the dynamic-mutualism that may have existed “from the inception of the Academy” eventually turned parasitic, with the Board ceding more control to Ingersoll’s Smart Schools Management. It’s not impossible to say which side got the best end of this relationship — and it wasn’t the partner left with an estimated $1.7 million dollar loss.

In this June 16 response to Doug Bishop’s June 13 letter, Ingersoll asserts the “financial structure of the Academy and its relationship with SSM has been vetted each year of its existence by independent audit, Standard and Poor’s rating evaluation, various government agencies, numerous financial institutions and others from both public and private sectors.”


An outrageously ballsy claim, considering Ingersoll’s letter was written less than 30 days after he (1) told the Academy Board he was under federal investigation, (2) admitted he could not pay the estimated $3.5 million dollars owed to the school, and (3) asked to have the debt characterized as a loan!

But take a closer look at Standard & Poor’s long-term rating of the Grand Traverse Academy’s $16.0 million dollar Series 2007 municipal bond (shown above), and you’ll see recognition of increased volatility in the school’s liquidity during the past five years [NOTE: 2007-2012] — hey, the same years during which Ingersoll systematically racked up his estimated $3.5 million dollar management fee overpayment balance!

Did Ingersoll exploit his ability to advance management fees from the Grand Traverse Academy when he got in over his head on both the Bay City Academy and his personal real estate development interests and, if so, how much did his scheme compromise the school’s liquidity?

Just a coincidence — or the cause?

June 30, 2013 The Grand Traverse Academy board and Ingersoll agree on a “repayment plan”, revealing the details in the Academy’s 2013 financial statement. The agreement allows Ingersoll to “work off” his $2.38 million dollar balance by foregoing management fee payments over three fiscal years: 2014: $774,000; 2015: $960,000; 2016: $604,980.

The difference between the demand letter amount ($3,548,319) and the $2.38 million dollar balance (reclassified in 2013 as a “prepaid balance” from a 2012 “related party receivable”) is never explained.

However, the management contract between the Grand Traverse Academy and Ingersoll’s Smart Schools Management, Inc. is not amended to include the terms of the “repayment plan”.

July 12, 2013 DGN issues a “Forensic Audit Proposal” memo to Grand Traverse Academy board president, Mark Noss.  In the memo, DGN states its understanding that Noss, on behalf of the Grand Traverse Academy, had been "advised to obtain an independent third party to verify the amount recorded as accounts receivable" on the Academy's financial statements by Steven Ingersoll's Smart Schools Management, Inc. 

The Grand Traverse Academy Board engages DGN to produce the report for an estimated $5,000 fee.

September 10, 2013 DGN issues its report to Mark Noss at the Grand Traverse Academy, and it's a veritable dick punch!

The report reveals, among other observations, that by “any objective measure, the fee arrangement lacks economic substance and accountability, provides an opportunity for abuse, and is structured to potentially become a benefit of a private party. It permits Smart Schools Management, Inc. to maximize their fee in good years and reduce their fee in poor years, leaving the impression that Smart Schools Management is forgoing payment for the benefit of GTA; when in actuality, Smart Schools Management is holding the Grand Traverse Academy’s funds in the process.”

The findings of the report are suppressed and never publicly disclosed by the Academy.

October 29, 2013 Grand Traverse Academy attorney Doug Bishop sends a letter to John Brooks, an auditor in the Michigan Department of Education’s Office of Financial Management regarding DGN’s September 10, 2013 findings.

Sidestepping the impact of his June 13, 2013 demand letter seeking the return of $3.5 million dollars on behalf of the Academy, Bishop narrowly insists the Academy “did not make any payments to Smart Schools Management not authorized by the Board of Directors in GTA’s budget”.

However, Bishop neglects to mention an important fact: while Ingersoll may have taken his management fee based on an approved prelimary Board budget, he declined to return the balance after the budget was adjusted downward at the end of a fiscal year.

Bishop asserts that while “concern has been raised that the ultimate affect of these payments, when the budget was reduced, resulting in the receivable, may have been an inadvertent (at least as far as the GTA is concerned) violation of the Uniform Budget Accounting Act (UBAA)”, he claims that it is “the position of the GTA that there has been no violation of the UBAA, nor of the Michigan Constitution”.

November 25, 2013
Grand Traverse Academy attorney Doug Bishop informs Michigan Department of Education’s Office of Financial Management in a letter to John Brooks that the Academy has determined that it will not pay Smart Schools Management’s fee, instead crediting the monthly fee amounts against the outstanding receivable until it has been reduced to “zero”.

However, Bishop reveals one whopping exception: a $332,000 cash payment authorized by the Board to Steven Ingersoll to cover his “pre-obligated annual debt service of Smart Schools Management”. The existence of that payment is never publicly disclosed by the Academy in its 2013 financial annual report.

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