The Enron, charter schools and related-party transactions

I meant to post this analysis by Preston Green III when it first came out. Then I saw something shiny and got distracted.

Enron’s downfall was caused largely by something called “related-party transactions.” Understanding this concept is crucial for grasping how charter schools may also be in danger.

Related-party transactions are business arrangements between companies with close associations: It could be between two companies owned or managed by the same group or it could be between one large company and a smaller company that it owns. Although related-party transactions are legal, they can create severe conflicts of interest, allowing those in power to profit from employees, investors and even taxpayers
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Without strict regulation, some bad actors have been able to take advantage of charter schools as an opportunity for private investment. In the worst cases, individuals have been able to use related-party transactions to fraudulently funnel public money intended for charter schools into other business ventures that they control.

Such was the case with Ivy Academia, a Los Angeles-area charter school. The co-founders, Yevgeny Selivanov and Tatayana Berkovich, also owned a private preschool that shared facilities with the charter school. The preschool entered into a sublease for the facilities at a monthly rent of $18,390 – the fair-market value. The preschool then assigned the sublease to the charter school at a monthly rent of $43,870.

The Los Angeles district attorney’s office charged the husband-and-wife team with multiple counts of fraud. Selivanov was sentenced to nearly five years in jail in 2013.

Fraudulent related-party transactions can also occur between education management organizations (EMOs) and their affiliates. EMOs are for-profit or nonprofit entities that sometimes manage charter schools, and might also own smaller companies that could provide services to those schools.

For example, Imagine Schools is a nonprofit EMO that runs 63 charter schools enrolling 33,000 students across the country. It also owns SchoolHouse Finance, a for-profit company that, among other things, handles real estate for many of Imagine’s charter schools. Though charter schools typically spend around 14 percent of their funding on rent, some of the Imagine Schools were paying SchoolHouse Finance up to 40 percent of their funding for rent.