BEFORE YOU READ MY STORY ABOUT THE GRAND TRAVERSE ACADEMY'S EXPANSION, YOU NEED TO READ THIS!
If you need a poster child for the failure of Michigan’s charter school financial oversight, look no further than Steven Ingersoll (shown at left).
Convicted on March 10, 2015 on three counts of tax evasion and conspiracy, and sentenced on December 15, 2016 to 41 months in federal prison, Ingersoll owned and formerly managed the Bay City Academy and managed the Grand Traverse Academy until days before his April 10, 2014 indictment.
Between 2007-2012, Ingersoll fraudulently converted an estimated $5.0 million from the Traverse City charter school's funds to his various bank accounts— but has yet to be investigated or charged with that illegal diversion.
And what about the Grand Traverse Academy’s Board of Directors?
After much public posturing, it opted not to pursue any legal remedy to recover the money, and that’s where it stands.
However, a May 30, 2013 legal analysis delivered to Mark Noss at the Grand Traverse Academy by Margaret Hackett of the Thrun Law Firm detailed the firm’s examination of Steven Ingersoll’s financial maneuvering and acts of self-dealing revealing he took advantage of his position as the Traverse City charter school’s Chief Administrative Officer.
The once confidential 15-page legal analysis, released publicly by government prosecutors as an exhibit in Steven Ingersoll’s sentencing hearing, was delivered to the Grand Traverse Academy Board 13 months before Ingersoll was indicted.
The letter revealed that Ingersoll had secretly opened a second general fund bank account, manipulated financial records (with a series of furtive bank transfers) to make it appear he had repaid his massive debt in 2011, and asked the board to characterize his $3.5 million-dollar debt as a “loan” because he “needed” it.
Like a black bra under a sheer white blouse, the Thrun letter revealed just enough to make you crazy for more.
Here’s is the definitive analysis of the circumstances leading to the Thrun letter, and Ingersoll’s continued financial misdeeds while head of the Grand Traverse Academy’s management firm, Smart Schools Management, Inc.
Instead of implementing the recommendations outlined in a 15-page May 30, 2013 legal opinion the Grand Traverse Academy board of directors received from the Thrun Law Firm, the board instead inexplicably formed what appeared to be an alliance of convenience with Steven Ingersoll, including this deceptive statement read publicly during the Academy's July 17, 2014 Board meeting by its then 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 $3.3 million 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.”
I have investigated and analyzed the board's actions and discovered many intriguing (and as yet unanswered) questions:
Why did the board reject much of the Thrun Law Firm’s recommendations, choosing to smother the issues it raised and enter instead into an alliance of convenience with Steven Ingersoll?
Why did the board portray Ingersoll to the community as a philanthropist instead of a thief, a thief who may have misappropriated millions of dollars?
And why would the Grand Traverse Academy board leave Ingersoll in charge of the school's management—and its money—while its members were aware Ingersoll was under federal investigation would soon be indicted on federal 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”.
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 just 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.”
Here is an excerpt from the Thrun letter, which details its financial examination of Ingersoll's claims:
By way of example, Tony Henning represented that SSM had repaid the “receivable” or “prepaid expense” in full during the 2011-2012 fiscal year and that this account or journal entry was “zeroed out”.
We specifically asked Steve Ingersoll if this was the case during the May 20th meeting and Steven 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.)
Based on these representations made by Tony Henning and Steve Ingersoll, we reviewed the bank statements, in part, to determine how a debt of $3.5 million accumulated within the same fiscal year following repayment.
Had these representations proven to be accurate, this would directly impact the magnitude and extent to which Steven Ingersoll and/or SSM had deviated from the Board approved budget and appropriations made for the 2011-2012 fiscal year and thereby violated certain governing statutes.
An additional purpose of requesting and analyzing the general fund bank statements was to address assertions made by Tony Henning, Kaye Mentley and Steve Ingersoll that SSM was entitled to unpaid management fees which would presumably shed light on the accumulation of this debt.
To be clear on this point, we found no support in the Management Agreement dated July 1, 2009, annual budgets adopted and approved by the Board, or within the financial records to suggest that the Academy owes any additional management fees to SSM.
To the contrary, the documentation we have reviewed reflects that SSM was paid the full management fee approved by the Board in the annual budgets.
In addition to this fee, Steve Ingersoll and/or SSM then withdrew a sum exceeding $3.5 million from the Academy’s general fund account(s) as of June 30, 2012.
Inexplicably, the Academy board ignored Thrun’s recommendation, using instead 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 stated 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 would 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 revealed 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 was never publicly disclosed by the Academy.
In addition, the management agreement between the Grand Traverse Academy and Steven Ingersoll’s Smart Schools Management, Inc. was 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, 2013 letter, Ingersoll appeared to back away from his May 20, 2013 acknowledgement (made during the meeting with the Thrun Law firm’s Margaret Hackett, Kaye Mentley and Mark Noss) of his $3.5 debt to the charter school, 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 May 30, 2013 Thrun legal recommendation letter), during the May 20, 2013 Grand Traverse Academy board meeting, Ingersoll did not dispute the opinion that he owed the Academy roughly $3.5 million, acknowledging the amount and asking that his indebtedness be characterized as a “loan”, not a debt.
In its May 30, 2013 letter, Thrun confirmed that during the May 20th Academy board 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 those funds.”
During the meeting, Thrun lawyers advised the Academy board that it “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.
By June 30, 2013, the Grand Traverse Academy board and Ingersoll agreed on a “repayment plan”, revealing the details in the Academy’s 2013 financial statement.
The agreement was crafted to allow 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”, the Academy board ignored Thrun’s legal advice, tacitly agreeing with Ingersoll that his debt was a “loan”, and allowing him to wriggle off hook.
On July 12, 2013, Traverse City accounting firm Dennis, Gartland & Neirgarth (DGN) 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 did 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 DGN report later revealed, 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 were suppressed and never publicly disclosed by the Academy.
On October 29, 2013, Grand Traverse Academy attorney Doug Bishop issued 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 insisted 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 preliminary 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 effect 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”.
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 said 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 disagreed, on behalf of the Grand Traverse Academy, calling the systematic looting of at least $3.5 million dollars from the school “inadvertent”.
Later, on November 25, 2013, Grand Traverse Academy attorney Doug Bishop informed the Michigan Department of Education’s Office of Financial Management (in a letter to John Brooks) that the Academy had 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”.
In the letter, Bishop revealed 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.
As calendar year 2013 drew to a close, Mark Noss sent an email to Steven Ingersoll on December 9, 2013 regarding a dispute that arose after the Academy board’s November 8, 2013 meeting.
According to government documents revealed in connection with Ingersoll’s federal sentencing hearing, Ingersoll sent an email to Noss on November 24, 2013 decrying DGN’s presentation of the “final audit and unexpected finding that implied ‘abuse’ of public funds.”
Ingersoll went 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 appeared 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 reminded him 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.”
In his December 9, 2013 response, Noss assured Ingersoll that he had “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 management’s response to the audit.”
Did Mark Noss forget the shocking disclosures in the May 30, 2013 Thrun letter regarding Ingersoll’s bogus 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 stated “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 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 his Smart Schools Management, Inc. account to a Grand Traverse account—and then repaid himself with the money he’d just paid the Academy.
So how could—and why would—Mark Noss forget that?
During the months after the Thrun Law firm's letter was delivered to the Grand Traverse Academy’s board of directors on May 30, 2013, the board’s promiscuous relationship with the truth grew even more flagrant.
Ingersoll’s misuse of his position of trust clearly continued even after his financial abuses were exposed to the Grand Traverse Academy board by the Thrun Law Firm.
The question is...why?
Although Ingersoll sent the November 24, 2013 email to then Grand Traverse Academy Board president, Mark Noss, he'd previously sent a letter the Board's attorney, Douglas Bishop, accompanied by the same selectively chosen bank records.
The bank records Ingersoll provided to Bishop on June 16, 2013 purported to demonstrate that Ingersoll had actually transferred $1,813,330 from Smart Schools Management, Inc. account back to the Grand Traverse Academy's account are described by Ingersoll as “bank statement entries of SSM outgoing and GTA incoming transfers from SSM to GTA that you had requested”.
Notice the description: 'bank statement entries', and not 'bank statements'.
However, Ingersoll did not disclose to Bishop that he had also transferred funds from the Grand Traverse Academy account to his Smart Schools Management, Inc. account before making his so-called payments.
According to documents released October 19, 2015 by the government, just prior to the start of Ingersoll's sentencing hearing, the net impact of the transfers made by Ingersoll from July 1, 2012 to December 31, 2012 between the accounts for the Grand Traverse Academy and Smart Schools Management, Inc. was that Smart Schools Management, and therefore Ingersoll, received over $110,000 more from the Grand Traverse Academy than the Academy had received from Smart Schools Management.
But Doug Bishop could have uncovered Ingersoll's scheme if he'd demanded that Ingersoll provide him with copies of actual bank statement records for both Smart Schools Management and the Grand Traverse Academy instead of the fabricated financial documents Ingersoll proffered.
But Bishop didn't...and neither did then board President Mark Noss.
Instead, mere months after receiving the devastating Thrun letter (which outlined Ingersoll's fiscal abuses in excruciating detail), both men chose to accept Steven Ingersoll's claims—overlooking his self-serving financial statements and making no effort to independently confirm what Ingersoll had claimed.
Why would they do that?
An answer may be found in the Grand Traverse Academy's 2013 financial statement, the report containing the allegation that Ingersoll had not repaid money his Smart Schools Management, Inc. owed to the Grand Traverse Academy, and that Smart Schools Management's ability to prepay its management fee and withhold payment of overpaid fees enabled “the abuse of Smart Schools Management, Inc. in their access of public funds”.
“As the Academy completed the year, its governmental funds reported a combined fund balance of $2.37 million, a decrease of approximately $384,000. Approximately $2.34 million of the fund balance is not in spendable form for expenses that have been prepaid.
As described in Note M to the financial statements, the Academy has advanced Smart Schools Management, Inc. $2,338,980 as of June 30, 2013, resulting in deficit unassigned fund balance. The Academy has accepted a repayment plan from Smart Schools Management, Inc. in which the management company will work off the prepayment by partially reducing cash transfers for future management fees through June 30, 2016. We have reported findings related to the advance of prepaid fee, “the abuse of Smart Schools Management, Inc. in their access of public funds”, and the negative unassigned fund balance in our report in accordance with Government Auditing Standards noted below.”
In the Notes section, DGN calls attention to “related party activities”:
“In July 2009, the Academy entered into a seven-year agreement with Smart Schools Management, Inc. Under the terms of this agreement, Smart Schools Management, Inc. provides a variety of services including financial management, leased employees, education programs and consulting, as well as teacher training. Management fees, leased employees, and curriculum material totaled $1,347,234, $4,680,661, and $300,000, respectively, equal to the amount budgeted for the year ended June 30, 2013.
The contract states the maximum management fee shall not exceed $2,000,000 in any fiscal year. The Board passed a resolution on May 4, 2012 maintaining a management fee of 12% of revenue, or approximately $1,053,000. The management fee exceeded the 12% amount by approximately $294,000.
The intent of the Board in the May 4, 2012 resolution was the recognition of the past and ongoing contributions of Smart Schools Management, Inc. Total payments to Smart Schools Management, Inc. during the year totaled $6,946,462 and refunds total $1,897,805.
As of June 30, 2013, the Academy carried a prepaid expense/expenditure balance of $2,338,980 for payments made to Smart Schools Management, Inc.
The prepaid expense/expenditure is expected to be received as follows: 2014 $774,000; 2015 $960,000; 2016 $604,980.
(Another Ingersoll-controlled entity, GTAS, LLC, provided janitorial services to the Academy for fees totaling $232,000 in 2013.)
Under “prepaid expenses”, DGN called out Ingersoll's Smart Schools Management, Inc. for its ability to prepay the management fee and withhold payment of overpaid fees, which enabled Smart Schools Management, Inc. to “abuse their access to public funds”.
This section, Note M in the June 2013 Grand Traverse Academy financial statement, is exactly what Noss referenced in his December 9, 2013 email response to Steven Ingersoll.
Assuring Ingersoll in that email, Noss stated 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 made the right decision in accepting management’s response to the audit.”
“We are all comfortable that we made the right decision in accepting management’s response to the audit.”
Management's response to the audit—the one based on false financial information from Steven Ingersoll—and not the independent opinion of its auditor, DGN.
Is there anyone who still believes Ingersoll was the only one helping himself to the taxpayer millions that flowed into (and out of) the Grand Traverse Academy?