}

Friday, October 30, 2015

A PROMISCUOUS RELATIONSHIP WITH THE TRUTH: What Happened After The Grand Traverse Academy Board Received The Thrun Law Firm Letter, What Didn't Happen...And Why Didn't It Happen!

Beginning in 2007, and continuing for six years until 2012, at the beginning of each fiscal year (July 1), Steven Ingersoll advanced his entire annual Smart Schools Management, Inc. fee directly from the Grand Traverse Academy’s bank account before he had earned it — and before he was entitled to receive it. Although based on Board-approved preliminary budget figures, Ingersoll’s management fees are later adjusted downward after actual budgets are calculated. 
However, Ingersoll never repaid the difference between the amount he'd advanced himself, and the actual management fee he was contractually allowed to receive.

Although the Grand Traverse Academy’s financials revealed that although Ingersoll initially classified his fee advance as a “prepaid expense”, he knew that the money would need to be reclassified as a “receivable” before the end of each fiscal year.

Ingersoll reclassified the amount previously listed as a “prepaid expense” just prior to the end of each fiscal year, terming it a “receivable”. If he had not, Ingersoll knew the Grand Traverse Academy would need to expense the money in the succeeding fiscal year — and Ingersoll (and Smart Schools Management, Inc.) would be required to recognize it as income.

In addition, that large of an expense for the Grand Traverse Academy would have exceeded the one percent variance in its approved budget.  (The State of Michigan Department of Education imposes this restriction on school budgets.)

If that variance were to occur, it would raise a red flag on the Grand Traverse Academy’s financial statements, prompting the State of Michigan and presumably the Grand Traverse Academy Board to make inquiries as to why there was such a huge leap in expenses.

As the Grand Traverse Academy’s Chief Administrative Officer, Ingersoll was aware of the Michigan Department of Education regulation and likely had been for years.

Instead, each year Ingersoll reclassifies the management fee overpayment amount he owes to the Grand Traverse Academy as a “receivable” from Smart Schools Management, and Ingersoll’s debt to the charter school grows from $538,864 on June 30, 2007 to $3,551,328 by June 30, 2012.


However, instead of implementing the recommendations outlined in a 15-page May 30, 2013 legal opinion it received from the Thrun Law Firm, the Grand Traverse Academy Board instead inexplicably formed what appears to be an alliance of convenience with Steven Ingersoll, including this colossally deceptive statement read publicly during the Academy's July 17, 2014 Board meeting by its President, optometrist Brad Habermehl:

If not for the efforts and intellectual contributions of Dr. Steven Ingersoll and Kaye Mentley and Smart Schools’ willingness to rebate its earnings, GTA would not likely exist today. Over the years GTA needed substantial financial support and Smart Schools always supplied what the Academy needed.

Analysis of GTA’s audited financial statements and board minutes from June, 2004 through March, 2014 shows that Smart Schools gave GTA from its budgeted and contractually authorized earnings. Additionally, Smart Schools planned to rebate another $1.6 million from its future earnings which is classified on GTA’s books as a non-spendable asset.

Smart Schools founded and funded GTA from its origin. GTA flourished in large part because Smart Schools was willing to rebate its contractually budgeted, authorized earnings during GTA’s lean years of infancy, expansion and State funding reductions.
 

With Smart Schools no longer associated with GTA the board will now go into closed session to consider disposition of the $1.6 million non-spendable asset.”
  
Miss Fortune examines the Board's actions and finds many intriguing (and as yet unanswered) questions: why did the Board reject much of Thrun's recommendations, choosing to smother the issues it raised and instead enter into an alliance of convenience with Steven Ingersoll? And why did the Board present Ingersoll to the community as a philanthropist instead of a thief who may have stolen over $3.5 million dollars? And why would the Grand Traverse Academy Board of Directors leave Ingersoll in charge of the school's management when they were aware he would likely soon be indicted on tax fraud charges?

In a pre-hearing brief filed on October 19, 2015, government prosecutors cited the fee arrangement scheme Ingersoll utilized with the Grand Traverse Academy. Stating that “Ingersoll took millions of tax dollars from the Grand Traverse Academy, diverted the money to his own use, and used his position relative to GTA, other people and his entities to conceal that he had done so”, the government said that “Ingersoll abused the position of trust that gave him that ability to enrich himself at the expense of the taxpayers”.

THRUN LAW FIRM LETTER RECAP

According to the May 30, 2013 Thrun Law Firm Letter to former Grand Traverse Academy Board President Mark Noss, the issue before the Board “relates to funds withdrawn from the Academy’s general fund by Steven Ingersoll and/or representatives of SSM, which exceed the amount appropriated or authorized by the Board to be paid to SSM for either management fees or the reimbursement of Academy expenses.”

The letter estimated Ingersoll’s debt to the Traverse City charter school at $3,548,319 (based on information provided by Ingersoll’s handpicked CPA, Tony Henning). As Henning had relied solely on “financial reports and representations of Steve Ingersoll” to determine the amount, Thrun repeatedly urged the Grand Traverse Academy Board of Directors to “independently verify the full sum due” instead of merely accepting Henning’s number. 


Thrun represented the interests of the Academy and the Board, not Steven Ingersoll and Smart Schools Management, affirming in its May 30, 2013 letter that “Steven Ingersoll openly admitted, when asked by us during the May 20th meeting, that a conflict exists between his personal interests and the interests of the Academy.”

THE ACADEMY STRIKES BACK

However, the Academy Board ignored Thrun’s repeated recommendation, instead using Henning’s exact $3,548,319 amount in its June 13, 2013 “demand letter” to Steven Ingersoll. 

Issued by Academy attorney, Doug Bishop, the 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.”

(During its June 7, 2013 meeting, the Academy Board adopted 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 reinforced that no cash payments will be made to Steven Ingersoll for management services until his entire debt is repaid.)
 

However, 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.

On June 16, 2013, Steven Ingersoll responded to Bishop’s letter, 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.“

In his response to Bishop’s June 13 letter, Ingersoll appears to back away from his May 20, 2013 acknowledgement of his $3.5 debt, asserting instead that 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.”
 

Significantly, according to the Thrun letter, at the May 20, 2013 Grand Traverse Academy board meeting, Ingersoll did not dispute that he owed the Academy $3.5 million, but rather asked that the his indebtedness be characterized as a loan.

In its May 30, 2013 letter, Thrun confirms that during the May 20 Academy meeting “Steve Ingersoll specifically proposed that the Board agree to characterize this as a loan and candidly stated that he “needed” the $3.5 million to be designated a loan in order to avoid the tax liability that the IRS is threatening to attach to thse funds.”

During the meeting, Thrun indicated that the Academy “did not have the requisite authority to enter into a loan or repayment plan which would document this transaction as a loan.” Ingersoll then stated that “he did not have sufficient money to immediately repay the $3.5 million that he and/or SSM owes to the Academy and repay his tax liability at the same time.”
 

However, judging from the position he took in his June 16, 2013 letter to Grand Traverse Academy’s attorney Doug Bishop, Ingersoll began to recant his acknowledgment. 

On 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 the remaining three fiscal years of his management contract: 2014: $774,000; 2015: $960,000; 2016: $604,980.

In its May 30, 2013 letter to Mark Noss at the Grand Traverse Academy, Thrun recommended against agreeing to Ingersoll’s “proposed repayment plan” which would not only lock the Academy into $3.5 million as the amount owed to the school by Ingersoll, it would tend to “characterize this amount as a ‘loan’ from the Academy” to Ingersoll”.
 

Mischaracterizing Ingersoll’s massive misappropriation as a loan, according to Thrun, would “subject the Academy and potentially Board members individually, to liability on a number of levels.”

By agreeing to a so-called “repayment plan”, it appears the Academy once again ignored Thrun’s legal advice, choosing instead to allow Ingersoll off hook.

On July 12, 2013, Traverse City accounting firm Dennis, Gartland & Neirgarth issued a “Forensic Audit Proposal” memo to Grand Traverse Academy Board president, Mark Noss. 

In the memo, DGN stated 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.
 

However, that narrow definition does not square with the repeated recommendation by Thrun that the Academy conduct an independent forensic audit “in order to accurately establish the amount owed to the Academy by Steve Ingersoll.” A clear conflict exists in this regard, with DGN making no independent investigation into the accuracy of Ingersoll’s audit reports, his general ledger, bank statement reconciliations, etc.

The report later 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.
 

On October 29, 2013, Grand Traverse Academy attorney Doug Bishop issues 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 neglected to mention an important fact: although Ingersoll may have taken his management fee based on an approved prelimary Board budget, he declined to return the difference after the budget was adjusted downward at the end of a fiscal year.
 

Bishop asserted 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”.

However, in its letter, the Thrun Law Firm stated that the UBAA “establishes budgeting and accounting requirements applicable to local units of government, including public school academies. Without the benefit of having complete information related to some of the transactions that occurred in this case, it is not possible for our office to enumerate every potential violation of the UBAA. However, based on the information that we have obtained and reviewed this far, certain actions taken by Steve Ingersoll and/or SSM represent a clear violation of various provisions of the UBAA.”

Continuing, Thrun says the UBAA “provides that no expenditure may be made without the authority of an appropriation. Sections 18 and 19 prohibit district staff, or in this case a contracted professional, from expending funds that are not authorized in the district’s approved budget. Based on our review it is safe to conclude that the $3.5 million in payments to SSM by Steve Ingersoll were not authorized by the Board and not appropriated in the adopted budget, regardless of whether Steve Ingersoll identifies this sum as a prepaid expense or a receivable.”

But Doug Bishop disagrees, on behalf of the Grand Traverse Academy, calling the systematic looting of at least $3.5 million dollars from the school “inadvertant”.

Later, on 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 Ingersoll’s outstanding debt 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 2013/2014 financial annual report.

And 2013 closes with a December 6, 2013 email from Mark Noss to Steven Ingersoll regarding a dispute that arose after the Academy Board’s November 8, 2013 meeting. According to government documents revealed in connection with Ingersoll’s ongoing sentencing hearing, Ingersoll sent a November 24, 2013 email to Noss decrying DGN’s presentation of the “final audit and unexpected finding that implied ‘abuse’ of public funds.” Ingersoll goes on to complain to Noss that DGN had based its finding “on their stated position that SSM had not transferred cash to service the FYE accounts receivable balance on GTA’s books at FYE 12.”

Ingersoll appears to be disputing DGN’s contention that he had not transferred cash from his accounts to the Grand Traverse Academy to “service the FYE accounts receivable balance” during the fiscal year that ran from July 1, 2011 through June 30, 2012. In his email to Mark Noss, Ingersoll reminds Noss that “I disputed that contention both verbally and in management’s written response. The auditors verbally repeatedly stated that there was no evidence of cash transfers. I have stated that bank statements that they should have reviewed would confirm those transfers. I have attached the confirming bank statements for your review. Please share these statements with your board member colleagues to give them comfort that those transfers did occur.”

Noss responds on December 9, assuring Ingersoll that he has “sent these bank statements to all board members and followed up with phone calls to each member to discuss this. Every board member saw and understood that these transfers took place and agreed that no ‘abuse of funds’ took place. We are all comfortable that we may the right decision in accepting managemnent’s response to the audit.”

Did Mark Noss forget what was disclosed in the May 30, 2013 Thrun letter regarding Ingersoll’s claim that he’d “repaid” the amount previously owed to the Academy in July 2011?

Or that the letter revealed former Grand Traverse Academy auditor Tony Henning had erroneously represented to the Thrun Law Firm that Ingersoll’s Smart Schools Management had repaid the “receivable” or “prepaid expense” in full during the 2011-2012 fiscal year and that this account had been “zeroed out”?

Thrun specifically asked Steven Ingersoll if this was the case during the May 20, 2013 meeting and Ingersoll confirmed that SSM had repaid the amount in full. (The amount owed at the end of 2011-2012 fiscal year as reported by Steve Ingersoll and reflected in Note 4 of Notes To Financial Statements was $2,500,000.)

However, upon receiving what the firm thought were the remaining general fund statements, contacted auditor Tony Henning via phone conference to address several remaining inconsistencies and related concerns. During the call, Thrun states “we again inquired as to the repayment of the “receivable” by SSM in 2011, noting that we could not find evidence of a repayment in any of the bank statements we had received.”

“At this point, Tony Henning alerted us to the fact that a second general fund depository account had been opened for the Academy, of which we had not been informed, nor had we been provided with any statements related to this account. Specifically, our office had only been provided with bank statements for the Academy’s depository account with Traverse City State Bank. A second general fund account for the Academy with Fifth Third Bank is actively used by Steve Ingersoll/SSM and reflects a substantial number of draws and other transactions related to SSM. Unfortunately, this substantially compromised a number of initial conclusions we had reached based on what we were told represented all general fund bank statements.”

Thrun ultimately discovered that although Henning initially confirmed that a repayment of the outstanding receivable had occurred in July of 2011 in the approximate amount of $2.5 million and that this transaction was through the (secret) Fifth Third account, “upon further analysis of the general fund ledger entries it became evident that a corresponding transfer was made out of the Academy’s accounts on June 30, 2011, which essentially offset this “repayment”.

To put it simply, Ingersoll transferred money from the secret Grand Traverse Academy’s bank account to his Smart Schools Management, Inc. account — and then repaid the account with the money he’d just taken.

So how could — and why — would Mark Noss forget that?

During the months after Ingersoll was indicted, the Grand Traverse Academy Board’s promiscuous relationship with the truth grew even more flagrant.


On Monday, Miss Fortune wraps up her exclusive examination of how Steven Ingersoll took taxpayer money from the Grand Traverse Academy in amounts that greatly exceeded the management fee owed to him and his wholly-owned Smart Schools Management.


Was it just his so-called “charismatic powers of persuasion”...or did he have inside help?


3 comments:

  1. The Grand Traverse Academy was his 'baby' all right...it was his lucrative money maker without controls, oversight. I guess his baby's name was 'Bucky'?

    ReplyDelete
  2. Do you have any idea when sentencing will conclude since the local paper is on sabbatical?

    ReplyDelete