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UNO charter schools charged with securities fraud by SEC

The largest charter school organization in Chicago, UNO charter schools, was charged on June 2, 2014 with securities fraud by the Securities and Exchange Commission (SEC). The SEC revealed in unsealing its complaint that UNO had issued bonds with the help of Illinois Governor Pat Quinn while misrepresenting conflicts of interest in how it handled its contractors. The conflicts, revealed after an investigation by the Chicago Sun-Times, involved then-UNO officials, both of whom have since resigned.

Juan Rangel speaking at a press conference outside the Board of Education on January 26, 2011. Substance photo by David Vance.In a June 2, 2014 press release, the SEC outlined the charges and stated that it had reached a settlement with UNO that will involve, among other things, monitoring.

"The Securities and Exchange Commission today charged a charter school operator in Chicago with defrauding investors in a $37.5 million bond offering for school construction by making materially misleading statements about transactions that presented a conflict of interest," the SEC June 2 press release stated.

"The SEC alleges that UNO Charter School Network Inc. and United Neighborhood Organization of Chicago not only failed to disclose a multi-million-dollar contract with a windows company owned by the brother of one of its senior officers, but investors also werent informed about the potential financial impact the conflicted transaction had on its ability to repay the bonds.

"UNO is settling the SECs charges by agreeing to undertakings to improve its internal procedures and training, including the appointment of an independent monitor."

UNO Chief Executive Officer Juan Rangel delivered a major address outlining the planned expansion of the UNO charter schools in Chicago at the organization's 25th anniversary party in November 2010. The event, held in the main hall of Chicago's Union Station, featured the then mayor of Chicago, Richard M. Daley (obscured in the above photo behind Rangel) and the future mayor Rahm Emanuel (second from right above). Substance photo by George N. Schmidt.UNO was not just any charter schools organization. Juan Rangal, then the UNO chief, served on Rahm Emanuel's election campaign and was an advisor to Rahm during the transition after he won the mayoral election. UNO was also hired as a consultant to provide guidance to New Orleans when New Orleans destroyed its real public schools following Hurricane Katrina. One of the results of the New Orleans charter schools expansion, which was assisted by among others Paul G. Vallas, was the destruction of the oldest and most influential majority-black unions in the state of Louisiana, the United Teachers of New Orleans.

In a press release on Monday, June 2, the SEC stated: UNO misled its bond investors by assuring them it had reported conflicts of interest in connection with state grants when in fact it had not, Andrew J. Ceresney, director of the SECs Division of Enforcement, said... Investors had a right to know that UNOs transactions with related persons jeopardized its ability to pay its bonds because they placed the grant money that was primarily funding the projects at risk.

The Board at its May 28, 2014 meeting approved a major expansion of the UNO charter schools, literally on the eve of the SEC revelations. The vote to expand UNO came during the time when the Board members were aware of the scandals involving UNO. By a unanimous vote at the May 28 meeting, the Board passed Board Report 14 0528 EX5. That vote added more than 1,000 students to UNOs authorized size, increased the number of UNO campuses to 17 (by the 2014 school year), and provided other benefits to UNO. The Board's vote continues UNO as Chicagos largest charter school in terms of total number of students. Not one member of the Board asked any questions about any of the charter schools expansions that were on the May 28 agenda. The UNO expansioin was the greatest despite the scandals that UNO had been involved in even before the SEC report.

SEC PRESS RELEASE ISSUED ON JUNE 2, 2014:

SEC Charges Charter School Operator in Chicago With Defrauding Bond Investors. FOR IMMEDIATE RELEASE. 2014-110

Washington D.C., June 2, 2014 The Securities and Exchange Commission today charged a charter school operator in Chicago with defrauding investors in a $37.5 million bond offering for school construction by making materially misleading statements about transactions that presented a conflict of interest.

The SEC alleges that UNO Charter School Network Inc. and United Neighborhood Organization of Chicago not only failed to disclose a multi-million-dollar contract with a windows company owned by the brother of one of its senior officers, but investors also werent informed about the potential financial impact the conflicted transaction had on its ability to repay the bonds.

UNO is settling the SECs charges by agreeing to undertakings to improve its internal procedures and training, including the appointment of an independent monitor.

UNO misled its bond investors by assuring them it had reported conflicts of interest in connection with state grants when in fact it had not, said Andrew J. Ceresney, director of the SECs Division of Enforcement. Investors had a right to know that UNOs transactions with related persons jeopardized its ability to pay its bonds because they placed the grant money that was primarily funding the projects at risk.

According to the SECs complaint filed in federal court in Chicago, UNO entered into two grant agreements with the Illinois Department of Commerce and Economic Opportunity (IDCEO) in 2010 and 2011 to build three schools. Each grant agreement contained a provision requiring UNO to certify that no conflict of interest existed when it signed the agreements. UNO was required to immediately notify IDCEO in writing if any actual or potential conflicts subsequently arose. If UNO breached this conflict of interest provision, IDCEO could suspend the payment of grants and recover grant funds already paid to UNO.

According to the SECs complaint, UNO breached the conflict of interest provision as it entered the construction phases of the project in 2011 and 2012. UNO contracted two companies owned by brothers of its chief operating officer. UNO agreed to pay one company approximately $11 million to supply and install windows and the other company approximately $1.9 million to serve as an owners representative during construction. UNO did not advise IDCEO in writing about either of those conflicted transactions.

The SEC alleges that when UNO conducted its $37.5 million bond offering in October 2011, it issued an official statement to investors in bond offering documents that devoted an entire subsection to the subject of conflicts of interest. UNO affirmatively assured investors that its conflicts policy was more robust than required for non-profit organizations. UNO did disclose the contract with the company serving as owners representative, which was owned by the chief operating officers brother who was a former UNO board member himself.

The SEC alleges that UNO nonetheless failed to disclose its much larger transactions with the windows company owned by another brother of the chief operating officer. Moreover, nothing in the official statement disclosed that UNO already was in breach of the conflict of interest provision in its June 2010 grant agreement with the IDCEO because it already had transacted with both companies without advising the agency in writing about those engagements. UNO also failed to disclose in the official statement that IDCEO could recoup all of the grant money as a result of this breach of the conflicts of interest provision. Had IDCEO exercised its rights under the grant agreements and recouped the entire amount of the grants, UNO would not have had the cash to repay the grants and therefore would have had to liquidate its charter schools the very revenue-producing assets essential for repayment of the bonds.

Conflicted transactions and self-dealing by issuer officials can be material information for municipal bond investors and should be given appropriate focus by issuers and underwriters in disclosure documents, said LeeAnn Gaunt, chief of the SEC Enforcement Divisions Municipal Securities and Public Pensions Unit. Failing to disclose material information undermines investor confidence in the municipal securities market and places at risk an important source of funding for local government projects.

The SEC complaint charges UNO with violations of Section 17(a)(2) of the Securities Act of 1933. UNO neither admitted nor denied the charges in the settlement.

The SECs investigation is continuing. It has been conducted jointly by staff in the Chicago Regional Office and the Municipal Securities and Public Pensions Unit, including Michael Mueller, Eric Celauro, and Michael Foster. The case is being supervised by Peter K.M. Chan.

TRIBUNE ARTICLE ON THE JUNE 2 SEC NOTICE:

By John Byrne

Clout Street

5:17 p.m. CDT, June 2, 2014

The powerful United Neighborhood Organization has agreed to have an outside monitor review its contracts for a year to settle a U.S. Securities and Exchange Commission complaint that the charter school group operator defrauded investors in a $37.5 million bond offering by misleading them about conflicts of interest in giving school construction contracts to companies run by relatives of an UNO official.

UNO will give Chicago attorney Patricia Brown Holmes authority to vet its contracts for 12 months, including vetoing any deal she reasonably believes to be a conflicted transaction, according to the federal court consent agreement the SEC released Monday. UNO will need to inform Holmes in writing before entering into various bigger ticket contracts, according to the agreement, and the organization will be required to pay Holmes up to $100,000 to cover her salary and costs.

According to the SECs complaint, UNO breached the conflict-of-interest provision of the bond deal as it entered the construction phases of the school project in 2011 and 2012. UNO gave contracts to two companies owned by brothers of its chief operating officer. UNO agreed to pay one company approximately $11 million to supply and install windows and the other company approximately $1.9 million to serve as an owners representative during construction, according to a news release from the SEC.

UNO neither admitted nor denied the charges in the settlement, according to the SEC release. Representatives of UNO could not be reached for comment Monday.

The SEC findings represent the latest reversal of fortune for the Latino school organization, which runs 13 charter school campuses in Chicago.

Clout-heavy UNO CEO Juan Rangel, who was one of the co-chairs of Rahm Emanuels 2011 mayoral election campaign, resigned in December after the SEC sent letters to the state and to UNO's charter school network requesting information about the organization's use of the state grants. Rangel also gave up his seat on the mayor's Public Building Commission.

Peter Chan, the assistant regional director of the SECs Chicago office, said the agencys investigation continues and that individuals also could be implicated. Our goal is to look into all parties and individuals who contributed to UNOs violations, Chan said. The SEC cannot levy criminal charges, but could issue fines or take steps to prevent people from being involved in future bond work, he said.

"We are not finished, Chan said when asked if he was satisfied with the settlement announced Monday.

In 2011, UNO received $37.5 million in state-backed loans, according to Illinois Finance Authority documents. UNO was supposed to get $98 million from the state to build charter schools, but Gov. Pat Quinn eventually turned off the spigot on that funding, citing an appearance of a conflict of interest in how the organization awarded construction contracts.

Last June, the SEC sent a letter to the state's economic development agency asking for documents, meeting summaries and other communications related to the grants.

UNO misled its bond investors by assuring them it had reported conflicts of interest in connection with state grants when in fact it had not, Andrew J. Ceresney, director of the SECs Division of Enforcement, said in Mondays release. Investors had a right to know that UNOs transactions with related persons jeopardized its ability to pay its bonds because they placed the grant money that was primarily funding the projects at risk.

Holmes, the new UNO monitor, was the court-appointed trustee for Burr Oak Cemetery near Alsip after revelations that workers there had dug up remains to resell burial plots.

jebyrne@tribune.com

Twitter @_johnbyrne



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